WASHINGTON – The U.S. government has hauled in about $4 billion in profits from large banks that have repaid their obligations from last year's federal bailout, The New York Times reported Sunday.
Last September, Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson pressed congressional leaders for legislation authorizing a $700 billion financial bailout of some of the nation's largest financial institutions, which were in danger of collapsing. The bill was signed into law in October.
Critics of the bailout were concerned that the Treasury Department would never see a return on its investment. But the government has already claimed profits from eight of the biggest banks.
The Times cited government profits of $1.4 billion from Goldman Sachs, $1.3 billion from Morgan Stanley and $414 million from American Express. It also listed five other banks — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — that each returned profits between $100 million and $334 million.
The government has also collected about $35 million in profits from 14 smaller banks, the Times reported.
Federal investments in some other banks, including Citigroup and Bank of America, are still in question, and the government could still lose much of the money it spent to bail out insurance company American International Group, mortgage lenders Fannie Mae and Freddie Mac, and automakers General Motors and Chrysler.
Monday, August 31, 2009
Report: US makes $4 billion from bailout banks
According to the August 31, 2009 Associated Press story "Report: US makes $4 billion from bailout banks," U.S. taxpayers have already profited from some of the bank bailout loans:
Hints of Recovery Elusive to Many Job Seekers
Hints of Recovery Elusive to Many Job Seekers
(10-minute video from PBS).
Despite talk of an imminent economic recovery, millions of Americans are still struggling to find work. Paul Solman visits a job fair to learn more about how job seekers are coping with long-term unemployment.
(10-minute video from PBS).
Despite talk of an imminent economic recovery, millions of Americans are still struggling to find work. Paul Solman visits a job fair to learn more about how job seekers are coping with long-term unemployment.
Test your understanding of economics in the news: Is this a change in supply or a change in demand?
In the January 3, 2008 article "Freak Florida Freeze Drives Up Orange Juice Prices," Dan Shapley explains that when freezing temperatures damage Florida orange groves, the price of orange juice increases.Is the increase in the price of orange juice caused by (a) an increase in the supply of orange juice, (b) a decrease in the supply of orange juice, (c) an increase in the demand for orange juice, or (d) a decrease in the demand for orange juice?
Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for orange juice and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.
The threat of a frost damaging enough to devastate Florida's citrus crop sent the price of orange juice soaring on the commodities market Wednesday. Strawberry growers were also particularly worried, as the short growing season would end before a frost-damaged crop might recover, according to The St. Petersburg Times.
The impact of the frost was still being assessed Thursday.
The Arctic blast threatened to bring record-low temperatures, or at least the lowest temperatures seen in decades, to parts of Florida, the nation's biggest fruit producer. By this weekend, however, it will be sunny and 70 degrees.
CLICK HERE FOR THE ANSWER.
More Successful Entrepreneurs
Entrepreneurs can become fabulously wealthy if they create or improve a product or service that consumers eagerly buy to satisfy a need or want. In the August 31, 2009 article "Million-Dollar Businesses You've Never Heard Of," Miriam Marcus profiles several successful entrepreneurs you probably have not heard of before:Seven-figure top lines abound -- if not in the most obvious places.
Best friends Adrian Salamunovic and Nazim Ahmed weren't looking for the next million-dollar idea. They were just two guys hanging out on a Friday night, enjoying a good bottle of wine, when the light bulb went on.
Ahmed worked for Bio-Rad, which markets DNA-imaging equipment. Salamunovic noticed Bio-Rad's brochure on the table and to his untrained eye, the images looked like art.
Turns out others saw it that way too. Smelling opportunity, in 2005 the twosome plunked down $2,000 in savings for initial prints and a Web site to feature their work; they outsourced DNA imaging to a DNA-extraction lab in Montreal. Working out of Ahmed's apartment, they sold a few prints to family and friends. As the work caught on, they were invited to showcase at an Absolut Vodka-sponsored party in Ottawa's SOHO neighborhood. The new company, called DNA 11, sold $40,000 worth of art in the first month. An 8"x10" mini-DNA portrait goes for $200, while a 36"x54" wall canvas garners $1,300. The Museum of Modern Art features DNA 11 art in its museum stores in New York and Tokyo. The company's revenue in 2008: $1.4 million.
Have a nutty idea for a business? It just might work. For inspiration (and even a few chuckles), we went looking for small companies that pull in at least $1 million in annual revenue in unexpected ways. Look hard enough and they are legion. So before you toss that nutty idea aside, check out some entrepreneurs who didn't. Here are a few highlights from our search.
1. Fairy Tales Hair Care
Passaic, N.J.
Entrepreneur: Risa Barash, 43
Product/Service: Head-lice prevention shampoos and conditioners
Start Date: 1999
Start-up Costs: $1,000
Revenue in 2008: $6 million
Business ideas come from anyone, anywhere, anytime. In 1999, Risa Barash, a 33-year-old stand-up comic, heard from her then-fiancé's cousin (got that?) about a rash of head lice cases at his Hewlett, N.Y.-based children's salon. After doing some research (including a lot of chatting with relatives in Israel, where head lice was a big problem), Barash hit upon an organic preventative shampoo, as opposed to chemical-based products applied only after the louse has taken up residence. Her big break came one morning while watching The Rosie O'Donnell Show -- Rosie was lamenting her own children's lice outbreak. Barash wrote a letter (in the voice of a fellow well-known comic), walked over to the NBC studio and told the security guard she was delivering some hair products for O'Donnell's kids. The next day, Fairy Tales Hair Care's Rosemary Repel Shampoo was the talk of the show.
2. The Fiero Store
Stafford Springs, Conn.
Entrepreneur: Matthew Hartzog, 32
Product/Service: Parts and accessories for the Pontiac Fiero
Start Date: 1991
Start-up Costs: $5,000
Revenue in 2008: $2.3 million
Matthew Hartzog, 32, spent his teenage summers and school breaks working for his stepfather selling parts and accessories for GM Opels. But the long-defunct, two-seat, mid-engine Fiero was where his heart lay. Approximately 370,000 Fieros rolled off the lines between 1984 and 1988 before Pontiac stopped producing the car; less than 75,000 are currently registered in the U.S. Keeping them purring proved a tidy little business. Fanatics make great customers.
3. Jimmy Beans Wool
Reno, Nev.
Entrepreneur: Laura Zander, 35
Product/Service: Knitting and crochet supplies
Start Date: 2002
Start-up Costs: $30,000
Revenue in 2008: $2.1 million
Laid off from her software engineering gig, Laura Zander decided to open a yarn store with her husband Doug in 2002. They plowed $30,000 into hanks of yarn, a Web site and a lease on a new store in Truckee, Calif. Good timing: The knitting market spiked in 2003 after a few celebrities, such as Julia Roberts and Vanna White, were seen knitting and crocheting. Zander found success with walk-in customers; she could teach them how to knit in less than five minutes, and many walked away with $100 worth of novelty yarns, enough to make five scarves, a fashion craze at the time. Zander, 35, now boasts an average of 20,000 customers per month, mostly through the Web site.
4. PetRelocation.com
Austin, Texas
Entrepreneur: Kevin O'Brien, 34, and Angie O'Brien, 34
Product/Service: Pet travel
Start Date: 2004
Start-up Costs: $97,000
Revenue in 2008: $2.5 million
"Pets aren't just household goods -- they're beings, just like people are." Such is the mantra of Kevin and Angie O'Brien, the husband-and-wife team who sold a doggy day-care business to get into the pet-moving game. They invested $97,000 of the proceeds in a new van, Google ads, a Web site, a USDA-backed carriers and intermediate handlers license (allowing the couple to transport animals over state lines) and a $300 membership to IPATA, an international trade association of animal handlers. The couple says it can move any live animal, anywhere around in world -- say, a dog from Seattle to Shanghai, mole rats from South Africa to San Antonio and dart frogs from Switzerland to the U.S. It's a turn-key service, covering airline bookings, blood tests, vet check-ups, logistics, customs and quarantine. The company expects to pull in $3.5 million in revenue this year, has been debt free since day one and turned a profit in its second month.
5. DNA 11, Ottawa, Ontario
Entrepreneurs: Adrian Salamunovic, 33, and Nazim Ahmed, 33
Product/Service: DNA artwork
Start Date: 2005
Start-up Costs: $2,000
Revenue in 2008: $1.4 million
Best friends Salamunovic and Ahmed blend science and medicine with modern art--and make money doing it. With a simple cheek swab, they can collect enough organic matter to create an image of human DNA using specialized equipment, similar to the machines Ahmed used to sell for a Canadian biotech firm. Working out of Ahmed's apartment, the twosome sold a few prints to family and friends, and were invited to showcase their work at an Absolut Vodka-sponsored party in Ottawa's SOHO neighborhood. They sold $40,000 worth of art in the first month. An 8"x10" mini-DNA portrait goes for $200, while a 36"x54" wall canvas garners $1,300. The Museum of Modern Art features DNA 11 art in its museum stores in New York and Tokyo.
Test your understanding of economics in the news: Is this a change in supply or a change in demand?
The article "Texas Cattlemen v. Oprah Winfrey" provides a summary of the 1998 trial in which Texas cattlemen sued Oprah Winfrey for causing them financial harm in 1996. Was the decrease in the price of beef after the airing of Oprah's television show caused by (a) an increase in the supply of beef, (b) a decrease in the supply of beef, (c) an increase in the demand for beef, or (d) a decrease in the demand for beef? Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for beef and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.
Significance: The ruling in this case reaffirmed the right of a person to freely speak his or her opinion without fear of prosecution. Also, it was determined that beef does not qualify as perishable food under the Texas False Defamation of Perishable Food Products law. (The law is commonly known as the "veggie libel" law.)
Oprah Winfrey's talk show has covered many controversial topics since her national television debut in 1984. "Dangerous Foods" aired on April 16, 1996, and focused, among other things, on the potential risk of contracting "Mad Cow" disease in America.
This was prompted in part by a recurrence of the disease in Europe, where it had previously manifested in the 1980's. Howard Lymans, a vegetarian activist, said there was a high potential for contracting of the disease, because cattlemen routinely feed ground animal parts to cattle. Winfrey, upon hearing this, declared the information "Stopped (her) cold from eating another burger."
Beef prices fell after the show's airing, and did not rise again for two weeks. Texas rancher Paul Engler was displeased with the statement and the show and deemed the statement "incorrect" and "negative." He claimed to have lost seven million dollars after the show aired. Engler and several other cattlemen claimed a collective loss of more than $12 million under the Texas law which holds people liable for falsely disparaging food products. The federal lawsuit is regarded as the biggest test to date of the so-called "veggie libel" laws. It was determined that the farmers didn't have a case under the "veggie libel" law, so the case was decided solely on the business disparagement law. This required them to prove that Oprah had acted with actual malice.
On February 26, 1998, almost two months after the trial began, the jury decided the case in favor of Oprah Winfrey. They determined that her statements did not constitute libel against the cattlemen. After the trial Winfrey said, "FREE SPEECH NOT ONLY LIVES, IT ROCKS!" The Texas Cattlemen's Association is appealing the verdict.
CLICK HERE FOR THE ANSWER.
If you have an interest in reading more about this incident, here are some other accounts:
http://www.vegsource.com/lyman/lawsuit.htm
http://www.madcowboy.com/01_BookOP.000.html
http://www.pbs.org/newshour/bb/law/jan-june98/fooddef_1-20.html
http://www.cnn.com/US/9802/26/oprah.verdict/
http://www.extension.iastate.edu/agdm/articles/hayenga/Hay%20Aug98.htm
Test your understanding of economics in the news: Is this a change in supply or a change in demand?
In the August 30, 2009 article "As hybrid cars gobble rare metals, shortage looms," Steve Gorman explains that the increasing popularity of hybrid automobiles is affecting the market for rare earth metals. What is the likely effect of this? Will the price of rare earth metals increase or decrease? How will this affect the market for hybrid cars?Part One: The Market for Rare Earth Metals
According to the article, is there (a) an increase in the supply of rare earth metals, (b) a decrease in the supply of rare earth metals, (c) an increase in the demand for rare earth metals, or (d) a decrease in the demand for rare earth metals?
Read the article and then illustrate this change with a graph that shows the initial positions of the supply and demand for rare earth metals and the new positions of the supply and demand curves. Have both curves shifted? Or has there been a shift in only one curve? There is a link after the article (below) that provides the answer.
LOS ANGELES (Reuters) – The Prius hybrid automobile is popular for its fuel efficiency, but its electric motor and battery guzzle rare earth metals, a little-known class of elements found in a wide range of gadgets and consumer goods.
That makes Toyota's market-leading gasoline-electric hybrid car and other similar vehicles vulnerable to a supply crunch predicted by experts as China, the world's dominant rare earths producer, limits exports while global demand swells.
Worldwide demand for rare earths, covering 15 entries on the periodic table of elements, is expected to exceed supply by some 40,000 tonnes annually in several years unless major new production sources are developed. One promising U.S. source is a rare earths mine slated to reopen in California by 2012.
Among the rare earths that would be most affected in a shortage is neodymium, the key component of an alloy used to make the high-power, lightweight magnets for electric motors of hybrid cars, such as the Prius, Honda Insight and Ford Focus, as well as in generators for wind turbines.
Close cousins terbium and dysprosium are added in smaller amounts to the alloy to preserve neodymium's magnetic properties at high temperatures. Yet another rare earth metal, lanthanum, is a major ingredient for hybrid car batteries.
Production of both hybrids cars and wind turbines is expected to climb sharply amid the clamor for cleaner transportation and energy alternatives that reduce dependence on fossil fuels blamed for global climate change.
Toyota has 70 percent of the U.S. market for vehicles powered by a combination of an internal-combustion engine and electric motor. The Prius is its No. 1 hybrid seller.
Jack Lifton, an independent commodities consultant and strategic metals expert, calls the Prius "the biggest user of rare earths of any object in the world."
Each electric Prius motor requires 1 kilogram (2.2 lb) of neodymium, and each battery uses 10 to 15 kg (22-33 lb) of lanthanum. That number will nearly double under Toyota's plans to boost the car's fuel economy, he said.
Toyota plans to sell 100,000 Prius cars in the United States alone for 2009, and 180,000 next year. The company forecasts sales of 1 million units per year starting in 2010.
As China's industries begin to consume most of its own rare earth production, Toyota and other companies are seeking to secure reliable reserves for themselves.
Reuters reported last year that Japanese firms are showing strong interest in a Canadian rare earth site under development at Thor Lake in the Northwest Territories.
A Toyota spokeswoman in Los Angeles said the automaker would not comment on its resource development plans. But media accounts and industry blogs have reported recently that Toyota has looked at rare earth possibilities in Canada and Vietnam.
CLICK HERE FOR THE ANSWER TO PART ONE: THE MARKET FOR RARE EARTH METALS
Part Two: The Market for Hybrid Cars
What affect will this have on the market for hybrid cars? Will a change in the price of rare earth metals affect the supply or demand for hybrid cars? (Hint: Does a change in the cost of inputs affect the supply or demand of a product?)
Will the change in the price of rare earth metals cause (a) an increase in the supply of hybrid cars, (b) a decrease in the supply of hybrid cars, (c) an increase in the demand for hybrid cars, or (d) a decrease in the demand for hybrid cars?
Can you illustrate this change with a graph that shows the initial positions of the supply and demand for hybrid cars and the new positions of the supply and demand curves. Have both curves shifted? Or has there been a shift in only one curve? The link below provides the answer.
CLICK HERE FOR THE ANSWER TO PART TWO: THE MARKET FOR HYBRID CARS
Sunday, August 30, 2009
Test your understanding of economics in the news: Is this a change in supply or a change in demand?
In the August 26, 2009 article "Diplomats Help Boost Rates at World's Most Expensive Hotels" Tara Loader Wilkinson explains that in the midst of the recession, some of the world's most expensive hotels are raising the prices of their luxury suites. Is this increase in the price of renting a luxury hotel room caused by (a) an increase in the supply of luxury hotel rooms, (b) a decrease in the supply of luxury hotel rooms, (c) an increase in the demand for luxury hotel rooms, or (d) a decrease in the demand for luxury hotel rooms? Read the article and then illustrate this price change with a graph that shows the initial positions of the supply and demand for luxury hotel rooms and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.
Amid the recession, rock stars, diplomats and other celebrities find solace from the doom and gloom by spending their time in sanctuary provided by the world's most luxurious, and expensive, hotels. While many of us are tightening our belts, shortening our summer holidays or even abandoning them, hoteliers to the rich and famous claim to have no trouble filling their most exclusive accommodations, and in the case of the most expensive suite in the world, managing to double its rate to $65,000 (€45,642) a night.
In an annual survey by Financial News' sister publication Wealth Bulletin, the Royal Penthouse Suite at the President Wilson Hotel in Geneva, Switzerland, tops the list as the most expensive hotel room in 2009, commanding $65,000 for its four-bedroom penthouse -- twice as much as patrons paid a year ago for its luxurious setting and views of Lake Geneva and Mont Blanc.
The hotel's management puts the rise down to "buoyant demand" from government officials and U.N. diplomats.
Last year's winner, the iconic Ty Warner Penthouse at the Four Seasons Hotel in New York, came second this time, at $35,000, $1,000 up from last year.
New entries this year were the third-placed Presidential Suite at the Hotel Cala di Volpe in Sardinia, the Villa La Cupola Suite at the Westin Excelsior in Rome and the Presidential Suite at the Ritz-Carlton in Tokyo.
Despite the past year's financial and economic turmoil, prices at the best hotel suites have risen by an average of 10% this year. Herbert Ypma, founder of the Hip Hotels brand, said: "The very high end hasn't suffered all that much. A lot of hotels used to having upmarket clientele are getting the benefit of them taking far more time off than usual -- so they have more time to stay in hotels. Money was never the issue, time was."
Hoteliers said that although the number of business travellers has fallen in the past year, government officials have taken their place in the best rooms and suites.
President Barack Obama and his entourage took over the entire Ritz-Carlton Hotel in Moscow for three nights in June. The President Wilson Hotel said heads of state and other high-level government officials are fuelling demand for its hugely expensive Royal Penthouse Suite.
Vivian Deuschl, spokeswoman for Ritz-Carlton Hotels, said demand is also coming from wealthy leisure travellers: "Last year they might have taken three or four cheaper holidays. This year they are taking one big vacation, but pulling out all the stops."
The 10 most expensive hotel suites according to Wealth Bulletin's survey for 2009 are:
1. The Royal Penthouse Suite, President Wilson Hotel, Geneva -- $65,000 per night
Complete with a cocktail lounge, the Royal Penthouse Suite at the President Wilson is so exclusive that bookings reportedly have to be made through the hotel's chairman. The suite occupies the entire top floor of the hotel. It is reached by a private elevator, has four bedrooms overlooking Lake Geneva and Mont Blanc and comes with six bathrooms. Equipped with bulletproof windows and doors, it is almost exclusively reserved for celebrities or state heads, ideal with the United Nations headquarters a five-minute drive away.
2. Ty Warner Penthouse, Four Seasons Hotel, New York -- $35,000 per night
Business at the Ty Warner Penthouse at the Four Seasons Hotel in New York has remained as buoyant as when the suite opened in 2007, according to a spokeswoman. The nine-room suite has walls inlaid with thousands of pieces of mother-of-pearl. There is an indoor-outdoor Zen garden, a private spa room with a screen of living bamboo and a book-lined library, which has a grand piano at its centre.
3. The Presidential Suite, Hotel Cala di Volpe, Costa Smeralda, Sardinia -- $34,000 per night
The Presidential Suite at Hotel Cala di Volpe near Porto Cervo, averages around $34,000 a night, although during the peak summer season will cost as much as $45,000. Located in the hotel tower, the multi-level Presidential Suite sprawls across 2,500 sq ft and has three bedrooms, three bathrooms, a private gym, a steam room and a wine cellar. It is crowned by a rooftop terrace with an outdoor saltwater swimming pool.
4. Villa La Cupola Suite, Westin Excelsior, Rome -- $31,000 per night
Villa La Cupola Suite in Rome's Westin Excelsior embodies all things Roman and excessive: a cupola, a Pompeii-style Jacuzzi, frescoes and stained glass windows detailing allegories of a mythological figure paired with a modern one, such as Atlas and Television, Hypnosis and Neurosis, Hermes and Marketing and Hermaphrodite and Fashion. Located on the fifth and sixth floors, the suite covers 6,099 sq ft and has an additional 1,808 sq ft of balconies and terraces overlooking Via Veneto.
5. The Presidential Suite, Ritz-Carlton Tokyo -- $25,000 per night
The Presidential Suite, on the top floor of the city's tallest building, has spectacular views of Mount Fuji and Roppongi Hills, as well as an expansive vista of Tokyo's impressive cityscape. It occupies 2,368 sq ft. For refreshments, guests may enjoy the $18,000 Diamonds-Are-Forever Martini, which comes with a one-karat Bulgari diamond at the bottom.
6. The Bridge Suite, The Atlantis, Bahamas -- $22,000 per night
The 10-room Bridge Suite is actually a bridge spanning the two towers of the Atlantis Hotel. The 23rd-floor suite is decked with marble floors, a grand piano and a 22-carat gold chandelier. It was known in former times as "the Michael Jackson Suite" because of his regular stays. Prices have come down from $25,000 last year and fees are negotiable. Nevertheless, the suite is so exclusive the hotel does not even advertise it.
7. The Imperial Suite, Park Hyatt Vendôme, Paris -- $20,000 per night
The Imperial Suite at the Park Hyatt in Paris provides guests with an "in-suite-spa" concept -- with the bathroom/spa comprising a whirlpool bath, a steam shower room and a massage table. The 2,500 sq ft penthouse suite has a huge living room, a dining room, a kitchen and a work area.
8. Royal Suite, Burj Al Arab, Dubai -- $19,600 per night
Since it was built in the mid-1990s, the Burj Al Arab has become one of the world's most instantly recognizable hotels with its billowing sail-like structure stretching out on an artificial island into the Gulf of Arabia. The Royal Suite on the 25th floor has a marble-and-gold staircase, leopard print carpets, its own private lift and a rotating four-poster canopy bed.
9. Royal Armleder Suite, Le Richemond, Geneva -- $18,900 per night
The Royal Armleder Suite at the Le Richemond Hotel is named after the wealthy family who used to own the famous hotel before Rocco Forte bought it in August 2004. The three-bedroom suite, which stretches over 2,500 sq ft on the seventh floor, has a 1,000 sq ft terrace with panoramic views of Lake Geneva, a real log fire and floor-to-ceiling bulletproof windows. Olga Polizzi, Rocco Forte's sister and well-known hotel interior designer, designed the suite.
10. The Ritz-Carlton Suite, The Ritz-Carlton, Moscow -- $16,500 per night
To stay at the best suite in Moscow's Ritz-Carlton would cost around $16,000 a night -- $500 less than last year. Furnished in Russian imperial style, the 2,370 sq ft suite has views of famous Moscow sites including the Kremlin and Red Square. The suite comes with that necessity for the security-conscious Russian billionaire -- a panic room with its own energy and telecommunications facilities.
Research for this survey was compiled during mid-August. Prices are rate per night including taxes.
CLICK HERE FOR THE ANSWER.
Saturday, August 29, 2009
Capitalism and Free Markets
Capitalism is an economic system in which the means of production and distribution are privately or corporately owned.
Socialism, by contrast, is an economic system in which the means of production and distribution are collectively owned.
A free market occurs when the purchases and sales of goods and services occur without interference, intervention, regulation, or subsidization by the government.
What many advocates of capitalism and free markets fail to acknowledge is that they do not exist - at least not in a pure form.
Every society in the world is a combination of capitalism, socialism, and tradition. Every economy allocates its resources and products through tradition, command, and markets.
Under pure capitalism, the government does not produce or distribute anything. It provides no national defense, police and fire protection, public health, education, roads, highways, bridges, or garbage collection.
And when markets are unregulated by government, they create many socially undesirable outcomes, such as excessive amounts of pollution, poverty, and market power.
Many advocates of capitalism and free markets seem to imply there are only two options: capitalism or socialism. The reality is that there is a whole spectrum of ways to produce and distributes goods and services. Societies vary in the degree to which they rely on the government to improve market outcomes. It is deceptive to imply any increase in government involvement in the economy is a leap from one extreme to another. Instead, it may be a slight move along a broad continuum.
Socialism, by contrast, is an economic system in which the means of production and distribution are collectively owned.
A free market occurs when the purchases and sales of goods and services occur without interference, intervention, regulation, or subsidization by the government.
What many advocates of capitalism and free markets fail to acknowledge is that they do not exist - at least not in a pure form.
Every society in the world is a combination of capitalism, socialism, and tradition. Every economy allocates its resources and products through tradition, command, and markets.
Under pure capitalism, the government does not produce or distribute anything. It provides no national defense, police and fire protection, public health, education, roads, highways, bridges, or garbage collection.
And when markets are unregulated by government, they create many socially undesirable outcomes, such as excessive amounts of pollution, poverty, and market power.
Many advocates of capitalism and free markets seem to imply there are only two options: capitalism or socialism. The reality is that there is a whole spectrum of ways to produce and distributes goods and services. Societies vary in the degree to which they rely on the government to improve market outcomes. It is deceptive to imply any increase in government involvement in the economy is a leap from one extreme to another. Instead, it may be a slight move along a broad continuum.
Friday, August 28, 2009
The Irony of Tax Tea Party Protest Signs
It is common to see children carrying signs at tax tea party rallies to protest how government budget deficits are burdening future generations. The irony of this is that the the tax cuts advocated by the conservative Republican politicians they support (without commensurate reductions in government spending) are the primary cause of the dramatic increase in the public debt since 1980.
There also seems to be a failure to understand the basics of macroeconomic policy. Economic declines are typically caused by a decrease in overall spending on newly produced goods and services, which economists call aggregate demand (AD). If consumers and businesses are unwilling or unable to increase spending during a recession or depression, government spending may be the quickest way to increase aggregate demand and reverse the economic decline. Deficit spending during economic downturns is an appropriate response if the goal is to lessen their impact. It is much harder to justify the deficit spending during the prosperous times of the past thirty years.
Consumer spending edges up in July, incomes flat
In the July 28, 2009 article "Consumer spending edges up in July, incomes flat," Associated Press economics writer Martin Crutsinger reports that the signs of potential economic recovery are mixed:
WASHINGTON – Consumer spending edged up in July with help from the popular Cash for Clunkers program, but household incomes, the fuel for future spending increases, were flat.
Consumer spending is the big question mark as the economy struggles to emerge from the recession. Economists worry that households hurt by rising unemployment, weak income growth and depleted investments will not provide the support the economy needs to rebound to sustained growth.
The Commerce Department said Friday that consumer spending rose 0.2 percent in July, matching economists' expectations. Personal incomes were unchanged last month, a weaker showing than the expected 0.2 percent gain.
With incomes flat in July as spending rose, the personal savings rate dipped slightly to 4.2 percent from 4.5 percent in June. The savings rate was 2.6 percent a year ago.
Economists expect the savings rate to rise in coming months to around 6 percent as workers try to rebuild depleted nest eggs. The process of rebuilding savings is one of the factors expected to depress consumer spending and weaken the broader recovery.
The modest rise in spending last month followed a 0.6 percent jump in June, a gain driven by a surge in gasoline prices. Adjusting for inflation, spending rose 0.2 percent in July, and 0.1 percent in June.
The slight rise in spending reflected a 1.3 percent jump in purchases of durable goods such as cars, a gain propelled by the clunkers program that started at the end of July. Purchases of nondurable goods such as clothing actually fell 0.3 percent last month.
The unchanged reading for personal incomes followed large swings in the previous two months that reflected payments to individuals from the government's $787 billion economic stimulus program. Those payments pushed incomes up 1.4 percent in May and their absence in June caused incomes to fall 1.1 percent.
Incomes have taken a beating during the recession as employers slashed payrolls and forced workers to take unpaid days off to hold down wage costs. In addition, households with sufficient income to hit the shopping malls have trimmed their purchases and boosted savings to cope with a severe financial crisis which sent the stock market into a nosedive last year.
The concern is that consumer spending, which accounts for 70 percent of economic activity, may not be strong enough to propel a sustained recovery from the longest recession since World War II.
The Federal Reserve has pushed a key interest rate to a record low near zero in an effort to boost the economy and is pledging to keep rates low for a considerable period even as the economy begins to grow again.
The Fed is able to make that pledge because inflation is not a problem. A price gauge tied to consumer spending was unchanged in July after a 0.5 percent jump in June that had reflected a big rise in energy prices. Excluding food and energy, the price gauge showed a 0.1 percent rise, and over the past year increased 1.4 percent, well within the Fed's comfort zone for inflation.
The government reported Thursday that the overall economy, as measured by the gross domestic product, fell at an annual rate of 1 percent in the April-June quarter. It marked the fourth consecutive decline in GDP, the longest stretch on records that go back more than six decades.
Many economists believe GDP in the current July-September quarter will rebound to growth above 3 percent and remain at that level in the fourth quarter. The economic growth likely will reflect a boost from the highly successful clunkers program to boost car sales and other government stimulus efforts.
But the fear is that economic growth will slip back in the early part of 2010 as the impact of the government programs fade and unemployment rises. The 9.4 percent jobless rate in July is expected to edge up to 9.5 percent in August and keep rising until it tops 10 percent. That will be a tough environment to see strong gains in consumer spending.
Some analysts worry that the country could be headed for a double-dip recession in which the economy resumes growing for a brief period only to fall back into a downturn.
The troubles consumers face have meant tough times for the nation's retailers. A survey of big retail chains showed that shoppers remained tightfisted in July, a development that raised worries about back-to-school sales and the holiday shopping season later this year.
In July, mall-based apparel stores fared the worst with Macy's Inc. and teen retailers Abercrombie & Fitch Co. and Wet Seal Inc. reporting disappointing results.
However, apparel discounters like Ross Stores Inc. and TJX Cos. both reported sales gains that exceeded Wall Street estimates. TJX operates the T.J. Maxx and Marshalls chains.
Thursday, August 27, 2009
Rallies protest Miami-Dade property taxes
In the August 27, 2009 Miami Herald story "Rallies protest Miami-Dade property taxes" Charles Rabin says South Florida residents are upset with rising property taxes. They do not seem to be seeking fewer government services, however. The article fails to mention that tax increases are necessitated by the January 29, 2008 passage of Amendment One to the Florida Constitution. The amendment was marketed to the public as a guarantee of lower property taxes by allowing homeowners to exclude more of their property from taxation. Yet, the advocates failed to sufficiently explain that property tax rates could rise. Indeed, if more property is excluded from taxation, property tax rates must rise if property tax revenues are to be maintained. Local governments typically use property taxes as their primary source of income. And if the amendment causes property tax revenues to be insufficient to cover the costs of the government services (such as police and fire protection, schools, and garbage collection) that citizens expect, it necessitates increases in other taxes and fees. If one considers all sources of revenue for local governments, the effect of the passage of amendment one has been to shift the tax burden away from the rich (because they can exclude up to $500,000 of property value from taxation with the portability provision) to the less affluent.According to article by Rabin:
Upset with skyrocketing property taxes over the years, a group calling itself Fair Property Tax For All is coordinating a series of protests Thursday afternoon at three sites in Miami-Dade County.
The protests are timely: By Thursday, most of the county's homeowners should have received their trim notices in the mail -- early property tax slips that give all the county's homeowners a peek at what their final tax bill may be.
Many homeowners probably won't be thrilled with what they see: Their homes dropping in value, but their taxes going up.
One reason: When county commissioners declined to set a tax rate in July, it forced the property appraiser to set the rate at the rollback rate. As a result, despite a decrease in home values, revenues to the county would be the same as they were last year.
And despite the value of most people's homes being lower this year, it means your property tax rate still could rise.
County commissioners have yet to set the final rate.
Another issue that has some seething: Miami-Dade Property Appraiser Pedro J. Garcia declined to include foreclosures when tabulating property values, which are primarily based on the sales of homes in your neighborhood.
``It gives you abnormal values on a house,'' argues Fair Property Tax President Dr. Jose H. Valladares. ``They're not worth what it says.''
Other variables that will influence your tax bill include how much less your home is worth this year than last, if the municipality you live in raises its tax rate, or what the county's School Board ultimately decides to do with its tax rate.
After mandated public hearings, all property tax rates must be set by the end of September.
What is certain: The amount shown in the window of the trim notice that says how much you owe cannot be raised. By law, the county and municipalities are required to set a ceiling before public budget hearings begin in September.
The protests are planned for 4 to 7 p.m. Thursday at the following locations: U.S. 1 and Southwest 27th Avenue, Bird Road and Southwest 87th Avenue and, West 49th Street and 12th Avenue in Hialeah.
Wednesday, August 26, 2009
Most red ink ever: $9 trillion over next decade
In the August 26, 2009 article "Most red ink ever: $9 trillion over next decade," Associated Press writer Jim Kuhnhenn reports the new forecasts of upcoming U.S. federal budgets project larger deficits than previously expected:WASHINGTON – In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion — more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.
But before President Barack Obama can do much about it, he'll have to weather recession aftershocks including unemployment that his advisers said Tuesday is still heading for 10 percent.
Overall, White House and congressional budget analysts said in a brace of new estimates that the economy will shrink by 2.5 to 2.8 percent this year even as it begins to climb out of the recession. Those estimates reflect this year's deeper-than-expected economic plunge.
The grim deficit news presents Obama with both immediate and longer-term challenges. The still fragile economy cannot afford deficit-fighting cures such as spending cuts or tax increases. But nervous holders of U.S. debt, particularly foreign bondholders, could demand interest rate increases that would quickly be felt in the pocketbooks of American consumers.
Amid the gloomy numbers on Tuesday, Obama signaled his satisfaction with improvements in the economy by announcing he would nominate Republican Ben Bernanke to a second term as chairman of the Federal Reserve. The announcement, welcomed on Wall Street, diverted attention from the budget news and helped neutralize any disturbance in the financial markets from the high deficit projections.
The White House Office of Management and Budget indicated that the president will have to struggle to meet his vow of cutting the deficit in half in 2013 — a promise that earlier budget projections suggested he could accomplish with ease.
"This recession was simply worse than the information that we and other forecasters had back in last fall and early this winter," said Obama economic adviser Christina Romer.
The deficit numbers also could complicate Obama's drive to persuade Congress to enact a major overhaul of the health care system — one that could cost $1 trillion or more over 10 years. Obama has said he doesn't want the measure to add to the deficit, but lawmakers have been unable to agree on revenues that would cover the cost.
What's more, the high unemployment is expected to last well into the congressional election campaign next year, turning the contests into a referendum on Obama's economic policies.
Republicans were ready to pounce.
"The alarm bells on our nation's fiscal condition have now become a siren," said Senate Minority Leader Mitch McConnell of Kentucky. "If anyone had any doubts that this burden on future generations is unsustainable, they're gone — spending, borrowing and debt are out of control."
Even supporters of Obama's economic policies said the long-term outlook places the federal government on an unsustainable path that will force the president and Congress to consider politically unpopular measures, including tax increases and cuts in government programs.
"The numbers today portend the biggest budget fight we've probably had in decades in the United States," said Stan Collender, a former congressional budget official.
The summer analyses by the White House budget office and by the Congressional Budget Office reached similarly bleak conclusions. The CBO's 10-year deficit figure was smaller — $7 trillion — but that is because it assumes that all tax cuts put into place in the administration of former President George W. Bush will expire on schedule by 2011. Obama's budget baseline, however, hews to his proposal to keep the tax cuts in place for families earning less than $250,000 a year.
Both budget offices see the national debt — the accumulation of annual budget deficits — as more than doubling over the next decade. The public national debt, made up of amounts the government owes to the public, including foreign governments, stood Tuesday at a staggering $7.4 trillion. White House budget officials predicted it would reach $17.5 trillion in 2019, or 76.5 percent of the gross domestic product. That would be the highest proportion in six decades.
Congressional Budget Office director Douglas Elmendorf said if Congress doesn't reduce deficits, interest rates are likely to rise, hurting the economy. But if Congress acts too soon, the economic recovery — once it arrives — could be thwarted.
"We face perils in acting and perils in not acting," Elmendorf told reporters.
David Walker, former head of the Government Accountability Office, said the numbers illustrated the need for a national commission that would review spending and taxing options and present lawmakers with a deficit reduction plan that Congress could approve or reject.
"We're going to have to do a hard course correction once we turn the corner on the economy," Walker, now president and CEO of the Peter G. Peterson Foundation, said.
Both Romer and Obama budget director Peter Orszag said this year's contraction would have been far worse without money from the $787 billion economic stimulus package that the president pushed through Congress as one of his first major acts.
At the same time, the continuing stresses on the economy have, in effect, increased the size of the stimulus package because the government will have to spend more in unemployment insurance and food stamps, Orszag said. He said the cost of the stimulus package — which spends most of its money in fiscal year 2010 — will grow by tens of billions of dollars above the original $787 billion.
The White House also credited the $3 billion cash-for-clunkers auto program for contributing to recent economic growth.
Orszag, anticipating backlash over the deficit numbers, conceded that the long-term deficits are "higher than desirable." The annual negative balances amount to about 4 percent of the gross domestic product, a number that many economists say is unsustainable.
But Orszag also argued that overhauling the health system would reduce health care costs and address the biggest contributor to higher deficits.
"I know there are going to be some who say that this report proves that we can't afford health reform," he said. "I think that has it backward."
At the same time, 10-year budget projections can be "wildly inaccurate," said Collender, now a partner at Qorvis Communications. Collender noted that there will be five congressional elections over the next 10 years and any number of foreign and domestic challenges that will make actual deficit figures very different from the estimates.
David M. Walker, the former Comptroller General of the United States, holds a B.S. degree in accounting from Jacksonville University.
Analysis: Bernanke is Obama's safe choice at Fed
In the August 26, 2009 story "Analysis: Bernanke is Obama's safe choice at Fed," Associated Press writers Tom Raum and Philip Elliott explain why it makes sense for Barack Obama to reappoint Ben Bernanke as Chairman of the Board of Governors of the Federal Reserve System:WASHINGTON – Giving Ben Bernanke a second term as Federal Reserve chairman was the politically safe course for a president beset by multiple crises and wanting no new battles.
The decision also helped soothe jittery financial markets, while drawing applause across party lines.
President Barack Obama cited the former Princeton economist's role in navigating the nation through the worst economic distress in decades in offering him a second four-year term on Tuesday. In so doing, Obama followed the pattern of other recent presidents in reappointing a central bank chief first appointed by a predecessor on grounds that he was doing a good job.
To do otherwise could have jeopardized the still-fragile recovery that Bernanke played a central role in engineering.
While other potential candidates were considered, including top White House economic adviser Lawrence Summers, any choice other than Bernanke might well have roiled Wall Street and touched off a fierce political battle in Washington.
"He couldn't have nominated anybody else," said Mark Zandi, chief economist at Moody's Economy.com. "It would have been destructive to the financial markets and nobody would have ever understood it."
Bernanke, 55, now faces the challenge of meeting the high expectations from the White House — and the rest of the country — to repair the battered economy. To keep inflation at bay, he also must tread carefully in unwinding hundreds of billions of dollars in Fed financial rescue programs once the recovery is under way.
The mild-mannered economist, who has taken some of the boldest, costliest actions of any Federal Reserve chief, does not bring heavy political baggage to the job, even though he served briefly as chairman of President George W. Bush's Council of Economic Advisers.
"I'm sure he hasn't made all the right calls, but he doesn't have a political cell in his body, and that's what you need in a Fed chairman," said Sen. Bob Corker, R-Tenn.
Reconfirmation seems all but sure. White House officials feel certain that any vote of no confidence in Bernanke would come at much too high a political cost to lawmakers with the economy still in a fragile state.
Bernanke is recognized in academic circles as a leading scholar on the Great Depression, deemed a good area of expertise given the current crisis.
Although his present term doesn't expire until early next year, Obama moved to end speculation percolating in political circles and on Wall Street, announcing his decision Tuesday morning on the Massachusetts island of Martha's Vineyard, where the president is vacationing with his family.
"Ben approached a financial system on the verge of collapse with calm and wisdom, with bold action and out-of-the-box thinking that has helped put the brakes on our economic free-fall," said Obama, with Bernanke standing by his side. "Almost none of the decisions he or any of us made have been easy."
The announcement's timing also helped the White House divert attention from a pair of gloomy economic reports issued Tuesday by the administration and Congressional Budget Office predicting a slow recovery and giant deficits for years to come.
First appointed chairman by Bush in early 2006, Bernanke has been widely praised by economists, and his reappointment was generally expected. Still, there remained some uncertainty. Bernanke has been criticized by some lawmakers for not doing more to head off the crisis, and by others for doing too much to combat it with what some see as an overly accommodating monetary policy.
He also drew criticism for strong-arm tactics, along with former Treasury Secretary Henry Paulson, in pressuring Bank of America to acquire the failing Merrill Lynch & Co. And Bernanke put himself at odds with the administration recently by resisting its plan to create a consumer protection agency for risky financial products, arguing that those responsibilities should stay with the central bank.
Obama's announcement removed any uncertainty on Wall Street about a potential replacement.
"Changing Fed chairmen at this point in both the economic recovery and in the midst of ongoing financial rescue efforts would have added uncertainty and would have been disruptive to markets," said Tony Fratto, a former economic spokesman for Bush and himself a former Treasury Department official.
White House chief of staff Rahm Emanuel and Treasury Secretary Timothy Geithner were the chief voices advising Obama to reappoint Bernanke. Obama decided about a month ago it was the appropriate move and told Bernanke of his decision last week during a meeting in the Oval Office, administration officials said Tuesday.
Obama followed a pattern established by the past four presidents in reappointing Fed chiefs who had been in place when they took office. Republican Ronald Reagan in 1983 reappointed Democrat Paul Volcker, who had been first named chairman by Jimmy Carter. Alan Greenspan, a Republican first appointed by Reagan, was reappointed by George H.W. Bush, Bill Clinton and George W. Bush. The Bushes are Republicans and Clinton a Democrat.
Bernanke's re-nomination "will bring continuity to the Federal Reserve that will send the right signal to the marketplace," said Senate Majority Leader Harry Reid, D-Nev. He said he expected Senate confirmation.
Even so, some lawmakers' remarks were pointed, suggesting Bernanke's confirmation hearings could produce fireworks even if the outcome seems assured.
Senate Banking Committee Chairman Chris Dodd, D-Conn., said, "Serious questions will be raised about the role of the Federal Reserve moving forward and what authorities it should and should not have."
Richard Shelby of Alabama, the committee's senior Republican, said he wanted to explore "the impact ad hoc decision-making had on the financial markets during the crisis," including what he called a "panicked response" by some regulators.
Senate Republican leader Mitch McConnell, R-Ky., said he hoped the confirmation hearings would offer lawmakers "greater insight into the cumulative impact the administration's trillions in new spending, borrowing and debt will have on the American taxpayer."
Sale of big-ticket items soar, bolstering economy
As explained in an earlier post that compares macroeconomic policy to the story of Goldilocks and the Three Bears, the key to managing the economy is influencing overall spending on newly produced goods and services. The largest component of this aggregate demand (AD) is consumption spending. According to the August 26, 2009 article "Sale of big-ticket items soar, bolstering economy," Associated Press business writer Alan Zibel reports that spending increased significantly in July, which may indicate that the current economic recession is close to an end:
Consumers and business spend big in July, sending home, equipment and car sales soaring
WASHINGTON (AP) -- Consumers and businesses went on a big-ticket spending spree in July, sending home, car and equipment sales soaring by the largest amount in years.
The sales, detailed in two government reports Wednesday, confirmed a subtle but marked shift in confidence about the economy. New home sales jumped almost 10 percent from June, while orders for long-lasting goods like appliances, planes and computers rose nearly 5 percent in July, the third increase in the past four months.
"It looks like we've hit bottom and we're now slowly trying to dig our way out," said Nigel Gault, chief U.S. economist at IHS Global Insight.
Still, it remains unclear whether the growth can be sustained. Though the increases in housing sales and manufacturing last month were dramatic, they came from extraordinarily low levels and were fueled by temporary government programs like Cash for Clunkers and tax credits for home sales.
Most economists now agree the recession that began in December 2007 has ended or is ending. Some say the economy is poised to grow strongly in the July-September quarter, but will probably show weaker growth after government stimulus spending tapers off.
Sales of new homes surged to a seasonally adjusted pace of 433,000 in July from 395,000 in June, the Commerce Department said, providing another sign the housing market is bouncing back from the historic bottom reached early this year. Driven by falling prices, the fourth-straight monthly increase was greater than expected. Sales haven't risen so dramatically since February 2005.
While sales are still off nearly 70 percent from the frenzied peak four years ago, they are still up more than 30 percent from the bottom in January -- a big relief after a long and painful decline.
"We can stop worrying about the housing market and start playing closer attention to other issues, such as when credit will start flowing more freely," Joel Naroff, chief economist at Naroff Economic Advisors, wrote in a note to clients.
The improved outlook could help further boost the economy. As home sales rise, builders will gradually need to hire more workers to pour foundations and pave roads, reversing the trend that saw 1.4 million industry jobs shed since the recession began.
"These are crucial elements of a sustainable recovery," David Resler, chief economist at Nomura Securities, wrote in a research note.
Construction job losses have slowed recently, with 76,000 lost in July, about half January's level.
Much like Cash for Clunkers, homebuyers are rushing to take advantage of a federal tax credit that covers 10 percent of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify.
And there are many deals to be had: The median sales price of $210,100 was 11.5 percent lower than levels a year ago, but still up from March's low of $205,100.
Builders and real estate agents fear that the end of the tax credit could reverse the upward trend. Sen. Johnny Isakson, R-Ga., has introduced legislation to extend it for another year, raise it to $15,000 and make it available to all buyers.
If that doesn't happen, Isakson said in an interview, "the little improvement we have from awful to terrible will go away and it will go back to awful again."
Some builders are already seeing sales dip.
At A.F. Sterling Homes in Tucson, Ariz., sales fell in July because the builder said it couldn't guarantee the homes could be finished in time to qualify, said Randy Agron, the company's vice president.
"The real estate market is really a fragile thing," he said. "It's not the right time to take (the tax credit) away."
There were 271,000 new homes for sale at the end of July, down more than 3 percent from May. At the current sales pace, that represents 7.5 months of supply, which means builders have scaled back construction to the point where supply and demand are coming into balance.
A similar trend is happening in other industries across the economy.
Orders for transportation equipment, including cars, car parts and airplanes rose more than 18 percent, helping to drive the durable goods data.
A huge jump in aircraft orders accounted for most of that gain. Also, auto production improved last month as General Motors and Chrysler reopened many plants that were shut in May and June while the companies restructured and emerged from bankruptcy protection.
Tuesday, August 25, 2009
The prisoners' dilemma
In the classic example of the prisoners' dilemma, two suspects have been arrested. The police do not have enough evidence to convict the perpetrators of a serious crime (e.g., a felony), but are assured of conviction on a lesser charge (e.g., a misdemeanor).The prosecutor wants to induce a confession from at least one of the suspects in order to obtain a conviction of the larger crime.
So the suspects are separated and interrogated. Each is offered the following deal:
*You must make a choice without knowing what your partner in crime has chosen.If you and your partner in crime are acquaintances with no loyalty to each other, what decision do you make. Do you confess or stay silent?
*If you stay silent and your partner stays silent, you both will be convicted of a lesser charge and will serve 1 year in jail.
*If you stay silent, but your partner confesses to the serious crime, then you will go to jail for 20 years. Your partner in crime will go free and serve no time in jail. (A plea agreement typically results in a reduced penalty.)
*If you confess, but your partner remains silent, then your partner will go to jail for 20 years. You will go free and serve no time in jail.
*If you confess and your partner confesses, then you both will be convicted of the more serious crime. But because you both cooperate with the prosecutor, your prison sentences will be reduced. You both will serve 5 years in jail.
Remember you do not know what your partner will choose. So let us consider both possibilities. If your partner confesses, then your options are (a) to confess and serve 5 years, or (b) to stay silent and serve 20 years. Confessing seems clearly preferable. (You would prefer to spend 5 years in jail rather than 20 years.) If your partner stays silent, then your options are (a) to confess and go free, or (b) to stay silent and serve 1 year in jail. Again, confessing seems clearly preferable. (You would prefer to spend no time in jail than to be in prison for 1 year.) So regardless of your partner's decision, it seems preferable for you to confess to the more serious crime.
Your partner has the same incentive structure. So regardless of your decision, it seems preferable for your partner to confess to the more serious crime, also. Thus, the likely outcome is that you both confess and go to jail for 5 years. Yet, there was option available in which you and your partner would have been better off. If you both remained silent, each of you would serve significantly less jail time.
So this is the prisoners' dilemma: Choosing what seems to be in your self interest may not be. Selfishness may not lead to optimal solutions, for society as a whole or you as an individual. You and your partner would be better off if you make choices than seem to go against your self interest.
So how can we arrive at the optimal outcome?
Suppose the two suspects have genuine love for each other, rather than being just acquaintances. (For example, suppose the two criminals are Bonnie Parker & Clyde Barrow.) Suppose you would be willing to serve a longer prison sentence if it allowed your partner to serve less time. If both partners feel this way, then you both might choose to remain silent. The outcome is then the optimal one.
Humanitarians and religious leaders urge people to show more love and compassion to one another. (Love your neighbor ... and everyone is your neighbor.) So a cultural revolution in which love and compassion become prominent might lead to more optimal social outcomes. In the absence of that, however, there may be yet another rationale for government intervention in the marketplace. (Indeed, if people demonstrated more love and compassion to each other, there would be less need for government.)
For example, the primary justification for large taxes on alcohol and tobacco is to increase the price of them to discourage their consumption. The government intervenes in the markets for these products because society deems it beneficial. The free market frequently provides outcomes that are socially undesirable. Unregulated markets create too much pollution, poverty, and market power. And free markets create too little national defense, public health, education, roads, and other public goods. Thus, despite the proclamations of many free market advocates, most people agree it is appropriate and indeed necessary for the government sometimes to intervene in the marketplace.
U.S. housing, confidence data point to recovery
According to the August 25, 2009 article "U.S. housing, confidence data point to recovery," Ros Krasny reports recent economic data suggest the current economic decline may be ending:
CHICAGO (Reuters) – Larger-than-expected gains in U.S. housing prices and consumer confidence on Tuesday lent new weight to views that the economy is emerging from the longest recession since the 1930s.
U.S. single-family home prices rose for the second month in a row in June, according to a closely watched index, and consumer confidence jumped in August.
In addition, President Barack Obama nominated Ben Bernanke to a second term as chairman of the Federal Reserve, removing some niggling doubt from investors' minds. The move promised a consistent approach to monetary policy in the years ahead.
The developments helped buffer the blow of projections for the U.S. budget deficit to reach its highest level in 2009, relative to the total economy, since World War Two.
"The recession appears to be over, with consumer attitudes lagging behind broad economic developments," said Steven Wood, chief economist at Insight Economics in Danville, California.
Major U.S. equities indexes closed higher after briefly hitting new 2009 highs on the day's events. Treasury bond prices initially fell as signs of a resurgent economy reduced interest in safer investments, but later rose after decent demand for an auction of two-year notes.
The Conference Board, an industry group, said consumer confidence climbed to a reading of 54.1 in August from 47.4 in July, handily beating forecasts, on an improved outlook for the job market and the overall economy.
The rise sent the index to its highest level since May. Still, some analysts warned not to get carried away.
"Confidence remains well below its historical average of 95 and it has not even regained the level of 61 seen before the collapse of Lehman almost a year ago," said Paul Dales, U.S. economist at Capital Economics in Toronto.
The weak labor market remains a sticking point to recovery, and especially a revival in consumer spending. Even the Fed has conceded the likelihood of a "jobless recovery," with the unemployment rate staying high long after growth resumes.
Americans saying that jobs were "hard to get" in August dropped to 45.1 percent from 48.5 percent but only 4.2 percent said jobs were plentiful.
"Most of the strength was in the 'expectations' component, so it looks like even though the near-term conditions are still a bit rocky, there is hope for the future," said Kim Rupert, managing director, global fixed income analysis, Action Economics LLC in San Francisco.
HOUSING PRICES IN BROAD-BASED GAINS
Other data supporting recovery hopes came from the Standard & Poor's/Case-Shiller housing price index. The housing market is considered a critical component to an economic recovery.
Prices of U.S. single family homes rose by 1.4 percent in June from May, after creeping up by 0.5 percent in April, suggesting the crippling housing slump is easing.
The Case-Shiller 10- and 20-city indexes have plunged by 54.3 percent and 45.3 percent, respectively, from their 2006 peaks.
June's improvement was broad based, with 18 of 20 metropolitan areas logging gains for the month.
"The most important take-away is the breadth of the rise," said Adam York, economist at Wells Fargo Securities in Charlotte, North Carolina. "The absolute worst is behind us."
Separately, the Federal Housing Finance Authority said U.S. home prices rose by 0.5 percent in June, according to its seasonally-adjusted monthly index, while prices fell by 0.7 percent in the second quarter.
"The S&P/Case-Shiller report dovetails with evidence from the FHFA house price index and the National Association of Realtors existing home sales report, suggesting that house price deflation has bottomed," said Anna Piretti, economist at BNP Paribas in New York.
BEN'S BACK
Bernanke's reappointment, while widely expected, was seen as a plus for markets that feared new uncertainty at a time the U.S. economic ship is finally righting itself.
Fed officials have warned that politicizing the U.S. central bank risked higher long-term interest rates as investors began to fear higher inflation taking root.
"Were Bernanke to be denied a second term in favor of, say, a current White House 'insider,' this would inevitably add to concerns about the blurring of lines between fiscal and monetary policy and the potential compromising of Fed independence," said strategists at analysis firm 4CAST Ltd.
For the time being, though, Bernanke & Company still face deflationary pressure from the huge "output gap" in the U.S. economy created by the deep recession.
"The news that the deflation-conscious Bernanke is going to be at the helm .... provides tentative support to our view that the zero-interest rate policy will remain in place until 2011 at the earliest," said Capital Economics' Dales.
The nonpartisan Congressional Budget Office (CBO) on Tuesday gave updated projections on the likely U.S. budget deficit in fiscal 2009 and beyond.
Spiraling deficit forecasts stretching far into the future have been cited as one element behind a dip in Obama's polling numbers, as Americans start to fear that tax hikes will almost inevitably follow.
The CBO forecast a fiscal 2009 deficit at $1.59 trillion, or 11.2 percent of projected gross domestic product, falling to $1.4 trillion or 9.6 percent of GDP in 2010.
It gave a 10-year deficit forecast of $7.14 trillion against $9.1 trillion.
Separately, the White House raised its forecast for the budget deficit between 2010 and 2019 to a total of about $9 trillion.
Monday, August 24, 2009
Test your understanding of economics in the news: Is this a change in supply or a change in demand?
Toward the end of the August 24, 2009 article "Attack on Obama riles Beck's advertisers," Associated Press television writer David Bauder suggests that the price of an advertisement on Glenn Beck's television program is likely to decline in the near future. Is this change in the price of a TV commercial during Glenn Beck's show caused by (a) an increase in the supply of ads during Beck's show, (b) a decrease in the supply of ads during Beck's show, (c) an increase in the demand for ads during Beck's show, or (d) a decrease in the demand for ads during Beck's show. Read the article and then illustrate this price change with a graph that shows the initial positions of the supply and demand for ads of Glenn Beck's television show and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.
NEW YORK – Glenn Beck returns to Fox News Channel on Monday after a vacation with fewer companies willing to advertise on his show than when he left, part of the fallout from calling President Barack Obama a racist.
A total of 33 Fox advertisers, including Wal-Mart Stores Inc., CVS Caremark, Clorox and Sprint, directed that their commercials not air on Beck's show, according to the companies and ColorofChange.org, a group that promotes political action among blacks and launched a campaign to get advertisers to abandon him. That's more than a dozen more than were identified a week ago.
While it's unclear what effect, if any, this will ultimately have on Fox and Beck, it is already making advertisers skittish about hawking their wares within the most opinionated cable TV shows.
The Clorox Co., a former Beck advertiser, now says that "we do not want to be associated with inflammatory speech used by either liberal or conservative talk show hosts." The maker of bleach and household cleaners said in a statement that it has decided not to advertise on political talk shows.
The shows present a dilemma for advertisers, who usually like a "safe" environment for their messages. The Olbermanns, Hannitys, O'Reillys, Maddows and Becks of the TV world are more likely to say something that will anger a viewer, who might take it out on sponsors.
They also host the most-watched programs on their networks.
"This is a good illustration of that conundrum," said Rich Hallabran, spokesman for UPS Stores, which he said has temporarily halted buying ads on Fox News Channel as a whole.
Beck can bring the eyeballs. With the health care debate raising political temperatures, his show had its biggest week ever right before his vacation, averaging 2.4 million viewers each day, according to Nielsen Media Research.
He was actually on another Fox show July 28 when he referred to Obama as a racist with "a deep-seated hatred for white people." The network immediately distanced itself from Beck's statement, but Beck didn't. He used his radio show the next day to explain why he believed that. He would not comment for this article, spokesman Matthew Hiltzik said.
ColorofChange.org quickly targeted companies whose ads had appeared during Beck's show, telling them what he had said and seeking a commitment to drop him. The goal is to make Beck a liability, said James Rucker, the organization's executive director.
"They have a toxic asset," Rucker said. "They can either clean it up or get rid of it."
It's not immediately clear how many of the companies actually knew they were advertising on Beck's show. Sometimes commercial time is chosen for a specific show, but often it is bought on a rotation basis, meaning the network sprinkles the ads throughout the day on its own schedule. Sometimes ads appear by mistake; Best Buy said it bought commercial time for earlier in the day, and one of its ads unexpectedly appeared in Beck's show.
One company, CVS Caremark, said it advertises on Fox but hadn't said anything about Beck. Now it has told its advertising agency to inform Fox that it wanted no commercials on Beck.
"We support vigorous debate, especially around policy issues that affect millions of Americans, but we expect it to be informed, inclusive and respectful," said spokeswoman Carolyn Castel.
Besides the unpredictability of the opinionated cable hosts, the rapid pace of today's wired world complicates decisions on where to place ads, said Kathleen Dunleavy, a spokeswoman for Sprint. She said she was surprised at how fast the Beck issue spread across social media outlets and how quickly advertiser names were attached to it.
UPS' Hallabran said the decision to pull commercials "should not be interpreted as we are permanently withdrawing our advertising from Fox." He said the company wants to reach viewers with a wide spectrum of opinions.
Except for UPS Stores, there's no evidence that any advertisers who say they don't want to be on Beck's show are leaving Fox. Network spokeswoman Irena Briganti said the companies have simply requested the ads be moved elsewhere and that Fox hasn't lost any revenue.
She wouldn't say whether Fox was benefiting from any anti-anti-Beck backlash, with companies looking to support him. Some Beck supporters have urged fans to express their displeasure at companies for abandoning their man.
Beck supporters have suggested that retaliation might have something to do with ColorofChange.org's campaign. One of the group's founders, Van Jones, now works in the Obama administration and has been criticized by Beck. But Rucker said Jones has nothing to do with ColorofChange.org now and didn't even know about the campaign before it started.
Beck's strong ratings — even at 5 p.m. EDT he often outdraws whatever CNN and MSNBC show in prime-time — make it unlikely Beck is going anywhere even as the list of advertisers avoiding him approaches three dozen.
But it could mean advertising time becomes cheaper on his show than such a large audience would normally command. Some of his show's advertisers last week included a male enhancement pill, a law firm looking to sue on behalf of asbestos victims, a company selling medical supplies to diabetics and a water filter company.
Rucker said ColorofChange.org has contacted about 60 companies regarding Beck, and is heartened by the response.
"It's causing a certain conversation around Beck, which I think is important," he said.
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Sunday, August 23, 2009
Millions face shrinking Social Security payments
According to the August 23, 2009 article "Millions face shrinking Social Security payments," Associated Press writer Stephen Ohlemacher says:
WASHINGTON – Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise. The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.
By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.
"I will promise you, they count on that COLA," said Barbara Kennelly, a former Democratic congresswoman from Connecticut who now heads the National Committee to Preserve Social Security and Medicare. "To some people, it might not be a big deal. But to seniors, especially with their health care costs, it is a big deal."
Cost of living adjustments are pegged to inflation, which has been negative this year, largely because energy prices are below 2008 levels.
Advocates say older people still face higher prices because they spend a disproportionate amount of their income on health care, where costs rise faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios just as they are relying on those assets for income.
"For many elderly, they don't feel that inflation is low because their expenses are still going up," said David Certner, legislative policy director for AARP. "Anyone who has savings and investments has seen some serious losses."
About 50 million retired and disabled Americans receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. All beneficiaries received a 5.8 percent increase in January, the largest since 1982.
More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration.
Millions of people with Medicare Part B coverage for doctors' visits also have their premiums deducted from Social Security payments. Part B premiums are expected to rise as well. But under the law, the increase cannot be larger than the increase in Social Security benefits for most recipients.
There is no such hold-harmless provision for drug premiums.
Kennelly's group wants Congress to increase Social Security benefits next year, even though the formula doesn't call for it. She would like to see either a 1 percent increase in monthly payments or a one-time payment of $150.
The cost of a one-time payment, a little less than $8 billion, could be covered by increasing the amount of income subjected to Social Security taxes, Kennelly said. Workers only pay Social Security taxes on the first $106,800 of income, a limit that rises each year with the average national wage.
But the limit only increases if monthly benefits increase.
Critics argue that Social Security recipients shouldn't get an increase when inflation is negative. They note that recipients got a big increase in January — after energy prices had started to fall. They also note that Social Security recipients received one-time $250 payments in the spring as part of the government's economic stimulus package.
Consumer prices are down from 2008 levels, giving Social Security recipients more purchasing power, even if their benefits stay the same, said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank.
"Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt," Biggs said. "Congress has to be able to tell people they are not getting everything they want."
Social Security is also facing long-term financial problems. The retirement program is projected to start paying out more money than it receives in 2016. Without changes, the retirement fund will be depleted in 2037, according to the Social Security trustees' annual report this year.
President Barack Obama has said he would like tackle Social Security next year, after Congress finishes work on health care, climate change and new financial regulations.
Lawmakers are preoccupied by health care, making it difficult to address other tough issues. Advocates for older people hope their efforts will get a boost in October, when the Social Security Administration officially announces that there will not be an increase in benefits next year.
"I think a lot of seniors do not know what's coming down the pike, and I believe that when they hear that, they're going to be upset," said Sen. Bernie Sanders, an independent from Vermont who is working on a proposal for one-time payments for Social Security recipients.
"It is my view that seniors are going to need help this year, and it would not be acceptable for Congress to simply turn its back," he said.
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On the Net:
Social Security Administration: http://www.ssa.gov/
National Committee to Preserve Social Security and Medicare: http://www.ncpssm.org