In Spain, if an employer fires a worker that worker is entitled to 45 days' severance pay per year of service. So if a worker has worked at a company for 8 years, that worker receives a severance payment equal to almost a full year salary. Do you think U.S. workers would benefit from having that kind of right? You'd better ask "what would that cost, and who would bear that cost?" How do you think such a policy would affect your ability to get a job, and the unemployment rate? Consider the following:
"Massive joblessness could further slow Spain's climb out of debt. Even in good times, unemployment never got below about 8%. Now the rate is nudging 20% overall and close to 45% among young people—statistics that reveal to economists a deeply flawed employment market.
"Wages are set through a complicated system of bargaining with trade unions that imposes wage increases on firms even if their business can't afford it. Because wages are inflexible, Spanish companies can cut labor costs only by firing workers. Yet some workers, hired on so-called indefinite contracts, are deeply entrenched, not least because they are entitled to 45 days' severance pay per year of service."
Thursday, February 25, 2010
What does Washington have in common with Star Trek conventions? - Don Boudreaux
From Cafe Hayek:
"This morning I heard on a local DC radio station an interview with a tourist who complained that Washington’s “scripted” inhabitants “have no real understanding” of the economic situation of ordinary Americans.
"I agree with the tourist’s assessment, but unlike her I’m not disappointed. You see, to visit DC expecting to find people engaged in serious discussions of economics is like visiting a Star Trek convention expecting to find people engaged in serious discussions of astrophysics. Perhaps a handful of the celebrities and costumed performers are familiar with real science, but their overwhelming object is not to help their public deal with reality but, rather, to escape it.
"This morning I heard on a local DC radio station an interview with a tourist who complained that Washington’s “scripted” inhabitants “have no real understanding” of the economic situation of ordinary Americans.
"I agree with the tourist’s assessment, but unlike her I’m not disappointed. You see, to visit DC expecting to find people engaged in serious discussions of economics is like visiting a Star Trek convention expecting to find people engaged in serious discussions of astrophysics. Perhaps a handful of the celebrities and costumed performers are familiar with real science, but their overwhelming object is not to help their public deal with reality but, rather, to escape it.
The supply of nonrenewable energy resources is increasing? - Donald J. Boudreaux
EXCERPT:
"Economically, the Earth's supply of nonrenewable energy resources [available to our ancestors] was, back then, much smaller than it is today." In other words, our supply of nonrenewable energy resources is increasing!? How could that be true? Read the article.
"Economically, the Earth's supply of nonrenewable energy resources [available to our ancestors] was, back then, much smaller than it is today." In other words, our supply of nonrenewable energy resources is increasing!? How could that be true? Read the article.
Monday, February 22, 2010
Overview of the President's Proposal | The White House
According to the Whitehouse website, the President's new healthcare proposal, announced today, includes a number of changes, such as:
"Improving insurance protections for consumers and creating a new Health Insurance Rate Authority to provide Federal assistance and oversight to States in conducting reviews of unreasonable rate increases and other unfair practices of insurance plans."
Think back to chapter 3, supply and demand. When the government keeps the price of a product below its equilibrium level, what does that lead to? Shortages.
But what if we think the original price is "unreasonable" and that the government-mandated price is "reasonable?" Does that change the consequences that will follow? No.
There is a bright side, though. Ten years from now economics teachers will have more good examples of the unintended consequences that result from government interference with the price mechanism.
"Improving insurance protections for consumers and creating a new Health Insurance Rate Authority to provide Federal assistance and oversight to States in conducting reviews of unreasonable rate increases and other unfair practices of insurance plans."
Think back to chapter 3, supply and demand. When the government keeps the price of a product below its equilibrium level, what does that lead to? Shortages.
But what if we think the original price is "unreasonable" and that the government-mandated price is "reasonable?" Does that change the consequences that will follow? No.
There is a bright side, though. Ten years from now economics teachers will have more good examples of the unintended consequences that result from government interference with the price mechanism.
Saturday, February 20, 2010
Interesting summary of the housing crisis - WSJ.com
EXCERPT:
"During the housing boom bankers made a raft of extraordinarily foolish loans. Some were the result of lenders defrauding borrowers; probably at least as many were the product of borrowers defrauding lenders. But there is no evidence ... that lender fraud was the overriding cause of the crisis.
The bank loans were not foolish because borrowers didn't realize what they were doing. They were foolish because of the incentives they created for borrowers, especially when housing prices turned south.
There were three distinct stages of the housing crisis. In the first, the Federal Reserve's extremely low interest rates from 2001-2004 induced consumers to switch from fixed to adjustable rate mortgages and drew short-term speculators and house-flippers into the market in certain cities. The Fed's increase in short-term interest rates over the next two years increased homeowner payments and precipitated a round of defaults.
My own research confirms the analysis provided by University of Texas economist Stan Leibowitz on these pages last July: The initial onset of the foreclosure crisis was a problem of adjustable-rate mortgages, whether prime or subprime. It was not initially a subprime problem.
In the second phase, falling home prices provided incentives for owners whose mortgages were under water to walk away from their houses. And in the third phase, which we are now experiencing, traditional macroeconomic factors like unemployment led to more foreclosures—especially where homeowners' mortgages are already underwater. Reflecting this situation, the Mortgage Bankers Association reports that the fastest-rising segment of foreclosures in recent months has been traditional prime, fixed-rate mortgages.
None of this analysis has anything to do with fraud or consumer protection problems. "
"During the housing boom bankers made a raft of extraordinarily foolish loans. Some were the result of lenders defrauding borrowers; probably at least as many were the product of borrowers defrauding lenders. But there is no evidence ... that lender fraud was the overriding cause of the crisis.
The bank loans were not foolish because borrowers didn't realize what they were doing. They were foolish because of the incentives they created for borrowers, especially when housing prices turned south.
There were three distinct stages of the housing crisis. In the first, the Federal Reserve's extremely low interest rates from 2001-2004 induced consumers to switch from fixed to adjustable rate mortgages and drew short-term speculators and house-flippers into the market in certain cities. The Fed's increase in short-term interest rates over the next two years increased homeowner payments and precipitated a round of defaults.
My own research confirms the analysis provided by University of Texas economist Stan Leibowitz on these pages last July: The initial onset of the foreclosure crisis was a problem of adjustable-rate mortgages, whether prime or subprime. It was not initially a subprime problem.
In the second phase, falling home prices provided incentives for owners whose mortgages were under water to walk away from their houses. And in the third phase, which we are now experiencing, traditional macroeconomic factors like unemployment led to more foreclosures—especially where homeowners' mortgages are already underwater. Reflecting this situation, the Mortgage Bankers Association reports that the fastest-rising segment of foreclosures in recent months has been traditional prime, fixed-rate mortgages.
None of this analysis has anything to do with fraud or consumer protection problems. "
Mugabe Pushes Zimbabwe's Black-Empowerment Law - WSJ.com
In class we talked about the importance of political stability to a country's economic growth.
Read the following and think about how you would feel if you had invested in a Zimbabwe company. Would you be interested in investing in Zimbabwe now? Do you think the government's actions are going to lead to an increase, or decrease, in the standard of living experienced by its citizens?
EXCERPT:
"In meetings this week, Zimbabwe's government failed to agree on whether to implement a controversial black-empowerment law. Under the law announced last month, foreign-owned firms have 45 days from March 1 to inform the government how they will achieve majority black shareholding within five years. Top executives at companies that refuse to cede majority shareholdingto locals could face jail.
Prime Minister Morgan Tsvangirai, until February 2009 an opposition leader, has ordered the law withdrawn, saying it will heighten Zimbabwe's reputation as a risky investment destination. He and his partners have said the law was published without their consent.
Mr. Mugabe, 85 years old, and key ministers have dug in their heels. Speaking to reporters at an investment conference earlier this week, Mr. Mugabe, 85 years old, said foreign companies should be content with holdings of up to 49%. "It's only foolish ones who will say no," he told reporters. "Wise ones would take it up."
Read the following and think about how you would feel if you had invested in a Zimbabwe company. Would you be interested in investing in Zimbabwe now? Do you think the government's actions are going to lead to an increase, or decrease, in the standard of living experienced by its citizens?
EXCERPT:
"In meetings this week, Zimbabwe's government failed to agree on whether to implement a controversial black-empowerment law. Under the law announced last month, foreign-owned firms have 45 days from March 1 to inform the government how they will achieve majority black shareholding within five years. Top executives at companies that refuse to cede majority shareholdingto locals could face jail.
Prime Minister Morgan Tsvangirai, until February 2009 an opposition leader, has ordered the law withdrawn, saying it will heighten Zimbabwe's reputation as a risky investment destination. He and his partners have said the law was published without their consent.
Mr. Mugabe, 85 years old, and key ministers have dug in their heels. Speaking to reporters at an investment conference earlier this week, Mr. Mugabe, 85 years old, said foreign companies should be content with holdings of up to 49%. "It's only foolish ones who will say no," he told reporters. "Wise ones would take it up."
Fed begins process of unwinding emergency measures - WSJ
This article provides a good summary of how the Fed used its ability to lend to commercial banks as a tool for addressing the financial crisis that began in August 2007.
EXCERPT:
"Easing the terms of primary credit was one of the Federal Reserve’s first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC’s target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.
Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.
The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC’s 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.
EXCERPT:
"Easing the terms of primary credit was one of the Federal Reserve’s first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC’s target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.
Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.
The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC’s 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.
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