Ask an Economist

E.g., Thursday, June 25, 2020
E.g., Thursday, June 25, 2020
Question:
What happens as new products enter the market? What factors determine gaining market share from existing products? For example, as nylon and polyester entered the market in the 1940s demand for wool decreased drastically. However, in cases of new, similar products, this isn’t always the case. Another example, “milk” like almond, soy, and coconut milk have taken away from conventional dairy milk; however, it’s certainly not as detrimental as synthetic fiber was for wool. How can we determine the factors that will influence consumer buying decisions as consumers have more choices?
Answer:

For consumers, changes in prices and per capita income are influential determinants of demand. Consumer demand is often measured as an elasticity, which is a relative measure, providing a useful means of comparison across all ranges of quantities...

Question:
My name is Bob Galask and I grew up in Iowa (Fort Dodge). I've been in the diamond business in Los Angeles for over 35 years. Much of that time has been spent in Asia, particularly Thailand where I still have a diamond cutting factory. I've developed extensive connections in Thailand, Burma, India, Taiwan and Indonesia as well as a strong familiarity with most Asian countries and customs.

My question is, are there opportunities to purchase, process and export Iowa agricultural products? Pigs ears, gluten, chicken feet, ginseng, farm equipment etc., I'd be amenable to any opportunities.. I'll be in Iowa next week visiting friends and family. I'd appreciate any feedback be it positive or negative from any members of your staff.
Answer:

Yes, there are definitely opportunities to export Iowa agricultural products.  The U.S. Census Bureau currently calculates that Iowa companies exported $13.2...

Question:
I'm just an average joe, but I thought I had a decent grasp on inflation and top down economics. I don't understand, however, why the cost of EVERYTHING continues to rise in leaps and bounds. Yesterday, I went to Sam's Club and passed on a can of cashews priced at $18. I'm certain last year I was debating whether or not they were worth $13. I'm almost certain that the cost of picking and packing nuts hasn't increased that dramatically; how can they justify an almost 50% increase in price? I've noticed that the cost of eggs has increased everywhere; a dozen eggs are almost $4, the expensive ones used to be $1 and some change. Am I to believe it costs 400% more now than it did five years ago for chickens to lay eggs? The cost of butter has increased at the same rate of eggs, so I can see whatever is affecting the chickens are affecting the cows as well... This question was prompted when I noticed that the $18 cashews were close to the same price as the honey which was comparable to the price of shrimp. No way you can tell me it costs the same to harvest honey, nuts and shrimp! For whatever reasons I know that the cost of gasoline has increased 400% since I first started driving less than twenty years ago; although it is declining significantly now, but why does a gallon of milk cost more than a gallon of gas? Who is controlling this stuff?
Answer:

Let me answer the last question first. The markets are controlling the prices, based on supply and demand. So, depending on how you want to look at it, either everyone or no one is controlling the prices. Let’s dive into the factors that have...

Question:
What percent of the US workforce is employed in local, county, state and federal government? Average yearly income of governmental workers? Average yearly income of non-government workers?
Answer:

I found a policy report that might be a little dated (2013) but I think is probably still relevant. You can find the report here: <https://fas.org/sgp/crs/misc/R41897.pdf>

The...

Question:
The Chinese government recently added a tax on imported luxury cars. My question is why "extravagant spending by the elite is politically dangerous at a time of slowing economic growth"?
Answer:

Although China has had a spectacular economic growth in the last three decades, income/wealth inequality has been rising over time. It would not be a big problem as long as the high growth of economy can be sustained. This is because most people...

Question:
What's the best place to put your money if your primary focus is preserving its value? During the recent financial crisis, stocks and bonds went down the tubes. Government debt is approaching unsustainable levels, the Fed is "printing money" (via quantitative easing) like it's going out of style, and it's all fiat money anyway, so keeping cash is looking riskier all the time. Real estate (housing) also lost value during the crisis, is highly illiquid, and has ongoing costs (property taxes). Is gold the answer? Is any place safe in a crisis? Help!
Answer:

First, a disclaimer. Whatever is written below is not actual investment advice; it is general economics discussion, a dinner table conversation, no more. When it comes to preserving value, it becomes important to figure out, over what length of...

Question:
Of course, as you know, the entire world has been massively affected by the coronavirus, including the world's economies. Recession will be a huge problem for many countries, even the richer countries such as the US and the UK. So my, perhaps ignorant question, as a 15 year old is - since every country will be negatively impacted by the virus, what would happen if the entire world, or close to it were to decide to just lower the price of everything, the price of buying everything, manufacturing everything, and everyone's salaries are lower too in comparison. Would that solve anything? As after all, the world's economic figures are just numbers, but could cause so much harm to everything and everyone in that country.
Answer:

The way in which prices and money enter models of the economy is important and potentially confusing.  So this is a great question. 

In most models, lowering (or raising) all prices, including the price of labor (wages) would...

Question:
Are goods and services purchased to comply with regulations included in GDP? For example, is money spent on preparing tax returns considered "production" in GDP calculations? It kind of feels like it should *not* be, but I suspect that it is.
Answer:

GDP is the final $ value of all final goods and services produced in a year. Even if a service exists to help compliance with a regulation, it is included because the provision of that service, such as that performed by a tax attorney, is income...

Question:
This is a naive question from a fellow economist.

The model of perfect competition among firms is supposed to eliminate economic profits (a.k.a producers' surplus) in the long run. The idea is that such surplus will bring in new firms, pushing the economic surplus down to nothing, so that there are only normal market rates of return on all factor inputs, explicit and implicit.

Why then does this same model not apply to consumers? I have never seen it stated in any econ text that the entry of new consumers will push their surplus down to zero, including their search costs. Is this a serious inconsistency, or is unlimited entry of new consumers simply not a good way to model most markets? (I suspect the latter.) Even if this is so, should not this asymmetry in our most basic model be explicitly noted?
Answer:

Yes, economic theory traditionally has emphasized the role of the entry and exit of firms in dividing market surplus. In microeconomics, free entry and exit of firms is an important part of the assumption of free competition. For macroeconomists...

Question:
Why do we need inflation? Could market prices just fluctuate according to supply and demand? It seems to me that the only real argument for inflation is that it is means for making the masses work just that little bit harder. By this I mean that companies and governments ensure that inflation rises a little bit more than wages when they want people to work a little bit harder, or to strive for that higher-paying job. In this situation, big businesses (as well as the progression of humanity's wealth) seem to be the only winners (eg. they can increase profits massively if they leave their workers' wages alone, while increasing the cost of their good/service in relation to inflation). Do we need inflation for anything other than this?
Answer:

Inflation is the natural outcome of price changes brought about by market forces and governmental forces. It is the rate of change in the price level that, in a country like the U.S., is entirely determined by market forces and the actions of the...

Question:
Some goods and services are provided by the government (e.g., mail delivery and schools) while others are provided by private business firms (e.g., grocery stores and dry cleaning). Economically, what goods and services would be best provided by the public sector and which are best provided by the private sector?
Answer:

Economists distinguish broadly among three types of goods along the private to public continuum. Purely private goods are purchased and used by individuals and families. Another way of explaining a private good is to say that my use (or...

Question:
This question may not be as clear cut as it sounds in my head, because people have different personal finance strategies based on their income and circumstance. However, the heart of it is that many people base their views on how the economy should work by how their personal budgets/finance strategies work. Can you explain in simple terms why personal finance strategies are not (or are) beneficial on a larger economic scale?
Answer:

Take a simple textbook example due to Keynes. If you are spending beyond your means, a financial advisor may recommend some austerity on your behalf: ask you t cut spending, pay off your debt, and stay within your means. At the level of a country...

Question:
I stumbled across a link regarding a Financial Settlement Tax (not FTT) from Scott Smith who is running a presidential campaign. The idea is to tax financial payments estimated to be $4515 trillion per annum in the US:

“The Bank for International Settlements in Basel, Switzerland, known as the BIS, publishes an annual report known as the Red Book, which reports on the volume of payments for most of the major nations in the world. The Federal Reserve keeps track of payments in the United States and provides the data to the BIS for publication in the Red Book. The Committee on Payments and Market Infrastructures at the BIS oversees the publication of the Red Book. International Financial Settlement payments are recorded and published and 1/10 of 1% could be deducted and transparently reported on the Internet.”

My questions are below:
1) Roughly what percentage of settlements would disappear with a 0.1% tax? My guess is there’s a significant percentage of very low margin trades that would end with such a tax.

2) Since you can’t take nearly 30% from the economy without someone noticing, what distortion(s) would be introduced in the market?
Answer:

1) There is no way to tell even approximately without a well calibrated model. As you suggested, very small profit margin trades will no longer be conducted. However, there are other, potentially much more important routes. First, many small...

Question:
During a discussion with some friends on the whole "free college tuition" debate, along with the trillions of dollars currently owed on student loans, I began to wonder about a solution that would be somewhat liberal, but not so far to the left that it would be completely dismissed.

My question is: would it be economically feasible if the United States changed its tax code to allow all citizens to deduct 100% of all monies paid towards student loan lenders (interest AND principle)?

Responsible tax payers could see a lower tax bill (something we all know conservatives AND most liberals love), or most likely a refund (even better!, and the American public would have a greater incentive to pay down the trillions in student loan debt we currently owe.

I am what people are calling a millennial. I am a liberal. However, I do believe that nothing is free. But after graduating in 2008, my loans quickly rent into repayment long before I earned the chance to pay them off. Almost a decade later, my wife and I have a combined student loan debt of just about $100,000. And that WITH going to a cheaper public in-state school!

Anyways, I digress. I just had this notion, and since my education is more in marketing, I felt I could let the economists tell me if I'm flat out crazy, or if it was a viable plan.
Answer:

This is a great question. Currently interest (but not principal) on student loans is deductible within certain limits. The maximum deduction is $2,500 and the amount of the deduction begins to diminish once your Modified Adjusted Gross Income...

Question:
I've read articles recently which conclude that--adjusted for inflation--paychecks have roughly the same purchasing power that they had 40 years ago. As a layman, this suggests to me that although the average American standard of living hasn't improved in several decades, it hasn't worsened either. I am trying to reconcile this statistic with the "shrinking middle class" and the need for people to work multiple jobs to get by, trends which have emerged gradually over the same 40-year period. I suspect that the answer lies in the rising costs of housing, education, and healthcare, but aren't these variables included in the inflation adjustment calculation?
Answer:

The challenge in describing a large economy with more than 300 million people in it is in finding helpful ways to simplify the data.  Economists often measure economic performance by using one very simple statistic: income per capita, which...

Question:
There has been a lot of talk about how millennial college graduates have had difficulty finding work. As a millennial I find this topic very interesting. I have heard explanations such as the lack of job growth in the 21st century, or the fact that most kids do not graduate college with practical skills. Although the second reason makes sense, statistically college graduates used to have a much easier time finding jobs. That being said, what kind of jobs did people with liberal arts degrees get 20 years ago?
Answer:

In a recent study of U.S. Census data on individual earnings for those with a wide range of degrees for 2010-2011, liberal arts majors who have completed a baccalaureate degree (only) have the lowest median salaries early after graduation ($22,...

Question:
In corporate finance, operating expenses and capital expenses are tracked separately. Total opex within a fiscal calendar goes against revenues to net at EBITDA. Capex is recorded as fixed assets and amortized over x years to net at net earnings. (I know I'm simplifying things.) Importantly, the company's treasury function provides funding for Capex through a mix of cash flow and issuing debt. This seems clean.

My confusion is how this is reported (at least in public spheres) with governments. When we talk about a government's deficit, we seem to be including operating shortfalls (Opex or where existing programs spending is greater than revenues) plus Capex.

Say my government is running a $10B deficit and no change occurs in revenues and in program spending in the next fiscal year. If they propose a new infrastructure project (say railway) that will cost $$20B starting that year, what would be the deficit? I expect the $20B (assuming it actually stays at that level) would eventually be added to the accumulated debt but only the amortized allocation of it would be recorded as a part of the deficit.

Is that how it's supposed to be? Is that what they actually do? It seems the press never makes a distinction between these, which only confuses the public and obfuscates debate about spending.
Answer:

In your example, the infrastructure investment of $20B will be included in the next fiscal year expenditures in the full amount. Thus, the deficit during the next fiscal year will be $10B + $20B = $30B. Also, the debt level at the end of the next...

Question:
Hello, I am a Clemson student in Biosystems Engineering of all subjects and I was working on a side project that had me consider how inefficient ubran development is. I suppose this has two parts: Why are there no private toll roads being constructed by the developers who are turning places like Greenville, Columbia and Charleston SC into parking lots? Is there a legal restriction on the use of toll roads considering South Carolina has two of the only private toll roads I know of?

A shorter way to ask this would be is if there is a true economic incentive to build roads when the government says that they will pay for it anyway.

Answer when you can. Thank you!
Answer:

Private developers will identify profitable opportunities from constructing toll roads; the current road system may be too congested or outdated, or an undeveloped route may have potential to be lucrative. Typically, proposals made by individual...

Question:
I'm writing a story about the impacts of incrementally raising the minimum wage each year, until it reaches $13/hour. Washington just passed the law and it goes into effect Jan. 1.

In my research I was surprised not to discover that not a single economic impact study had been done. Sure the state Office of Financial Management did theirs, and the restaurant/lodging lobbies did theirs. But there is no INDEPENDENT THIRD PARTY study out there ... that I could find.

The question is: Is that a kind of breach of sound fiscal management? Meaning, Washington citizens are sitting back and saying, "Well, let's just vote for it and see what happens?"
Answer:

Alas, your concern about lack of sound fiscal management is not only justified in this case but is justified far more broadly. Many policy changes are initiated without third party studies to back them up. One assumes the government agencies do a...

Question:
Hi.. I am a writer. I am from India.. I need some help on a story I am writing based on economics.. India is a poor as well as a wealthy country. Therefore, it seems to me that money has a dual purpose - Basic Survival and Human Ambition. The poor I see are busting their asses off just to reach basic survival, while the rich are making millions by the strength of their ambition, intelligence, and passion.. I have always heard the argument that printing money to get rid of poverty will in turn lead to inflation thus in turn leading to even bigger poverty. But one day, I had a different idea... What if, anyone is allowed access to print money.. Every money that is printed can only be accepted by government bodies providing basic necessities like food, basic clothing, water, and modest shelter. These government bodies can later exchange that money for anything they want. But the initial printer cannot exchange the first printed money for anything but only for basic public services. All the money in the market will therefore come from a government source providing one of basic services to people. If people want to then improve, meaning if they want to go to a fancy restaurant rather than a public mess,, they will have to earn that money.. Therefore earning money will be associated with human ambition and passion while money itself will be associated with public basic needs.. With survival out of question,, all people can focus on doing a personal business, taking better jobs, etc. in order to improve their lifestyle; economy will bloom... What I need to know, is, for the sake for my story,, what things can go wrong in this model?? Why is this kind of a system practically impossible because I assume if it was possible it would have been already there.. What are the flaws of this model?? Why does this sound too good to be practical?? I thank you for your time and your patience.. I hope to hear from you soon..
Answer:

I think you don't want everyone to have access to the money-printing press or if you do, then let there be a fixed limit (say, they can print no more than a thousand "basics", the name of this currency). If anyone can print as much basics as they...

Question:
My name is Tracy Bergmann, I am the Chief Examiner for the Iowa Division of Banking. We supervise Iowa state chartered banks in Iowa. We continue to monitor the impact of COVID-19 on the institutions we regulate, their customers, and the customers they serve. Agriculture has been on our radar for sometime now, but we are trying to get more detailed data on how much agricultural debt is in Iowa, specifically what is the breakdown between Ag Operating, Livestock debt, Term debt, and Real Estate debt.

We traditionally get our data from two sources: 1) call report filed by banks quarterly which does not go into enough detail to get the information that we want; and 2) the banks themselves when we conduct an examination. Banks generally have concentration reports that will break down debt on many different levels; however, this doesn't give us aggregated point in time data.

I have been looking at the ISU, Ohio State University, and USDA websites in an attempt to get the data we are looking for, but cannot find it. I find news reports or research that mentions these sources, but I can't get to the raw data we are looking for. When I do find data that is close to what we want, it is a couple years old.

Do you have any suggestions on where we can find this data? We appreciate any assistance you are able to give, as we monitor the impact of COVID-19, particularly in the ag sector. Thank you!

Tracy Bergmann
Answer:

The most relevant reports to track the evolution of the financial situation of well-managed mid-size commercial farms in Iowa are:

  1. “Financial Performance Measures for Iowa Farms” Dec 2019....
Question:
Can you see the number GDP per capita increase in the next year and subsequently cause an increase in commercial boat ownership within the United States?
Answer:

Let me start by saying that I have expertise in the economics of commercial fishing. I cannot speak to whether GDP will increase next year. If GDP does rise, there may be channels by which commercial boat building and therefore boat ownership...

Question:
Why are economists and retailers surprised at the 11 percent lower Black Friday sales given the slight rise in the economy? Seems like just because gas is a bit less expensive and overall unemployment, people have still taken a financial hit that cannot be recovered in bank accounts simply by saving a few dollars at the gas pump. Is there an economic theory behind this surprise? I know I save more than most people but the outcome doesn't surprise me. Thanks for any thoughts and for this service!
Answer:

Black Friday is mostly a marketing gimmick to stimulate shopping during an extended weekend of wide-spread idleness, and the weekend’s performance is not a reliable predictor of total holiday spending or the health of the economy. To understand...

Question:
I recently read a story about China stockpiling commodities.
https://www.agriculture.com/news/business/doud-china-is-stockpiling-world-s-grain-supplies

Mr Doud, the chief agricultural negotiator for the U.S. trade representative, has put out statistics saying that China has been stockpiling large amounts of the world’s residual supplies of grains and other commodities and says that stockpiling these commodities is “depressing prices for every other farmer across the globe,”. But why would stockpiling lead to depressing prices? It would seem to me that taking residual commodities off the market (stockpiling) would have the opposite effect; that it would create greater competition for the remaining supplies, which would lead to higher prices.
Answer:

The impact of stockpiling commodities on prices depends on the timeframe. While the stockpiling is occurring, your reasoning is accurate. The stockpiling is removing supplies from the market, creating more intense competition for the remaining...

Question:
Can a market failure occur when there is a high amount of risk within the market leading producers and consumers to avoid the market?
Answer:

To answer this question, it is critical to agree on the definition of "market failure." In what follows, by "market failure" we will mean a situation where a free market fails to provide an efficient allocation of goods and services (i.e., risk...

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