A Proposition for Office

Mitt Romney, presidential candidate and former Governor of Massachusetts, puts forth an economic policy dubbed “The 59-Point Plan”.   Romney is firm in the belief that the private economy will inexorably produce millions of new jobs when it resumes growing at 3% or more.  Therefore, Romney intends to cut the top corporate income-tax rate to 25% from 35%, due to the common bipartisan consensus that the United States’ current rate hurts American companies.  According to the Wall Street Journal, the former governor proclaimed he favored “tax reform with lower individual tax rates”, but only “in the long run”.  On spending, Romney would set a cap on spending over time at 20% of the total GDP.  Yet, he is unclear about what sections of spending he would be cutting except for nonsecurity domestic programs.  Specifically, according to the same article, Romney’s rollout centers on “jobs and economic growth”.  Romney hopes to devitalize most of the capital gains tax cut’s economic impact by only affecting those who earn less than $200,000 a year.  He ultimately anticipates the allocation of funds to another portion of the economy will help foster expansion.  Romney’s proposals open a conduit for free trade and expanded choice in the market, but at a large cost of reduced governmental funds and confidence in governmental investment.    The candidate’s potential policy “contains a number of options for incremental entitlement reform” without the overbroad condemnation of Social Security.  With increased tax reductions, Romney aims to aid in the elimination of economic inefficiency in the overall market by constricting dead-weight loss.  Essentially, Romney calls for tax breaks not extreme as Perry’s, but potent enough to have influence over the economy.

Information taken from “Romney Unveils Pro-Business Economic Plan”, The Wall Street Journal, 2011

Conflagrations in the Euro Zone

   Even as the euro zone speeds towardsa potententially disasterous crash, most people are assuming that a miracle will occure because European leaders will do whatever it takes to save the single currency.  A euro break-up would inevitably cause a global bust worse even than the one in 2008-2009.  The world's most financially integrated region would surely be torn apart by defaults, bank failures, and the imposition of capital controls.  The odds of a miracle recovery are dwindling fast.
    Most of the cause stems from the fact that panic has rapidly proliferated across European banks.  Their access to wholesale funding markets has almost completely dried up, ensuring minimal to no economic profit.  As banks refuse to lend to each other and large national firms begin pulling deposits from peripheral countries' banks, these acts of blatant fear lead many to believe hope is becoming lost.
    "The Economist" predicts due to the collapse in business and consumer confidence, there is little doubt that the euro zone will see a deep recession in 2012, with a possible fall in output as much as 2%.  Past fiscal crises show that the only further prevention of this downward spiral comes from bold policies to regain market confidence.  The only institution that can provide immediate relief id the ECB.  Vast monetary loosening should cushion the recession and buy time.
    However, the future of the Euro Zone looks exceedingly bleak.  As many companies expeirence a temporary shutdown in the short-run, even the most skilled economists can not truly accurately predict what will happen to the euro zone.  Only time will tell.

Information taken from 'Is this really the end?' -- "The Economist" December 2011

The Economics of Thanksgiving

Gobble-Gobble:  Choosing the Perfect Turkey 

            In preparation for this year’s celebratory feast of gratitude, the first thing on the “King Checklist” was the turkey—a decision that required a meticulous cost-benefit analysis.

            Basically, it came down to two choices of meats.  The first—a cheaper turkey my family has bought for the past five consecutive holidays—seemed the favorite.  Because of the lower price, monetary value could be allocated elsewhere, like towards scrumptious pumpkin pie.  However, the second option—an expensive, pre-ordered turkey—still held weight.  As my father always says, “Quality holds its own benefit”.  Price aside, the latter bird offered a much higher utility.

            Utilizing the power of economics, my family decided to go with the organic turkey because of the greater satisfaction it presented.  The deliberative process was rough, but the ultimate decision proved deliciously worthwhile!

The Law of Cheese and Crackers

            After watching the Macy’s Day Parade, it is customary for my family to nibble on a small snack before the big dinner.  This quick food has varied over the span of many Thanksgivings.  It just so happens that this year’s appetizer was heavily influenced by the law of demand.

            In the search for a delectable snack, my mother came across the bargain section.  Naturally, price reductions were galore.  Locating a cheese and crackers package on sale, my mother swiftly bought five of them.  Her action is in accordance with the aforementioned law, showing that a decrease in price leads to an increase in overall demand.

            The copious amount of dairy products still left over is a testament to fiscal theory.

Ocean Spray Cranberry Sauce?  I Think Not.

            It happens annually.  Every Turkey Day, one way or another, a catastrophe occurs.  This year’s abominable conflagration turned out to be the overlooked purchase of cranberry sauce.  But have no fear.  I was assigned the task of solving this conflict.

            Packing a recently-baked roll into my mouth, I grabbed my keys and drove to the nearest open supermarket.  Intent on my objective, I hastily found my way to the correct food aisle.  Planning on taking an Ocean Spray brand can, I grabbed one and started heading towards the nearby checkout line.  Yet, during that quick time lapse, I discern a glimpse of the price—a 30% increase than what it normally is!

            Contemplating the situation, elasticity comes to mind.  Due to the fact that multiple substitutes exist, I decided to not buy the Ocean Spray product.  Being an elastic good, I decide to purchase a much more comfortably priced brand of cranberry sauce.  The high elasticity made it easy for me not to conform to such a drastic price change.

            That’s one more thing to be thankful for: cranberry sauce is not inelastic!

Stuffed of Stuffing

            For me, the highlight of the Thanksgiving dinner is the stuffing, my mother’s personal specialty.  The other cuisine is certainly nice, but it’s the stuffing that drives my love for the holiday.  As such, I eat multiple servings.

            My feasting starts off in complete jubilance.  With each bite, I feel more and more satisfied.  There seems to be no end to the joy I receive from gobbling down an abundance of buttery goodness.  But of course, the inevitable law of diminishing marginal utility eventually surfaces.  There comes a point of eating where the more I eat, the less satiated I feel.  When the stuffing becomes painful to down, I know it’s time to step back and let my stomach convalesce. 

            Like any product in the economic world, increased intake of stuffing inexorably becomes burdensome and ineffective.  Therefore, it is very beneficial to know one’s limits.  Especially when it comes to food!

Black Friday Shopping

            The day after Thanksgiving, I headed to Wal-Mart to get a head start on Christmas shopping for my two sisters.  The alluring thought of Black Friday deals lessening damage to my wallet brought me in speedy time.

            The problem was, however, what I should buy for them.  For the longest time, I have not had a clue what the female sector of the population enjoys receiving as gifts.  From past experience, clothes and jewelry seem to do the trick (I think).  And so, knowing I could care less about which amount of each good I bought, I plotted an indifference curve.  Factoring in my scant budget line, I was able to deduce my optimal consumption bundle for clothes and jewelry for my sisters using that graph.

            Even with taxation, I ensured I got a great deal on the busiest shopping day of the winter season because of the dropped prices.  Mastery of indifference curves really does come in handy!

Wikitroubles

Many thought it impossible, but Wikipedia, a non-profit public information-sharing site that allows anyone to edit its content, has become a major Internet power.  It’s the world’s fifth-biggest website, with 400 million visitors every month.  In order to maintain itself, the online encyclopedia needs its user’s money and volunteer’s time.  Surprisingly, the former is the easier task.

When the founder of Wikipedia, Jimmy Wales, beseeched users to help pay for piling bills, the site reached its target of $16 million in just 50 days.  The majority of donations stem from either rich individuals or affluent companies who admire the site’s unrestricted access and equitable mantra.  The extraordinary increase in demand for a database of variant knowledge feeds customer appreciation.  That said, consumer surplus is considerably high. Though such large monetary sums are nice, Wales would much rather prefer funding to come from large numbers of happy, average-income users; a stable alternative representative of a content constituency of Wikifans.  Besides the fact that Wikipedia can fundraise with relative fluidity, not much capital is actually needed.  The site has just 78 full time staff and 370 servers, compared to a staggering 60,000 for Facebook and over 1 million for Google.  Also, it spends 44% of proceeds on technology, with administration costs just making up a quarter.  It doesn’t accept any advertising.

As for “raising time”, the task is much more tedious.  Month-on-month article growth in the English Wikipedia was as high as 5% in 2006 but has obstinately stayed at 1% for the past two years.  Even worse, Wikipedia fears that without immediate action, the number of active editors will decline below 80,000 by next year.  The scarcity of editors makes for an exiguous amount of content production.  Says Wikipedia’s chief global development officer, “90% of users outside of Wikipedia’s ‘core community’ aren’t even aware they can edit the encyclopedia”.  Users seem to ignore the plentiful invitations to get involved, limiting potential growth in total utility.

Wikipedia presents a unique economic conundrum.  In order for the “customers” of Wikipedia to get the most out of the site they know and love, they are going to have to become actively involved the back-breaking process of editing and revision.  Payment is augmentation.

(Information taken from “Free but not easy”, The Economist November 11^th 2011)

A Surge in Insurance

The future of Barrack Obama’s healthcare bill is relatively ambiguous.  Its main provisions will activate until 2014.  Until then, the Supreme Court may hastily strike it down or Congress may enact serious legislative restraints. However, even though the law has yet to take effect, implicit repercussions are already occurring, especially in the insurance field.  It is the latest deal to extend insurers’ grip into new areas of healthcare.

Normally speaking, insurers “protect margins by micromanaging claims and hiking premiums”, leading to perverse incentives for high quantity, low quality procedures.  Thus, from 2014, the law will require everyone to buy health insurance and offer subsidiaries to those who cannot afford it. As more people purchase insurance, “firms’ revenue will more than double to $1.2 trillion by 2019”.  Yet, profits will be squeezed thanks to a new tax, a minimum standard for benefits and new scrutiny of increases in premiums.  With this in mind, insurers are keen to diversify.  Like Aetna and other major healthcare insurance companies, many are hedging against a volatile private market by turning to the public one, like Medicare Advantage. 

Moreover, insurers are spreading to new businesses.  This past year, Aetna bought an information technology requirement.  Humana recently purchased a chain of clinics.  For the UnitedHealth Group , two non-insurance subsidiaries already “account for 20% of its $94 billion annual revenue”.  In all these companies, the concept of marginal analysis is being applied because the costs and benefits are weighed for each additional acquired supplemental business.  That said, historically, insurers have derisively fought with hospitals over payments.  But now, with more insurers interlinking with small, non-insurance companies and an increased demand for pay-for-performance contracts, the interests of insurer’s may finally be aligning with those of its former enemies.

(Information taken from “The Doctor Octopus”, The Economist October 29th 2011)

Popcorn

This past Friday, corn prices plummeted to their lowest level since December after the U.S. Department of Agriculture surprised the market by saying stockpiles had been severely underestimated.  In actuality, the reserves of corn were a quarter higher than previously documented.  The unexpected buildup in reported supplies of the country’s largest agricultural product tore prices down by an astounding 6.3%, which is a 25% decline from the all-time high on June 10.  In addition, the report also dragged down wheat prices, suggesting a correlative crop relationship.

          The USDA’s poor assessment underscores how difficult it is to accurately measure the nation’s gargantuan agrarian output—the U.S. produced 38% of the world’s corn last year. Because of the new price decline, high cost pressures on food corporations and beleaguered consumers are assuaged.  Yet, serious cuts in farmers’ income occur as well.   The volatility of the corn market, as modeled by the USDA, can be exacerbated by variables like false information and miscommunication.

           Moreover, this situation is a prime representation of fundamental economics.  With an increase in demand and an increase in supply, the equilibrium quantity inevitably increases. In this scenario, price decreases, but is theoretically indeterminate.  The inherent patterns of supply and demand really can be found anywhere.


(Information taken from “Corn Market Surprise”, The Wall Street Journal October 1st 2011)

Just Look at the Family Jewels

Shiny objects are not only just pleasing to the eye—they often represent fluctuations in the global economy. The fact that investors infuse a copious amount of money into gold is well known.  The price of the metallic substance has reached $1,900 this past week.  Often times, the possession of gold shares is usually indicative of personal fiscal prosperity.   However, in recent times, growing prices are also beginning to venture into facets of a similar economy—gemstones.

            International dealers of precious gems have stated that “prices for high-quality rubies are up by 50% this year and have doubled in the past two years”.  Top-notch sapphires and emeralds have also nabbed considerable gains in price as well.  This boom has even had far-reaching repercussions in the market of semi-precious stones, boosting up by “20-25 % this year”.  Certainly, there are several potent forces instigating the price rises.

            First, one only has to look at the insatiable demand stemming from rapidly-growing economies like China and India.  Both countries have a long-standing obsession with colored stones, in part due to a positive connotation in consumer’s tastes (eg yellow sapphires in Hinduism).  Because of this passion for gemstones and willingness to have expensive supply costs, Chinese wholesalers are often setting the equilibrium price.  The yuan has become the denominating currency for gemstone prices, beating out the dollar in fierce competition.

            Second, another leading influence is economic insecurity.  Similar to gold, gemstones are perceived by some as a tangible store of value in tumultuous times.  Lately, “dealers are increasingly being asked to put together entire collections for wealthy Americans who want to diversify away from paper investments”.  The desire to possess a concrete symbol of affluence leads many to buy luxurious, costly products.

            Lastly, a third factor is definitely supply shortages.  Good quality colored-stones are difficult to find whatever the economic climate.  The outfits digging for them are infinitesimal compared with the giant diamond corporations.  Major producers, like Madagascar and Myanmar, are too entrenched in dysfunctional politics to engage in serious trade.  With such losses, the Law of Supply says it all.

(Information taken from “Rubies in the Sky”, The Economist September 10th 2011)

All the World's a Game

With increasing improvements in software technology, new breakthroughs in the economic realm occur frequently.  One such development manifests itself from the game theory—which exhibits calculated circumstances where a person’s success is based upon the choices of others.  Essentially, by taking this conceptual basis and compounding it into an augmented digital format, a program can be developed to “guess” the actions of particular entities.   The software’s versatility is almost immeasurable, with ranging capacities from settling divorce settlements to mediation between warring states.

            For instance, Bruce Bueno de Mesquita of the Mesquita &Roundell consulting firm, was able to successfully predict that “Egypt’s president, Pervez Musharraf, would fall from power within a year” and that “Pakistan’s president, Pervez Musharraf, would leave office by the end of summer”.  The computer model Mesquita uses functions by first assigning numerical values to the goals, motivations and influence of “players”.  Then, the program considers the options available to the various players and determines their likely course of action.  In this way, “game theory software played an important role in finding Osama bin Laden's hideout in Abbottabad, Pakistan”.  Mesquita’s application of the game theory allows users to exploit a highly-structured methodology that churns out statistics of critical import.

  Of course, forecasts can go astray when people give in to non-rational emotions, like hatred or guilt, rather than pursuing what seems to be currently in their best interests.  Sorting out people’ motivations is much easier when making money is the main objective.  Even so, these advancements in game theory have “picked up dramatically” and it has become apparent that forgoing utilization of such an analysis technique could demonstrate to be an exorbitant opportunity cost.

In a world where every favorable circumstance needs to be taken advantage of to move ahead, the game theory will inexorably prove to be an extremely helpful asset for solving a myriad of problems— with infinite implications for the future.

(Information taken from “Game Theory in Practice”, The Economist Technology Quarterly September 3rd 2011)

The Frigid Quest

           As demand for oil proliferates, multinational gas corporations desperately search for new and innovative methods for drilling.  Oil sites that were prosperous and immense a few decades ago are finally reaching their limit points, prompting realization of the obvious: the world is gradually drying up.  There seems to be two primary responses to this spreading phenomenon—either increased investment in energy ingenuity or revamped exploration of oil in the most isolated sections in the world.  Fiscal powerhouses like Exxon Mobil, Royal Dutch Shell, and Cairn Energy of course chose the latter, desperately wanting to keep the status quo and attain results as soon as possible. 

            Russell Gold of The Wall Street Journal discerns the Arctic Circle as the hotspot where avaricious oil moguls now have their sights set on.  Even though the region encompasses a tiny fraction of the earth’s land mass, “it is estimated to contain the oil and natural-gas equivalent of 412 billion barrels of oil”.   This translates to about “22% of the world’s undiscovered oil and gas”.  Should drilling prove to be successful, there is a wealth of unspoiled natural resources to be unearthed.  Peter Robinson, a retired Chevron vice chairman, notes there is much scientific, not only financial, reason to drill, stating. “All around the coast of Russia, geologists salivate over the opportunity to drill”.

            Exxon Mobil and the like followed the concepts of simple economics.  A chance presented itself to make companies better off and those companies exploited it.  But of course, there are still concerns, drawbacks, and costs.  The extreme weather and ice flows during the bitter months of the arctic could potentially maul apart oil industry platforms.  Even more, as Gold also points out, “Cleaning up an oil spill would be a huge effort”.  The agility of a massive response to such an emergency would be infinitesimal compared to any accident in the Gulf.  Additionally, the range of environmental implications of drilling has yet to be properly tested.  The marathon to get a piece of the upper northern hemisphere has resulted in dodging of industrial regulation and setup of proper procedural standards.

            The race to get to oil is not pointless, but in my opinion, it seems counterproductive.  Billions of dollars are being invested into an oil funnel that, in a small lapse in time, will eventually close over.  Instead, as I mentioned before, resources should be allocated to innovation projects, which solve the problems of tomorrow and dually inspire competition and collaboration.  Becoming dependant on a commodity that invariably becomes extinct soon hardly makes much sense.  Let’s face it; oil is simply not as ubiquitous as it once was.  The golden era of oil availability is coming to a close.  Reminiscing of the past is meant for home movies, not the global economy.