August 31, 2006
Sales taxes and the Internet
A major issue for many states is that the sales tax they levy isn’t collected on Internet sales. Does this mean that if a state increases its sales tax rate it may drive more buyers to the Internet? N.C. State University economist Mike Walden says there's good evidence now that the answer is "yes."
"We have a new study that carefully tracks sales tax rates and Internet sales. And what it found was that for every 1 percent increase in a state’s sales tax Internet sales from people in that state go up by 6 percent," Dr. Walden says. "So obviously what this is showing is if you have a higher state sales tax that is going to drive some people to go buy off the Internet. And what this means is that states won’t collect as much as they expected from a sales tax hike, and it gives us more reason to hope there’s some resolution on the taxation of Internet sales."
August 30, 2006
Ways for our money to last
With the retirement population growing and living longer, many people are worrying about outliving their money in their golden years. N.C. State University economist Mike Walden considers ways to guard against this.
"Most households … will have Social Security, and that lasts as long as you live. But most people don’t want to live just on Social Security," Walden says. "There’s also something called an immediate annuity. This is where you have accumulated a large amount of money, you turn that money over to an insurance company and, in turn, that insurance company guarantees you a monthly income for as long as you live.
"Now there’s a new concept called longevity insurance that also may help. Again, with longevity insurance you plunk down a large amount of money -- say you are age 65. In return you get guaranteed income but not right away. It does not start until you are age, say, 85.
"So what happens here is you are able to spend down your other assets but then make sure that you have income if you do reach those later years."
August 29, 2006
Why some work more
There appears to be a trend for some people working really long hours. N.C. State University economist Mike Walden takes a look at what's behind this.
"Well, it used to be if you looked demographically at who worked long hours it was low income people," Walden says. "They worked long hours simply because they had to to make more money.
"Now what we find is long hours are more likely to be worked by higher income people –- the folks that you would expect wouldn’t be working long hours because they are making a lot of money.
"And the reason for this appears to be that in today’s very competitive society, working long hours is one way to demonstrates to your boss or to the company that you are valuable, that you are productive," he adds. "It’s a signal that you are hard working and you hope by working these long hours that you eventually will be promoted and earn even more money later."
"So it’s really one of these things where people are doing it not so much to earn more money now but in hopes of getting much more money later."
August 28, 2006
Making annuities better
People often avoid annuities as a retirement vehicle for a couple of reasons: First, they worry they’ll lose money if they die early. And their second concern relates to protection from rising prices. But N.C. State University economist Mike Walden says there are new annuities that address these concerns.
“First a little background on what annuities do: Annuities primarily provide safety against the possibility of outliving your money in retirement. You give money, a certain amount of money, to in effect an insurance company. They’ll promise to make payments to you as long as you live,” Walden explains.
“Now one of the concerns you mentioned is, ‘What if you die soon?’ What if you die in a couple of years after you start? Well you lose all the money. Well, modern annuities have addressed this, and many of them will allow payments to continue to your heirs. So that problem can be addressed.
“The other problem you mentioned is, ‘What about inflation protection?’ Two thousand dollars looks good now but in 10 years it will be small. Many of them having a stated policy whereby your payments will increase with the inflation rate, maybe based on the CPI,” Walden adds.
“So if you are near or in retirement I think you should take another look at today’s annuities.”
August 25, 2006
Some good news on debt
It seems like we hear continual bad news on debt: government debt, household debt and trouble paying bills But N.C. State University economist Mike Walden says there’s one area where the trend in debt is actually positive.
"If we look … at the debt that consumers have outside of their home mortgages -- so, for example, we are looking at credit card debt, debt from personal loans, auto loans -- we do see improvement if we measure the debt service payments (in other words, what you’re paying each month to carry that debt) as a percent of after tax income," says Dr. Walden.
"This percentage has actually been going down in the last couple of years. It was 6.7 percent in 2003. It’s now 6.1 percent," he says. "And I think the reason for the improvement is a combination of, number one, consumers being more frugal in their build up of debt as well as … getting some income gains in the last couple of years.
"I think what this trend indicates is you can find some good news on debt," Walden concludes, "and it also indicates consumers can be rational, and they can be careful."
August 24, 2006
Do computers help learning?
In the last decade there’s been a big push to put computers in classrooms to boost student achievement. Dr. Mike Walden, an N.C. State University economist, considers new evidence on whether this works.
“Well, we’ve had several studies on this, and we now have a new study that -- I won’t get into details … -- many consider a better study to try to ascertain if computers help.
“The results are very interesting – the results show that computers appear to help elementary students do better,” he says, “but not so much in math classes, where you might think computers would help, but more so in language classes. The positive impacts, however, take time to be revealed – maybe over two years.
“Now, in contrast, the study found no positive impacts from computers for student achievement in high schools. Clearly these are not the last words on the topic,” he concludes, “but I think this does give us some valuable information.”
August 23, 2006
How we’re coping
We’ve now lived with super-high gas prices for over a year. But the high cost hasn't caused drivers to change their behaviors much, says N.C. State University economist Mike Walden.
"If we look, for example, at the consumption of gasoline, it’s not declined. In fact it’s estimated to be near a record high in July," says Dr. Walden. "If we look at average speeds, they’ve gone down a little bit –- maybe half a mile per hour.
"If we look at the kinds of cars and trucks that Detroit and other auto makers are producing, not a lot of change there," he adds. "In fact, the 2006 model cars and light trucks are the heaviest and most powerful ever. The 2006 models also have lower fuel efficiency than models 20 years ago.
"So although people do complain about gas prices, we haven’t seen a lot of change yet in behavior," he concludes. "Some economists are thinking it might take $4, $5 a gallon gasoline or more to get people to make real changes."
August 22, 2006
Where higher energy prices will hit
Everyone knows that higher energy prices are showing up in the price of gasoline. N.C. State University economist Mike Walden discusses other common products that might become more costly because of these record high oil costs.
"I think this will be surprising to people, but outside of transportation and gasoline, the most intensive energy users are the chemical industry, the forest products industry and the glass industry," says Dr. Walden, an economist with the North Carolina Cooperative Extension Service.
"Now the chemical industry, of course, uses a lot of energy to make things like plastic products and fertilizers. So one result should be that ... if these oil prices persist, we will likely see over time higher prices for things that come in plastic bottles or fertilizers, for example, that farmers use.
"Same way with the forest products industry furniture: There is a lot of energy that goes in, for example, to making furniture. Again we should expect to see significantly higher furniture prices if these higher oil prices persist.
"And then lastly glass: So anything made with glass –- bottles, windows -- again, the answer is we should expect to see higher prices because that industry is an intensive energy user."
August 21, 2006
It seems as if we are seeing a lot of incentives for consumers to buy these days. Auto dealers are offering free gasoline, and builders are promoting things like free swimming pools and kitchen upgrades on houses. N.C. State University economist Mike Walden takes a look at what's going on and offers advice for consumers.
"It’s a sign of the times. Auto sales are slowing, home sales are slowing, so sellers are looking for some hook with which to catch buyers," says Dr. Walden.
"Now, of course, one option is simply to offer the product –- a car or a house -- at a lower price. But oftentimes sellers don’t want to do this because they want to use something that makes them stand out.
"So for example, auto dealers offering free gas for a year. Well, gas prices are high now, so that’s going to get people’s attention. Same thing with house upgrades.
"However, the buyer always has to ask, would they be better off with just a lower price? Maybe you don’t want a swimming pool with your house. Should you buy a house just because it has a 'free' swimming pool?
"So always look at the alternative: Would you be better off just taking a lower price?"
August 18, 2006
When using individual retirement accounts to save for retirement, households face two choices: They can effectively pay the taxes up front or they can defer taxes and pay them later. N.C. State University economist Mike Walden examines how to decide which is right for you.
"What we are talking about here … is the difference between the Roth IRA, where you do pay the taxes up front, and the regular IRA, where you pay them later," says Dr. Walden, a faculty member in the College of Agriculture and Life Sciences.
"Well, a couple ways to look at this: One depends on the tax rate. For example, if you thought your tax rate was going to be higher today, then you would not want to pay the taxes now. You would want to defer them," he says. "And the opposite if you thought the tax rate was going to be lower.
"But what if you thought your tax rate –- and, of course, this is very hard for anyone to know -– what if you thought, 'Well I’m going to assume my tax rate is going to be the same in retirement as now.' Then the question becomes, 'Well, which is better?'
"And actually many economists and financial people think the Roth is actually better, because if you don’t prepay your taxes, so to speak, and you have some money to invest outside of the IRA, the question becomes, could you invest it at a rate that is as good as the rate that you are getting inside the IRA?
"If the answer is no, then you are actually better off going ahead and prepaying the taxes and taking the Roth IRA.
"Bottomline here -- ... if this sounds confusing -- is that many investment experts say if you are going to do an IRA, go ahead and take the Roth IRA where you prepay taxes."
August 17, 2006
Profits and gas prices
Many drivers were shocked to learn of the gigantic profits that oil companies earned in the recent quarter, just a time when they are paying close to $3 a gallon for gas. But N.C. State University economist Mike Walden says these high profits aren’t the main reason behind the high price of gas.
“And of course we heard about billions and billions of dollars worth of profits, and this got all the attention by the media,” says Dr. Walden, an economist with the North Carolina Cooperative Extension Service. “But if you break it down and if we were to eliminate all profits made by all companies – I mean take all those profits away -- you know what it would do to gas prices? It would reduce gas prices by about 10 cents a gallon. So instead of paying $3 a gallon we’d pay $2.90 a gallon.
“So high profits are not the major reason why gas prices are high,” he says.
“Another way to look at these profits is to look at them as percent of sales. Here we see that oil companies are only slightly above average at about 9 percent profits compared to sales,” Walden adds. “The average for the economy is 8 percent. And actually the profit rate earned by oil companies is lower than the profit rate earned by banks, software companies and many household product firms.
“So again, the main reason for high gas prices -- it’s not oil profits (oil company profits). It’s the high price of oil.”
August 16, 2006
When slower growth is good
The latest barometer on the national economy shows it growing at only half the rate in the second quarter as in the first three months of the year. Yet the report was greeted with good news from investors. N.C. State University economist Mike Walden explains why.
“Indeed, we had big gains in the stock market after this number came out, showing, for example, that GDP -- gross domestic product -- which is our barometer for the large economy, grew at only 2.5 percent in the second quarter compared to actually almost 6 percent in the first quarter,” says Dr. Walden, a professor of agricultural and resource economics.
“Which means the economy is slowing down -- slower retail sales and likely a slower job market.
“So I think the question is, Well, why would this be greeted with good news?
“Well, I think it was greeted with good news because many feel that this will give the Fed -- the Federal Reserve -- reason to stop raising interest rates. In fact, this has been a slowdown that the Fed has wanted.
“This is why they have raised interest rates 17 times. They want the economy to cool off in order to arrest the rate of increase in inflation,” Walden says. “And it looks now [as if] the Fed has gotten its wish. So if the markets are cooling off, that may mean we’ve seen the end of higher interest rates.”
August 15, 2006
Measuring spending growth
After a public budgets is passed, whether it’s a state budget or a local city budget, many people want to know how much more money is being spent. But, explains NC State University economist Mike Walden, just because a government spends more money next year than this year it doesn't mean that the budget has gotten bigger.
"A couple of factors have to be taken into account. One is inflation. So we would expect that public budget just like private budgets would have to be bigger this year rather than last year just to account for higher costs," Dr. Walden explains.
"Another is population growth. If your population is bigger for your state or for your city, you would expect that the government is going to have to pay and spend more.
"So, for example, if you had a year when the inflation rate is 3 percent and your population base grew 2 percent, then you would expect that spending … would have to go up just to stay even by the sum of those two -- by 5 percent.
"So you would only call a budget increase greater than 5 percent a larger budget."
August 14, 2006
Unequal pay raises
In the budget that was recently passed, North Carolina’s public school teachers received, on average, a substantial pay raise. However, a closer look at the details reveal that the less experienced teachers got a much higher raise than teachers with much more experience. NC State University economist Mike Walden offers an explanation.
“Well this is all a practical application of the labor market, and what I think our state leaders recognize is that you don’t have one labor market for teachers. You actually have several,” he says.
“For example, for experienced teachers many of whom are perhaps close to retirement -- they are very much less likely to leave. One reason being is if they are close to retirement, there is a heavy penalty if you don’t fill out those 30 years and get full retirement.
“So very practically the state decided that they could give those folks perhaps a lower raise because, again, more than likely they are not going anywhere.
“But the inexperienced teacher -- the young teacher who hasn’t been in the system very long -- they are not looking at retirement right now; they are looking at their pay and they are looking at what other opportunities they may have to work.
“They are much more likely to leave and take a different kind of job, so again our legislators decided those folks, if we are going to keep them, they need to get a much higher pay raise.”
August 11, 2006
Forecasts for the second half
While it may be difficult to think that half of 2006 is now over, economists are now making their predictions for the second half of the year. And NC State University's Mike Walden says there's lots of agreement about what's in store.
"This is the time of year when you will see a lot of publications publishing forecasts by a group of economists. For example, the Wall Street Journal does this every six months," says Dr. Walden, an economist with the North Carolina Cooperative Extension Service. "So we have a new batch of forecasts out for the second half of the year.
"I would say these forecasts are rather consistent -- you might even call them boring -- because ... for the second half of the year these economists think the economy will continue to grow but at a slower rate," he says. "We’ve talked about that a lot.
"They do see unfortunately a slight up-tick in the unemployment rate –- not anything dramatic, maybe one-tenth or two-tenths of a percent.
"They see the inflation rate staying around 3 percent.
"And although many predict perhaps another interest rate increase by the Fed, overall they don’t see a lot of change in interest rates. So depending on your perspective you may look at that as a good forecast or a bad forecast, but … there does seem to be a lot of consistency -- at least right now -- among these economists."
August 10, 2006
In today’s world of high energy prices, many people talk about energy independence. But NC State University economist Mike Walden says there is another goal that is perhaps more realistic.
"I would call it energy efficiency, which means getting more use out of each unit of energy," says Dr. Walden, of the College of Agriculture and Life Sciences.
"And so I would argue that we can set a more modest goal perhaps rather than energy independence, which many economists think is probably not possible in the short-run,to a goal of greater energy efficiency.
"And the good news is we are moving forward on that goal. For example, in just the last five years energy efficiency -- broadly measured across the economy -- has improved 12 percent. And in the last 30 years we have cut the amount of energy we use per dollar of economic output by 50 percent.
"So although this goal may sound more modest, we are making headway."
August 09, 2006
Everyone is concerned about the housing market today and whether slowness in the market is going to hurt household finances and the larger economy. NC State University's Mike Walden examines new research about the ups and downs in the housing market.
"We have a new study just released by a couple economists who looked at this very question. They looked across many years and many countries, and they reached several conclusions," explains Dr. Walden, a professor in the Department of Agricultural and Resource Economics.
"They decided that the housing market goes through two distinct phases: what they call the calm phase, which is where prices are generally rising but there is little variability. That is, everyone is pretty well sure the price of their house is going to go up.
"The second phase they call the volatile phase," he adds. "This is where some prices are falling but some prices are continuing to rise, so there’s a lot of variability and there’s a lot of uncertainty.
"Now these economists argue that each of those phases lasts six years, and they argue that today we are probably in the volatile phase."
August 08, 2006
Consumers slow down
Consumer spending is the driving force of the U.S. economy, but N.C. State University’s Mike Walden says there are signs that the steam is coming out of this force.
“Consumers account for about two-thirds of all spending in the economy, so this is a sector that economists and others pay a lot of attention to, says Dr. Walden, an economist with the North Carolina Cooperative Extension Service.
“And what we have seen in recent months is a fairly consistent trend of retail spending going up, but in each successive month it’s going up at a slower rate. So what we are interpreting this to mean is, yes, consumers are spending more, but they are beginning to slow down that rate of spending.
“And we think again that this is as a result of higher interest rates that the Fed has passed along to us, making it more expensive for consumers especially to borrow money and then spend that money. And again this is exactly what the Federal Reserve has desired.
“So I think this is another piece of evidence that suggests that as we move into the second half of the [year] the economy will continue to grow, but it will grow at a much slower rate.”
August 07, 2006
An interest rate rule
Economists and others are always trying to predict what the Federal Reserve will do with interest rates. N.C. State University economist outlines one simple rule economists use to predict the Fed’s next move.
“This is a little bit of inside baseball –- or inside economics -– but it does have a lot of practical relevance because, of course, higher interest rates or changes in interest rates really affect everyone,” Dr. Walden says. “So economists especially are always trying to guess what the Fed is going to do with interest rates.
“And one of the rules is … that what’s called the neutral interest rate –- the interest rate set by the Fed that’s not going to have an impact on the economy -– will be equal to the rate at which the economy is growing plus the inflation rate.
"And if the Fed moves their interest rate above that calculated rate, that means they are trying to slow down the economy. If they move the rate that they control under that calculated rate, that means they are trying to increase growth in the economy.
“Now, if you use that rule and you look at where the Fed has set interest rates right now, it appears to be right about normal or neutral,” he adds. “And so what many economists are predicting is that the Fed will probably push rates up a little bit more -– maybe one more rate hike –- and that will be it.
“So this is something we can use to perhaps look forward to and guess, in a sophisticated way, what the Fed is going to do.”
August 04, 2006
Where will we cut back?
With energy costs rising again this summer, N.C. State University economist Mike Walden explores those expenditures he thinks many households will have to cut back on to balance their budgets.
“I think this is really common sense. I mean, if you think about a household budget, people are not going to cut back on necessities. They are going to try to pay their mortgage, pay their light bill, certainly buy food,” says Dr. Walden, a professor in the College of Agriculture and Life Sciences. “And in terms of driving, they are still going to have to drive themselves to work, back and forth, school, other kinds of necessity driving tips.
“Instead what most households will do if they have to cut back, they are going to identify lower-priority items. And so if we think about the average household that’s probably going to mean:
· less eating out in restaurants;
· cutting back on entertainment –- going to the movies, for example;
· cutting back on shopping, casual shopping -– that is, where you go to the mall on the weekend and just buy things on sight.
What about vacations? “I think people will still take vacations this summer,” Walden says, “but they are probably not going to go as far. They maybe [will] cut out a day here or there in order to reduce the total costs.
“And so in terms of the places that are going to suffer I think we’ll see [less] activity at the malls, shopping centers and other retail outlets … this year than last year.”
August 03, 2006
Will higher gas prices hurt more this year?
With tensions heightened in the Middle East, gas prices are on the rise yet again. And it seems like a repeat of last summer. But N.C. State University economist Mike Walden says this year’s jump is likely to hurt more for two reasons.
Number one: very simply, we are starting from a higher level. We are about 30 to 40 cents higher in terms of the cost of a gallon of gasoline this year than we were at the same time last year. So we’re going up, but we’re going up from a higher base,” says Dr. Walden, a North Carolina Cooperative Extension specialist.
“But secondly, unlike last year when the economy was actually fairly robust and actually picking up steam, this year all signs –- I mean, all signs –- are pointing to a slow down in the economy, and this is really apart from gas prices,” he adds.
“It primarily has to do with higher interest rates -– and actually by design from the Federal Reserve, who wants to slow the economy down. So we don’t have that strong economic growth that we had last year to cushion the impact of higher gas prices.
“So I think those higher prices could be more dangerous economically speaking this year than last year.”
August 02, 2006
The future of technology
Information technology was a big economic driver in the 1990s. Then came the crash of the tech industry. N.C. State University economist Mike Walden takes a look at where North Carolina’s tech sector stands today.
“At its height … the tech sector –- when we say ‘the tech sector,’ we mean the hardware side of producing, for example, computers as well as the software side that’s designing and writing programs,” says Dr. Walden, a professor in the Department of Agricultural and Resource Economics.
“At its height, it employed 85,000 people in North Carolina. Now we lost a fair number of those – about a third – due to the tech crash. And today we are about at 65,000 – there’s really not been much gain since the year 2000,” he adds.
“On the other hand, production is back: You’ll see that companies like IBM and others are selling more, but employment has not come back. So I think the companies are trying to be leaner and meaner. And they are very much concerned about the future, so they don’t want to hire and then have to fire people down the road.
“And the expectation is -- at least here in the United States -- there is going to be more growth in the tech sector on the software side (in application and management of software) and less so on the manufacturing of the actual computer.”
August 01, 2006
Cost of public services
The cost of government services is always a concern in local areas, and Dr. Mike Walden says that population density is a key factor in how expensive those services are.
"It’s really mostly related to density. And what we find is that if you are in a rural area where you don’t have many people per square mile, the cost of public services is rather high," says Walden, a professor of agricultural and resource economics at N.C. State University.
"Then if you move to an area where the density has increased a little bit, those governments there are able to employ more economies of scale, and the cost of public services will go down.
"But then as you move up the ladder of density and you get into some really high dense areas -- in North Carolina, that might be in some areas like in Raleigh and Charlotte; certainly nationally in areas like New York City, Philadelphia, et cetera -- then we see the costs go back up.
"So you kind of have this U-shape where you get very high costs of public services in low-dense and very high-dense areas, and you get the lowest cost of public services kind of in the middle-size cities.
"And this is an issue that government people have to face all across the country," Walden concludes. "It does cause some issues, especially in fast-growing areas."