December 29, 2006
The Trail of Profits
Some people see profits as earnings that go to a relative few at the expense of workers. But N.C. State University's Mike Walden says that economists have a different viewpoint.
"First of all," Dr. walden says, "you have to remember that most companies are run by certainly having workers, but they also use other things than workers: They have to have buildings, they have to have machines, they have to have technology. So all the revenues of a company are certainly not going to go to workers.
"The other thing you have to remember is that companies are risky," he adds. "And there are investors who are putting up their money, and the profits that a company earns are in some sense a return to those investors.
"And the third thing that I think folks should realize is that investors can be a very diverse group, the investors who receive the profits. I think many people think of them as bigwigs or a relatively few number of people. But if you are an individual and you have, for example, investments in a mutual fund or you have investments through your pension fund, those funds in turn will be invested in companies, and the return that you get on your mutual fund or your pension fund will in part be dependent on profits.
"So profits can be distributed very widely," he concludes.
December 28, 2006
All states have a central or state government as well as local governments like counties and cities, but they don’t divide the responsibilities between the two levels in the same way. And N.C. State University's Mike Walden says this can affect tax rates.
"Transportation or roads … is a really good example of this. North Carolina has been criticized for having a high gas tax compared to other states. And we do," Dr. Walden says. "But one reason is because we do most of our road spending in North Carolina from the state level, so we use the state gas tax to fund that.
"For example, 80 percent of all road spending in North Carolina is done from the state. Only 20 percent from local governments. In many other states the split is more 50-50," he says. "So you have local governments doing more of the road construction and maintenance. Now, they don’t have generally access to a gas tax, so they have to use money from the property tax.
"So what this means is when you are drawing a conclusion about who has a higher tax and who doesn’t, you first have to ask who is actually bearing the cost -– the state level or the local level," he concludes.
December 27, 2006
A Social Security solution in the making
Rumors are flying that the Bush administration and Congress are moving toward a grand solution to Social Security’s financial future. N.C. State University economist Mike Walden fills listeners in on some of the details.
"Well, we haven’t heard a lot about Social Security, but it is certainly still an issue. It was a big issue about a year ago, and then I think other events have pushed it off the table," says Dr. Walden, a William Neal Reynolds professor of agricultural and resource economics.
"But there are rumors that it may reappear in that there may be a grand compromise … between the Bush administration and the new leadership in the Congress over changing Social Security," he says. "The rumor is that the Bush administration, which had been pushing for something called private accounts -– people being able to take some of their Social Security contributions and really put it in an account owned and run by them -- … will agree to drop that requirement. They will put that aside.
"In exchange, ... the new congressional leadership will agree to some technical changes that the Bush administration has also wanted in terms of changes in how future Social Security payments are indexed to go up over time," he adds. "In essence, they are going to change the inflation rate that’s used, which will if adopted save Social Security billions of dollars in the future and again put it at a much more solvent fiscal level.
"We’ll obviously have to see if this compromise that’s rumored does turn out," he concludes. "But if it does, this could be a major change to Social Security."
December 26, 2006
Physical and human capital
It used to be that physical things were much more important in economics. Rivers and harbors determined where cities grew, and the strongest workers received the highest pay. Economists call these characteristics physical capital. But as N.C. State University economist Mike Walden points out, physical capital isn't as important today as it used to be.
"Well, it is certainly important, but ... physical characteristics can now be overcome by technology and knowledge," Dr. Walden says. "For example, we can build roads and use them in place of rivers. And we can use airports and truck terminals in place of harbors. That means we can put cities just about anywhere we want.
"And with respect to workers, we can take a very small, diminutive worker and train that person to use high-tech equipment and machinery," he adds, "and they can lift and move a lot more than the strongest person could on their own.
"Economists call these other characteristics, apart from physical, human capital and human characteristics. And ... it means that in today’s economy we are just a lot more flexible," he concludes. "We can basically live anywhere they want, work anywhere we want, and people can do almost anything they want."
December 25, 2006
The discounters’ debate
There has been an ongoing debate about the economic pluses and minuses of the so-called big box discounters. N.C. State's Mike Walden summarizes the two sides.
"And we don’t want to take sides here but we do want to show what the cons and the pros are," says Dr. Walden, an economist with the College of Agriculture and Life Sciences. "On the con side, you will hear one argument that discounters pay their workers not very well. They pay low wages; they don’t have many benefits. And so their workers are earning less than they could perhaps in other occupations.
"One retort to that is that, well, if there are better jobs, the workers ought to go take them," he adds. "So it may be that folks who work at the discounters don’t have many opportunities. But clearly rate of pay is low.
"Another con is that discounters may put out of business many existing companies," Walden says. "And you see this debate when a big box discounter will come for example to a small town and the existing businesses will put up a fight because they know they may be competed out of business.
"Now on the pro side, no question: The biggest benefit, I think, of the big box discounters is they offer lower prices, and they offer a wide variety of products, all of them carrying very low prices. In fact, economists have been able to statistically find that the advent of the big box discounters, say in the last decade, probably shaved a full half-percentage point off the overall inflation rate.
"So like anything, we have got pluses and minuses," he concludes. "The debate over discounters is no different."
December 22, 2006
Shifting tax bases
What is taxed may be just as important as the tax rate we pay, says N.C. State University economist Mike Walden, and what's taxed -- or the tax base -- has changed over time in North Carolina.
"In the early 20th century … property was the main tax base, actually both for the state and the counties. Now in the 1920s and the 1930s the statewide property tax was ended, and in its place the state added a state income tax and a state sales tax," explains Dr. Walden, a professor of agricultural and resource economics. "The property tax was reserved for local governments only, and, indeed, that’s the main source for tax revenues for local governments.
"The sales tax that was put on in the 1930s was a tax only on tangible products, and that’s also remained the same with a few exceptions," he adds. "The problem or issue -– one of the issues -– today, of course, is if you look at what people buy ... they not only are buying a lot of tangible products, they are buying a lot of services.
"And services are not taxed by the state sales tax. So that’s an issue," he adds. "Also when you compare North Carolina to other states, we rely much more on the income tax; we rely much less on the property tax. These are all issues that, in fact, a new state commission will be looking at."
December 21, 2006
Happy birthday to the expansion
As the current economic expansion turns five years old, N.C. State University economist Mike Walden explores how it's been different from past expansions.
"And what we mean by expansion … is the fact the economy has actually been growing. A lot of people may not believe this but we actually have had a growing economy starting in 2002," says Dr. Walden, a North Carolina Cooperative Extension specialist. "This expansion, though, I think …, has been different. It has been primarily different because of globalization.
"You can really say that globalization started in full force in the year 2000 with China’s entry into the World Trade Organization," he adds. "And what we see if we look behind the numbers, behind the averages, what we see is a lot of unevenness.
"While most of the averages in our economy have improved, when we look behind those we see they have not improved for everyone," he says. "Certainly college educated workers, professional workers, woman -- they all gained big during this expansion, but those folks with less than a college education, in particular occupations like construction and service workers, they’ve not gained.
"And I think we have to put a lot of the onus for this," he concludes, "at the feet of globalization."
December 20, 2006
Has the Fed gotten what it’s wanted?
Many economic indicators point to an economy that is growing -- but at a rate slower than that experienced earlier this year. And N.C. State University economist Mike Walden says this ought to please the Federal Reserve.
"One group that I think is definitely pleased … is the Federal Reserve," says Dr. Walden, a professor of agricultural and resource economics. "They have been worried this year about inflation. Now certainly some people say, 'Well, isn’t that due to higher gas prices?'
"Well, some of it, but there are things the Federal Reserve can do to try to arrest the rate of growth in inflation. One thing they can try to do is slow down the economy, sort of pull back that economic locomotive," he adds.
"So I think the fact that the economy has slowed and we have seen some of the pressure taken off of inflation is definitely pleasing the Federal Reserve.
"They always have this dual goal of trying to have enough growth in the economy to keep people employed yet also have low inflation. And they want a balance between those two -– the so-called Goldilocks combination," he concludes. "And they may have gotten what they wanted this year in the form of just that as a present."
December 19, 2006
Economists are frequently asked to make predictions about the economy, but N.C. State University's Mike Walden says two wildcards make it hard to precisely predict our economic future. Listen
“Well, economists have obviously been developing over time some ideas -- some tools -- to use to predict the economy. And these have been tested and have been well supported. And I think economic predictions can be very accurate when we have the proper conditions for making those predictions," says Dr. Walden, a professor of agricultural and resource economics.
"But there are two wildcards: One is having accurate information. One of the problems in economics is that don’t often have real-time data on some important economic measures. We may have data that is three, four and in some cases six months old. So that hurts our predictions," he says.
"The other wildcard, of course, is human behavior. Now economics is a science based on human behavior. It’s not based on elements or physical properties. And so unlike running an experiment in a lab, we always have to account for human behavior that’s not always perfectly predictable. Humans won’t behave the same in all circumstances," he explains. "That obviously tents to throw our forecasts off."
December 18, 2006
Will the real house price please stand up?
With so much concern about the housing market, owners are naturally concerned about what is happening to housing prices. We hear different averages of house prices quoted. N.C. State University economist Mike Walden explains why.
"What I want to do here is talk about national house prices, so this will not necessarily translate into a local market. But if you look, for example, at simply the average price of homes sold nationally, both existing homes and new homes, prices have been declining. Right now they are going down at about a rate of 3 percent," he explains.
"One of the problems, though in the housing market, in comparing housing prices over time is that you can compare houses with different characteristics. Houses in general, for example, are getting bigger, more amenities.
"So another price index that tries to account for this shows that housing prices are still rising but they are rising at a slower rate," he adds. "They are going up about 3 percent now compared to 8 percent a year ago.
"So both of these statistics are saying the same thing: The housing market has slowed down; prices have softened. But it’s a difference of whether housing prices are going down absolutely or simply rising at a slower rate."
December 15, 2006
Evaluating deficits and debts
The annual federal budget deficit is between $200 billion and $300 billion, and the total national debt is near $8 trillion. How should we evaluate these large, scary numbers? Mike Walden answers.
“Well, you don’t want to just look at those numbers that you just cited because, of course, you will be scared. They are big numbers. But just like for an individual household, if someone says that they have $50,000 worth of debt, you wouldn’t know if that is big or small because you need know on what base: What’s their income? What’s the value of their investments?" explains Dr. Walden, an economics professor at N.C. State University. "For someone earning $20,000, $50,000 is big; for someone earning $1 million a year, it’s small.
"So we want to do the same thing with the national government or the national economy. Typically what economists do is we look at these numbers in terms of the annual value of our economic production. And when we do this, we see the budget deficit is running around 2.5 percent of our economy, and the national debt is about 60 percent.
"These are both numbers within normal historical ranges. They are not way off the charts," Walden concludes. "They are about where they have been for a long time. I think the big issue among economists is will they stay there."
December 14, 2006
Improvement in pay
Next to having a job, perhaps the most important factor for a worker is the pay of that job. By this standard, how have American workers been fairing recently? "Better," says N.C. State University economist Mike Walden.
“For example, in 2005 … the pay of workers -- and of course we are talking average -- barely kept up with inflation, particularly at the end of the year. A big part of that, of course, was rising gas prices," says Dr. Walden, a professor in the College of Agriculture and Life Sciences.
“We are doing much better as workers in 2006. The average pay for the average worker has been increasing about three to four percentage points faster than inflation, and that edge that pay has over inflation has actually accelerated as the year has gone on," he says.
“Now, of course, one reason is lower gas prices, meaning lower inflation; also … a tighter labor market. Businesses are having to compete more for workers, and that often translates into better pay.”
December 13, 2006
Can politicians direct the economy?
When problems occur with the economy, people often look to elected officials for a fix. But N.C. State University economist Mike Walden says many economists think it's getting harder for our political leaders to change the economy.
“Many economists … argue that it is getting actually harder because we are increasingly tied more tightly to our global economy. For example, international trade that we do as a country both in terms of our exports and our imports -- that now accounts for a third of our economy," explains Dr. Walden, a North Carolina Cooperative Extension specialist. "So a third of our economy is directly tied to other countries. Also foreign investors are financing right now a third of all investments made in the U.S.
"So the tools that particularly the federal government has to influence domestic spending –- things like fiscal and monetary policy -- have less impact because so much of this domestic spending is now tied to other countries. This is one of the prices that we are paying for global trade," he concludes.
December 12, 2006
The stock market crash of 1999 and 2000 was a major turning point in our modern economy. N.C. State University economist Mike Walden explores how the market value of major U.S. economic sectors has changed since the crash.
“And importantly … what we are looking at here is how the stock market values companies -- the valuation they put on companies, not in terms of how much they produce, not in terms of employment, but how much companies are worth," says Dr. Walden, a professor of agricultural and resource economics.
“We are going to look at this by sectors, and what we see from 1999 to the current period, biggest gainers in value have been construction, financial services, the energy sector –- that’s no surprise –- the retail sector and the media," he says. "The biggest losers have been telecom, technology, autos and parts, and the food and beverage sectors.
“So this is showing how the relative importance of these parts of our economy has shifted in the financial world. And I think obviously an important part for North Carolina is the shrinkage of the tech and telecom sectors, which were very hot, of course, in the 1990s.”
December 11, 2006
A manufacturing upswing
Manufacturing jobs continue to be cut both in the country and here in North Carolina. But N.C. State University economist Mike Walden says this doesn't mean that the United States is losing its status as a world manufacturing leader?
"[I]f you really look at the data from recent years … we are still for example, the leading country in the world in terms of manufacturing: We manufacture more than any other country in the world, even China," Dr. Walden says.
"Furthermore, in the last five years, among the major nations we are a leading country in manufacturing growth and manufacturing productivity. For example, among the 15 leading nations in the world, the U.S. ranked sixth in growth in manufacturing from 2000 to 2005 and also third in improvement in manufacturing productivity," he adds.
"Now the last factor works into the job loss because as workers become more productive in manufacturing you simply don’t need as many of them there," he concludes, "because they are working with high tech equipment and technology."
December 08, 2006
What happened to the surplus?
It wasn’t that long ago that the federal government was running budget surpluses and projections showed these surpluses lasting well into the future. But of course in recent years these surpluses have turned to deficits. N.C. State University Mike Walden explains that what happened.
"We have a new study out from the Congressional Budget Office that I think summarizes what happened very well," says Dr. Walden, a professor of agricultural and resource economics.
"They say the most important factor for the turnaround was additional federal spending, particularly on defense and homeland security. Obviously a lot of this was the result of 9/11," he says.
"Second most important factor for the turnaround -- this is very interesting to an economist -- was that they said the economic forecasters simply were wrong," Walden adds. "For one, they did not project the 2001 recession, and they didn’t project the slow recovery from that recession.
"Thirdly were the tax cuts," he concludes. "The CBO analysis says that about 20 to 25 percent of the movement from surplus to deficit was caused by the tax cuts enacted earlier this decade."
December 07, 2006
The state tax burden
As a new state tax commission begins looking at the structure of the state’s fiscal system, N.C. State University economist Mike Walden examines one of the issues the commission will address: North Carolina's tax burden.
"If you take state and local taxes together, which is the way you should measure this, as a percent of income in the state, we pay 10 percent," says Dr. Walden, a North Carolina Cooperative Extension specialist. "Ten percent of our income goes to state and local taxes in North Carolina.
"Right now we rank 28th," he adds, "28th highest among the 50 states in that measure of the tax burden. However, that is up a little bit from where we have been in the past. In 1990, we ranked 36th.
"Also in the Southeast we rank second in the relative size of the individual and corporate income taxes, although we are very low on the property tax," Walden says. "So there is some concern there that perhaps our tax burden has moved up a little bit, particularly in terms of certain taxes. I know the commission is going to look at that.
"However, when we look at where we spend this money, North Carolina ranks very high. In fact, we rank second in the Southeast in terms of expenditures on areas like public safety, education and roads," he concludes. "These are all public expenditures that have been shown to be positively related to economic growth."
December 06, 2006
Legacy of Milton Friedman
The recent death of Nobel Prize-winning Milton Friedman prompts N.C. State University's Mike Walden to highlight Friedman's contributions to our understanding of economics.
"Well, I think No. 1 … most economists would rank him among the top, probably, ... three economists," says Dr. Walden, a professor of agricultural and resource economics. "Some would even put him first of people in that profession in the 20th century. So he is well known in the economics profession.
"And he also, I think, did a lot to popularize economics. He had TV shows. He wrote a column, I believe, for one of the weekly magazines," Walden adds. "He had an ability to take economic ideas and concepts and present them in a way that the average person could understand. That’s something that I try to emulate.
"I think in terms of his academic background, a couple of highlights: One, he is the one who stressed the importance of what we call monetary policy, particularly how much money is being created by the government and how that can influence inflation," he explains. "That’s something that’s very commonly accepted now but really wasn’t held until he did it.
"Second thing I think that he did is he showed that you can have a situation in the country where you can have both high inflation and high employment. Up to then it was thought that the country had to accept a tradeoff between putting people to work and high prices. He showed that you can actually have both high inflation and high employment, but also low inflation and low unemployment.
"So clearly," Walden concludes, "he is a giant in the economic profession in this century and the last."
December 05, 2006
Outsourcing, which is the movement of jobs outside of the U.S. to a foreign country, is a big issue in today's economy today. Most people have assumed it occurs because companies can find cheaper labor overseas, but, as N.C. State University economist Mike Walden explains, a new study offers a different explanation.
"This study was done jointly by Duke University and the Booz Allen consulting firm, and what they found was very interesting, Dr. Walden says.
"They found that a significant number of companies said that they were not motivated to outsource jobs because they could find cheaper foreign labor. Instead, they were motivated simply because they couldn’t find the appropriate number of skilled workers here in the U.S.," he says.
"So it’s a push reason for outsourcing -- pushed outsourcing because they can't find the workers here rather than a pull -– rather than the attraction of cheaper labor," he adds. "This is a very significant finding. It flies in the face of all the assumptions that we’ve had about outsourcing.
"And if it’s accurate," he concludes, "it has a lot of implications for our educational system here in the U.S."
December 04, 2006
The other construction market
The slowdown in the housing market and in residential construction has received much attention, but, as N.C. State University's Mike Walden points out, another construction market is actually booming.
"It’s the nonresidential market. It’s the commercial and industrial construction market," says Dr. Walden, an economist with the North Carolina Cooperative Extension Service. "It is indeed booming.
"For example, commercial construction is growing right now at an annual rate of 20 percent. The industrial construction market is going up at a rate of 8 percent," he explains.
"Now why is this happening? Well, it is due to a robust industrial and commercial economy. There are low vacancies there," he concludes. "Factories have been expanding, and indeed this has helped to offset about 75 percent of the slowdown that we’ve seen in the residential market."
December 01, 2006
The national economy grew at a slow rate in the third quarter, but N.C. State University economist Mike Walden says this doesn't mean a recession is around the corner.
"The actual rate that was reported … was 1.6 percent growth rate, annualized, in the third quarter," says Dr. Walden, a specialist with the North Carolina Cooperative Extension Service. "Now these numbers can always be revised -- probably will.
"But many economists had expected the growth rate for the third quarter to come in slower, primarily due to the adverse effects in the summer of the high gas prices (and) the slowdown of the housing market," he adds.
"Now this does not mean we are in a recession. We are still growing, we’re just growing at a slower rate," Walden says. "Now for the future, right now economists I think are fairly optimistic. They don’t think this 1.6 percent is going to get slower –- that we may actually go into negative territory, which would be a recession. But they are looking for a pickup in economic growth after the turn of the year."