3/01/2015

Should the Federal Reserve Play Mind Games to Stimulate the Economy?

The Federal Reserve has two jobs: maintain the value of the dollar and maximize employment. In a very interesting article from the NY Times , the author Adam Davidson points out that Janet Yellen, who is currently in charge of setting the interest rates at the Reserve, has been maintaining the dollars’ value so well that it is actually impeding the development of new jobs. US citizens have become so comfortable in the stable value of their money that they are less likely to take the risks that coincide with the creation of jobs such as entrepreneurship and venture capitalism. Adam Posen, the man who once set the interest rates for the Bank of England, stated that if Janet Yellen were to simply suggest that the long run interest levels may be higher than previously considered acceptable she might scare people into investing their money in riskier ways to ensure they can beat the inflation curve, thereby creating more jobs.

Giffen goods, items that result in a rightward shift in demand as the price increases, were mentioned in an earlier post. My understanding of Giffen goods in lay-mans terms is that they are items that people are willing to pay or do more to obtain as the price increases. Giffen goods tend to be durable commodities, items that we use regularly that can be bought in advance and saved for later. Based on the information above, would it be appropriate to categorize the US dollar itself as a Giffen good? As interest rates rise, the cost of each dollar also rises. To offset its devaluation, people want more dollars and more willing to take part in riskier investments to gain them.

I would like to know your thoughts on whether the Giffen good concept applies to the US dollar and whether you think the suggestion made by Adam Posen is a good idea.

2/28/2015

Comcast Horizontal Merger

On February 13, 2014 Comcast announced their intention to merge with Time Warner Cable.  The proposed merger would be a “friendly, stock-for-stock transaction”, where Comcast will procure 100% of Time Werner Cable’s 284.9 million shares, “amounting to approximately $45.2 billion in equity value”.  According to Freepress.net the proposed merger would create, “an Internet and cable juggernaut with unmatched power to crush the competition and hike prices for consumers”, giving Comcast a one-third control in the Internet and cable industry.  The Federal Communications Commission (FCC) has yet to approve the merger. 


This type of merger is a considered a horizontal merger between the two largest companies in the Internet and cable industry.  Comcast will need to show the FCC that the proposed merger will benefit consumers, reducing the price that they currently pay for Internet and cable services while not limiting their choice in providers.  

Should the Federal Reserve Play Mind Games to Stimulate the Economy?

The Federal Reserve has two jobs: maintain the value of the dollar and maximize employment.  In a very interesting article from the <a href = "http://www.nytimes.com/2015/03/01/magazine/in-greenbacks-we-trust.html?ref=economy&_r=0">NY Times</a> , the author Adam Davidson points out that Janet Yellen, who is currently in charge of setting the interest rates at the Reserve, has been maintaining the dollars’ value so well that it is actually impeding the development of new jobs.  US citizens have become so comfortable in the stable value of their money that they are less likely to take the risks that coincide with the creation of jobs such as entrepreneurship and venture capitalism.  Adam Posen, the man who once set the interest rates for the Bank of England, stated that if Janet Yellen were to simply suggest that the long run interest levels may be higher than previously considered acceptable she might scare people into investing their money in riskier ways to ensure they can beat the inflation curve, thereby creating more jobs.  

Giffen goods, items that result in a rightward shift in demand as the price increases, were mentioned in an earlier post.  My understanding of Giffen goods in lay-mans terms is that they are items that people are willing to pay or do more to obtain as the price increases.  Giffen goods tend to be durable commodities, items that we use regularly that can be bought in advance and saved for later.  Based on the information above, would it be appropriate to categorize the US dollar itself as a Giffen good?  As interest rates rise, the cost of each dollar also rises.  To offset its devaluation, people want more dollars and more willing to take part in riskier investments to gain them. 


I would like to know your thoughts on whether the Giffen good concept applies to the US dollar and whether you think the suggestion made by Adam Posen is a good idea.

Berkshire Hathaway and "sprawl"

Warren Buffett may be the most well know man in business and many people have used his ideas in classrooms and boardrooms alike. In the past 50 years he has used the idea that sprawl is good. It is the idea that he used to build his massive conglomerate, Berkshire Hathaway. The company has been outperforming the stock market for decades but over the past several years has fallen short of beating the average gains.

Buffett has recently stated that while sprawl is good it may not be enough to continue as the company has been before. To me, a novice business person, this makes sense and has a lot to do with diminishing returns. His company is so large that it is hard for all the companies inside to continue growing above average. Basically the company is an example of a mutual fund, and I hope this is not news to anyone but some funds perform better than others.

One thing that I believe will help pull Berkshire Hathaway back out of the "average" stage is it's great reputation. This gives it a competitive advantage over others who run other conglomerates. They will continue to have the advantage in merging and acquiring fast up and coming businesses. Though the last couple of years have been below average I would not put it past Buffett to come up with the strategy to change things for the better.


2/27/2015

Is the Golf Economy Really Handicapped?

One of my passions is to play golf and I wanted to post something interesting to me so this was a natural fit.  I found two articles that present two similar but different sides to the economic health of the golf industry.  The first article is The 2011 Golf Economy Report which focuses primarily on the economic data from 2011 and compares it to an initial report in 2000 and a second report in 2005.  I don’t want to write a summary of the report but only state that it found the golf economy generated almost $70 billion in goods and services in 2011, down 9.4 percent from 2005, while several other sectors of the golf industry actually grew.  The data indicate poor golf real estate and a decline in golf course capital investment are responsible for this decrease while facility operations, tournaments and associations, and golf-related travel grew by 6.4%, 21.6% and 14.2%, respectively.
            The second article I found focuses more on the socioeconomic issues plaguing the golf industry in recent years.  According to an article in the Economist, The future of golf: Handicapped published in late 2014, the golf industry is facing an economic downturn.  One of the biggest reasons for the downturn is the economic recession from 2007-2009.  However, some other reasons for the downturn are a decline in new and retired players, it’s too meditative in our frenetic world and it’s just too hard.  Some solutions have been to make the game easier and change dress codes to be more laid-back to appeal to the younger generation.  Some have even suggested using the course for other sports like footgolf.  There’s no clear consensus on the exact problem or the solution among golf professionals.
The first thing that stands out to me is that golf is entertainment, at least for most that play it, and the game survived and even thrived in some areas through an economic recession.  Entertainment is one of the first things to go when I tighten up my budget and I suppose it’s the same for many other Americans.  I’m surprised the article in The Economist didn’t highlight that more by comparing the effect of the recession to other entertainment industries.
The second thing which stands out more than anything else are the reasons presented in this article for why there’s a decline in play.  I don’t agree it’s related to the game taking too long or not being entertaining enough.  I agree it’s not an Xbox kind of entertaining but many young people are willing to spend 3-4 hours going to a concert or attending a sporting event or watching it on TV.  I believe to attract attention to the sport, especially from the younger generation these courses need to focus on the almighty dollar.  Even in St. George, where there is a lot of golf, $40 a round is on the lower end of the cost to play.  I know when I was in my late teens and early twenties this was a week’s worth of groceries.  With the growth of course development and construction over the last 30 years, the demand for golf is elastic.  This means a decrease in price will increase revenues. 
Please let me digress for a minute.  I remember a number of years ago The Ledges Golf Club in St. George was a ghost town.  The grass was still being watered and cut meaning fixed costs were still being paid while little to no revenue was being generated.  I used to say there’s too much golf in St. George for these guys to be charging so much.  I think the greens fee was $60 to play 18 holes with a cart.  I would make the comment that you can sell 1 widget for a million bucks or a million widgets for a buck each.  Evidently, someone else took notice and they lowered prices and created a players card for $100 which allowed you to play a round for $20.  People showed up in droves, my friends and I included.  I was not surprised when the course began to thrive.  I don’t want to jump on my soap box here but The Ledges recently raised that players card to $350 and each round is $35.  I know myself and almost 20 other people decided not to buy the card and to play elsewhere when we've all played almost exclusively at The Ledges for the last 3 years.  It should be interesting to see how this plays out for The Ledges.

I tell that story because all the people in that group that left were over 40 years old with nice paying jobs or a comfortable retirement and it still came down to price.  That has to be especially true for a younger generation.  To get a young person or anyone for that matter hooked on golf they need to enjoy it and to do that you simply have to play more often.  This puts an even higher premium on price.  Yes, the game is challenging but so are video games when you first play them.  I’m willing to bet young people would not be as good at video games or play as often if they had to pay a fee of $40 for every 4 hours of game time.  

2/24/2015

Healthcare Economics

Healthcare Economics

In my last post I commented on some of what I feel are negative aspects of current healthcare legislation.  To be fair, in this post I would like to point out a few attributes that can be construed as positive from my point of view as a hospital employee. 

 For example, Obamacare requires people to have insurance or pay a tax.  While many people would see this as negative because they now have to pay money for insurance they do not feel they need, healthcare organizations see this as a positive.  This is because the number of people that are uninsured has declined.  This should in turn increase the demand for healthcare because more people will have coverage.  Hypothetically, having coverage should reduce the price people will have to pay for healthcare and reduce some of the risk hospitals face with collecting payment for services.

Another up-side to Obamacare is the pay for performance measures.  As hospitals improve their quality they are reimbursed more from the federal government and if a hospitals quality declines they are reimbursed less.  This is a great incentive for hospitals to improve their quality which leads to better care for patients.  Economically this means that hospitals can increase the amount they are being paid by increasing quality.  Thus there will be a greater supply of quality services and a smaller supply of inferior services.   

There are a few other positive points related to Obamacare.  I have listed the two I feel are most beneficial to the hospital I work at.  However I still believe the bad outweighs the good.  Following are two links to articles that shed greater light on this subject. 




Marijuana Laws - Baked Alaska

The Economist just published this article on the legalization of marijuana in Alaska. I figured this would be an interesting and controversial topic relating to economic principles. According to the article, Alaska has some of the highest rates of marijuana use in the country. It states that the farther way you are from Mexico, generally the more expensive marijuana is. This tends to hold true because Alaska also has much higher prices than many other "user friendly" states. 

In accordance with the article, I would assume that demand for marijuana is relatively inelastic. People will buy the same amounts even if prices increase or decrease. However, many opponents of the legislation claim that with the legalization, prices will drop, resulting in more use of the drug.
Since it has now been legalized, will that have an affect on demand? I propose that there are some who have avoided marijuana due to its previously illegal stature, however, now that it is legal more people may decided to take part. 

Colorado has seen a small increase in price for legal dispensed marijuana, illegal marijuana is cheaper. I speculate that prices will remain the same or increase much like Colorado's market. After all, there is really no reason for the price to drop, especially when considering the inelastic nature of marijuana. 

Also, Colorado has seen increasing tax revenues. The Washington Post outlined some of Colorado's revenue from recreational marijuana use here ---  Tax Revenues

What do you think? Will prices drop with the legislation? Will demand increase? How will the tax revenues affect the Alaskan economy? 

2/15/2015

The perpetual motion of supply and demand

From an educational standpoint, it is understandable that supply and demand is taught in a such a way that the increase or decrease in the supply of product A increases or decreases the demand of product B without any further advancement of the topic. It may seem more complicated due to multiple variables, but I believe that people would get a better understanding of supply and demand if they are shown how one individual product can have a seemingly endless effect on a multitude of other products.

Starting with a simple example, this article shows that the increase in the cost of one product decreases its demand and directly affects the supply of another product. The increase in the price of corn has decreased the demand of corn from beef producers. Beef producers have decided that it is not worth the investment in corn, for feed, so they have decreased the number of cows that they raise leading to a decrease in the supply of beef.

The decrease in the supply of beef has led to an increase in beef prices which has steered consumers towards other products, like chicken. This increase in the price of beef has led to an increase in chicken consumption showing that chicken is an inferior good. Meaning that if the price of chicken and beef were the same, based on weight, consumers would prefer beef. The price of corn has begun to stabilize, even decreasing a little, and it will be interesting to see how quickly consumers will see an increase in the supply of beef which will lead to a decrease in the cost of beef. Have consumers gotten comfortable with chicken or will they switch back to beef in droves? This will really tell us whether chicken is an inferior good.

Premium Tax Credit

The premium tax credit (PTC) is a new credit related to Obamacare.  Individuals who purchased heath insurance through the Marketplace were giving the choice to, “get it now” or “get it later”.  If they chose to receive the credit now, their estimated credit was paid directly to the insurance company and used to reduce the amount of the monthly premium.  However, the Marketplace calculated the amount of the credit based on the individuals household size and income information provided by the taxpayer and did not require any form of verification.  Taxpayers will be required to file Form 8962 to reconcile their tax credit and the advance payment that they received.  Any overpayment may have to be repaid along with penalties.


As I see it this tax credit is similar to both a price ceiling and a price floor.  Taxpayer’s who purchase health coverage and are eligible for the PTC and are entitled to no more but no less than their eligible amount. 

A price ceiling is a maximum amount that can be charged for a good or service.  When price ceilings are set below the equilibrium price consumers will demand more of the good than what the suppliers are willing to supply creating a shortage.  The PTC, like many tax credits, can be viewed as a price ceiling in that the government has placed a maximum amount on the credit that the taxpayer is entitled to.  However, the PTC also creates a price floor in that the taxpayer is entitled to receive the unused portion of the credit as a refund on their tax return.  A price floor is just the opposite of a price ceiling in that it is minimum amount that can be charged for a good or service and has the opposite effect on the demand curve creating a surplus. 

Mergers Can be Beneficial



The chairman of “AdvancePierre” and advisor to the same, Dean Hollis links the aggressive acquisition of company by “LandShire” with the growth in product and innovation and emphasizes on the importance of this acquisition plan as being growth driven both for the customers and strategic partners of AdvancePierre. Even though this is the second time they are being acquired by some other company during last three weeks.

The mergers no doubt are found very effective in many ways, that they help two producers to merge and pool their capabilities in order to enjoy the synergy effect and economies of scope or scale whatever the case may be, because there will be sharing of diversified skills and activities from both companies and will result in closing the gap that was there before the merger.

Such mergers no doubt are also important for key stakeholders of the company which is being acquired as they will be under a larger and safer roof now, and resultantly they will be on a more profitable end.

Further, mergers are also helpful for the economy, this can be said if such acquisitions turn successful they will be making a larger sum of profits now than both the companies were making separately before. Therefore a profitable merger always adds to the economy by displaying positive results which will be a building block in calculating National Income. The other aspect of such mergers is obviously an increased total output of the economy i.e. a higher GDP level.

Besides the merits of merger, there are many disadvantages of such mergers as well, like it may lead to large amount redundancies therefore promoting an increased unemployment level which obviously cuts down the National Income level.

Such mergers may result in cartels and monopolies, if the mergers are at a larger level. The cartels and monopolies are considered unfavorable for society as they charge discretionary prices from the consumers.

If we see the mergers, they are by far beneficial for society and economy as it can; support the weak business, ensure continuity of employment level or an increase therein may be, greater quantity of products and services etc., therefore, if such mergers are regulated for their negative impacts on economy, they can be very helpful for the society and economy.

But there arises a series of questions, when mergers occurred so frequently as was used by ‘AdvancePierre’ would it help growing? Would it not send a message that there may be some risk attached to “Advance Pierre”? And the list of such questions is not exhaustive.