Ask an Economist

E.g., Thursday, June 25, 2020
E.g., Thursday, June 25, 2020
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:
I have been thinking about open market operations that the federal reserve performs to control the money supply and I have a question that I do not fully understand and it is bothering me. An answer to this question will be really appreciated.

Question: Let’s say that if the central bank is keeping the base money at 6% of the GDP then as the GDP expands then the central bank will also have to increase the money supply to keep it at 6% of the GDP. In that case the central bank will perform open market operations to pump extra money in the economy by buying treasury bills. Some of those treasury bills that central bank has on its balance sheet will mature and the central bank will have to replenish those by buying new treasury bills to keep the money supply constant at 6% GDP. So as the economy grows larger and larger, the central bank will be holding more and more treasury bills on its balance sheet and will have to conduct more and more open market operations to replenish the maturing treasury bills? Does that also imply that in an ideal world with no recession and constant GDP growth the central bank will always increase its balance sheet and the balance sheet of the central bank will not go down? Also, if the federal debt is paid off somehow then the central bank cannot use the treasury bill for open market operations so will they use some other type of instruments such as etfs to conduct open market operations? Thank you very much.
Answer:

The money supply and the size of the central bank’s balance sheet are closely connected. Currently and historically, the sum of currency and bank reserves (a narrow definition of the money supply) account for almost all of the Fed’s liabilities....

Question:
The way the economy is today, would it be bad if rich countries (US, EU and Japan) print money and instead of doing the QE (top bottom) inserted the money on a bottom up approach? And I know about the risk of inflation, but isn't it what we want right now? A little bit?

1) I'm talking here about rich countries with deflation or very little inflation, so a bit more of extra money in the market wouldn't be bad (it would be up to them to calculate this amount)

2) The money could be give to the poorest in the society. This money would go straight back to the economy since lower classes save very little (usually they spend the extra money or pay debts). So instead of the trickle down economics (which usually doesn't work) we would have a trickle up economics. Australia did it just after the 2008 GFC and it was one of the only developed countries that didn't go into recession. (although it took the money from its budget).

3) The QE amounted in trillions of dollars and not much of this money went to the real economy in terms of investment and the creation of jobs. A lot of it created an inflation of assets such as the growth of the stock market in US, a housing price hike in world cities such as NY, London, Sydney, LA and so on and even Art prices exploded...but not much to the real economy.

4) Corporations don't need more money in the form of tax breaks and cheap loans (they are swimming in cash). They need consumers to consume! So they know they have a market and be confident to invest in new projects. And with the squeeze of the middle class in rich countries, we are not consuming as much as we need to keep the economy growing.

5) I don't know how much money would be enough to kick start (or improve) the economy of Japan, Europe and US without a dangerous inflation but it could be done in 4 installments along the year to the poorest families. Image something like 4 x 200 USD in one year. This money would make a big difference for low-income families and would flood directly to the economy...and companies would know that the money would come and they could prepare themselves.

6) The dollar is pretty strong now and it's becoming a problem for the US and the rest of the world. So printing a bit might not hurt much.

7) A few years ago negative interest rates were seen as something out of this world. But now Japan, Switzerland and Sweden have it. We just need to think out of the box to improve this economy in a more inclusive way....no middle class, no economy and no democracy!

8) Obviously, this wouldn't work with developing countries with weak currencies and inflation...but for US, EU and Japan...why not?
Answer:

There are several issues here. First, the US central bank, the Fed, is an independent monetary authority and does what it thinks best to keep inflation and unemployment low. They cannot be "asked" to print more money or change interest rates....

Question:
Dose any branch of the field of economics have a term for when producers cease to compete at the production level, but continue to compete fiercely in marketing. The example I have in mind for this is the sports shoe industry (Rebok, Nike, Adidas, etc.), where production has been subcontracted to East Asian companies that specialize in finding the lowest cost producers in China, Vietnam, Indonesia, etc., where the same manufacturer can be in the business of making shoes in the same factory for several companies (Rebok, Nike) at the same. And what precisely are the theoretic conditions that enable this to happen? Are production costs that their absolute lowest so that no production competition is possible?
Answer:

The term you are looking for is product differentiation. This is the name we give to a class of models (most prominently, the Hotelling linear city and Salop circular city models) where firms may have identical production costs and competition is...

Question:
Has the advent of the 401K retirement plan impacted the stock market? It seems to me that the massive flow of cash that must be invested immediately would drive up prices. I understand that prior to 401Ks, retirement plans tended to invest in the host company's stock rather than the general market.
Answer:

In principle, if most companies offering retirement plans switched to 401(k)'s simultaneously and no new stocks were issued (i.e., no change on the supply side of the stock market), I would expect a substantial increase in the stock prices, as...

Question:
In the recent Canadian federal election, the winning Liberal party's platform included running a "small" fiscal deficit of about C$10B each year for 3 years to invest in infrastructure. The commentary about this that most surprised me was this would not increase the accumulated debt, and in fact would still contribute to reducing the debt, albeit more slowly.

Does that make sense? My understanding is that any fiscal year you end up with a deficit means you're borrowing more to make up the shortfall, and thus adding to the accumulated debt. Or are there technical aspects during the year that do otherwise?
Answer:

Given that the standard definition of government spending does not include the repayment of maturing debt, your understanding is correct. In particular, during the three years of running the deficit as planned, the Canadian federal government...

Question:
I was just curious if there was some law or regulation somewhere that stipulated that an insurance company had to be a for profit business? If you had the capital to cover the costs, could you run a insurance company as a npo and funnel profits into a cost sharing fund or something like that?
Answer:

No, there is nothing preventing non-profit organizations from offering insurance. Indeed, this is quite common in health care, with non-profit health insurers accounting for over 60% of health plans with more than 100,000 people enrolled (...

Question:
In news and other articles it often is stated "the cost of something could reach billions" or some such statement. Do these statements mean anything?
Answer:

It means that once the dust has settled, insurance companies have paid out, homes have been rebuilt, infrastructure redone, people have moved out, businesses rebuilt, and so on, the total cost of all that would reach billions. These "billions"...

Question:
Hello. First of all, this idea about answering economic questions is just wonderful and very helpful to simple citizens, but to people like me, too, who are studying economics and want to ask some things. My question has to do with the rate between two currencies. I know the basics but I would like a deeper answer on what it means for the countries the two currencies represent. For example, how can we understand which country is more powerful when we know the rate between their currencies. A few examples, such as with the euro and dollar, would be appreciated in order to understand it better. Thank you in advance!!
Answer:

The rates don’t reflect relative power. For example, 1 UK pound equals about 1.56 USD. That does not at all mean that UK is more powerful. Similarly, a US dollar approximately exchange for 122 Japanese yen currently. By no imagination, it means...

Question:
In light of the current pandemic, and constant feuding about what it means for our economy, I wanted to ask what the best long term solution is for reopening the United States economy. Is it in the best interest of our economy to reopen soon, losing lives, or is minimizing the death in the long term a better economic strategy?
Answer:

In short, we do not know, especially so because nothing like this has hit the US in modern times. The Great Depression was a massive disrupter and devastator but caused ultimately by economic forces from within. This time around, the fundamentals...

Question:
I keep seeing this number used instead of actual dollar numbers. Isn't most government spending a part of GDP? If $1 billion spent on a battleship raises the GDP by $1 billion, doesn't that fatally skew the percentage formula?
Answer:

Let me start by reminding you that GDP is a measure of the total amount of goods and services produced in an economy, say the USA, in a year. So it sums the total value in dollars of everything that has been produced in the country in a given...

Question:
Because of QE, the money supply has increased substantially since 2008. Why aren't we seeing more inflation?
Answer:

As noted, the Federal Reserve has significantly expanded its balance sheet from about $800 billion prior to the Financial Crisis, to roughly $4.5 trillion as of November, 2014. The Fed expanded its balance sheet by buying long-term assets and...

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...

Question:
At the risk of sounding like a socialist, I wanted to ask about potential economic potential of a maximum wage. Sweden tried it with a 12:1 ratio, failed sadly, but I wondered if a less extreme idea would be viable. Say 100 times the minimum wage is the most anyone could earn in gross taxable wages. I'd probably say it would be fair to exclude athletes and entertainment industries. It would be a hard sell for congress so this is purely a theoretical question. Short of how the CEOs would feel, what is the viability and potential impact on the economy?
Answer:

I am not sure there is any deep reason why a government would want to set a cap on wages. What purpose would it serve, other than to curb income inequality by lopping off the top rungs of the ladder? If that is desirable, then there may be other...

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:
Hi! I'm trying to do more reading on economics this summer as I consider applying to master's of economics programs after working in IT for 13 years. I came across a paper (linked at the bottom) on inequality. I only have an undergraduate level understanding of economics and statistics (think intermediate micro/macro and an introductory stats class I took around 2003) so I'm limited in my understanding.

I'm reading through this paper and while I can think of reasons why some of the conclusions might be true I don't get how empirically they are reaching their conclusions.

1) According to page 16 item #23 "The empirical results show that inequality has a negative impact on economic growth. The baseline results are reported in columns 1 to 4 of Table 1" and then goes on to explain its reasoning why inequality negative impacts growth and says "Based on the estimated coefficients in column 1, for example, lowering inequality by 1 Gini point would translate in an increase in cumulative growth of 0.8 percentage points in the following 5 years".
2) In item #29 (page 19) they go on to say "Taken together, these results suggest that inequality in disposable incomes is bad for growth, and that redistribution is, at worst, neutral to growth". Again while I can think of some reasons why this may be the case (and some reasons why it may not like if some of the wealth leaves the country so as not to get redistributed depending upon implementation) I'm not sure how they are coming to that conclusion empirically.
3) Then several times they estimate what the impact on growth would be for every % change in the Gini index but I'm not sure how they built that numerical assumption.

I came across the paper because I was trying to do some simple research into whether income inequality can lower the velocity of money (though so far I've just pulled some data from FRED on MZM and the Gini index and found like a -.46 correlation.

I'm hoping I could learn from someone to better understand how the tables this paper provides actually translates into the conclusions they claim; I don't know how to properly interpret the tables.

https://www.oecd-ilibrary.org/social-issues-migration-health/trends-in-income-inequality-and-its-impact-on-economic-growth_5jxrjncwxv6j-en;jsessionid=g-XlVT6DTb4_r_CW_3M5veza.ip-10-240-5-57

Thanks!

Christopher

Answer:

1) According to page 16 item #23 "The empirical results show that inequality has a negative impact on economic growth. The baseline results are reported in columns 1 to 4 of Table 1" and then goes on to explain its reasoning why inequality...

Question:
I know that when there is too much of something the value of that item goes down. If the money supply of US Dollars goes up drastically that will that lead to or cause inflation of the US dollar or a decrease in its value. According to an article I am referencing *," When inflation starts to bubble up, Treasury inflation-protected securities can turn down the heat on your portfolio. Issued with the full faith and credit of the U.S. government, TIPS are one of the few investments guaranteed to earn, under normal circumstances, a "real," or after-inflation, return. Their principal value adjusts in sync with the consumer price index and, because the coupon payments on TIPS cue off this adjusted principal figure, the bonds pay an inflation-indexed income, too."
So my question is: if the US dollar loses 10 % of its value to inflation, how much will the bonds return? In dollar amounts- a $5000 investment in Treasury inflation-protected securities should yield how much?
* http://m.kiplinger.com/article/investing/T041-C000-S002-why-you-need-tips.html
Answer:

Suppose that $5000 is the face value or redemption value (not the market price at which an investor may have bought it) of a 5-year TIPs. Suppose that it promises to pay an annual coupon payment of 1% or the amount of $50 at the time of purchase...

Question:
I watched President Obama’s speech this last week, and I didn’t understand something. He said he’s cut the deficit by 2/3. Yet, we need the debt ceiling raised in order to avoid a government shutdown. Why? If I were to pay down 2/3’s of my debt, I would have a larger amount of credit available to me. What am I missing?
Answer:

You are missing a key difference between the federal budget deficit and the public debt level. The deficit shows by how much the federal government expenditures exceeded its revenues in a given fiscal year; the deficit is measured per year. In...

Question:
Can you tell me, please, what the projections are for the U.S. and State of Iowa work forces? What is the likely composition of those work forces, and where/how would we be smart to recruit in order to build the strongest pool of workers over the coming years?
Answer:

The U.S. Bureau of Labor Statistics has an annual projection of employment and labor force growthThe most recent is Employment Projections: 2018-2028, available...

Question:
One of the macro economic indicator that is monitored by organizations is "the contribution of construction to the GDP". This is measured in terms of percentage contribution of construction.

My question is:
What does this comprise? Does it include large infrastructure projects/oil refineries/nuclear plats etc or not?
Answer:

As you probably have seen already, you can find the measure of value added to GDP per sector of the US economy at the Bureau of Economic Analysis website, specifically at this web address: https...

Question:
With all the killing of poultry by bird flu and euthanizing that will this do to the retail poultry prices?
Answer:

Avian influenza has continued to spread, particularly in flocks of egg-laying hens. When a farm encounters a case of avian influenza, some birds die and others are euthanized. In the immediate short-run, this translates into a direct reduction in...

Question:
Can an economist call the economy good when there is low unemployment, good profits, but great income disparity? Is it within the realm of the social science of economics to consider social justice?
Answer:

Economists measure the economic health of a country by its G.D.P per capita. They see low unemployment as good because it means labor resources are not sitting idle. They also consider whether income disparities are good or bad. In fact, these...

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