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Taxes and Smuggling

Posted on Apr 16, 2014 | 0 comments

Mark Glassman has an interesting chart in Bloomberg Businessweek, which I’ve pasted below. Or click here to see it over at Bloomberg Businessweek.

Click on graphic to enlarge.

Click on graphic to enlarge.

The chart shows how varying state cigarette taxes encourages smuggling across state lines. Here are a couple of interesting sets of states to look at:

1) cigarettes are smuggled out of New Hampshire (per pack state tax = $1.78) and smuggled into Massachusetts (per pack state tax = $2.51) and Maine (per pack state tax = $2.00), and

2) cigarettes are smuggles out of Vermont (per pack state tax = $2.62) and New Jersey (per pack state tax = $2.70) and smuggled into New York (per pack state tax = $4.35).

Discussion questions:

1)  Discuss why cigarettes are smuggled out of some states and smuggled into other states.

2) A tax on cigarettes is a so-called sin tax. Discuss why states do not raise their cigarette tax to a level where zero tax revenue is collected.

Price-Rent Index for Tampa Bay

Posted on Apr 14, 2014 | 0 comments

The figure below shows the Price-Rent Index (PRI) for Tampa Bay, which measures the price of area homes relative to their implicit rental value from 1987 to 2013.

Click on graphic to enlarge.

Click on graphic to enlarge.

The price component of the PRI is the S&P’s Case-Shiller HPI for Tampa Bay.  The rent component of the PRI is the owner’s equivalent rent index (OWRI) for Tampa Bay, published by the Bureau of Labor Statistics.Each series is adjusted to one in 1987 and the PRI computes the HPI/OWRI ratio. 

A PRI greater than one means home prices are high relative to rents in Tampa Bay, while a PRI less than one means that home prices are low relative to rents in the Tampa Bay. 

The figure informs the reader that from 2003 to 2007 home prices were high relative to rents.  During the Great Recession, the PRI declined dramatically.  By the end of 2011, the price-rent ratio reached a level not seen over the period of study. The 2013 PRI reveals that in Tampa Bay an individual could purchase a home and maintain a monthly payment for 89 percent of the cost required to rent the same home. So, yes, buying a home in Tampa Bay is still a good deal–relative to renting the same sized home.

Atlanta, Georgia Jobs Report

Posted on Apr 11, 2014 | 0 comments

The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), Georgia (red line) and the Atlanta metro area (green line) between January 2000 and March 2014. 

Click to enlarge graphic.

Click to enlarge graphic.

The U.S. and the Georgia have observed monthly increases in this employment measure since August 2010, while the Atlanta metro area has observed a monthly increase in this employment measure since July 2010.

The most recent data reveal that year-on-year employment growth continues in the Atlanta metro area (1.8 percent, February 2014), Georgia (1.4 percent, February 2014) and the U.S. (1.7 percent, March 2014). However, the number of nonfarm employees in the Atlanta metro area is 69,300 lower than the peek level observed prior to the great recession in December 2007.

Case-Shiller HPI: Atlanta

Posted on Apr 8, 2014 | 0 comments

Atlanta’s Case-Shiller housing price index (HPI) from January 1991 to January 2014 is shown in the figure below.

Atlanta’s pre-recession housing market peak was in 2007. Similar to the rest of the U.S., Atlanta’s housing market declined after 2007 and it has subsequently recovered. 

Click on graphic to enlarge.

Click on graphic to enlarge.

If the Atlanta housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.

1) The top third of Atlanta’s housing market—the high tier segment—reached a maximum value of 137.87 in April 2007. The high tier declined 28.7 percent to reach its lowest HPI value of 98.24 in March 2012. As of January 2014, this segment of Atlanta’s housing market has increased 24.5 percent from its 2012 low.

2) The middle third of Atlanta’s housing market—the middle tier segment—reached a maximum value of 132.67 in March 2007. The middle tier declined 42.4 percent to reach its lowest HPI value of 76.42 in May 2012. As of January 2014, this segment of Atlanta’s housing market has increased 40.1 percent from its 2012 low.

3) The bottom third of Atlanta’s housing market—the low tier segment—reached a maximum value of 138.12 in January 2007. The low tier declined 64.4 percent to reach its lowest HPI value of 49.20 in March 2012. As of January 2014, this segment of the Atlanta’s housing market has increased 87.8 percent from its 2012 low

Youth Unemployment in Europe

Posted on Apr 8, 2014 | 0 comments

Europe’s economic downturn is still being felt by youth in Spain, Italy, France, the European Union, and the United Kingdom.  The figure, from The Wall Street Journal,  below shows the unemployment rate for people 15-24 from selected countries from 2008 to date.

Click on graphic to enlarge.

Click on graphic to enlarge.

Youth unemployment in Spain in February 2014 fall to 53.7 percent, while it rose to 42 percent in Italy. Relatively speaking, France and the E.U. have a much lower youth unemployment rate, 23.6 percent and 22.9 percent.

Discussion questions:

1) Discuss how the unemployment rate is calculated. Could real youth unemployment be worse than the numbers suggest? (Hint: think about how the labor force is defined.)

2) What is the youth unemployment rate in the U.S.?

 

March Jobs Report

Posted on Apr 4, 2014 | 0 comments

The Bureau of Labor Statistics (BLS) released its March 2014 jobs report. Read the BLS report here.

The U.S. added 192,000 jobs in March. Over the prior 12 months, employment growth averaged 183,000 per month. The unemployment rate in March was unchanged at 6.7 percent.

The labor force participation rate was little changed from February at 63.2 percent. And the employment-population ratio was little changed from February at 58.9 percent.

Here are other highlights from the March report:

1) The number of unemployed persons declined to 10.5 million persons.

2) The number of long-term unemployed (those jobless for 27 weeks or more) was 3.7 million persons.

3) Individuals working part time because their hours had been cut back or because they were unable to find a full-time job was 7.4 million persons.

4) The number of discouraged workers in March 2014 was 698,000 persons, down slightly from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

 

Martin Feldstein on Monetary Policy

Posted on Apr 4, 2014 | 0 comments

 

Martin Feldstein (Harvard) has an interesting Op-Ed in The Wall Street Journal on how the Fed might respond to future inflation. Click here to read it.

Professor Feldstein writes that the Fed should be telling the public and markets about the risk that future inflation could rise well above its 2 percent target and what the Fed would do the prevent such inflation or reverse it if it occurs.

The real source of future inflation is that commercial banks can use their excess reserves currently deposited at the Fed (excess reserves are discussed in this blog post).

Excess reserves are part of the monetary base, but are not part of the money supply. If and when banks find it economical to begin lending their excess reserves, the money supply will begin to accelerate—putting upward pressure on inflation.  If this occurs, Feldstein asks, how will the Fed respond?

First, it appears that the Fed’s traditional anti-inflation strategy—raising the federal funds rate target—won’t work because banks have so much in excess reserves that they don’t need to lend to each other.

Second, the Fed could increase its interest rate paid on excess reserves. This approach would induce commercial banks to leave their funds at the Fed, but two problems might arise. First, the Fed would be paying banks not to lend—you could imagine the outrage by the business community. Second, if inflation rises quickly, the Fed could end up paying more on interest that the Fed earns. Both scenarios could be politically awkward.

Third, the Fed has been experimenting with a new monetary policy tool: repos. Repos (repurchase agreements) are short-term sales of securities by the Fed with the promise to buy them back in the future at a certain price. When the Fed sells securities, it takes money out of the system and thus contracts the money supply. However, once again, the Fed could end up paying more on repos than it earns. And this could be politically awkward.

Fourth, the Fed could impose quantitative restrictions on bank lending by increasing required reserves or increase capital requirement imposed on banks. Each policy would decrease the amount that commercial banks could lend, which would slow the growth rate of the money supply.

Discussion questions:

What are excess reserves?

Discuss why the Fed has $2.5 trillion of excess reserves.

European Central Bank Announcement: No Change

Posted on Apr 3, 2014 | Comments Off

The European Central Bank (ECB) decided to keep its main refinancing rate at 0.25 percent, where it has been for five months. The deposit rate on reserves held at the ECB remained at zero.

Claire Jones reports on the announcement in The Financial Times. Click here to read it.

However, inflation in the euro-area has fallen to 0.5 percent, well below the ECB’s target of 2 percent. Because inflation is trending down, Mario Draghi, ECB president, insisted, during his traditional news conference, that he stands ready to loosen monetary policy if the economic outlook worsens. This more dovish tone from the ECB has stoked expectations that the ECB could begin bond buying if this June’s forecasts show that the risk of deflation has risen, according to the Financial Times.

Discussion questions:

Explain how increasing bond buying by the ECB loosens monetary policy.

Explain the benefit of loosening monetary policy if the economic outlook worsens.

GDP Grows 2.6% in 4th Quarter (Third Estimate)

Posted on Mar 29, 2014 | Comments Off

Real gross domestic product (GDP) grew 2.6 percent in the fourth quarter, according to the Bureau of Economic Analysis’s third estimate. See figure below. Click here to read the BEA’s March 27 news release.

Click on graphic to enlarge.

Click on graphic to enlarge.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from consumption expenditures, exports, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and residential fixed investment, according to the BEA’s news release.

Discussion question:

1) The BEA’s news release also reports that imports increased in the fourth quarter of 2013. Does an increase in imports increase or decrease U.S. GDP?

The Long-Term Unemployed

Posted on Mar 25, 2014 | Comments Off

The NBER released a fascinating new study on the long-term unemployed in the U.S by Princeton University economists Alan Krueger, Judd Cramer and David Cho. Click here to read the long version. Click here to read the short version.

Long-term unemployment in the U.S. has remained a persistent problem in the post-Great Recession era. Despite declining over the last four years, the share of the unemployed who have been out of work for more than six  months still exceeds it previous peak reached in 1981-82.

The first graphic shows the percent of employed, short-term unemployed and long-term unemployed by education level.

Click on graphic to enlarge.

Click on graphic to enlarge.

The second graphic shows the short-term unemployed and long-term unemployed by age.

Click on graphic to enlarge.

Click on graphic to enlarge.

The two graphics together show that the long-term unemployed are spread throughout the economy and age groups.

A Lobster in Every Pot

Posted on Mar 22, 2014 | Comments Off

Sarah Nassauer writes in The Wall Street Journal that the supply of lobsters has increased 80 percent over the last five years. Click here to read the article. As a result, the price paid for a whole lobster has declined from $4.63 per pound in 2005 to $2.89 per pound in 2013. As lobster prices decline, the sandwich shop Quiznos and buffet-style restaurant Golden Corral, among many others, have put lobster on the menu.

Discussion questions:

1) Draw a supply and demand diagram for lobster. Use the information in the article to demonstrate in your diagram how the price per pound of lobster decreases while the quantity sold of lobster increases.

2) Click here and read the article. What is the sign (positive or negative) of the cross-price elasticity coefficient for the price of lobster and the quantity demanded of black truffles at L20 restaurant in Chicago? Explain how you know this.

Fed Continues Tapering and Tweaks Rate Guidance

Posted on Mar 19, 2014 | Comments Off

The Federal Reserve concluded its latest Federal Open Market Committee (FOMC) meeting today. The Fed announced that it will reduce its monthly asset purchases by another $10 billion to $55 billion–$25 billion for mortgage backed securities and $30 billion of longer-term Treasury securities.

The Fed also changed its so-called forward guidance.Since late 2012, the Fed has stated that it would not increase the federal funds target until the unemployment rate decreased below 6.5 percent, provided inflation looks likely to remain below 2.5 percent.

As of today, the Fed has dropped the explicit unemployment target. Instead, “the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.”

Read the complete announcement here. Read reaction to the announcement here and here.

CPI: February

Posted on Mar 18, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its February 2014 Consumer Price Index (CPI) report today. Click here to read the report.

The CPI increased 1.1 percent over the last 12 months (see the figure below). This reading is below the Fed’s inflation target of 2 percent.

Core CPI–which excludes food and energy prices–increased 1.6 percent over the last 12 months.

The following figure shows both CPI and Core CPI since February 2013.

Click on graphic to enlarge.

Click on graphic to enlarge.

The Price of Milk

Posted on Mar 14, 2014 | Comments Off

Kelsey Gee writes in The Wall Street Journal that the price of milk is on the rise. Click here to read the article. Most notably Asia’s growing thirst for milk, and dairy products in general, is spilling over into the U.S. market. As a result, the price of a gallon of fresh milk has increased to $3.552, a thirteen month high. At the same time, there has been an increase in the quantity of milk supplied to the market. Indeed, over the next year milk output in the U.S. is expected to rise 2 percent.

Discussion questions:

1) Given the information above, sketch a supply and demand diagram for the milk market. Describe how Asia’s increasing preference for milk affects the market for milk.

2)  Referencing your diagram, what change in supply and / or demand would cause both an increase in the price of milk and an increase in the quantity supplied of milk.

U.S. Wealth Rises to Record High

Posted on Mar 7, 2014 | Comments Off

Wealth in American hit its highest level ever last year, according to new data released by the Federal Reserve. The net worth of U.S. household and nonprofit organizations rose to $80.7 trillion, according to the report. The data from 2000 to 2013 are shown in the figure below (from The Wall Street Journal).

Click on graphic to enlarge.

Click on graphic to enlarge.

The report also shows that the ratio of debt-to-personal disposable income has declined, homeowners’ equity in real estate as a share of real-estate values has increased, and mortgage borrowing continues to decline on an annual basis. Each is shown in the figure below (from The Wall Street Journal).

Click on graphic to enlarge.

Click on graphic to enlarge.

Discussion questions:

1) Discuss how the increase net wealth is distributed among Americans.

2) Discuss how a lower ratio of debt-to-personal disposable income might lead to a boost in future consumer spending.

 

 

CBO Revises its Potential GDP Estimate

Posted on Mar 7, 2014 | Comments Off

The Congressional Budget Office (CBO) decreased its forecast of U.S. potential GDP on February 28. Click here to read the report.

As a result, the U.S. output gap—the difference between potential and actual GDP—is now $754 billion, according to the CBO.  See the figure below.

Click on graphic to enlarge.

Click on graphic to enlarge.

Although the output gap is now smaller than before the revision, it remains quite large. The most immediate problem with a large output gap is that it leaves too many people unemployed.

How do we close the output gap? Faster economic growth. However, over the next decade, the CBO forecasts that the U.S. economy will not reach the new lower level of potential GDP.

Apparently, the Great Recession might have done permanent damage to the U.S. Economy.

Discussion questions:

1) What is potential GDP? How is it defined?

2) The output gap is now smaller than previously thought. Discuss how this change might influence fiscal policy and monetary policy.

Case-Shiller HPI: Washington, D.C.

Posted on Mar 6, 2014 | Comments Off

Washington DC’s Case-Shiller housing price index (HPI) from 1987 to December 2013 is shown in the figure below.

Click on graphic to enlarge.

Click on graphic to enlarge.

Washington’s pre-recession housing market peak was in 2006. Similar to the rest of the U.S., Washington’s housing market declined after 2006 and it has subsequently recovered. 

If the Washington housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.

1) The top third of Washington’s housing market—the high tier segment—reached a maximum value of 224.13 in March 2006. The high tier declined 24 percent to reach its lowest HPI value of 170.36 in April 2009. As of December 2013, this segment of Washington’s housing market has increased 17.1 percent from its 2009 low.

2) The middle third of Washington’s housing market—the middle tier segment—reached a maximum value of 260.46 in February 2006. The middle tier declined 36 percent to reach its lowest HPI value of 166.76 in May 2009. As of December 2013, this segment of Washington’s housing market has increased 23.4 percent from its 2009 low.

3) The bottom third of Washington’s housing market—the low tier segment—reached a maximum value of 295.36 in June 2006. The low tier declined 45.3 percent to reach its lowest HPI value of 161.58 in May 2009. As of December 2013, this segment of the Washington’s housing market has increased 26.9 percent from its 2009 low.

Majors That Pay You Back

Posted on Mar 4, 2014 | Comments Off

Why does one job pay more than another job? The answer: supply and demand.  The interaction of supply and demand in a specific labor market determines the market wage. So, before you progress too far in your academic career, it might be worth your while to take a peek at the equilibrium wage of a major that interests you. Although money is not everything, it certainly helps to pay the bills.

Click here to see the starting and mid-career salaries for college majors, according to Payscale.com’s 2013-2014 College Salary Report.

Discussion question:

Discuss the differences in the starting salaries for criminal justice majors and chemical engineering majors. Explain why is there a difference in starting salaries between the two majors?