Ask an Economist

E.g., Friday, March 29, 2024
E.g., Friday, March 29, 2024
Question:
What could cause live cattle prices, that is the price paid for cattle on the hoof, to plummet, suddenly, when numbers have not increased substantially, (we were in a herd building mode following a drought), but boxed prices are at an all time high. Packers are receiving huge net profits, ($1300 per head)while ranchers are losing money. ($350 per head). Cattle-Fax and other statistics gathering reporting and marketing services predicted that cattle prices would remain high throughout the herd rebuilding phase of the cattle cycle, about 3 years. But, suddenly, and without warning, cattle prices crashed, August 2015, There was not a crash in the general economy. Live cattle are traded on the futures market, Chicago Board of Exchange. The U.S. does engage in exporting and importing of beef. Secondly, because of a fire in a processing plant, and the COVID19 pandemic, the problems in the cattle industry have come to the attention of the federal govt. because of food security issues.

What measures can be taken to keep the cattle industry in the U.S. from imploding? What can prevent vertical integration from further occurring? How can the American farmers and ranchers be kept from bankruptcy, (without gov’t subsidies or handouts) making sure that private ownership of land persists? What kind of market manipulation could cause all this?
Answer:

Here are several resources that begin to address many of your questions.

Beef Marketing Margins - http://jaysonlusk.com/blog/2020/5/4/beef-marketing-margins

...

Question:
Hello, I'm a 42 year old woman from Los Angeles CA. Due to personal reasons I left the state for about 10 years. Now that I'm back, I noticed that things have changed a lot! For example: when I was a young adult, I used to work as a waitress. I remember that most of my co-workers were about the same age and most of us were attending Junior College. However, now I'm 42 years old, I noticed a completely new group of people. Most are mature, in their mid 30s to mid 40s. A lot of them made careers out of working as servers. How does it affect the economy to have more people pursue careers in minimum wage jobs?
Answer:

First, the characterization of foodservice and restaurant workers as a career track is inaccurate. The median age of restaurant workers is 28.4 years, the second youngest sector of our economy (next to retail shoe stores at 24 years). As shown in...

Question:
What is the ADJUSTED gender pay gap in Iowa? Such as when adjusting accordingly for choice of education, child rearing, profession such as manual labor jobs, dangerous jobs, and other life choices?
Answer:

The Male Female Wage Gap in Iowa compared to the U.S. by Peter F. Orazem and Levi Soborowicz

The Current Population Survey March Supplement includes questions about the last year’s annua earnings. The survey includes...

Question:
Hello, in the article https://news.cgtn.com/news/2020-08-07/China-confident-of-meeting-2020-fiscal-targets-Finance-Minister-SKUFJsrke4/index.html , it says China has been implementing tax and fee cuts, and "issued 100 billion yuan (about 14.1 billion U.S. dollars) of special government bonds for COVID-19 control measures in a bid to support local infrastructure construction and epidemic prevention and control." In what ways will implementing tax and fee cuts help China's recovery? And if selling government bonds is a contractionary monetary policy, what will this do, other than fund fiscal objectives, to help a recovering economy? Why sell bonds instead of borrow more?
Answer:

China mainly cuts corporate tax and fees (no tax cut for individuals) during the COVID-19 epidemic period so that firms could have incentive to increase the production compared to the scenario without tax and fee cuts.  

...

Question:
Where did the money come from, what kind of economies, why did they run out of money?
Thank you
Answer:

Projects like temples and pyramids, as with public monuments today, represent a choice about how labor effort in a society is directed. Some labor is required to produce food, shelter and clothing that are necessities for sustaining life. Beyond...

Question:
I took an undergrad macro economics class at Drake University a few years back and I had a hard time understanding the professor on several issues. (I want to say that I'm not politically motivated here, or trying to make a political point). One issue was regarding national debt and deficit spending. In class we discussed how historically the USA general public and government hadn't looked favorably on holding debt until the 1930's. During this time through borrowing and spending on domestic projects the federal government helped pull the nation out of the grips of the depression. Since then it's been an accepted part of life that deficit spending by the federal government has more good than ill effects. Sometimes I think this works, but too often it's just assumed it works and we've worked ourselves into a massive financial hole by this unchallenged assumption. The rational he used was the debt was being bought by citizens and thus the interest on this debt was owed to ourselves, and when the gov repaid the debt and interest there was a gain somewhere in the US economy for purchase or investment in something else. I could buy this point of view if the Treasury sales were restricted to US citizens, but the fact is there are many international purchasers of our debt so we are actually paying out interest to England, Canada, Japan, China, etc. So the beneficiaries are not ourselves, but foreigners. I'm not sure if the professor was getting his point of view from a textbook or his own judgement, but I'm curious why these viewpoints are not scrutinized more in academia. Any insight would be helpful, thanks!
Answer:

Your understanding is correct that government debt allows governments to handle economic recessions better. When the private sector employment and therefore consumption demand is shrinking, the government can increase its public sector spending (...

Question:
In many developing countries, similar types of shops are located in a clumps in the cities, right next to each other. All the motorcycle repair shops will all be on one block, and all the kitchenware stores are all on the next block, etc. Are market forces responsible for this somehow? One source suggested there was a Nash equilibrium at play, but that doesn’t seem to fit. There could be non-market factors like zoning or tradition, but why would that be the case in under-developed countries more than more developed countries?
Answer:

This is an interesting observation.  We regularly see spatial clustering of similar establishments for a number of reasons including natural advantage, agglomeration economies, zoning, social networks, and "norms" shaping location decisions...

Question:
I am studying education currently, and we have been asked to explain the areas of our high school history classes we feel have failed us. While writing my essay this evening, I remembered when my teacher at the time (a White, 30-something pregnant woman) was talking about Hamilton's financial plans and how they are still destroying the country today. One of my classmates asked something about the wage gap between men and women, and my teacher looked at all fifteen of us and said, "Well, when you factor in paid maternity leave, there is no wage gap." I have thought about that every single day for four years. When I took AP Microeconomics the following year, I asked my teacher if what my history teacher had said was true, and he refused to give a straight answer, saying more about the experience and what degrees employees have upon hiring. I really believe that maternity leave does not "fix" the wage gap for a lot of reasons, but no one I have asked has given me an explanation.
Answer:

Similar to the response of your AP Micro teacher -- part (potentially a large part) of the gender wage gap can be accounted for by the differences in the fields and positions that working men and women hold in the workforce. This study <...

Question:
Since the U.S. has "Fiat" currency, why does the Treasury sell securities?
Answer:

The sale of Treasury securities is the government's way of borrowing funds from the public. When the government sells bills, notes, and bonds, the public, the investors, become the government's creditors. The Treasury...

Question:
Is bitcoin meet the definition of money? if so How?
Answer:

Money refers to any asset that is widely used and accepted as a form of payment. It must be a medium of exchange, a unit of account, and a store of value (assets like stocks, bonds are all stores of value meaning they can be traded for goods at a...

Question:
Can you tell me a price range (per acre) that Central Iowa farmland sales have fallen within the last 6 months or so and is that price generally trending up or down? I am specifically interested in Webster County.
Answer:

Thank you for your question. Yes, we have recently developed a new Iowa Land Value web-portal which allows you to visualize the trends in Iowa land values at the county, district and state level. It is available at...

Question:
When we talk about interest rates, theoretically we say that lower interest rates lead to higher investment, thus higher GDP. My question is, using data from World Bank or other institution, what sort of interest rate should we consider (there are many of them, deposit interest rate, reference interest rate) and theoretically seems not to be well specified. For instance, in regression analysis, if we want to compute the impact of interest rate to GDP, what kind of rate are we paying most attention to while using data?
Answer:

As is usually the case in economics and economic data analysis, the answer is "it depends."

From a theoretical standpoint "The" interest rate is not really something that exists in the real world, it is more of a conceptual tool that...

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:
I understand that inflation occurs when demand for commodities far exceeds supply (like now) and that the Fed typically raises interest rates to lessen overall demand and reduce/control inflation. This approach seems focused on addressing demand, but does it also affect supply? Businesses want to expand their capacity to meet higher demand and typically need capital to do that. Does the policy of increasing rates ultimately limit businesses ability to expand further hindering their ability to meet demand? Wouldn't be better if we lent more aggressively to businesses so that they could increase capacity rather than reducing demand?
Answer:

Standard theory describes channels through which raising rates affects both demand and supply.  Higher rates raise the opportunity cost of spending and thus tend to dampen both business investment and household consumption.  All else...

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...

Question:
I would like to ask you a basic question of not understanding quantitative easing. I understand the mechanics but I don't understand why this is considered pumping in "fresh" money, since the FED is just buying up Bonds that were purchased before. They are NOT just giving away absolutely free to BANKS. I know it's wordy but the below elaboration details my confusion. Hope you can help. Thank you!

In quantitative easing, the process of US Fed Bank buying bonds from Banks in order to increase money supply is pretty straight forward but no one seems to be able to explain my particular question or I guess confusion. I even posted on the US Fed open market website but they just gave me the typical answer I already knew.

Again, I'm aware that the FED can pretty much "print money" out of thin air and "inject" it into system but when I look closer at the details of what is happening, I still have trouble describing the process of injecting "fresh" money into an economic system because it looks as though they are limited by putting back the money that was spent to buy the bonds in the first place by banks.

So, to elaborate what I'm trying to say is that if you have a situation of the FED just giving away cash or call it a credit on their ledger for various banks out of the blue. Now that is exactly what I would call injecting fresh money because the banks didn't have to do anything or exchange anything in order to receive that money, just like if I were walking down the street and a complete stranger just came up to me and handed me cash. Now that scenario is what I would understand as injecting fresh money on top of a system.

But what is really happening is that under open market operation for quantitative easing, the US FED is buying up all the bonds that banks are holding at a given moment. Those bonds were purchased at an earlier time by various banks by giving money to the FED or other government agencies, so it looks at best to be putting all the money back into a system in which those monies were extracted from the system before, therefore it's not a "fresh" injection of new money. So it's just putting equal money back into system that was taken out at earlier time? Isn't it?

In other words, let's just say for simplicity that all US Banks spent $1 Trillion to buy bonds 5 years ago (so 5 years ago, $1 Trillion was taken out of an economic system) And now, 5 years later the FED is buying up those bonds from the banks(putting $1 Trillion back into system) The net effect is no new fresh money.

Put it another way, if you add up all the bonds that banks are holding, let's say it comes to $1 Trillion, the FED even though they want to inject $2 Trillion into system over time, they can not do that because all the bonds that are out there doesn't equal $2Trillion; they can only purchase back up to $1Trillion. So the saying, the FED can "print" money as much as they want into a system is not possible, at least in this example of how they do it now in the real world.

I'm sorry for such wordiness but you won't believe how much misdirected answers I get even from professionals. I'm really hoping you can shed some light on my confusion.
Answer:

Let me try to answer your question by breaking it down.

“In other words, let's just say for simplicity that all US Banks spent $1 Trillion to buy bonds 5 years ago (so 5 years ago, $1 Trillion was taken out of an economic system)”.

...

Question:
I would like to get your educated opinion on Right to Work, specifically, what will happen if all 50 states in our country become RTW states.

Right now, it is attractive for a corporation to set up or move their business to a RTW state due to lower wages and not having to deal with strong unions. I understand this. But how will a RTW state entice a company to move FROM a RTW state?

Cut corporate taxes? Suppress wages? Reduce services to the tax payers so more money can be given to the corporation? How will states entice business to set up shop once this is a Right to Work country? Thanks for your time.
Answer:

Your question requires that I explain some of the background for Right-to-Work laws, and I took the liberty of adding a more general answer on the effect of Right-to-Work on the economic outcomes for firms and workers.

Union strength in...

Question:
Hello, I'd like some insight into what people mean when they talk about property value appreciating. The question comes directly from my grandma's observation that her initial investment in the house she still lives in of $79,000 in 1967 compared to the sale of the house across the street for $220,000 in 2021 means she estimates her house appreciated in value by an amount of $141,000 over those 54 years. But after looking at some inflation calculators online, it seems like a conservative estimate for the value of the $79,000 in 1967 purports to be over $630,000 in 2021. Furthermore, converting backwards, the $220,000 her neighbor's house sold for in 2021 seems to equate to only about $27,000 in 1967. This all seems absurd because I can't imagine my grandparents being able to afford a house of that level of apparent value on the salaries they were making at the time. I know real wages were higher back then but the whole situation seems like I'm missing something because it also doesn't make sense that her home has lost two thirds of its real value when adjusted for inflation.
Answer:

People sometimes have different ideas in mind when considering home price appreciation.  Most conventional discussions do not adjust for inflation.  A more nuanced consideration could account for rises in the general price level, i.e.,...

Question:
I'm looking for a quick and dirty way to total up the economic costs of Covid-19. Does it make sense to add (1) expected 2020 GDP losses (about $1.6T) to (2) the total cost of the federal Covid-19 response bills (assume for now that it's about $8T??) to get $9.6T at a minimum? In totaling up the cost of the Federal intervention, should we subtract from $8T the additional GDP losses that would have occurred if the stimulus spending had not been made? Also, why can't I find this kind of analysis online? Where should I be looking?
Answer:

In short, there are probably many ways that you could get a rough estimate of this and they are all likely flawed in some way or another which makes this a really tough question to answer. Also, we probably haven't fully realized the impact of...

Question:
How can there be inflation at different rates within the same currency zone? For example, how can there be higher inflation in Greece than in Germany, despite having the same currency?
Answer:

Effectively, you are asking: how can there be different prices across countries within the same currency zone? This may sound surprising because within the Euro common currency, for example, we label regions as countries and there is a price...

Question:
With the debate on whether or not to raise the minimum wage to $15, I think there is another question looming. I previously worked at a large parcel carrier, who paid their new couriers around $15 an hour. The work included:

Lifting boxes up to 150 lbs.
Loading and unloading trucks in a warehouse that can be freezing or sweltering,
Driving a large truck anywhere from 10-150 miles a day,
Customer interaction,
Route planning.

Now if the minimum wage was raised to $15, what would make me choose to work at this parcel company when I could work at a grocery store as a cashier? Wouldn't the new minimum wage increase cascade into other jobs in order to entice people to fill those more difficult positions?

I can see such a large jump in the minimum wage having unforeseen consequences. I would love someone's opinion on this. Thank you for your time!
Answer:

The current federal minimum wage for workers in covered sectors is $7.25 an hour. As you suggest, raising the minimum wage to $15 an hour would motivate many workers who were already being paid $15 in the old regime to seek employment in less...

Question:
Hello! I am trying to learn economics through YouTube videos and I don't really have a person to ask a question to so I figured I would give this a shot. My question is: isn't charging the market equilibrium price actually inefficient for producers sometimes? I was watching an explanation about market equilibrium, with the supply curve and the demand curve plotted on a graph with the equilibrium point at the intersection of the two curves. The example was that the price is at equilibrium when producers produce 2,000 pounds of apples and charge $2 per pound - producing more than 2,000 apples at that price results in oversupply and producing less apples at that price does not satisfy demand. Meanwhile, according to the graph, producing 4,000 pounds of apples and charging $4 per pound is a vast oversupply because only 1,000 pounds of apples would be demanded at that price. The solution, according to the video, would be to drop the price and the production down to $2 and 2,000 pounds of apples to reach equilibrium.

What seemed obvious to me, though, was that charging $2 per pound and selling 2,000 pounds of apples results in a gross earning of $4,000, while if the producer still charged $4 per pound and only produced the 1,000 pounds of apples that he could sell at that price he would still make $4,000. Why then should the producer work twice as hard by producing 2,000 to sell at $2 per pound when only producing 1,000 pounds of apples and selling them at a price of $4 earns the exact same amount of money? Both options are meeting the maximum demand for the apples at their respective price levels and making the same amount of money, so why should the producer strive to reach market equilibrium if that means, in this case, working twice as hard for the same profit? Wouldn't that be horribly inefficient?

Thank you for your time.
Answer:

Your question relates to what we teach in our Principles of Microeconomics courses: “The Law of Supply.” Indeed, producing 4,000 pounds of apples and charging $4 per pound creates a surplus in this specific market you describe....

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