Ask an Economist

E.g., Thursday, August 6, 2020
E.g., Thursday, August 6, 2020
Question:
Using the worst case scenario (Illinois), what are the economic implications of underfunded pension plans?
Answer:

The problem of underfunded pension plans is complex. Some possible economic effects are as follows.

1. Plan beneficiaries will suffer economically in retirement unless they are bailed out by taxpayers. Whether and how much to bail them out...

Question:
In Canada, where I live, there has been much talk lately about the need to build more pipelines to export oil from Alberta. Western Canadian Select (WCS), the benchmark for bitumen from the oil sands, trades at a discounted price compared to higher quality products like West Texas Intermediate (WTI), for example. While the difference in quality accounts for most of the price differential between the two, the rest of the price discount can be explained by export bottlenecks, apparently. Since oil production in Canada exceeds the capacity of existing pipelines to export the oil to refineries in the US, oil producers turn instead to rail companies to export the oil.

1) Why does a transportation bottleneck cause Canadian oil to trade at a discounted price? Is it simply because rail companies have more leverage in this situation, as they have an effective monopsony as a buyer, a.k.a. near-monopoly over transportation? And if that's the case, is the oil sold to the rail company, who is able to negotiate a discounted price at which to purchase the oil from the producer?

I suspect it may have something to do with the fact that rail companies seek to secure long-term contracts with clients, so when oil producers want to use rail services just for the short-term, until new pipelines can be built, rail companies refuse to pay a high price for the commodity being transported (alternatively, rail companies demand a higher fee to transport the commodity). But again, I'm not clear about whether or not rail companies actually purchase the oil and then sell it on to refineries. And if a Canadian rail company does purchase the oil, then the revenue stays in Canada, doesn't it?

2) I have read that rail transport only adds marginal export capacity compared to what's needed, so perhaps the oil producer/rail transaction has a negligible effect on price? If that's true, then I'm really confused.

3) Is it simply just that a transportation bottleneck causes excess oil supply to build up, reducing its market price? But I thought that a bottleneck would equate to less supply, since it can't be exported as quickly, and therefore its market price should rise.
Answer:

Great question!  In general, we don’t need a monopsonistic setting to explain crude differentials between WCS and WTI.  In a competitive market, prices for the same product (oil, corn, etc.) can diverge in different markets for two...

Question:
What would happen if the minimum wage laws were repealed? Would businesses pay their employees a penny an hour?

If raising the minimum wage to $10.10 would be good for the economy, wouldn't raising it to $20 be better? If not, at what point are the good economic effects of a minimum wage outweighed by the bad?
Answer:

If minimum wage laws were repealed, the vast majority of U.S. workers would not have their wages impacted. Through supply and demand, competitive market forces drive up the wage rates of most workers to levels considerably above the current...

Question:
Was it Truman's intention to begin paying down the debt after WW2? If so, what happened to prevent it? And was there any way that the public would have known that the debt was not to be whittled down to the same extent that had always been attempted previously? Was it the result of an announced policy, or simply something that was never gotten around to?
Answer:

To begin with, the premise of this question is somewhat mistaken.  As was true in earlier wars, WW II did cause a large expansion of federal government debt both absolutely and relative to GDP.  Indeed, the debt/GDP ratio reached about...

Question:
What are the major pieces of literature on Agricultural economics as well as the household names when it comes to Agricultural economic research?

I am mathematics major student with an MA in Economics, I am developing an insatiable interest in Agricultural economics and would like to read more on research in this area. I would like to be guided on the body of literature making names in this field.

I will particularly be interested in works that apply econometric techniques using time series econometrics and forecasting, panel data.
Answer:

Handbook of Agricultural Economics

Editors: Bruce L. Gardner and Gordon C. Rausser

Volume 1, Part A, Pages 3-741 (2001)

Agricultural Production

Volume 1, Part B, Pages 745-1209 (2001)

Marketing, Distribution and...

Question:
Why has Saudi Arabia released so much oil for sale that prices for that have dropped so fast? Does that country have a lot of debt? Does it relate indirectly to the economic slow down in China?
Answer:

Currently, Saudi Arabia’s foreign exchange reserve is about $600 billion. Saudi’s oil export is about 8 million barrels per day, or about 2800 million barrels per year. At $100 per barrel, their revenue from oil exports would be about $280...

Question:
Do Trump’s new tariffs affect things that were made in China, but were NOT sold from China? As in a toy from Xplus. They are made in China, but are sold and exported by Japan.
Answer:

Trumps tariffs are collected by U.S. customs officials when Chinese goods are imported into the US. They are not collected on goods imported from Japan. However, the tariffs have created worldwide perturbations and there may be modest second...

Question:
Do GDP figures include depreciation of infrastructure? What about other forms of depreciation, eg. consumption of non-renewable resources, or consumption of renewable resources at a greater than the sustainable rate?
Answer:

There is a large literature that attempts to adjust the various conventional measures of economic growth for the effects of environmental degradation. There is a useful Wikipedia page on the topic (...

Question:
Hi there, thanks for taking the time to answer my question.

I understand the basics of measuring GDP based on the product, income, and expenditure approaches, but I am stuck on a simple question: how are household savings accounted for using the expenditure approach if they are not invested?

In other words, say I earn $100, spend $98, and deposit $2 in a non-interest earning savings account. If the $2 (along with a lot more money, presumably) gets lent out to a company that builds a factory, then clearly that would be investment, but what if it just sits in the savings account? Does that count as “residential investment”?
Answer:

There are two components to investment in the national income identity. In addition to expenditure on capital equipment and buildings by firms, investment also includes additions to business inventories (goods that firms did not sell). So if you...

Question:
When Minimum Wage is increased by more than 5%, studies have shown a negative impact for one to three years - job loss, reduction of hours, and non-hiring to replace workers leaving - causing a reduction of pay of low pay workers, a 1-3% reduction in teenager hired, and failure of many start-up businesses. I have not found longitudinal studies showing where the economy rebounds from these losses and whether there is a long-term benefit at all for the lower or higher wage workers. Has there been studies going longer showing when the (a) teenage hiring returns to previous levels, (b) hours return to normal for the low pay workers, etc... Is Minimum Wage a permanent negative impact or temporary? ... I've seen what happens statistically for things like holidays - where a sick person will power through the holidays, but then die immediately thereafter, creating an average between "less deaths during the holiday" and "more death just following" matching normal death rates. And studies which show that capital punishment creates a permanent troth with an immediate reduction of several months after a criminal has been executed without a rebound increase afterwards ... just a return to normal levels. .... So which is it, a permanent loss to the economy when we have minimum wage raised that never recovers; a temporary loss to the economy which returns to the previous level but no further; a temporary loss to the economy but a rebound that balances and then return to average; OR a temporary loss to the economy but a long-term gain once everything is considered? Everything I have found indicates a permanent loss to the economy with no upside and that just doesn't make sense to me as yet. If there are longer studies, I would appreciate finding out about them. Asking because I would like to support a higher minimum wage, especially for tip-income wages, but based on the evidence I have found I cannot.
Answer:

The adverse effects of the minimum wage depend on how high it is compared to the prevailing wage in the area.  Because wages are higher in San Francisco than Des Moines, a $15 minimum wage in San Francisco, where the median wage is $25.11,...

Question:
If 25% of the US population left their 401k (and other retirement funds) alone, reduced contributions by 25%(50%, 75%, 100%), withdrew all non-penalized funds and kept personal savings out of their banks, did not otherwise invest their money, what would happen nationally, internationally, immediately, long-term?
Answer:

My best guess is that you are interested in the effects of investors withdrawing from the financial market (as opposed to the labor market or some other market).

If 25% of the US population suddenly changed their investment behavior as you...

Question:
Why is it that the largest market fluctuations, by a large majority, mainly happen in September, October and November? What about those three months causes the massive fluctuations? It happened in 1929, 1987 and 2008.
Answer:

At present, I am not aware of a widely accepted academic research in economics and finance that would provide a definitive explanation for the exact calendar timing of major financial market fluctuations in the United States for the time period...

Question:
I here a bit more these days about our being a consumer economy. What other types of economies are there?

Thanks a bunch!
Answer:

Ours is called a consumer economy because consumption is nearly 70% of our GDP. Countries like China, are more investment-driven with investment (often by the public sector) at nearly 50% of GDP. 

Question:
What is the median family spendable income for families living in Fort Dodge, IA.
Answer:

The American Communities Survey provides information on median household income

This is before taxes and transfers

American Fact Finder

https...

Question:
I wonder what "reduced-form analysis" is, and a non-reduced form would be. To be more specific, I'm reading an article (www.clevelandfed.org/research/review/1996/96-q1-craig.pdf) which states the following:

"Economic data usually influence policy through a reduced-form analysis...Explicit assumptions about behavior that underlie the relationship are not emphasized; rather, the researcher asserts that the “data do the talking.”"

The author later specifies what he means by "reduced-form":

"We use the term in a wider context, where the pattern in the data — not an assumed behavioral structure — forms the point of departure for estimation."
Answer:

A “reduced-form” analysis, also often referred to as “non-structural” analysis, is the most common kind of econometric analysis performed by economists. The other kind, which you called “a non-reduced form,” is customarily referred to as “...

Question:
My country is currently debating the prospect of banning live exports of sheep to the Middle East, due to the abhorrent conditions that the animals suffer on the journey over there. Our Agriculture Minister has come out and said "We should tighten regulations instead, because if we ban live exports entirely, then these countries will instead import from other countries with lesser regulations, and there will be no overall reduction in animal suffering."

Does his claim hold up? If other countries have enacted similar bans, what happened afterwards?

Context: https://www.theguardian.com/australia-news/2018/jun/09/live-export-opponents-should-check-their-moral-compass-minister-says

Cheers!
Answer:

I am not aware of any restrictions on live animal exports centered on animal welfare concerns. Concerns about animal disease outbreaks and food safety have primarily led to trade restrictions on live animals, meat, and animal products. A little...

Question:
How high can our national debt get (as a % of GDP) before it will be a threat to our financial stability? ie: dollar loses its status as the reserve currency.
Answer:

The national debt of the US is the amount owed by the US federal government and is the value of the Treasury securities that have been issued primarily by the Treasury and which are outstanding at that point of time. By far, the largest component...

Question:
I am familiar with Karl Fox et al. "functional economic areas" framework of regional modelling. I am also aware of REMI products. These latter models are widely used by state and local governments. But I am not aware of the availability of computer models that would use functional economic areas per se. Can you inform me if there are such models that might be an alternative to REMI? Thank you.
Answer:

Any subnational economic modeling includes two challenging components: data and structure.  Detailed subnational data for the US is automatically suspect because input-output tables are not collected at any subnational level. ...

Question:
If a business owner employs workers in a third world country, is it better (for the workers) to pay them in strong American dollars vs paying them with the local currency? Considering the American dollar will likely be stronger than that of a third world country, the workers will have more economic power with greenbacks than their own national currency.
Answer:

If the third world country has low and stable inflation, then it should not matter much; after all, there is a market exchange rate between say $1 and Indian rupees (these days, $1 = Rs. 60) and whether you pay an Indian worker $1 or Rs 60 should...

Question:
Why did China’s banking system grow so much since 2000 if the PBOC was actively increasing the RRR and withdrawing liquidity through FX Reserve purchases?
Answer:

First of all, I want to make it clear that, when a central bank increases its FX reserves, it supplies local currencies and increases liquidity in the money market. But this is certainly not the reason that China’s banking system grew so much....

Question:
I just saw this quote in Seeking Alpha by "Goldmoney": "Entire AAA-rated bond yield curves are likely to be forced into negative territory, following the Swiss government bond market, which is already there. The denial of time-value will mean a government bond with no final redemption date priced at less than infinity will be technically a bargain. That is the measure of distortion." My background is statistics. I'm trying to teach myself economics. Thanks in advance.
Answer:

The unusually shaped yield curve was in the news the other day. But it was attributed to the Fed buying 10-year T-notes, which temporarily lowered their yields relative to notes/bonds with shorter maturity. It sounds to me the quote cited by...

Question:
Please disregard the implausibility of this question, I am curious on a purely hypothetical level. What would happen if all of the illegal immigrants and legal Muslim refugees were both deported and/or kicked out at approximately the same time. (As Donald Trump has sometimes suggested we should do) I would imagine that there would be significant negative impacts to the economy and specifically the housing market. But, I'm wondering how catastrophic those would be and if there would be any... Less obvious results?

Answer:

A 2012 United States Department of Agriculture Economic Research Service study used a simulation analysis to estimate the impact a 5.8-million-person reduction in the number of unauthorized workers—agricultural and nonagricultural. This was...

Question:
Is it true that large banks can borrow funds at close to 0% interest rates from the Fed and turn around and buy US bonds paying higher interest rates with the borrowed funds?
Answer:

Yes, large banks can in principle borrow funds at close to 0% from the FED and turn around and invest them on higher paying US bonds. But, when large banks do this, they push up the market price of these US bonds (being large players in the...

Question:
Why would the stock market react negatively to the increased supply and lower price of oil? Isn’t cheaper energy good for all including oil producers who created the supply shift?
Answer:

While it is true that lower prices at the pump benefit consumers, stock markets also infer that low oil prices signal weak demand for oil, in this case from travel-related fears due to the corona virus. And weak demand for oil often indicates...

Question:
With the Trump administration intent on fiscal spending, there is opinion from bank economists that this shall cause weakness in the USD. If we assume the spending will be serviced by domestic bonds, is this really a credible argument in today's climate and why? Thanks
Answer:

An increase in government spending will increase the domestic interest rate. A lot depends on how analysts perceive future price levels and inflation. If the government spending is not expected to cause future inflation, an increase in interest...

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