Wednesday, January 31, 2007


For those who follow the financial news, Q4 2006 (advanced) GDP was released today posting a strong 3.5% increase. If you look at table 2 here you can see where growth came from (hint: not from housing investment). Growth was mainly driven by consumer spending, exports and government spending. (remember the equation GDP = C + I + G + NX).

Tuesday, January 30, 2007

The Fed isn't close to setting an inflation target

Proponents of an inflation target (including current Chairman Ben Bernanke) believe that the Federal Reserve should set an explicit target of inflation. The most likely target for the US would be a "core" rate (inflation minus food and energy) of 1-2%.

However, while this theory has wide support among academic economists, it does not look as if it will happen anytime soon, due to logistics and some opposition among Fed Governors.

Read more here.

Thursday, January 25, 2007

Is Income Inequality a problem?

Tyler Cowen argues in the NY Times today that income inequality in the US is not as much of a problem as is commonly thought.

The gist of the argument is this: Despite the fact the inequality is increasing, other measus of inequality--consumption, happiness--are not. Relate this to your own common experience. Bill Gates has earned billions over the past 2 decades. But has this prevented you from buying your new up to date cars, TV's, clothes and other goods? No. Granted, on a relative basis income inequality has increased, but on an absolute basis a vast majority of Americans are better off.

A counter response would grant this but say that relative inequality can dissolve social cohesion and foster jealosy. Cowen argues that this has been overstated as a concern for the US.

Supply Curves and Bush's Health Care Plan

This is an interesting application of basic supply and demand theory that we will be discussing this semester. Keep the following facts in mind: You have an upwards sloping demand curve and a downwards sloping demand curve (draw your basic graph here).

Now let’s apply this to the latest Bush proposal on health care. Essentially the plan boils down to this. Currently, if you get a health plan through your company that health plan is tax deductible. That is, the company (or you) pays the bills and then you can write if off on your tax returns (making it cheaper). But if you buy insurance on your own you do not get a tax break.

This creates a potential distortion because you have an incentive to get insurance through your employer rather than on your own. Those who cannot get insurance through their employer are thus at a disadvantage. The plan being proposed is to remove the distortion by creating a universal tax deduction regardless of whether you get insurance from your employer or on your own.

The debate on whether this is a good idea is a huge own and parts of it go beyond the purvey of this class. However, one aspect of the debate can be discussed using a simple supply and demand analysis. It runs something like this:

The tax break to get insurance through your employer is a subsidy. This subsidy allows people to purchase insurance. People with insurance go to a doctor, pay a small premium ($5-25 say) and then the insurance company picks up the rest. Since consumers do not pay any additional money if the doctor uses expensive equipment (if your doctor visit costs $200 or $500 you still pay a flat co-payment). Thus demand shifts to the right and prices go up, pricing other people out of the market.

The argument is advanced here. A counter argument is that the supply curve for medical services is actually flat. That is, prices rise in the short term but this induces people (doctors) to enter the market and shift the supply curve back down (think perfect competition). Therefore, prices do not rise.

Whether this argument holds is a tough question to answer. Personally, the limited supply of doctors (due to regulations and the difficulty of being licensed) means that the supply curve likely has an upwards slope.

Thursday, January 18, 2007

Why are Oil Prices falling

Econbrowser has a good post on why oil prices are falling. It dispels a number of myths but honestly leaves me with the impression that there may have been a bit of a bubble (although the post resists this explanation).

Friday, January 05, 2007

Good article on Oil

The US economy is much less dependent on higher oil prices today than it was in the 70's and early 80's. This means that higher oil does not necessarily bring the economy to a halt. But, on the flip side, consumers are more dependent on oil now than previously due to bigger cars. This is the conclusion of the latest NY Times Economic Scene's column.

Why are median wages stagnating?

Jagdish Bhagwati has an interesting article on why median wages have not been increasing along with productivity here . His answer is to stop blaming globalization and to starting taking a look at technological change, which has been increasing at a faster rate in the past 2 decades.