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October 31, 2007

Profits from junk

American households use an amazing amount of material goods, from cars to toasters to computers. When the goods are replaced, the old ones have to go somewhere. N.C. State University economist Mike Walden discusses three options. Listen

"For some there's an established used market. Vehicles are the best example. So you get tired of your old car, you sell it. It goes to the used car market and so that vehicle gets handed down to other people," he says.

"For some other used materials there's a market for the raw components -- for the raw materials -- particularly metals that can be salvaged and resold. And in fact this has been occurring more with metals because the prices of metal have been going up. People have heard about copper prices being so high and people taking old materials and trying to get the copper out to resell," he adds.

"But I think what many of us worry about most regarding used appliances or used toasters ... is many of them may end up going to a landfill -- and, of course, this raises potential environmental problems.

"And so what are some of the proposed solutions here? Well, one is to charge a fee to either the manufacturer or to the consumer to offset possible damage when you do that, when you take an old appliance, for example, to the landfill. Or to motivate people to reuse it," he says. "In other words maybe you would get the fee back if you sold that appliance to someone else.

"As we get bigger, as we have more people, as we have more appliances and gadgets and electronic materials," Walden concludes, "this issue is likely to increase in importance."

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October 30, 2007

The reset danger

The housing slump continues to hang over the economy, and foreclosures on homes are still scaring investors. N.C. State University economist Mike Walden points to data that indicates the problem could get worse. Listen

"One set of data that can help us is the value of adjustable rate mortgages that are due to be reset. Now an adjustable rate mortgage by its nature has an interest rate that changes. And one of the problems in the mortgage market has been that these interest rates in recent years have been going up," says Dr. Walden, a North Carolina Cooperative Extension specialist. "And so people perhaps who could afford those payments when the rate was lower found they couldn't afford those payments when the rate was higher. And that has contributed to higher foreclosures in the mortgage market.

"So we can look at the amount of adjustable rate mortgages that will have their interest rate reset as some gauge for whether the problem is going to get bigger or smaller," Walden continues. "And the numbers aren't very good. In 2007 it's estimated there will have been $260 billion worth of adjustable rate mortgages that will have their rate reset. In 2008 that will swell to $700 billion -- two and a half times larger.

"So we still have an issue here looming ahead, and I think this is one reason the Federal Reserve lowered short-term interest rates," Walden concludes, "because they want to clearly contain this potential problem."

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October 29, 2007

Ups and downs of a lower dollar

The U.S. dollar's value has been dropping against the value of foreign currencies. In other words, it's taking more U.S. dollars to equal one euro, the Canadian dollar and many other currencies. As bad as it sounds, economist Mike Walden points out there is a good side. Listen

"As we see in most areas .. of economics, there are good parts and bad parts of this trend. The bad part of it is that if you are traveling overseas, making a foreign trip, with a lower dollar that's going to be more expensive," says Dr. Walden, a professor of agricultural and resource economics at N.C. State University. "Also if you buy a significant number of foreign imports -- if you like foreign food or you buy foreign cars -- those will also be more costly with a lower-valued dollar.

"On the other hand, if you are a manufacturer here in the U.S. and you sell some of your products to foreign buyers, you will actually find those foreign buyers now more interested in buying your products because of the lower-valued dollar. It actually makes our exports cheaper,"Walden adds. "And if you are, for example, the operator of a
tourist attraction here in the U.S. and you find that some of your customers (consumers) are foreign people traveling to the U.S. for vacations, you'll find more of them coming because again their currency will go further.

"Economists think that right now actually a lower-valued dollar overall -- when we balance these good parts and bad parts -- is good for the U.S. economy because it will cause our trade deficit to actually go down somewhat," he concludes. "However if the dollar were to plunge significantly in a short period of time, that would be bad."

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October 26, 2007

Metro economies

Economists have a new set of numbers to analyze our nation's metropolitan regions. N.C. State University economist Mike Walden explains what those numbers are and what they mean for North Carolina. Listen

"I'm sure many people have heard the concept gross domestic product. We talk about this ... as the broadest economic measure of economic activity in the nation. We also have a comparable measure for states," says Dr. Walden, a professor of agricultural and resource economics. "And gross domestic product is the value of all production ... from factories, offices, farms, services in a year. And this is the number that's most avidly tracked to gauge what's happening to economies like the nation and North Carolina.

"Well now the U.S. Department of Commerce has developed GDP numbers for metropolitan regions," he continues. "And so it's interesting to look at these because it gives us some sense of the size of regions in North Carolina as well as nationally.

"The largest region in terms of economic activity is the Charlotte-Gastonia-Concord metropolitan area in North Carolina, (which) had a gross domestic product of $106 billion in 2005.
Second was the Durham-Raleigh-Cary area, $70 million. And then third was the Winston-Salem-Greensboro-High Point area at $51 billion.

"The largest metropolitan area in terms of economic activity in the nation is the New York-Northern New Jersey-Long Island area, which produces $1 trillion of production annually."

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October 25, 2007

Education gaps

One of the big issues today in education is the difference in academic achievement of different groups of students. N.C. State University economist Mike Walden discusses what one new study of academic achievement reveals. Listen

"We have a new study that's based on a very large national data set -- so we are not just talking about North Carolina. North Carolina is included in this, but we are really talking about national trends," says Dr. Walden, a professor of agricultural and resource economics. "And what this study looked at was academic achievement over the first two years of school. The study did find a gap when students entered between white, African American and Hispanic students, although the researchers said that that gap could actually disappear when you adjust for socioeconomic characteristic.

"But here is the interesting findings: Over time -- and of course, again -- the education gap between white and African American students actually increased, whereas the gap between white and Hispanic students narrowed," Walden explains.

The question of why -- whether it's due to factors such as parental involvement, teaching techniques or neighborhood effects -- isn't addressed by the study. Still, Walden says, "This is a very revealing study, and I'm sure it will be debated and discussed in the years ahead."

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October 24, 2007

A ranking we may not want

Recently the U.S. Department of Labor released the latest installment of trade adjustment assistance, and North Carolina will receive more money than any other state. N.C. State University economist Mike Walden explains what the money is used for and why North Carolina is getting more than other states. Listen

"This money is used to retrain, relocate and help reemploy workers in the state who have been certified -- it's important they have to be certified -- to have lost their jobs due to international trade," says Dr. Walden, a North Carolina Cooperative Extension specialist. "And I think the fact that North Carolina is getting more of this money than any other state indicates that our state has been adversely affected by the increase in international trade.

"Now there are certainly segments of our state that have greatly benefited, but also there are segments that have been very adversely affected," he says. "And ... this adverse effect is likely going to continue.

"So this money will help some workers and help them, as I said, retrain and possibly get reemployed. Now one issue that is ongoing with this money is that it's generally simply available for what we call blue collar workers -- people who are working in factories: the textile factory, the apparel factory, the furniture factory. It's not available to white collar or office workers. And I think the reason for that is the feeling is that office workers have more options.

"But some are arguing that the money should be opened up to all workers and businesses that have been adversely affected. This is going to be an issue that will be debated in the future."

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October 23, 2007

The big economic measure

Many economic measures come out every month, but there's one that deserves more attention than others. N.C. State University's Mike Walden explains. Listen

"There are lots of measures that come out every month: income measures, retail sales, various employment numbers, measures on consumer confidence [and] price measures. But sort of the granddaddy or grandmother of them all, economists would argue, is a measure called gross domestic product," says Dr. Walden, a professor of agricultural and resource economics. "And that is simply the value of everything that we produce at a given period of time, both goods and services.

"It includes only the value produced in the U.S. ... regardless of who actually owns the factory or company," he adds. "And we think this is the broadest measure of our economy and probably gives us the ... broadest gauge ... of economic activity.

"So when that measure goes up we say the economy is expanding, and when it goes down it's obviously contrasting. And right now our gross domestic product on an annualized basis is around $12 trillion in the nation, and in North Carolina it's about $350 billion. And we are by far -- by leaps and bounds -- the largest economy in the world based on this value."

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October 22, 2007

Defining necessities

What do economists consider necessities? N.C. State University's Mike Walden says their definition isn't much different from the way the term is used in everyday language. Listen

"I think most people have the notion that well a necessity is something they just need to have. And it doesn't matter what the price is, they have to buy it," says Dr. Walden, a professor of agricultural and resource economics. "And actually that's pretty close to the way economists define a necessity.

"How we define it is that we look at how people react in their purchases of a product when the price changes. And if, for example, when the price of gas goes up and people reduce their gas purchases just a little bit -- they essentially buy the same numbers of gallons that they were when the price was lower -- then we call that product a necessity.

"On the other hand," he adds, "if we look at say the purchase of luxury cars and what we typically find -- pick any model of a luxury car -- that when the price goes up a lot you will see a major drop in the purchase of that luxury car. Then we say that luxury car is not a necessity.

"So the things we think of as necessities –- gas, food, clothing, housing -– they are necessities, again, because people don't respond very much in their purchases to changes in price. So this gets beyond just saying necessity is something that we want to call a necessity. It really gives us a specific way of defining that very important concept."

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October 20, 2007

Profits from junk

American households use an amazing amount of material goods, from cars to toasters to computers. When the goods are replaced, the old ones have to go somewhere. N.C. State University economist Mike Walden discusses three options. Listen

"For some there's an established used market. Vehicles are the best example. So you get tired of your old car, you sell it. It goes to the used car market and so that vehicle gets handed down to other people," he says.

"For some other used materials there's a market for the raw components -- for the raw materials -- particularly metals that can be salvaged and resold. And in fact this has been occurring more with metals because the prices of metal have been going up. People have heard about copper prices being so high and people taking old materials and trying to get the copper out to resell," he adds.

"But I think what many of us worry about most regarding used appliances or used toasters ... is many of them may end up going to a landfill -- and, of course, this raises potential environmental problems.

"And so what are some of the proposed solutions here? Well, one is to charge a fee to either the manufacturer or to the consumer to offset possible damage when you do that, when you take an old appliance, for example, to the landfill. Or to motivate people to reuse it," he says. "In other words maybe you would get the fee back if you sold that appliance to someone else.

"As we get bigger, as we have more people, as we have more appliances and gadgets and electronic materials," Walden concludes, "this issue is likely to increase in importance."

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October 19, 2007

Money knows no borders

The relative importance of world trade is three times more important today than it was just 30 years ago. Does this mean that money freely moves across international borders? N.C. State University economist Mike Walden says yes, indeed. Listen

"And the free flow of money is probably the best example of our global economy because money from one country or region can now easily get invested in another country or region," says Dr. Walden, a North Carolina Cooperative Extension specialist. "And we can definitely see this with our country. The U.S. has become a very popular place for international financial investments. That is, money being created and earnings being created in other countries and those folks coming here to the U.S. to invest that money. And we also see the reverse.

"It's very easy now for U.S. citizens to invest in foreign countries. And you don't have to go there and to that," he adds. "There are mutual funds for example that automatically do that. So this back and forth of money has become a key characteristic of a global economy.

"There has been one possible downside, and that is that the central bank -- for example, our Federal Reserve or the Bank of England or the Bank of Japan -- traditionally relied on their ability to control the flow of money as a way to control the ups and downs of the business cycles. With money now freely flowing around the world, it becomes more difficult for those central banks to do just that."

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October 18, 2007

Who finds the next big thing?

As the old saying goes, someone is always trying to build a better mousetrap. N.C. State University economist Mike Walden discusses who those people are and where they get their ideas. Listen

"Economists ... call them entrepreneurs. These are people who are always trying to shake things up. They are looking around, they are seeing what problems people are having with current products. And they try to do something about it; they either make a modification to an existing product or maybe they come up with a completely new product, some new invention," says Dr. Walden, a professor of agricultural and resource economics.

"So these are thinkers -- these are thinkers who are good observers, and they are good problem solvers. Now of course the motivation here is money, because if you have a new product that people flock to, you are going to have a lot of people buy that product. And you are going to make a lot of money," Walden adds.

"Oftentimes these entrepreneurs are doing things that are mundane and simple. For example I was reading a biography of the Crosley brothers
And they made their initial money developing tire inner tubes -- something (that was) very mundane but yet had a great market appeal once they developed that product.

"So entrepreneurs are very, very essential to our economy. It's hard to predict what new product is going to do well, and there are plenty of entrepreneurs who develop things and they fall flat on there face," he concludes. "But they are definitely needed because ultimately it's these folks who push us forward and help improve our standard of living."

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October 17, 2007

North Carolina hits homer for personal income

Recently released rankings show that North Carolina has hit a home run on personal income growth, says N.C. Cooperative Extension economist Mike Walden. Listen

"Personal income is one of the most watched measure of the economy. It includes all income received by persons. The most important component is earnings. We just had released from the federal government the second quarter of this year, 2007, for personal income growth in all states. And the good news is North Carolina ranked very, very high," Dr. Walden says. "In fact we ranked number 10 among all states in growth in personal income in the second quarter of 2007. In the Southeast we were first only to Florida. That is, Florida beat us by just by a little bit. So we were very good also here in the Southeast.

"And this pattern -- that is, we in North Carolina doing very well in personal income growth -- is a pattern we have seen in other business cycles. That is, we have big slumps in personal income during recessions then when the economy gets back on track and going, North Carolina does very well.

"So we are sort of slow out of the gate from a recession, but we pick up steam much greater later," he concludes. "And again that's reflected in these good numbers on personal income."

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October 16, 2007

Causes of obesity

With obesity becoming a major U.S. health issue, N.C. State University economist Mike Walden discusses recent research about the economic and demographic links to obesity. Listen

"Number one, the researchers found that obesity is negatively related to education -- another way of saying that the more education you have the more knowledge you have of the adverse effects of obesity, the more knowledge you have of nutrition, all of those things lead to lower rates of obesity," says Dr. Walden, a professor of agricultural and resource economics. "So we see, for example, that college-educated people have a lower rate of obesity than high-school-educated people.

"We also see that obesity is negatively related to income. Again, higher-income people are less obese on average than lower-income people," he adds. "The thinking here would be that there are greater financial benefits to staying healthy the more income that you are earning.

"There is a positive relationship between obesity and age; that's probably related to a slow-down in metabolism," Walden continues. "The most interesting finding ... I think from this recent research is that the researchers found a negative link between obesity and gas prices. That is, lower gas prices they found were related to higher rates of obesity; higher gas prices were related to lower rates of obesity. And the thinking here is that with lower gas prices people are going to drive more, they are going to exercise less, and the reverse when gas prices go up.

"So this would suggest there might be some silver lining to higher gas prices," he concludes, "when you look at its effects on obesity."

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October 15, 2007

Looking for comparative advantage

Competition is a key part of our economic system, but to effectively compete people need to use their skills and advantages. Economist Mike Walden says that while this idea is easily understood for workers, it can it also be applied to larger groups, such as communities or even countries. Listen

"This concept called comparative advantage is really applied universally," he says to his host Mary Walden. "For example, when you are talking about individual people, you and I became teachers; my dad, for example, found his skills were best suited for him to become a carpenter; your mom was a businesswoman. But we can apply this concept that obviously applies to workers more broadly.

"You can talk, as you said, about the comparative advantage of countries," he tells her. "For example a country like Saudi Arabia, its comparative advantage of producing oil. The U.S. has comparative advantages in technology, the arts and agriculture.

"A big focus today is finding a comparative advantage of towns and communities, especially those towns and communities that have seen their previous dominant industries decline. And we see this here in North Carolina," adds Walden, an economics professor at N.C. State University. "There are plenty of towns that are struggling. The textile industry, the furniture industry has gone away. And those towns are trying to assess what comparative advantage do they have.

"And they are looking at the skills of their people, they are looking at their location maybe natural advantages and trying now to figure out what now can they do for the future in order to compete and earn money. Again, they are trying to find their comparative advantage.

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October 12, 2007

The hidden cost of depreciation

Many costs in our economy are obvious: the cost of gas at the pump, the mortgage or rent we pay every month, and the tuition check parents of college students might pay. But there are hidden costs that are not so obvious but still as significant, says N.C. State University economist Mike Walden. Depreciation is one of them. Listen

"Depreciation occurs when the value of an asset falls. You can think of it as the using up of the value of that asset," explains Dr. Walden, a North Carolina Cooperative Extension specialist. "Now this is a common cost for businesses to account for. Businesses, for example, will account for depreciation in their buildings, in their machinery, in their technology, even in their vehicles.

"But many times I think that consumers ignore depreciation. One of the best examples of depreciation for the average person is the depreciation in their vehicle, in their car or their truck," he adds. "Let's say you go and buy a new car for $20,000. After a year you will likely find that if you tried to sell that car (even if it's in excellent shape) you could maybe only get $15,000. That $5,000 loss is what we call depreciation.

"Now depreciation also occurs in homes in the structures we live in. But usually it's overcome by the increased value of the land on which the house sits, so you don't really see it in structures but it is still there."

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October 11, 2007

Housing’s impact

The housing market appears to be slowing down, even in hot markets like the Triangle, says North Carolina State University economist Mike Walden. And that could have ripple effects in the broader economy. Listen

"The construction and real estate sector together is huge. It's a big, big sector," says Dr. Walden, of North Carolina Cooperative Extension. "In most markets in North Carolina, that one sector accounts for close to 10 percent of economic activity. That's just directly. And it is one of the leading if not the leading industry in most markets in North Carolina.

"Now the impact, however, of construction and real estate goes wider; surely we are going to count for example, people working, building homes, and Realtors and so forth, but you are also going to have impacts on folks who do landscaping, painters, carpet installers, people in finance," he adds. "So the ripple effects, in you will, of the construction and real estate market go much wider than just that 10 percent.

"In terms of employment, I estimate that that market when you account for all the other folks involved supports about 300,000 jobs just in North Carolina," he concludes. "So if we are talking about a slowdown in the construction and real estate market, we can potentially see that slowdown work its way through the greater economy and really have a very massive impact. Again, I think that's why recently the Federal Reserve moved to lower interest rates in order to try to support this market."

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October 10, 2007

The interest rate cut

The Federal Reserve recently surprised many by cutting one of their key interest rates by one half percentage point. N.C. State University's Mike Walden explains why they did this and what kind of impact it will have. Listen

The Federal Reserve has become worried that the slump in the housing market and the rise in mortgage foreclosures may leak over into the rest of the economy and cause a general economywide recession. Therefore they have at their power the ability to try to pump up the economy by number one ... lowering interest rates. And at the same time they are putting in additional money into the system.

"Now I think the impact on the housing market will come in two parts: Number one it is going to be easier with lower interest rates for home buyers to qualify for mortgages and to buy homes," says Dr. Walden, a professor of agricultural and resource economics. "And we have a large inventory nationwide of homes, and so the hope is that those lower interest rates will cause those inventories to be reduced and eventually cause there to be more construction to get that market back in gear.

"The second impact will be for those home buyers who have current adjustable rate mortgages," Walden continues. "Those mortgages have been adjusting upward; their interest rates have been going up. That's one of the big causes behind the increase in mortgage foreclosures.

"Well, with lower interest rates generally the adjustment upward will not be as great, so again the Federal Reserve is hoping that that will try to mitigate the rise in mortgage foreclosure and put a lid on those," he says. "So I think the Fed will sit back now and see if their hoped-for remedies will work. If not we may see more cuts in the future."

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October 09, 2007

Tame inflation?

One of the important economic gauges that the Federal Reserve watches in making decisions on interest rates is inflation. It's widely thought that the Fed wants the inflation rate to be no higher than 2 percent on an annual basis, says N.C. State University extension economist Mike Walden. And, he adds, there is some evidence that we've met that target. Listen

"If you track the inflation gauge that the Federal Reserve prefers, then yes, we are there and we've been there for two months. The Federal Reserve likes to follow something called the personal consumption expenditures price index (that's a mouthful) or PCE because they feel that it better tracks what consumers are actually buying and where they are buying it, and therefore they get a better gauge of prices.

"Furthermore, the Fed likes to exclude energy and food prices because they feel these are prices that can go up and down with a lot of volatility," Walden adds. "So when we look at the PCE, excluding energy and food prices, we see that it's slightly under 2 percent for about two months in a row. And this is thought to be the target that is set by the Federal Reserve -- that they want that number to be under 2 percent.

"This is fuel to those who think that the Federal Reserve will in its next meeting likely turn its attention away from fighting inflation," Walden concludes, "because there's some evidence that fight's been won to ensuring there’s enough growth in the economy."

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October 08, 2007

Making money in the parking lot

It's football season, and a big part of going to a game for many is the tailgating parties and feasts that happen even before the kickoff. N.C. State University economist Mike Walden says those parties have become big business. Listen

"It's estimated that there will be 50 million tailgaters this year at college and pro games, and collectively those tailgaters will spend between $7 and $15 billion on their activities," says Dr. Walden, an economist with North Carolina Cooperative Extension. "Furthermore, these figures have all doubled in the past eight years. So this is really a growth industry.

"Another element here is tailgaters are really a retailer's dream because the major of them are, studies show, high-income folks," Walden adds. "So this is why you see a lot of ads now being targeted to tailgaters for different kinds of products and services to use while you are tailgating because those folks have a lot of money to spend.

"And this," Walden concludes, "is also an interesting fact about tailgaters: TVs are marketed to tailgaters because over a third of the people who are in the parking lot tailgating never go into the stadium."

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October 05, 2007

Did the Fed take too long?

The blame game has already started over who or what is at fault for the financial issues in the housing market and the resulting threat to the overall economy. The Federal Reserve is receiving its share of pointed fingers. But what could the Fed have done wrong? N.C. State University economist Mike Walden explains. Listen

"The typical pattern ... is that the Fed lowers interest rates when the economy is in a recession and they increase interest rates later. And what many are saying -- and I will say, with the benefit of hindsight -- is that the Fed waited a year too long to raise interest rates," says Dr. Walden, a professor of agricultural and resource economics. "They didn't raise interest rates until 2004, some say they should have increased interest rates beginning in 2003.

"Now what does this mean? What could this have done to get us into the situation we are in now?" Walden asks. "Well, what the critics say is that this gave the economy a full additional year of very low interest rates, lots of money and credit floating around in the economy. ... Much of this money went into the housing market; some of it went into loans that we now can say were marginal loans. They weren't credit-worthy loans. And now since interest rates have gone up many of those loans have turned out to be bad, and foreclosures have gone up.

"And the critics of the Federal Reserve say that if the Fed had actually raised interest rates in 2003, not all but some of this would have been eliminated," Walden adds. "So this is why the Fed is having some fingers pointed at it. I should say that ... these decisions were made under the previous Fed chairman, so Greenspan is getting some heat here. But again this is all the benefit of hindsight. It's actually very difficult believe it or not to know exactly where you are in the economy at a particular time."

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October 04, 2007

Good news for Hispanic households

With Hispanic people becoming a more important part of our population, trends in their economic progress become more noteworthy. The latest national report on household income was just released, and N.C. State University economist Mike Walden says it brings good news for Hispanic households. Listen

"For many years these financial numbers for Hispanics were not improving. Indeed, Hispanic household income, once you adjust for inflation, showed no gains whatsoever in the 1970s, the 1980s and the first part of the 1990s. And likewise the poverty rate for Hispanic households trended upward during that time period," explains Dr. Walden, a professor of agricultural and resource economics. "And some say this was the result of the economic characteristics of new immigrants -- new Hispanic immigrants.

"But the good news -- the different news -- is that there has been a noticeable turnaround in recent years. New Census data show that household incomes for Hispanics are rising faster than for other demographic groups," he says. "And poverty rates for Hispanics are actually falling.

"The question here is whether the composition of the immigrants who are coming to the U.S. is changing and whether it's becoming skewed more toward folks with more education and therefore higher marketable skills -- or whether existing Hispanic households are beginning to move up the economic ladder," he adds. "Many economists actually think it's the latter."

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October 03, 2007

North Carolina's ups and downs

North Carolina's economy has been through a lot this decade: a recession, the transformation out of manufacturing into services, state budget shortfalls and reactions to 9/11. N.C. State University's Mike Walden comments on the state's economy over the past six years, comparing it to that of the nation and the Southeast. Listen

"First of all, the recession that we had beginning in 2001 and in many regions really didn't end until around 2003 hit North Carolina harder. and the recession in North Carolina lasted longer than in both the nation and in the Southeast," says Dr. Walden, a North Carolina Cooperative Extension economist. "For example, in terms of manufacturing we saw that manufacturing in the nation and the Southeast began to turn around in 2003. It didn't begin to turn around in North Carolina until 2004.

"The second difference, however, is that once our economy got back on track and, for example, in manufacturing in North Carolina it was in 2004 and in the broader economy it was really in 2003," he adds. "Once our economy in North Carolina got back on track we have actually progressed faster than the nation as well as faster than the Southeast. So this is an example of where it is important to know the time period you are comparing.

"If you look at North Carolina this decade -- the entire decade -- we don't look very good in terms of comparisons to other states. But if you look at our performance since the recession in North Carolina ended and since our economic growth has started on an upward trend, we actually perform much better than other states in the country."

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October 02, 2007

Incentives for existing firms

Incentives are often used to attract new firms to North Carolina, and the state now plans to extend such incentives to existing firms. N.C. State University economist Mike Walden explains why. Listen

"Well, of course this is a very hot topic, but the rationale if you were to support this would be that if a firm, for example, is in danger of leaving the state and taking with it its investments and its jobs or if a firm is making a decision about whether to add investments here in the state and they are not sure they want to do that, then incentives may be considered in order to encourage that firm to stay and keep their jobs here or in order to encourage that firm to make those additional investments here in the state," says Dr. Walden, a professor of agricultural and resource economics. "So I think it's a little harder to see than with attracting a new firm here because obviously a new firm is bringing new investments and new jobs. But the point here or the way to look at this I should say is whether you want an existing firm to stay or potentially leave. Now in most cases the new incentives will be not a check written by the state to the firm but it will be a forgiveness of some of the taxes paid by the firm. And what the state will likely do is look at this in a benefit-cost framework and say, alright, if we provide this tax relief will we, however, make more money from the firm in terms of the remaining taxes that it will pay if they stay and don't leave and if they make these investments.

"So the state is looking at this in terms of whether the benefits outweigh the costs, and of course that's a tricky thing to do. But nevertheless the state is trying to establish that," Walden concludes. "So again, the point here is do you want the firm to stay or leave and base your economic calculation on that."

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October 01, 2007

Beware of comparisons

Economic comparisons are made all the time. But N.C. State University economist Mike Walden says that you need to be careful when making such comparisons. Listen

There are ... two big things here. One is to make sure that when you are comparing anything in dollar value -- income, price, cost, profits, whatever -- that you adjust for inflation," says Dr. Walden, a professor of agricultural and resource economics. "Another way of saying it (is) you adjust for the rising cost of living.

"So what this means of course is $1,000 in the year 2000 is actually higher in purchasing power than $1,000 today. And you need to make that adjustment to account for inflation," he explains. "And fortunately, fortunately many media stories now do that. So you'll read an article, and you'll see in parentheses 'in inflation-adjusted dollars' or 'in 2007 dollars.' That means inflation has been accounted for.

"The second thing you need to be careful of is the business cycle," he adds. "Our economy goes through a pattern of economic ups and downs, and if, for example, you choose some dollar value in a past year when the economy is up and you compare it to this year when the economy is down, then obviously this year is going to look worse.

"So what you want to try to do is to compare dollars in years when we were at the same point in the business cycle," he concludes. "That's a little trickier, but again it's something to keep in mind.

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