GDP and Trade

As you Econ studs know GDP = C + I + G + (X - M). The year over year GDP reading for the second quarter (reported here) was a stronger than expected 3.3%. The reasons? One can safely assume that rebate checks turned into "C", but trade provided a nice stimulus of its own. Imports (M) were down 7.6% and exports (X) up by 13.2%. The reason? The weak dollar.

Budget Hero

Try Budget Hero and experience scarcity first hand. You will have the opportunity to be the fiscal policy commander and try to solve big problems like social security and medicare. Give it a try.

We're All Entrepreneurs

This article from Businessweek combines two themes that I studied to a great extent at the University of Delaware - globalization and entrepreneurship. In the article, author Marshall Goldsmith says:

"In the new era of uncertainty, we all need to think like entrepreneurs.

The West is just beginning to understand what globalization really means. We hoped it would mean a world of people competing to buy our products. We liked the idea of a globe producing products that we could buy for less money. Now we're beginning to learn that globalization means that people across the planet are competing for our jobs. We are just beginning to understand the impact of a world competing for food, oil, cement, wood, and natural resources... Young people in the West need to learn the meaning of one word that all successful entrepreneurs know well: compete."

The Demand for Smaller Houses

Many of the articles I have been reading lately have been extolling the market for smaller houses. After the building boom in McMansions that typified the late 90s and early 00s, all of a sudden the small house looks attractive again. Why? Let's start with the housing crisis. Turn the clock back a year or so - people borrowed huge sums of money with questionable credit. Mortgages companies went out of their way to make sure you could get any house you wanted, in spite of your ability to pay. Why bother with a small house when your mortgage company was more than willing to loan you the money for a big one? This is America right, bigger = better. Many of those ARMs are resetting at higher rates, giving people second and third thoughts. Back to reality, mortgage companies have realized there errors and buyers are finding harder to find mortgage funds. Reason number two, many of these McMansions were built on the undeveloped city fringes where the lots are big. This makes for a long commute. When gas is below $2 a gallon the cost of the long commute was about the opportunity cost of time. When gas hit four dollars, the McMansion looked a lot less attractive. Reason number three is utilities. We tend to focus on gasoline prices because they are posted on every street corner, but heating oil and natural gas prices have skyrocketed as well. The McMansion is big and therefore very expensive to heat. This Businessweek article brings in the retirement of the babyboomers, predicting that many will choose to retire to smaller homes..."As the population ages, smaller homes will be more in demand and many larger homes will be on the market". After all, if your wealth is tied up in home equity, you must sell the home to realize the gains. In order to use the gains, one must buy a less expensive home or move to a more affordable housing market. My prediction: smaller homes will appreciate at a faster rate than McMansions if these trends continue.

The Demand Curve for Gasoline

Businessweek reports a decline in gasoline consumption to the lowest level in five years. This brings to mind many phrases tossed around on CNBC lately such as "demand destruction" and "the cure for high prices is high prices". Both speak of the relationship displayed by the simple demand curve - as prices rise, the quantity demanded falls. When the prices rose, consumers reacted by buying less. The demand for gasoline is relatively inelastic which means that consumers are not very sensitive to changes in price. This doesn't mean that consumers don't complain about the change in price, it just means that consumers are not able to change their behaviors quickly in response to price changes. For instance, I still have the same car as I did last year when gas prices were lower and I still live the same distance to work, etc. If gas prices stay high I will make long-run adjustments and buy a more efficient car next time or move closer to work. In any case over time people make adjustments. Of course this same phenomenon could be used to easily cure our dependence on oil - a goal politicians have spoken of for decades but they have never had the political will to do something about it. The easiest solution is to use market forces - increase the gas tax. Read Greg Mankiw's plan and comment below. The gas tax has never been seriously considered in the U.S. because the Democrats think that the word tax should only be followed by "the rich" (and gas taxes are regressive) and Republicans think that the word tax should only be followed by the work "cut".

College Majors and Income

Students may want to check this link for income data. Money is not the only think to consider when picking a major, but it is does determine future consumption of goods and services.

Fed Meeting August 2008

One of my assignments at the University of Delaware this summer was to read up on the current state of the U.S. economy and make a policy recommendation for the Federal Reserve FOMC meeting of August 5. We will see if I was in the neighborhood of Bernanke, Mishkin, and the gang at the conclusion of today's meeting.

The Federal Open Market Committee (FOMC) finds itself stuck in the crux of its dual mandate of full employment and price stability. The economic times are further complicated by the crisis in the financial industry and volatile oil prices...

Policy Recommendation: The Federal Reserve’s dual mandate of full employment and price stability makes the current situation incredibly difficult. While weak growth numbers and falling consumer confidence is a worry, one of the biggest issues in our current situation is providing liquidity to the financial sector. If banks are unwilling to borrow and lend, money growth and therefore economic growth becomes difficult. Indeed, many of the steps taken by the Federal Reserve in the past months have been to shore up the financial sector and safeguard the larger economy from further damage. This said, I also am very concerned about inflation. The current inflation numbers are higher than we have seen in quite some time and I fear that these effects will spill over into expected inflation. Once rising inflation is built into expectations it is very difficult to tame. On the one hand, it seems that inflation has been confined mainly to food and energy, (confirmed by the much lower core-CPI rate) and the Fed continues to forecast lower inflation rates later this year and next year. Indeed, inflation pressures may be easing a bit evidenced by the recent decline in oil prices. On the other hand, the Fed was very aggressive in cutting rates over the past nine months. The lag time necessary for policy to have its intended effects means that the cuts of this earlier this year won’t be fully felt until late this year and into next year. As these cuts start to have their intended effect, the current inflation problem may well become even more pronounced. Another consideration is the political business cycle. While the incumbent president is not running for re-election, the Fed might appear least biased by not increasing the interest rates until after the election. As I weigh these very heavy issues, I recommend that the Federal Reserve maintain the current 2% Federal Funds Rate with a clear statement expressing inflation concerns and a clear signal that the Fed remains ready to raise rates if necessary. Leaving rates the same will give the financial sector breathing room while they recover from the current situation and it will give the Fed time to see if policy is working and if inflation is in the process of retreating.