It’s Friday morning here in Shanghai. My AP students are in the middle of their Macro Unit 2 test on Aggregate Demand and Aggregate Supply. I’m reading SAS’s weekly Parent Talk newsletter that I handed out to my homeroom this morning, and on the back cover is an advertisement for the housing compound across the street from school, “Rancho Santa Fe”.

I just had to post this to my blog, as I think it captures well the trajectory that rich, suburban, Shanghaites are heading as Shanghai and the other Eastern provinces continue to develop and get rich.

“Success has many stages.

Acquiring a definitive territory counts as the ultimate one.

Embracing the best nature and humanity have to offer.

Rancho Santa Fe Phase 3 is a magnum opus of a villa residence.

Opulent in elegance. Bountiful in spirit.

The grandeur lies not only in heritage, but the entirety of all that is perfect.”

I hope you enjoyed this as much as I did. Happy Friday!

Answer: Because sometimes it’s just the right thing to do.

Major British retailer Marks & Spencer will charge for plastic bags - International Herald Tribune

More and more firms and governments are seeing the merits of corrective taxes on plastic bags. British retailer Marks and Spencer will voluntarily begin “taxing” its customers who wish to use plastic bags:

Beginning May 6, food and clothing retailer Marks & Spencer says it will charge 5 pence (10 US cents, €0.07) per plastic bag.

Marks & Spencer says it hopes the charge will save 280 million bags per year, and income from bags that are sold will go to an environmental charity called Groundwork.

The company said Thursday that it has tested the idea in Northern Ireland and southwestern England, and says it cut bag use by 70 percent.

Now that’s good economics, right out of a principles text: tax the product whose overconsumption creates negative externalities for the environment, and use the revenue earned to support environmental projects in the community. Here’s to Marks and Spencer, a corporation with an environmental conscience!

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Economics focus | From Mao to the mall | Economist.com

China, long acknowledged as the world’s factory, could suffer if falling demand for its exports in the US results in a decline in aggregate demand and GDP here as some economists believe it will. But not all economists agree on the importance of exports to China’s domestic economy:

The increase in net exports (exports minus imports) has never been the main source of China’s growth. It contributed two to three percentage points to annual GDP growth between 2005 and 2007, whereas domestic demand (consumption and investment) added eight to nine percentage points.

But the latest figures show that exports have become even less important as a driver of growth. The World Bank’s latest China Quarterly Update suggests that net exports contributed only 0.4 percentage points to GDP growth in the year to the fourth quarter of 2007 (see left-hand chart). Overall GDP growth slowed only modestly (to 11.2%) because of faster growth in domestic demand, which contributed an impressive 10.8 percentage points.

Continue Reading »

Pepsi Tests ‘Naturally Sourced’ Beverage - Advertising Age - News

Pepsi is just about to launch its first new beverage since 1992.  The drink, called “RAW” will present consumers with a healthier alternative to the artificially flavored soft drinks that dominate the oligopolistic market.

Apple extract, sparkling water, grapes, coffee leaf, raw cane sugar. The list of ingredients sounds like it belongs to a health drink, but those are the components of Pepsi’s newest variant.

Pepsi Raw, being launched in U.K. test markets, is meant to be a more healthful alternative to the traditional cola. A type of Pepsi made from only “naturally sourced” ingredients, it taps into demand for premium, less-processed products.

Sounds great, right? But would you be willing to pay more for a “natural” Pepsi than for the good old fashioned artificially flavored Pepsi and Cokes you grew up with? Pepsi is betting the drink will appeal to young hipsters, and is launching it primarily at clubs and bars in six UK cities to test out the market.

So when can Americans expect to  enjoy the natural goodness of Pepsi RAW? Unfortunately, Pepsi seems to think Americans are a bunch of fat tightwads:

 ”It makes sense to launch first in the U.K. because health concerns are a bigger issue there,” Ms. Dornblaser said, adding, “It might not fly as well in the U.S. because of the price.”

Oh, and if you’re too young to remember what Pepsi’s last attempted new product launch was, allow me to jog your memory:

Hey, I LOVED Crystal Pepsi! So, would you be willing to pay more for a healthier Pepsi?

Price of a bottle of beer in Zimbabwe - Worldometers

Check this out… Our favorite African basket-case economy is now experiencing 150,000% inflation! Zimbabwe’s new $10,000,000 bill will buy you two beers.

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As we study economic development in year 2 IB Economics, we examine different models for economic growth. Growth in GDP is not the only determinant of economic development, which in order to be measured effectively must account for human welfare determinants such as life expectancy, literacy rates, child mortality rates, distribution of income, and so on. However, it has been shown throughout history that economic growth, or the increase in real output and income, correlates directly with improvements in development factors like those above.

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Inflation gets a new focus along with recession worries - Feb. 21, 2008

As we begin our studies of the theories underlying the aggregate demand/aggregate supply model in AP Macroeconomics, it is useful to look in the news to see if we can try and understand how these theories apply to the real world. In the US, it appears as if a dangerous economic phenomena that plagued the country in the early 1970’s may be returning to wreak its havoc among households and policymakers.

Stagflation, “the unwanted combination of stagnant economic growth and destructive inflation”, has emerged in America today, in the face of weak aggregate demand and rising unemployment, combined with rising costs to firms thanks to energy costs and food prices.

Recession has been getting so much attention lately that it’s been easy to forget about the threats posed to the U.S. economy by inflation.But inflation worries are now back in focus in a major way. Oil prices hit a record of $101.32 a barrel in trading Wednesday, and was briefly above $100 again Thursday

Meanwhile, the Consumer Price Index, the government’s key inflation reading, showed a 4.3% rise in overall prices over the past 12-months. That reading has risen steadily from only 2.0% last August. Even stripping out volatile food and energy prices, the so-called core CPI posted the biggest seasonally-adjusted one-month jump in 19 months.

Continue Reading »

I was checking out the Shanghai Daily’s macro-economics news page this morning and here’s the headlines to the three latest stories:

Inflation fears grow on price rise figures — Shanghai Daily - English Window to China News

German producer prices rose at the fastest annual pace in 13 months in January, underlining European Central Bank concern that inflation is accelerating.

Prices for goods from newsprint to plastics jumped 3.3 percent from the same month a year earlier, compared with 2.5 percent in December, the Federal Statistics Office in Wiesbaden said yesterday, Bloomberg News reported. Economists expected a 2.8- percent gain…

“Energy prices are clearly the main driver of inflation,” said Peter Meister, an economist and bond analyst at BHF Bank in Frankfurt. “While inflation should moderate in the coming months we don’t expect the rate to fall into the ECB’s comfort zone before year-end.”

Continue Reading »

Defining the macroeconomic problem - Paul Krugman - Op-Ed Columnist - New York Times Blog

Paul Krugman, economics columnist for the NYT, shares his views the true problem with the US macroeconomy. Krugman thinks that the source of instability today is too much consumer spending and too few exports in the last decade.

Basically, I’d say, the problem is twofold. First, in the mid-00s the U.S. economy got badly unbalanced — too much dependence on housing and housing-inflated consumer spending, too big a trade deficit.

The table here (from Krugman’s piece) shows the net change in consumer spending, investment (non-residential or business investment, and residential investment) and net exports between 2007 and the average for the last 20 years of the last century. Continue Reading »

Beijing’s Olympic Quest: Turn Smoggy Sky Blue - New York Times

In ancient times alchemists exerted great energy trying to turn worthless metals into gold. Their endeavors proved to be in vain as science would later show that such alchemy was a fantasy.

In Beijing, similar endeavors are underway to turn the city’s gray sky to blue for the upcoming Olympic games in August of this year. In a city where 1,200 new cars and trucks appear on the road every day and where a massive construction boom has been underway for years, the sky remains thickened with particulate rich smog for over 100 days a year. The problem is, China has promised the world that during the month of August, when the world’s athletes congregate in the city for the Olympics, the skies would be clear and blue.

The solution to Beijing’s problem is obvious, yet impossible to achieve: halt new construction, ban automobiles, and shut down the factories surrounding Beijing. So how IS Beijing planning to deal with this challenge? Turns out they’re once again turning to alchemy, this time to turn gray to blue: Continue Reading »

How the World Work - Salon readers refuse to go on spending spree

Many of the recent posts on this blog have attempted to analyze the likely impacts of the US Congress’s fiscal stimulus package consisting of $120 billion in rebate checks to be mailed to American households in the next few months. Washington’s intention, of course, is for households to spend their rebate checks on American goods and services, with the hope that new consumer spending will ward off a recession at home.

Salon.com blogger Andrew Leonard surveyed his readers a couple of weeks ago to find out what real Americans would do with their $600 checks when they arrive this spring. The responses he received do not look promising for America’s weak aggregate demand:

Sixty-eight said they would use it to pay down their credit card debt… Fifty-four said they would sock it away in some form of savings account. Another 26 planned to use the money for either a college savings plan, investment in foreign stocks, taxes, paying off student loans, or applying toward mortgage or car payments.

These are the smart people… any financial adviser would tell you to pay off existing debt and other obligations before spending more on new goodies. Ironically, some readers claimed they’d use their tax rebates to, yep you read it, pay their taxes. Hmm… what a funny system! Unfortunately, being wise with your money is NOT what the government hopes you’ll do, because none of the above equal C (which is, of course, our abbreviation for the magic word, consumption).

Those are the boring responses, here’s where they get interesting: Continue Reading »

FT.com / Asia-Pacific / China - US downturn hits Asian garment makers

Here’s a good example how a slowdown in consumer spending in the US effects manufacturers in other countries. Asian garment makers are feeling pinched not only due to less demand from American consumers, but also the weak dollar and rising costs.

“Costs are hitting us,” says Henry Tan, chief executive of Luen Thai, a large Hong Kong-based manufacturer with operations in China. “Sales to Europe are not so bad because the euro is strong, but sales to the US are very difficult.”

Chinese manufacturers have been facing double-digit annual wage increases over the past few years. More recently their headache has come from the renminbi’s appreciation, which Beijing has allowed to gather pace this year as it seeks to curb inflation.

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China Mobile: 400,000 Unlocked iPhones On Our Network (AAPL) - Silicon Alley Insider

Here’s a shocker… although not so surprising if you’ve ridden a Shanghai subway lately and seen the city’s movers and shakers fiddling with their fancy new iPhones:

China Mobile, the biggest wireless carrier in China, said there were 400,000 unlocked iPhones operating on its network at the end of 2007.If true, that represents more than 10% of the 3.7 million iPhones Apple sold last year. Market research firm In-Stat, which included the stat in an email newsletter today, said that total was four times what they had previously estimated. That helps explain where many of the “missing” iPhones have wound up.

This may seem like great news for Apple; I mean, who wouldn’t want to tap the largest cell phone market in the world? Problem is, Apple does not have a deal with either of China’s big mobile carriers, so Apple doesn’t get a cut out of users’ service plans, which account for a huge part of Apples profits in Europe and the US.

Some analysts estimate that AT&T, Apple’s exclusive U.S. carrier partner, pays Apple $15 per month, per iPhone subscriber — $360 over the length of a 2-year contract — which is pure profit.

So I wonder if the real iPhones in China outnumber the fake ones now!?

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Chinese leader offered women to U.S. in 1973 - CNN.com

China’s demographic challenges have proved difficult to overcome for much of the last century, and indeed, throughout its long history. Feeding, employing, and sheltering 1.3 billion people has recently been made less difficult thanks to China’s economy opening up since 1978, but as recently as the early 1970’s scarcity posed a serious threat to the country’s health and strength.

So how did Mao, in 1973 and elderly leader on the brink of senility, propose solving China’s population growth problem? He made visiting US Secretary of State an enticing offer:

Amid a discussion of trade in 1973, Chinese leader Mao Zedong made what Secretary of State Henry Kissinger called a novel proposition: sending tens of thousands, even 10 million, Chinese women to the United States.

“You know, China is a very poor country,” Mao said, according to a document released by the State Department’s historian office.

“We don’t have much. What we have in excess is women. So if you want them we can give a few of those to you, some tens of thousands.”

A few minutes later, Mao circled back to the offer. “Do you want our Chinese women?” he asked. “We can give you 10 million.”

After Kissinger noted Mao was “improving his offer,” the chairman said, “We have too many women. … They give birth to children and our children are too many.”

“It is such a novel proposition,” Kissinger replied in his discussion with Mao in Beijing. “We will have to study it.”

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You Are What You Spend - New York Times

Fact: The richest 20% of Americans earn 15 times the income of the bottom 20%.

Fact: The richest 20% of Americans only consumer 4 times as much as the poorest 20%.

Question: Why don’t the richest 20% consume 15 times as much as the poorest 20%?

The author of this NYT opinion piece claims that the gap between America’s rich and poor is not as stark as the income figures suggest. While before tax income of the top 20% is around $150,000, the poorest 20% earn only around $10,000. Clearly these numbers indicate an enormous income gap in America.

However, when it comes to consumption, the poor consume an average of $18,000 on everything from food to housing to entertainment to transportation. The richest 20%, on the other hand, consume an average of only $70,000, less than half their before-tax income.

So the question is, is standard of living based on our income, or on our consumption? If it’s income, then there’s certainly a huge gap in standard of living between the rich and poor. But if we believe it’s consumption, then the gap is narrowed dramatically. The author claims the latter:

To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.

Continue Reading »

Here’s a comment from student Alice Su to a previous post about Washington’s $170 billion fiscal stimulus package:

It seems to me that this tax rebate is not truly addressing the problem of recession–undoubtedly, it does, as Nancy Pelosi said, “put money in the hands of hardworking Americans”, and this looks like a nice act done under a bipartisan agreement that makes lots of citizens feel better. But only in the short run. Offering a one-time tax rebate like this is like trying to stick a band-aid on a bullet wound.

So the question isn’t “Why put more medicine in now than is necessary?” but rather, “Does this medicine actually do anything to help?” It looks like all it does is temporarily reassure Americans, maybe make the recession a little more cushioned and make the government able to say “LOOK we’re cutting back on taxes! Don’t you love us?”, but it won’t actually do anything that will feasibly fight against the “vicious cycle.”

So does this mean that recessions are inevitable, that there really is nothing you can do to fight them except… wait for it to get better?

In the podcast they mentioned something about fine-tuning interest rates and such to prevent occurrences like the Great Depression. How does that actually work though? And how is the government supposed to know how they should “fine-tune” taxes and interest rates and government spending if they’re in a period of growth/peak? They won’t know what’s needed until they’ve entered the recession, and by then it seems like it’s too late to stop it and all they can do is try methods like the tax rebate in this blog post to just “slightly offset the negative effects.”

Sometimes students simply amaze me in their uncanny ability to pierce through the logical fallacies of the world in which we live. Despite the lauding rhetoric coming from politicians about how this package will help lead the economy towards a new period of expansion, the package’s true impact will probably be more of, as Alice so astutely points out, “like a band-aid on a bullet wound”.

Here’s the kind of thing you’ll hear from Washington:

Bush signs stimulus package - Feb. 11, 2008: CNNMoney.com

President Bush said Monday he is pleased with the $170 billion economic stimulus package passed by Congress last week. The White House announced that he plans to sign it Wednesday.

The government hopes the package, which will send most Americans tax rebate checks by May, will either prevent a recession or make one relatively brief…

“I really want to thank the Congress for getting this bill done,” Bush said. “It’s going to help deal with the uncertainties in this economy.”

But is it enough, asks Alice? And what about the “fine-tuning” of interest rates going on at the Fed? How are fiscal and monetary policies supposed to be employed by governments to fight recession?

These are some of the questions we’ll be discussing in the next unit of AP Macroeconomics. Stay tuned for the answers… and in the mean time, students, keep reading critically and asking those tough questions that politicians simply hope Americans are just too ignorant to think about! Great job, Alice, thanks for the insightful commentary!

FT.com / Asia-Pacific / China - China ‘on course for growth slowdown

Among many Americans today there seems to be a negative opinion towards China. It is popular to bash China (remember Red Storm Rising!?) and blame the country’s cheap labor and booming export sector for the loss of American jobs. Undeniably, however, the US depends on China as a source of cheap imports, which help keep the overall price level for American households down and relieves inflationary pressures in the face of a weakening dollar.

Likewise, China depends on the US for its own economic health. In China around 40% of GDP comes from exports (vs. less than 10% in the US); of the $1.22 trillion of exports from China last year, 21% went to the United States (source: CIA World Factbook). This means that something like 10% of China’s national income comes from US households’ demand for Chinese products. Significant, to say the least. Continue Reading »

Jessica Ng asks,

Hi Mr. Welker,
I was just wondering whether the business cycle pertains to ALL economies, including both market and command economies?

Great question, Jessica. I thought I’d put this one out there for everyone to discuss. What do you think, readers? Based on what we’ve learned about the business cycle, would you think that this pattern of economic expansion, contraction, recession and recovery would be likely to happen in a command economy, where all economic decisions are made by a central planning agency? In other words, are business cycles unique to market economies, or can an economy run by the government also experience these patterns of instability? Post your thoughts in a comment below.

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Can the stimulus save us? - from CNNMoney

Today the US Congress approved a $170 billion stimulus package that will consist of rebate checks to be mailed to 117 million low and middle-income households. The details of the package are as follows:

Tax rebates to 137 million people. A rebate of up to $600 would go to single filers making less than $75,000. Couples making less than $150,000 would receive rebates of up to $1,200. In addition, parents would receive $300 rebates per child.

Tax filers who do not owe income taxes but have at least $3,000 in income would get a $300 rebate.

The IRS will start sending out checks in early May, said Treasury Secretary Henry Paulson.

“Payments will be largely completed this summer, putting cash in the hands of millions of Americans at a time when our economy is experiencing slower growth,” Paulson said in a statement.

Business tax breaks. The bill would temporarily provide more generous expensing provisions for small businesses in 2008 and let large businesses deduct 50% more of their assets if purchased and put into use this year.

Housing provisions. The bill calls for the caps on the size of loans that may be purchased by Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) to be temporarily raised from the current level of $417,000 to nearly $730,000 in the highest cost housing markets.

It also calls for an increase in the size of loans that would be eligible to be insured by the Federal Housing Administration.

Politicians from both parties joined forces on this act of expansionary fiscal policy. The hope, of course, is that with more money in their pockets, Americans will start spending again, firms will start investing, and these increases in expenditures will shift the US economy towards a path of expansion, increasing employment and output.

But what will the impact of this “stimulus package” be? Will Americans spend their rebate checks in the way Congress hopes they do? Some fear that low and middle-income households will take their newfound income right to Wal-Mart and buy Chinese imports, or put a large proportion of it into savings, or pay off existing credit card debt, three actions which would represent “leakages” from the circular flow, leading to no new income or output. Savings and spending on imports would do nothing to stimulate the US economy, therefore, before concluding that the tax rebates will help fend off a US recession, economists must consider the American peoples’ marginal propensities to save and to import. Only new spending on American goods and services will contribute to aggregate demand.

The provision of the stimulus package more likely to result in increased spending in the US is the business tax deduction for spending on new capital. Capital goods such as heavy machinery tend to be made in America by American workers, so encouraging firms to invest in new capital is likely to have a positive demand-side effect on US income and employment. Furthermore, more capital for US businesses is likely to increase productivity of workers in those firms which have invested, leading to greater income and output: this is the desired “supply-side” effect of stimulating business investment. When aggregate demand and aggregate supply increase simultaneously, economic growth is the result.

Unfortunately, the provisions aimed at encouraging business investment represent only around one third of the total stimulus package. Most of the $170 billion will end up in the hands of households, which I suppose should come as no surprise in this election year, when both the Democratic and Republican parties want to appear as the benevolent parties that helped make the average American household a little bit richer in 2008!

For some informative insight from Harvard economist Martin Feldstein, who is president of the National Bureau of Economic Research, click here.

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Motivated by a Tax, Irish Spurn Plastic Bags - New York Times

Here’s a textbook example of how government can use taxes to correct a market failure.

In 2002, Ireland passed a tax on plastic bags; customers who want them must now pay 33 cents per bag at the register. There was an advertising awareness campaign. And then something happened that was bigger than the sum of these parts.

Within weeks, plastic bag use dropped 94 percent. Within a year, nearly everyone had bought reusable cloth bags, keeping them in offices and in the backs of cars. Plastic bags were not outlawed, but carrying them became socially unacceptable — on a par with wearing a fur coat or not cleaning up after one’s dog.

A market failure existed; too many plastic bags were being used and discarded, creating negative externalities for society. A responsible government minister made it his mission to correct this market failure, and in the face of strong opposition from retailers. But guess what, it worked. Not only have they practically disappeared from the country’s retail stores, but their use has become a social taboo.

Why don’t more developed countries, where citizens can afford to care about the environment, place corrective taxes on plastic bags? Heck, why not use taxes to correct other market failures, too? How about a gas tax, for goodness sake?

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