Elasticity of Soda

This article discusses, among other things, the debate of whether the government should impose steep taxes on soda to reduce consumption and thus weight gain. Some argue that because there are so many substitutes for soda that can be just as harmful and not lead to weight loss that it would not be effective. While I am not discussing the effectiveness of the policy, I feel that soda is fairly elastic so I do think that more and more people will consume less soda. I don’t know what they will turn to, but if they were drinking soda I can’t imagine that they would switch to something that would help with weight loss. At any rate, I feel that soda will show to be elastic and if prices rise, then people will look to other options that may be substitutes, such as energy drinks, or high calorie juices. On the flip side though, I do know people who would go crazy if they didn’t have their daily fix. To these people, I don’t think it really matters what the price is, they want their fix so to them, soda is very inelastic.

Supply and Demand During the Holidays

On page 129 in our textbook, there is an example of "real world" elasticity that caught my eye. It explains that as Valentine's Day comes, roses become a necessity (well, a necessity to any man that doesn't want to sleep on the couch for a while). In the example it makes the point that greeting cards are more elastic than roses because roses are perishables. Nobody wants to give their significant other a bouquet of dead roses, therefore, floral shops can charge more to increase the quantity supplied on Valentine's Day. From this we can see that supply is relatively inelastic and because of that, the increase in demand causes the price to increase substantially.

So here's what I don't understand fully. I think that pumpkins would be classified as a "perishable" just like roses. Well maybe not just like roses but you know what I mean. How come on October 31st we don't see a spike in the price of pumpkins? Is it because supply outweighs demand? Are there too many pumpkin farmers relative to the amount of consumers purchasing pumpkins? It's been a while since I had to purchase a pumpkin but it seems like if my memory is right, pumpkins are more expensive a few weeks before Halloween and then the price of pumkins actually goes down as it gets closer to Halloween. Why can't roses work that same way? It would sure help my checkbook out because now days it seems like I'm spending my tax refund just to get a Valentine's gift.

Although, I may be wrong because according to this article, http://www.freshplaza.com/news_detail.asp?id=29734 it sounds like the pumpkin farmers may have caught on to what the rose farmers are up to and they are raising the price of pumpkins.

Current Income Elasticity of Consumers

According to the article on msnbc.com, Shoppers of All Incomes Are Changing Habits, the recession has induced consumers to rethink their shopping strategies and impulse purchases. This article indicates that many people have reduced the amount of money they spend, especially those who have incomes of under $45,000.

"New" (I quote this because it's not really new... just more noticeable now than a few years' prior) strategies include finding the lowest priced items, quality products, and using coupons. The article also indicates that there are certain items that consumers won't go without: "Topping that list is animal protein: 10 percent [of consumers] said they refuse to give up meat, poultry, fish and seafood. Four categories came in right behind that, with 8 percent saying they're not eliminating alcohol and tobacco; coffee and tea; milk and juice, or household and laundry supplies."

Predictably, the most frequently forgone commodity is clothing. The article indicates, "38 percent say they're purchasing less clothing and 20 percent said they're buying less expensive brands. Clothing is also the category most often chosen — by 29 percent — when asked what they would most likely spend more on as the economy improves."

Therefore, items such as proteins, alcohol, tobacco, coffee, tea, milk, juice, and household supplies are relatively inelastic goods with regard to income. On the other hand, clothing is an inelastic good with regard to income during this recession.

I can see these elasticities in my own home. One thing I won't cut out is food and household supplies. Can others relate to these products? Are you cutting back? What items are you cutting back on?

Healthcare Supply and Demand -- Chapter 2

The 2008 census report reported that 15.3% of people in the United States are without health insurance, a decrease of 45.7 million people from the 2007 study claiming 15.8%.

Using a simple supply and demand model, if universal health care is implemented and the 15.3% of the population that was not covered before would now have access to the health care system, then demand for health care related services will increase.

Supply is currently based on number of practicing physicians (MD and DO), number of students in medical school, number of medical professionals (NP and PA) current medical school graduation rates, number of physicians retiring, taking leave of absence, sabbaticals, etc. Taking this into consideration, supply, will at most, stay the same, though the additional patients merged into the system will likely create a shortage with rural areas suffering the most from the shortage.

With an increasing demand and stagnant/decreasing supply the price will increase until supply catches up with demand (so much for controlling health care costs).

This may seem a simple fix, graduate more physicians into healthcare, but physicians are not the only piece of the health care puzzle.

Nurses (Registered Nurses and Licensed Practical Nurses) are required to run/staff hospitals, surgery centers, Intensive Care Units, Emergency and Accident Centers, clinics, quick-care centers, school health, telephone referral programs, community wellness centers, and health care in general. Nursing has long been known to have a shortage. Currently the average age of a Registered Nurse is more than 46 years old, and the retirement planned age is 55. With an aging workforce and forecasted shortage of more than one million nurses through 2020, the supply side of healthcare is quickly diminishing. (This estimate did not include implementation of universal health care and the additional 45.7 million currently uncovered individuals which will greatly affect the number of nurses needed to staff current facilities, let alone increase the number of staffed facilities.)

"If 46 million more people are added to the demand side of the health-care equation without optimistic productivity gains in providing health care, we likely will see a trade-off between quality and quantity, particularly as services are rationed."

Case loads per provider will increase, wait times will increase, quality will decrease. Yes, healthcare reform is necessary, however, the 85% of the population that has care should not have to lose access to care to provide for those that have not secured health care coverage for themselves.

Chmura, C., Supply and demand may hinder health-care reform. Richmond Times-Dispatch. September 7, 2009.

Print Media Gone Before Too Long

According to a recent article on FT.com, (Financial Times.com) the method in which we receive our news will no longer exist as a paper organism. What is happening with this method of receiving our news? It is being taken over my other forms. This has been happening for many years and will continue to happen until there are no more news paper companies that exist.

The demand for this form of media is dwindling at a rapid pace. Subscribers might still be using the news paper company for their information source but they are no longer purchasing the paper itself. They are sifting through the news online and they are downloading the newspaper on to their electronic devices. This has caused, and will continue to cause, a demand shift to the left.

What does that shift mean? In the short run, the supply will remain somewhat the same until those companies that cannot afford to be in business, will be long gone. Those that do stay in business will have to raise their prices for the ads that are being placed by other businesses, they will have to charge more the physical paper itself, and they will also need to charge more for the online subscription. The online subscription has been free to utilize for most newspapers around the country but all that will change in the future. The author feels like that future will be within the next twenty years or less.

In the long run, the supply curve will shift as well and the supply will be less. This means that the prices will go up because the demand has shifted and the supply has shifted. There is nothing else the newspapers can do except charge more for the services that they are offering. It is a vicious cycle that might be a downward spiral for them in the near future. If subscription base falls, then so will advertisement. If advertisement falls, where is the revenue?

Some of the variables for these rising costs in the past year or so have been that newspaper subscription has been falling and so has the ad revenue from businesses advertising with the newspapers. People have been able to find the same news somewhere else on the internet. This has caused many of the newspapers to start charging for the online subscription already. I feel that most people will even opt out of paying for their online subscription because there are so many places from where one can get news that is from a reliable source. Newspapers will have to come up with some ways to entice people to keep their subscriptions or they will be asking for bailouts and they might even become run by the government.

Although this was not the meat of the article, the demand shift can very easily be taken from this article because of what has been said in it.

Blog Topics and Style

I am not happy with a lot of the posts. There is too much focus on policy proposals, and poorly supported opinions about policy. Managerial Economics is not a class where national policies often have a role. In particular, I am concerned about posts and comments about Obama's healthcare, environmental, and stimulus policies.

Having said that, there is fertile ground to discuss specific aspects of these policies in the context of the chapters we are currently covering that is being completely missed. Here are some examples:

• Demand and supply diagrams show revenue in a certain way. If we are concerned about healthcare because of the amount we spend on it, how do demand and supply have to shift to make that larger (Chapter 2)?
• What are the demand shift variables for healthcare (Chapter 2)?
• Is the fact that, for those with insurance, office visits are cheap shown with a shift of demand or movement along it (Chapter 2)?
• Why do we have to subsidize environmental measures? What does this tell us about demand and preferences for them (Chapter 2)?
• What is the market for healthcare, environmental, and stimulus measures (Chapter 1)? Where does it start and end? How is this related to national borders, illegal immigration, and organized (drug trade) crime?
• How elastic is healthcare demand (Chapter 3)? Why?
  
• How income elastic is healthcare demand (Chapter 3)? Why?
  
• How elastic is energy demand (Chapter 3)? Why?
• How income elastic is energy demand (Chapter 3)? Why?
• How elastic is environmental policy demand (Chapter 3)? Why?
• How income elastic is environmental policy demand (Chapter 3)? Why?
• If elasticities have these patterns, what can that tell us about whether or not policies will work as advertised?

These are examples, not suggestions. You have great tools available in this class and text, and an open forum to practice using them.

You made your SUV now lie in it

I came across an article on the "Big 3" automakers and their trip to the bailout buffet at the end of last year. The pathetic arguments on the collective part of the Ford, GM and Chrysler is because they cannot guarantee that they will be able to attract consumers who will purchase their products, they need help.

Well duh. Automakers have been on notice since the 70's energy crisis that the day would come when fuel efficient vehicles and durable goods, like cars, would dominate the industry. Just as our financial industry role-models were lured by easy credit and the opacity of accounting systems, automakers greedily sold high margin SUVs instead of developing needed technologies to compete in the next age of business.

Having given up their once magnificent market power, and influence toward better vehicles, this industry is now cowering instead of thriving. Imagine if Big 3 had developed sustainable, efficient vehicles in the 80's and 90's. Wouldn't present day income shrinkage spur demand for its products currently? As economic recovery begins and incomes rise I think we may see the demand for american automobiles drop as evidence that our auto industry produces an inferior product. Foreign made vehicles will be substituted at a much higher rate because they match up better with complimentary things like fuel prices.

Now I understand the well publicized argument that certain industries are too large to fail. Certainly the auto industry is in there with insurance and finance and the demise of automakers would send shockwaves through our labor markets and affect our domestic and world economic outlook.

However, at what point do we stop inflating our national debt in favor of a few bloated industries that have brought problems upon themselves? The ever-widening deficit will have economic consequences that no one wants and the truth is the economic consequences of more debt are unknown. What we do know is that the future is gonna suck when we, as a nation, are unresponsive to future crisis because we are overdrawn.

Just as the Federal Reserve regulates monetary policy, a regulating body that would require a scalable amount of capital, insurance and/or surety bonding in gigantic industries would decrease federal government/taxpayer exposure in the future.


http://www.economist.com/businessfinance/displayStory.cfm?story_id=12754289

Transformational Outsourcing?

For many years the word outsourcing has brought a sense of fear to employees in industrialized nations. Outsourcing has been a way for employers to decrease their labor costs by taking advantage of the low cost of employees in developing nations, and is often accompanied by many lost jobs of employees demanding higher pay. Transformational outsourcing may slowly take the place of traditional outsourcing.

Transformational outsourcing is helping executives realize that outsourcing should not be focusing solely on cheap wages, but recognizing that corporate growth is more essential. Executives are finding that although it is beneficial to a company to maintain cheaper labor costs, there are other benefits from outsourcing that can help to achieve this goal of corporate growth and continue to create more jobs within the U.S. as well. If companies become more aware of the potential offered by offshore talent and choose to take full advantage, they may find they will be able to improve quality, efficiency, productivity, and revenues. Successful companies of the future may find the idea of leveraging offshore talent essential, and in turn will create better jobs for everyone.

http://www.businessweek.com/magazine/content/06_05/b3969401.htm

What is the Long Term Economic Impact of the Bailouts and other Federal Spending?

Several months ago, the United States economy struggled through weeks of turmoil as corporate giant Lehman Brothers followed Bear Stearns in closing shop due to ill advised investment strategies. Mammoth organizations, once thought unshakable, were suddenly becoming unviable as they became insolvent. But when organizations seen as critical to the U.S. economy began to buckle, such as AIG and The Hartford, panic set in.

In response to this crisis the federal government issued over a trillion dollars to banks, insurance companies and other qualified institutions within specific industries. The rational behind the feds effort to “inject liquidity” into the economy was to solidify institutions that were “too big to fail.” In other words: let’s delay painful economic consequences by engaging in the same activity which caused the problems. The crisis was caused by pretending value exists when in fact it didn’t – printing more dollar bills at the Fed doesn’t create value, it only dilutes the dollar and creates inflation.

As the national debt’s stratospheric amount equals near a dollar amount close to the entire US gross domestic product, it’s apparently a “perfect” time to initiate health reform which carries a price tag in the trillions of dollars. Like the opinion reflected in the article sets forth below – this spending is not only economically irresponsible, it’s reckless. Perhaps somebody can give me hope that notwithstanding the aforementioned facts that America can remain an economic power going forward. The article referred to in this blog can be found here: www.americanbankingnews.com/2009/08/30/will-business-and-banking-bailouts-kill-the-american-economy/

Wall street goes to Washington

I recently read an article called "In Shift, Wall Street goes to Washington" which brought many interesting facts to light for me. It mentions the fact that the federal government is now a key player in every major decision that comes up in the financial markets today. A lot of information that would have never before been shared with the federal government is now readily available. Information regarding members of the board, compensation executives receive, and even how companies value their investments.

The above being said what does this mean for companies dealing with mortgages, finance, or insurance? I think when government regulation meant just worrying about taxes and some minor regulations they were a little further down the totem pole as far as effect on the business but now things have changed and government has gotten involved on a whole new level. This means you’re going to have to keep a fixed eye on what the government is up to, in other words you need to get close to Washington and that law makers who are bound to be involved in the day to day decisions of your organization.

This demand for knowledge of lawmakers’ insight into what is going on in the recovery process and how they think things should be done makes it necessary for any organization with a lot vested in the financial markets to move to Washington and get involved. Many companies are either beefing up offices in the Washington area or even creating new offices just to be close to the action. Many organizations even take it one step further and actively recruit for ex- government officials to fill positions on their board to gain further insight into the minds of lawmakers to prepare for the next move by Washington.

I think this whole shift in Wall street to Washington will have a profound impact on the way business is run at least until the bailout money has been paid back if not forever.

In Defense of Capitalism

Right now, capitalism is a hot topic in the political sphere. But capitalism is about economics, not politics. It is an economic theory, or system, or whatever, that operates on a set of loose rules: if more people want iPods than Apple can make, the prices go up; if consumers are knowledgeable then a merchant who sells crappy goods won't last very long... etc.

It bothers me when I hear about how capitalism is evil, or that the poverty in this country is due to "the free market." Capitalism isn't a faith, or a lifestyle, or a person--it's a description of how a system works. Capitalism isn't bad; greed and selfishness are bad. And for some reason, people who support some sort of hybrid socialistic capitalism think that greed and selfishness will go away if we have enough regulation. Does that really make any sense to anyone? Greed and selfishness only go away if people learn to be kind and loving, and if everyone in the world was kind and loving, it really wouldn't matter what economic system a country used.

Okay, I'll admit it: capitalism doesn't make everyone rich. I'll also admit that "poor" has to exist in order for "rich" to exist. Honestly, "rich" is always defined in relation to something else. And what we consider to be poor now would have been a luxurious lifestyle a few centuries ago. Capitalists generally understand that results aren't going to be even... but capitalists also understand most people would give up guaranteed mediocrity in exchange for nearly endless opportunity. And so we enter the classic debate of free markets vs. government.

Those who oppose free markets are quick to point out the underprivileged people who are left behind. The rich have better schools and better health care. Millions of Americans are uninsured, and millions more lost half of their retirement because of the free market. "If we just provide proper regulation and more government support, millions of Americans will have better lives." Well I think that's fantastic. I think everyone should have health care and everyone should have a great education. We can argue all day over whether the government or consumers would do a better job of deciding where money should go, but that's really not the point. The true issue concerns the future status of all of the amazing things the markets and capitalism have done. Almost every modern convenience you have in your lives was brought about by competing companies fighting for dollars. Universities in this country are generally regarded as the best in this world, and that is largely due to the fact that they have to compete for prestige and the best students. We need to address the 10% of the economy that isn't working very well, but we cannot do it at the expense of the other 90%.

Now, this isn't an argument against redistribution of wealth, this is an argument against the government getting in the way of freedom, innovation, and creativity. Every dollar the government spends is one dollar that someone else doesn't get to decide how to spend.

Demand Increasing?

According to an article in BusinessWeek published back in July the global demand for commodities is on the rise. Foreign countries such as China and India are "snapping up" commodities as they see signs of global economic improvement. The article also states that companies are adjusting their inventories of raw materials because even though there may be signs of improvements there is still a great deal of uncertainty. The article infers that a recovery in commodities is a first step in economic recovery.

What are your thoughts? Has the global economy begun to recover? Were there signs of recovery as early as July? Is it smart for companies to re-stock their inventories based upon these signs of recovery?

In small town Southern Utah I sure don't see signs of recovery. I work in an industry where it would definately be nice to be recovering. Based on the latest economic data the current White House sure preaches the recovery has begun. I hope demand is on the rise in all sectors and that the recovery will take place in the near future.

http://www.businessweek.com/globalbiz/content/jul2009/gb20090723_961619.htm

Socialized Health Care

We’ve all heard the ongoing news of healthcare reform and by now I think we’re all getting sick of it (no pun intended). Although there are many aspects to this issue, I would only like to mention one to keep it brief. If healthcare becomes socialized, it will kill competition in the industry. Competition is the driving force behind innovation and quality. Without it, firms will no longer be worried about losing business because they are guaranteed being paid. They will receive their annual salary regardless of how many lives they save, or how many diseases they cure. There is no incentive to excel or do better than the next doctor.

There are two examples that will help illustrate this point. The first comes from my brother. He graduated from the Air Force Academy and is now serving in the Air Force. Military personnel are given free healthcare from the healthcare institution on their respective bases. However, my brother has stated many times that he doesn’t even try to go there unless he’s “dying;” and on other occasions he’s said that if he ever did have a serious injury or illness he’d prefer going to a regular hospital. This is because the military doctors are paid on a biweekly basis rather than on performance. He said it creates an environment that “breeds mediocrity.”

The other example comes from one of my friends, who we will call Julie, hails from Albania. Albania was one of the last European countries to do away with communism. As a result, many of the communist practices are still in effect until the new government decides what to do. Julie’s dad has a very bad heart and had to have heart surgery a few years ago. Since doctors are paid a wage by the government, they feel as though they are not being paid enough. So instead of trying to reform it through the government, they request that the families pay them extra to save their loved ones. The family is then stuck with another bill that usually measures in the tens of thousands. Hardly anyone has that kind of money. Since Julie’s family was unable to pay the bribe, the doctor did not do his best to save Julie’s dad and he slipped into a coma for months. He has since recovered somewhat but he is forbidden to do any work, chores, or anything else to exert himself.

NATURAL GAS vs CRUDE OIL....Supplements??

According to a recent article in the WSJ (see link below), we are witnessing a phenomenon in the energy market of crude oil and natural gas. It states that the price for natural gas has fallen 79% from its high in the summer of 2008 and that gas has fallen significantly less, thus, creating a historic price gap between the two energy sources where the price of oil is nearly 37 times the price of natural gas.

Because oil and gas fulfill the same fundamental purpose, that of an energy source, consumers and business will begin changing behavior if the price gap continues over the long-run. In the short-run, the upfront costs of switching from oil to natural gas might be too expensive to justify, but in the long-run consumers and businesses will begin replacing worn-out equipment with a natural gas equivalents, worn-out automobiles with natural gas equivalents, and other worn-out durable goods with natural gas equivalents. As these businesses and consumers makes such changes, the demand curve for natural gas will shift out (right) representing their increased demand for natural gas at all prices, and the demand curve for oil will shift in (left) representing their decreased demand for oil at all prices. As the two markets adjust to the change in demand, eventually their prices will drift back to the historic equilibrium of the price of oil being "6 to 12 times more...than natural gas."

I know you will all be watching closely to see if and when it becomes economically reasonable to convert your cars and trucks to operate on natural gas.

http://online.wsj.com/article/SB125253910905897591.html

Electicity Demand Decrease

I recently watched a story on MSNBC about declines in the demand of electricity in several areas throughout the country. To follow-up, I found a more thorough article on msnbc.com that I feel explains the issue.

The article explains that, "Consumers and businesses may finally be seeing some relief from rising utility bills, thanks to the biggest decline in U.S. electricity demand in decades." This decline in demand is expected to last throughout the rest of 2009.

This really goes to show how severe the economic downturn has been for some families. In the past decade, increased electronic innovation and demand for these electronics (i.e., iPods, computers, video game consoles, etc.) has increased as well. It appears that to save money, people are cutting back on the use of their electronics. This trend began last year when power consumption decreased 1.9%.

This trend is interesting because according to many different studies, the own-price elasticity of demand for electricity is inelastic. This means that an electricity price increase of 1% results in less than a 1% change in demand for electricity. While the numbers aren't enough to convince that electricity is now an elastic good, it does pose the question: if pushed far enough, COULD electricity (and various other utilities) become elastic goods?

I know that I, personally, am taking care to save money in any way possible right now. I constantly find myself turning down the air-conditioning, or unplugging appliances that are not being used. I can only imaging what people who are under tighter money restrictions than I am are doing to save money.


http://www.msnbc.msn.com/id/32709382/ns/business-oil_and_energy/

Oil Prices: Higher or Lower in 2010?

I read an article in the seeking alpha that discusses about the oil price. This article indicates we need to ready for both direction Increase or decrease oil price. According to article and book If we look in short run market than definitely oil price will rise because in the short run, supply is inelastic, meaning that higher demand, leading to higher prices. In short run no new productions add in market so we can`t see new firms` supply effect in market.
On the other side in long run oil supply is elastic, meaning that higher price will bring new supply in market. But here I think oil price will rise in 2010. Because supply will decrease in next year. According seeking alpha article data oil price picked about $ 150 last summer but very less change in supply. Demand will increase about 87 million barrels and supply will decrease less than 83 millions barrels in 2010. Also in developing countries demand increase day by day. I believe according to supply and demand theory price will go higher. According to Higher demand as the global economy improves will push U.S. crude oil to average about more than $100 to $150 a barrel in 2010.
In long run oil price is elastic and when global economy improve income also improve. On the other hand the government pumping more money in market. Because of this inflation rate increase. Inflation is very effected in any higher price. Thus these all factor also effect to higher oil price.I believe oil price rise and reach average more than $ 100 in next year.

What do you all think oil price will increase or decrease in 2010?


http://seekingalpha.com/article/157778-oil-prices-higher-or-lower-in-2010

Want Cheaper Health Insurance? Increase Supply

I recently read a Wall Street Journal article which explained the problem of interstate health insurance. It is currently prohibited to purchase health insurance coverage from a company in a state where you do not reside. This greatly reduces the number of options one has to secure the most cost effective plan. It would be impossible to obtain coverage by Select Med if I lived in New York.

Eliminating state boundaries would immediately increase competition which in turn would result in lower health insurance premiums. Increase the supply and the prices will fall. Competition is always a main driver for more affordable products and services. Let more companies fight for your business. Let pricing become a competition.

This is not a complete solution to the health insurance problem, but it will definitely increase its affordability.

http://online.wsj.com/article/SB10001424052970203550604574360923109310680.html

Gold 2009 Supply and Demand Impact on Gold Price

last week i was reading the article , published on Feb 27, 2009 in The Market Oracle which predicted the gold price above $1000 level based on the supply and demand impact and today i seen in a news that gold price pass the $1000.00/oz mark which is the highest price level. Price is truly related to the supply and demand of gold. In article author mention the following comment. " We conclude by emphasizing that demand through gold Exchange Traded Funds will dominate the gold market and take gold to new heights well above $1000."

According to the article total projected demand for 2009 is 3,493.40 to 4,171.02 tonnes. Where as the supply are 3,493.40 tonnes. That means the demand is higher then the supply. Article also shows the data of Gold supply from mine production, scrape and Central Banks. From article i can see the new pattern of gold demand. people are investing more in Gold. so investment demand rise by 40% to 702.8 tones. article indicate the big change in the Gold E.T.F which will rise up to 677.62 to 1,355.22 tones.
In my opinion there are many factors affect the gold price. In developing countries people are buying more jewelery, I think fear of inflation, recession and weakness in dollar also increase the gold price. As per economic principle when price will go higher then demand will be going to decrease. so i think in near future the demand of gold is going to decrease.

http://www.marketoracle.co.uk/Article9140.html

New Exotic Investments Are Emerging on Wall Street

This morning I was reading an Article about the ever new and exciting instruments that wall street is coming up with. Last year there was a mad dash by investment firms to purchase life settlements policies from elderly people. They plan to package them, rate them, and sell them off to investors much like they did with the mortgage markets. The article goes on to talk about the large fees that Wall Street would collect by creating, packaging and selling these life settlement policies. It looks like they are back to the same old tricks.

By packaging these types of instruments what effect is this going to have on Life Insurance premiums? During these last couple of years companies like Mass Mutual, North Western and New York Life have been the bright spots in an otherwise ugly economy. What will this do to their companies if they have to start paying out death benefits? Their profit margins could collapse quickly if they do not hedge themselves.

I personally think that that it is a great idea and could produce a lot of great investment products in the future but at the same time there are a lot of unknowns in these products. What happens if people start living longer? Investors could end up losing a lot of money. What if these large insurance companies can not pay out the death benefit's? Who is going to bail them out? There are a lot of different variables that could come into play here. The biggest concern I have is that big Life Insurance companies build their model around not having to pay the benefits. You could see a huge shift in the future if these new life settlement instruments really start to take off. Profits could go down drastically, premiums could rise, and firms that are "to big to fail" could be in trouble.



http://www.cnbc.com/id/32707038

Cash-For-Clunkers Supply/Demand

Referring to an article found in USA Today relating to Chapters 2&4. I have to ask are automakers making the right decision? The article says that as a result of the highly successful Cash-For-Clunkers program the automakers will be ramping up production for the 3rd and 4th quarters of this year. However, the cash for clunkers program only made a short term spike in demand that is now over since the government rebate program has ended, but it seems the automakers don't realize that they could over supply the dealers again who will be left with cars on their lots because demand has fizzled.

The article also states that once this oversupply of vehicles happens dealerships will "require profit killing rebates in order to unload". It seems automakers are jumping the gun in order to save jobs and think demand will return to normal levels. Although automakers are claiming they are only producing enough to replenish lots from the vehicles that were sold during the Cash-For-Clunkers program.

The Cash-For-Clunkers program definitely spiked demand, and has created an incentive for automakers to supply more vehicles, however what is the short term demand as a result of this program? Are many consumers going to be purchasing new cars anytime soon or did those who were thinking about it already buy them? How much of consumers demand will rely on automakers offering hefty rebates again?

Cash-for-clunkers demand has carmakers boosting production

Is any firm really "too big to fail"?

I came across an article in the Harvard Business School Working Knowledge research site discussing the economic impact of large financial firms and whether or not we can afford to let these firms fail. A main point from the article states that, "The federal government should slap tough new regulations on all firms that pose 'systemic risk'—the risk that a failure of one institution could wreak havoc across the entire financial system." I wholeheartedly agree with this statement and wish that the government would "step up" and implement some new security measures to prevent firms from failing in the first place.

However, once these firms are getting to a point where they are looking like they might fail, even though this really shouldn't ever happen if management teams were smarter, the government needs to keep their hands off and let the firm fail. It is not the taxpayer's responsibility to continually bail out these gigantic organizations that keep failing time and time again. Everybody in government needs to show some respect for the hardworking American's that vote them into office and not do things that benefit the few at the expense of the many.

What do you all think? Are these large firms really "too big to fail" or should we cut the cord and let them fail and see what happens?

Here is a link to the article that got me thinking about this: "Too Big To Fail": Reining In Large Financial Firms

A lesson to learn

"Cycle-proof regulation"

This article written by a former IMF economist details his idea of a possible "non-band aid" solution. He basically comes up with an idea to keep banks capable of producing the necessary cash when times are good, so that they can use it when the economy turns bad. The author comments that regulation usually is allowed to progress when times are bad and public sentiment is in the regulators favor. This idea needs to be implemented by more than just banks. The public could use this dose of medicine, too. What's interesting is who will actually put this into practice. My bet is that the financial sector will put on a face for the public to show sorrow and a "real change of heart," and may even make some actual changes here and there. The public on the other hand will make the more significant and long lasting change to prevent a crisis again. I could be wrong. Maybe the banks will actually figure out a way to cash in on public savings.

US foreclosures up 24% in first quarter

I came across this article after responding to a post made about the 4.7% increase in new home sales. I thought it was interesting that in February new home sales rebounded nearly 5%. It's even more interesting that US foreclosures are up 24% now and in February new home sales were up 4.7%. I would have to say that this article about foreclosures show us that the 4.7% increase in new home sales wasn't much of a sign that the economy is recovering. "The faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same time period a year earlier. Wow! That is such a huge jump in just a years time. The article states that while foreclosures were down 13% in the fourth quarter last year they project that it will continue to rise and hopefully taper of in the summer.

Here is a link to the article.
http://finance.yahoo.com/news/US-foreclosures-up-24-percent-apf-14940685.html

Is China a threat?

Spurred by the time-deadline placed before me, I read an article in the New York Times about China expanding it's influence in Latin America. This article explained that China has negotiated deals with Venezuela, Ecuador, Argentina, and Brazil, giving them large sums of money. This move either shows that China cares, or that they have a lot to gain by doing this. David Rothkopf is quoted in this article as saying, "This is how the balance of power shifts quietly during times of crisis." This comment sort of put me on the edge of my seat thinking that China is secretly taking over the world. Then i thought about it some more and realized that we owe China a lot of money so it's not like we aren't aware just how much influence China already has with us, and in the world in general.

It’s Okay if you lose your Job

I saw an interesting advertisement on TV a few days ago and thought I would share it with those who might have not seen it. Saturn has a new protection plan for their vehicle buyers. They offer to pay up to nine months of your payments if you lose your job. I know they are trying to promote sales, but how is this going to help them? Yes, they might get a few more cars off the lot, but their company just got bailed out and is on the chopping block to be sold. There terms state: “You have to be employed for at least 30 hours per week for 90 days after you buy or lease the vehicle and for 12 consecutive weeks prior to your first day of unemployment. Then, if you lose your job due to economic conditions during the next 21 months you are eligible for benefits. If you lose your job for other reasons, you may not be covered.” How would someone go about proving they lost their job due to “economic conditions”?

Terms and Conditons

G-20 2009

What I would like to know is what changed, this big meeting amongst world leaders, large and small countries, highest security ever assembled, etc. I here very little of Obama coming back from the Summit with new ideas, for that fact I hear nothing about change in other countries due to the summit. I was looking up the agenda for the summit and what was to take place during it. With all of the things being discussed, I would have expected more. We talked about the relevance of each country that attended and what they brought to the table in class. The one thing that I feel is missing is the outcome, there were more stories about the security at the conference than the outcome of it. (Wikipedia: 2009 G-20 London Summit)

China's New Investment

I found an article from the Wall Street Journal Online entitled China's Growth Slowest in Two Decades. Given that we study growth theory, and China is a major player in the world economy, and tonight is the deadline for submitting new posts, I thought I would give it a read. The article is pretty basic and talks about how the numbers don't accurately portray Chinese growth because they only release numbers on a year-to-year basis, unlike our quarterly releases. The main thing that caught my attention was the noted increase in Chinese domestic investments.

The government's stimulus program has been ramping up investment to counteract the weakness in export demand. Fixed-asset investment in urban areas, China's benchmark measure of capital spending, rose 30.3% in March from the year-ago period, picking up from 26.5% growth in the first two months of this year.

I may have this completely wrong, but this seems to be a step in the right direction as far as their policy goes. Reinvesting back into your countries own capital is vital to growth and if the Chinese begin investing some of their billions back into their own country as it becomes more stable and reliable they could experience substantial gains in well-being, I think. Here is a link to the article, http://online.wsj.com/article/SB123984767545423661.html#mod=testMod.

Same Game Different Rules

The Post-Recession Appetite for Risk and Regulation
This article points out the various questions currently being asked in regard to initiating new regulation of banks and the financial sector. It features various economists giving their take on what needs to be done to ensure that a meltdown like the current one doesn't happen again. I'm really not sure what the point of new regulation is. Any regulation on the banking system will have its moment in the sun and be played up as Washington and Obama "getting things done." But the financial system runs on taking risk, and whether they are called hedge funds or something else, they will find a way to get around any new laws and regulations. It has been going on for years with tax evasion, and when this crisis blows over the game will continue and their will be new winners and losers.

Consumer Prices Falling

This article on bloomber.com caught my attention:
http://bloomberg.com/apps/news?pid=20601068&sid=aiLW5X3YKx8U&refer=economy

Many economist have been warning that as the Fed continues to inject hoards of cash into our struggling economy that inflation will soar, thus effecting the purchasing power of Americans. Such effects are not yet evident as consumer prices actually saw an annual drop for the first time in over 50 years. It was reported that the consumer price index fell .4 percent in March from the previous year. These figures signal deflation and may be due to the global recession keeping prices low. Some would view this as a bigger danger than current manufacturing and production data that is effecting businesses' outlook on the economy. It is not likely however that consumer prices will downspiral. As senior economist Carl Riccadonna stated,“The more slack there is in the system, the longer it will take for inflation to become a concern.” The effect of the Fed's massive spending I would assume will be seen further down the road.

Is Lebron James Overpaid??

I have often heard people talking about the salaries of professional athletes. It's no secret that most professional athletes make more in one year than most of us will ever make in our life times. And I can see how people might think that paying people millions of dollars to run around playing like they were still in kindergarten could seem a little ridiculous. Just as an example, Lebron James plays for the Cleveland Caveliers. He came straight out of high school and is already making the individual salary cap of 20 million per year. That's some serious dough for just playing a game of basketball!! Most people see those kinds of numbers and are just disgusted. I used to think the same thing until I took a class on sports economics. There are certainly cases where players are overpaid for what they actually do in their profession. This is not the case for Lebron James.

It seems logical that a worker in his field should be paid what he is worth. For Example, I work in a factory driving a large fork lift doing very skill based maneuvers. It is not an easy job to do for most people. If I were to apply to work somewhere else, I know that I am at least worth what I am making. If an offer were less than what I am making now, why would I ever accept it? The only problem with most jobs, is that there is no effective way of measuring productivity. It is a very hard thing to do in most cases. In basketball however, productivity is perfectly measured. It is a very simple thing to see what a player contributes to his team. And it would make sense that a player should be payed according to his productivity.

Lebron James is one case where his productivity can be measured very well. In his profession, he would expect to make what he is worth compared to other players in the league, just like any other industry. If we use the stats to determine how much money James should be payed, there is very clear data showing that he is actually underpaid! If he were paid for the amount of money that he alone generates for the Caveliers, he would make a lot more money than he does. He brings in a lot more revenue than he is paid. This is determined by looking at the number of wins that he himself produces and the revenue that is made from the gate, merchandise, and other factors. So despite common belief, some professional players are not being payed what they should.

Don't read if you're a right wing republican

Due to the responses another blog of mine received, I decided to make another blog that goes into further detail of why the Federal Reserve needs to rescue the banks, and letting them fail would be a grave mistake with enormous economical consequences. MSN published an article a few months ago listing the 10 biggest mistakes the Federal Reserve has made thus far in this recession. I realize it's a little early for such hindsight, but bear with me. MSN stated that the #1 worst mistake our country has made was letting Lehman Brothers fail. Once that happened, it sent investors scrambling for the exits as that meant no company is 'too big to fail.' This panic also sent a run on the banks, which is blamed for the bankruptcy of Washington Mutual, as well as the further destruction of Citigroup, Bank of America, and others. This panic spread throughout the economy and news outlets, causing consumer spending to plummet and the Dow Jones to get into the 6000's.

As a moderate Republican, I side with the Republican party on most aspects, but this issue is simply impossible to ignore. In most economies we can allow major companies to fail, as inevitably a replacement will come, replacing the lost jobs. However, we cannot allow every major bank and insurance company in the nation to fail all at once, as this panic and devastation would easily plunge us into a great depression that could take years or decades to recover from. If some major banks fail, this will likely trickle down to all the financial institutions, as they are so tightly correlated, and virtually all of them are in financial trouble. For a long time I've criticized those who compared this recession to the Great Depression because things aren't close to that bad. I believe though that if the government does nothing, and lets the economy repair itself, things could get much, much worse, ultimately dwarfing the Great Depression. Thank goodness that isn't the case, as the Fed is rescuing all the major banks that could cause us to spiral out of control.

Some Republicans believe that the best policy is Pure-Capitalism. I believe that system is just about as bad as Pure-Communism. What we need is a Capitalistic market, with the regulations that are necessary for optimal economic growth, and government intervention when necessary. I hope that doesn't sound too much like Socialism, as I'm certainly not Socialist. No one wants to relive the Great Depression, that's why I'd rather have the government spend billions, knowing that much of it will be wasted. At the very least, this optimism is getting people to spend, in turn causing us to climb out of this awful economy.

I couldn't find that old MSN article, but here's an interesting one: http://www.financialexpress.com/news/letting-lehman-go-was-big-mistake-lagarde/370911/

China isn't stupid

Last time we were in class we discussed the problem of a lot of foreign ownership of U.S. treasury bonds and the risks that we are facing by deflating the value of the dollar on purpose. China currently owns 70% of the $2 trillion of foreign held reserves. China recently asked for a guarantee of safety of their assets, due to rising concerns of U.S. spending. Dallas Federal Reserve President Richard Fisher recently pointed out that China wouldn’t dare do anything to harm U.S. interests, like dumping the treasuries they own, because U.S. and Chinese interests are directly connected. We rely on Chinese investment in our treasuries for revenue, and China’s economy relies on U.S. consumer spending. And despite the continuing economic turmoil, the U.S. dollar is still the preferred currency of the business world. China would be giving itself a huge kick to the crotch if it tried to get rid of the treasuries it’s currently holding. Whether they wish they had bought them or not, they’re stuck with them for the foreseeable future. You can read more about what Mr. Fisher said about the situation here:http://news.yahoo.com/s/nm/20090414/bs_nm/us_fed_fisher;_ylt=AqlZtLX_x97QmqMFhr.BFXXv5rEF

The Future of American Roadway Maintenance Unclear

I came across on article entitled “Oil Industry Braces for Drop in U.S. Thirst for Gasoline” in the April 13 copy of the Wall Street Journal. The article explains that since the introduction of the mass-produced Model T nearly a century ago, U.S. demand for oil has been on the rise until now. The article claims that many of the oil industry’s most prominent members including Exxon Mobil Corp., believe that U.S. gasoline consumption has peaked and will never again attain such levels. The U.S. Energy Information Administration reports that American drivers consumed 371.2 million gallons of petroleum-based gasoline a day in 2007 and that this figure is expected to decline in 2009 to 345.7 million gallons daily. One might say the current recession is to blame for decreased gasoline consumption which is essentially true but Americans have begun to alter their lifestyles as well. Americans have recently made a concentrated effort to decrease commuting distances and driving overall as gasoline prices skyrocketed as recent as last summer. Those deeply involved in the industry believe that even after the economy strengthens, gasoline consumption will never again reach the levels it did in 2007 due to the emergence of biofuels and more energy efficient vehicles such the hybrid. One might additionally argue that certain policies promoted by the Obama administration are fueling the energy revolution and thus will have a decreasing impact on overall gasoline consumption. While this trend is generally regarded positively as a step in the right direction, concern has risen regarding the tax revenue that gasoline consumption supplies. The article notes that federal gasoline-tax revenue fell 3% last year and that the trend must inevitably continue as consumption declines. This reveals a major concern that needs to be addressed. What is the future of America’s highways and roads that are currently funded primarily by gasoline-tax revenue? How will the United States maintain and repair its massive highway system as funds decrease? One suggestion is to tax drivers per mile driven rather than by the gallon to incorporate the use of biofuels and more energy efficient vehicles but how would such a policy be enacted? Would one have to report miles driven annually with your income taxes? In my mind such a policy seems implausible, but I can’t think of any alternatives. Are there any better suggestions? How can America continue to contribute to the Highway Trust Fund as gasoline-tax revenues decline?

Obama Sees...

I read an article from the New York Times called "Obama Sees More Pain Now but Hope Later on Economy." http://www.nytimes.com/2009/04/15/business/economy/15obama.html?_r=1&hp The article discusses a speach given by Obama on the economy, in his speech, Obama states that the near $800 billion stimulus plan was "starting to generate signs of economic progress." I agree that we are starting to see signs of improvement in many of the economic indicators (ie. the stock market). Assuming the economy has turned the corner (which I am in no way stating, only hoping), perhaps it is/was due to the injection of Obama's stimulus plan. But I for one feel it is too early to tell whether or not the turn-around is a direct result of Obama's stimulus. People have been talking about a turn-around since late last year. In my opinion, we were due for a turn-around. The inefficient companies failed (more would have failed had the government not bailed out the entire world) and the stronger companies are left to carry on. I think the reason for the recent upswing in the stock market, and hopefully the economy, is because businesses have reduced waste. They have slashed costs in order to save, and are now position to succeed for the future. I tend to agree with Obama that the worst is over and that rough times are still ahead of us. I'm just not quite ready to bow down and worship Obama because he saved us from economic collapse.

Finally...signs of life

In an article from http://www.economist.com/displayStory.cfm?story_id=13411349 the author states how this recession is likely bottoming, but a full recovery will likely take some time. Over the last month, we've seen more and more positive economic reports, in contrast to three months ago where positive news was nowhere in sight. National home prices are now considered 10% undervalued relative to income, and this is leading buyers back into the market. Auto sales recently saw an 8% jump from February to March, creating a glimmer of hope in a dismal market. Larry Summers recently said that the current annualised vehicle sales of 9 million are well below the 14 million needed for replacement and rising population. Larry continued to say that the current level of the stock market might be the 'sale of the century.' Investors certainly have known how cheap stocks and houses have become, but with the good news we're seeing people are starting to buy once again. Despite all this good news, certain parts of the economy are likely to take longer to recover. Consumer spending in general will continue to be depressed by the 18% drop in household net worth last year. More job losses are inevitable as unemployment is a lagging indicator. These job losses are likely to lead to more defaults on loans, thus causing more problems for an already battered financial system. The Federal Reserve should counter this by continuing to buy the bad assets, as an economic recovery isn't likely without the financial industry on board. It will take macro economists months to call March 2009 the trough, but I think the evidence exists to already label it as such. The lagging indicators will certainly take a while to get better, but the leading indicators (such as the stock market) are pointing to a recovery.

Shifty Savings

In the April 6th edition of the Wall Street Journal, Kelly Evans discusses the United States’ savings rate in, “Frugality Forged in Today’s Recession Has Potential to Outlast It.” He quotes Richard Berner from Morgan Stanley by saying that, “consumer spending will grow at an inflation-adjusted 2% to 2.5% annual rate over the next several years, compared with 3.5% in the decade ended in 2007.” In a previous blog, Professor Tufte explained that people save because they:
Lack insurance
Lack social security
Lack a pension
Lack material possessions
Are more worried about the future than the present.
Based on these incentives, it is no surprise that Americans are saving more. While Social Security hasn’t really changed, the other four incentives have had an effect on the personal savings rate. Many Americans have lost their jobs and with that they have lost benefits such as insurance. Due to the financial crisis, many citizens have lost their entire pensions or have at least lost a good portion of it. During the recession, discretionary incomes are lower; therefore, material possessions are not necessarily in abundance. With countless doom and gloom reports or at least reports that do not look favorably on the near future, expectations of the future are grim. The personal savings rate should be expected to increase during these conditions. Is it not true, however, that the savings was always there it just was not counted? Most Americans previously stored their savings by purchasing homes, which was counted as investment. Due to the financial crisis, investments in homes have decreased. This has resulted in moving our way of saving to a type that is now counted.