Ask an Economist

E.g., Thursday, June 25, 2020
E.g., Thursday, June 25, 2020
Question:
In his answer to my previous question, Dr. Orazem states that 'Iowa's small towns are surviving' (compared to Nebraska). Are they? A vast majority of Iowa school districts have seen declining enrollments for years/decades, many/most of the small rural main streets that I see appear to be in serious decline, and the towns in general seem to be losing both population and vitality. I travel a lot through rural Iowa and it sure doesn't feel like most of these small towns are surviving. Am I incorrect? If my eyeball test and what I think are accurate demographic data aren't sufficient, how do we determine if rural towns are surviving? Thanks much. Just trying to wrap my head around issues related to small Iowa town vitality and the accompanying implications for schools.
Answer:

I think it is important in establishing policy to work from facts and not perceptions. While rural towns are getting smaller on average, not all are. While schools are consolidating in rural areas, they are also consolidating in cities as like...

Question:
Disinflation describes a lower inflation rate than the previous month, using YoY values. Does it make a different interpretation if the MoM value decreases or increases? I have seen a decrease in the MoM value corresponding to a decrease in the YoY inflation as well as a decrease in a MoM value corresponding to an increase in inflation YoY. Does the MoM value tell you anything about the YoY value? I used to think the MoM value described accelerating or decelerating of the YoY inflation/deflation. Can you please elaborate on the relationship between MoM and YoY values, if any? Thank you.
Answer:

The easiest way to see the connection between Month on Month Inflation and Year on Year inflation is to take a step back and recall where these numbers are coming from.

 

The inflation numbers we see reported are reflecting the...

Question:
http://imgur.com/4uBj6mc

How do I read what is the most profitable? I want to buy low and sell high. Something called item-flipping.
Answer:

I’m not able to read (too small) the table. Regardless, I think the question relates to flipping stocks. Admittedly, my expertise is much more in commodity futures markets, but I believe the theory/rationale holds across markets. As such, my...

Question:
I have simple question and I hope you could help me with it. Why when someone books for one week for international flight during vacation time, it will be cheaper than two weeks, and two weeks cheaper than three weeks? Why is that from an economic prospective?
Answer:

I always thought that it was the other way around: the closer you are to the departure date the higher the price. Airlines have some market power and use pricing overtime as a way to second degree price discriminate: Consumers who plan long ahead...

Question:
The Department of Veterans Affairs sent me a letter saying they were going to cancel my student loans, (about $7,000) but that I could stop them from forgiving my student loans if I want to.

I have a few questions;

1. Will canceling my debt negatively impact my credit score?
2. Will I be able to get future student loans if I want to go to graduate school?

(The process states that I WILL be able to get those loans if I waive some stuff and agree to have my old loans reinstated). But my question is more basic:

will anyone give me a loan?

References;
https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/disability-discharge
https://www.insidehighered.com/news/2019/08/22/trump-administration-grant-disabled-veterans-automatic-loan-forgiveness
Answer:

1. The most common credit score is of the form used by FICO (Fair Isaac Corporation).  The calculation has five components, payment history, amount owed, length of credit history, new credit, and type of credit used.  The first two...

Question:
It's said that printing more money causes inflation. What if the Federal Reserve printed a bunch of money and gave to someone secretly? How would that cause inflation? Thank you
Answer:

If the central bank printed some money and "gave to someone secretly" and that person did not spend it, nothing would happen. If they did spend it, it would add to the money already in circulation, which may or may not (if output went up) cause...

Question:
My wife and I live in the US and are trying to plan for a retirement abroad. We wish to retire to my wife's native Brazil, and one of my principal concerns while we save our nest egg is accounting for the relationship between inflation and exchange rates after retirement, which I do not understand well. The BRL has had fairly high inflation since it's inception in the mid 90's, on average around 7% per year. Due to the inflation of the Real, and my familiarity with investing in the US, I am inclined to leave our assets in USD, and transfer funds into BRL as needed for the duration of our retirement. The exchange rate between BRL and USD also seems to vary wildly, from R$1.50 per USD all the way up to just under $R4.00.

So if we're looking into the future and we predict that the BRL will have an inflation rate of 7% per year, and the USD will have inflation of 3% per year, obviously the cost to live in Brazil will grow much faster than in the US. If that's true, over a period of 30-40 years, in theory, should the exchange rate become more favorable to the USD as the value of the BRL is eroded due to inflation? If so, is there a way I can replicate that effect in my retirement planning? Thank you for hearing my question. Please reach out to my email address if any clarification is needed.
Answer:

First, a disclaimer. Whatever is written below is not actual investment advice; it is general economics discussion, a dinner table conversation, no more.

It is certainly a great thing to be planning your retirement to such a...

Question:
What area of economics addresses questions about the price of a one-time consumer equipment purchase vs ongoing monthly service fees? For example, to analyze when it makes sense to purchase an upgraded smartphone for its greater capacity/utility, considering fixed ongoing cellular service costs. Or when it makes sense to upgrade your home wifi system to provide greater coverage and speed, given fixed monthly internet service costs.
Answer:

I am assuming you have to keep the cell or wifi plan and you are just upgrading the fixed cost of a new router or cell phone. Let’s take the smartphone/cellular plan case.

Suppose you currently pay $100 per month for your cellular plan and...

Question:
Hi, I gross $52,500 a year in Suffolk County Long Island, NY. How does my personal income compare to other income earners on Long Island? Somewhere in the middle or on the low side?
Answer:

None of us here have direct expertise on this issue. You may look at: http://www.longislandindex.org/data_posts/household-income-distribution/ for more...

Question:
A recent Economist article www.economist.com/news/finance-and-economics/21639587-beware-heavily-traded-stocks-drop-pops reports on an academic paper that seems to offer a mechanical rule for beating the stock market by a substantial margin. Is this a disproof of the efficient market hypothesis or is there some trick?
Answer:

Assume that you decide to buy a new cell phone. Are you going to buy iPhone or Xiaomi, some unknown brand? For a typical US consumer, you have about 40% chance to buy iPhone, but almost 0% chance to buy Xiaomi. An iPhone costs you about $600, but...

Question:
I am a huge Duke Blue Devils fan and the NCAA basketball season has just recently started back up again. Currently, I am taking a microeconomics class and we just started covering oligopolies and cartels along with game theory. It got me thinking about whether or not the NCAA is considered a cartel or if it would be a monopoly. I looked into it and I have seen it referred to as being a cartel but also having monopoly power. Is monopoly power the same as a monopoly? If so, can the NCAA be a monopoly and a cartel?
Answer:

I teach an Economics of Sports class here at Iowa State University.  In my class, we discuss the economic structure of the NCAA and professional sports leagues in the U.S.  You are correct that the NCAA is a cartel and so is a...

Question:
I came across a company recently which farms mussels off the coast of a small town in Bulgaria, and I started thinking about its structure in the economy. I know since it produces a homogenous product along with hundreds of other mussel farmers, it must be in perfect competition; however this mussel company also sold locally on top of selling to suppliers. This means it was the only mussel supplier (locally) in the town, and as far as I know that's a monopoly. My question is, what would this company's graphs look like? Would it be more like a perfect competition, or a monopoly? Although it is the only supplier in the town, it sells the mussels at the same price if not cheaper to locals as it does to suppliers, which I know unlike monopolies. Would there be any deadweight loss in a company like this? Is it inefficient or is it more efficient than normal? Consumers can buy mussels from the supermarket, but local supermarkets all get their supply of mussels from this one local company. Please help me understand!
Answer:

The local mussel farm has a cost advantage in supplying in its own town mostly because it saves on transportation costs. Even with that cost advantage, the local firm may not be able to fully exert monopoly power on the local market. It is easy...

Question:
My sister and I were trustees for our Mom's estate that was a two family house. For five years that our Mom was in assisted living my sister lived there and collected rent. The rent paid for all house expenses and any needs that Mom required. My sister had also lived there for the past 25 years. All house expenses during that time was paid for by Mom. When Mom recently passed the house became the estate to be shared by both. Rent is $650 per month equaling $7800 per year. Annual expenses cost $3400. That would provide a share of $325 per month or $3900 per year for each of us. My sister says I should pay for half the house expenses. I believe that because she resides in the house the rent will pay for the annual costs and that I should be entitled to my share of $3900. I believe that my paying half the annual expenses is subsidizing her living there. Can you please provide your opinion on what is the proper resolution to this matter? Thank you very much for any assistance you can offer.
Answer:

It is not possible to provide a very good answer to this question because because it is not very clearly posed and is not specific about the desired remedy. Also, the answer below represents some off-hand views of an economist and, under no...

Question:
When I attended ISU and graduated with an M.S. in economics in 1967, I was taught that government debt was largely a good thing, as it was (then) mostly money owed to ourselves. It also provided a useful tool for the Fed. to use for controlling the money supply by buying or selling bonds. Has general economic thought changed with the large amount of debt being taken on by government spending, quantitative easing, and a larger percentage of our debt being owned by foreign powers (China, etc.). Do we now believe that our national debt is not such a "good" thing?
Answer:

Your understanding is correct that government debt is “good” in the sense that it serves as a useful tool for conducting both monetary and fiscal policy. By allowing federal, state, and municipal governments to borrow, it lets these entities...

Question:
I’m currently doing a research on the subject of American founding father Alexander Hamilton as a character in the musical “Hamilton: An American Musical” vs the portrayal of Hamilton by professional historians. To be able to understand the importance of the historical Hamilton as a founder of the US in order to write about him, I need to be able to explain (and first of all understand) what “Hamiltonian finance” is. Could you in a simple way explain the basics of Hamiltonian finance? It is something I have had a difficult time finding an pedagogical and reliable source on. It would be of immense help for me.
Answer:

Alexander Hamilton was, as the musical portrays him, an influential figure in the early history of the United States.  A full description of his views about and impact on financial arrangements in the newly formed United States would be well...

Question:
I am an Amerian citizen and have been considering applying to graduate school in London for a while now, and have finally found multiple programs of interest and have a plan in motion to raise enough money to be a financially stable unemployed student. Due to recent events (Brexit) I am trying to determine if it is financially feasible to continue pursuing obtaining a degree in London. Would school become more affordable for someone like me being an international student there? What about the cost of living? Or is it too early to determine all of this?
Answer:

It’s hard to answer your question since the situation in Britain is in flux. I can only mention a few considerations that may be relevant.

One is the exchange rate.  The British Pound has fallen in response to the Brexit vote. ...

Question:
I have a question about nomenclature related to resources and commodities. Am I right to say that a natural resource is something that is not refined or changed and sold on as a resource. Am I then also right to say that a commodity is a refined natural resource or product?

If possible could you folks better describe the raw product that comes from the ground as sold, vs the raw product that is transformed (in some way) then sold?

I think of wheat as a resource. I think of cereal as a commodity. Is that right?
Answer:

Here is a definition that I found on an OECD website https://stats.oecd.org/glossary/detail.asp?ID=1740. It is as good as any definition I have seen.

The...

Question:
Stock Market Question.

There is something very basic and fundamental about how the stock market works that I have never understood and always wondered about.

I understand that a company issues a certain fixed number of shares so the value of those shares are subject to the law of supply and demand. However, it seems like, at any given moment I, and anyone else, can buy or sell any number of shares at the current stock price. So what is the actual mechanism that determines the change in stock price?

If I look at the stock price of company X and see it is selling for $100 per share I, and anyone else, can decide to buy one share at the market price of $100, or one million shares at the market price of $100. So what actually makes the stock price of company X actually move up to $100.01 per share or down to $99.99 per share? It doesn't seem like the stock price would move up unless all available shares were already purchased, or down unless there were people willing to sell shares for less than the market asking price at any given moment.
Answer:

The answer is that stock prices are indeed determined by supply and demand. If you see no change in price when you trade, it is because the amounts you are trading are relatively small. If you try to buy or sell a particularly large amount at one...

Question:
Hi! So my original question, that I posed to several different online communities was this: I am currently reading Naomi Klein’s book “the shock doctrine, the rise of disaster capitalism”. In it, she has a chapter critiquing Milton Friedman, specifically on his involvement with the Chilean government and the spread of neoliberal ideals common to the Chicago School of Economics. In this chapter, she basically argues that the Chilean neoliberal experiment was a failure, and speaks about Pinochet’s policies and their results.

Here are some quotes from her book: “He took no pity on local companies and removed even more trade barriers; the result was the loss of 177,000 industrial jobs between 1973 and 1983”

“Pinochet had deliberately sent his country into a deep recession, based on the untested theory that the sudden contraction would jolt the economy into health”

“In the first year of Friedman-prescribed shock therapy, Chile’s economy contracted 15 percent, and unemployment- only 3 percent under Allende— reached 20 percent, a rate unheard of in Chile at the time”

“He calculated what it meant for a Chilean family to try to survive on what Pinochet claimed was a ‘living wage’. Roughly 74 percent of its income went simply to buying bread... by comparison, under Allende, bread, milk, and bus fare took up 17 percent of a public employees salary”

“In 1974, inflation reached 375 percent- the highest rate in the world and almost twice the top level under Allende”

So I’d like to ask;

1) are there any statistics/ data that contradict these claims, or maybe give more context to them
2) was Pinochet’s “neoliberal experiment” really an example of neoliberalism? And if it was, was it a failure?

Also,

1) was the economy under Pinochet really that terrible
2) if it was, was it due to the pushing of neoliberal ideals by the Chicago boys (those educated at the Chicago school of economics)
3) is Chile proof of the failures of neoliberalism
Answer:

My name is Marcelo Oviedo and used to work as Assistant Professor at Iowa State University. My ex-colleagues in the Department of Economics have invited me to answer your questions posted in the Ask An Economist section in that...

Question:
I've read that the total bank bailout was just under 30 trillion dollars http://ritholtz.com/2011/12/bailout-total-29-616-trillion-dollars/ I don't understand the purpose of the bailout: why did the Federal Reserve give out money to the banks instead of buying up the bad mortgages? I thought that money doesn't trickle down, but instead grows and multiplies from below. Am I misunderstanding the purpose of the bailout?
Answer:

Without questioning the specific numbers cited in the study, I would argue that much of the total does not represent a bailout of banks in a conventional sense. For example, $10T in central bank liquidity swaps refers to agreements between the...

Question:
This is more of a speculative, hypothetical question. I’m working on a novel in which the wealth of the previous generation is distributed randomly into the next generation. The wealth isn’t distributed equally – in other words, there are the same number of wealthy people from one generation to the other, but there’s no predicting who those new people will be. Once the new generation has the money, they can spend it as they like. So I’ve been speculating – how would that economy look different than our own? Wealthy families wouldn’t be able to pass on wealth – instead, a young person in a slum could be the lucky recipient. What kind of economy would that create?
Answer:

Thank you for your question. The economies would look very different. Your hypothetical world seems analogous to one that imposes a 100% estate tax and uses a lottery to transfer any tax collected back to the economy. Naturally, individuals...

Question:
I am 16 years old and I want to start a project that makes yarn whales to give to people in the hospital during this time. If it successful and keeps momentum, I want to continue this even after the COVID-19 has subsided. A problem though, is that I have no idea where to start, what kind of permission I need from who, or anything like that. I would love some pointers and help on what to do. I really thank you for reading and answering my question. Stay strong :)
Answer:

How very thoughtful and considerate a project you have in mind!

You are already exhibiting entrepreneurial behaviors by reaching out for advice. When starting anything new, you need to get questions answered for which you don’t know the...

Question:
I was wondering if there are any threats that could cause regression or the stop of progression in the arena football league. I know the Arena football league is trying to expand in order to create more revenue but their business models have been poor in the past. Wondering what's your take on the subject and what environmental factors could prohibit this development
Answer:

If I understand your question correctly, you are asking about factors that will determine the success or failure of the Arena Football League.  As with any firm or industry, ‘economic’ success or failure depends on the ability of the firm or...

Question:
If budgets have to be approved by Congress before they get signed by the President, why does the Congress again have to approve an increase in the borrowing limits?

If govt debt is at $10 trillion, and Congress approves a budget with a budget deficit of $1 trillion, isn't it implied that the administration can implement the budget only by borrowing an extra trillion?
Answer:

Just to be clear, “the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the...

Question:
I just wanted to know if price changes how much quantity is supplied or demanded then what creates the price in the first place? If you say that price affects supply and demand and supply and demand affect price then this just sounds like circular logic to me.
Answer:

First, it is important to understand the difference between a few concepts. The demand is a function that describes that the quantity demanded (consumption) declines as the price increases. That is, the demand is the relationship between the...

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