Ask an Economist

E.g., Thursday, February 22, 2018
E.g., Thursday, February 22, 2018
Question:
Please advise my going to become an economist. I was an average mathematics major as an undergraduate with a G.P.A. of 3.19 overall with a bachelor's degree in applied mathematics. I have about the average IQ for economists, but I know nothing about economics. Now that I am 41 this year, I am thinking of starting anew in a brand new area of applied mathematics. Is this advisable this late in life to switch careers from mathematics to economics given that the two share a common bond in mathematical economics and are theoretical in microeconomics?

Would the transition be better if I pursued pure mathematics instead, because my experiences has been lately in proof making? What can I look forward to? How and what should I be looking into, to start off, if economics is a good choice? I am a highly curious person. Plus, I have worked hard, I have been doing pure mathematics on my own since 2004 until presently; but, it has been slow going; so, I thought that by going into something that has a better return in investments of my intellectual energy, I should try microeconomics?
Answer:

The prospect of a mid-life career change would be daunting for anyone.  In the end, you’ll have to make that difficult decision on your own.  But I can give you a few tips on how you might begin to explore whether a career in economics...

Question:
A commodity (let's say a vegetable like squash or tomato) that is grown in Mexico and transported to the US and is being sold at 1.29/lb.
After about a month when the commodity has less than 2 weeks of shelf life it may be sold at .69/lb and then discarded after another week.

1) Why would the store not further discount these items at let's say .30/lb to clear the complete stock? ( I understand it is so as not to let the global/US prices of the commodity go down.)
2) Is wasting better for the store than to sell it at a discount?
3) Even if customers stop buying fresh commodity and start to wait until the price goes down to .30/lb. Isn't it economically profitable to the store to actually sell it than waste it ?

Thanks
Answer:

Food waste arises from preferences, incentives, and constraints. Retailers have time and other resource constraints which implies that it simply will not be worth it to sell every last item of food in every instance. It can be said that there is...

Question:
Hi there,

Okay, so this is going to be a really stupid question but I need to know the answer to this. There is a message board about collecting video games and we got into a argument about the definition of the word "rarity." With these games, we all know the exact amount of copies printed for each title. Say Game A has 2000 copies printed and Game B has 5000 copies printed. Assuming that no copies are lost or destroyed, Game A will always be rarer, correct? Someone else is arguing that the availability of copies on the secondary market changes this.

If Game A has 20 copies available on the marketplace right now and Game B only has 2 copies, would Game B be considered to be rarer overall? At that moment in time, sure, but overall, I would say no. Are either of us correct? Would the monetary value of the game on the secondary market change the definition of rarity? Thanks for your time!
Answer:

In the strictest (or standard) sense of the word, you would be correct that game A is “rarer”, given that there are fewer of these in existence than game B. However, the other person is not totally wrong because, in the words of economists, the “...

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:
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:
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:
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:
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:
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:
I am student and recently have come across 2 equations which explain basically the same thing. It's about the real interest rate. One equation tells us: real interest = nominal interest - inflation The other one says: 1+real interest = ((1+inflation) / (1+nominal interest)) Which one is correct? Which one should we use? Thank you!
Answer:

The nominal interest rate associated with an asset (for example, a deposit in an interest-bearing savings account) is the rate at which the dollar value of the asset increases over time. The corresponding real interest rate is the rate at which...

Question:
News commentators appear to universally deride Donald Trump's suggestion that the National Debt be renegotiated, whatever that means. What would really happen if the US decided to cancel its outstanding debt, or at least selective portions based on who's holding it, e.g. hostile governments, unfair trading partners, etc. Assume that the Washington will enact whatever legislation to avoid or minimize the economic and political shocks, at least in the US, e.g. issue new currency, start massive infrastructure spending program.
Answer:

US government debt is considered the safest asset in the world. The US borrows at a low interest rate while it lends at a higher interest rate, an “exorbitant privilege” sometimes resented by the foreigners. Over the past two decades, a higher...

Question:
Is the oil surplus caused by the economic slowdown in China?
Answer:

No. The world consumes about 100 million barrels of oil per day. US consumes 20 million, while China consumes 10 million barrels per day. Thus, whether China is in a recession or not, its economy will not have a significant effect on the world...

Question:
What are the best reasons one should buy a new car instead of a used one with low mileage and an in tact warranty. I ask, because my wife wants to purchase a new car, while I would prefer to purchase a slightly used car at a lower price. (letting someone else take the depreciation hit)
Answer:

There are many things to consider in making the choice between purchasing a new or used car, including a comparison of sticker prices.  As you suggest, new car values depreciate significantly in the first few months of ownership, often...

Question:
I am trying to get an estimate for 2014 arc-co corn and soybean payments for Monona and Harrison counties.
Answer:

ISU Extension has created tools to explore the potential benefits/payments from the programs in the 2014 Farm Bill. These tools are available from www.extension.iastate.edu/agdm/...

Question:
I have read a few recent articles in the Wall Street Journal recently regarding farmers going out of business, prices for fertilizer inputs, and how well farmers have been doing producing crops. They were titled "The Next American Farm Bust Is Upon Us", "Here’s One Industry Where the U.S. Is Already Catching China—Fertilizers".

Regarding the first article, why are American farmers still incurring such high costs for production inputs and why do they really have no where to sell their grain and product to make any money? Secondly why are fertilizer inputs in particular so expensive when the second article talks about how our supply is expanding and we are producing more fertilizer than any other country? Shouldn't these input costs go down or be down because of such a high supply?

Lastly it seems that farm production has been peaking and they are doing extremely well in regards of yield and product output, consequently having no place to sell their grain. My question is where do Ag Economists forecast job growth will be greatest in the Agriculture Sector in the next five years? Which particular majors in certain sectors of the Ag industry will do the best and be in high demand?

Thank you for your time
Answer:

While it is true that, in general, farmers are still facing high production costs.  They have also seen some of those costs fall over the past couple of years.  And it is not true that they have nowhere to sell their products. ...

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:
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:
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:
Is there an economic theory that describes the relative value of money amongst different strata of the population? For example, $100 might seem like a lot to an Economics professor, seem like almost nothing to a pro baller and might seem unimaginable to someone in true poverty. Thanks!
Answer:

I am guessing, by money, you mean income. Yes, the notion that $100 means something very different to people with varying incomes is a basic tenet of economics. The question is, what do people do with that $100. If they consume (buy stuff) it,...

Question:
I have a question about utilities; specifically: How to compare them among competing options for funding.

There is a wonderful new technology that is able to vaporize garbage (also known as "Municipal Solid Waste", or MSW). The output of this process consists of only three things: Synthetic gas, a metal alloy, and a glass-like slag. All three have commercial value. No pollution is created in the course of this transformation.

As you may know, markets for energy and metals are in the doldrums. The falling prices indicate a reduced utility for these commodities, and that creates a headwind for the sale of this new technology.

On the other hand, citizens hate landfills more than ever. No one wants to live near a garbage dump, so doing away with landfills has high utility.

My question, therefore, is this: How do I compare the falling utility of process outputs (the syngas, metal, and slag) with the increasing utility of eliminating landfills altogether? The physical outputs can be priced in the open market, but civic satisfaction is hard to measure.

Many thanks for any guidance you might have.
Answer:

When trying to quantify "civic satisfaction," we need to determine what a community is willing to pay, in dollar terms, to remove the landfill. Typically this is done with randomized surveys, but unfortunately it appears that economists have not...

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