February 28, 2007
Judging the budget
President George Bush has submitted his proposed federal budget to the Congress, and it is big, totalling $2.9 trillion for the next fiscal year. N.C. State University economist Mike Walden helps put that huge figure into perspective.
"It's way too much money for anyone to contemplate. So let me try this: Think of the total amount of income produced in our entire economy in one year as similar to your family's income. Then ask, 'What percent of this income is going to the federal budget?' And if you do this, the answer is about 20 percent," says Dr. Walden, a North Carolina Cooperative Extension specialist.
"Right now the total national income -– that is, the income earned by everyone in the country -– is around $14 trillion. So the proposed federal budget of 2.9 trillion is about 20 percent of this," he says. "And amazingly this percentage, 20 percent, has remained relatively constant for several years."
February 27, 2007
Ups and downs in gas prices
Why does it seem that when oil prices rise, gas prices go up almost immediately -- but when oil prices drop, it takes a while for prices at the pump to fall? N.C. State University economist Mike Walden explains.
"Economists give a couple explanations here: One is that when oil prices are on their way up and gas prices are also on their way up, people will start to top off their tanks," he says. "So they are going to try to buy gas more frequently because they fear that ahead the price is going to go higher in a couple of months.
"And what that does is it increases demand, and it actually becomes a self-fulfilling prophecy because that increased demand pushes prices up even faster," adds Dr. Walden, a professor of agricultural and resource economics.
"Now on the downside, two things may delay the drop in the price at the pump: One is that it takes time for people to shop around and get the best bargain. You get locked into buying gas from a certain place, and when prices fall you don't get out of that mode very frequently, and so that sort of gives your local buyer kind of like a little monopoly so he will not have to lower his price as fast.
"The other thing that happens is again when prices fall, demand increases," he concludes. "And that also slows down the drop."
February 26, 2007
Necessities and luxuries
In everyday conversation the terms necessities and luxuries are used to mean products we have versus products that we would like to have if we had enough money. N.C. State University's Mike Walden says that's close to, but not precisely, the way economists use the terms.
"Economists are going to add a twist here. A product is considered a necessity if it’s one where we don’t increase our purchase of it very much when our income rises," he says.
"So, for example, take water: When our income goes up most of us aren’t going to use a lot more water than we did when our income was lower," he adds. "So we say water is a necessity. You might say the same thing with milk and bread.
"On the other hand, a luxury is one where the opposite situation happens: When our income goes up, we purchase a lot more of it. So filet mignon steak would be a luxury for a family if when that family sees its income go up … they start eating a lot more filet mignon each month.
"So this indicates what a necessity and what a luxury is," he concludes. "It can differ, however, from person to person depending on their likes and preferences."
February 23, 2007
Gas prices, fuel efficiency and vehicle size
American drivers have been criticized for buying large sport utility vehicles and trucks in light of concerns about the environment and energy use. But N.C. State University economist Mike Walden says there a logical explanation for these buying habits.
"I think there is," says Dr. Walden, a North Carolina Cooperative Extension specialist. "And really if you look at the data the big interest in light trucks and SUVs started in the 1990s. And what was happening in the 1990s? Well, gas prices were very low –- about a dollar a gallon. And there is an economic principle at work that says when something is low in price, people are going to buy more of it.
"So gas was cheap then, that made driving vehicles cheap, it made driving big vehicles with a lot of power cheap. And so people bought those kind of vehicles," he explains. "Now prices of course are higher, and we see the trend moving away slightly from SUVs and trucks. And people are more interested in fuel efficiency and smaller cars and vehicles.
"So I think what this shows is the importance of price –- just raw price –- in determining our buying decisions."
February 22, 2007
Are we still number one?
At one time the U.S. was the leading manufacturing country in the world. Those who think it has slipped in the rankings need to think again, says N.C. State University economist Mike Walden.
"I think most people think we are far down the list of manufacturing countries in the world. But in this case, most people in fact are wrong," says Dr. Walden, a professor of agricultural and resource economics. "The U.S. is still the leading country in the world in terms of the value of manufactured output.
"In 2005, U.S. factories accounted for 25 percent of the world's manufactured products, Japan was number two at 14 percent, and China was number 3 at 11 percent," he adds.
"Now, this doesn't mean that we still lead in manufacturing workers. In fact, we don't. We've been losing manufacturing workers. One reason: because output per worker is higher," Walden concludes. "But we still are number one in terms of manufacturing."
February 21, 2007
Money and inflation
The late Nobel Prize-winning economist Milton Friedman theorized that inflation is fundamentally caused by the government injecting too many dollars into the economy. Using Friedman's theory, N.C. State University's Mike Walden predicts that most folks will find this year's inflation rate acceptable.
"What Friedman’s simple forecasting method said is that you want to take the amount of money the economy is producing -- that really the government controls -- how much the money supply is growing. You want to subtract from that the amount by which economic production in the economy is growing, and the result is the inflation rate," explains Dr. Walden, a North Carolina Cooperative Extension economist.
"So, for example, right now the money supply in the country is growing around 5 percent, the economy is expected to increase its production by maybe between 2 and 3 percent. So the net result of subtraction there is you should get an inflation rate of about 2 to 3 percent.
"Now this is not a perfect predictor," Walden concludes. "It doesn’t have a perfect track record, but it does show through history to be a very good indicator."
February 20, 2007
Manufacturing that stays
Some people worry that most, if not all, of U.S. manufacturing factories will eventually move to overseas locations. But N.C. State University economist Mike Walden says there are factors that would prevent this from happening.
"First of all, the U.S. is still the largest consumer market in the world, and that fact alone makes it advantageous for many manufacturers with certain characteristics to still want to be located here in the U.S.," says Dr. Walden, a professor of agricultural and resource economics.
"For example, manufacturers who are making cutting-edge products where it is very important to be located near to their buyers who have perhaps changing tastes -- there you want to be in the U.S.," he explains. "And a good example here would be high-end electronic products.
"Also manufacturers making large and expensive products, like sub-zero refrigerators -- they are going to find the transportation costs to be very high. So they also want to be close to their customers here in the U.S.," Walden adds.
"And finally factories that need very high skilled, highly productive workers. The U.S. has more of them than any other country. They will stay here, too."
February 19, 2007
How energy dependent are we?
Statistics show that the United States gets 60 percent of its oil from other countries. But that doesn't necessarily mean we are heavily dependent on other countries for our energy supplies, says N.C. State University economist Mike Walden.
"I think many times we forget that oil is not our only energy source," says Dr. Walden, a North Carolina Cooperative Extension specialist. "We also have natural gas, coal, nuclear power and, of course, increasingly, renewable energy sources.
"When we tally up all of our oil and energy supplies, we see that 70 percent of our energy sources come from our own country. So you could actually say … that we are 70 percent energy self-sufficient.
"Now, of course one issue -– one big, big issue -– with energy is that for one of our major sectors, transportation," he adds, "it’s largely dependent on one source, oil, and there we are dependent upon other countries."
February 16, 2007
Who supplies our oil?
The United States imports 60 percent of the oil it uses. N.C. State University economist Mike Walden tells where we get the rest.
"First we should say that the U.S. is still a major producer of our own oil. In fact, we pump more oil than any other country in the western hemisphere," says Dr. Walden, a professor of agricultural and resource economics. "We also pump more oil than countries like Iraq, Kuwait and Nigeria.
"The two leading suppliers of our oil, or oil imports, are Canada and Mexico. Next in line are Venezuela, Nigeria, Algeria and then Iraq," he adds. "Now in terms of total world supply -– to all countries -- Saudia Arabia is still the top world supplier, followed by Russia and then, again perhaps surprisingly, the U.S.
"So the U.S. is still right now the third-leading oil producer in the world."
February 15, 2007
Ethanol and food prices
Gas alternatives, such as ethanol, are seen as major energy sources for the future. But, as N.C. State University economist Mike Walden points out, there are downsides.
"Well, economics is called the dismal science … and I think in this case you can see why," says Dr. Walden, a North Carolina Cooperative Extension specialist.
"Economists are really trained to look beyond the first effects to secondary effects, and one concern here is that we have had a, of course, dramatic increase in the use of ethanol," he says. "People are being encouraged to use ethanol.
"Now ethanol is a corn-based fuel, so what we have seen happen is a dramatic increase in the demand [for], or use of, corn. And as economists would predict, corn prices have risen to quite lofty levels," he adds. "Now this could not only affect the profitability in the future of producing ethanol, but it also could have an impact on the price of food, including meat. And we could see those food prices jump.
"So the concern here ... -- and something I think we will have to address -- is that some of our fuel cost savings potentially by using ethanol down the road could be offset by the increases in the price of food."
February 14, 2007
Changing health care through the tax code
President Bush has recommended making some major changes to the tax code to influence the way Americans obtain health insurance. N.C. State University economist Mike Walden explains what the president proposes -- and why.
"Well, he wants to on the one hand … give major tax breaks to families who purchase health insurance on their own, not through their employer," says Dr. Walden, a professor of agricultural and resource economics. "At the same time, the president would tax some of the value of high-end coverage provided by some companies to high-income employees.
"And this is all part of an effort to really do two things: The president wants to make health insurance portable -- sort of like car insurance, not tied to your job so that when people change jobs they simply have their same health insurance," Walden says. "Secondly he wants to give the consumer an incentive to shop for policies rather than just taking what their employer offers. And he feels that will make the health insurance market more competitive."
February 13, 2007
Oil-producing countries have been accumulating billions of U.S. dollars as a result of high oil prices and our continued dependence on foreign-produced oil. N.C. State University economist Mike Walden takes a look at what ultimately happens to these dollars.
"Well the interesting thing here … is those dollars actually come back to the U.S.," says Dr. Walden, a North Carolina Cooperative Extension specialist. "Now they can come back in two different ways: One they come back by foreigners using those dollars to buy U.S. products and services. Or they can come back by foreigners using those dollars to purchase U.S. investments.
"Now statistics show that most of the dollars have actually gone into the second alternatives," he adds. "Foreigners who have those dollars due to oil sales are buying U.S. investments -– things like stocks, bonds and other investments. So really the way to look at this we are trading some of our investments –- stocks, bonds, mutual funds -- in order to purchase foreign oil."
February 12, 2007
The benefit of prices
Most of us think of prices as bad because they represent what we have to pay to obtain a product or a service. But economists look at prices in a slightly different way -- one that actually helps consumers, says N.C. State University's Mike Walden.
"Well let me give you an example: We’ve had a major freeze in California that’s knocked out I think three quarters of the citrus crop in that state. So things like orange juice will go up dramatically in price," explains Walden, a professor of agricultural and resource economics.
"Now the question is, We are going to have less orange juice, so who’s going to get that orange juice? Well, the higher price is a signal to consumers of orange juice that now orange juice is relatively more scarce, it’s more expensive. It’s going to take more of your resources to have orange juice.
"And so what happens is people who really, really, really like orange juice and are willing to pay the price, they will pay the higher price and get it," he adds.
"Those people, for example, who marginally like orange juice, they will say, ‘I like it but not enough to pay whatever more a gallon.’ So they are not going to buy it.
"So the higher price is a way of rationing, in this case, the smaller supply among consumers. And those consumers who value orange juice the most and are willing to pay a higher price actually get the product."
February 09, 2007
It’s well known that textile jobs in North Carolina have been dropping for several decades, yet N.C. State University’s College of Textiles continues to attract students and place graduates. Dr. Mike Walden, a university economist, explains why these two trends aren’t incompatible.
“The trends are different for different jobs in that textile industry. The jobs we are losing – and indeed we lost 20,000 textile jobs last year in North Carolina – the jobs that we are losing tend to be the so-called cut-and-sew, factory-level jobs. [These are] often [filled by] workers who don’t have advanced training. Those are the kinds of jobs that are going overseas to where labor is cheaper,” explains Dr. Walden, a professor in the Department of Agricultural and Resource Economics.
“However, the domestic textile industry that is remaining, which will be smaller, is more focused on research, more focused on new products and industrial applications. And they need well-trained professional and technical workers for those jobs, and those are exactly the kind of folks that our textile colleges are turning out,” Walden adds. “So actually there is going to continue be a textile industry in North Carolina. It is going to need a different kind of worker -- one that comes out of the college.”
February 08, 2007
With a new state tax and finance commission looking at the division of public responsibilities between the state and local governments, N.C. State University economist Mike Walden explores the tradeoffs.
"Well I think the issue is that we would like to have some government services ... available to the same degree at the same level regardless of where you live in the state -- things like public safety, public health, public education," Dr. Walden says. "We want every person, every child, to have the same available services in those areas regardless of what county they are in.
"And yet all localities can't afford -- simply can't afford -- to produce that same level of service. So you have an issue of whether the state should step in and finance some minimal level. And indeed this is one of the things that the new state commission on taxes and finances is looking at.
"There is one tradeoff here, though ... and that is that usually with financing goes control," he concludes. "So if you have state financing of an area, usually that means giving up some degree of local control."
February 07, 2007
The drop in oil prices
We’ve had an unexpected fall in oil prices this winter. N.C. State University economist Mike Walden explains why and what it means for the economy.
"Two reasons … for the drop in oil prices: One, of course, is the relatively warmer winter weather we have had. Now it’s not, but we have had a relatively mild winter," says Dr. Walden, a professor of agricultural and resource economics. "This means less demand for home heating oil, so that puts downward pressure on prices.
"The other thing is that speculators who are always trying to guess where the oil market is going and they either keep supplies or sell supplies, since oil prices have been dropping they gave been selling supplies," he adds. "That’s actually allowed for more oil on the market. That’s also contributed to lower prices.
"Now the impact, I think, clearly is that this has been beneficial up to now, but now that winter appears to have hit and the speculators will actually stop selling their inventories because they will run out, I think we will probably see a turn around in oil prices and gas prices for the rest of the winter," Walden concludes. "And unfortunately they will head upward."
February 06, 2007
Don’t make this economic mistake
Consumers would be wise not to compare dollars to dollars in different years without taking inflation into account, says NC State University economist Mike Walden.
Treating dollars in different years as being worth the same is “a mistake … simply because inflation reduces the value or purchasing power of dollars every year. So for example, if last year we had an inflation rate of 3 percent, that means today’s dollar is worth only 97 cents compared to a full dollar’s value a year ago,” explains Dr. Walden, a professor of agricultural and resource economics.
“Clearly the impact is even greater over longer periods of time, so you need to make an adjustment when you are comparing any dollar amount in two different years, whether you are comparing price, costs, profits or importantly your salary,” he concludes.
“Fortunately there is an easy way to do this. There is a calculator on the Web at www.bls.gov -- that stands for the Bureau of Labor Statistics -- that will actually allow you to make this adjustment very simply.”
February 05, 2007
The prospects for pay
2007 should be a good year for workers, with the prospects for pay raises high, says N.C. State University economist Mike Walden.
"A good rule of thumb in the job market is that pay raises are always better when the labor market is tight. Now a tight labor market means that companies are hiring and the unemployment rate is low. And we have had that situation and should continue to have that situation in 2007," says Dr. Walden, a North Carolina Cooperative Extension specialist.
"In fact you already hear about many companies [having] difficult times hiring in some industries and finding qualified workers," he adds. "So I would expect to see the average pay for the average worker in 2007 actually be about 2 percentage points above the inflation rate, so that will translate into somewhere between 4 and 5 percent pay raise."
February 02, 2007
Has the housing market bottomed out?
The slow housing market has not affected North Carolina as much as it has other states. While the trend in sales and prices have been a concern to many people, N.C. State University economist Mike Walden says this may be the year when we start seeing a pick up in housing activity.
"Many housing experts say yes, and they say yes for several reasons," says Dr. Walden, a professor of agricultural and resource economics. "First, nationally, the housing market has actually contracted to the point where housing investment is at an average or normal level. In other words, the speculation that we had in prices has been eliminated.
"Secondly, interest rates remain very good, remain very affordable, and this certainly helps buyers," he adds. "And then thirdly -- and perhaps most importantly -- the job market has been relatively strong. This is going to help put more people in jobs, get better raises and that will stir and stimulate the housing market."
February 01, 2007
North Carolina has long been a major producer of the paper and paper products, in part due to its leadership in the forestry and wood industries. But N.C. State University economist Mike Walden says the future is uncertain.
"Some people may be surprised to hear that because they think, 'Paper, gee, everyone uses paper, that’s got to be a stable industry.' But paper production has actually been trending downward," says Dr. Walden, a North Carolina Cooperative Extension specialist.
"One reason is computers: More and more information and more and more reports being stored digitally rather than on paper, and this has reduced the demand for paper," he says. "Also as with many other industries there is now the element of foreign competition from paper producers in countries like Russia and China.
"So although this has been a really mainstay industry in North Carolina, it’s future is not secure," he concludes.