February 11 to 20

February 11

Q1: I'm still very confused on calculating GDP Real/Nominal. Any tricks to remember which data to use for different calculations. 

A: O.K., one way to understand the calculation of real income or real GDP is that the purpose is to determine how much income you would have in the base year that would just allow you to purchase the same quantity of goods that your current income allows you to purchase now. 

                    Year                       Nominal Income    Price of a Lexus   #Lexus cars

              Base year (year zero)       $40,000                 $40,000                    1

                   Year 1                        $40,000                 $42,000              .9523809

 So, you can see that prices have increased by 5%, while your nominal income is the same. Your income doesn't go as far. You can only afford .95 of a Lexus. So, the question is what income does this compare to in the base year? To change that question slightly, we are trying to find that income in the base year that would allow us to buy only .9523809 of a Lexus. That tells us what our real income is, i.e., what its purchasing power is in base year prices. This is the way to do it:

                                 nominal income / (1+inflation) = $40,000/1.05 = $38095.238

                                        38095.238/40,000 = .9523809

As you can see, $38,095.238 will just buy .9523809 of a Lexus in the base year. So, we are that much worse off. In the base year we had $40,000 which would allow us to buy 1 Lexus, but now our equivalent income in base year prices is only $38,095. 

February 18

Q1: I don't understand how states can justify different wages according to whether or not you're living at home (teenagers vs. living wages). They're both doing the same work!?

A: First, you make a good point. If you do the same work you should get paid the same wage. But it isn't according to whether you're living at home or not (although that is in the back of their minds), but whether or not you are likely to have family budget responsibilities. That aside, they also justify lower minimum wages for teenagers on the notion that if employers were forced to pay teenagers the same minimum as all workers, they would fire them and hire adults. Honest, that is the reasoning. The assumption is partly based on the notion that teenagers are less skilled, have had less time on the job and that they have been given jobs out of some sense of social responsibility on the part of the employer, i.e., the employer is losing money hiring teenagers. Additionally, however, your question (an excellent one, by the way) raises a host of others. Why should legislators assume teenagers' wages are not important components of their families budgets? Is it really true that an adult can flip hamburgers, take orders and wait on customers more efficiently and effectively than teenagers or is this just an excuse to exploit younger workers? In fact, many restaurants prefer younger workers -- one might think they would be willing to pay more for them, not less (be careful here, though, age discrimination is illegal and works both ways). So, you see, this is an interesting conundrum. Reading a little Edmund Burke, John Rawls, Martin Luther King Jr. and John Stuart Mill might add some weight to your argument. 

Q2: I don't understand COLA still.

A: O.K., look at Q1 on Feb. 13. What would you need to be given to have the same real income (the same purchasing power) as you had in the base year? You would need $42,000 in nominal income in year 1 to be able to buy 1 Lexus -- just as you were able to buy in the base year. So, $42,000 in nominal income in year 1 is exactly $40,000 in real income (measured in base year prices). If your employer gives you a $2,000 salary increase you'll be left with the same real income. 

[Note: There were only two questions (albeit good ones) on Wednesday. Everyone is suppose to participate in writing these one minute comments, not just because it is part of your grade -- But I keep every card; and the number and quality of your questions/comments will partly determine your participation grade.]

February 20

Q1: Explain capital flight once more. 

A:  The term "capital" refers to businesses of all kinds. It comes from the notion that owners of the means of production (capital) are capitalists. The term capital flight conjures up the notion of businesses fleeing one community, region or country for another. Principally, this is done in search of greater profit. The drive to maximize profits is what fuels the market economy. The question is should it be allowed to wreck entire communities? Do communities, states and countries have the right to control capital flight so that these changes occur in a more orderly fashion? One thing to remember is that the corporate form of doing business is a legal right that flows from the state (i.e., the government). The people have the right to go to court and challenge the corporate charter of a company, i.e., the charter can be revoked. States also have the right to pass legislation (plant-closing legislation) that restricts corporations' abilities to flee without compensating workers who lose their jobs. Remember Michael Moore's notion about economic terrorism. [The U.S. does not offer redundancy packages. Workers are entitled to unemployment compensation that expires after about 16 weeks. Unionized workers might have packages that provide them with other forms of compensation when the plant closes, but that is a firm to firm benefit]

Q2: What about Okun's Law? I still don't understand it.

A: Arthur Okun, a famous economist, calculated the cost to the U.S. of losing the output of workers when they lose their jobs. So, looking at historical data, he found that when the unemployment rate has increased by 1%, the GDP of the U.S. has fallen by 3%. It was a simple statistical association. Why 3% (it's now calculated at 2%)? That's a good question. You can partly answer it by arguing that it reflects the productivity of workers, i.e., that a single worker is disproportionately responsible for the total output produced by his/her firm. But several things about that don't make sense. First, if you continued to lay off workers and the unemployment rate continued to rise, and this ratio continued to hold, then we would have zero output by the time we had laid off one third of the employed workforce. So, does that mean 2/3 of the workforce do no work? Second, let's assume that worker productivity is unevenly distributed across the labor force (i.e., some workers are more productive than others). Does it make sense that employers would fire their more productive workers first? No, it does not -- rhetorical question, eh? So, the statistical association is a fact, but it's still not completely explained.

Q3: Why is full employment at a 5.3% unemployment rate?

A: First, the Employment Act of 1946 gave the federal government the responsibility to achieve full employment as a goal. So, it was necessary to define what that goal would be. Second, many folks are unemployed for reasons that cannot be affected by increasing demand for output, i.e., by strengthening the economy. If government boosts its level of spending and the demand for output rises, workers whose skills don't match the skill requirements of jobs will still not be able to find work. Additionally, workers who are unemployed because they are between jobs will not be re-employed any quicker. So, it was believed that a goal of a zero unemployment rate was unrealistic and that increasing demand for output to reduce it from say 5.3% (the exact figure is always under dispute) would only cause prices to rise. Now, all that is well and good, but boosting demand for output is only one tool (and a crude one at that) the government has to reduce unemployment. As we said in class, they can have a jobs program to retrain workers and they can develop a national job bank that more efficiently moves workers between jobs. That would reduce the unemployment rate without affecting inflation. Remember Alan Greenspan's comment though -- "a lower inflation rate is more important than a lower unemployment rate." And look at the cartoon on page 124 -- that's what is called sardonic humor. Maybe Marx's reserve army of the unemployed wasn't so radical a notion after all.

Q4: Is it possible for 2.8 million jobs to be created in the year of 2004, as the Bush administration has predicted? If so what industries will grow?

A: As they say in the comics, anyone predicting 2.6 million more jobs this year please step forward -- whoa there Mr. Bush! Last week the Economic Report of the President was released in which that prediction was made and just two days ago Secretary of Treasury John Snow downplayed the prediction as reported in a N.Y. Times article. Unfortunately, the kinds of jobs that are growing are in the low-wage service sector. We're still waiting for the "knowledge industry" to kick into high gear again. A good place to find information about the regional jobs picture is the New England Economic Review recently released. You might look at the Bureau of Labor Statistic Industry Outlook website to learn more about particular industries. You can see that education and health services have been growing steadily, but the financial sector, manufacturing and the information industries have taken a nosedive since about 2001.

Q5: When we were going over the costs of unemployment, I couldn't help but think about a town near me -- Pittsfield, MA. That place has gone down a hole because G.E. left. Also, it sucks hearing that bosses would rather unemployment rates go up.

A: As you probably know, G.E. wasn't exactly the most responsible corporate citizen in Pittsfield. They gave away landfill for decades that was laced with PCBs from their transformer production process. As well, they dumped PCBs into the Hoosatonic River to the point that (fish aside) even migratory birds that fly over that river are now on a toxic warning list, i.e., you aren't suppose to eat them. Pittsfield has an extraordinarily high cancer rate among its residents. They are disallowed from suing G.E. because of a consent agreement the company made with the E.P.A.

Q6: Is the economy in Sweden good because of their plant closing legislation? Wouldn't that boost the U.S. economy?

A: The chances of plant closing legislation passing are less now than ever because the pressure from the World Trade Organization is to prevent countries from implementing controls on capital mobility. Sweden of course is the so-called "middle way". It is a trade off between greater economic security and a bigger government. The Swedish citizens pay considerably more of their income in taxes than Americans.  

Q7: Does the "reserve army" affect newer, expanding fields like technology in the same way it affects production businesses?

A: First, the technology field is not expanding at the moment -- check the BLS website in the answer to Q4. It is a difficult argument to make that employers purposely build up a reserve army of unemployed to keep wages low. However, the current trends of contingent employment, short-term contracts and other "flexible employment" schemes is precisely for the purpose of changing the bargaining power in the favor of employers.