Ask an Economist

Question:
Hello!

1) What do economists think of the Lange model: https://blogs.cornell.edu/info2040/2015/10/19/the-lange-model-of-socialism/? Does it adequately address the economic calculation problem? Tying into this question, is it true that Robin Cox is thought to have won the debate around the ECP? Or was it Mises, Hayek, or James Scott?

2) Finally, I would appreciate any insight toward this economic system: Instead of prices, it uses calculation in kind. It accomplishes this by decentralizing economic decision-making, by means of turning firms into self-managed associations joined in horizontal federations, which assess how much is taken at distribution centers by means of book-keeping and assess how many physical quantities of the goods they particularly use are required. I know this is a bit brief, but the part of this comment that explains this further starts with "But now, there is still a question to answer, how could an economy not based in prices make rational decisions" (it's toward the end).": https://www.reddit.com/r/CapitalismVSocialism/comments/4ib76d/automation_capitalism_v_socialism/d2wx6la/?utm_source=share&utm_medium=web2xthat.

Any insight would be greatly appreciated!

Answer:

1.  A mainstream neoclassical synthesis economist would say that this system can be doable but it has what we would call a lot of incentive compatibility problems. It is not only the fact that the government needs to be accurate in...

Question:
At what point does it become profitable for the producer of an agricultural good to begin seeking alternative uses to its main product, similar to the way the corn, soy and cotton industries founded boards to research new uses for their product? If this principle has a name, what is it called for further reading on the subject?
Answer:

If the principle has a name, I suppose it would be DIVERSIFICATION. But, given the inclusion of the words “boards to research new uses for their product,” the questioner may also be asking about how do agricultural industries decide whether to...

Question:
My friend is buying a new cable internet modem so he can quit leasing one from the cable provider. We both currently have DOCSIS 3.0 modems which support speeds up to 400 Mbps. We both currently subscribe to internet service of less than 200 Mbps, so we're not even using the full capability of the modems now.

Currently, DOCSIS 3.1 modems are widely-used as they support speeds up to 2 Gbps (5 times the bandwidth of the 3.0 standard). Of course they cost more. In the real-world situation my friend faces, should he pay $117 for the 3.0 modem or $149 for the 3.1 modem?

My argument for 3.1 is this: Modems last a long time. About 7 years ago, I had subscribed to faster internet service and was only receiving about 1/3 the bandwidth I was paying for. I learned that I needed a modem that supported the faster speed. After research, I learned I needed a 3.0 modem (the current standard at the time). I bought the new modem and instantly experienced the significantly faster internet I was paying for. I've had my current modem for seven years (and I'll upgrade to 3.1 if I ever subscribe to gigabit service). Even at a life expectancy of 7 years the difference is 38 cents per month.

In many regions, gigabit internet is becoming standard. In the next several years, I anticipate that gigabit will be the default service offered by providers. If you have a 3.0 modem, you effectively will only be able to harness up to 40% of the capacity you're subscribed to.

His argument for 3.0 modem is this: He's had 75 Mbps internet service for years now and he's fine. He lives alone (38 year old male). He claims he is certain he won't partner with anyone. He says he will never need more than 400 Mbps anyways. If he ends up with gigabit service and can only use 40% of it, it won't matter.

Answer:

Individual consumers have different preferences and information, which guide those individuals to choose what is best for themselves.  Your friend seems quite determined that he will not use faster internet even if gigabit service were to be...

Question:
With regard to diversification, if two investments are correlated in their response to economic conditions, then they are not providing diversification. So, for diversification purposes, the less correlated two investments are, the better. Is it therefore also the case that anticorrelation is to be avoided to achieve diversification? For example, it seems pointless to invest in both a strengthening dollar fund and a weakening dollar fund. So, for diversification, is it ideal to avoid both correlation and anticorrelation, and to seek zero correlation between two investments? If so, what about owning both equities and bonds? Are they not anticorrelated? I would like to understand diversification better.
Answer:

The idea underlying diversification is to achieve a desired expected rate of return at the smallest possible risk. If there are two investments that are perfectly negatively correlated, then by investing in both you could achieve a rate of return...

Question:
Since the high cost of rent has become a problem, I've been wondering what the outcome(s) would be if the price of rent was determined by a percentage of minimum wage after taxes? What would happen if 30 or 40 percent of someone's take home was the maximum that could be charged as rent?

I've tried to find any information that relates to this question but have been unable to find any due to my limited grasp of complicated economic systems and how they interact with one another. My main hope is that exploring this line of thought might lead to a solution of being able to pay rent and have the ability for upward mobility no matter what your income is.
Answer:

Traditional economics tells us that price ceilings lead to shortages. A lower price encourages sellers to reduce the quantity they supply to the market. A lower price also encourages buyers to increase the quantity they demand. As a result,...

Question:
I saw Joe Biden released a plan to buy American products in order to maintain domestic supply lines and stockpiles of essential commodities. Surely considering the amount of funding the government supplies in farm subsidies indicates an unwillingness to allow agriculture to lose in the marketplace, and would consider agricultural commodities as strategic resources. Hypothetically, if there were a way to nationalize the agriculture sector, would there be benefits to American farmers? The economy? Our ability to adapt rapidly to climate change?
Answer:

I think you are using the term "nationalize" to mean the US government buying US farm products. The US is a major exporter of meat and grains and these products are typically more expensive in other countries than they are in the US. So the US...

Question:
I live in a condominium which, some time ago, changed the rule from permitting dogs to one that forbade them unless grandfathered. I researched the issue a bit and discovered that 39% of households owned one or more dogs. I don't recall the source; don't know the veracity but I wonder how to calculate what impact that would have on the resale value of my condominium if every dog owner refused to purchase any unit prohibiting dogs. (I know that that's not 100% true. Just looking for a starting point.)
Answer:

It seems there are two markets for condominiums: units that allow dogs (Market Dog) and units that do not (Market Sad). My black lab mentioned that the latter group are probably sad folks. OK – my econ jokes in class aren’t any better.

On...

Question:
I have been working for the past two years to break into the IT world, specifically in data analytics. So far, it hasn’t worked—there seem to be very few openings for entry-level employees.

The controversy over President Trump’s suspension of temp worker visas got me wondering if there might be a connection. I have seen both sides argue about the effect of H1B visas on employment and salaries, both in IT and in the nation at large, but I am wondering about the effect on entry into the field.

The reason I wonder is that IT skills are very transferable, and a citizen or green card holder is much more able to take advantage of that ability, while a worker on a temp visa may require a bigger benefit to justify the hassle and risk of leaving. In this hypothesis, corporations choose temp workers instead of potentially training their competition’s talent, and not because of a salary differential. Over time, this degrades the pool of local employees, justifying further temp worker visas.

My two questions are, one, is this economically plausible? And two, is there any evidence of it occurring in the US?
Answer:

I think the basic mechanism you describe could well be part of the complex story of how the H1-B visa affects domestic workers in IT. The H1-B visa program does expand the supply of workers for certain kinds of jobs, potentially reducing the...

Question:
I have been working, earning weekly or bi-weekly paychecks since the late 1980's. Why is it that in 2020 the yearly salaries are the same as they were over 25 years ago? The salary of $40,000 earned in the 1990's also was a higher dollar earning than it is now, it bought more in 1990's. Today, in job postings the numbers are still the same numbers as they were over 25 years ago. Why?
Answer:

I will try to answer the questions as I interpret them, but first, it is important to explain what the facts are.

Annual compensation includes wages and salaries, but also benefits.  Benefits including federal social insurance taxes,...

Question:
I want to compare previous years' numbers since I have inherited a farm in Marshall County.
Answer:

Iowa has updated the soil productivity system from Corn Suitability Rating (CSR) to Corn Suitability Rating 2 (CSR2) in 2013, and the USDA NRCS Web Soil Survey tool allows you to compute the new CSR2 for your farm (Google ISU Extension Ag...

Question:
Hi, I hope to undergo a career change to graphic design. My question is, what are the chances of Artificial Intelligence taking over a design-related job, and how can it affect my employment?
Answer:

Artificial Intelligence is likely to impact all of our jobs, just to varying degrees. Specific tasks that we need to perform in our jobs, skills required, wages, and hours will all likely be adjusted. There will inevitably be winners and losers...

Question:
I apologize, as this will seem to be a very vague question. I don't know that it is so very vague, as it is nuanced and not so easily answered without a tremendous amount of effort and time information gathering.

I'm very curious what an economist thinks about the automotive repair trade. We aren't really a professional industry as there are no requirements or licenses to become a professional repair technician or work in a professional repair facility. Auto repair has become extremely high tech and sophisticated, in many areas, but also retained many of the same procedures from decades and decades ago with maybe a few changes. So, we have the need for two distinct types of individuals. The thinkers and the doers. Thinkers for the analyzing of systems and data for diagnostic decisions and dealing with technology (computers both on the car and to be used in the shop for scan tools, oscilloscopes, programming, coding, etc.). Doers to take it apart and put it back together efficiently and properly.

Most repair facilities are operated by former technicians. They are not businessmen/women. It is often discussed how, with the commoditization of our services, we are in a race to the bottom by greatly undervaluing ourselves and each other. Many are in this race and unwittingly standing on the gas.

This sounds like a rant and perhaps at some level it is. But I'm seriously interested in the opinions of those that are businessmen/women, who understand economics and game theory (most shops seem to operate on a zero-sum game principle, whether they know it or not).

Automobiles are getting more and more complex, the skill set required to service them is growing and becoming much more difficult to find and retain. Many other industries are looking for the skill sets, or a small fraction of the skill sets that many automotive technicians possess, that have far greater means to compensate for those skill than the auto repair trade currently has; a problem they've created for themselves with the constant undervaluing of their skills, knowledge, and services.

I suppose the easy answer is that it is a total "clusterf^&%" but will either solve itself or crumble altogether, I just wanted to hear what someone that knows what they are talking about thinks, and maybe even entice them to look into it and find out more about our trade.

Answer:

Auto repair is an example of a "credence good," which is a type of product or service where an expert knows more about the quality the consumers need than the consumers themselves. These kinds of markets can work poorly if consumers are unable to...

Question:
Would the implementation of a 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 country 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, can the reply possibly contain some details pertaining to an ideal tax rate for the land value tax and can some arguments be included in regard 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 concern equity...

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:
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:
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:
I here a bit more these days about our being a consumer economy. What other types of economies are there?

Thanks a bunch!
Answer:

Ours is called a consumer economy because consumption is nearly 70% of our GDP. Countries like China, are more investment-driven with investment (often by the public sector) at nearly 50% of GDP. 

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...

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:
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:
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:
Can the federal government reduce its debt by getting the Federal Reserve to write off /forgive government bonds that it buys in conducting quantitative easing?
Answer:

The short answer is, no. By law, the U.S Fed is an independent authority in charge of the monetary affairs of this nation. The White House cannot formally ask or force the Fed to do anything. If the Fed tried such a move, it would send panic...

Question:
Many years ago I remember a quote that said something along the lines of "Every job at Boeing supports 3 jobs in the community" meaning that wage earners spend their wages, which in turns supports other wage earners like grocery clerks, hair stylists, mechanics, doctors, etc. Is there a formula for this? How do I determine in Seattle, for example, how many jobs each $90K job at the City (a large employers) in turn supports in the community?
Answer:

It is common for industries to claim that they create jobs outside the industry, especially when they are seeking government subsidies.  A few years back, a consultant for the Iowa ethanol industry claimed that ethanol was responsible for 90...

Question:
An investment group bought Aramark in 2006. Some of the members- J. P. Morgan, Goldman Sachs, Warburg pincus, etc received bailout money from the government in 2008. Would Aramark have gotten any "benefit" or money from that bailout as a private equity holding?
Answer:

My best understanding is that the acquisition you indicated was completed in 2007, but Aramark retained its identity as a company. TARP was created in 2008, and a comprehensive list of companies that received “bailout” funds can be found at...

Question:
I am 16 years old and I want to start a project that makes yarn whales to give to people in the hospital during this time. If it successful and keeps momentum, I want to continue this even after the COVID-19 has subsided. A problem though, is that I have no idea where to start, what kind of permission I need from who, or anything like that. I would love some pointers and help on what to do. I really thank you for reading and answering my question. Stay strong :)
Answer:

How very thoughtful and considerate a project you have in mind!

You are already exhibiting entrepreneurial behaviors by reaching out for advice. When starting anything new, you need to get questions answered for which you don’t know the...

Pages