If Economics were a required high school course in every state in the United States, our politicians would not be able to to “BS” us to get our vote.

I am actually an independent voter having voted for George Bush in the first election in 2000 and having voted against Bush in 2004. The two video clips below are NOT a political statement since I am unsure who I will vote for this November. I provide these two clips only to show you how politicians can say different things on the same economic issue.

Both political candidates speak of “NAFTA” (North American Free Trade Agreement) which is a free trade agreement signed by the U.S., Mexico, and Canada back in 1993. There are very few economists, if any, that believe the agreement was bad for any of the three nations. But, listen to the perspectives of the two candidates for U.S. president:

What are your reactions to this video? Are both candidates correct? Is one candidate misleading us on this one issue to get your vote?

• Bloomberg.com:Greenspan Says McCain Tax Plan Needs Corresponding Budget Cuts

  “Former Federal Reserve Chairman Alan Greenspan said the country can’t afford $3.3 trillion of tax cuts proposed by Republican presidential nominee John McCain without corresponding spending reductions.

  Greenspan, a lifelong Republican and longtime friend of McCain, said today on Bloomberg Television’s “Political Capital With Al Hunt” that “I’m not in favor of financing tax cuts with borrowed money.”

  McCain has said he would balance the cost of most of his tax cuts with budget reductions, while providing few details beyond eliminating earmarks and other pork-barrel spending, which have totaled about $171 billion since 2001. Democratic nominee Barack Obama is proposing fewer tax cuts and more ambitious spending programs.

  Greenspan said he has “mixed feelings” about a second government economic-stimulus bill after the U.S. provided a $168 billion package in February. While such an action may increase the budget deficit at a time when spending on retirees’ medical benefits is about to cause “big” financial problems, it may also boost economic growth, he said.

  Greenspan has said there’s at least a 50 percent chance the U.S. economy will slide into a recession.”

  tags: economics

The summer before last, I spent three weeks exploring the mountains, beaches, volcanoes and temples of the Indonesian island of Bali. While crossing Bali’s central mountain range, I stopped at a produce market where local fruits, vegetables, coffee and nuts were brought in from the surrounding hills to be sold. As I strolled the market snapping pictures, I caught out of the corner of my eye a flash of a familiar shade of red. Upon closer inspection, I was surprised to find a “Blue Chelan” apple from Washington state (my home state!).

I could not help but be shocked to see a fresh red apple grown on another continent in another hemisphere on the Eastern slopes of the Cascade mountain range of Washington state for sale in a farmer’s market in a remote village 60 km from the nearest port. It got me thinking about globalization, trade, specialization and comparative advantage. So I pose these questions to you, my Econ students:

Discussion Questions:

1. How did a ripe apple grown 9,000 miles away in the United States end up fresh and shiny in a market 1500 meters up in the mountains of Bali? I mean, literally, HOW did it get there?
2. Why would Indonesia import apples from so far away when surely it could grow apples domestically and avoid the hassle of transoceanic transport?
3. Where did Indonesians get the dollars to buy US grown apples?
4. How does trade between Indonesia and the US affect consumers? Producers? Is trade between these distant countries good or bad? Discuss.

More misleading economic statements from uninformed people who have never taken an economics course!

What about, you say?

I’m glad you asked!

It seems like I continuously read and hear in the American press that the United States is creating a giant wealth transfer by buying oil from other countries. Those “wealth transfer” words imply to the typical citizen that somehow our U.S. money supply is leaving our country, never to return again, and somehow our country is then poorer after the transaction and the country we imported from is now richer!

That is only a half-truth! Yes, the other country becomes richer, but we grow richer also by an equal amount! Both countries always gain economically from trade!

Let’s first get a few things straight before I elaborate: I am not happy either as gas prices rise ($3.50 a gallon in the U.S. as of this writing, although down from over $4.00 recently). I am also not happy that a fairly large share of oil purchases are from countries like Saudi Arabia and Venezuela whose loyalty to our country is certainly questionable. Luckily, the U.S. produces 40% of its own oil consumed and the other 60% consumed is imported from many different countries with 85% of our imports coming from 15 countries with Canada and Mexico being the largest two.

However, when we buy from any of these countries, both countries benefit equally and there is NO transfer of wealth. When the U.S. buys oil from any other country those U.S. dollars paid on the purchase are immediately returned to the United States and are spent almost immediately in our country since the other country cannot use our dollars in their country. What is really happening is that both countries’ citizens GAIN (not lose!) equally as we are, in essence, trading one product for another for both countries to enjoy!

Let’s use an example. Let’s say the U.S. buys 1000 barrels of oil from Saudi Arabia. At today’s price per barrel of $100 that would mean the U.S. would pay Saudi Arabia $100,000 and Saudi Arabia would then, in turn, be forced to turn around and use the paper ($100,00 USD!) on say, a bunch of iPods from Apple. Yes, the Saudi’s are listening to “I Kissed a Girl” by Katy Perry with their IPods under those smart head robes they wear! Ladies and gentlemen: that is why they call it trade: the essence of the transaction is that we have traded some of our iPods for some oil to fuel our cars and heat our homes. Both of us have gained! Katy Perry is hot on the charts and the Saudi’s “got their hands in the air”, and we can now drive to 7-Eleven for a Big Gulp and stay warm in the winter.

Also, think of it this way: when an American buys a gallon of gas the money is, in substance, going to an American business such as Apple! All spending of US dollars is spent back into our economy, and all spending of Saudi dollars (actually they call their currency the “dollar” also but it doesn’t look like ours!) benefit the Saudi economy.

Yes, trade is mutually beneficial. I would rather a warm home this winter and forego another Katy Perry song!

U.S. companies are rethinking manufacturing in China – Sep. 11, 2008

As the US presidential campaign trudges ever forward, both Obama and McCain have had much to say about “job creation” in the USA. Elaborate plans aimed at retraining workers displaced by globalization, arming them with 21st century skills that will enable them to thrive in our advanced economy, and assure that the hardships imposed by free trade are minimal and all Americans have the skills they need to find employment. These are good goals for America, but even as they preach their job creation plans across the country, right under the candidates’ noses jobs are being created thanks to the invisible hand of the market economy.

Talk of a reverse migration of manufacturing from China to the U.S. has been buzzing across union halls and factory floors, corporate boardrooms and Wall Street.

The cost of shipping outsourced goods from China to U.S. customers has doubled in just two years thanks to high oil prices, and labor costs in China are rising sharply.

“There’s a shortage of technical and managerial talent,” reports Anand Sharma, CEO of TBM Consulting Group. “To attract managers Chinese companies are talking about salary increases of 15% to 30% year-over-year.”

The phenomenon of jobs being “in-sourced” to America after a decade or two of being done by Chinese workers may seem surprising. Certainly, wages are still lower in China than in the US labor market. This is true, however, the demand for highly skilled labor in China is driving wages up higher and higher, due to its relative scarcity in a country where reliable, well-educated factory managers are nearly fully employed by the thousands of foreign and Chinese firms operating plants there. Competition among producers means the only way to attract new managers is to continually offer higher wages. This leads to a form of “wage-spiral inflation” where rising costs lead to higher priced output.

Despite its much smaller work force, the percentage of American workers with the managerial and technical skills needed to run a plant is much higher than in China, and the weak manufacturing sector growth in the US has meant relative wages between the US and China are closer than ever before.

Take into consideration the rising cost of fuel and the fact that China’s economy is producing at or beyond full employment, and it becomes clear why manufacturing certain products in China has become less attractive to American firms. To be sure, not all manufacturing jobs are being “in-sourced” back to the US. As Chinese wages climb and skilled labor becomes more scarce, the giant’s Asian neighbors are beginning to enjoy the re-allocative effects of the “invisible hand”.

…plenty of manufacturers will continue looking for ever cheaper places to produce. In fact, as the cost of doing business in China rises, many companies – including Chinese firms – are shifting their production to less expensive markets, such as Vietnam.

Discussion questions:

1. What is the “invisible hand” referred to in the post above?
2. How do higher wages in China benefit Americans? How do they harm Americans?
3. Some critics of free trade argue that multi-national corporations exploit workers in developing countries. Does the article above illustrate give an example of exploitation? Discuss…

• Mixed Economic Data Show A Changing Business Cycle – WSJ.com

  “The U.S. economy looks like it is traveling along two tracks.

  If you look at output — the amount of goods and services Americans produce — the economy has been rising at a decent clip. But people aren’t feeling it in their wallets because the factors driving their own incomes — such as jobs and wages — are under strain.”

  tags: economics, recession, business cycle

PickensPlan

The Pickens Plan is an initiative put together by the hedge fund manager of BP capital Management T Boone Pickens. The plan puts forth a model to get America off its addiction to foreign oil and on a path towards sustainable energy sources produced in the US of A. Watch the following video and read through the following information and comment on the questions.

“America is addicted to foreign oil. It’s an addiction that threatens our economy, our environment and our national security. It touches every part of our daily lives and ties our hands as a nation and a people. In 1970, we imported 24% of our oil. Today it’s nearly 70% and growing.

As imports grow and world prices rise, the amount of money we send to foreign nations every year is soaring. At current oil prices, we will send $700 billion dollars out of the country this year alone — that’s four times the annual cost of the Iraq war. Projected over the next 10 years the cost will be $10 trillion — it will be the greatest transfer of wealth in the history of mankind.

America uses a lot of oil. Every day 85 million barrels of oil are produced around the world. And 21 million of those are used here in the United States. That’s 25% of the world’s oil demand. Used by just 4% of the world’s population. The simple truth is that cheap and easy oil is gone.”

THE PLAN

Discussion Quesitons

1. Is Pickens correct in saying that America’s addiction to foreign oil is a problem? Be sure to use the concept of comparative advantage and specialization in your answer.
2. If we assume it to be a problem, what solution would you recommend? Do you agree with Pickens?

Switzerland “could become a feudal state” claims an economist. – swissinfo

One Zurich economist thinks so:

In Switzerland 71 per cent of the wealth is concentrated in the hands of just ten per cent of the population – a figure that economist Hans Kissling finds alarming.

Kissling tells swissinfo that the gap between the rich and everyone else is growing and that this could threaten traditional Swiss democracy and the economy. He makes a call for an inheritance tax for the wealthy.

Statistics show that the 300 richest people have become 40 per cent wealthier in the past eight years, whereas most of the population has a lower income than at the beginning of the 1990s

Kissling has nothing against wealth, he just thinks that if someone did not earn their wealth but inherited it instead, they should have to share a bit with the rest of society.

I call for a tax on very high inheritances, from SFr1 million ($900.000) upwards, and only on the excess value of that. I certainly don’t want people to think that they can’t pass on their family home to the next generation.

I’m only interested in trying to stop any creeping feudalisation, to avoid having huge clans like in South America, which threaten the economy and the political world

He’s most concerned that if the gap between rich and middle class continues to widen and the middle class of Switzerland don’t start benefiting from the country’s growing wealth, there could be a dangerous backlash against the free market system.

…the richest one tenth of a percent in Zurich – there are no full Swiss statistics – had 677 times more wealth than an average citizen in 1991. By 2003, 12 years later, the richest one tenth of a percent had 1,027 times more wealth. So the gap has really grown.

The middle classes, unlike the lower classes, have not benefited from any concessions, such as health insurance or childcare allowances. Here they have to use up all their assets before they receive any support. The lower classes have help from the beginning. This is why the middle classes are threatened

Discussion Questions:

1. Why does a growing gap between rich and middle class threaten social stability in Switzerland?
2. What would advocates of socialism propose in order to avoid future struggles between the rich and the middle class?
3. What kind of tax system would help re-distribute the wealth of Switzerland and narrow the enormous gap that exists here?

Managing Globalization: To reduce poverty, money isn’t everything – International Herald Tribune

Two developing countries: Venezuela and Brazil. Two ideologies underpinning economic growth and development: command in Venezuela versus free market in Brazil. Which system has worked better for the people of these two large South American countries?

How much can governments do to fight poverty? In South America, a couple of answers are emerging in the growing economies of Venezuela and Brazil. Both governments have publicly pledged billions of dollars to raise living standards – but have they succeeded?

Overall income is moving upward in both countries, if for different reasons. Venezuela is riding the black tide of high-priced oil, while Brazil’s relatively firm economic policies have built confidence in its business prospects among both locals and foreigners.

The president of Venezuela, Hugo Chávez, has portrayed himself as an ardent socialist and a disciple of Fidel Castro. Reducing inequality is fundamental to his agenda, whether by dividing up Venezuela’s oil wealth or, as he has obliquely suggested this month, through land reform. His consolidation of executive power has brought Venezuela closer to a centrally planned economy and, as such, has given him the opportunity to invest heavily in social programs.

But identifying the results isn’t easy. The poverty rate in Venezuela was about 50 percent when Chávez’s presidency began in 1999, according to the government’s own figures. Since then, roughly equal numbers of people have fallen into and out of poverty at various times, with a spike to more than 60 percent in 2003 and a drop below 40 percent in 2005…

Rodríguez also questioned whether Chávez’s programs could be completely effective because of the way they were managed. Some of the world’s most successful initiatives for improving the well-being of the poor, he said, linked families’ benefit payments to useful actions like their children’s attendance in school or visits to the doctor. In Venezuela, he said, the link is to political loyalty instead.

“The level of political polarization has become so high that not only is loyalty to the regime the key determinant of your access to benefits, it is also the key determinant of your capacity to be involved in the administration of those benefits to others,” Rodríguez said.

One example of this problem was a program intended to improve literacy. “The government had no system of accountability to monitor performance other than the reports of its own administrators,” Rodríguez said. “When program administrators learned that it was more important to show loyalty to the regime than to effectively run the program, any incentives that they had to administer resources efficiently, from a social point of view, disappeared.”

In Venezuela, president Chavez’s socialist inspired, command policies, paid for by the sale of expensive oil to the rest of the world have led to benefits primarily for those citizens willing to show political loyalty to Chavez and his party. Hard work and productivity is not rewarded as much as loyalty and support for the government. This system of incentives leads to some poor outcomes. The result? Only mediocre improvements in poverty rates, literacy, employment and health of the people.

In Brazil, where free market principles underlie much of the economic development policies, monetary benefits for development workers and the families they serve are linked not to political affiliation but to actual behavior of households and government employees. The result, not surprisingly, has been real improvements in education, health, and poverty levels amongst Brazilians.

Meanwhile, in Brazil, progress appears to have been more widespread. Figures compiled last year by Rômulo Paes de Sousa of the Ministry of Social Development and Fight Against Hunger, covering the period from 1999 through 2004, painted a rosy picture: School attendance was up, while illiteracy was down. Life expectancy was up, but hospital visits were down. Employment was up, and child labor was down.

Again, however, it’s difficult to say with certainty where the credit should go… [perhaps] to the simple fact that Brazil’s monetary benefits for families are indeed linked to actions like attendance in school, prenatal care and childhood vaccinations?

The lesson here? In a command economy like Venezuela’s, in which the government decides how resources are to be allocated, it appears that real improvements in people’s lives are not as important as political loyalty. Because most people involved in economic development work for the government, they focus on making themselves appear more dedicated and loyal to president Chavez, in order to make sure they get paid more and promoted up the ladder.

In Brazil’s free market economy, on the other hand, rewards are based on performance, not political loyalty. Brazilians have enjoyed access to a wider variety of efficiently run development programs than Venezuelans, despite Hugo Chavez’s pledge to alleviate poverty. Correct incentives explain why the market system is more efficient and effective than a command system, and the examples of Venezuela and Brazil illustrate this observation quite nicely

Discussion Questions:

1. Why do command economies fail efficiently allocate resources to where they are needed the most?
2. What does Brazil do that Venezuela does not that has led to real improvements in people’s lives?

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Palin’s Intellectual Bipolar Disorder – Mises Economics Blog

Jeffrey Tucker at the Mises Economics Blog wonders what’s up with the conflicting statements coming from Republican vice presidential candidate Sarah Palin:

One the one hand, she assails Obama as favoring big government, more taxes, more control from Washington, and everyone goes nuts denouncing government. Then only a few sentences later, she is blasting Obama for not favoring war enough, for wanting to give people too many rights, for not wanting military victory over the entire planet. People cheer that too.

Do these people not realize that the same government that controls from Washington is also the institution that she is proposing have a world empire? Do these people not realize that global military occupation costs money that comes out of the pockets of American citizens? Do they not realize that a government that cares nothing about the rights of foreigners is not going to have much respect for the rights of its citizens either?

Sarah Palin – VP acceptance speech – Sep 3, 2008 pt1

Palin makes it sound so simple: Obama wants to take money out of Americans’ pockets and make us all poorer. Here’s his plan from Obama’s own website: