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April 30, 2007

Incentives to save

Many economists are worried about Americans' low savings rate and what it implies for our future. But some companies have found a successful way to take advantage of, as N.C. State University economist Mike Walden puts it, human nature to encourage people to save.

"This really is very interesting to an economist … because it really is based on human nature," says Dr. Walden, a professor of agricultural and resource economics.

"I think many people know that at their company where they work or other places, they can get involved in retirement plans. At companies, they are called 401 (K) retirement plans. This is where you tell the company to retain or hold some of your salary. That money goes tax free into a savings account. And the idea is to build that up for retirement," he explains. "Previously people had to take the initiative to say, ‘Yes, withhold that money from my salary.’ Now though … some companies are saying, ‘OK, we are going to withhold the money unless you tell us not to.’

"So you start off assuming you are going to participate in the 401 (K) plan, and you have to take the initiative not to," he continues. "And what companies have found is that the participation has skyrocketed.

"For example, maybe 30 percent of workers -- when they had to make the effort to enroll in the 401 (K) plan -- … did it. Now when they are automatically enrolled and they have to make the effort to dis-enroll, 90 percent of them stay in the plan.

"So in this case, human nature, I think, is working for us in terms of getting people to save more."

Posted by deeshore at 08:46 AM

April 27, 2007

Telecommuting

A few years ago some futurists were predicting that a large percentage of workers would be telecommuting. Has the prediction come true? N.C. State University economist explains what the facts and figures show.

“Well you see this more and more … Unfortunately we don’t have precise numbers on telecommuting. But the best numbers we do have indicate that about 15 percent of the workforce, which comes to about 21 million workers, do telecommute or work from their home at least once a week,” says Dr. Walden.

“Now there are several issues here. One is simply that many jobs aren’t suitable for telecommuting because they have to be performed on site. Obviously if you work in a factory you have to go to that factory. If you go repair appliances you have got to go to that person’s home. So many of us are not going to have an option to telecommute.

"Also from the company’s perspective, there’s the questions about the cost of the equipment, control over the equipment and certainly supervising workers. And then for the worker there are some issues related to motivation. Some people work better in groups rather than (alone). Also lack of ready access to your colleagues -- that may affect productivity.

"Bottom line," he concludes, "certainly telecommuting is just right for some people. It’s not right for others."

Posted by deeshore at 07:47 AM

April 26, 2007

Shrinking home equity

The equity that many Americans have in their homes has been an important factor in recent years in fueling consumer spending. N.C. State University's Mike Walden considers whether home equity has lost some of its punch now that the national housing market has slowed.

"Home equity … you can look at as the profit that people have in their homes," explains Dr. Walden, an economist with North Carolina Cooperative Extension. "It’s the the difference between the value of their home and what they owe on their mortgage. And at the height of the housing boom two to four years ago, homeowners were borrowing against that home equity to the tune of 8 percent annually as a percent of their income. So it was like an 8 percent income boost.

"And that provided a big jump in consumer spending power. Now as the housing market nationally -- not so much here in North Carolina -- but nationally has gone through some trials and tribulations recently, we have seen home equity become much softer because we are not getting those big boosts in housing values.

"And therefore borrowing by homeowners against their equity has gone down," Walden says. "In fact it has gone now to 2 percent of income.

"And some economists are looking for this to put a drag on consumer spending this year. Others say, no, that the continuing good job market is going to fuel consumer spending.

"So we are going to have to wait," Walden concludes, "for the coming months to see who’s actually right on this question."

Posted by deeshore at 07:41 AM

April 25, 2007

Is it demand or supply?

When it comes to questions about why prices of different goods and services, economists usually point to some combination of demand and supply. N.C. State University economist explains which factor -- supply or demand -- has been most important in oil price changes over the past three decades.

"We can certainly see the impacts of supply, particularly shortages in supply and increasing price. You only have to go back to Labor Day of 2005 after Hurricane Katrina," explains Dr. Walden, a professor of agricultural and resource economics.

"And there were also episodes in the 1970s when we had severe supply shortages of oil, and the price of oil and gas went skyrocketing. But economists who’ve studied the gas and oil markets in looking over … the past three decades really have found -- and this is really contrary to what most people would think -- they have really found that demand has been much more important in moving oil prices.

"For example in this decade, the big jumps that we have had in oil prices -- and of course leading to higher gas prices -- have really been caused by big jumps in the demand or usage of oil, particularly from countries like China and India.

"Now interestingly when we have increases in oil and gas prices that have been caused by increases in demand rather than supply, those increases have not been associated with a recession," he concludes.

Posted by deeshore at 08:15 AM

April 24, 2007

Europe turns 50

The European Economic Union, also known as the European Community or E.C., turns 50 this year. N.C. State University economist Mike Walden explains what the union has meant both for Europe and the United States.

"Economically it's an economic union or a collaboration. It's really similar to what we have in our country between the 50 states. There's free trading across country lines in Europe. There's easy migration of labor and money. And in fact they now have one currency called the euro," explains Dr. Walden. "So the whole point of the economic union was to make it easier for countries to trade in Europe and for resources to move around.

"Now, of course, the E.C. does not have the political power that the United States has. They are still working toward that," he adds.

"Now for the U.S., I think what it has done is it has made trade with Europe easier. Because now if you are a company here in the U.S. and you want to trade with Europe, you don't have to worry about different currencies in 15 or 20 different countries, you don't have to worry about different standards, different tariffs. Essentially you have one set of rules to deal with for all of so-called Western Europe, and that's made trade much easier.

"And indeed, we have seen trade between the U.S. and the E.C. go up dramatically in the last 50 years," he concludes.

Posted by deeshore at 08:02 AM

April 23, 2007

Charging interest

People confront interest charges every day, from credit card interest to interest on car and home loans. These interest charges can mean people who borrow pay back maybe as much as double what they borrowed when the loan is finally finished. But the justification for such interest is not greed, says N.C. State University economist Mike Walden.

"There are actually two economic reasons here. One is inflation," says Dr. Walden, a North Carolina Cooperative Extension economist. "If you are going to loan someone money, and they are going to pay you back in the future, to pay you back in the same amount in dollars you are actually losing money because in the interim prices have gone up. So lenders have to charge interest on one hand to account for inflation.

"Then the other factor is that if you are loaning money to someone, you are giving up the use of that money, and people would rather have money now rather than later," he adds. "So there is a time value of money aspect there. That also gets factored into the interest rate.

"So the interest rate is really the combination of these two things: inflation as well as the fact that you are giving up the use of that money," he concludes. "Looked at this way, lenders really get back the same value from the borrower when the loan is repaid as they sacrificed in making the loan."

Posted by deeshore at 08:00 AM

April 20, 2007

Spending to keep us safe

The world has changed significantly since 9/11, and one of the ways it has changed is increased public and private expenditures on security. N.C. State University economist Mike Walden reviews how much this spending has risen.

"And, of course, this is a relatively new thing. We always had spending -- both private and governmental -- for security but of course the number has been ratcheted upward since 9/11," says Dr. Walden, a professor of agricultural and resource economics.

"And let's look at the changes since 2001," he says. "The federal budget for so-called homeland security has actually doubled, from $20 billion a year to $54 billion a year. Now if we look at the private sector, private sector spending on security for labor services -– that is, hiring people -– actually has not gone up dramatically, from about $27 billion back in 2001 to about $29 billion today.

"Where we have seen the big increases in the private sector has been in private security spending on equipment. Here, we have seen the annual amount go from $9 billion a year to today’s $17 billion a year.

"So if we total all these expenditures, both governmental and private, we were spending about $56 billion for homeland security in 2000, and today we are spending about $100 billion," he concludes. "So virtually a doubling."

Posted by deeshore at 08:25 AM

April 19, 2007

How big is the defense budget

President Bush has asked Congress to approve a defense budget for the upcoming fiscal year of more than $600 billion, the largest on record. But N.C. State University's Mike Walden recommends another way to put his big figure into perspective.

"We always have an issue here when we are looking at big government budgets," says Dr. Walden, an economist with North Carolina Cooperative Extension. "I mean, virtually everything the government does you are going to have a big number. It's going to look gigantic to the average person.

"Economists ... advise people to look at these big budgets and ... do the following: Think of the economy as a pie, a big pie, and then you ask what slice of that pie is going to different functions, like health care, like food, and, in this case, military spending.

"And when we do that, for example, we see that the budget the president is recommending would take 4 percent of that economic pie.

"Now this, indeed, is up from 3 percent in 2000, but it is down from the 6 percent slice that the military took in the 1980s, the 10 percent slice that the military took in the Vietnam War era, and the 35 percent slice, of course, the military took during World War II.

"So this would be a way that economists recommend (so) that folks are able to get a handle on such big budget numbers."

Posted by deeshore at 08:58 AM

April 18, 2007

The hard sell for hybrids

With gas prices still an issue, it may come as a surprise that hybrid sales aren't booming as a percentage of total vehicle sales. But N.C. State University economist Mike Walden cites three reasons for the drop-off.

"I think, one, the recent drop in sales may reflect the fact that we did have a decline in gas prices last fall and winter And now as gas prices are going up, we may see a revival of interest in hybrids," says Dr. Walden, a professor of agricultural and resource economics.

"The second issue, though, is hybrids cost more money. They cost as much as much as $3,000 more upfront, and that's a cost that takes several years to recoup in gas savings," he adds.

"And then, thirdly, I think some people are questioning the environmental savings regarding hybrids. Certainly you use less gasoline when you run a hybrid, and therefore you are going to pollute less when you are driving a car. But you have to ask the question -- the other fuel, electricity ... -- Where is that being generated from? Is it being generated from oil or coal? And if so, that may actually pollute more. So I think people are beginning to question really the background of hybrids and really how much they do help the environment.

"So I think for all these reasons hybrids are really not moving forward very fast right now," Walden concludes, "but I’m sure that dealers are going to address these issues in the future."

Posted by deeshore at 08:00 AM

April 17, 2007

The sub-prime shutdown

Sub-prime mortgages have been in the headlines recently. N.C. State University economist Mike Walden explains what they are and why there's a problem.

"Sub-prime mortgages are simply home loans made to lower- and moderate-income homebuyers, usually who have more risk. And usually what they have done -- those kind of homebuyers -- is they have taken out in the past adjustable rate mortgages because they could qualify at the lower rate," explains Dr. Walden, a North Carolina Cooperative Extension specialist.

"The problem is that those rates of course can adjust upward. And in fact, they have been doing so because of interest hikes over the last couple of years. So right now, this year we have about $260 billion worth of loans -- sub-prime mortgage loans -- that are going to adjust upward. That is, they are going to become more expensive for those homeowners to carry," Walden adds. "And a significant percentage of those homeowners already have not been able to do that. That is, they have foreclosed, and probably even more are going to do that in the future.

"So this is the problem, and it is really a problem related to the fact that folks got in on the mortgage market at very low rates, they just got in by the skin of their teeth, and then when those rates went up, as they are now, they cannot afford to carry the loan, and so we have bankruptcies and defaults. And we are probably going to see this continue for at least a couple of years."

Posted by deeshore at 08:00 AM

April 16, 2007

The real threat to the economy

While concerns about the economy today center on the stock market, housing market, inflation and energy costs, some economists think there is an even bigger threat. Mike Walden describes what it is and why it's significant.

"It's the potential for slowdown in worker productivity. Now productivity simply means how much we produce, how much output we produce, in a given period of time. And higher productivity means we are producing more in the economy for the same work, and we are creating more income and creating more wealth," says Dr. Walden, a professor of agricultural and resource economics at NC State University.

"And, indeed, in the last decade we have really been on a productivity spurt, probably a lot due to computers and technology," he continues. "Some economists estimate that just due to productivity gains, we have increased income by $6 trillion in the last decade in our country.

"But -- here is the big concern -- if you look over the last three years productivity growth has slowed down. We are still getting ahead, but we are getting ahead at a slower rate.

"Now this may be temporary, but if it's not temporary, if we are moving into a period where we have much slower gains in productivity, that's going to effect everything in our economy –- from earnings to wages to standards of living to inflation," Dr. Walden concludes. "So this is perhaps the most important economic gauge –- productivity -- to watch."

Posted by deeshore at 11:23 AM | Comments (0)

April 13, 2007

What are carbon credits?

The term carbon credits has been in the news recently, so N.C. State University economist Mike Walden explains what they are and how they work.

"Well, it's simply an idea to offset the pollution that people may create in their day-to-day lives when you drive, when you pollute the air, when you perhaps heat your home or cool your home and create greenhouse gases," explains Dr. Walden, a North Carolina Cooperative Extension specialist.

"The notion here is that if you are going to continue to do that, can you do something else? Can you buy something else that will create an offset to the pollution?" he adds. "And this is where the notion of carbon credits comes, where you go off and you send money to some organization, who will then take that money and, for example, plant trees.

"The notion is you are going to plant enough trees such that those trees can absorb those greenhouse gases and, therefore offset, the pollution you are creating in your day-to-day activities. And this is becoming very, very popular. People can actually go on the Web and purchase these so-called carbon credits.

"Now that's the theory. I think one question that some have is whether the offset really does work," Walden says. "For example, if you are creating pollution in our country here but you are buying trees to be planted in Africa, is that really an offset? But so this certainly will, I think, become an idea that is going to get more investigation."

Posted by deeshore at 08:10 AM | Comments (0)

April 12, 2007

Predicting stock market booms and busts

The stock market has been up and down frequently in the past month. N.C. State University economist Mike Walden outlines some of the reasons why and considers when big changes might occur in this important investment market.

Economists "tend to see the stock market go up -- that is, do well -- when number one, the economy is growing and businesses are producing more and earning more and, importantly though, when the inflation rate is low," says Dr. Walden, a professor of agricultural and resource economics.

"Conversely we tend to see the stock market falter when inflation rises and the Federal Reserve steps in and perhaps increases interest rates in order to slow the rate of growth in inflation," he adds.

"Now the situation we are in today is ... almost ... the worst of both worlds. We have economic growth, but it is slowing. Inflation is not high by historical standards, but it is certainly higher than the Federal Reserve would want," Walden says. "And so the Federal Reserve has been placed in the position of perhaps wanting to lower interest rates in order to boost economic growth but not wanting to lower interest rates because they are afraid of inflation.

"And I think this is almost [changing on] a day-to-day basis, where investors think the Fed is going to move: Are they going to try to increase economic growth? Or are they going to try to reduce inflation? I think that's why we've been seeing this seesaw pattern on the stock market."

Posted by deeshore at 08:00 AM | Comments (0)

April 11, 2007

Home values and property taxes

Most homeowners like it when the value of their homes increases. But higher home values can trigger higher property taxes. And, as N.C. State University economist Mike Walden notes, this chain reaction can create problems.

"Home values can certainly rise faster than your income. And the problem is you pay your property taxes out of your income, and you may get into a situation where you simply can't afford to stay in your home and pay the property taxes," says Dr. Walden, a North Carolina Cooperative Extension specialist.

"Now, North Carolina recognizes this can be a problem for low-income households and for disabled households. And in fact North Carolina has a program specifically to address this issue for those kinds of households," Walden adds. "But they don't have a general program to address it for everyone.

"There has been some discussion of perhaps postponing property taxes on some households (that) are in a particular kind of tight bind," he says. "This would be were you would not pay the property taxes now, but you would postpone and pay them later when you voluntarily sold your home.

"There's also talk in some counties perhaps of shifting away from the property tax to other kinds of taxes like sales taxes. But, of course, this would simply mean shifting the burden from one form to another. But this is certainly an issue in fast-growing areas of our state."

Posted by deeshore at 08:35 AM | Comments (0)

April 10, 2007

All housing markets are local

There’s an old saying that all politics is local, and when it comes to housing markets, N.C. State University's Mike Walden says that economists say the sentiment applies to housing markets.

Location makes a big difference in housing prices, he says, "and that's because when you buy a home, you are not just buying the square footage of that house -- you are not buying the bricks and mortar and everything that’s in the house -- you are also buying into the surrounding neighborhood.

"And so you can take two houses exactly the same in size, in structure, and amenities in the houses and put them however in different neighborhoods, and the prices will be different, and the rate of price appreciation will be different," says Dr. Walden, a professor of agricultural and resource economics.

"Recently we have seen that housing prices in neighborhoods that are more accessible, neighborhoods that have better schools, nicer amenities, near bodies of water, neighborhoods that are safer -- houses there have been going up faster in price than houses in neighborhoods that don't have those characteristics," he adds.

"So never expect two houses that are the same to necessarily be priced the same nor have the same rate of appreciation."

Posted by deeshore at 08:32 AM | Comments (0)

April 09, 2007

The "r-word" returns

Former Federal Reserve Chairman Alan Greenspan recently uttered the r-word -- recession -- and now others are, too. In today's Economic Perspective, N.C. State University economist Mike Walden takes a look at two questions: Has the risk of a recession suddenly gone up? And are we about to enter another recession?

"My answers are yes and no: Yes to the fact that I think the risks of a recession are higher this year than last, but for no other reason than we are now in the sixth year of economic expansion, and when you get farther into an economic expansion, the risk for a recession go up," says Dr. Walden, a professor of agricultural and resource economics.

"Many economists put the risk maybe at no more than 10 or 20 percent, however, for this year. So I don't think we are going to have a recession this year. But that doesn't mean we are never going to have one. In fact, we will," Walden adds. "The last two recessions have come about nine years into an economic expansion. So if you use that as your barometer, maybe look for a recession around the turn of this decade, say around 2009 or 2010."

Posted by deeshore at 08:36 AM | Comments (0)

April 06, 2007

Gender inflation

Inflation is usually is discussed in terms of a single rate that affects everyone equally, but N.C. State University Mike Walden says that the inflation rate can be different for different people -- and recently it's been higher for women than for men.

"Economists give two reasons: One is based on employment," reports Dr. Walden, a professor of agricultural and resource economics. "The employment situation has really been better recently for women, and especially single women, and also women tend to spend a higher percentage of their income.

"And what this does is create a greater demand for the things they buy, and that greater demand tends to push up prices faster," he explains.

"Secondly the specific kinds of products that are geared more toward women -- like jewelry, cosmetics, appliances and housekeeping -– they have been rising faster in price than other kinds of products and services," he adds. "So we can say that the inflation rate has been higher for women, and it's really a matter both of demographics and of economics."

Posted by deeshore at 09:04 AM | Comments (0)

April 05, 2007

Measuring the value of higher education

Our colleges and universities are crucial assets in today's economic world. And N.C. State University economist Mike Walden cites one way to directly measure their value.

"Of course colleges and universities do many things. They teach students, conduct research, provide knowledge and guidance to citizens and policy makers, and actually provide some entertainment and other amenities," says Dr. Walden, a North Carolina Cooperative Extension specialist.

"But the easiest aspect of all of this to measure is the value of educating students. What economists typically do is we look at what we call the value added of degrees. We look at, for example, if a student graduates from college what their income would be over their lifetime, then we subtract off what their income would have been if they had just stopped at high school. And that gives us some measure of the value of that college degree.

"And you simply do that for all graduates of all universities and colleges, for example, in the state. If you do that in North Carolina what you quickly find is that college education is worth billions of dollars annually to North Carolina graduates."

Posted by deeshore at 12:57 PM | Comments (0)

April 04, 2007

The Chinese sneeze

The Chinese stock market fell recently, and many other markets around the world, including ours, also dropped. But N.C. State University economist Mike Walden says that while China bears watching, he wouldn't necessarily say that when China sneezes, the rest of the world catches a cold.

"I wouldn't go as far as to say that, but I think this does show that China is increasingly an important part of the world economy," says Dr. Walden, a professor of agricultural and resource economics. "I think many people knew that. But China does have some economic issues, and I think that was brought out in the big drop in their stock market.

"One of them is they have been rapidly increasing their money supply," Walden adds. "And what that has been doing is holding down the international value of their currency and allowing them to export more. Now that does have a downside, because when a country pushes their money supply up very rapidly that can lead to higher domestic inflation -- it can lead to speculation in their investment markets.

"And that's been a concern of many economists who watch the Chinese economy and the Chinese stock market: Are they getting into what we call a speculative bubble, which could burst and send their economy into a recession?

"So clearly China is important," he concludes. "They do bear watching, because missteps their could affect all of our financing."

Posted by deeshore at 08:28 AM | Comments (0)

April 03, 2007

Tax evasion

It's tax-paying season again, and, of course, while most of us legally pay all the taxes we owe, some folks don't. Economist Mike Walden takes a look at the statistics on tax evasion.

"Well, we only have estimates ... and they suggest that there is a 15 percent underreporting of taxable income," says Dr. Walden, an N.C. State University professor and extension specialist. "So you could call that 15 percent tax evasion.

"Very interestingly the percentage is lower for income taxes, I think one reason being we have withholding for income taxes," Walden adds. "It's much higher for investment income, where there is no withholding.

"Also, the underreporting of income by large corporations is much lower than for small ones. Some people may think that it would be flipped around, but large corporations don’t engage in as much tax evasion, so called, as small ones.

"But all in all, the 15 percent under-reporting ... really to me as an economist indicates a remarkable degree of compliance with the tax code," he concludes."

Posted by deeshore at 08:27 AM | Comments (0)

April 02, 2007

Carbon trading

Addressing environmental issues is one of our nation's biggest challenges. N.C. State University's Mike Walden takes a look at an approach to pollution called carbon trading.

"This is actually an old economic idea, and it's actually been used in some environmental applications," explains Dr. Walden, a professor of agricultural and resource economics. "Let's say that we want to limit the total amount of release of carbon dioxide to the atmosphere. We want to put a cap on the total amount of emissions.

"Rather than telling every company and, indeed, perhaps every household how much carbon dioxide they can emit, what the government would do would sell permits, where the sum of the permits equals the limit on the total emissions," he says. "And companies, therefore, for whom polluting is very valuable and very expensive to reduce, they would likely buy the permits. Other companies, for example, who could perhaps reduce emissions would not.

"And we'd also allow the permits to be traded. So we are setting up a quasi-market system here where the government doesn't get into micromanaging who is allowed to pollute but the government puts an overall limit on the total amount of pollution," he says.

Posted by deeshore at 02:45 PM | Comments (0)