Ask an Economist

E.g., Thursday, August 6, 2020
E.g., Thursday, August 6, 2020
Question:
I work for a local government in Kansas and recently discovered FDIC deposit data by county, zip code, institution. I was wondering what an increase or decrease in deposits might indicate about a community? I couldn't find discussion on-line regarding how to interpret this FDIC data. Thanks for you help. -Mike
Answer:

Information on changes in deposits at commercial banks can be useful in gaining a better understanding of a local economy. However, determining whether an increase in deposits is positive, negative, or neutral can be difficult if the reason for...

Question:
I gave an economic presentation the other day and we were talking about how the Chinese devalued their currency to make their exports cheaper to the world, and essentially position themselves better to the American consumer. Someone asked me then why doesn't the U.S. simply follow suit. I answered that every country could not do this because it would end up being a zero sum game and that everybody would eventually lose and that it would not be sustainable. Furthermore, with the U.S. dollar the reserve currency of the world, the amount of volatility in the market place would skyrocket if the U.S. did the same thing. What else could I have said or is there another angle to tackle the question?
Answer:

China’s total trade (exports+imports) as percentage of GDP is about twice that of the US. In this sense, the US is a relatively closed economy and therefore its monetary policy is (and ought to be) more domestically oriented. Second, Chinese...

Question:
Dear Iowa State economists:

This question is predicated on five assumptions: first, that investors generally now prefer capital gains over dividends, a shift that occurred in the '60s or '70s; second, that this preference for capital gains encourages corporations seeking equity funds to appear to have potential for growth; third, that this appearance causes equity markets to overvalue such firms; fourth, that the second and third factors cause managers to make deceptive decisions, ultimately misallocating capital. This story is based on a couple essays I read defending short selling as a way to devalue overvalued firms.

Whether or not short selling is "encouragable", the story was convincing enough that I came to think it would be a good thing to push investor preferences back towards dividends, so that capital would be at least somewhat more allocated towards sustainable profitability instead of unsustainable growth.The policy that occurred to me to accomplish this was to raise the capital gains tax and lower corporate income tax.

What is your opinion of this story and policy proposal? Are either plausible? Where do these views sit in today's economic rhetoric?
Answer:

Thank you for these interesting questions. As they indicate, you are already well aware of potential distortions associated with tax policies. It is quite possible that your suggested policy proposal would be associated with distortions and...

Question:
Many markets in third-world countries have small stores selling exactly the same goods located side-by-side. In the Mid-East you can go to the gold souk, or the carpet souk. In the Far East you will see an entire street of hat shops, or bamboo-pole shops. My favorite street in Hanoi is full of shops that only sell gaffer-tape and scotch-tape. What is the economic mechanism that drives this clustering? Surely the pressure would be to price your goods lower than the next guy, thus driving down prices overall, to all of the shop-owners disbenefit?
Answer:

Souks and bazaars are in appearance competitive market places. The close proximity of shops selling virtually identical goods should drive price down. So, why do shops locate close to each other instead of locations where they would have less...

Question:
What is your opinion on the potential impact of the proposed Nicaragua Canal, a trade route that would connect the Pacific Ocean to the Caribbean via Lake Nicaragua, on the Nicaragua economy?
Answer:

I will focus on the benefits of the Canal when it becomes operational, because a project of this magnitude is very likely to create numerous temporary jobs and plenty of opportunities for local companies in the construction sector during the...

Question:
My name is Por Chandara, government officer, responsible for law and policy making. May I seek for your kind support. I want to propose a LAW ON ECONOMIC SYSTEM OF THE KINGDOM OF CAMBODIA but I have no idea where and what I should start with. May you provide me some input and samples for drafting the law.
Answer:

You have asked a very interesting question. Without more specific information, it would take volumes to answer this general question appropriately; however, I can point you to a few resources that may be useful.

     ...

Question:
Burkina Faso has an employment rate of about 15%, give or take. Approximately 85% of the population is subsistence farmers. Does this mean the country's economy is supported by the 15% of the population who are receiving a wage (not including foreign aid)?
Answer:

The answer is no. It is not correct to conclude that Bukina Faso’s economy is supported by only 15% of the population. It is a common challenge in developing countries to appropriately account for employment and the economic contributions of a...

Question:
Regarding the great minimum wage debate, I found a quote attributed to John Boehner that goes something like this: “Employment is like everything else: the more expensive it is, the less you get.” What would be a bumper stickerable argument to counter that? I think Boehner’s point works because it is short, simple, and has economic cred. For my students’ benefit I'd like to find as effective a point to make in support of a higher minimum wage.
Answer:

Are your students economists? If so, it will be difficult to fashion a legitimate bumper sticker in support of the minimum wage. Boehner’s quote is called the “Law of Demand” in economics. You might use:

“Because employers can pay...

Question:
I have questions on China soybean import tariff.

1. Because of the tariff on US soybeans, China buy soybeans from other countries. How can other countries increase their production to accommodate this sudden increase of demand? You cannot just grow more soybeans by flipping a switch. Supply and demand suggests there was an equilibrium before. Those buyers who "lose" their orders to China have to find soybeans somewhere else. Does it mean they come back to the US farmers because they are the only producers left in town?

2. China is a big soybean buyer and can move the market. Soybean prices have been fallen since the tariff announcement, factoring in the impact of the tariff. Does it mean it hurts other producers like Brazil? But why there are reports saying Brazilian farmers are happy about increase in export? They don't suddenly produce more to sell at a lower price. According to Business Insider, Brazil is estimated to produce 3.5% more year-to-year. Is it enough to cover the loss in lower prices?

3. What happens to the US unsold China-bound-supposedly soybeans? Are they sold to other nations as mentioned above, or they are left to rot?
Answer:

The policy-driven increase in the import price of U.S. soybeans into China generated a change in relative soybean prices across the globe, making U.S. soybeans relatively more expensive and soybeans of other origins, such as Brazil, relatively...

Question:
Iowa’s 2016 current gubernatorial race is starting to heat up. Democratic challengers, as are all politicians, citing "job creation" as a major platform focus of their political campaign. In his 2010 campaign, Terry Branstad set a "job creation" goal for his 5th term as Iowa's governor at 200,000 new jobs. The Governor now claims to have created 130,000 Iowa jobs to date. How many "new" jobs has the Governor actually created and how many "net" jobs have been created in Iowa since January 2011?
Answer:

Governors really do not create jobs. Their departments of economic development, as well as other departments, may provide assistance, subsidies, and other types of aid to industries, but they do not create the jobs. The industries create the jobs...

Question:
I understand that the balance of payments should be equal, and that the Current Account should equal the Capital Account. The U.S. imports more than it exports, so other countries have more of our currency and can use it to buy assets. What I don't understand is how that USD is categorized in the interim. If Company U.S. buys $1 million worth of goods from Company China, how is that cash categorized while it remains unspent in Company China's bank account? What if they just let it sit there and continue to save that cash, wouldn't this throw off the balance of payments and cause the Current Account to be greater than the Capital Account due to the unspent cash?

Thank you!
Answer:

The balance of payments accounts are maintained on a double entry basis. An import of $1 million will show as a negative $1 million entry in the Current Account. When the Chinese exporter receives and deposits this $1 million check in its Chinese...

Question:
I don't understand why deflation, or even the zero-bound liquidity trap are not easily escaped by printing money.

I understand why deflation is debilitating, and why the zero-bound inhibits monetary policy. Why can't central banks just print money, and turn it over to their national governments to generate inflation? As a bonus, those governments would then have more money to spend - presumably to the benefit of their populations.

I do understand that high inflation carries its own problems (I remember the 1970s) but could a central bank facing perennially low interest rates not just run the presses until inflation began to approach its target level?
Answer:

In the US at least, financing Govt expenditure/budget deficit by using more Federal Reserve notes is not an “usual” option (the way it is in India for example) is primarily because the central bank’s independence from the Treasury and the Govt’s...

Question:
Can artificial scarcity be considered a nudge under nudge theory (from readings it sounds like nudges should be transparent if so, can I call it a non-transparent nudge?
Answer:

Thaler and Sunstein in their book define nudge as “any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives.”

...
Question:
From 1934 to 2015 the mean difference between the national debt and commercial bank assets has been as follows: National Debt = 0.94 x Commercial Bank Assets. There is a simplistic narrative of the national debt that goes as follows. The government spends into the economy and then removes some of the spent money and then spends more, etc and the amount the government does not take from the economy is equal to the debt. This simplistic narrative does not include the complexities of a central bank, an endogenous money supply system, etc. Is it possible that the narrative is true but the system enables commercial banks to "capture" the money as their assets?
Answer:

A fundamental principle of accounting is that the liabilities of one party are the assets of another. National debt is simply the amount owed by the federal government – that is, its liabilities. Some other party must hold these as assets, but it...

Question:
If you have a large amount (lets say 50%) of your wealth tied up in a single foreign currency and your home currency depreciated what would be the effects? Would you be better off or worse off than someone with all their wealth in their home currency? What are the variables that would determine if you are better or worse off?
Answer:

Your wealth in terms of home currency will increase whereas in terms of foreign currency it will decrease. If your home country prices remain the same, it means your real wealth has also increased. So, broadly, it depends on when and where, home...

Question:
What would the impact of a Congressional or Presidential order for a “financial time out” until the virus is brought under control? This would be a closure of the stock market and suspension of all debt and rent. This would be far cheaper than throwing trillions of borrowed dollars at everyone and everything! I believe we are working on the wrong part of the “equation.” People would only have to worry about food, water, and utilities. This is a much smaller problem to solve! When the virus is brought under control, the “time out” can be canceled and the economy can be brought back to life. People will have confidence, in the meantime, that their life savings isn’t going to melt down. It is absurd to allow this virus to destroy our economy! It doesn’t have to!
Answer:

When banks lend out money, they do so expecting repayment.  If banks are not repaid, the value of the loan decreases.  By law, banks are obligated to value their loans at the fair market value.  Mandating that all repayment stop...

Question:
A few of my friends believe that the cure for cancer already exists, but the pharmaceutical companies won't release it because they make more money treating the disease rather than curing it. In my head, the company that had the cure would end up making the most because they would have a better product. My questions is which model would be the most profitable?
Answer:

You have put your finger on an important topic that economists have been arguing about since Kenneth Arrow’s analysis of the incentives to innovate in “Economic Welfare and the Allocation of Resources for Inventions” in _The Rate and...

Question:
I do not fully understand how Open Market Operations of US Treasury Bonds by the Fed increases the money supply, i.e. reserves. Treasury issues a $1000 bond which is given to a primary dealer to auction off. The NY Fed buys that particular bond by crediting the dealer's bank account with $1,000 the Fed just created. But doesn't the dealer now have to remit that $1,000 to Treasury? The dealer is at net $0.00 (ignoring commissions or other minor amounts). So when the Fed buys bonds, the new money actually ends up at Treasury. That doesn't seem to agree at all with my reading that the new money is held as reserves at commercial banks. Can you please clarify?
Answer:

Money supply increases when the FED (say NY FED) buys T-bonds from other banks (say Wells Fargo) or non-bank public (say a household or a dealer) in a secondary market, NOT a primary market. The Treasury does not get anything if its assets are...

Question:
Would the implementation of Land Value Tax be reasonable in a small country with a tourism based economy? For example, a country such as The Bahamas has low levels of industrial output and exports. The Bahamas is a country that relies heavily on tourism (specifically the hotel industry), foreign investment and the banking industry to generate revenue. Also, there is a growing sentiment that the low levels of innovation and productivity in the private sector are due to various taxes on imports needed to start and grow a private business. Therefore, would a single tax (the land value tax proposed by Henry George) be beneficial? (Also may the reply possibly contain some details pertaining to an ideal tax rate for the land value tax and may some arguments be included in regards to providing certain methods to properly implement the land value tax in the case of a nation such as The Bahamas?)
Answer:

Economists generally agree with Henry George that land value taxes promote efficient use of land.  A small country with a tourism-based economy seems like an excellent case for the efficiency of a land value tax.  The bigger issues...

Question:
I've worked with, or had my kids, in many organizations that rely on (and demand) contributions. They claim that 100% participation (even a single dollar) is important because other donors look at the participation levels when making their decisions. It seems plausible, but is there any ACTUAL evidence that (a) that is a wide-spread practice, and (b) that such institutions actually raise more money?
Answer:

This question is in two parts: 1) How prevalent is the requirement for 100% giving of any amount; and 2) Do organizations raise more money if there is a 100% giving expectation?

Let me begin by stating that I’m not aware of any research...

Question:
How many families would be helped by raising the minimum wage?

This week the Congressional Budget Office analyzed the effects of raising the minimum wage to $10.10. They say (Table 4) that it will raise the average income for families in poverty by $300, but also (Table 1) that it will raise the total income for families in poverty by $5 bn.

These two numbers would make sense if there were 17 million families in poverty, but the census says there are only 9.5 million families in poverty. The numbers about families at other income levels have the same issue. Somewhere a number or an interpretation is wrong -- but where?

CBO link: www.cbo.gov/publication/44995

Census link: www.census.gov/hhes/www/cpstables/032013/pov/pov04_000.htm
Answer:

That’s an astute observation. As you say, $5 billion divided by $300 per family in poverty suggests there are about 17 million families in poverty. But the Census data cited in the CBO report indicate far fewer families in poverty. Updating your...

Question:
I have no formal background in economics, not even a college ot high school course, so my question may be simplistic. I am given to understand that bank assets include loans and the value of those loans is one factor in determine the asset holdings of banks. If this is correct, is debt reflected as a net economic positive in the GDP because the banks assets include debt, which is construed as income? By extension, what gets measured in GDP, income from the loan during that year (my payments) or the total value of the loan? Or is it both?
Answer:

GDP is the $ value of the total value of final goods and services produced in a year. That is the income definition. There is an equivalent expenditure definition. Loans are financial assets and all financial assets and liabilities are not...

Question:
Why aren't citizens who have given up looking for work not included in the unemployment numbers?
Answer:

Various measures of the U.S. labor market are prepared and published by the Bureau of Labor Statistics (BLS), U.S. Department of Labor. The (civilian) labor force (L) is defined to be the summation of those in the non-institutionalized and non-...

Question:
Hi, I am studying an introduction module for Economics on a business degree course. I have recently covered the theory of Comparative Advantage within International Trade. While the theory makes perfect sense to me, and I can see why it would benefit different countries to trade together and import/export different goods to maximize profitability and production costs etc., I am struggling a little to ever find real world examples. For instance, every example I ever see for this model, shows two different countries and two different products. For example USA and China, both producing Planes and Electronics. Usually the answer works out that it would be best for USA to export the planes and import Electronics and vice versa for China etc. However, I am sure International Trade does not involve the bartering of goods. All trade is carried out with normal currency transactions right? What about if USA produces 10 million products, and China produces 30 million products. Is the Comparative Advantage now worked out between all of these products or is it still maybe one or two products compared? This seems in the examples of books really easy, but then practically impossible if all products are compared?

Also, who carries out these imports/exports or who decides it's better to import/export certain products? Is it private sector industries or is it government influenced.

So back in the previous examples of USA producing planes and China producing Electronics both with comparative advantages over each other. We know in real world examples Boeing in the USA produces planes and Huawei in China (along with many others) produces Electronics.
Does this mean Boeing should export planes to China, but what has this got to do with the Huawei company in China? They don't necessarily care about planes at all? Their business is electronics?
Does it also mean Boeing should use Chinese electronics on their planes (which I'm sure they don't)? This is where I am struggling to see the real world examples of it all, and understand WHO works out what products should be Imported/Exported from specific countries etc.?
Also who works out what country would be best to import goods from and what countries are best to export goods to?

I live in Ireland, and obviously dairy farming and beef are big exports here. But is it down to the individual farmers to understand these economics, or would the government figure a lot of this out?
Answer:

Prices will drive the system. For example Ireland has a comparative advantage in cheese and butter due to climate and a large amount of land suitable for dairy cows.  China has a comparative advantage in electronics because it has an...

Question:
If banks create credit from thin air, when they issue loans, and make astonishing interest in doing so, why would it not be beneficial to have their government create the credit? Then the interest collected on those loans could be used to fund goodies for the people, instead of super-yachts for crooks! Cheap loans for the poorest, expensive loans for the richest. Narrow the wealth gap a smidge. I cannot see a down side. Was this not how it once was, to our great prosperity? Is access to credit not the true essence of opportunity. Only people create value, thus, credit can only be created by the people. When did private banks capture our credit? And whom is responsible?
Answer:

There are government owned corporations or government backed corporations that directly lend to households or foster lending to households in other ways, for specific purposes. For example in the US, GNMA (Ginnie Mae), FNMA (Fannie Mae) and FHLMC...

Pages