Economics – General

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What is the difference between GDP, GNP, and National Income?

March 23, 2011 in Economics - General | No comments

Gross Domestic Product (GDP), Gross National Product (GNP), and National Income measures attempt to measure how much economic activity took place during a specified amount of time (usually a year).  Yet many people do not know the difference between these measures.  Today, I’ll briefly review these differences by describing how they are calculated by the Bureau of Economic Affairs.

  • GDP mesausre the market value of all final goods and services produced within a country in a given period of time.
  • GNP measures the market value of all final goods and services produced by a country’s citizens or residents.  The difference is subtle but improtant.  GNP excludes economic activity that occurs in the U.S. but is owned by foreigners and includes American economic activity that occurs in other countries.  GDP is place based whereas GNP is ownership based.  Thus, if a foreigner creates an internet startup in Silicon valley, this will count as GDP, but not GNP.  If General Electric opens a new plant in Poland, this investment will be included in GNP, but not GDP.
  • National Income.  National income is equal to GNP less the consumption of fixed capital (i.e., depreciation).
  • Personal Income measures the amount of income available to individuals in terms of funds on hand.  Personal income equals to national income less: corporate profits with inventory valuation and capital consumption adjustments, contributions for government social insurance, domestic net interest and miscellaneous payments on assets, net business current transfer payments, current surplus of government enterprises, undistributed wage accruals. Added to net national income are personal income receipts on assets and personal current transfer receipts.

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Did the Stimulus Hurt the Economy?

March 11, 2011 in Economics - General | No comments

Although the stimulus money may have helped the economy in the short run (1-2 years), in the near-term it seems to have exacerbated problems by bloating state government spending and postponing necessary cuts.

“As part of the 2009 stimulus package, Washington gave the states $150 billion. The states became dependent on a higher level of federal aid — 35 percent of their budgets, compared with about 25 percent before. But the stimulus is ending, and the states will have to cut.”

I would guess that there are asymmetric costs to increasing and decreasing the budget.  Increasing the budget is easy and generates short-term jobs.  Cutting budget, however, produces significant administrative costs as interest groups fight to maintain funding.  Further, more creative solutions to spending shortfalls are postponed when the Feds inject stimulus money for states.

Consider Vallejo, CA in the Bay Area.

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An Oxygen Tax

February 17, 2011 in Economics - General, Taxes | 1 comment

The UK  explored selling or leasing forest land to private interests, but encounter some public backlash.

“The plans were intended to give the private sector, community and charitable groups greater involvement in woodlands by encouraging a “mixed model” of ownership.

But critics argued it could threaten public access, biodiversity and result in forests being used for unsuitable purposes.”

Should the government own forests?  In general, I would say no.  If private firms or organizations would want to pay to access these forest, they should be able to do so.  Some of the businesses who buy the land may want to harvest trees or start building apartment buildings.  Others may want to create eco-tourism sites or private NGOs could buy the land to maintain it in its natural state.  Regardless, individuals, firms, or organizations with the highest willingness to pay should be able to purchase the property.

Once exception may be the production of oxygen.  Trees produce oxygen for the whole country.  However, oxygen is generally non-excludable.  Thus, by cutting down trees, businesses who decide to deforest land impose an externality on others, especially if there are few forests left.

To solve this problem, the government would create an oxygen tax.  The tax would basically mandate that you need to have a certain number of trees per acre on your land or else you would pay the tax.  This could apply to all land, not just forests.  With the cost of apartments in central London, it is of course optimal to simply pay the tax and create dense neighborhoods.

The oxygen tax is not without its flaws.  If the tax is based on the number of trees on the property, one could simply buy lots of young trees to avoid the tax.  Young, smaller trees, however, will not produce as much oxygen as larger older trees.  One could estimate the aggregate biomass of trees on any property, but this would of course require regulators to ensure that people don’t lie about the biomass on their property.

Is the oxygen tax a good idea?  If deforestation becomes severe enough, it may be.

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Prison

January 28, 2011 in Economics - General | No comments

Below are two excerpts from a series of articles in Wilson Quarterly on Prison reform:

“With effective programs, we could reduce the number of repeat offenders by nearly 100,000.  We could do even better if these efforts were linked to improved services in teh community upon release.  Such efforts would pay for themselves by reducing future criminal justice and corrections cost.  Economist Mark A. Cohen and criminologist Alex Piquero found in a recent study that a high-risk youth who become a chronic offender costs society between $4.2 and $7.2 million, principally in police and court outlays, property losses, and medical care.  We either pay now or pay later–and we pay a lot more later.”

“Unserved warrants tend not to pile up in jurisdictions with commercial bondsmen.  In those places, the bail bond agent is on the hook for the bond and thus has a strong incentive to bring those who jump bail to justice.”

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Do Economists need an ethical code?

January 10, 2011 in Economics - General | No comments

American Sociological Association and the American Anthropology Association have a code of ethics.  Similarly, the American Psychology Associationand the American Statistical Association both have guidelines for ethics.  Does the American Economic Association need one for economists as well?

A recent petition by a group of economists called for just such a code. The petition has been covered in the New York Times and the Economist. The authors propose the following basic code:

“Economists should maintain the highest degree of integrity in their professional work and avoid conflicts of interest and the appearance of conflict. Moreover, economists should disclose relevant sources of financial support and relevant personal or professional relationships that may have the appearance or potential for a conflict of interest in public speeches and writing, as well as in academic publications.”

I do not think an ethical code that asks economists to ‘maintain the highest degree of integrity’ will have much of an effect on behavior.  First, most economists already know they should act with integrity.  Second, what body would enforce that economists act with integrity.  Without enforcement, the code would have little teeth.  However, the AEA is made up of a small clique of economists, few of who would expel their peers (and friends) from being an economist.

On the other hand, compelling economists to disclose their financial interest could be useful.  Almost every economist has their own homepage.  The code could compel economists to include a link to a webpage which lists the sources from which the economists receive income.  Again, enforcement could be a problem.  The AEA could check that the webpage is updated annually for each of their members.  It is unlikely, however, that the AEA would be able to verify the accuracy of these reports.

Thus, the code of ethics could promote more of a culture of disclosure among economists.  For instance, upon all economists could be required to sign the code of ethics upon defending their dissertation. Thinking that the code of ethics will turn corrupt economists honest, however, is unrealistic.  More likely, it will have a very marginal or no effect on economist behavior.

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Japan: Bigger deficit problems than the U.S.

November 22, 2010 in Economics - General, Public Policy | No comments

The cover of The Economist this week looked at America’s budget deficit.  According to their estimates, “America’s budget deficit in the fiscal year that ended on September 30th stood at $1.3 trillion; at 9% of GDP, the second-largest since the second world war.”  The short run cause of this deficit is the recent severe recession, the wars in Iraq and Afghanistan, and the stimulus spending.  In the long run, however, entitlements will further destabilize the country’s fiscal soundness.  Entitlements such as Social Security, Medicare and Medicaid “…will double the federal debt by 2027; and the number keeps on rising after then.”

Nevertheless, the prospects for Japan look even bleaker.  While the U.S. debt has exceeded 50% of GDP, Japan’s debt is near 200% of GDP.  Further, Japan is aging quickly; the median age in Japan is 44.6.  Although a long life expectancy is a good thing, it will be difficult to support so many older workers without a concurrent rise in the number of workers.  Since the birth rate in Japan is so low (2nd lowest in the world), fewer and fewer youth are entering the job market.  More immigration could help, but it is currently difficult for non-Japanese immigrants to gain citizenship even after working in Japan for many decades.

More from the Economist:

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Child Development Accounts

November 9, 2010 in Economics - General, Public Policy | No comments

Some policymakers have called for the creation of Child Development Account (CDAs).  CDAs are basically savings accounts to which parents and/or the government to contribute.  Children turning 18 can use the funds for various uses such as college tuition, purchasing a home, or starting a businesses. The SEED for Oklahoma Kids (SEED OK) project aims to create CDAs through 529 College Savings Plans.

Creating a pool of saving for a child’s future gives these children some liquidity to pursue their dreams.  The question is, why would the government need to set up a program like this?  Most parents will save money for their child’s future.  The CDA may be useful in the case where parents have hyperbolic preferences and under-save for their children’s future. If parents save optimally, however, CDAs may crowd out other forms of parental saving for their children and may decrease the parent’s financial flexibility.

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The Nobel Prize in Economics goes to…

October 12, 2010 in Current Events, Economics - General | No comments

From the Nobel press release:

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

This year’s three Laureates have formulated a theoretical framework for search markets…The Laureates’ models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Media coverage here, here, here, and here.

Tyler Cowen has more detailed profiles of the three laureates: Diamond, Mortensen, and Pissarides.

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Book Review: This Time is Different

August 20, 2010 in Books, Economics - General | No comments

What is the history of financial crises?  Why to they occur?  Are they common?  In the book This Time is Different, authors Reinhard and Rogoff assiduously review the history of government defaults and crisis of the financial system. Their data on government default is truly astounding.  They document instance of government default in multiple ways: renegotiating the terms of a loan, failing to pay investors, and reducing the value of their debt through inflation or devaluation.  Although defaults on external debt (from foreign investors) grab the of the headlines of the international media, default on domestic debt occurs as well.

Like most bubbles, the reason for these crisis is the delusion is that “this time is different.”  Astronomical house prices relative to rent are interpreted as evidence of that past ideas of sound fundamentals are obsolete; highly leveraged investments of all types become more and more prevalent.

This is a book of economic history, but one where the last 5 chapters specifically examine how the conclusions drawn from centuries of historical data can be brought to bear to analyze the current Great Contraction.  One of the points I found most interesting is that government debt almost always booms directly after a crisis, however, not for the reasons conventional wisdom ascribes.  It is true that bailouts do add to this debt, but the main short term driver of booming U.S. debt is decreased tax revenues.  During a financial crisis, the economy slows and tax receipts drop precipitously; hence the States’ recent request for more funding from the Feds.

This book is very worthwhile for economic historians and macroeconomists.  The amount of evidence presented is overwhelming.  The key points, however, are repeated over and over; after the first 100 pages, I felt I had already digested  the main points.  This is a book that I do recommend, even if I can’t say it was a page turner.

  • Carmen M. Reinhart and  Kenneth Rogoff (2009) This Time is Different, Princeton University Press, 463 pages.

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Should police departments be privatized?

August 19, 2010 in Economics - General | No comments

With state budgets running low, funding for police has fallen.  Can private security forces step in to fill the gap?  Temple Professor Simon Hakim believes so.

“The police is a monopoly. It’s less innovative than the private sector that is under the gun of competition. A police department will never go bankrupt; private company could go bankrupt. So private companies adopt more technology. I expect we may find contracting out of small police department, ’cause a lot of small police departments really don’t have the justification, in many cases, to exist. And for the consumers, they get better service in much lower costs.”

No one would question whether police have a monopoly, but whether this arrangement is welfare improving or not will depend on what the monopoly is over.  Those who prefer private security firms often claim that the police have a monopoly over security.  The logic then proceeds that allowing private competition will increase innovation as well as the equilibrium level of security supplied.

On the other hand, the police may not in fact be in the business of security but rather in the buiness of violence.  In this case, one of the police’s fundamental roles is to restrain the supply of violence and, by doing so, making themselves more valuable.

One empirical example of a monopoly on violence comes from Colombia during the time of Pablo Escobar.  Escobar was the unquestioned drug king of Medellín and–although he personally was very violent–he did not tolerate violence that he did not sanction.  When Escobar died, the violence market was “open to competition” and the quantity of violence supplied grew exponentially.

Although many tragedies have occurred under the direction of state police, having a single (hopefully responsible) authority to maintain a monopoly on violence may, in fact, be optimal.

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