Shutdown is Latest Challenge for Small Firms

According to this article in the Wall Street Journal, the government shutdown is just one of many troublesome obstacles small firms have been faced with. With museum doors and park gates back open, and federal money for preschool programs flowing once again, one must remember to consider the long run repercussions of the two week federal hiatus, especially on the struggling small businesses of America. Budget cuts and market uncertainties are leading dropping revenues and ultimately layoffs, and in some cases, employees are voluntarily leaving in fear of the questionable future which makes it difficult to retain a talented and skilled workforce.

The SBA reported that there has been an 8% decline in contracts awarded to small firms from the federal government because they are consistently looking for a "lower price" rather than the best value when purchasing. Another trending disadvantage to small companies is increased competition among the number of firms allowed to bid on contracts and an increase in paperwork to prove compliance with the growing list of federal requirements. Ultimately the time and labor that is put in to preparing the proposals increased by more than 150 hours or the equivalent of 1-2 additional employees. This demonstrates that in the short and long run, average and total costs are increasing without the guarantee that the contracts will be fulfilled. This is encouraging layoffs of skilled employees, diminishing the quality of work, and requiring small firms to attempt to remain competitive by seeking work in the private sector and abroad.

Cheaper Sugar Sends Candy Makers Abroad

According to the Wall Street Journal, the U.S dropped sugar prices by 50% in the last two years but it is not enough for some domestic companies to continue productions of its sugary sweets at home. The beloved Jelly Belly Candy co. is a case in point. Jelly Bell only sells 20% of its sugary sweetness abroad but the company is expanding its foreign production in Thailand, the fourth largest sugar producer, in order to gain access to cheaper sugar. In addition to expanding foreign productions, the company had to increase the price of its candy over the last 10 years in order to account for the higher sugar prices in the U.S.

The U.S currently has a price floor on sugar and limits imports. The article states that “sugar users say the protections inflate wholesale prices, hurt profit margins and sap the competitiveness of U.S candy makers in the global market.” On the global scale, average sugar prices are nearly half the average price of U.S sugar. Defenders of the price policy say, “without the current U.S policy, 90% of the 142,000 sugar-growing and processing jobs in the U.S would be in danger…” With more companies choosing to expand their productions abroad, what will be the implications for the domestic sugar industry? And how will the U.S react?

Trick or Treat: The End of Chocolate

If you have a sweet tooth for chocolate, you may want to start stockpiling your favorite goodies. According to a recent NBC news article, raw material costs for a 3.5 ounce chocolate bar have risen 28% this year alone. This is partly due to adverse weather and agricultural regulations in West African countries where cocoa beans are produced, but also because of increases in the price for other ingredients such as milk powder. The theory of supply suggests the changes in these non-price determinants will cause an inward (left) shift in the supply curve, raising the price and possibly creating a shortage of the beloved confection.

Adding more concern to the pending worldwide chocolate crisis is the increase in demand from emerging markets. Forecasts predict a 21% increase in demand for chocolate in India by 2018, and an astonishing 45% increase in Russia by 2016. As the article states, "People are prepared to pay 70 pounds ($113) per kilogram (2.2 pounds) for chocolate." In order for consumers to continue indulging in their favorite sweet, producers may have to increase fillers and use imitation flavoring to contain costs. For those of us who will eat nothing but the best, we may find real chocolate becomes a luxury item, and a scarce one at that.  

The Economics of Solar Installations

When businesses provide consumers with a good or service they can unintentional enrich or hurt third parties. These unintentional economic boons and hardships are termed externalities. The energy market is no exception to this creating mostly negative externalities through pollution. More specifically this market creates a large portion of the world's CO2 output.

Most economists believe that the cost/benefit of these externalities should be placed upon those who take part in the transaction. The argument starts in how these externalities are placed upon the market. For example some suggest that through property rights pollution  can be controlled while others suggest direct taxation and others regulation. Each way has distinct strengths and weaknesses. Whether or not it is right the energy market's externalities have been mostly controlled through taxation and regulation for the past few decades.

The problem with externalities and placing them on a market is that it is sometimes difficult to ascertain an exact monetary amount. This is the case with the energy market. Scientists disagree on the effects of greenhouse gasses alone without even discussing the cost. With that in mind let's consider solar power. 

Solar power has long been lauded for its pollution free energy production; however, solar supplies less than half a percent of all US demand. This is due to solar's variability and cost. It is not economically viable when considering the buyer and seller alone. This could change if the externalities were completely placed on the energy market. In a recent scholarly article produced at Berkeley they discuss the current problems of solar as well as delve into the economics of solar energy. Here is the link: The Economics of Solar Electricity.

Whether or not these externalities are placed on the market may ultimately be a moot point. New technologies are being invented every year to tackle the price delta of solar vs. conventional. A recent power plant in Arizona uses the idea of concentrated photovoltaics (CPV) and removes the substrate from the equation. This plant uses parabolic mirrors to concentrate sunshine on oil that then heats either water or salt. The water powers a steam turbine while the salt holds the potential heat energy in reserve. The potential energy is used whenever output does not meet or exceed demand. This type of power plant solved the costly dilemma of having to have a reserve gas or coal plant for use during the night or when a cloud blocks out the sun. Here is NPR's article on that plant: In Ariz., A Solar Plant That Powers 70,000 Homes Day Or Night.

Will the Fed's Continue to Spend?

As successor of Ben Bernanke, chairman of the Federal Reserve, Janet Yellen is predicted to continue the Federal Reserve’s spending policies to keep the economy stable.  The Economist this month rendered a clear picture for the Federal Reserve’s plan going forward with respect to QE.  With government shutdown on our minds, this article has come in a timely manner.

The concept of QE is simple, bottom line- it pumps money into the US economy to help keep interest and unemployment rates low.  On the contrary, this adds to the deficit that the government has been griping about over the past couple of weeks.  Looking forward- Does the Federal Reserve necessarily need to keep to its current spending policy to lead the economy along or should they let the invisible hand guide the US markets course? 

Today's space race...

A recent Space.com article discusses American company SpaceX and their competitive strategic outlook.  The article isn't focused on the details or status of sending astronauts to the Moon or Mars, but on launching and deploying payloads, such as satellites, into low earth orbit.  This is the space equivalent of today's long haul truckers.  In the early 1980's, the US government was responsible for launching most commercial satellites into orbit, but has given up that position and launched only 2 of 38 during 2011 and 2012, according to the article.  

SpaceX has entered the market competing head to head with China, Russia, and Europe, hoping to be able offer a better product value, thus increasing consumer surplus above what is currently received from the competitors.  As demand continues to increase for space payloads, they are banking on the fact that they will be more efficient, provide better service, or in some way be able to gain a significant portion of the precious 20 - 25 launches per year.  As the price to launch cargo is driven downward, no doubt the demand for additional launches will increase.  If space budgets significantly change or new technology changes the need for space equipment, among other factors, anticipate the demand curve to shift.

Netflix, Coming Soon to the Cable TV Box?

According to BusinessWeek.com, Cable companies are toying with the idea of having Netflix, one of their major competitors, make its video streaming service available through their cable boxes. The online streaming king already made similar deals with a UK cable provider, Virgin, to offer its video streaming in their TiVo boxes.

The article states that “Netflix is arguably the biggest reason why people feel inspired to cancel their cable subscriptions” So why should cable companies welcome Netflix? The integration of Netflix on cable boxes seems like a threat, but it is also an opportunity for the cable companies. According to the article, If cable companies incorporate Netflix on their cable boxes, the cable companies can charge the user a mark-up on the Netfix service or the cable companies can charge a usage fee for how much the user is online (i.e the Netflix streaming). Either way it would be win-win situation for Netflix and the cable companies.

Two Brands Likely to Disappear in 2014

In the endless ebb and flow of markets and new businesses there are constantly casualties along the way.  It’s estimated that approximately 50% of businesses fail in the first five years.  Many, if not all of those businesses ever gain any real national brand recognition and thus, very few even know when the company has closed its doors.   Each year however, there are a handful of well-known established companies who are either forced out of the market or are required to make dramatic changes in their image.  There are a plethora of reasons why this happens but, almost without exception, the root cause is embedded in simple economic principles.  This blog post (based on a 24/7 Wall St. article) will expose two companies likely to close their doors in the coming years and will discuss the likely economic principles behind why. 

First, let’s briefly explore the camera industry and in particular, Olympus.  Years ago, when the concept of putting a camera on your cell phone first emerged, this idea was a very low threat to the digital camera industry.  Not only was the quality of the image horrible, but there was virtually no easy way to extract the image from the phone.  As a result, demand for digital cameras soared, providing ample room in the industry for a number of competitors.  The passage of time however, has brought with it more sophisticated technology which allows users to both capture and share images anytime, anywhere.  As a result, worldwide unit sales of digital cameras are down 18% in 2012. Ironically, Olympus seems to not have seen this coming (actual sales were less than two-thirds of what they forecasted).  While the phone camera’s image might not quite match the quality of a comparable digital camera, it has gotten good enough to act as an adequate substitute thus dramatically decreasing demand for digital cameras.  The digital camera market is currently reacting to this shift in demand but we currently still see companies trying to decrease their supply and find viable ways to stay in business.  This adjustment will ultimately result in companies (or at least product lines) being forced out of the market. In order to survive, Olympus is going to need to make drastic changes. 

Next, there is a high likelihood that the WNBA (Women’s National Basketball Association) might take a major hit in the next twelve to eighteen months.  “The Chicago Sun Times reported back in 2011 that ‘The majority of WNBA teams are believed to have lost money each year, with the NBA subsidizing some of the losses.’”  These losses are likely attributable to the very low attendance at each game.  The NBA average attendance is around 18,000 fans while average attendance for WNBA is less than half that.  Economically speaking, this means that some percentage of every ticket purchased for an NBA team is helping pay for and sustain the WNBA.  Because the demand clearly isn’t there, from an economic perspective, the company should go away.  It’s simply not a sustainable venture.  The article suggests that the primary reason the WNBA has lasted as long as it has is because the commissioner of the NBA (David Stern) has been a “champion and protector” of it.  He however, is set to retire in early 2014.  The jury’s out on whether the WNBA will survive the change in commissioner. 

These two examples illustrate different ways in which demand (or the lack thereof) can have a dramatic impact on businesses and their longevity in the marketplace.  Companies unwilling to adapt to the marketplace, or find a niche within the market are likely to disappear along with the vast number of startups who never make it to their five year anniversary.  

Government Shutdown - Economic Impact on Southern Utah

Economic concepts tend to make more sense to me when demonstrated through real life examples.  As a resident of Southern Utah I have been intrigued by the economic impact of the government shutdown on the local and state economy.  Holding true to the concept of locality I would like to reference and base some of my thoughts from a Ksl.com article entitled, "Visitors Return to Zion National Park, Neighboring Businesses."  In summary, this article discusses the welcome opening of the park and that event's impact on the local economy.

With a basic understanding of supply and demand, it is obvious to see the economic impact that has taken place due to the shutdown.  As the park shutdown there was no available supply of park activities for tourists.  While the park remained closed the demand was still present.  The demand for access to park activities contributed to the State of Utah paying to open the parks.  As park access was eliminated the volume of tourists visiting the surrounding communities decreased significantly.  Fewer tourists caused a decrease in demand for local amenities such as food, lodging and other related activities.  As the demand for these services decreased the revenue for local companies plummeted.  

The State of Utah took notice of the eliminated supply of national park and monument amenities and associated loss of revenue.  The state did two important things.  To address the demand for tourist activities state parks and monuments were advertised as substitutes.  Providing substitutes supplied some activities to meet the demand.  These substitutes kept a portion of potentially foregone revenue within the state. Eventually, the State of Utah took note of decreasing revenue for the tourist industry and funded the opening of national parks and monuments and restored the associated supply.  

The State of Utah has only funded theses national parks and monuments for 10 days at a cost of $167,000 per day.  If the parks close again similar changes in demand and supply will likely occur.  I believe there to be a positive correlation between the length of the government shutdown and level or uncertainty and risk.  I believe that if the 10 days of funding expire and the government is still shut down, the uncertainty and risk will cause an overall decrease in demand and tourists visiting the area.  

It has been interesting for me to observe the workings of the economy on such a local and personal scale through the closing of national parks and monuments. I hope the best for our local economy.  

http://www.ksl.com/index.php?sid=27224616&nid=148&title=visitors-return-to-zion-national-park-neighboring-businesses

Some Impacts of the Government Shutdown

The ongoing government shutdown has been a great source of debate within the country and a great dissatisfaction for the nation's elected representatives, Congress.  This shutdown has had negative impacts on various stakeholders, whether directly or indirectly.  For example, furloughed governmental employees and military personnel have been obviously been affected, yet certain businesses that rely on governmental land or operations have also been impacted.  An article entitled “Shutdown Costs at $1.6 Billion With $160 Million Each Day” discusses, among other things, an individual business’s loss in revenues due to the Grand Canyon being shut down.  This business provides guided raft tours down the Colorado River (through the Grand Canyon) and has lost an estimated $80,000 in revenues from just one week.  Unfortunately, this loss of revenue will not be reimbursed (unlike some of the government furloughs) once the shutdown is over.  If the shutdown continues, then the firm will have a more difficult time covering its fixed costs and could eventually leave the industry.  There are surely many other examples of private, small firms that have been negative externalities of the government shutdown.

The shutdown has also impacted consumer expectations for the future.  Another article entitled “Economic Confidence Plummets as Gov't Shutdown Begins” discusses the plummeting economic confidence, which is based on two important components: first, one’s individual assessment of the current economy, and second, which direction the individual feels the economy is headed.  The plummet in consumer confidence implies that consumers have a bleak assessment for the current and/or future of the economy. This impacts current consumer purchasing trends.  In this case, consumers are likely to save more of their discretionary income and spend less.  The author of the article suggests that the direction of economic confidence will reverse and improve once the government shutdown is resolved.  However, If the shutdown is not resolved, then consumer purchases will continue to drop, which will continue to decrease demand of normal goods and hurt sellers of products and services, especially luxury goods.

Shutdown means workers furloughed, death benefits halted

The U.S. government shutdown has negatively impacted many U.S. citizens, which can result in negatively impacting the U.S. economy. The following article http://www.deseretnews.com/article/765639090/Shutdown-means-workers-furloughed-death-benefits-halted.html states that about 800,000 federal employees were furloughed on Tuesday. This means that these employees will not get paid and cannot work until the U.S. government starts fully operating again. If the government continues to be shut down, demand in luxury goods and non-essential goods will eventually shift to the left because the U.S. employees will no longer have the money to purchase those goods. Instead, they will have to focus on paying essential items such as mortgages, bills, etc. The article also states that the lost wages will start to have a ripple effect throughout the U.S. economy, resulting in at least $300 million in lost output each day. This loss can eventually affect the global economy. If this occurs global demand in non-essential goods will shift to the left because consumers will not have the money to purchase those goods. However, most likely demand in inferior goods like canned soup, peanut butter, etc. will shift to the right because the incomes of the federal employees has decreased.

Home-price growth fastest in more than seven years

According to the article from the Wall Street Journal http://www.marketwatch.com/story/home-price-growth-fastest-in-more-than-seven-years-2013-10-01, home prices across the U.S. have accelerated to the fastest pace since 2006. Compared to last year, home prices have increased by 12.4%. The continued increase in home prices will eventually lead to a decrease in the quantity demand of homes. Also, the article states that the rising mortgage rates are starting to slow the housing price increase. A reason for the increasing mortgage rates is due to speculation stated in May about the Federal Reserve scaling back on its asset-purchase program. As a result, a 30-year fixed-rate mortgage has increased by one percentage point. Increasing mortgage rates will lead to a decrease in quantity demand for homes or shift the quantity demand upward on the demand curve. My wife and I are in the process of purchasing a home. We currently live in Lehi and hoped to find our new home in Lehi during the house search. However, the prices of homes in Lehi increased rapidly and we were priced out of the housing market there. Due to the rapid increase in homes, the quantity demand for homes in Lehi has decreased (quantity demand shifted upward on the demand curve) for people with a certain income and below. However, if mortgage rates decrease, the quantity demand can shift down and allow those individuals priced out of the market previously to purchase homes in Lehi.

Switching to a hybrid

What will it take for me to switch to a hybrid or electric car ask Richard Read in the article “If Gas Goes Up $1, What Does it Mean for Auto Sales?”  Research suggest no amount of price hike will increase the rate at which consumers switch to hybrids and electric cars. “If encouraging them to do so is a goal of the auto industry, the government, or some other authority, Experian's data suggests that it's going to take something other than gas taxes to get the ball rolling”

Right now with the average gas price in Utah at $3.523 per gallon, I have no intention of making the switch to a more fuel efficient vehicle. Gasoline is an inelastic good, meaning if the price per gallon reaches $4.50, I would still have to drive my car to work, school, supermarket, etc... The price of gasoline would have to be north of $5.00 a gallon for me to drastically adjust my driving habits or consider purchasing a hybrid vehicle; unfortunately experts believe it is only a matter of time before federal tax on gasoline increases which hasn't happened in 20 years.

With that being said, rising gas prices do effect my spending habits.  As “Gas Prices: How Real Is the Damage?”  explains that each $.01 increase in a gallon of gas redirects $1 billion of consumer spending away from other goods over the course of the year.  For example here in St. George we live a short 90 minute drive from Las Vegas. Many of us drive down there to go shopping at the many retail outlets and malls because the selection and prices are better than here in southern Utah. The higher gasoline prices have made us spend less on purchases in order to balance our budget.

The NFL and International Expansion

Since 2005, the NFL has hosted at least one regular season game outside of the United States in a series known as the “NFL International Series”. To date, NFL games have been played in Mexico City (x1), London (x7), and Toronto (x5). The most recent game was played this last Sunday at Wembley Stadium in London, England. London will host one more regular season game this year on October 27, making it the eighth time the NFL has played in England. It has recently been confirmed that the Jacksonville Jaguars will play as the home team at Wembley once a year until 2016.

The NFL has been pushing hard for more international awareness in recent years. From the span of mid-September through mid-October, all NFL fields display the “NFL Futbol Americano” logo in celebration of Hispanic Heritage Month. Although efforts like this may show an increase in international demand for NFL games, they are not necessarily bringing in foreign talent, however. In fact, among professional sports in the United States, the NFL ranks last when it comes to the number of foreign-born athletes. Only 2.5% of active roster players in the NFL were born outside of the U.S. That percentage is extremely low when compared to the MLB and the NBA, which are 34.5% and 22.8%, respectively.

There are some who believe that a foreign NFL expansion team is on the horizon. According to an article in The Independent, London would be a serious contender for such an expansion. In fact Roger Maslin, the Managing Director of Wembley Stadium, has said, “If they were bringing it anywhere in the world, we want it here”. London would actually be one of the few places internationally that is immediately NFL-ready. The fan base is there, the stadium is there (as Wembley Stadium has a capacity of 90,000, which is even larger than the 70,700 average capacity among NFL stadiums), and the financial viability is there. On paper, it appears as though London is in prime position to one day receive its own NFL expansion team.

If that were to happen, not only will the international fan base skyrocket but potential worldwide revenue could do the same. There are some who disagree, however. According to sports business expert Simon Chadwick, “The NFL is one of those sports that is deeply socio-culturally embedded -- it is quintessentially American, which means it only has limited appeal outside its core markets” Whether the NFL would succeed with a permanent international presence is to be speculated. As for me, the more worldwide appreciation for the game of American football the better.

One "Struggling" Student's Notion on the Economy

As a “struggling” student of economics, I am lost as to how anything I read applies at all to what I am learning. I know it must apply somehow, but I just don’t see the connection. However, that being said, I set out to read article after article about economics, goods and services, government spending etc.  After encountering a vast number of varying opinions on each topic, I discovered one topic that I found interest in and I “think” I can apply to managerial economics.  

“Government spending and stimulating the economy? Really?” you say. “Haven’t we beaten this topic to death?”  Unfortunately, this student has just begun opening their eyes to the real world and while this is old hat to many of you, it is a very curious subject for me.

The article I read in The Examiner, touched briefly on the United States’ recession and how the government’s response to the recession is related to Keynesian Economics. One thing I determined after reading this article and many more is that I am NOT a Keynesian economist.

Keynesian economists encourage government spending. I don’t understand how encouraging people and the government to spend money that they don’t have will in any way improve the economy.  It seems to me like this is exactly how we got into this situation in the first place. We bought houses we couldn’t afford, we maxed out credit cards and couldn’t pay them, and we didn’t save a dime.

The article discusses what is wrong with Keynesian economics and the government’s attempt to fix the economy. It doesn’t mention, more importantly, what an alternate solution would be. What I do know is that a recession causes demand to fall or is it that falling demand causes a recession? When demand falls, companies end up having to lay off workers, cut costs, and hold on to inventory which further encourages the recession, and as we have learned, lowers prices of products and services. Next, we have high unemployment, which causes workers to be willing to work for a lower wage. Now we start to see the turn around.  Companies will start to produce again because costs are low.  Workers are employed and prices are low so they start spending again. As the economy starts to recover, if we can educate and encourage people to save instead of spend, we can further improve the economy. Every dollar we save, whether we save it in a bank or buy stocks, is an investment and encourages the companies we invest in to spend.  Bottom line: We will see a drastic difference in the health of our economy by allowing laws of supply and demand to work without the added help of fake government spending.

How Outsourcing Benefits the American Economy

Outsourcing is when a company procures labor or parts to an outside organization. So, does outsourcing outside of America help or hurt our economy? For the most part outsourcing is done in order to lower costs. For example, advertising stickers produced in America for the solar company GoalZero costs ten cents each, when they started to outsource the stickers, it lowered costs to one cent each. One down side is that the quality of the service and/or items can suffer since there may be a communication barrier. Another downside is that the time to ship the items can take much longer.

Although outsourcing is perceived to hurt our economy due to the amount of jobs lost to overseas organizations, there are several articles written by Forbes, Business Source Premier, and CNN Money stating that outsourcing does not hurt the job situation in America. One reason for this is that companies have been saving money through outsourcing, which has caused organizations to grow through innovation by focusing more on core competencies such as product and design, and in turn allows them to hire more. Not only do they hire more, but they are hiring more at a management level due to growth and responsibility. 

Therefore, with the information provided by the above sources, outsourcing does help the economy by allowing organizations to focus time, money, and efforts on more important aspects of their business, which in turn raises the quality of the economy as a whole.

The Electric Car Market

This article found in the September issue of The Economist titled "Plugging Away", discusses the European market for electric cars.  The article specifically mentions a French firm by the name of Groupe Bollore' and their approach to this rising market.  The article discusses how Bollore' has focused it's efforts not on the electric car market itself, but on the management and storage of the energy that will make such cars run.  Bollore' claims to have manufactured a battery that is more powerful and more resistant to external temperatures than the lithium-ion batteries currently being used by electric car manufacturers.  Whether or not Bollore' indeed makes a superior battery is not the imposing question however, the question is where do we think the market for electric cars is heading?

In looking at what the electric car market may or may not do in the future there are many economic factors to consider.  The first and most prominent factor is whether governments will even allow a major transition to electric vehicles.  Just as important is evaluating what the implications would be to the price of oil for existing automobiles that run on gas?  In looking at a supply and demand curve for oil, if you introduce a supplement in the form of electric cars, what can we expect to happen to the curve?  If an affordable option is streamlined and introduced into the market you can expect the demand for oil to shift to the left.  This shift would inherently cause a drop in price for oil.  If on the other hand the electric cars continue to be higher priced than gas powered automobiles we can expect little to no change to the demand for oil.

In examining the demand for oil and the effects of what the pricing of electric cars will do to the demand we can see the risk that Bollore' is taking.  Bollore' is currently spending billions of dollars to push forward the manufacturing and marketing of their new batteries.  If the market for electric cars does not take off as Bollore' is expecting and electric cars do not become more affordable to the public, Bollore' will crumble.  On the other hand, if Bollore' can indeed provide a cost affordable battery for electric cars that is better than the current option and the electric car market does take off and gain significant market share in the automobile market then the billions of dollars spent by Bollore' will have paid off in a very big way.

Taking a Bite Out of Apple: Smartphones in China

This article, "Taking a Bite Out of Apple" , discusses Apple's new strategy to reach the Chinese market and other developing nations, and compares their efforts to Apple's major competitor in this market, Xiaomi. Typically, smartphone devices in the United States, especially during the introduction phase of the product life cycle, have relatively inelastic demand because of consumer perceptions on brands such as Apple and Samsung. Even though these products have hefty price tags, brand loyalty makes these items a necessity rather than a luxury for many consumers who are willing to pay these high prices.

This is not the case, however, in some other nations, and this article discusses China as an example. Just one week before the release of the new iPhone 5c and iPhone 5s, a Chinese firm, Xiaomi released a new device called the Mi-3. Xiaomi was recently founded in 2010 and has already earned billions in revenues and has often been compared to Amazon. The Mi-3 can be purchased at $330 (U.S dollar) compared to the $733 iPhone 5c price tag, and is available directly to consumers online rather than sold in retailers. Xiaomi uses a different tactic from Apple in that they offer the device at a relatively low price, and then sell services to users in order to make a profit as the customers use the phone (just as Amazon sells e-books to Kindle users; i.e. product complements). Also, Xiaomi is receptive to consumer feedback and guided by users, whereas, Apple has a very standard and rigid operating system with limited freedom. Because Apple does not hold the same level of loyalty in China as in other regions, these products can be analyzed as substitutes in the market, and as the first three weeks of sales has shown, Xiaomi is controlling more of the market share than Apple's iPhone devices in China. I personally believe it is in response to the price to consumer value comparison among substitutes available.

Additionally, this article was intriguing because as Apple is penetrating the Chinese market, Xiaomi is attempting to, for the first time, develop new products for the international market. It will be interesting to see the success (or failure) of these competitive efforts.

Construction boom of St. George, Utah

I read an article referencing the the construction boom of St. George, Utah and the later recession, and how home builders are responding to the demand of the current market. The five to seven year period prior to the recession of 2008 was a huge building boom in St. George.  We saw home prices double over the course of these years.  When the recession hit, the demand for new housing literally dropped to a fraction of what it was during the boom.

Looking back from now (2013) we are starting to see home buying on the rise, though not as fast as it was during the boom, as well as interest rates beginning to go up.  Some developments that were left with only streets paved and one or two houses built at the end of 2008, are now seeing plans for ten to twelve houses being built over the next year.  While we do not see the demand of 2005, we can most definitely see elasticity taking effect with more modest prices on new homes as well as builders constructing far less new homes.

Welcome Fall 2013 Students

Both of my ECON 6200 sections will be posting and commenting on this blog this semester.

The remainder of the semester will be organized into 6 two-week blocks. Block 1 starts now, and ends on October 2.

Each of you will be randomly assigned to 1) post for a grade in 2 blocks, 2) comment for a grade in 2 blocks, and 3) have no required posting or commenting in the other 2 blocks. Those assignments will be made through Canvas or e-mail. I'll start making the assignments for Block 1 later today or Friday.

You should refer to your syllabus for guidelines on how blogging will be evaluated.

In this National Journal article, Congress is challenged on its ability to make informed decisions. We have recently just covered a section on information asymmetry that exists in the market place. Many examples provide solution in the form of government intervention to prevent market failures. However after reading this question, I am uncertain that the federal government (or any level of government really) can provide timely and effective intervention when their source of information comes from research that may be biased. According to the article, Congress significantly "gutted" its research staff in the 90's and are now swimming in the sea of information with a sail. The result may be the emergence of more internet-is-not-a-truck comments from the chairman of senate committee on commerce, science, and transportation. A more extensive overview of the report cited in the article can be found here.

We have learned asymmetry of information in the market usually leads to higher costs, I wonder what will be the cost when the people that are suppose to protect consumers from such failure are subject to the same blindfold. In the face of overwhelming information and little knowledge to navigate through them, are consumers at the mercy of special interest groups? 

Affordable Care Act (Obamacare)

I have been wondering about the facts of the Affordable Care Act (ACA) for some time now. As a result, I began to study the actual writing of the Act and different articles that are either in opposition or in support of Obamacare. I had heard many rumors. For example, I had heard the rumor that doctors would receive a salary cap as a result of the ACA. However, I found that this wasn't true after reading every word contained within the ACA.

Despite that I was able to debunk that rumor, some of my other concerns were confirmed. The biggest theme to this Act that has jumped out to me is that fact that it appears to be geared to help families within poverty limits and the middle class to be able to afford health insurance. For example, those who are between 100% and 400% of the poverty line could receive tax credits so that health insurance is more affordable. Also, more people will have increased access to Medicaid beginning in 2014. Just with these two examples, the demand for healthcare will greatly expand. Therefore, there will be a greater need for doctors, physicians, specialists, nurses, etc., to be employed in the healthcare industry. If there is no increase in the supply for employees of the healthcare industry, prices will rise and the ACA will actually hurt insurance companies because they will be the ones who are taking the biggest hit of the increased cost.

What I find interesting is that the writing of the ACA states in Title I that the market for insurance will be more competitive. I find it difficult to believe that the market for insurance will be more competitive while being less attractive as a result of increased costs due to the provisions of the ACA.

Let's Talk About Food Stamps

As we can see from this Huffington post article, food stamp usage is at a record high.  The article talks about how food costs are increasing, and that food banks are low on food.  This has lead more people to go to the government for help.

The comments at the bottom of the article were more interesting than the article in my opinion.  I have come to the conclusion that large companies, like Wal-Mart, do not want the government to slow down or stop their subsidies.  I have heard that Wal-Mart uses programs like food stamps to help subsidize their wages to their employees.  It is difficult to raise a family when making $8 an hour; however it is much easier to raise a family making $8 an hour when you are collecting food stamps and government healthcare.  

The question I would like to ask is, "Are these government subsidies helping or hurting?"  Some might think these programs help the families that receive them because Wal-Mart just doesn't pay enough.  I think that Wal-Mart doesn't pay enough because they don't have too.  The solution in my mind is to end the subsidies.  If we ended these government supported entitlement programs, Wal-Mart would be more likely to increase their wages because their employees would demand it.  As long as their employees are making do, they will not put as much pressure on their employers.  

It seems cold to want to take away food stamps.  Maybe the solution is not to completely end the program, but to make it a very temporary solution.  As long as we subsidize employees’ wages, they will be complacent.  If they are complacent, they will stay in a Wal-Mart job for 10+ years making $10 an hour and complain the whole time. 

Why are Shopping Carts Getting Bigger?

This article takes a look at several reasons for the increasing size of grocery carts.  There are a few theories that proved interesting.  The first theory discussed comes from the viewpoint of behavioral economics.  The theory is that by increasing the size of the grocery carts, stores are able to establish a consumption norm consistent with the size of the cart.  In other words, grocery stores are attempting to influence consumer consumption habits.  Another explanation is that as more women enter the labor market, fewer trips are being made to the grocery store.  This has the effect of increasing the number of items purchased in a single trip.  A third explanation is that they were always too small.

I tend to believe that the carts are larger to accommodate bulk purchase items.  As the article points out, superstores have a few advantages when it comes to bulk items.  They have lower costs because of favorable economies of scale.  They also have monopsony power when brokering deals with suppliers.  Stores like Costco and Sam’s Club have discovered that they are able to target price-sensitive customers by offering items in bulk.  Wal-Mart and other superstores have also found that bulk items are an effective means of implementing price discrimination.  By offering bulk items, stores are able to offer a lower price per unit in exchange for greater sales volume.  This allows them to charge two different prices for the same item.  Ultimately, by increasing cart sizes to accommodate bulk items, stores are more efficiently meeting their customers' needs.

Another Perspective on Unemployment

With the 2010 emergency unemployment benefit extension passed by Congress set to expire on December 29, 2012, plenty of folks are anxiously evaluating the US job market. The New York Times published an intriguing economist argument by Casey B. Mulligan concerning labor market contractions and their impact on the economy.

Mulligan begins by claiming that politicians, pundits and lay people alike tend to adopt a Keynesian view when trying to interpret the high ratio of unemployed to job openings, concluding that the unemployed are competing aggressively for a limited supply of jobs. Additionally, Mulligan acknowledges that any reduction in the labor demand from new employer taxes or healthcare costs would further motivate organizations to do with even less employees—again resulting in fewer job openings and more unemployed people.

Standard stuff right? Where this becomes interesting is when Mulligan claims that a reduction in labor supply in the form of additional subsidies for the unemployed has a similar effect on the job market. Arguing that with these subsidies (unemployment benefits and other aid) the unemployed will be more selective about the jobs they take, Mulligan hypothesizes that this is the reason behind the increasing amount of jobs available (in most states) yet the mostly static rates of unemployment.

Mulligan makes a few more interesting observations about economic drivers in this theory: 1) with more help available for people after layoffs, organizations do far less to avoid layoffs, and 2) subsidies for the unemployed make labor more expensive because the unemployed can be choosier about what jobs they take. This incentivizes employers to get by with fewer employees, thereby reducing the number of jobs they have available. 

A quick local application seems to lend credence to some of Mulligan’s observations. Average weekly unemployment benefits in Utah, as reported in May 2011, amount to $316. If we take a low-paying job—the classic example of flipping hamburgers at McDonald’s—we can compare the part-time wage in this position to the unemployment subsidiary.  GlassDoor statistics claim the average hourly pay rate for McDonald’s cashiers and crew members is $7.63 an hour. Working part-time (the most common job opening) at Mickey D’s then earns only somewhere between $152.60(20 hours) - $228.90 (30 hours) per week for employees—and those numbers represent gross pay, not net income.

Mulligan concludes by arguing that in this way a reduction in labor supply by itself or a reduction in labor demand by itself, or a combination of both can contract the job market and explain the high ratio of unemployed to job openings. 

I think that there is some merit in Mulligan’s perspective, merit born out of a very human condition. Most individuals choose an income level that best supports themselves, their family and their chosen lifestyle. The math seems simple, if I am already struggling to put food on the table and can bring in more money by remaining registered for unemployment benefits than by taking a low-paying job, it makes more sense for my family’s survival to stay on unemployment. To be perfectly honest, $316 a week is going to be tough to live on (and Utah ranks in the top ten states of the country for offering the highest unemployment benefits). Mulligan’s perspective is often used by the anti-welfare perspective to cite what is wrong with the system, but the very real financial struggle individuals in both unemployed and low-wage circumstances face must be acknowledged.

I enjoyed Mulligan’s perspective because it offers a more well-rounded economic view than simply suggesting that only demand—rather than labor supply—has caused recent labor market contractions. Likely both elements play a role in the US’s ongoing job crisis. In this way, we find ourselves in a “what came first, the chicken or egg?” cycle.

It will be most interesting to see what happens in 2013 if unemployment benefits do indeed expire, then we may gain more insight as we watch fluctuations in the job openings data. 

Is the National Debt that Big of a Problem?

Is the national debt that big of a problem? An article by John T. Harvey explains why it might not be as big as a problem as you think. Let me first start by stating that the current debt to GDP ratio is not the largest that the Unites States has ever experienced. The current debt to GDP ratio has slightly crept over the 100% mark but is still not as high as it was at the end of WWІІ which was around 120%. Having the debt to GDP ratio eclipse 100% is alarming because of how fast the ratio grew over the last decade but will it cause the U.S. government to go bankrupt? The answer is no.

You are probably frequently given the analogy between the government’s debt and a family’s debt to illustrate how bad the growing debt problem is. The problem with that analogy though is that those two things are not analogous. They are not comparable for a few reasons: the government has an infinite lifespan and can print its own money. That is why people and other countries are willing to lend to the U.S. at such low interest rates because they know it is a safe investment. Let me put it this way; if you could continually borrow money at 2% interest for an infinite lifetime and have the ability to print the money due, wouldn’t you run a deficit?

There are a few other fallacies that I would like to point out. Many compare the United States’ situation to Greece’s. This is another comparison that it not analogous for many reasons. One main reason is that Greece owes its money in a currency that it does not control. Once again, the U.S. can print its own money if it chooses.

One last fallacy that I would like to address is that China essentially owns the Unites States because of the huge amount of U.S. debt that China owns. Many Americans don’t know that much of the U.S. debt is actually held by the U.S. government. China owns around 30% of the debt which could be printed and paid if China wanted it. But keep in mind that China’s economy hugely relies on the U.S. to purchase their exports that their economy desperately relies on.

Before losing sleep about the national debt, remember that the United States does not even have close to the largest debt in the world. We do have one of the largest economies though.

Rapid Growth in N.D.

24/7 Wall St. recently ranked North Dakota as the #2 best managed state; this was, in part, due to their fast growing economy and low unemployment rate. Bruce Kennedy wrote an interesting article which highlights some of the growing pains experienced by Minot, a North Dakota city which has a 2.3% unemployment rate. Apparently, one business is so desperate for workers that they are willing to fly employees from Wisconsin and put them up in a motel (a 500 mile commute), just to staff their store. The town is so frantic to house out of state oil workers that some investors have converted a retirement home into a hotel, taking little time for renovation. The town's schools are stretched and construction on hotels, housing, restaurants, etc. have ramped up. However, this boom sounds reminiscent of historical coal towns, many of which have become ghost towns. The challenge then, for Minot, is how to appropriately grow the city without the oil companies there taking on the form of a watered down version of a monopsony. Put another way, how will the town remain viable if the oil wells dry up or a technological innovation causes the demand for oil to fall drastically? The article quotes a Mr. Jerry Chavez (CEO of Minot Area Development Corporation) who is making efforts to carefully plan zoning and establish "proper infrastructure." Mr. Chavez is counting on the arrival of young families and their subsequent demand for professional occupations such as doctors, nurses, teachers, lawyers, etc. to establish a strong foundation which could support their long term growth goals. It will be interesting to see if Minot can succeed where so many towns in West Virginia have failed.