Recession or Recess?

Matt Wilstein has a funny video about the housing induced recession. The YouTube video is here. In January, consumers spent less and unemployed reached 5%. The economists in the know predict a 50-50 chance of a recession this year. Our presidential candidates want to use fiscal policy to cure the economy. Let the Fed do its job and enjoy the video.

Recession or Recess?

Infant Mortality in Africa

In Lesser Developed Countries, LDC, infant mortality is high as the chart shows. In Tanzania, the life expectance of an adult is 43 years.

In the dark green countries, disease that is nonexistent in the US killed 14 million children under the age of 5 in 1990. In Africa, 15 countries are landlocked making trading with developed countries difficult. In many countries, corrupt officials skim off money that could be saved and invested. Many of the incentives for direct foreign investment in Africa are defeated by corrupt officials, trade barriers, nepotism, and high marginal tax rates. Usually, the powers in charge, reap the rewards in a winner-take-all market while the country burns in flames of greed. Africa is a mess.

The Last King of Scotland

In the movie, The Last King of Scotland, Forest Whitaker, plays Ugandan dictator, Idi Amin. In a brilliant speech, Amin tells Uganda that they will be free and self-sufficient. The ethos is so deep that I believe him. Of course, Amin takes the riches of the land for himself and savagely kills his enemies. I was left with the question, "Why do African countries remain poor?"

I believe that Amin could have more power and wealth if he developed infrastructure, human capital, and encouraged free markets. What does the data show? The data shows that the greater the markets are free the more income per capita. (click on the graph to enlarge.) I also want to offer that many Ugandans worked in subsistence agricultural occupations. The goods that are produced are income inelastic so that an increase in income does not increase the demand for the product. Thus, GDP stagnates for LDC such as Tanzania, Rwanda, Somalia, and Ethiopia. For these countries a drought is devastating. Dictators like Amin could develop the wealth and dignity of their beautiful countries, by investing in capital formation, human capital, and liberalizing markets. That would be Pareto efficient.

NIN

The new Nine Inch Nails CD can be downloaded for free. The Long Tail has a brilliant post about why giving away media with low marginal cost. The CD, ("The Inevitable Rise and Liberation of Niggy Tardust") can be purchased for $5 for listening purists who want the high quality listening experience. At this price, Trent Reznor felt disappointed with sales. In the comment section, a listener suggested a price of $3 which is exactly the price I predicted in Las Vegas last summer. Interesting to me.

Incentives and Negative Externalities

Should students rat on the parties in a high school food fight? Tyler Cowen opines.

Smoking Bans

Judy Heil asked if the ban on smoking hurt businesses that serve alcohol. My econ 101 answer is that smoking and drinking are complementary goods. So the higher price paid by bar patrons by not smoking should decrease the quantity of alcohol consumed. It does, according the to St. Louis Fed.

What is a Recession?

The Wall Street Journal has a short video on oil price, inflation, and the 50% chance that a recession is looming. A salute goes to MV=PQ for the tip.

Trade Balance

Bob Weaton asked about the trade balance. I replied that every industrialized nation runs a trade deficit. "What about China?" Bob asked. I said China too. The chart shows otherwise. Click to enlarge.

The J-Curve

The falling dollar is good for US exports as explained in a MSNBC video. Why does a depreciating dollar boost US products sold to foreign countries?

A dollar that used to buy $1 of a foreign good and now only buys $.50 of a foreign good is depreciating. So the US dollar buys less and the foreign currency buys more. According to econ 101 theory, our exports will increase while the nationals imports decrease.

What matters most, according to Jason Welker, is whether the increase in income for exports exceeds the decrease in expenditures on imports. According to Welker, "The M-L condition examines the price elasticities of demand for exports and imports of a particular country. Say the US experiences a depreciation of its currency (as it has over the last year or so). If foreigners’ demand for exports from America is relatively elastic, then a slightly weaker dollar should cause a dramatic increase in foreign demand for American output, causing export income in the US to rise dramatically. On the other hand, if American’s demand for imports is highly price elastic, then a slightly weaker dollar should likewise cause Americans’ demand for imports to decrease drastically, reducing greatly American’s expenditures on imports. If the combined elasticities of demand for exports and imports is elastic (i.e. the coefficient is greater than 1), then a depreciation of a nations currency will shift its current account towards surplus. This is the Marshall-Lerner Condition."

Welker estimates the price elasticity of demand for America's exports at 2 indicating that foreigners are responsive to a depreciating dollar. The J-curve above is from the New York Fed explains that the economy can move to either a current account deficit if the demand for foreign and domestic goods are inelastic. In this case the trade deficit worsens. The J-curve shows that if demand for America's output is elastic, then a depreciating dollar will move the nation to a surplus. Using Mr. Welker's coefficient for price elasticity of demand, one should observe the current account moving to surplus. The Bureau of Economic Analysis shows exports increase .6 billion from October to November for a .9% increase. However, imports increased by more than exports for a growing trade deficit.

I offer congratulations to Mr. Welker as his blog has won several awards this year. He is an excellent writer, photographer, and teacher. Please visit his blog.

Consumer Confidence

Economy analysts like Squawk on the Street, Erin Burnett, CNBC, are reporting recessionary fears as the unemployment rate reached 5%, retail sales were weak in December, and consumer confidence is low. About 43% of economists are predicting a recession in 2008 unless the Fed takes action later this month. An AP report is here. The Dismal Science is acting like Chicken Little these days.

The Conference Board has the gated index here. Note: this isn't the Survey of Consumer Sentiment that the University of Michigan releases. The Conference Board survey has confidence up slightly for December at 88.6 from November's 75.5. The index base year is 1985 = 100. A falling index indicates that consumers will spend less which might spur the Fed to lower interest rates. The Fed watchers are predicting a 25 to 50 basis point decrease in interest rates at the next FOMC meeting at the end of this month. Declining consumer confidence is bad for stocks as business profits should decline.

Consumers make up about 67% of the spending so measuring the confience is a lagging indicator of the state of the economy. The broadest index is the Conference Board which surveys 5,000 households of which about half respond. Consumers are fickle and so is the survey. I've never had confidence is what the average consumer has confidence in since economic conditions are so exogenous.

Clinton's Fiscal Responsibility

Over a Mt. Dew breakfast, coworker, John Each asked about William Jefferson Clinton's budget surplus. Clinton is best known for NAFTA, the longest peace-time economic expansion in American history, and the political platform, "It's the economy, stupid." John told me that Clinton had a surplus during his term, and I disagreed. I stand corrected as the graph shows.

During Clinton's term, unemployment fell from approximately 8% to 4%. Even though Clinton's health care reforms failed, he maintained a "healthy budget" of $4,000 billion that was earmarked for Social Security. GDP expanded by 50% in real terms during his legacy.

During Clinton's term, Fed Chairman, Alan Greenspan, reduced interest rates which helps pays off debt and encourage investment and consumer spending. Investment in capital goods increases productivity from information technology and incomes and tax revenue from automatic stabilizers. Clinton also raised taxes and reduced spending.

Was Clinton the beneficiary of a positional externality? Or was he both a leader with the political clout and economic intelligence to bring about real change? Would the US still have a surplus if Clinton was in office? I don't know the answers and welcome comments.

Who Pays The Tax

From the WSJ and Greg Mankiw. The income earners who earn the most also pay the most in taxes.

What would happen if everyone had to pay an equal amount for any public good? Say the government wanted to build a new bridge that cost $15 million. If there were 5,000 citizens, then each citizen would have to pay $3000. It's likely that some citizens would not have savings of $3000 to pay their equal share. However, if those who can pay more do, the project might have legs. That's one reason why our nation has a progressive tax.

Obama

Last night in New Hampshire, the Democratic Presidential hopefuls debated over energy and economics. Obama backs price controls on energy noting that there will be costs as well as benefits to US citizens. Cafe Hayek discusses the politics of economics including prediction markets and voting.

Inside the Iowa Caucus

The Iowa caucus received national attention. I thought my readers might enjoy being on the inside of the caucus. Mary Huddleston is standing firmly in the Richardson camp at the beginning. You'll see MHS teachers Eric Olsen and Dolores Silva. Also Brooke and Connie Armstrong showing grace under pressure.

Positional Externality

Muscatine Urgent Care is meeting the demand for medical care in Muscatine, Iowa. Dr. Maitreyi Janarthanan, an immigrant from Sri Lanka, found the right spot to help those in urgent need of immediate health care. Dr. Janarthanan thought that they would serve 2 or 3 patients a day but has served 12 to 15. Earlier I posted about the possibility of losing market share to Unity. I was wrong.

Health care in Muscatine is dominated by Unity Hospital which operates as a monopoly. Maitreyi and her husband, Tracy, has put themselves in the right position to provide a substitute. Both work late into the night.

Those against immigration would have to refute my hypothesis that many immigrants enter the health care field. Furthermore, immigrants tend to help those in lower income brackets. It's hard for anyone to argue against immigration.

Impact of Minimum Wage in Muscatine

The Muscatine Journal reports that the minimum wage increase had little impact on employment in Muscatine County. The link above is good for 14 days then expires. The first paragraphs of the article are pasted below.

MUSCATINE, Iowa — A dollar increase in the state minimum wage that went into effect Tuesday will have limited impact for local workers and uncertain effects for employers.The increase — from $5.15 to $6.20 on April 1, 2007, and to $7.25 on Jan. 1, 2008 — was signed by Gov. Chet Culver last January.About 1,000 workers out of more than 23,000 in Muscatine County began earning more on Tuesday, said Greg Jenkins, director of economic and community development at the Greater Muscatine Chamber of Commerce and Industry.

Obama vs. Clinton on Economics

A NY Times article today, compares the two Democratic candidates on health care, tax credits, and savings. The article states that Hillary is a classical economist. I don't believe that. Hillary told a group at West Middle School that she believed in fiscal resposibility which would include spending on health and tuition. As an economist, I am concerned with small, marginal steps. Both candidates are advocating broad changes.

A salute goes to Marginal Revolution for this tip.

As the Caucus Approaches

Senator Clinton promised to make all of these changes at a rally at West Middle School in Muscatine, Iowa. Hillary will end the war in Iraq, reform education, nationalize health care, develop a middle class, have fiscal responsibility, and create jobs. Obama promises the same things except Obama isn't going to be influenced by special interest groups.

On Monday, the Des Moines Register endorsed Hillary. So does the AFSCME. Hillary's smile is beautiful, and I think it shows her true character. I think the power union, NEA has endorsed Hillary. Hillary was sweet enough to autograph an American flag for my mom. While waiting for the autograph, secret service men told me to keep my hands out of my pockets and to put my pen away. The security is tighter, it seems to me, than around Obama even though Obama is the poll favorite.

Low Wages and Job Loss

Senator Clinton was fabulous last night at West Middle School in Muscatine, Iowa. Her resume is robust. Hillary talked about job loss in manufacturing and a living wage. She didn't say cheap foreign labor was the reason for the loss, but many around thought that's what she said. I thought I would take a minute to give my take.

Suppose there are two ways to delivering a package to a location. One way is with a truck and the other way is to pack it on a mule. The truck is more expensive than the mule. So why aren't all packages delivered by mule? The answer is that a truck can carry more. A truck is more productive. One reason why wages are higher in the United States is that workers here are more productive. Using a formula from micro, let's say that W/P = MPL, where W is the wage, P is the price, and MPL is the marginal product of labor. If MPL increases and P is constant, then W must increase. As wages increase, this increases the demand for more skilled labor who can work with capital. Those workers displaced by the increase demand for skilled workers will increase the supply of labor in the nonskilled sector. One reason why jobs are lost in the manufacturing area is this substitution of capital for labor.

Senator Obama

Senator Obama, Dem., IL, talked in Muscatine, Iowa, on Friday night at Central Middle School. His speech reminded me of Martin Luther King Jr. The Senator promised to reform America, provide national health care, withdrawl troops from Iraq, repeal NCLB, stop special interest groups and lobbying, and listen to everyone. Obama says he'll rebuild the middle class while cutting taxes and diminishing tax loopholes for the rich. On a late, snowy night, Obama appeared tired.