Here are some noted Conservative (right of center) Economists supporting an increase in the Debt Limit. Who am I to disagree?

Some noted Conservative (just right of center, mostly) chime in on whether to raise the debt limit or not. Who am I to argue? A one minute video below illustrates the problem in a concise way. (HT: Modeled Behavior)

Gary Becker: “That Congress will have to raise the debt limit this summer is a no-brainer since revenues are not anywhere near large enough to cover government spending. Without a boost in the ceiling, the federal government will be unable to pay its bills, including pay to federal employees.”

Keith Hennessey: “Congress must raise the debt limit. Not doing so would eventually lead to defaulting on Treasury bonds, a potentially catastrophic event.”

Douglas Holtz-Eakin  – “Yes, Congress should raise the debt limit. Being a good steward of the U.S. credit rating means that it has to pay Obama’s credit-card bill. And it should do so as quickly as possible — on the day it returns from recess.”

Glenn Hubbard: “The debt ceiling must be raised – not doing so is irresponsible”

Richard Posner: “No doubt before the political and economic damage becomes too severe, the Republican radicals in the House of Representatives will relent and the ceiling on borrowing will be raised. Before that happens interest rates may rise, and stay higher, because of doubts about the basic competence of American government. Those doubts, plus the higher interest rates they engender, may deepen the current economic downturn, which in turn will reduce tax collections, increase transfer payments, and in both respects increase the federal deficit… Why Republicans prefer flirting with failing to raise the debt ceiling by the August 2 deadline to accepting the deal tentatively worked out between President Obama and Speaker Bohner…is a deep mystery.”

Are you on vacation? Check this graphic to see where you are mentally...

Source: Chartporn

The Federal Reserve does not cause inflation, Costco does! Something that makes you go "Hmmmm"....

A study (HERE) shows that where merchandise discounter Costco opens a store, the average price of groceries INCREASES at grocery stores in the surrounding community(s).

""The study, which is titled Competing with Costco and Sam's Club: Wharehouse Club Entry and Grocery Prices, looked at what effect the opening of a Costco had on grocery prices in nearby supermarkets. The authors found that on average customers who continued to shop at the supermarkets near a Costco tended to spend 3% more on groceries than they did before the bulk retailer opened. The Costco Inflation effect was generally larger in smaller towns...."" (article HERE)

This is at odds with with known research regarding the opening of a Walmart and the effect on area prices.  The study did not look at Sam's Clubs, perhaps because Sam Clubs seem to generally open up near Walmarts, whereas Costco is a stand alone business.  One of the possible explanations is that Costco attracts the "value" shopper, the Kroger,Tom Thumbs, and Albertsons of the world concentrate on the less price sensitive shopper (fancy way of saying someone willing and able to pay more for the same good/service)...

""Instead, Courtemanche says he thinks Costco tends to drive the cost conscience customers out of the local supermarkets. The remaining customers are willing to pay more. Store managers figure that out and raise prices...""

As someone who goes to Walmart (or a Costco if one was nearby)  as a LAST resort, I identify with this reason.  Perhaps that means I have too much discretionary income for my own good. 

Look at the whole article HERE for other possible reasons. If you are interested in business or consumer behavior this is worth a read. I see an opportunity to discuss elasticity of demand.

Is my restaurant doing better or worse because of infrastructure projects underway in the name of "Fiscal Stimulus"?---Well, let me tell you a story...

I own a restaurant on the outskirts of town. It is located off a highway beside an overpass that has easy on and off ramps. In good years, I had a staff of 20, but now I have 10 because of the recession. Assume the economy (and my business) has bottomed out and is not going to get worse.  The overpass and the ramps have been classified as shovel ready projects and are to receive stimulus funds because there are not in good repair. 

Construction begins. It is going to take 6 months to complete the work.  The site requires 50 construction workers. On any given day 25 of the workers come to my restaurant to eat lunch. This is 25 NEW customers that I did not have before the construction started.

Do I need to hire another waitperson or cook to serve these new customers? While I ponder that question, I notice that I have 30 fewer non-construction work related customers.  Some of these are my friends! I call a couple of them up and they tell me the construction makes it inconvenient for them to get to my place of business, so they are trying some of the other restaurants in town.

I am WORSE off then before! I now have to lay-off a worker. What is this worker to do? The construction business seems to be good, but they are a waitperson and do not have construction skills.

I wonder if my fellow restaurateurs in town have seen an uptick in business and are going to hire workers--maybe I can place the waitress I had to layoff. I call them up and I hear a common refrain---Yes! They all are seeing a few more customers (that may have eaten at my place if it were not for the construction) AND a few construction workers coming in after work to the various establishments. This is great for them but, they tell me, it is not enough for them to justify hiring additional staff (like the one I laid-off). They just work a little harder. Besides, they know when the overpass is finished in six months, my customers will return and the construction workers will go away.

They tell me the restaurant suppliers who deliver us our supplies are encountering the same conundrum. There is a short term increase in the demand for supplies, but why hire when they know they will have to lay-off in a few months as the infrastructure money runs out? Keep the profits and get more productivity out of existing workers. Those additional profits will come in handy when/if things go back to normal.

As a small business owner, this is what I learned: The additional outside money injected into my town left me at status quo (actually a little worse off). Increased the short-term profits for my fellow restaurant owners. Did not create any additional permanent new long term jobs in my community. YES, it did provide jobs additional construction jobs on a temporary basis, but it caused one of my employees to lose their job. 

Do I just not see "The Big Picture" Washington is painting for me??

This is a quasi-made up story, but I believe there is a lot of truth to it IF you take the position of a small business owner (allegedly the backbone of the economy).  Where I live (Dallas/Ft Worth), there is MAJOR road construction all around. I have avoided many businesses, large and small that I frequented before the traffic snarls. This has to hurt them in the short run, right??  Just look around when driving through the construction zone in your area. What do you notice??

I understand the long run benefits of upgrading infrastructure and I do see how some workers are better off, but the short term benefits appear to be marginal at best and perhaps negative, FROM MY PERSPECTIVE AS A SMALL BUSINESS OWNER.

My advice to politicians: Don't make spending on infrastructure the center-piece of promoting a recovery, especially the employment aspect of it--people will be disappointed with the results.  Focus on post-infrastructure policies you have in place (you have post infrastructure policies in place, don't you?) that will use this new and improved over-pass and  ramps to encourage/incentive OTHER businesses (preferably high value/high paying) to locate there permanently.  If you do this then I will hire more workers and perhaps expand my business because I know everyday I will have a sustained increase in customer traffic. That is what small businesses people want to see.

Where am I going wrong? Is Washington already doing this but not communicating it well or or am I not listening to them.--or a combination of the two...Respectful replies are encouraged...

Which food source emits the most earth destroying Carbon? Sorry, Mary, the lamb has to go...Nice chart not to be missed...



Source: Matthew Ygleasias

 Read all about it HERE...

Nice chart showing the foreign holders of our National Debt. "We're gonna need a bigger boat"---load of money to land this debt shark...

There are two parts to the National Debt. (1) Debt held by the "public"--me, you, businesses, investment firms, foreigners (foreign individuals, businesses, investment firms and governments). The chart below shows the major foreign holdings of US Treasurys (interest bearing IOU's, if you will). The sum total of debt held by the public is $9.644 Trillion, of which $4,489.1 Trillion is held by people/banks/governments outside the US. The remaining amount, $5,154.9 Trillion is held by US citizens/banks/corporations/investment firms.  The total National Debt is $14.2 Trillion. The additional $4,556 (or so) is considered "private" debt or "intergovernmental transfers".  This is the money shuffling game played by Congress---it represents money borrowed from a variety of Federal Trust Funds, i.e. Social Security, Medicare, and other Federal pension funds. Our portfolio of creditors is not very balanced--45.9% of our national debt is held by China and Japan and 47% of our total Public Debt is held by foreingers ($4,489/9,644 x 100).



Source: Economix



The Walmart-ization of America...Video of Walmarts US growth in 26 seconds...

The Walmart-ization of America...Walmarts US growth in 26 seconds...HT: Carpe Diem

Nice graphic summing up the National Debt---It was a group effort to get us into the mess. Seems like they could make a group effort to get us out of it...Just sayin'...

Nice graphic that  shows the growth of the National Debt over time AND whether a Republican or Democrat was President AND the majority party in the House and Senate at the time. This was a group effort to get us into this situation. Seems like they could make a group effort to get us out of it. Just sayin'...



Source: Ezra Klein (I corrected the "House Bar" colors. They were incorrect in the original Klein post. I could not match the pink exactly, but I think you can get the idea...)

It does not matter what the price of rice is in China. You still need chopsticks to eat it...Guess which country is a growing supplier of them?

Comparative advantage is a strange thing... A Georgia company is a leading exporter of chopsticks, of all things, to China...Nice example of a small business with an unromantic product filling a niche.  Read story HERE and/or watch video below...HT: Carpe Diem

Netflix raises prices...This has to kill their revenues, doesn't it? Look at the numbers and see if they can STRETCH revenues like an elastic

Netflix recently announced a new pricing plan for its online streaming and DVD service.  People understandably are upset about this. Is this going to hurt their revenues as people follow through on their threats to discontinue the service?  Let's perform a total revenue test to see if this is going to hurt their revenues.

 I am going to use some easy numbers to illustrated what might happen to Netflix revenue as a result of this change in pricing policy.

I currently subscribe to the $9.99 plan (round to $10 so the math is easy) where I can stream online and get 1 DVD at a time through the mail. This plan will increase in price to $15.98 (round to $16 so the math is easy).  This is a 60% increase in the monthly price. Right now, Netflix has approx 23.6 million subscribers. Assume that because of the negative publicity 10% of their customers drop the service completely. I don't think that many will, but lets see what happens.  This means monthly subscriptions will be 21.2 million now (a loss of  2.2 million subscribers).  That can't be good for the bottom line, can it?

Revenue before the change in plan: $10 X 23.6 million = $236 million.  Revenue is actually higher because they do have more expensive rental plans, but we will leave that aside for now.

Of the remaining 21.2 million customers, assume only 40% decide to maintain the streaming and 1 DVD at a time plan for the higher price of $16---8.48 million X $16 = $136 million.  Assume the rest are split 50/50 between online only and DVD only plans---12.72 million X $8 (either plan costs $8) = $102 million. Total revenues now are $238 million---$2 million MORE than before the change.

Performing the Total Revenue Test for Elasticity of Demand, we found that the increase in price and corresponding decrease in quantity demanded actually increased their total revenues. This means overall not enough people were sensitive to the change in price to discontinue the service and cause Netflix total revenues to decrease.

The percentage change in price for Netflix (+60%) was greater than the percentage decrease in quantity demanded for their service.  If this remains the case, then we can say the demand for Netflix is relatively INELASTIC.

Netflix will weather the storm of negative publicity. Eventually the DVD part of the business will disappear and so will the postage and all the other costs associated with running a mail order business. A broader offering of content will be available for online streaming in the near future and everyone will forget the day Netflix raised prices.

So which is it America? In the Budget Deficit debate this is not Burger King---You can't have it your way.

The first poll shows 50% of Americans want the deficit reduced through spending cuts "only or mostly". The second one shows most Americans want to maintain the level of benefits for THE MOST costly Federal govt programs (look at the brown shaded portion of the pie charts). After these two polls is a pie chart of the Federal Budget and where money is actually allocated...Do you see any contradictions? Most want to cut spending, but not on the programs that disproportionately cost the most and cutting them would actually have the most impact on the deficit. 

Source: Gallup Poll

Source: Pew Research



Source: The Fiscal Times

 The parts of the Federal Budget that are considered mandatory spending programs---Social Security, Medicare, the Interest on the National Debt (this MUST be paid FIRST when bills are paid), "Security Discretionary" is National Defense/The Military. These three programs alone are 61% of the budget. It seems they are sacrosanct and immune to budget cuts.  Some of the other items in the chart are classified as mandatory spending, but for the sake of argument, let's leave them ON the budget cutting table. .  What do you cut?

Are you getting mostly "A's" in college? You should be according to this graph...




Source: Economix



""Most recently, about 43 percent of all letter grades given were A’s, an increase of 28 percentage points since 1960 and 12 percentage points since 1988. The distribution of B’s has stayed relatively constant; the growing share of A’s instead comes at the expense of a shrinking share of C’s, D’s and F’s. In fact, only about 10 percent of grades awarded are D’s and F’s."" -----Read the whole thing HERE

Budget Solution: "Cut Spending AND Cut Tax Expenditures!" I understand the first one, but what does the second one mean? You are going to hear it a lot. I try to explain it here for you...

There is a two word phrase that has been used a lot recently in the Federal budget debate-- "Tax Expenditures". It has been used like this: "We need to reduce government spending AND reduce tax expenditures in the tax code". The first one is self-evident and needs no explanation.  However, the second one I think passes by people and most believe it is a similar in meaning or related to reducing govt spending.

When the Congress taxes your income it is tax revenue for them.  If Congress decides to grant a tax deduction, your taxable income decreases by the amount of the allowable deduction. As a result the tax revenue to the Federal govt will be less than it otherwise would have been...Quick Simplistic Example:

Assumptions: You are single and rent an apartment.  You do your taxes and you calculate you have a taxable income of $150,000 . Using the  IRS tax tables for 2010 you would owe $35,709 in Federal income tax.  Write your check and be done with it.

Now assume you are still single BUT you own a home and last year you paid $10,000 in interest on the loan you took out to buy the house.  As the tax code is presently written, when you do your taxes you can now subtract that $10,000 from the $150,000. Your taxable income is $140,000.  NOW, your Federal tax bill will be $32,909---$2,800 LESS because of the interest deduction you were allowed to take.

Congress considers this $2,800 a "Tax Expenditure"---tax revenue they otherwise would have received if the interest deduction did not exist.  Instead of being revenue for them to spend, they are "expending" it back to you.

When a politician/pundit talks of reducing "tax expenditures", they are referring to eliminating (or reducing) various tax deductions or tax credits that are currently allowed.  In effect you would be paying a larger tax bill--$2,800 in our example.  BUT your TAX RATE did not increase by eliminating this deduction, only your income that is subjected to tax increased.

Reducing or eliminating the interest you pay on a home mortgage is just one area Congress is looking at to raise more revenue without raising taxes. 

Whether you agree or disagree with how the term is used/interpreted, I hope this brief explanation helps you better understand it when you hear it.

The nation's trade deficit increased in May. The "why" is shown in two easy line graphs...

The US trade deficit increased last month from the prior month. A trade deficit occurs when a nation's exports are LESS THAN its imports. This means its Net Exports (N(x)) are negative.  Look at the right-most tips of the lines on the graph below.  The BLUE line shows the US had a total trade (goods and services) deficit of roughly $52 Billion dollars just for the month of May. The import of crude oil (BLACK Line) is roughly $32 Billion of the total trade deficit, or 62% (32/52=.615)!! The difference between these two lines is represented by the RED line. What are we doing to minimize our dependency on this stuff? Rhetorical question--we all know the answer...

Source: Calculated Risk

It is not because of a lack of effort on the export side of the equation (goods and services we make and sell to foreigners), as shown in the graph below. Our exports are recovering nicely (RED line) and almost back to a historical high.  As we recover, we are either consuming more oil overall (domestic production + Foriegn imports) OR we are producing less domestically, hence importing more. I am not sure which it is, to be honest....Any ideas???

Source: Calculated Risk

How Hot is it?? Surface heat map of the US...CODE RED, CODE RED! No, I cannot handle the truth.

Source: NOAA