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

What about, you say?

I’m glad you asked!

I often 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 pooer after the transaction than if we had produced the oil within our own country.

Yes, the other country becomes wealthier but it has nothing to do with the US currency we send them, for, after all, the US dollars are only useless paper in their own economies as the US dollars cannot be spent in their own economy, but rather those same US dollars can be used to gain access to the US goods and services that those countries covet! The US also becomes financially better off due to the “trade” as the US can aquire our culturally, covetable and inexpensive oil to fuel our cars and heat our homes, in return for the various US products and services traded to the countries from which we imported the oil. In effect, we have “traded”, just like the old western cowboys & indians, US goods for oil, and both countries are better off!

Let me clear about one thing, however; I am fairly confident that it is NOT in our best homeland security interest in purchasing such a large share of oil purchases 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. Canada and Mexico are the two largest import countries, which is pretty darn safe.

However, ignoring the aforementioned security issue, 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 another country those U.S. dollars paid on the oil 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 oil price per barrel of $75 that would mean the U.S. would pay Saudi Arabia $75,000 and Saudi Arabia would then, in turn, be forced to turn around and use the paper ($75,000 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 hidden 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 are boogying in the streets, as US citizens can now drive freely to 7-Eleven for a Big Gulp and stay warm in the winter with the oil received in return.

Also, think of it this way: when an American buys a gallon of gas the money is, ultimately, 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!

Questions for Discussion:

1. Have you ever realized why they call it “trade”? That each country cannot use the other country’s currency so, in essence, there is a simply a trade of only products and services.

2. The US has a large trade deficit with China and Japan. Why is China and Japan holding on to US dollars and not spending it back into the US? Have they thrown the US dollars away?

3. Do you believe that free trade is a win-win always? If not, why not? Why do nations interfere (tariffs, quotas, etc.) with trade if it is so beneficial?

I wonder how many people in countries like Switzerland, Brazil, Canada, Russia, and China, and the United States would be surprised to learn that prices of products and services in their countries have become much less expensive over the years.

Say what? You must be crazy, you say! Prices are rising way too fast!

Yes, most citizens see their purchases as becoming more expensive when, in actuality, things are becoming less expensive. Of course, the paradox is that although nominal prices (the actual price tag) are, in fact, increasing, nominal income (the average wage or salary) has been growing faster. This is a topic that in economics is called “real income” or a measurement that compares a nation’s income growth relative to the growth in prices that the same income buys.

Let’s take some specific facts for the United States:
In the United States real median household income grew from $41,318 to $50,811 from 1970 through 2006 for a total percentage gain of 23% (source: Pew Research Center). Both of the aforementioned median household incomes are stated in 2008 or current dollars which makes the comparison valid. Median household income is an attempt to quantify the progress that the “middle American” family or typical family has made. So, in short, the median household in America can buy 23% more with their income today than they could in 1970. In other words, relative prices are lower to income.

If we look at the same United States income data over the same period for real average household income, there is real income growth of nearly 60%. The higher growth (60%) in real incomes for the average household versus the median (middle) growth rate (23%) is explained by the fact that much of the growth in United States’ real incomes has accrued disproportionately to the college educated & entrepreneurs driving up real income growth rates much faster for the average than the median or middle household. (Hint: continue your education!)

Now let’s get back to the main premise of the title of this blog and the opening assertion that prices are lower than ever. What we are really saying is that you have to benchmark price increases to income increases to really understand whether things are becoming more expensive. The vast majority of products & services are cheaper today in all nations than they have ever been before, which helps explain, excluding the effects of the current recession, why more citizens than ever before can afford to own their own houses, drive more and better cars, and are likely to have cable, cell phones, and computers. The reason we are led to believe differently is because we are victims of our own human nature, which often causes us to focus on the problem areas (rising prices) and not the benefits (incomes that are rising faster). Most citizens’ focus expands out to the last dollar of their incomes and they quickly notice those select products that are rising faster than others like health care, gasoline prices, and education! Hey, even gasoline prices are not at an all relative price high. If gasoline prices in the United States are restated for inflation, or set to comparable 2009 dollars, they are $2.60 per gallon today vs. $3.17 in 1981 and $3.50 in 1918!

Now, you may say to yourself that statistics can lie or mislead and you are sure in your gut that things are getting more expensive relatively. You can try to validate that incorrect “gut feeling” by examining whether your country’s middle class is enjoying less or more products and services. “Real income” really is just a measurement of the quantity and quality of products and services that you have. For example, the average American household has larger homes, more cars, more air conditioning, more gadgets, and better healthcare & prescription drugs than, say, 20 years ago.

But let’s end this blog with a concern. Although everything noted above is accurate, the pace of real income growth has been relatively slow over the last 10 years, especially for the middle class in the United States. Most of that growth in real income mentioned above has occurred up until this current decade. For the last 10 years, median family income growth in the U.S. has been very small and the average income growth has been higher but below the U.S. historical experience. There are many reasons for this slowdown in real income growth, but three big reasons are that

1. the U.S. has now had two recessions this decade (2001 and 2007-current, versus our historical average of only 1 per decade), and
2. energy and health care prices have risen much faster, and
3. foreign labor competition and technology advancement has kept the uneducated/unskilled U.S. workers real income relatively stagnant. More than ever before, a good education is the ticket to your economic future!

Discussion Questions:

1. Inflation is bad, right? Well, what if average prices rise by 2% a year but average incomes rise by 3%. What happens to real income in this situation? Is the average household better or worse off in such a scenario?
2. How have trade and globalization contributed to rising real wages in America and Swizerland?
3. How have trade and globalization contributed to falling nominal wages in America and Switzerland?
4. How do improvments in technology contribute to rising real wages in both developed and developing economies? What about health and education?
5. What types of policies can government pursue to help raise the real wages of the nation’s workers?

Now is that time of year when thousands of high school and college students across the world will be taking their very first economics course. Perhaps it will be a basic, high school introductory economics’ course, or perhaps an even more challenging AP or IB economics’ course. Or perhaps you are a freshman or sophomore in college taking an introductory macroeconomics or microeconomics course.

Whatever your situation, you will soon read that all introductory economic text book authors make the point, usually in their respective text’s first chapter, that a primary benefit of studying economics is that it aims to transform one into a more effective and influential citizen by enabling one to better understand and conclude on the economic positions and promises of those running for public office. The underlying logic is that a citizen or voter that is well-versed in basic economic principles will be a smarter citizen and more likely to vote for the political candidate or referendum that will deliver the greatest economic gain for the citizens of the locality, state, and/or nation. In fact, this “economics for citizenship” reason is why a growing number of states now require completion of a basic economics course as a requirement for high school graduation.

In my classroom, I informally call the study of economics “the 180 degree science” because as the student studies this social science for the very first time they often develop conclusions that are precisely the opposite (hence, the “180 degrees”) of what they had originally believed before taking their first economics course.

For example, here are two “180 degree moments”, which are applicable to the United States’ economy, that you may well learn in your first year economics’ course:

1. Pre-Econ Course or Uninformed View: “We don’t make anything anymore in America. America’s manufacturing prowess is in a state of constant decline. It seems like almost everything bought and used in the U.S. is made in China”

Post-Econ Course and 180 Degree View: Right before the recession hit in 2007, the U.S. was manufacturing approximately 2.5 times more in dollar value than China and is still today the largest manufacturer in the world. The dollar value of manufactured goods in the United States, restated for price level changes so the comparison is accurate, is up over 50% for the last 13 years ending in June of 2007, just prior to the recession! Yes, it is true that the U.S. has lost several million jobs in manufacturing over that same time period, but that is primarily due to rising manufacturing productivity (think machines & technology replacing humans), where the U.S. can now produce more valuable manufactured products than ever before freeing up those displaced manufacturing workers who now have found or must find employment in other more labor-intensive service-related businesses.

Moreover, the US has maintained its percentage share of rising global manufacturing product over that same aforementioned time period, whereas other countries, such as Japan and Germany, have actually decreased their percentage share of global manufactured product. More specifically, in 2006 U.S. manufacturing revenue, profits, exports, and productivity per employee reached their all time peak! Of course, with the current recession and the regression of the U.S. automobile industry, manufacturing levels are now below the levels of 2006. According to government statistics, manufacturing still accounts for slightly over a third of our economic activity and the U.S. will continue to grow in production value, although manufacturing will continue to decline as a percentage of overall economic activity as the United States is growing faster in services than in manufacturing.

2. Pre-Econ Course or Uninformed View: “It is patriotic for U.S. citizens to “buy American” so that we can help our own economy. When we buy foreign products (i.e., exports), in lieu of American products, we hurt our U.S. economy as we lose American jobs and incomes. I hope the recently passed stimulus bill monies will be spent entirely on U.S. products and services.”

Post-Econ Course and 180 Degree View: The U.S. will benefit the most economically if Americans buy what they consider to be the very best product, in terms of price and quality, regardless of whether it is a foreign-produced product or an American-produced product. One of the greatest “ah-ha” moments in all of economics is when an economics’ student or citizen learns for the first time that every time a U.S. buyer purchases a foreign product (i.e., an “import”) that those same U.S. dollars spent on the foreign product circle back to a U.S.- based company, not a foreign company. Yes, I am telling you that when you (or Wal-Mart, for example) buy Chinese shirts, your same U.S. dollars spent quickly end up in the hands of, say, an Apple, Microsoft, IBM, or General Electric to maintain or increase U.S. employment, profits, and stock prices!

Let me try to explain this concept in more detail so that I may actually be able to convince you of this amazing “180 degree” revelation. I always say the more accurate slogan should be “Buying American is Un-American”, since it creates a weaker America!

Let’s say that the United States (we’ll say Wal-Mart) decides to buy some shirts costing $400 from a Chinese shirt manufacturer, in lieu of buying similar shirts from, say, a shirt manufacturer in Elon, North Carolina (USA). The first key point is that when Wal-Mart buys the shirts from China for $400 it can only pay China with US dollars. Why? Because Wal-Mart has only US dollars! It has no Chinese currency (Yuan). It literally drains its bank account of US dollars that are transferred/paid to China! The second key point is that when China receives that same $400 US dollars for the shirts, China cannot, unfortunately, spend any of the $400 in its own economy since only the Yuan is accepted as a medium of exchange in China! China is now forced to either throw the U.S. currency away (not advised!), or immediately spend the money back to the USA (advised!).

In summary, China has initially traded a product (shirts!) for paper (US dollars!), and those US dollars cannot be spent in China. For China to receive any value at all for the shirts it sent to America, China must now spend the $400 back into the US economy for, say, a few i-Pods from Apple (USA). Cutting through to simplicity, in essence, it’s almost as if Wal-Mart (USA) just paid Apple (USA) $400 directly! Yes, the economic “punch line” is that all spending by the domestic nation on foreign products (imports), in turn, are spent immediately back to the domestic nation increasing or maintaining that domestic nation’s employment, income, and standard of living.

And, yes, let’s not forget about that Elon, North Carolina shirt maker that did not get the original $400 from Wal-Mart in our above example! Any good economy promotes competition and I will be excited to see if that North Carolina shirt manufacturer can “raise their game” (increase productivity and/or quality), and hopefully get the next shirt contract from Wal-Mart! If not, well, that North Carolina firm may just have to close down. But remember the key point is that the $400 spent for the Chinese shirts went to Apple, in lieu of the Elon, North Carolina shirt manufacturer. If Wal-Mart would have “bought American” by buying from the Elon shirt manufacturer, even though the Chinese shirts were preferable, Wal-Mart would have prevented the more effective U.S. business (Apple, in this example) from getting your U.S. dollars by giving them to the less efficient Elon manufacturer. In short, you would have contributed to American inefficiency and mediocrity, hurting our country! And that is un-American!

Now, you may be thinking the following if you have a little economics’ background: “But the US has a growing trade deficit with China, so China may not immediately buy those i-Pods from Apple for $400. And, you are correct, but that is also not a problem for either the United States or China. What China is really doing right now is deciding to temporarily save or invest a minority percentage of their US dollars received from U.S. import purchases. Said another way, China is not buying as many US i-Pods as the US is buying Chinese shirts and, of course, we call that situation the US trade deficit which immediately seems to speak “problem”. But it is really not as big a problem as most people think! China is still spending their “saved” US dollars back into the US economy, but in different ways. China is saving and investing some of those US dollars directly into the United States economy by building plants in America, buying US stock to fund American companies’ expansions, and temporarily saving some of their dollars, for future US purchases, by buying US bonds to help the US government pay for other US government initiatives necessitating borrowing. Eventually, China will sell these US bonds and be forced to use those U.S. dollars to buy those i-Pods or build more plants in America to employ more Americans!

I decided to highlight this particular “180 degree moment” because of the fact that the recently passed $800 Billion U.S. stimulus bill has some “buy American” provisions within it. Based on my intuition, I believe that over 95% of adult Americans believe that these “buy American” clauses somehow help our economy more so than if the stimulus bill was silent on “buy American”, thus allowing stimulus money to be spent on foreign-produced products as well. Yes, it is an economic principle that if U.S. citizens “buy American” driven solely by patriotism (and not because they think the product is superior) the American economy actually becomes weaker as the U.S. dollars spent out of patriotism on that American company are, therefore, unintentionally withheld from another more efficient and deserving American company.

In summary, when citizens of any country in the world buy the product that is best for them based on a combination of quality and price, they will be taking the most patriotic action possible to help their own country they love so much! If a domestic citizen sees the foreign product as a better alternative to the domestic product, buy it! Your money spent will immediately find its way back through the “trade loop” to another business within your country!

Of course, this is why all economists from around the world know that international trade, and not protectionism, helps a country’s standard of living and promotes efficiency and rising standard of livings!

Well enough for now. I could go on and on with more 180 degree moments relating to areas such as standard of living, unemployment, the minimum wage, gasoline taxes, and many others. But we’ll discuss some of those in class and I will cover others through this blog site. For now, I just really hope you look forward to and work hard in your economic course so that, you too, will become a more informed and influential citizen as you begin to see your nation’s economy, and our global economy, in a whole new light!

Discussion Questions:

1. Do you believe that politicians will promise and enact policy that seems on the surface to be beneficial to a nation, but are actually harmful to that nation?

2. After reading this blog do you begin to see how the huge declines in manufacturing employment are more driven by leaps in productivity (machines and know-how)? How else could we be producing more manufacturing value each year if employment is decreasing?

3. What would happen to a nation’s “standard of living” if the government passed a law requiring its citizens to only buy their own domestic products? Why?

4. Do you personally believe you will make your own country’s standard of living grow the fastest if you buy the best product available, whether an import (foreign) or a domestic product?

Next Test – Value of $125,000-a-Year Teachers – NYTimes.com

More on the New York City charter school that is experimenting with paying teachers nearly triple the national average salary of public schools.

So what kind of teachers could a school get if it paid them $125,000 a year?

An accomplished violist who infuses her music lessons with the
neuroscience of why one needs to practice, and creatively worded instructions like, “Pass the melody gently, as if it were a bowl of Jell-O!”

A self-described “explorer” from Arizona who spent three decades honing her craft at public, private, urban and rural schools.

Two with Ivy League degrees. And Joe Carbone, a phys ed teacher, who has the most unusual résumé of the bunch, having worked as Kobe Bryant’s personal trainer.

“Developed Kobe from 185 lbs. to 225 lbs. of pure muscle over eight years,” it reads.

They are members of an eight-teacher dream team, lured to an innovative charter school that will open in Washington Heights in September with salaries that would make most teachers drop their chalk and swoon; $125,000 is nearly twice as much as the average New York City public school teacher earns, and about two and a half times as much as the national average for teacher salaries. They also will be eligible for bonuses, based on schoolwide performance, of up to $25,000 in the second year…

The school received 600 applications. Mr. Vanderhoek interviewed 100 in person.

It’s amazing to me that a school in NYC that pays $125,000 a year and expects teachers to work year round gets so much attention, while international schools are paying teachers nearly as much to work a regular school year, yet 99% of American public school teachers seem totally clueless about the career opportunities available at international schools! Teachers can make $100,000+ at at least four international schools I can think of right now… including the one I’m working at currenty!

I am by no means saying that because of what they pay international schools employ more qualified teachers than a typical American public school. On the contrary, it makes me wonder why if excellent pay can attract 600 applicants for 8 positions in a NYC school, why do so many international schools paying more than twice what American public schools pay still find it difficult to recruit teachers?

When are highly skilled American teachers going to realize that they can earn incredibly competitive salaries by teaching overseas? Maybe the best of the best will just wait for another charter school offering $100,000+ to open up so they can compete with hundreds of applicants for a handful of teaching positions. OR they could go to the next ISS international recruiting fair and accept a job in London, Tokyo, Singapore, Hong Kong, Zurich, Dubai or a handful of other cities where international teachers regularly make in the $100,000 range and be lavished with offers from schools in exciting, exotic locales from all corners of the globe!

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look – washingtonpost.com

Here in Switzerland I enjoy the luxury of having to pay a relatively small federal income tax of 9.6%. In the US, at my current income level, I would be paying a 25% federal income tax. On the other hand, everything I buy here in Switzerland, from food to clothes to train tickets and bike parts, costs me an additional 7.6% of value added tax. If a product is imported, chances are there is also an additional 20% import tariff. In other words, what I save coming in (because of the low direct tax) I lose going out (through high indirect taxes).

The incentive, therefore, is to save as much of my income as possible. I shop much less than I would in the US where indirect taxes are much lower, but when I do shop prices are much higher. Much of Switzerland’s government revenue comes from the value added tax and other indirect taxes, which means households keep much more of their earned income.

In the United States, where the government has not seen a balanced budget since 2001, there has been much talk about creating a national sales tax to help raise revenue to pay for many of the social plans that the Obama administration wants to pursue, such as national health care. VATs and sales taxes are regressive, which means more of the tax burden is born by low income households compared with high a direct, income tax, which is progressive, meaning the higher a household’s income, the greater percentage it pays. But with budget shortfalls expected to reach $4 trillion over the next four years, new sources of tax revenue are needed.

“Everybody who understands our long-term budget problems understands we’re going to need a new source of revenue, and a VAT is an obvious candidate,” said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. “It’s common to the rest of the world, and we don’t have it.”

The surge of interest in a VAT is testament to the extraordinary depth of the nation’s money troubles. While some conservatives have long argued that a consumption tax would provide a simpler and more efficient alternative to the byzantine U.S. income tax code, this time it’s all about the money.

To counter claims that a national sales tax is regressive, advocates point out that such a tax would allow the federal government to lower income tax rates for low income Americans, giving them more disposable income to spend on goods and services, which would be more expensive because of the VAT.

Another option the government should consider is a tax on greenhouse gas emissions. Currently, Obama is advocating a carbon permit market, which would be less effective at generating income for the government as permits, once they are issued or auctioned to industry, are bought and sold by firms, creating revenue for companies and not the government. A carbon tax, on the other hand, would create new tax revenue for the federal government and help reduce the negative externalities causing global warming and encourage development of alternative “green” methods of production.

In the short-term, it is unlikely that the US government will legislate any significant new taxes. Carbon taxes have been ignored by the Obama administration and Congress, under the argument that during a recession any new tax on industry might just break the nation’s manufacturing and energy sectors’ backs. A VAT is just as unpopular, for the reason that any policy raising consumer prices puts even greater burden on already strapped household incomes. Tradeable carbon permits are popular for the reason that they appear to be a “market based” approach to reducing greenhouse gas emissions; but Congress is talking about putting a price ceiling on carbon permits of $28 per ton, a price at which the incentives to reduce emissions among firms is minimal.

America’s long period of strong growth, low savings, and deficit financed government spending will necessitate belt-tightening in the near future as ultimately the government will have to start financing its budgets through tax revenues, not the issuing of new debt. Carbon taxes, higher marginal income taxes, or a national sales tax are all options the Obama administration can choose from. For now, it appears it’s choosing none of these, and instead selling more bonds to the public, foreigners, and the Fed, increasing the moneys supply in the hope that households and firms begin spending once more. The path towards fiscal discipline is a hard one to get started on, especially during a recession when no new taxes are politically viable.

Discussion Questions:

1. What make’s a sales tax regressive if everyone has to pay, say, 10% on top of the regular sales price of a good or service?
2. How does the US government finance its massive budgets when its revenue from taxes don’t even come close to equaling the amount of spending?
3. Why is it important for a country, in the long-run, to achieve a balnced budget?
4. What would you prefer to do: pay a higher income tax or a higher sales tax? What are the pros and cons of direct versus indirect taxes?

Help Wanted: Why That Sign’s Bad – BusinessWeek

This week’s cover story in Business Week magazine tells an interesting story about unemployment in America. Listen to the podcast or follow the link above to read more of this story:

 

 Help Wanted: Why That Sign's Bad: Play Now | Play in Popup | Download

Surprising statistic: In the midst of the worst recession in a generation or more, with 13 million people unemployed, there are approximately 3 million jobs that employers are actively recruiting for but so far have been unable to fill. That’s more job openings than the entire population of Mississippi.

Sound like good news? It’s not. Instead, it’s evidence of an emerging structural shift in the U.S. economy that has created serious mismatches between workers and employers. People thrown out of shrinking sectors such as construction, finance, and retail lack the skills and training for openings in growing fields including education, accounting, health care, and government. At the same time, the worst housing bust in decades has left the unemployed frozen in place. They can’t move to get work because they can’t sell their homes.

In IB and AP Economics we teach that there are three types of unemployment an economy may experience, ranked roughly in order from the least undesirable to the most undesirable (from a macroeconomic perspective):

• Frictional unemployment: This accounts for people who are “in between jobs” or fresh out of college looking for their first jobs.
• Structural unemployment: This is caused by the changing structure of an economy. As America’s manufacturing sector shrinks and its education and health care sectors grown, those whose skills lie in manufacturing become structurally unemployed.
• Cyclical unemployment: This is also called “demand-deficient” unemployment because it is caused by a fall in aggregate demand or overall spending in the economy.

America today is clearly experiencing all three types, but due to the particular circumstances of the recession, the American worker is finding it it harder than ever to match his skills with an appropriate job. Below are some of the industries with the most and the fewest job openings today:

Most openings:

• Education
• Health care
• Government
• Energy (such as wind, oil, natural gas)
• “Analytics” (i.e. business data analysis by firms such as IBM)

Fewest openings:

• Construction
• Manufacturing

Unfortunately for the large numbers of unemployed construction and factory workers, the kinds of skills required to work in the fields with the most job openings are prohibitively different from those learned in their previous industries. In addition to a mismatch of skills between the industries in which jobs are being lost and those in which labor is in demand, there is also a geographic mismatch in the labor market. Below are the states with the least and the most job openings:

Most job vacancies (states with large energy sectors: oil, natural gas and windmills)

• North Dakota
• Wyoming

Least job vacancies (states with large manufacturing and construction sectors)

• North Carolina
• California
• Michigan

Historically, the geographic factor has not posed an issue to American workers, and when jobs opened up in one part of the country, Americans would pack up and move where necessary to find work. Today, however, with the collapse of house prices, more and more Americans find themselves stuck with a house they can’t sell in a part of the country where they can’t find a job.

To paraphrase the podcast above, “the US in danger of looking like Europe. The European job market has been described as ’sclerotic’; people don’t respond to want ads because of the generous long-term unemployment benefits offered by European governments. Europeans have historically been geographically immobile due to nationalist ties to their home countries.” Today, the US job market reflects some of the same “sclerosis” as that of Europe.

America is facing the perfect storm of unemployment. At the same time that the economy is undergoing its most significant structural change since the Industrial Revolution brought millions of American workers from the farm fields into factories, it is facing the most significant decline in private sector spending (consumption, investment and exports) since the great depression. Put this together with the relative immobility of the American worker caused by the housing crisis, and unemployment has climbed to its highest level in three decades.

This interesting story ends with a glimmer of hope for the American worker:

To fight this sclerosis, the White House is using $3.5 billion of the stimulus for training, while boosting support for community colleges. Classes for factory workers seeking entry-level health-care careers have shown some success.

The truth is, displaced workers may have to move down a few rungs as they switch careers because their skills are irrelevant in their new roles… Many laid-off Wall Street financial engineers still haven’t absorbed that, says Fred Wilson, a partner in Union Square Ventures, a New York venture capital firm. “For them to take a job that pays a lot less, they have to make a meaningful change in their lifestyle. And that is an issue.”

Employers need to bend as well, recognizing that the candidates they’re seeking may not exist. Mark Mehler, co-founder of CareerXRoads, a staffing strategy consulting firm in Kendall Park, N.J., tells employers: “You’re hiring potential….You’ve got to train them.”

A mismatch of work and workers is never a good thing. But smart policy—combined with realism on the part of employers and job seekers—can minimize the disruption.

Discussion Questions:

1. In what way may structural unemployment be a sign of a healthy economy, rather than a sick one?
2. Part of the Obama stimulus package includes increased benefits for unemployed Americans. How may this pose an obstacle to reducing unemployment in America?
3. Historically, the natural rate of unemployment in most European economies has been higher than that of the United States. Why is this?
4. Do you think America’s NRU will return to its historic level (4-6%) when the economy eventually recovers from the current crisis? Why or why not?

One of the greatest “ah-ha” moments in all of economics is when an economics’ student or citizen learns for the first time that every time a domestic buyer purchases a foreign product or import that those same U.S. dollars spent on the foreign product go to a U.S.-based company, not a foreign company. Yes, I am telling you that when you (or Wal-Mart) buy Chinese shirts, your same U.S. dollars spent quickly end up in the hands of, say, Apple, Microsoft, Garmin, or General Electric to increase U.S. employment, profits, and U.S. stock prices!

I decided to write this particular blog because of the fact that the recently passed $800 Billion U.S. stimulus bill has some “buy American” provisions within it. Based on an intuitive hunch, I believe that over 99% of adult Americans believe that these “protectionist” clauses somehow help our economy. Yes, the vast majority of U.S. adults believe that it is clearly more advantageous to “buy American” in order to keep the money or wealth within America in order to increase U.S. employment, profits, and U.S. stock prices. In true economic fact, however, if U.S. citizens “buy American” solely out of patriotism (and not because they think it is a superior product) they actually HURT America because the U.S. dollars spent out of patriotism on that American company are, therefore, unintentionally withheld from another more efficient and deserving American country via the “trade loop”.

Let me try to explain this “trade loop” in more detail so that I may actually be able to convince you of this amazing “180 degree” revelation: “Buy American” is Un-American

Let’s say that the United States (we’ll say Wal-Mart) decides to buy many shirts costing $400 from a Chinese shirt manufacturer, in lieu of buying those same shirts from, say, a shirt manufacturer in Elon, North Carolina (USA). The first key point is that when Wal-Mart buys the shirts from China for $400 it can only pay China with US dollars. Why? Because Wal-Mart has only US dollars! It has no Chinese currency (Yuan). It literally drains its bank account of US dollars that are transferred/paid to China! The second key point is that when China receives that same $400 US dollars for the shirts, China cannot, unfortunately, spend any of the $400 in its own economy since only the Yuan is accepted as a medium of exchange in China! China is now forced to either throw the U.S. currency away (not advised!), or immediately spend the money back to the USA (advised!).

In summary, China has initially traded a product (shirts!) for paper (US dollars!), and those US dollars cannot be spent in China. For China to receive any value at all for the shirts it sent to America, China must now spend the $400 back into the US economy for, say, a global positioning system (GPS) from FleetMatics out of Waverly, Massachusetts (USA). Cutting through to simplicity, in essence, it’s almost as if Wal-Mart (USA) just paid FleetMatics (USA) $400 directly!

Yes, the economic “punch line” is that all spending by the domestic nation on foreign products (imports), in turn, are spent immediately back to the domestic nation increasing the domestic nation’s employment, income, and standard of living. (Note; this is also shown and reported in a nation’s balance of payments schedule if you are skeptical about what you are reading!)

And, yes, let’s not forget about that Elon, North Carolina shirt maker that did not get the original $400 from Wal-Mart in our above example! Any good economy promotes competition and I am excited to see if that North Carolina shirt manufacturer can “raise their game” (increase productivity and/or quality), and hopefully get the next shirt contract from Wal-Mart! If not, well, that North Carolina firm may just have to close down. But remember, the key point, the $400 spent for the shirts went to Fleetmatics in Waverly, Massachusetts, in lieu of the Elon, North Carolina shirt manufacturer. If you would have “bought American” even though the Chinese shirts were preferable, you would have prevented the more effective U.S. business in Waverly from getting your U.S. dollars by giving them to the less efficient Elon manufacturer. In short, you would have contributed to American inefficiency and slowing productivity, hurting our country! And that is un-American!

Now, you may be thinking the following if you have a little economics’ background: “But the US has a growing trade deficit with China, so China may not immediately buy that GPS system from FleetMatics for $400. And, you are correct, but that is also not a problem for either the United States or China. What China is really doing right now is deciding to temporarily save or invest a minority percentage of their US dollars received form U.S. import purchases. Said another way, China is not buying as many GPS’ as the US is buying shirts and, of course, we call that phenomenon the US trade deficit which immediately seems to speak “problem”. But it is really not as big a problem as most people think! China is still spending their “saved” US dollars back into the US economy, but in different ways. China is saving and investing some of those US dollars directly into the United States economy by building plants in America, buying US stock to fund American companies’ expansions, and temporarily saving some of their dollars, for future US purchases, by buying US bonds to help the US government pay for other US government initiatives necessitating borrowing. Eventually, China will sell these US bonds and be forced to use those U.S. dollars to buy that GPS system or build more plants to employ more Americans!

In summary, when citizens of any country in the world buy the product that is best for them based on a combination of quality and price, they will be taking the most patriotic action possible to help their own country they love so much! If a domestic citizen sees the foreign product as a better alternative to the domestic product, buy it! Your money spent will immediately find its way back through the “trade loop” to another business within your country!

Of course, this is why all economists from around the world know that international trade, and not protectionism, helps a country’s standard of living and promotes efficiency and rising standard of livings!

CHICAGO, January 7, 2008 – How much money does it take to be considered rich?  It turns out that $1 million just doesn’t cut it, anymore.

In fact, rich today requires at least $5 million, according to a new survey of affluent households, defined as those with investable assets of $500,000 or more.  When asked how much money it takes to be rich, 45% chose $5 million, 25% selected $25 million, and 8% picked $100 million, according to the research by Millionaire Corner (http://www.millionairecorner.com/index.php), a newly launched website powered by Spectrem Group.  Only 22% said $1 million is enough to be rich.

 Achieving such wealth – and holding onto it for generations – is the topic of a new book by Spectrem’s Catherine S. McBreen and George H. Walper, Jr. titled “Get Rich, Stay Rich, Pass It On: The Wealth Accumulation Secrets of America’s Richest Families” (http://getrichstayrich.net/).  Published this month by Portfolio and available in bookstores now, the book is based on years of research in addition to interviews with ordinary individuals who were able to amass enough wealth to pass on to future generations. “All you really need is to know how to use the same wealth-building tools Carnegie and du Pont and all the other progenitors of sustainable fortunes used,” McBreen and Walper write.  “They created the model but they didn’t patent it.  It’s available for your use, and this book is the operating manual.” 

The authors found that the proper mix of entrepreneurial activities and income-producing real estate is the key to achieving building perpetual wealth. “Get Rich, Stay Rich, Pass It On” walks readers through not only the theory but the practice of building sustainable fortunes.  It not only lays out the model, but provides exercises to help readers bring their own finances into focus and determine what they need to do to develop perpetual wealth of their own.

 

* * *

 The data on how much it takes to be rich are based on 253 telephone interviews conducted in December 2007, with a margin of error of plus or minus 6.2 percentage points.  Interviews were conducted with the financial decision-makers in households with $500,000 or more in investable assets. 

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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Is international trade really as good for a nation’s standard of living as economists say? And, what the heck is comparative advantage anyway? And what about the foreign currency market and those confusing supply & demand curves? Yes, the quest to understand the economic benefits of international trade is enough to make any citizen or first-year economic student vomit, tremble, get a headache, or at least curse.

Having been an AP Economics’ teacher for 8 years now, I must candidly admit that it took me a few years of study and research to try to reduce international trade to pure simplicity and understanding. Let me give it a shot below. I love simplicity.

The average “Joe Citizen” in almost any country in the world is suspicious of trade, and rightfully so, since he reads or observes factories being closed, jobs lost, and the feeling that somehow his country is going down the toilet as his own home fills up with foreign-made products. Unfortunately, what Joe Citizen does not understand is that the money his own nation is spending for those foreign products (imports) is spent right back into the pockets of his own country, increasing employment and income.

Let’s take a single, real-world, international trade example being careful to accurately explain the whole economic story:

Let’s say that the United States (we’ll say Wal-Mart) decides to buy several shirts costing $400 from a Chinese shirt manufacturer, in lieu of buying those same shirts from a shirt manufacturer in Elon, North Carolina (USA). As a US AP Economics’ teacher I am one of about only 47 Americans in Fairfax County Virginia, which not coincidentally ties to the number of AP Students I taught this year, that quickly understand that the decision to purchase the shirts from China, in lieu of the US manufacturer in North Carolina, is actually BETTER for America and will make my home country better off in the long run! What? Mr. Latter, are you Benedict Arnold, the American traitor, reincarnated?

Let me explain how the US benefits (and China too!) in simple terms ignoring foreign currency transactions, which will just confuse the discussion and cause the student to lose sight of what is really happening:

The first key point is that when Wal-Mart buys the shirts from China for $400 it can only pay China with US dollars. Why? Because Wal-Mart has only US dollars! It has no Chinese currency (Yuan). It literally drains its bank account of US dollars that are transferred/paid to China!

The second key point is that when China receives that same $400 US dollars for the shirts, China cannot, unfortunately, spend any of the $400 in its own economy since only the Yuan is accepted as a medium of exchange in China! China is now forced to either throw the currency away (not advised!), or immediately spend the money back to the USA (advised!).

In summary, China has actually traded a product (shirts!) for paper (US dollars!), and those US dollars cannot be spent in China. For China to receive any value at all for the shirts it sent to America, China must now spend the $400 back into the US economy for, say, a global positioning system (GPS) from FleetMatics out of Waverly, Massachusetts (USA). Cutting through to simplicity, in essence, it’s almost as if Wal-Mart (USA) just paid FleetMatics (USA) $400 directly for the shirts!

Yes, the “punch line” is that all home-currency spending by the domestic nation on foreign products (imports), in turn, are spent right back to the domestic nation increasing the domestic nation’s employment, income, and standard of living. (Note; this is shown in a nation’s balance of payments schedule which always nets to zero, but, yuk, who cares about that right now with summer coming!)

And, yes, let’s not forget that Elon, North Carolina shirt maker that did not get the original $400 from Wal-Mart in our above example! Our nation loves competition (ready for the Olympics?) and I am excited to see if that North Carolina shirt manufacturer can “raise their game” (increase productivity), and hopefully get the next shirt contract from Wal-Mart or some other firm! If not, well, that North Carolina firm may just have to close down.

If you are still reading this post at this point, you may be thinking the following if you have a little economics’ background: “But the US has a growing trade deficit with China, so China may not immediately buy that GPS system from FleetMatics for $400”. And, you are correct, but that is also not a problem for either the United States or China. What China is really doing right now is deciding to temporarily save or invest a minority percentage of their US dollars received back into America in lieu of buying US products. Said another way, China is not buying as many GPS’ as the US is buying shirts and, of course, we call that phenomenon the US trade deficit which immediately seems to speak “problem”. But it is really no problem at all! China is still spending their “saved” US dollars back into the US economy, but in different ways. China is saving and investing some of those US dollars directly into the United States economy by building plants in America, buying US stock to fund American companies’ expansions, and temporarily saving some of their dollars, for future US purchases, by buying US bonds to help the US government pay for the war in Iraq, the war against terrorism, and several other US government initiatives necessitating borrowing. Eventually, China will sell these US bonds and buy that GPS system or build more plants to employ more Americans!

Now one last thing. Promise! Let’s get back to why trade is really so economically advantageous to any nation that pursues it. And by advantageous, I mean how it increases our incomes and standards of living. In one word, the answer is “productivity”. If we go back to the original example of the US buying shirts from China and China taking the US dollars to buy the GPS, we remember that the shirt manufacturer from North Carolina was “left out in the cold” because Wal-Mart did not buy the shirts from them. We can logically conclude that perhaps some Chinese manufacturer of GPS systems was “left out in the cold” because some Chinese business elected to buy from FleetMatics in the USA, and not the Chinese GPS manufacturer. Wow, I love global competition! What a great way to incent businesses in both the USA and China to compete against each other and increase their productivity and conserve our nations’ scarce resources, increase our choice, and lower our costs!

Discussion Questions:

1. Which basic economic principles underly the emergence of international trade as a global economic force.
2. Who are the winners and losers of trade between the US and China as explained above?
3. Why do you think free trade is such a controversial topic among certain groups of Americans an other Western nations’ people?

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!

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.

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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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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.

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Bill Gates Issues Call For Kinder Capitalism – WSJ.com

“We could make market forces work better for the poor if we could develop a more creative capitalism…” – Bill Gates at the 2007 Harvard commencement address

Is capitalism capable of lifting the world’s 4 billion poor people out of poverty? Bill Gates, the world’s greatest beneficiary of capitalist markets, thinks the system that forms the foundation of our market economy requires some re-thinking. Gates is calling for “creative capitalism” in which firms respond to incentives aimed at developing technologies that serve the world’s poor.

Gates first expressed his interest in a capitalist system with a focus on helping the poor in his Harvard commencement address last year, and reiterated his vision last week at the World Economic Forum in Davos, Switzerland. Gates envisions a future where profits will motivate industies to create goods and services not just for the top 20% of the world’s income earners, those in the rich countries of the OECD (the “country club of the UN” as Hans Rosling calls it), but by developing products that are meant to benefit the world’s poorest people, those in the bottom 20%, who suffer most from poverty.

Watch the videos below and discuss the prospects of Gate’s vision becoming a reality.

June 2007 at Harvard

and January 2008 at Davos

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Grinding poverty defies China’s boom – International Herald Tribune

Here at SAS my year two IB Econ students have started off the new year with a new unit: Economic Development. So far in the semester we’ve learned about what makes economic development different than economic growth. While gross domestic product may offer an indication of a country’s level of economic activity and output, it says little about the reality of life for the common person of developing countries.

To offer a more rounded figure for determining the level of economic development, the United Nations Development Program has created an alternative to GDP, the Human Development Index. The HDI accounts for the GDP per capita, the average level of primary and secondary education attained, literacy rates, and the life expectancy of citizens, to offer a glimpse into the reality of not just material wealth, but health and education in developing countries.

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The Nano comes with its own moral dilemma. – By Anne Applebaum – Slate Magazine

Tata Motors of India recently launched the world’s cheapest automobile, the Nano.

“…meet the Nano, possibly the most significant new car of the decade. Small, cute, and snub-nosed, it fits four people and a duffel bag, has a single windshield wiper, travels at 60 mph, and it’s all yours for the princely sum of $2,500…”

Tata plans to build and sell 250,000 Nanos this year in India, spreading production to Africa, South America, and Southeast Asia. Clearly the company is targeting not the traditional auto markets of Europe and North America, rather the regions traditionally thought of as poor and thus not associated with auto sales.

What is the meaning of this “car for the masses”? At first glance, it looks like the perfect solution for bringing millions of the world’s poor (if not super-poor) closer to the dream of achieving a quality of life previously only accessible by the world’s middle class and rich. Great,  so what could possible be bad about fulfilling the dreams of so many of the world’s poor? The answer? Externalities…

“Though the small Nano uses less gasoline than many larger cars, the enormous potential numbers could mean an equally enormous environmental impact. Since it will be a long time before Nano drivers will be able to afford the $20,000-plus hybrids now on the market, let alone a Honda FCX Clarity, the prototype experimental hydrogen car thought to be worth as much as $10 million apiece, that means an exponential rise in carbon emissions as well as other kinds of pollutants. The United Nations’ top climate scientist, Indian economist Rajendra Pachauri—chair of the Intergovernmental Panel on Climate Change, which shared the Nobel Peace Prize with Al Gore—has said he is already “having nightmares” about precisely this scenario.”

Herein lies the moral dilemma of the Nano: where does society’s desire to improve the lot of the world’s poor come into conflict with society’s desire to to improve the environment and minimize the impact global warming?

What do you think? Do the social benefits of a $2,500 car exceed the social costs it will likely impose? Does the Nano’s $2,500 price incorporate the full costs that its existence places on society and the environment? Should we jump for joy at the thought of millions upon millions of the world’s poor finally having access to the convenience of automobile transport? Or should we pause with uncertainty to contemplate the effect on the environment and the social costs that millions of cheap cars will impose on the world?

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Foreign Policy: Why We Trade

Professor Russ Roberts, host of the EconTalk podcast, has an essay in the latest issues of Foreign Policy journal titled “Why We Trade”. In this piece, Roberts defends the benefits of trade from a broad perspective, beyond the popular political view of trade, usually along the lines of “exports, good – imports, bad”. Roberts compares this line of thinking (characteristic of presidential candidates of both the Republican and Democratic parties), to the 14th century, pre-Adam Smith view of world trade, known as mercantilism.

Mercantilism was a view of global economic interaction that placed emphasis on the accumulation of gold and other precious metals from abroad in exchange for your country’s exports. The doctrine failed to recognize the importance of imports from abroad, as this was viewed as a loss of wealth to foreigners. Mercantilists viewed wealth in terms of bullion or the amount of precious metals a country owned. Today, of course, our understanding of wealth has evolved to account for the amount of output, or products (goods and services), we are able to consume. Herein lies the flaw in the rhetoric of modern politicians who, “are always talking about the necessity of other countries’ opening their markets to American products. They never mention the virtues of opening U.S. markets to foreign products.”

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How the World Works: Who Invented Calculus? – Salon.com

IB students, here’s a blog post you’ll want to read closely once we start studying economic development later this semester. Andrew Leonard at Salon.com refers to a study titled “Does Economic Growth Reduce Fertility? Rural India 1971-1999″.

Interesting stuff. Leonard points out a peculiar paradox of growth in India:

India’s Green Revolution has been criticized by those who wonder if an agricultural model reliant on large inputs of fertilizers and pesticides is environmentally sustainable over the long run. But if in the short run these spikes in agricultural productivity contribute to population stabilization, then we have a nifty paradox: a (possibly) unsustainable agricultural model contributing to (possibly) sustainable population levels.

This article and the study it refers to might make for an interesting commentary for your internal assessment, or as a source for an extended essay on growth and development. Any opinions on the supposed correlation between economic growth and decreased fertility?

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Cuba libre | Free exchange | Economist.com

Here’s a piece from the Economist’s blog about whether America removing its embargoes on trade with Cuba would have all that big an impact on the lives of the average Cuban.

Trade is, it goes without saying, wonderful stuff. But trade with America isn’t that marvelous. Cuba is, right now, free to trade with just about every other country in the world, yet it’s still a pit of economic misery for most of its citizens. Yes, shipping costs would be higher, stopping some trade from happening. But China is much farther from America than Cuba is from Europe; it still manages to run an enormous trade surplus with that country.

According to the CIA World Factbook, Cuba exports roughly $3 billion a year. Even assuming that the American embargo is so effective that it has slashed Cuba’s exports in half, that would give Cuba new gains from trade of only another $3 billion, or $272 for each of its 11 million citizens. (We assume for the sake of argument that Cuba is so true to the Socialist Revolution that elites will not appropriate a single extra dollar of the surplus to themselves, or to wastefully showy political projects.) It should be obvious from descriptions of Cuba that this will not be enough to lift Cubans out of the grinding poverty in which they currently live.

Trade can only make countries better off if they make something worth selling; Cuba largely doesn’t. Opening up trade with America, but not opening up the sclerotic state owned economy to internal change, would result i a little extra income on the margin, but it has no prospect of transforming the economy. Without little things like relative changes in price signals to allow inputs to flow to their highest valued uses, free movement of capital to profit opportunity, and incentives for higher quality work, trade cannot work any economic miracles.

Discussion Questions:

1. Based on what you read above, how much freedom do you think exists in Cuba’s economy? What type of economic system does Cuba have?
2. Besides free trade, what else must Cuba do to help its citizens to escape poverty?
3. Explain and discuss the following passage: “Without little things like relative changes in price signals to allow inputs to flow to their highest valued uses, free movement of capital to profit opportunity, and incentives for higher quality work, trade cannot work any economic miracles.”

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