« March 2008 | Main | May 2008 »

April 30, 2008

Are utilities different?

All of us are being asked to conserve resources, from water to electricity to natural gas. But now we hear something that seems both disturbing and inconsistent. Some providers of these resources say when use falls, they have to charge higher prices to stay in business. This doesn't seem fair or logical. Help us out. Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, let me see if I can help you out. What we're talking - generally here - is about utilities, providers of water, power, for example, as well as electric power and natural gas. And these utilities are different in the sense that they experience what economists call declining average costs because of their huge fixed costs related to building the generating capacity or the reservoir and the relatively small variable costs related to selling and moving that energy or water to households. This means that the more they sell, the lower their average costs. That's one reason why they are so-called natural monopolies, and they are regulated. But it also means that the less they sell, their average costs rise, and they have to charge higher prices to cover those higher costs. So what the utilities are saying is exactly right. There is an economic logic here. It does send out an unfortunate perception. But if you are going to blame someone, blame it on the huge costs that have to be incurred to build power plants and reservoirs."

Posted by Dave at 08:21 AM

April 29, 2008

A win-win for government?

Often people look at government policies in a win-lose framework. Some group will gain from a particular policy, while other folks will lose. But is there ever a win-win outcome? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think there can be, and I think a good example of this is last year's General Assembly here in North Carolina changing the way that Medicaid was financed. Medicaid, of course, is the government program that helps low-income people pay their medical bills. North Carolina was rather unique in that it made counties pay part of those bills. And so what you had was a system where low-income counties that presumably have the highest percentage of Medicaid recipients were having to pay some of those bills. And those counties for a long time said, 'We need to have this burden lifted from us.' On the other hand, high-income counties said, 'Wait a minute now, if we have the state take over Medicaid, we'll probably lose out of this.' Well, the General Assembly, I think, crafted a unique plan. They did take over - or will by 2009 - local Medicaid expenditures. But they made sure that all counties will benefit; that is to say that every county will benefit from this swap by at least half a million dollars per year. So I think this was a real example where government can tackle a problem, can craft a change that really benefits all concerned. This, I think was really a win-win for all counties."

Posted by Dave at 08:00 AM

April 28, 2008

Lucky stores

Now that North Carolina has a state lottery, here's a question: Do stores that sell a winning lottery ticket reap any long-run benefits, that is, do people consider such stores lucky? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"That's a really interesting question. It's one that economists actually thought about. Now we have some research from the Texas lottery. Economists there found that lottery players do consider stores selling winning tickets to be lucky; that is, they found that in the week after a winning ticket is announced, the store selling that ticket experiences as much as a 38 percent increase in sales, and that sales bump does continue over time, as long as 40 weeks, although it does dissipate. And so I think what this is saying is that people may think that, 'Hey, if that store sold the winning ticket, there must be something lucky about that store.' Now, there's really no rational reason to think that way, but enough folks do think so that those stores do experience this bump in sales."

Posted by Dave at 08:00 AM

April 25, 2008

Regulating the financial system

In an attempt to contain the nation's financial problems, the Federal Reserve has been making available large amounts of credit to the banking system. Now there's a proposal to increase the oversight and regulations of the Federal Reserve over the entire financial system. But whatever happened to the notion that if you or I or a bank makes a bad investment, that person or business should just take their losses and learn from their mistake? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"That is certainly the attitude of many, that you don't bail out a person or bank for bad investments, and we really had that attitude ingrained in policy in the 19th century, but we found it can lead to problems. The economic system really rests upon the financial system. For our economic system to work, you need to have a place where people can safely and with confidence invest their money. At the same time, businesses and others go to that system to take out loans. If people do not have confidence in that system, they are going to horde their money, and the economic system simply won't work. So before we had the Federal Reserve, we had situations in our country where if the financial system were in trouble, people would simply stop using it, and there were no loans and no investment, and the economy really suffered. So we created the Federal Reserve as a backstop to banks, to go in and help individual institutions if they are having trouble, because those individual institutions really help the entire economy. This is a balancing act. You don't want to overdo it and create the incentive for banks to take unwarranted risks. But it is an important role that banks play, because they are the underpinning of the economic system."

Posted by Dave at 08:00 AM

April 24, 2008

The North Carolina revenue picture

It won't be too long before the North Carolina General Assembly returns to Raleigh. When legislators do arrive, what kind of public revenue picture will greet them? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Many states are having issues right now with their public revenues. States have seen big budget deficits. When our legislators return, I think they're going to see a less optimistic revenue picture, but one that is much less disastrous than in other states. Clearly, revenue growth has slowed, but - this is where I'm going to give a big round of applause - but our legislators, backed up by their fiscal research staff last year, were very cautious about their forecast for revenue this year. So they built the budget around a very modest increase - expected increase - in revenues, and that's really serving them well now. We're actually seeing revenues run ahead of those forecasts, but if we get a dip in revenues in future months, that means we're going to be in much better shape because we did not build a budget around big expectations of major increases in revenues. Now, April's going to be a key month with income tax payments for clearing up what the revenue picture will look like. But I can say right now, we're in much better shape than many other states."

Posted by Dave at 08:00 AM

April 23, 2008

What's driving commodity prices?

Many economists have been surprised by the big runups in commodity prices, such as oil, metals and even gold. Typically during an economic slowdown, prices of these items retreat. What's different about today's commodity market? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"What's different is that many analysts think that it's being driven by investors, some would say speculators, people who have been cleaned and taken their money out of the stock market and the bond markets because they've been fearful of losses there. They've tried to think of where can they put that money and be relatively assured that it's going to earn a good rate of return. And they've looked around and said, 'commodities.' Agricultural commodities are going up in price. Of course, oil's going up in price. Metals like gold are going up in price. So there's been a big influx of investable funds into commodities, and whenever you have that, that's going to push up the price even further. So it is contrary to what we might expect during a typical slowdown, when a slower economy tends to push those commodity prices down. Now, recently we've seen some shift. We've had a little bit of strengthening, for example, in the stock market, and we've seen some movement of money out of the commodities, and we've seen downward price pressure on those commodities. So my expectation is that as we see the economy actually improving in the future, which we hope it does, and the stock market, for example, doing better, that's going to move those investable funds out of commodities, and we may actually see a softening of prices in areas like oil and gold and agricultural commodities. This probably won't happen until late summer or early fall."

Posted by Dave at 08:00 AM

April 22, 2008

Why North Carolina might do better

Traditionally, North Carolina has fared worse than most other states during recessions. For example, in the last recession of 2001, only Michigan suffered more than North Carolina. So if we are now in another recession, should we expect it to be worse in North Carolina? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The answer is no, and that's a good answer, and I think there are two major reasons. First of all, this recession as most people know, if it is a recession, was sparked by the downturn in the housing market, which in turn was sparked by the big runup in housing prices. Fortunately in North Carolina, we had a runup in housing prices but not as much as in the nation. And in fact, except for some isolated areas, like on the coast and in the mountains, we've had very modest increases relatively in housing prices. So the housing bust has not been as deep here in North Carolina, and that's going to help us. Number two has to do with manufacturing. We were hurt in the 2001 recession because manufacturing really took it hard. We are a state that has more of its base in manufacturing. This time around though, again we're still a manufacturing state, but this time around, manufacturing is actually benefiting from the economic slowdown because of the low-value dollar. The low-value dollar is improving our exports. Exports are up almost 20 percent over last year, and that's helping North Carolina's factories and workers sell more in foreign counties. That should also buffer the effects of a downturn here in North Carolina."

Posted by Dave at 08:00 AM

April 21, 2008

Sources of Energy

Energy use is one of the top national issues, and it's likely to be with us for a long time. But before we know where we want to go, we need to know where we are. So where are we today with energy consumption? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"If you look at all energy use, and then break it down as where does that energy originate from, here are the numbers. Oil represents about 40 percent of our energy use, followed by coal and natural gas. They each contribute 22 percent, nuclear about 8 percent and renewables about 8 percent. Now, there are issues with all of these. Of course, the big issue with oil is that it is increasingly a foreign source. There is also the pollution aspect. Coal has the benefit of being very plentiful here in the U.S., but it is also highly polluting. Natural gas has a low pollution effect, and there is also a big domestic source, but as use grows, we are going to rely more on imports. And of course, with nuclear there is the fear and the issue of waste disposal. Now, some people will say I didn't mention electricity, isn't that an energy source? Well, it's obviously a way we use energy, but electricity is generated from one of the sources I just mentioned. It's not a prime energy source. And one of the issues, I should say, one of the economic issues with electricity is that it's difficult to store. So all of these are big issues, and I think we need to realize them before we go on and talk about changing how we use energy."

Posted by Dave at 08:12 AM

April 18, 2008

Where to cut back

For households having a tough time in today's economy, with incomes not able to stretch to cover all spending, what can they do? What are some likely items for them to cut back on in their budget? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"First, what should you not cut back on? You should not cut back, obviously, on your mortgage payment or your rent payment. You shouldn't cut back on insurance payments. And you shouldn't cut back on money that you're setting aside for retirement, for emergency savings and for college funds for your children. Instead, what you want to focus on are these areas. First of all, I would try to eat in more and eat out less. Americans now are spending just as much on eating out as they are eating in. Eating in is cheaper because you are not paying effectively for the rent and the wages of the wait staff and the electricity bill of the restaurant because you are already doing that at home. So try to eat in more and eat out less. Wear your clothes a little longer. Don't get lured into buying the new fashions. Try to go along with the same fashions for another year. People will still like you. Plan, when you are driving, plan for multiple purpose trips. That is, if you need a quart of milk, don't jump in the car and run to the grocery store. Put that on a list, and try to plan that trip to get milk with other things you might have to do, pay a bill, go to the bank, something like that. Take more modest vacations. Try to cut spending there. And then, finally, this summer set the temperature up a little bit to save on your electric bills. It's amazing how much you can save by doing these little things."

Posted by Dave at 08:16 AM

April 17, 2008

Keeping in mind the good numbers

We're hearing many bad economic numbers today. The unemployment rate is rising. Job growth is slowing, and home foreclosures have set records in some regions. Is there any way to look at these numbers in a good light? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"You’re always going to keep these numbers in perspective. For example, when you hear that the unemployment rate has gone up to 5 percent, recognize that this means that the employment rate - the number of people employed - is at 95 percent. Or when we hear that home foreclosures have set a record, note that that means that 3 percent of all home loans are resulting in foreclosing, meaning that 97 percent of homeowners with loans are not having any problems. Likewise, in North Carolina when we hear that job growth is slowing, the unemployment rate is going up, recognize that we're still adding jobs, just not as fast. So for the vast majority of households, yes, we are in a downturn, maybe in a recession, but most people will keep their jobs. They are going to keep their homes; they are not going to be put out on the street. This is not to minimize the effects of an economic slowdown, but it is trying to keep things in perspective."

Posted by Dave at 07:57 AM

April 16, 2008

Are drivers changing?

One of the complaints we've heard about drivers is that despite record high gas prices, gas consumption continued at the same rate. But recent information suggests this is changing. What's happened? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Indeed, in the last three months gas consumption is down one and a half percent from the same period a year ago. Now, this doesn't sound like a lot, but it's very, very unusual. Usually, we see gas buying go up year after year, quarter after quarter and so forth. Any quarter, for it to go down is a major change in attitude of drivers. And I think this reflects two factors. Of course, everyone is keyed in on the price effect, and I think consumers are beginning to respond to higher gas prices. They're reducing their driving. They're buying more fuel-efficient automobiles and vehicles. They're combining trips. And all that has now had an impact on gas consumption. The other thing is what economists call an income effect. The slow economy is pinching consumers' wallets, meaning that there's fewer dollars available to spend on gasoline. That's motivating consumers to try to cut down on gas buying. Whether this is a long trend, I think is going to depend on whether gas prices remain high, whether the economy remains in the doldrums. My expectation is that after we get out of this downturn or recession, we'll start to see gas consumption go up again."

Posted by Dave at 08:00 AM

April 15, 2008

When do recessions end?

Most economists now say the economy is in a recession? If this is the case, then the big question is, How long will the recession last and what will be the spark to end it? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"If we go by recent recessions, the recession will last about a year. There's some indication that if, indeed, we are in a recession, it may have begun in the fall, let's say October. If accurate, that means we should be coming out of this downturn sometime in the late summer or early fall. Now, what is it going to take to bring us out of the downturn or recession? Well, really this is where we mix psychology and economics, because it really takes a change in people's attitudes, and what we have to have happen is, people are looking at the economy, they're looking, for example, at depressed real estate prices, they're perhaps looking at bargains in the stock market. They're looking at business opportunities. They're saying, 'Ok, I think things have bottomed out. I now have to buy. I have to go invest in that rental house. I have to buy stocks. I have to take advantage of business opportunities because it's just too good to pass up. Prices are too low. The opportunities are too high.' And so it really takes that kind of mass attitude. And it starts small and then spreads. And that's really what brings the economy out of a recession. So really, psychology is the key."

Posted by Dave at 07:54 AM

April 14, 2008

What did the Fed do?

There was an earthquake of sorts in the financial markets recently when the Federal Reserve organized a rescue of the investment bank Bear-Stearns. This is all high and confusing finance. Was this just about saving some investors, or was there something bigger at stake? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think there was something much bigger at stake. Now Bears Stearns did have a lot of direct and indirect investments in the mortgage market, particularly in higher risk mortgages, so they have been hurt clearly by the fallout from the decline in housing. But the issue here was not just that Bears Stearns and its employees and investors would have been hurt, the issue here was whether this could have pulled down the entire financial system. And the reason it could is because investment banks as well as commercial banks are all intertwined. They lend each other money; there is a lot of loanable money in back of them. And so it's a domino effect. The fed was concerned that if Bears Stearns were to fall, that would be the first domino in perhaps a whole line of banks - commercial banks - that would either fail or have major losses. And really the first goal of the Federal Reserve, the reason - the major reason - it was set up in the early 1900s is to preserve the financial system, to make sure the financial system is working well. And so the Federal Reserve I think saw this as a major threat to the entire financial system, not just to one company, to really everyone. And of course we are all part of the financial system. That's why they moved in. They really serve as a backstop for the financial system, a lender's last resort. And I think the Federal Reserve was exercising that function in this Bears Stearns bailout."

Posted by Dave at 08:00 AM

April 11, 2008

Should you want a tax refund?

It's tax payment time again for the federal income tax. Most people are hoping for a big refund from Uncle Sam. But from the point of view of personal economics, is a refund really a good idea? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"We do this program every year, because, I think, people still have the wrong idea about a refund, again from an economic point of view. The answer to that question is, 'No, you should not want to get a big refund from the federal government.' The reason is that means you have given the federal government an interest-free loan for that entire year. In other words, you have said to the federal government, 'Here, take my money, use it for whatever you want to use it for for a year. I'll get it back, but you're not going to pay me any interest on that.' How many of you, how many people would want to do that in their day-to-day lives, just give an interest-free loan? So what you really want to do is adjust your withholding - work with your employer or if you are self-employed, figure this out on your own - adjust your withholding so you can get your refund as close to zero as possible. Now some people will say, 'But I use my refund as a way of forcing myself to save.' Well, if that's your goal, there are much better ways to do that. You can have an automatic withdrawal from your paycheck, so you don't even see that money, and that goes into an interest-earning account. The point is, you want to earn interest on money that you saved, and you're not doing it when you get a refund."

Posted by Dave at 08:58 AM

April 10, 2008

Mixed job market signals

The nation lost jobs in February, but the unemployment rate in that month actually fell. If we had fewer jobs, the unemployment rate should rise. What's going on here? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well you're confused, and I think you've got a lot of company, because this can be confusing because exactly what you said appears to make sense. If we lose jobs, there should be more people unemployed, and, therefore, the unemployment rate should go up. Well, here's what can actually happen. We lose jobs and in order to be, however, counted as unemployed, those people who lost those jobs, they have to be actively looking for work. They have to go on job interviews; they have to be contacting employers. If they don't, in the statistics, they are actually counted, not as employed certainly, they're not even counted as unemployed. They are just not even counted. They are what we call discouraged workers, who have really left the labor force. And, therefore, they don't figure into the unemployment statistics. So what can happen is that we have a decrease in jobs, we have a fair number of those people who lost their jobs simply give up looking for work. So they are not even counted as unemployed. And, therefore, the unemployment rate can either stay the same or can actually go down. So I think this is why it is important especially when we are in this transitional period, when we're, for example, going from growth to a recession or vice versa, to not really pay a lot of attention to the unemployment rate but really pay more attention to simply the number of jobs and whether they are going up or whether they are going down."

Posted by Dave at 08:25 AM

April 09, 2008

What goes out comes back in

Let's connect some dots today. Is there a relationship between the purchase of a Japanese-made TV and a new Toyota plant opening in the U.S.? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, indeed there is. When you buy an import like you are buying a new Japanese TV, you are obviously sending U.S. dollars out of the country. You are sending those dollars to Japan, but Japan is a country that doesn't use dollars, they use their own currency. They use the yen. So eventually what's going to happen is the holders of those U.S. dollars are going to say, 'Well, we don't want them just sitting around, we want to earn some money on those. So what we are going to do is, we're going to go take them back to the U.S. and invest them. We are going to buy something with them, or we're going to build something in the U.S. Something we can spend dollars on and hopefully get a good return.' So you might find that those Japanese owners of U.S. dollars will buy some U.S. stock or some bonds or some real estate. Or they may decide to set up some factories, build some factories in the U.S. Of course, if they do, that creates jobs, and it creates income in the U.S. So what's changed here is ownership. When we buy an import, effectively down the road, what we will do to pay for that import is to sell off some asset, some part of ownership of U.S. assets, and that's the way the exchange actually takes place."

Posted by Dave at 11:40 AM

April 08, 2008

The Fed and the dollar's value

It seems like every day the dollar is setting new lows against foreign currency. Many economists thought the dollar would strengthen this year. What happened? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I think, in a word, the economic slowdown happened. The problems in the economy have, of course, been prompting our Federal Reserve - as people know - to cut interest rates. It's widely expected our Fed will cut interest rates further. But other central banks in the world, like the European central bank and the Bank of England, have not followed suit. Or if they have, in the case of the Bank of England, they have not cut rates as much. What this means is that the interest rate earned by U.S. dollars in the world is much lower than the interest rate earned on the pound - the British pound - or the Euro. Now, international investors are always looking for the best return on their money. So when they are looking around the world and they are saying, 'Ok, what currency should we invest in to get the best return on our money.' What they are finding is they don't want the dollar because the interest rates are very low. They're going to go to the Euro or the pound. And so as they do that, that means they are shunning dollars, and the value of that dollar is going down, just like if for some reason people decided not to buy apples, the price of apples would go down. Now, many economists think that eventually foreign central banks will come around, and they will also lower their interest rates. And if they do, that will help prop up the value of the U.S. dollar."

Posted by Dave at 08:00 AM

April 07, 2008

Evaluating government projects

Debates over government spending are some of the hottest contests you'll ever find. Of course, as an economist, you try to look at these debates in a logical, calm manner. So exactly how does an economist look at a proposal to spend public money on project x or plan y? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think in two ways. I think the first question is whether the project is logical for the government to be involved in. There are many projects out there in the world that simply aren't profitable for the private sector to be involved in, or where the private sector can only perform at a great cost, and this is a reason for government to be involved. Roads have traditionally been a good example. It's very difficult for private road makers to make money because of the problem of keeping users off the road, and the benefits of roads were so great, so it was logical for the government to be involved. Secondly, you want to look at every government project in a benefit-cost framework. This is saying, 'What are going to be the benefits to the economy for, say, a new road in terms of faster economic growth?' But, very importantly, you have to recognize the private sector - people, taxpayers - are going to have to give up money in order to build that road. So there's a cost, so what you obviously want to do is try to evaluate the benefits from building the road versus the costs of what you have to give up in the private economy to build that road. I know this sounds very easy, but actually getting the numbers can prove very, very difficult."

Posted by Dave at 08:00 AM

April 04, 2008

The ups and downs of leverage

Leverage is a financial term that simply means that a relatively small amount of money can control a much larger amount of money. Leverage is often used in real estate, where buyers use a small amount of their own money to control a much higher value of real estate assets. Can leverage work both for you and against you? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The answer is 'yes,' and we're seeing that, really, right now. Certainly, leverage can work for you when you buy an asset with a relatively small amount of money, and you're controlling a much bigger value, and that asset appreciates substantially. So, for example, you buy a piece of real estate, say, you put 5 percent down, you borrow the rest. You come out ahead if that real estate goes up in price at a very fast rate. You look very good. You look very smart. In fact, this happened to many people in the residential real estate market in the early years of this decade. But now, when real estate prices are falling in many markets, leverage can really come back to bite you, because now you have borrowed money to buy an asset, and instead of that asset's value going up, it's actually going down, which means that you're going to have to come up with more money to cover the loan. This is exactly what's happening to many people. They're finding their home value is actually less than the value of their loan. They're going bankrupt or walking away. This is a good example of where you have to be careful with leverage and really focus on what's going to happen to the value of that asset that you're leveraging."

Posted by Dave at 08:00 AM

April 03, 2008

Is there one oil price?

There's a common view that if the U.S. could become independent of foreign-produced oil, perhaps by pumping more oil from our own country, then we wouldn't be impacted by changes in world oil prices. Is this a valid expectation? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"It's nice to think about, and it would be nice to have as a goal, but it's really not going to happen. And the reason is, there is really one world price of oil. An economist several years ago, I think, came up with a very good analogy explaining this. He said that if you think of all the world's oil as being put into a big bath tub, and one country's oil in that bath tub is really indistinguishable from another country's oil - it's all oil - that means there's going to be one price of oil. So every user sort of dips their straw into that bath tub and pays the price and takes out the oil that they want and need. So if we were to produce more oil from our country, yes, that might help the world supply, and it might actually put some downward pressure on the price of oil, but that's not going to insulate us from fluctuations in oil price movement."

Posted by Dave at 08:00 AM

April 02, 2008

The two-front Fed war

With the slow economy, many people are looking to the Federal Reserve to bail us out by lowering interest rates. Is there anything holding back the Fed? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"In part, there is because the fed is always fighting a two-front war. One front is to keep the economy growing fast enough to generate new jobs and keep the unemployment rate at a reasonable level. But the second front is to keep inflation at bay. And the problem is that sometimes the goals of these two fronts are incompatible. And now really is a good example. As most people know, the Federal Reserve has been lowering interest rates. It's thought they will continue to lower interest rates in order to stimulate the slumping economy, but interesting research shows that if this is overdone, if the Federal Reserve lowers interest rates too much for too long and especially pumps a lot of money into the economy, this can spark higher inflation down the road. So the Fed is faced with a help me now, hurt me later scenario. Now the current thought, however, is that in terms of choosing which front to fight, the Federal Reserve is going to focus more on the front of stimulating the economy. They will ignore inflation problems and deal with those later."

Posted by Dave at 08:00 AM

April 01, 2008

Taxes and the housing bubble

Everyone is looking for answers as to why housing prices rose so sharply earlier this decade, but now those prices have peaked or have fallen in some markets. Could changes in a key part of the federal tax code have anything to do with the answer? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Many economists think, 'yes.' There was a major change in the tax code about 10 years ago, in 1997, that applied to the profits we make when we sell our home. Now, prior to that change, if you sold a house, in order to get a tax break on any of the profits you earned, you had to buy a house of equal or higher value. However, in 1997 Congress changed the law, and they said you can make up to $250,000 tax free if you're a single person, or $500,000 tax free if you're a couple from the sale of your house. And you didn't even need to buy another house. Furthermore, you could do that sale and make those profits tax free an unlimited number of times. So it's thought by economists that this stimulated a big rush to buy residential homes because of the big tax break. That contributed to the runup in housing prices and really set us up for the fall in the housing market that we're now seeing."

Posted by Dave at 08:00 AM