Who spends a dollar more effectively--the Fed Govt or You?...Guess again!

     NewsFlash: We are/have been in a recession!  In this particular recession it is generally accepted by economists (relatively objective ones)  that it is because of sagging Aggregate Demand. This means our total demand for US made goods and services is LESS than our ability to supply US made goods and services (aka Aggregate Supply).  We don't necessarily have an excess supply of goods/services, but we have an excess supply of CAPACITY to produce goods/services---a gap between our actual production and our potential to produce good/services.   Because people are not buying "stuff" then businesses are not selling stuff and certainly not re-ordering stuff.  This in turn effects employment as employers shed employees as demand for their goods declines.  As more people become unemployed they buy less so businesses lay workers off or close entirely, so on and so forth.  It becomes an economic death spiral downward. 
    This means we need to get money into the hands of people/businesses so they can spend it to INCREASE or at least STABILIZE Aggregate Demand so businesses will sell/re-order more goods, and more people can keep there jobs, and hopefully more will be re-called as business picks up--Phew! That was hard work! How best to achieve this?  
     In general, we all think in terms of "bang for the buck" (hey, we are Americans, after all).  What transmission mechanism that originates from the Federal Govt is going most effective---Govt spends a dollar OR Individuals spend a dollar from a tax cut?  Oh, boy, here we go!
     Below is a chart that represents research into how much ONE DOLLAR spent (by govt or individuals) INCREASES GDP, which is the goal of congress/the President. This is called "The Multiplier Effect", or more specifically, "The Keynesian Multiplier Effect".

Mark Zandi via  Ezra Klein 

     Notice that one dollar spent can either yield a change in GDP of more than one dollar or less than one dollar.  How can this happen? 

     To simplify, lets assume we ALL behave the exact same way.  If I get a dollar in the form of a tax cut, research shows that I will save some portion of that dollar and spend the rest.  So if we all save 10% ($.10) of our dollar then we will spend the other 90% ($.90), thereby increasing GDP by $.90.   Economists would say we are acting "rationally" by saving some of our bounty.  However, government does not save ANY of that dollar because, well, why would they? So, on the face of it, which entity, the  individual OR the government, is going to have the BIGGEST impact on the purchase of GDP in that FIRST round of spending?  Why the government, of course (I just proved it to you mathematically!!).  Govt is going to buy $1.00 worth of "stuff" and I am going to buy only $.90. 

    However, as you look at the graph you will notice as you start from the top and move down you will see a transition from Tax Cuts/Rebates to more direct spending by the government then back to spending by individuals.  Does this not go against what I just said about government spending being king? Sort of...

    There IS going to be "leakage" from that federal dollar spent and not all of it will be spent directly on goods/services.  Some of that dollar will be subjected to what I call "WTF"---no it is not what you are thinking, but  it could be, I suppose.  For me, WTF is "Waste, Theft, Fraud".  Ultimately we want to look at who, an individual, business, or government entity is going to spend MORE of that initial dollar when it is received, hence affecting Aggregate Demand in the most impactful way.

   Looking at the graph, we see the group with the highest tendency to spend an additional dollar they receive is the unemployed and others receiving direct government transfers. This makes sense, doesn't it? These are people living at the margin, as economist put it. Or more simply, people who have little immediate need to save but the most incentive to spend right away.  They spend on necessities, one would suppose. Necessities, like food, rent, utilities and other basic staples, that are made in the US (mostly).  This allows businesses to stay open to sell stuff and re-order more stuff AND keep/hire employees.  Now Aggregate Demand is STABILIZED! Perhaps it inches forward to close the recessionary gap?

    This is important to understand because there is A LOT of politics that takes place between the gaps of all the groups in the above graph.  Who should get a tax cut, if anyone? Who should spend money in a recession:? The Federal Govt directly, or people who are most likely to spend it to get the economy stabilized?  What do YOU think????

 

"And then, And then, I threw a puppy at the Hells Angels and Escaped on a Bulldozer--yeah, yeah, that's what I did!"--no, this was not Will Ferrell!

I spit milk through my nose after reading this...Close your eyes and envision this scenario from start to finish...The Onion could not do any better...

German student attacks Hell's Angels with puppy

A German student created a major traffic jam in Bavaria after making a rude gesture at a group of Hell's Angels motorcycle gang members, hurling a puppy at them and then escaping on a stolen bulldozer.
German police said on Monday that after making his getaway from the Hell's Angels club, the 26-year-old dumped the bulldozer, causing a 5 km (3 miles) traffic jam near the southern town of Allershausen, local police said. He then fled to his home nearby where he was apprehended by the police.  "What motivated him to throw a puppy at the Hell's Angels is currently unclear," said a spokesman for local police, adding that the student had lately been suffering from depression.  The puppy was now in safe hands, the spokesman added.

Arizona has done some squirrely things lately, but this the most squirrely---No, really, it is literally Squirrely

Good use of tax money?? I report, you decide...:)

Arizona Spends $1.25M to Save 250 Squirrels

""Arizona is spending $1.25 million to build bridges for endangered squirrels over a mountain road so they don't become roadkill and then monitor their health.
The money is being spent, officials said, because cars kill about five of these squirrels each year.
While most suburbanites may be baffled why anyone would protect a pesky squirrel, these are Mount Graham red squirrels, a breed once thought to be extinct. Only 250 of them are known to live near the top of Mount Graham. The Federal Highway Administration grant will be used to build rope bridges over the lone road through the squirrels' habitat, according to Arizona Department of Transportation Community Relations Director Timothy Tait. The DOT plans to install 41 of the "canopy tunnel crossings" at a cost of $400,000.
Another $160,000 will be spent on cameras to monitor the bridges, and the rest of the money will fund a project to monitor the rodents.


That works out to about $5,000 per squirrel.""

NEVER have to think again about buying "the lastest and greatest"---this Chart does it for you!!

Have you ever wondered how long does it take overseas to make the equivalent of US minimum wage?

Click the image to Enlarge

Source: FixR

"Bond, James Bond"...er, I mean "Bond, Japanese Bond"--Click HERE to see the NEW Bond Girls!!

Well, not in the traditional sense of a Bond Girl...The Japanese Government is trying lure younger men to buy Government Bonds (Government Debt)...Gives new meaning to the name "Bond Girls"...

Bloomberg: Women Prefer Men Holding State Bonds, Japan Ad Says

""Japanese women are seeking men who invest in government bonds, according to an advertisement being run by the Ministry of Finance.
“I want my future husband to be diligent about money,” a 27-year-old woman says in an ad being run in free magazines promoting a fixed-rate, three-year note that Japan started selling last week. “Playboys are no good.” She’s one of five women featured in the page, which says “Men who hold JGBs are popular with women!!”
The ministry commissioned the ads to appeal to citizens for money at a time when record government borrowing threatens to outstrip demand. Prime Minister Naoto Kan, who took office yesterday, said he doesn’t have an instant fix to rein in the world’s largest public debt.
The government’s plan to attract marrying-age men comes after a campaign aimed at retirees started last August. That push featured Junko Kubo, a former anchor on Japan’s public broadcaster NHK, in ads placed in the backs of taxi cabs. Kubo followed Koyuki, an actress and model who in 2003 appeared in “The Last Samurai” with Tom Cruise as well as posters for government bonds.
“It strikes of desperation,” Christian Carrillo, a senior interest-rate strategist in Tokyo at Societe Generale SA said about the ad campaign. “I doubt this will be a successful strategy to attract retail investors.”"

"Oooohhhh, Ahhhhhh, Only at Mattress Giant!"...umm, no, not this $33,000 mattress!!!

From WSJ: A Mattress at $33,000?

""How much would you spend for a good night's sleep?

Some people might say $33,000. That's the price of E.S. Kluft & Co.'s hand-tufted, king-size Palais Royale mattress and box spring, currently the most expensive American-made mattress set on the market. The company says it has sold about 100 since introducing it in 2008.  Or maybe it's $44,000—the price tag on Kluft's Sublime model, which the company has teed up for a launch later this year""...read rest of story HERE and Click on picture to see how it is made!

Oil is THE Green Energy source we have been looking for all along....Say What?

Opportunity cost(s) is/are the most under-appreciated concept in economics, but is perhaps the most powerful when synthesized into critical thinking.  Broadly defined,  it means what you give up to get more of something else, but specifically it is the next best alternative forgone when one makes a choice.   Maybe because economists think in terms of opportunity cost is why people get so frustrated with economic analysis.  Laymen see it as not being able to make a decision ("analysis paralysis"). Economists see it as making sure you think of as many ramifications (positive and negative) when making a decision or fashioning a public/private policy.  As defined this way, you have to give weight to as many things you may have to do without as well as the things you may gain in the course of making a decision. Two examples are provided by Professor Mark Perry at Carpe Diem. You have to count the benefits as well as the costs, it is only honest to do so...

1. “Oil may be the single most flexible substance ever discovered. More than any other substance, oil helped to shrink the world. Indeed, thanks to its high energy density, oil is a nearly perfect fuel for use in all types of vehicles, from boats and planes to cars and motorcycles. Whether measured by weight or by volume, refined oil products provide more energy than practically any other commonly available substance, and they provide it in a form that’s easy to handle, relatively cheap, and relatively clean.’’

~Manhattan Institute’s Robert Bryce in “Power Hungry."

2. "Fossil fuels have been one of the great boons both to humanity and the environment, allowing forests to regrow (now that we don't use wood for heating fuel or grow fuel for horses anymore) and liberating billions from backbreaking toil. The great and permanent shortage is usable surface land and fresh water. The more land we use to produce energy, the less we have for vulnerable species, watersheds, agriculture, recreation, etc. As counterintuitive as it may be to say so, oil is a green fuel, while "green" fuels aren't. And this spill doesn't change that fact." 

~Jonah Goldberg, "Oil: The Real Green Fuel"

Wages in China too high ($1.84/hr)---Gotta move to Vietnam to produce ($.49/hr)---Crazy or Crazy like a Fox?

A race to the bottom OR is the bottom being eliminated?  Wages paid to Chinese apparel workers have increased and manufacturers/outsourcers are looking for ways to (1) get around the increase in wages by decreasing other variable costs that go into production or (2) move production to a lower wage country, notably Vietnam.  I have mentioned in class for the last two years that Vietnam is investing in infrastructure, education and creating a more business friendly environment. We have to stop thinking of these places as being backwater "villages".  They are quickly modernizing, however the wages are painfully low, by OUR standards (see graph below).  While there will be no major migration of manufacturing to Vietnam, there is enough movement to get the attention of the Chinese and various apparel retailers.  The Vietnamese are "exploiting" their comparative advantage---willingness to do quality work at lower wages than Chinese workers.  When we look at the relative pay, $1.84 in China and $.49 in Vietnam, it seems pitiful, until you look at what is the alternative for Vietnamese workers?  Does this type of job offer them a foot in the door to a higher standard of living, like the Chinese did 20 years ago?  Do they have a right to use this comparative advantage, even if it seems "exploitative", to climb the economic ladder? Or is this way of economic improvement not right and too exploitative and should be discouraged? What do you think?

From WSJ: U.S. Apparel Retailers Turn Their Gaze Beyond China .

""Rising labor costs in China are forcing U.S. apparel and accessories retailers, such as AnnTaylor Stores Corp. and Coach Inc., to consider relocating at least some of their production to countries with cheaper work forces. But doing so could risk increasing other expenses, such as shipping.

"We are looking to move production into lower-cost geographies, most notably Vietnam and India," Mike Devine, Coach's chief financial officer, said at a conference last week. The luxury-handbag retailer already produces goods in those countries, but plans to increase its presence in both of them.""

There is money in Dog Poop...No, REALLY, there is money IN dog poop!!

From NYTIMES: Pet Waste Removal Worker Finds $58 in Dog Poop

This is why your mother says to wash your hands after handling money: A St. Louis worker found $58 -- packed in dog poop. Steve Wilson works for DoodyCalls Pet Waste Removal. On a recent call, he noticed money sticking out from doggie doo. Wilson wasn't sure what to do, but eventually pulled out the bills, sanitized them, placed them in a plastic zip-locked bag and returned them to the customer. It turned out to be $58. The company said the money was torn, but the serial numbers were identifiable, which means the bills could be returned to a bank and replaced with new money. The Association of Professional Animal Waste Specialists says Wilson is the first person in his profession to find and report money in dog poop.

AMAZING interactive Graphic showing migration patterns in US in 2008--Where people are moving to AND away from...

You will find a GREAT interactive map HERE of migration patterns in the US JUST in 2008...Select a city  and watch! If you click on the map itself you can select specific counties--it is that detailed.  Black lines mean moving into and red means moving out...Amazing differences!! Have fun!  (HT: Carpe Diem)

"Oil Spill May End Up Lifting GDP Slightly"---There is no profit in destruction--Frederic Basitat

"Society loses the value of objects unnecessarily destroyed," and at this aphorism, which will make the hair of the protectionists stand on end: "To break, to destroy, to dissipate is not to encourage national employment," or more briefly: "Destruction is not profitable."

A significant negative in the way we count Gross Domestic Product (GDP) is we don't SUBTRACT damage (natural or man-induced) to existing goods and services already provided (i.e.infrastructure).  Example: A house in hurricane Katrina is destroyed.  The value of the house is not subtracted from GDP, ONLY the value of the goods/services purchased to re-build that house is counted.  GDP is forward looking and does not take into consideration the value lost to society to "enjoy", as Bastiat puts it.  An alternative measure of GDP is available called "Gross National Happiness"--Click HERE to find out more about it...

Read more about this GREAT Frenchman..

From WSJ: Oil Spill May End Up Lifting GDP Slightly

""The continuing oil spill in the Gulf of Mexico could end up adding a bit of growth to the U.S. economy as the huge cleanup efforts in some ways outweigh negative factors, analysts at J.P. Morgan Chase said. 
Underlining that gross domestic product measures are often not a good guide to an economy’s well being, the bank said in a research note its best guess is that the impact on the U.S. economy of BP’s Gulf Coast spill would be minimal.
“The spill clearly implies a lot of economic hardship in some locations, but given what we know today, the magnitude of these setbacks looks dwarfed by the scale of the US macroeconomy,” said chief U.S. economist Michael Feroli. If anything, he added, U.S. GDP could gain slightly from it.
The six-month moratorium on deep-water drilling may cut U.S. oil production by around 3% in 2011 and cost more than 3,000 jobs, according to J.P. Morgan’s energy analysts.
Commercial fishing in the Gulf is also likely to suffer, but that’s only about 0.005% of U.S. GDP. The impact on tourism is the hardest to measure, although it’s fair to expect that many hotel workers who lose their jobs will find it hard to get new ones.
Still, cleaning up the spill will likely be enough to slightly offset the negative impact of all this on GDP, J.P. Morgan said. The bank cites estimates of 4,000 unemployed people hired for the cleanup efforts, which some reports have said could be worth between $3 and $6 billion.
“If realized, this would likely mean a near- to medium-term boost to activity that might offset the drags,” Feroli said.""

Trade allows us to get more goods at lower prices...does this make us better or worse off?

In my AP Macroeconomics class, when we look at the numbers in the Consumer Price Index, I ask students to see more than just numbers and statistics.  Reports like these (the CPI) can tell a story and reflect what is going on "out there in the real world".  One connection I ask student to make is to look at how the price(s) of certain categories of goods have changed over time and WHERE they are produced.  Are the goods subjected to competition domestically AND internationally? Does this make a difference in terms of the price of those items? The following graphs from HERE illustratre the price changes over time. The first one shows categories of goods that have INCREASED in price and the second categories of goods that have DECREASED in price...

The simple definition of inflation is "too much money chasing too few goods".  When you have world-wide competition, the production of goods is more diffused and plentiful, making the above definition harder to come to fruition and tends to put a damper on inflation.  However, when domestically you dont have the ability to greatly increase the production of a good relative to the money flowing to it then the definition becomes more appropos (education and healthcare supply are relatively INELASTIC).  One more observation---of the 2 categories of goods that have risen faster than anything else in the CPI, what do they have in common?   (HT: CoyoteBlog)

What do this Matador and a Teacher at O.D. Wyatt have in common?

I can sympathize with this bullfighter. This is the way I felt after my first two weeks at O.D. Wyatt High School in Ft. Worth.  I lost my courage and wanted to break my contract!.  I had to teach Freshman Geography and they were the bulls and I was the timid matador---I was "gored" by the students for awhile! Mr Weaver saved my bacon.  I will never forget him... LOVE O.D. WYATT!!!! :)

From BBC: Mexican bullfighter flees from ring (click link to see video)

""A bullfighter was arrested, apparently for breach of contract, after he turned and ran from the ring at the beginning of a fight. Cristian Hernandez later re-entered the ring but soon left again and was taken to a police station. Several months ago, another bull had gored Hernandez in the leg. After his latest ordeal the matador has said he will retire from bullfighting.""

Everything you wanted to know about the Vuvuzela and less...

Everything you wanted to know about the Vuvuzela, but were afraid to ask...Also click on the link to view a video of a professional musician playing it...What a treat!!!!

From BBC: 10 things about the vuvuzela

What does "vuvuzela" mean?
Again, it appears to be a matter of debate. Some think it comes from the Zulu word for "making noise". Others say it is township slang for "shower" because it "showers people with music". Many believe it means "pump up".

See the rest of the known "facts" about this menace HERE