BP Exec says his family will eat Gulf Seafood---Reminds me of this scene from Erin Brokovich...

BP Exec: I Would Serve Gulf Fish to My Family

""BP's chief operating officer sought to give the southern US fishing industry a much-need boost Sunday, saying he'd "absolutely" eat Gulf of Mexico seafood after the massive oil spill devastated the region...." \

Reminds me of this scene from Erin Brokovich...

Adam Smith would be proud of this English Muffin...And I'm not talking about Mrs. Smith

Who would have thought making an English Muffin would require so much and be so technical in nature, and at the same time permit a relevant reference to Adam Smith?  Gotta LOVE Social Science!

NYTIMES: A Man With Muffin Secrets, but No Job With Them

""According to Bimbo’s filings, the secret of the nooks and crannies was split into several pieces to make it more secure, and to protect the approximately $500 million in yearly muffin sales. They included the basic recipe, the moisture level of the muffin mixture, the equipment used and the way the product was baked. While many Bimbo employees may have known one or more pieces of the puzzle, only seven knew every step.

“Most employees possess information only directly relevant to their assigned task,” Daniel P. Babin, a Bimbo senior vice president, said in a written court declaration, “and very few employees, such as Botticella, possess all of the knowledge necessary to produce a finished product.” ""

I was immediately reminded that I have heard this before---In so many words, Mr Babin is channeling the following quote from "The Wealth of Nations" by Adam Smith in regards to his famous Pin Factory analogy. 

""But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.""

How The Average American Uses Energy---Nice graphic!

I was a bit surprised at how little oil we use for generating electricity and how much coal we use...

How The Average American Uses Energy

"Amber Waves of Grain..." Not so much in Russia---What does the price of wheat in Russia have to do with you?

From WSJ: Russian Export Ban Raises Global Food Fears and Wheat Goes Up, Prices to Follow

"Russian Prime Minister Vladimir Putin, responding to the country's crippling drought and deadly wildfires, said on Thursday that exports will be banned from Aug. 15 until the end of the year..."

Look at what has happened to the price of wheat in the last few months:

NY TIMES

   Most people have a "ho-hum" reaction when it comes to commodities like wheat, corn, soy beans, etc.  But these are important inputs into so many finished food products.  When we have negative supply shocks like the one in Russia it affects the economy at both the macro and micro level.

     In the global market for wheat there has been a reduction in supply due to drought AND fires in the highly productive regions of Russia (Ukraine, especially).  Now added to the mix is a mandate by the Russian President that wheat is subjected to an export ban.  Graphically, the supply curve for wheat is going to shift to the left, indicating a decrease in market supply (at any given price, the quantity supplied is less than what it was before--graph those new points and you get a new supply curve (S1) that lies to the left of the previous one (S*).

As supply curve S1 shifts to the left, notice we MOVE ALONG the existing Demand Curve D*.  Demanders are responding to the supply reduction  by DECREASING the quantity demanded of wheat as the price of wheat increases, as the Law of Demand would suggest.  Think of it this way: as the price goes up then some demanders are simply not going to be part of the market as they were before because they are "not willing and/or able" to purchase the same quantities of wheat at the new higher price P1 (or maybe none at all now). The difference between market quantity  from Qe to Q1 illustrates this reduction in BOTH quantity supplied due to weather, fire, government policy and the quantity demanded due to the higer price. Here is an example of the decrease in quantity demanded from the article:

""The wheat price spike has forced the U.N. World Food Program, which helps feed more than 90 million people world-wide, to cut back on purchases, according to a spokeswoman""

They are not completely out of the market, but the higher price is limiting their ability to purchase the same amount as before, hence the decrease in quantity demanded. 
     On a Microeconomics level this is only the begining--how is this going to affect farmers/ranchers, aid organizatioins, food processors, retail and wholesale businesses in terms of the cost of production? On the Macoeconomics level--globalization, government policies that affect world trade, allocation of resources (as planting season approaches, is wheat a better bet than corn, soy beans, cotton, etc)? Is this a start of a broader increase in food prices resulting in harmful inflation? Will the rise in price for this essential input cause food riots in some countries?
      Something as simple as wheat can have a large impact on our lives is so many ways...This is why I love economics!!  So much to consider and ponder...

Where do you put all YOUR Stuff? George Carlin and I know...

For the past several years when teaching GDP I frame it in terms of "stuff" or material goods.  I first ask students if they have a garage and if at least one of the bays cannot be used to park a car because of all the stuff (maybe two, or ALL the bays). I then ask if their parents have space at a storage facility.  Most hands still stay up.  Our High School is located near a road with MANY large storage facilities within a 5 mile radius.  This explosion in material goods really took off in the mid-eighties.  Hmmm...why was that?  Anyone my age (50) and older can testify to this.  I am pretty sure almost no one would trade the quality and quantity of stuff we have today with what we had in the 60's and 70's.  If you have any doubt, browse this catalog and see for yourself. Only good ol' day syndrome would cloud the thinking on this, I believe. Below are some interesting data on the Self-storage industry.  I highlighted some of the more prominent numbers and information...Also, a video of George Carlin talking about "Stuff" (caution, some language you may  find objectionable)...

Self Storage Data
The self storage industry has been one of the fastest-growing sectors of the United States commercial real estate industry over the period of the last 35 years

There are now approximately 46,000 “primary” self storage facilities in the United States as of year end 2009; another 4,000 are “secondary” facilities (“primary” means that self storage is the “primary” source of business revenue – US Census Bureau)

The distribution of U.S. self storage facilities (Q4-09) is as follows: 32% urban, 52% suburban and 16% rural

Nearly 1 in 10 US households (HH), or 10% (10.8 million of the 113.3 million US HH in 2007) currently rent a self storage unit; that has increased from 1 in 17 US HHs (6%) in 1995 – or an increase of approximately 65 percent in the last 15 years


It took the self storage industry more than 25 years to build its first billion square feet of space; it added the second billion square feet in just 8 years (1998-2005)


During the peak development years (2004-2005) 8,694 new self storage facilities (approximately 480 million square feet of space were added)

There are approximately 58,000 self storage facilities worldwide as of Q4 – 2009; there are more than 3,000 in Canada and more than 1,000 in Australia.

Fewer than 250 new self storage facilities came on line in the U.S. during 2009; the trend in new construction is down significantly the last four years

Primer on Externalities---One of the more interesting and relevant concepts in Economics

Here is an excellent blog post that summarizes externalitites, negative and positive,  better than I can do...It is an extension of the blog entry I did just below this one.

I Suppose That This Is One Way To Internalize An Externality, Turbine Edition…(From: Econogirl)

Let me start with a quick recap of the whole externality deal, in bullet-point form:
■Externalities are side effects in a market, i.e. costs and benefits that accrue to people who neither produce or consume a product. For example, pollution is an externality because I am affected by pollution from factories even when I neither produce nor consume the products that they make.

■Externalities can be either negative (as with pollution) or positive (as would be the case if I lived upstairs from a bakery and got the smells wafting into my apartment…though I suppose that would get old quickly).

■When externalities are present, free markets left to themselves don’t produce the socially optimal quantity of a good or service. If there are negative externalities, the free market produces more than is socially optimal because it doesn’t take into account the cost it is imposing on society by producing. If there are positive externalities, the free market produces less than is socially optimal because it doesn’t take into account the benefits it is providing to society.

■In these situations, taxes and subsidies respectively can increase overall welfare because they move production and consumption to the socially optimal level. Taxing or subsidizing in the amount of the externality that a good creates is referred to as “internalizing” an externality, and taxes (and subsidies, I suppose) of this form are called Pigovian taxes.

■Note that it is not necessary for the tax revenue generated to be spent on fixing the externality for this setup to work, since the taxes and subsidies are in this case merely used as a vehicle to move the needle on production and consumption. For example, Pivogian taxes to reach the socially optimal level of pollution do not require that the tax revenue be spent on pollution cleanup, but there is an implicit assumption that the tax revenue is being used for something socially beneficial rather than being flushed down the toilet.

This is usually where the textbooks stop, which means that they ignore a number of relevant subtleties and complications associated with externalities and Pigovian taxes. First off, they act as though calculating the amount of the externality is easy, whereas I am pretty sure there is a shiny new Ph.D. and academic job waiting for anyone who has a good way of figuring this out. I mean, by what dollar amount are you inconvenienced by the pollution resulting from the production of one beanie baby? Yeah, I don’t know either. But wait, it gets even more complicated, since this answer technically depends on the framing of the question- people typically give higher answers to the question “how much would you have to receive in order to tolerate one more unit of pollution?” versus “how much would you be willing to pay in order to make one unit of pollution go away?” And this doesn’t even come near the fact that differences in income and whatnot mean that different people probably give widely varying estimates of this amount.

Even if we could put a dollar amount on an externality, we still need to address a few more things before automatically jumping on the Pigou bandwagon. (Okay fine, there isn’t actually a Pigou bandwagon…but there is a Pigou Club.) When we say that Pigouvian taxes lead to the “socially optimal” level of production, we mean that this level of production is best for society in the aggregate under the assumption that a dollar to me is the same as a dollar to you is the same as a dollar to Bill Gates. (I’m not sure why he is always my scapegoat for these types of comparisons, other than that is has a lot more money that I or probably you do.) This does not mean that *everyone* is better off under a Pivogian tax, just that the winners win more than the losers lose. For example, consider a gasoline tax to internalize the pollution and congestion externalities of driving- those with their gas-guzzling SUVs are certainly worse off, since they have to pay more in taxes than they get in benefits from cleaner air and more open highways. People without cars are better off, since there is less pollution and they aren’t paying the gasoline tax. It is important to note, however, that while they may enjoy some public services that are funded by the tax revenue, they aren’t getting compensated directly for having to put up with the remaining pollution that is still in the air. (I will allow you to make your own judgment regarding whether you’d rather have $1 in cash or $1 in government services, but I think I can guess where this audience is going to come out on that.)
Wouldn’t it be nice then if we could eliminate the governmental middle man and have companies tell people “we’re sorry we @#$! up your air, here’s some cash?” It turns out that that isn’t as unreasonable as you’d think. From The New York Times:

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.

Hm. Theoretically, this should work if $5,000 is an appropriate estimate of the per-household cost of the externality. It probably reduces the number of turbines that the company puts up (since more turbines would mean more noise and thus a higher payout required to get households to comply), and, if the households agree to the deal, their revealed preferences show that they are being compensated adequately for their inconvenience. It’s interesting to note that the article implies that some households were refusing the offer out of principle, since they didn’t like the idea of being bought. (Are you surprised by now that people don’t act like economic robots?) If I were trying to strike this sort of deal, I think I would have approached the households before the turbines went in so that they felt a little more in control of the process.

Wind Mill energy provider is buying peoples silence...no, 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....

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)

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

"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.""

Which State has 5 counties in the Top 10 in terms of job growth in the last 10 years? Answer within...

According to CNN Money, these are the Top 10 Counties in the country that, on a percentage basis, have experience the largest job growth...Look where 5 of the Top 10 counties are located.  I wonder why that is? Click HERE to see more of the list and descriptions. (HT: Carpe Diem)

1. Lincoln County, SD
2. Williamson County, TX
3. Hays County, TX
4. Douglas County, CO
5. Fort Bend County, TX
6 Webb County, TX
7. Collin County, TX
8. Broomfield County, CO
9. Hamilton County, IN
10. Cache County, UT

Does an increase in the Minimum Wage hurt teen employment? Textbook says it does, but maybe Grandpa has a different opinion.

In today's WSJ there is an editorial relating the recent increases in the minimum wage to an increase in unemployment among the teenage population.  Every introductory economics textbook tells us this relationship exists, but there is some controversy (at the margins) about how much of an effect it actually has.  As with many things economics lately, there is another variable(s) to consider.  Look at the chart below....

Previous Blog Entry

Statistically, there are more 65+ people in the job market at the lower ends of the pay scale then teenagers (a relatively new development, demographically speaking.  So, perhaps it is not as cut and dry to say that the increase in the minimum wage has reduced teen employment.  Perhaps "the olds" are being employed at a higher rate than teenagers.  I don't know the answer, I just pose the question that the WSJ does not address  I suppose one would have to look at the hiring rate of the 65+ group and see if there is a connection.  Might be a good research paper for someone...

Letting the Bush Tax Cuts Expire--Primer on Marginal Tax Rates...It is FUN!...Really, it is!!

     Congress is in the midst of deciding to extend or let expire the "Bush Tax Cuts" of 2001-03 (In the original law, there was a "natural" expiration date of 2011).   These tax cuts were initiated as part of a fiscal stimulus plan to get the economy out of a recession that further deteriorated as a result of the events of 9/11.  The tax cuts were on Marginal Tax Rates applied to individual  incomes. 
     Marginal is a fancy word economists use to mean "each additional". In the US we have what is termed a progressive tax structure, which means the more you earn beyond certain levels of income, a higher tax rate is levied on each of those additional dollars.  Currently we have 6 levels of income that when each level is exceeded, the tax rate applied on each additional dollar is higher than the tax rate on the previous level of income (confusing, I know...example to follow).
    First, look at the graph below.  The current marginal tax rates are in the first column. The benchmark level of income that is subjected to each marginal tax rate is in the third column. The fourth column are the previous (pre-2001) marginal tax rates and the ones that we will return to if the tax cuts are allowed to expire. These columns are the ones we want to examine.

  Important definition:  In the third column you can assume these numbers represent "Taxable Income".  Taxable income is the income left over AFTER you take any tax deductions and/or tax credits you may be entitled to. Also, the FIRST $5,350 of income you earn is exempt from taxation.  In other words, you likely earned more than this amount, but not all of it is subjected to Federal taxation. 
     Look at the first line in our graph. Right now, if your TAXABLE INCOME, is between $1.00 and $16,750 you pay 10% of that income in Federal Income Taxes.  Assume you take all your deductions and credits you are entitled to take and you are left with a taxable income of exactly $16,750.  Currently, when you do your tax return you would owe 10% of that, or $1,675.  If the tax cuts expire, you would pay 15%, or $2,512.50.  One caveat here: Congress has the discretion (important word!) to keep any of the current tax rates or change any one of them.  It is NOT likely they would make lower income people pay this much more, percentage-wise, but for illustration purposes I will assume they do.
    Lets assume instead of $16,750 your taxable income was $17,750.  Under the current tax rates you would pay 10% of the first $16,750 or $1,675 PLUS 15% of the $1,000 over $16,750, which is $150.  Per our definition, each additional dollar over $16,50 is taxed at a higher tax rate (15%).  So, now your total tax would be $1,675 + $150 = $1,825.  Using the numbers from the previous paragraph, you can easily calculate what the total tax bill would be on $17,750 if the tax cuts were allowed to expire. Note: the 15% marginal tax rate is the only one that stays the same.  I forget the main idea behind this, but I have to assume that this level of income represented middle class America back then.
   Another example: You are now a high paying executive and are doing your taxes. After deductions/credits you find you have a taxable income of $250,000 (which means you ACTUALLY earned $300,000+). Nice going!!! Lets calculate your Federal income tax:

Looking at the above table under CURRENT TAX RATES
The first $16,750 of earnings times 10% =                                        $1,675.00
The amt. between $16,750 and $68,000 = $51,250 times 15%=         $7,687.50
The amt. between $68,001 and $137,300 = 69,299 times 28% =      $19,403.72
The amt. between $137,301 and $209,250 = $71,949 times 31%=   $22,304.19
The amt. between $209,251 and $250,000 = $40,749 time 33%=     $13,447.17
Phew!!!
Federal income tax owed on a taxable income of $250,000  =  $64,517.58

While you are in the 33% tax bracket ($250,000 is in between $209,251 and $373,650 with a marginal tax rate of 33%) your EFFECTIVE TAX RATE is $64,517.58 divided by $250,000 multiplied by 100 = 25.8%.  In other words, you are actually paying 25.8% of your taxable income in federal taxes, not 33%. And in terms of your gross income, say $300,000, you are effectively paying ($64,517.58 divided by $300,000 mulitplied by 100) 21.5% of your income in Federal taxes.   This is a technical issue, but important to know if you want to be literate on the issue...
    Now, YOUR homework is to calculate what the amount of tax in dollars AND the effective tax rate is on $250,000 IF the Bush Tax Cuts are allowed to expire. How do the two compare?  We will use this for class discussion on Fiscal Policy, tax policy and  Automatic Stabilizers...