Saturday, July 31, 2010

Wind Mill energy provider is buying peoples, really they are BUYING silence! Very mob-like AND has economists seal of approval.

Wind mills apparently cause alot of noise...whoosh, whoosh, whoosh, all day and night long.  This noise produces what economists term a negative externality.  It is a negative by-product of production for which the producer does not explicitly pay for.  It makes the cost of production lower than what is should be and produces additional profits at the expense of society at large.  Often in cases like this  government steps in and either regulates the firm or imposes fines.  However, there is a market alternative that can take care of the problem.  The energy company can pay the people who are "hurt" by the negative externality for there inconvenience.  If an agreed upon price can be reached, then there is no need for government regulation.  Obviously, there are difficulties with this approach, but can be effective in the right circumstances for both the producer and the affected. 

NYTIMES: Turbines Too Loud for You? Here, Take $5,000
""Residents of the remote high-desert hills near here have had an unusual visitor recently, a fixer working out the kinks in clean energy. Patricia Pilz of Caithness Energy, a big company from New York that is helping make this part of eastern Oregon one of the fastest-growing wind power regions in the country, is making a tempting offer: sign a waiver saying you will not complain about excessive noise from the turning turbines — the whoosh, whoosh, whoosh of the future, advocates say — and she will cut you a check for $5,000.""
 Another simple example---lets say you want to have a party with a live band in your backyard.  This is going to affect your neighbors (assuming you are not inviting them to come) with loud music for half the night.  This is the non-monetary cost you are imposing on your neighbors and you are not fully accounting for all the costs for your party.  To keep them from calling the police and ruining your party, you could offer them compensation to not call the police.  If you can agree upon a price then you are fully accounting for all the the costs of your party.  You have eliminated the negative externality...The noise remains, but you have internalized the cost....

Friday, July 30, 2010

I may live to see this happen, though I hope not...

China Becomes Second Biggest World Economy
China has overtaken Japan to become the world's second-largest economy, the fruit of three decades of rapid growth that has lifted hundreds of millions of people out of poverty....Depending on how fast its exchange rate rises, China is on course to overtake the United States and vault into the No.1 spot sometime around 2025, according to projections by the World Bank, Goldman Sachs and others.

This is NOT an Onion story---Do you experience an "experience" at Chipotle? Apparently some do and they sued to get it...

Court: Chipotle restaurant violated disability law
SAN FRANCISCO — An appeals court has ruled that two Chipotle Mexican Grill restaurants in San Diego have violated a federal law protecting the rights of the disabled.
The 9th U.S. Circuit Court of Appeals ruled Monday that customers in wheelchairs are denied the "Chipotle experience" of watching their food being prepared because the restaurants' 45-inch counters are too high.
The company now faces hundreds of thousands of dollars in damages. The unanimous three-judge ruling overturned a trial court decision pointing to Chipotle's willingness to prepare a disabled customer's order elsewhere. The appeals court said that is still unfair.
The ruling was issued on the 220th anniversary of passage of the American with Disabilities Act

(HT: Carpe Diem)

Monday, July 26, 2010

Nice Interactive Graphic on the aging population---Too many "olds" not enough "youngs".

Click HERE to take you to this interactive graphic.  Watch the bulge in baby boomers work its way through the decades. Sort of like watching  the monster in Alien squirming through a belly...As a bonus you can compare the US to Europe/Japan/China.  This is THE fiscal problem for the young generation.  Are policy makers REALLY addressing this issue?

HT: Chartporn

Sunday, July 25, 2010

"Recalculation" in the Economy---Yes, YOU are being Recalculated as we speak! A must read

     The more I read about this concept of "recalculation" the more I am intrigued and believe it needs to be more understood by students.  In the past, creative destruction pulled everyone along for the ride and opportunities, seemingly, fell into peoples laps relatively easily.  As old industries faded away, people were able to move into new and better employment situations with little friction. Look at the years between 1980 and 2000, for instance.  So much changed so quickly, but employment and opportunity rose dramatically. Could we say, by and large, we had a "good calculation" or resources to their most productive uses in the 80's/90's (technology driven advancements, etc) and the 2000' s were marked by a "bad calculation" of resources (housing, financial instruments,etc)?   Something has changed and there appears to be a disconnect between  how we currently allocate our resources domestically and how we work or train/prepare for that work.
    The following 16 points go a long way in understanding the underlying structural issues we face in terms of employment as it relates to the output (production) of goods and services.  These points are not the "be all to end all" in the discussion (politics will inevitably jump in), but it is a terrific starting point.  Well worth reading and pondering...Do you disagree with any of the points??

The Recalculation Story: A Summary--(Arnold Kling)

1. Try not to think of macroeconomics in terms of equations or in terms of aggregate demand. Try to learn to think in a new language, rather than translate from the Recalculation language to something you are used to.

2. "Economic activity consists of sustainable patterns of specialization and trade." That is the mantra of the Recalculation Story.
3. Note how difficult it is to squeeze patterns of specialization and trade into a model of a single representative agent. Robert Solow has more good points.
4. If you cook for yourself and I cook for myself, that is not economic activity. If we eat at each other's restaurants, that is economic activity. This is true in the national income accounts, and it is justifiable. It is better to have millions of people working for you to produce your food, computers, health care, and so on than to produce them for yourself.
5. Part of the challenge of creating sustainable patterns of specialization and trade can be described as a matching problem. Think of two decks of cards, one with a list of workers with specialized skills and one with a list of occupations that utilize specialize skills. If you draw two cards at random, the chances are that they will not match. The skills of the worker will not match the skills required in the occupation. In that case, the marginal product of the worker in that occupation is very low, and the worker is unemployed.
6. The economy's calculation problem is to sort the two decks in ways that match workers to occupations in which they have value. This problem becomes more complicated with each increment of technological progress. The number of occupations has increased, because even as some occupations become obsolete, even more occupations emerge as useful. Also, the amount of human capital needed for many occupations has increased.
7. The patterns of specialization and trade are interdependent. In some instances, there is negative feedback. A new pattern that involves automobile production has negative impact on horseshoe makers. In other instances, there is positive feedback. A new pattern that involves automobile production has a positive impact on gasoline refiners.
8. Economic profits are what indicate a sustainable pattern of specialization and trade. Ultimately, the way that we know that we have a good set of matches of workers and occupations is that employers are not losing money.
9. The sustainability of patterns of specialization and trade is always changing. New opportunities emerge, and some older patterns become obsolete.
10. A danger in the economy is that an unsustainable pattern will go unrecognized for a long time. In the recessions of the U.S. between the end of World War II and the 1980's, excess inventories were accumulated. In the most recent episode, excesses in housing construction and mortgage finance went unrecognized for a long time.
11. If the excesses are merely short-term inventory problems, the old patterns of specialization and trade can be restored once the inventories are worked off.
12. However, if the old patterns of specialization and trade are not sustainable, the economy faces the Recalculation Problem. New patterns of specialization and trade need to be created. While the economy is creating new patterns even in good times, when it faces a Recalculation Problem it cannot create new patterns rapidly enough to prevent widespread unemployment.
13. Government can create temporary jobs for the unemployed. However, that is not the same thing as creating sustainable patterns of specialization and trade. For example, if the government subsidizes a firm that builds solar panels and those solar panels are not efficient, then this does not really represent a sustainable pattern of specialization and trade.
14. The more that patterns of specialization and trade involve government direction of resources, the greater the risk that those patterns are not sustainable.
15. It is possible that lower real wages will help to solve the Recalculation problem. However, generally speaking, when you pick a card from the worker deck and a card from the occupation deck, the match is either a good one or it isn't.
16. The production process has become more roundabout over the years. Fewer workers are engaged in hands-on production of output. Instead, they are engaged in building what Garett Jones calls organizational capital, as indicated by functions such as marketing communications, management reporting systems, or corporate training. This means that the relationship between output and employment has become looser. It means that patterns of specialization and trade reflect not just what goods and services are produced but how they are produced.

With all the infusion of money into the economy, why do we not have Inflation? Hello! It's due to Velocity of Money! Did you not know that??? Nice chart enclosed.

Below is an excellent explanation of the velocity of money and its impact on economic recovery AND why we are not experiencing inflation with the increase (real or perceived) in the nations money supply.  Velocity of money is simply how many times the money supply turns over on itself to purchase GDP.  If GDP for a given year is $14 Trillion and there are only $7 Trillion in circulation, how can that be? The $7 Trillion turns  over on itself twice to buy $14 Trillion dollars worth of "stuff".  Some dollars turnover more than others (some sit in the seat cushions of your couch) and others circulate many times over.  I will do another blog entry to further explain this in the context of an equation called the Equation of Exchange...Fun! Fun!

Bartlett: Hoarding Cash Could Stifle Growth and Halt the Recovery
""The Wall Street Journal reported somewhat breathlessly on June 10 that nonfinancial businesses in the U.S. are sitting on $1.84 trillion in liquid assets, or 12.6 percent of the gross domestic product (GDP). The implication is that this money could immediately be mobilized to invest and create jobs. This isn’t quite so, but excessive cash holdings by households, businesses and banks are symptomatic of a fundamental problem plaguing the economy: the low level of monetary velocity.
The $1.84 trillion figure is a bit misleading because businesses always have a lot of liquid assets. At the end of 2007, before the financial crisis hit, they were sitting on $1.53 trillion in liquid assets, which represented 11.1 percent of all their financial assets. At present, liquid assets represent 12.9 percent of financial assets, roughly comparable to the 12.5 percent share in 2005.
It’s difficult to say what would be a normal percentage for liquid assets, but it’s doubtful that businesses are sitting on much more than $150 billion or so of precautionary liquid assets . If they were to spend these funds on hiring or investment or even dividend payments to shareholders, it would help the economic situation, but not by all that much.
However, to the extent that businesses and households are hoarding cash it reduces the rate of turnover of money in the economy—the number of times dollars are spent in the aggregate—which economists call velocity. In the simplest terms, velocity is the ratio of the money supply to GDP in nominal (money) terms.
For many years, economists treated velocity as if it was a constant like pi (π), the ratio of the diameter of a wheel to its circumference. Throughout the 1960s and 1980s, velocity was fairly stable at around 1.6/1.7. But in the 1990s, it began to rise due to financial innovations, such as debit cards, that allowed people and businesses to use their cash more efficiently. Throughout the 1990s, the velocity ratio was more than two, meaning that if you multiplied the money supply by two, that would approximately equal GDP.
In the 2000s, velocity fell to the 1.8/1.9 range. On the eve of the financial crisis it was about 1.93, as shown in the table. But in mid-2007, it began to fall, hitting a low of 1.68 in the middle of last year, a level not seen since the 1980s

A decline in velocity has the same economic effect as a decline in the money supply, which creates deflation—falling prices. This is what happened during the Great Depression. At that time the money supply fell because there was no deposit insurance, so when banks failed, their deposits literally disappeared. (Most of the money supply is in the form of checking accounts or demand deposits that exist only in an accounting sense.) Between 1929 and 1933, the money supply shrank by 30 percent. Since the price level is a function of the quantity of money times the goods and services available for sale, this caused the Consumer Price Index to fall by about 25 percent.""
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