Ask an Economist

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...

Question:
What area of economics addresses questions about the price of a one-time consumer equipment purchase vs ongoing monthly service fees? For example, to analyze when it makes sense to purchase an upgraded smartphone for its greater capacity/utility, considering fixed ongoing cellular service costs. Or when it makes sense to upgrade your home wifi system to provide greater coverage and speed, given fixed monthly internet service costs.
Answer:

I am assuming you have to keep the cell or wifi plan and you are just upgrading the fixed cost of a new router or cell phone. Let’s take the smartphone/cellular plan case.

Suppose you currently pay $100 per month for your cellular plan and...

Question:
Hello from New Zealand! I have a dataset of sales of products at auction from 1960-2020 in various countries. I have converted all of the sale prices to NZD but I would also like to adjust for inflation.My question is: since inflation is different in each country, should I adjust for inflation according to each country's inflation data before converting the values to NZD or should I just convert all of the values to NZD and then adjust for inflation based on New Zealand's inflation rates? The latter would be the easiest but would it result in bad data?
Answer:

The most correct way should be adjusting inflation according to each country's inflation data before converting the values to NZD if New Zealand is the baseline to compare with. The latter will not necessarily result in bad data as long as the...

Question:
With this global and U. S. crisis because of the coronavirus what is the possibility of the catastrophic devaluation of the dollar so that my buying power is greatly reduced?
Answer:

1) The coronavirus is everywhere.  It is not obvious it would affect the U.S. dollar differently than the Euro or Yen or Yuan.  All the governments and economies are stressed, and so relative values will be unaffected.

2)...

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

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

Question:
Dear Iowa State economists:

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

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

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

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

Question:
I was reading a paper on authoritarianism in Brazil, and was puzzled by some things the authors had to say regarding the country's fiscal/monetary policy. According to the paper, the policies of the ruling PT party were largely neoliberal throughout the growth of the 2000s, and high interest rates were a component of such policies. Generally, the paper describes Brazil's neoliberal policies as "contractionary."

This is very confusing to me, as coming of age in a post-GFC United States I've always associated neoliberalism with things such as low interest rates. Any help on this would be greatly appreciated.
Answer:

Thank you for your question! These ideological "definitions" and distinctions can be quite confusing and arbitrary. In the Latin American context, usually neoliberal is associated with policies that are orthodox, that is, based on notions of free...

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:
When Minimum Wage is increased by more than 5%, studies have shown a negative impact for one to three years - job loss, reduction of hours, and non-hiring to replace workers leaving - causing a reduction of pay of low pay workers, a 1-3% reduction in teenager hired, and failure of many start-up businesses. I have not found longitudinal studies showing where the economy rebounds from these losses and whether there is a long-term benefit at all for the lower or higher wage workers. Has there been studies going longer showing when the (a) teenage hiring returns to previous levels, (b) hours return to normal for the low pay workers, etc... Is Minimum Wage a permanent negative impact or temporary? ... I've seen what happens statistically for things like holidays - where a sick person will power through the holidays, but then die immediately thereafter, creating an average between "less deaths during the holiday" and "more death just following" matching normal death rates. And studies which show that capital punishment creates a permanent troth with an immediate reduction of several months after a criminal has been executed without a rebound increase afterwards ... just a return to normal levels. .... So which is it, a permanent loss to the economy when we have minimum wage raised that never recovers; a temporary loss to the economy which returns to the previous level but no further; a temporary loss to the economy but a rebound that balances and then return to average; OR a temporary loss to the economy but a long-term gain once everything is considered? Everything I have found indicates a permanent loss to the economy with no upside and that just doesn't make sense to me as yet. If there are longer studies, I would appreciate finding out about them. Asking because I would like to support a higher minimum wage, especially for tip-income wages, but based on the evidence I have found I cannot.
Answer:

The adverse effects of the minimum wage depend on how high it is compared to the prevailing wage in the area.  Because wages are higher in San Francisco than Des Moines, a $15 minimum wage in San Francisco, where the median wage is $25.11,...

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:
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:
Hello, I am a Clemson student in Biosystems Engineering of all subjects and I was working on a side project that had me consider how inefficient ubran development is. I suppose this has two parts: Why are there no private toll roads being constructed by the developers who are turning places like Greenville, Columbia and Charleston SC into parking lots? Is there a legal restriction on the use of toll roads considering South Carolina has two of the only private toll roads I know of?

A shorter way to ask this would be is if there is a true economic incentive to build roads when the government says that they will pay for it anyway.

Answer when you can. Thank you!
Answer:

Private developers will identify profitable opportunities from constructing toll roads; the current road system may be too congested or outdated, or an undeveloped route may have potential to be lucrative. Typically, proposals made by individual...

Question:
What percent of the US workforce is employed in local, county, state and federal government? Average yearly income of governmental workers? Average yearly income of non-government workers?
Answer:

I found a policy report that might be a little dated (2013) but I think is probably still relevant. You can find the report here: <https://fas.org/sgp/crs/misc/R41897.pdf>

The...

Question:
What problems will economists have to solve in the next 20 years?
Answer:

As many observers have noted, economists are not especially good at forecasting the future. Nonetheless, intellectual trends generally move slowly.  So I would expect that the issues economists deal with in the next twenty years will look a...

Question:
My understanding of the Fed is that it must keeps its books balanced as follows:
value of securities held at central bank = amount of central bank money.

If the value of the securities rise, then the Fed needs to increase the amount of central bank money, which it does by passing its "profits" to the US treasury. Normally, the securities held at the Fed are US Treasury Notes, but starting with the Great Recession, the Fed began accumulating mortgage backed securities as well. Ultimately, these securities gave a profit, and these were passed on to the US treasury like always. However, what if that was not the case? What if these securities defaulted, and the Fed incurred a "loss"? Would it have to pass the loss onto the US Treasury as well? What would that look like? Would the US treasury simply give the Fed US Treasury Notes without getting central bank money in return?
Answer:

The following FEDS Note by Bonis, Fiesthumel, and Noonan (2018) provides detailed answers to your questions: https://www....

Question:
Student mental health issues and resulting disruptive behaviors are becoming increasingly difficult for schools to manage. As a result, sometimes students are staffed into special education strictly for assistance with behavioral goals (and not academic issues). Special education costs are 2-3x the cost of general education, resulting in many school districts' having a year-end budget with a special education deficit. To cover this budget shortfall, local property taxes are often raised. Could early identification and early treatment of student mental health issues help reduce the special education costs a school district pays every year? What is the potential ROI, and how would the impact of this investment be measured?
Answer:

There is a large body of research that shows that peers matter for later academic and economic success.  A prominent study in which children were randomly placed in kindergarten classes showed that children who were placed in schools with...

Question:
Hi! So my original question, that I posed to several different online communities was this: I am currently reading Naomi Klein’s book “the shock doctrine, the rise of disaster capitalism”. In it, she has a chapter critiquing Milton Friedman, specifically on his involvement with the Chilean government and the spread of neoliberal ideals common to the Chicago School of Economics. In this chapter, she basically argues that the Chilean neoliberal experiment was a failure, and speaks about Pinochet’s policies and their results.

Here are some quotes from her book: “He took no pity on local companies and removed even more trade barriers; the result was the loss of 177,000 industrial jobs between 1973 and 1983”

“Pinochet had deliberately sent his country into a deep recession, based on the untested theory that the sudden contraction would jolt the economy into health”

“In the first year of Friedman-prescribed shock therapy, Chile’s economy contracted 15 percent, and unemployment- only 3 percent under Allende— reached 20 percent, a rate unheard of in Chile at the time”

“He calculated what it meant for a Chilean family to try to survive on what Pinochet claimed was a ‘living wage’. Roughly 74 percent of its income went simply to buying bread... by comparison, under Allende, bread, milk, and bus fare took up 17 percent of a public employees salary”

“In 1974, inflation reached 375 percent- the highest rate in the world and almost twice the top level under Allende”

So I’d like to ask;

1) are there any statistics/ data that contradict these claims, or maybe give more context to them
2) was Pinochet’s “neoliberal experiment” really an example of neoliberalism? And if it was, was it a failure?

Also,

1) was the economy under Pinochet really that terrible
2) if it was, was it due to the pushing of neoliberal ideals by the Chicago boys (those educated at the Chicago school of economics)
3) is Chile proof of the failures of neoliberalism
Answer:

My name is Marcelo Oviedo and used to work as Assistant Professor at Iowa State University. My ex-colleagues in the Department of Economics have invited me to answer your questions posted in the Ask An Economist section in that...

Question:
The Department of Veterans Affairs sent me a letter saying they were going to cancel my student loans, (about $7,000) but that I could stop them from forgiving my student loans if I want to.

I have a few questions;

1. Will canceling my debt negatively impact my credit score?
2. Will I be able to get future student loans if I want to go to graduate school?

(The process states that I WILL be able to get those loans if I waive some stuff and agree to have my old loans reinstated). But my question is more basic:

will anyone give me a loan?

References;
https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/disability-discharge
https://www.insidehighered.com/news/2019/08/22/trump-administration-grant-disabled-veterans-automatic-loan-forgiveness
Answer:

1. The most common credit score is of the form used by FICO (Fair Isaac Corporation).  The calculation has five components, payment history, amount owed, length of credit history, new credit, and type of credit used.  The first two...

Question:
What if I were to buy nearly 100 stocks in different companies and build an algorithm to sell them the minute I make money, and then buy a stock again, but different from the one I had just purchased. Wouldn't the build-up of all the stocks being sold and bought cause a rapid increase in profit? Sorry if this seems like a dumb question. I am 16 and I just had this question about how to exchange market works and if this is plausible.
Answer:

For such a strategy to work at the least following two conditions must hold:

- each time you transact, you need to correctly pick a stock that would eventually rise in price by enough to offset the bid-ask spread and transaction fees you...

Question:
In the world of vintage car collecting, a frequent topic of discussion is whether prices for a particular model or type are rising or falling. Answering this question is made more difficult by the fact that very few transactions are documented. We know that a given car was listed for price X, but we don't know what price it actually sold for, or to whom.

Does economics provide any model by which one can infer anything about actual selling prices for something, based only on data obtained from published asking prices? For example, if we had a data set of ~3000 sales over 20 years, and we knew that asking prices in real dollars were basically flat, would that tell us anything about the selling prices? Would they also be flat? Or maybe instead would they be gradually approaching the asking price? I have no idea.

Thank you.
Answer:

The question you are asking is about the bid-ask spread.  The bid is what a buyer wants to pay for an item. The ask is what the seller wishes to receive.  You know the ask, you want to know the bid.  The bid would be demand, the...

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

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

...
Question:
Which is better for/has a more positive impact on the American economy:

Purchasing a vehicle from an American car company that is mostly manufactured overseas with foreign parts (list for reference: https://www.motorbiscuit.com/3-american-cars-that-are-barely-made-in-america/)

Or,

Purchasing a vehicle from a foreign car company that is mostly manufactured in the US with US made parts (list for reference: https://www.usatoday.com/story/money/cars/2018/06/22/american-cars/724724002/)
Answer:

This question addresses an important debate in the current economic climate in which global production network and offshoring are prevalent. Economic research on this topic from both theoretical and empirical aspects is vast and is still ongoing...

Pages