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January 30, 2009

The recession in North Carolina

The economic numbers for the ongoing national recession seem to be getting worse. Do we see the same bleak picture here in North Carolina?

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

"The unemployment rate in North Carolina soared at the end of last year, so, yes, the picture has gotten bleaker. But if it's any consolation, it could be worse because so far North Carolina is actually faring better in the current recession than it did in the recession earlier this decade. For example, compared to the nation, so far in this recession, we have lost 50 percent more jobs. But in the 2001-2003 recession, our job loss compared to the nation was 130 percent greater, and percentagewise, our manufacturing job losses have been about half as great as they were, again, in the last recession. And one final statistic: right now we have the seventh highest unemployment rate in the nation. But in 2001 we had the fourth highest unemployment rate. So I guess you can always look at bright sides and dim sides of any item. Certainly, this recession is challenging and troubling, but if there is a bright side, it is that is could be worse."

Posted by Dave at 08:00 AM

January 29, 2009

Ripple effects

When hearing reports about the potential effects of auto manufacturers reducing their operations, the term "ripple effect" is used to describe the total impacts. What exactly is this ripple effect, and why is it important in economics?

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

"Let me explain this with an example. Say John Jones loses his job that pays $50,000. Obviously, this is a $50,000 loss to John. But if John had earned that $50,000, he probably would have spent most of it. Let's say he spends all of it. So that $50,000 in turn would have become further income to merchants and retailers and anyone else that John Jones had bought something from. Likewise, those merchants who received John Jones' income would have respent that money that they received on their suppliers, etc. So the point is that an initial amount of money, once it's spent, respent, respent, etc., etc., several times, ripples through the economy and actually has a much bigger total financial impact on the economy than the initial amount. Now as a rule of thumb, what you can do is to take something like John Jones' income of $50,000, and if you want to say, what's the total impact of that once it has been respent, roughly double it, and say that is going to result in a loss, if he were to lose his job, a total loss of about $100,000."

Posted by Dave at 08:00 AM

January 28, 2009

Should you be bartering?

Bartering is enjoying a resurgence. Bartering means you trade products and services directly without using money. With money tight these days, some people have concluded bartering is the way to go in economic exchanges. Is bartering for everyone?

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

"There are two issues with bartering. One, it requires two matches to be made. You have to find someone who wants what you have to sell, and in turn, they have to have something that you want to buy. And secondly, it limits your choices, obviously, only to people who are bartering. So in normal times, bartering is not very popular. Now, bartering has enjoyed somewhat of a resurgence, with money being very tight. Also, the Internet has helped it because there are sites now that are designed for people who want to barter. And so you can scan those sites and find much more quickly people who have things that you want to buy and who, in turn, want something you have to sell. So the Internet has certainly helped it. One thing that people need to keep in mind, though, is that bartering is not a way to escape taxes. You have to report the value of any economic gains that you have derived from bartering to the Internal Revenue Service. That has to be reported as income, and you will be taxed on it. So don't think that bartering is simply a way to escape income taxes."

Posted by Dave at 08:00 AM

January 27, 2009

Should you take some TIPS?

TIPS are not advice or payment to a waiter or waitress but instead a type of investment. What exactly is the TIPS investment and why should people consider it now?

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

"TIPS stands for Treasury Inflation Protection Security. And what this is, first of all, it's an investment with the federal government, so it's actually super safe. People may be surprised to hear me say that, but any investment with the federal government, like a treasury security, is considered the absolute safest investment you can make. And it's an investment where really there are two interest rates that you earn. One is a base interest rate that will be stated when you buy the investment, something like 2 or 2 1/2 or 3 percent. And then secondly will be added over time an interest rate based on what the inflation rate has been. So you are guaranteed always to stay ahead of inflation. And many people right now are saying, 'Hey, if I can do that, that's fine. I want to make sure my money is safe, number one, (which it is with TIPS) and number two, at least if I can earn something above and beyond inflation, I'll be happy.' And again, you can do that with TIPS. So these have actually increased in popularity right now. You can buy TIPS directly from the Treasury Department, and you can do that through the Internet. Or you can buy them through mutual funds."

Posted by Dave at 08:47 AM

January 26, 2009

No worries about inflation

Earlier this year, inflation was perhaps the number one economic concern. Now, inflation worries have faded. Why? And does this mean inflation is off our radar screen for the near future?

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

"Lower inflation is one of the beneficial results of a recession. It's probably one of the only beneficial results. We typically see inflation subside during a recession for the simple reason people aren't buying as much, so in economics lingo, demand is down. Supply is the same. That puts downward pressure on prices. Indeed, some economists see inflation averaging in 2009 only a little over 1 percent for the entire year, whereas earlier in 2008, we were worried about inflation perhaps averaging 6 percent. Again, a big part of this is due to lower energy prices, lower commodity prices, but typically it's a result of a recession. Now, if you take out energy prices, inflation is a wee bit higher. It's averaging around 2 percent, and that's actually been fairly consistent for the past several years. Now there is one big worry looming down the future that economists are pointing to, and that is that all this money that the federal government is creating to try to stem the recession may come back to haunt us two or three years down the road in terms of much higher inflation. But right now we have low inflation, and hopefully we can enjoy it."

Posted by Dave at 08:00 AM

January 23, 2009

The drop in interest rates

There's good news for homeowners and homebuyers. Mortgage interest rates are headed down. Two questions about this: First, Why is it happening? And second: How important is it?

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

"Well, the 'why' I think is easy, and it's based on the Federal Reserve a couple of weeks ago announcing that it would buy $600 billion worth of mortgages and mortgage-backed securities held by the big secondary mortgage lenders Freddie Mac and Fannie Mae. Now this is significant. This is big because Freddie Mac and Fannie Mae have been in trouble financially, and the fact that the Fed, in essence, says we're going to come in and directly bail you out – buy these mortgages – has given a big lift to the mortgage market. Translated, what it's done is really reduce the risk of making mortgage loans from banks to homebuyers. And so what we've seen is because that risk is down, interest rates are down. In fact, they're down big time. They're down to 4-year lows right now. Now the impact of this could also be very, very significant because the major sector in our economy that has to revive for the entire economy to revive is the housing market, and lower interest rates will help spur home buying because people will be able to buy homes with lower payments so their income won't have to be as high. We've also seen a big rush of homebuyers refinancing. That will be important to stave off some, not all, but some foreclosures. So this is very big, very important news for the potential economic recovery."

Posted by Dave at 08:00 AM

January 22, 2009

Continued debate over the New Deal

There have been many comparisons to our current economic situation and the Great Depression of the 1930s. There's also a debate over public policy and whether large public spending programs can lead us to an economic recovery. What lessons can we learn from the 1930s?

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

"Well, we're still debating those lessons. There's a lot of debate in academic circles about what worked and what didn't work regarding government policy during the 1930s, during the Great Depression. Now, of course, the federal government did enact very large spending programs, particularly for public works. Nevertheless, at the end of the 1930s, economic production in the economy was still 25 percent lower than at the beginning of the decade. That is, the economy did not recover to any great means during the entire decade of the 1930s. Now some economists argue it wasn't because of the lack of effort on the spending side. It was because the government got involved in the labor markets, in terms of heavily regulating labor markets, and that did not allow wages to adjust to levels that would motivate employers to increase hiring. And many economists say that is the big, important factor behind the lack of an economic recovery during the 1930s. Indeed, we need to allow all prices, including wages, to adjust, perhaps downward, to, again, cause this revival of business spending and hiring."

Posted by Dave at 08:00 AM

January 21, 2009

Fractional reserve banking

Banks serve a vital function of taking money from depositers and loaning it out to businesses, homebuyers and other borrowers, but is there something in the nature of this banking system that makes it susceptible to financial ups and downs?

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

"This is a big debate within the economics profession. Some economists say the answer to your question is a definite 'yes,' and it's based on a concept called the fractional reserve system or fractional reserve banking. And what this simply means is that when depositers take money to the bank, the bank puts that in the vault. The bank is going to loan out most of that money, and indeed, when they do that, they're going to create money, and they're going to create more money, so they have more loans outstanding than they have back in the vault. Now, that works well when those outstanding loans perform, when the bank earns interest on those loans. The bank makes money. Their depositers make money. But it, perhaps, creates a problem when a significant part of those loans go belly up, that is, they don't perform. And the losses can be multiplied because the losses can actually end up being more than what the bank has back in the vault. You may remember the scene from the story 'It's a Wonderful Life,' where Jimmy Stewart's character is trying to convince people in the lobby who want their money out, 'Hey, we don't have all your money back here. It's been loaned out.' So some economists say that this system really creates big ups and downs in the financial sector, and indeed, can in the whole economy. That's one reason why the Federal Reserve was established as sort of a backstop where banks who are in trouble can go to get emergency loans."

Posted by Dave at 08:00 AM

January 20, 2009

The stimulus policy debate

There will likely be some kind of new federal stimulus to the economy under the Obama administration. It's widely thought it will take the form of new federal spending for infrastructure. But some say a better approach would be to simply reduce tax rates. What's the difference?

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

"This has been a long, long term debate over decades, probably over 70 years. Both would accomplish the same objective of putting more money into the private sector. The debate really surrounds two issues. One, who should call the shots. Those who favor individuals deciding how this additional money would be spent would favor tax cuts. Those who favor government calling the shots would obviously favor something like an infrastructure spending plan where the government is directly spending the money. So that's one debate. The second debate is over the impact, and that is to say, for each dollar of either tax cut or infrastructure spending, what's the total effect on the economy. And in the past, the nod has been given to infrastructure spending. That is to say, there'd be more total impact on the economy from a dollar spent on infrastructure than from a dollar cut in taxes, but there's been some recent research that disputes these results and actually gives the nod to tax cuts. So I think the bottom line here is that this debate will continue, but I do think it's very likely that the new administration will favor the infrastructure spending approach."

Posted by Dave at 08:52 AM

January 19, 2009

State budget shortfalls

The recession is having an adverse impact on all budgets, including those for the government. A recent report said that 43 states now face deficits in their operating budgets for the upcoming fiscal year. Why is this happening, and is North Carolina among the majority of states with budget problems?

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

"Well, the reason this is happening is because we're in a national recession, and of course, that affects the private sector, affects people's incomes, it affects their wealth, and so if wealth and incomes go down, that's less for governments to tax. Governments, of course, get their revenues from the private sector. So it should make sense that if the private sector is in a recession so, too, will be the public sector. Now a big difference between the states and the federal government, the federal government can run budget deficits. They can borrow money for their operating costs. Most states, including North Carolina, can't do that, so they have to balance their budgets. Now this new report that came out from the Center for Budget and Policy Priorities shows that for the upcoming fiscal years, 43 states are expected to face a shortfall in their operating budget. The average state budget deficit will be 16 percent of total spending. North Carolina, unfortunately, is among those 43 states, but our average budget deficit is expected to be somewhat smaller at about 12 percent of total state spending. That actually translates to $2.7 billion. Now again, we can't have these deficits - states can't have these - so what states will have to do is either raise taxes - that's unlikely - or pare down on spending, which is more likely. Either way, this is going to be a tough, tough year for elected officials."

Posted by Dave at 09:19 AM

January 16, 2009

The wealth shock

Household income during the recession has been battered by job losses, but household wealth has also been hit by declines in both the stock market and home prices. How significant has the drop been in our wealth?

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

"Well, first let's define the difference between income and wealth. Income is what you earn, for example, on a monthly basis from your job, in your paycheck. Your wealth is your investments. It's the value of your assets minus the value of your liabilities. It is what you owe. Another word for wealth is net worth. And household wealth has been down big time, unfortunately, during this recession. In fact, since early 2007, household wealth has dropped $7 trillion - that's with a 't' - $7 trillion. That's 11 percent of the total. Almost $3 trillion of this has been in real estate. The rest is primarily a decline in the value of financial assets; the most important would be the stock market. Also, if you look at household wealth as a percent of household income, wealth has dropped on average from 600 percent of household income to 500 percent of household income. Now one impact of this beyond just these ugly numbers is the effect on consumer spending. There is what economists call a 'wealth effect.' The wealthier people are, the more they're going to spend. Therefore, as people's wealth has gone down, that's having a detrimental effect on consumer spending."

Posted by Dave at 08:00 AM

January 15, 2009

Why not a Mahattan-style energy project?

Many people say we should do for energy today what we did for winning World War II or sending a man to the moon in past decades; that is, to develop a massive government project to produce the fuel that will be the successor to gasoline. What's wrong with this idea?

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

"Well, what's wrong with it is it's not the same. Developing the atomic bomb or sending a man to the moon were specific goals, and we put resources into achieving those goals. But it was not necessary to make either a commercially viable endeavor. That is, this is the difference between achieving something that's technically possible and achieving something that's economically possible. With the atom bomb and going to the moon, all we needed to do was make sure that that was technically possible, and we did it. Developing a new fuel not only has to be technically possible, it then has to be profitable; that is, commercially viable on the market. That is, it has to be able to produce at a price that consumers are willing to pay and that will provide a profit to the company. So this is a very tall order, and it's a much taller order than those other endeavors you mentioned. And this is why we haven't yet achieved it."

Posted by Dave at 08:00 AM

January 14, 2009

The dollar's gain

Something unusual seems to have happened recently in the economic world. At the same time that our government has been borrowing and creating hundreds of billions of dollars, the dollar's international value has jumped. It would seem the opposite would have happened, that the dollar would have dropped in value. Why didn't it?

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

"Well, because with all the economic troubles, all over the world - and indeed, we are in a worldwide recession - the U.S. dollar is still considered to be the most stable currency. It's still considered to be a safe haven. So, what you've seen happen is as investors all around the world are getting out of stock markets, they're getting out of different government bonds, they're all flocking to the dollar. They're all buying investments that are denominated in the dollar, like federal treasury securities. Indeed, the federal government has now been able to issue investments that carry zero interest rates. That is, people are so interested in having their money parked in dollars that they don't even need to be paid interest on it. That's actually unprecedented. And so it has been good for our international status actually to have this worldwide economic crisis. Now there's certainly a downside to the stronger dollar, and that is that it's reducing the growth in our exports. Our strong export growth over the last couple of years has been a very positive point in our economy. Now that export growth is slowing, that's simply going to add to the recession."

Posted by Dave at 08:00 AM

January 13, 2009

Reworking mortgages

There's increasing public interest in preventing further home foreclosures by redesigning or reworking the mortgages of those troubled homeowners. What are the pluses and minuses of such actions?

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 the pluses are obvious. If we were able to rework those mortgages, we could perhaps keep more people in their homes. This would help stabilize the housing market, and stabilizing the housing market is really crucial to stabilizing the entire economy and getting us out of the recession. However, there are some downsides. Number one, some of the mortgages can't be reworked because they don't exist in the form they were taken. They've been split up into little chunks and repackaged with other investments and sold all around the world. So technically you can't rework some of those mortgages. There's also the potential for legal resistance by investors to having those mortgages reworked. And then also, there's no assurance that the affected homeowners would be financially safe. In fact, the current data show that half of the homeowners who've had their mortgages reworked still eventually are foreclosed on, and I think this is because we have now a problem not just related people who, perhaps, took out mortgages that were too big for themselves, but now we have a problem of people losing their jobs. That's really what's driving foreclosures at this point."

Posted by Dave at 08:00 AM

January 12, 2009

The downside of lower gas prices

Drivers received an early Christmas present in the form of lower gas prices - much lower. It's at least a small consolation for the recession. But are there any negatives that come with these lower prices for motor fuel?

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

"Well, there is a negative, and it is that I think it is slowly taking our focus away from improving our fuel efficiency and looking for gas alternatives. The economics are very simple. Why were people so interested in alternatives to gas and why were people so interested in buying fuel-efficient cars when gas was $4 a gallon? Well, because they wanted to save on that $4-a-gallon gas. They wanted to find something that was cheaper or some vehicle that got more miles per gallon so they wouldn't have to buy as much gas. Well, now that gas is lower, it makes common sense - it's not saying we're bad people - but it makes common sense, we're going to take our eye away from that. It's just not as important. So we're already seeing, for example, reports that some ethanol plants around the country are now struggling. They've shut down. There's not as much interest in fuel alternatives. So in some sense, you can say that our push to find alternatives, clean alternatives to the internal combustion engine and to fueling that internal combustion engine, is one of the casualties of lower gas prices. I don't think public policy wise we're going to do anything about this now because of the recession, but it is something I think our policy makers will eventually have to confront. If you have these gyrations in gas prices over time, it really sets you back in ultimately finding alternatives to gasoline and oil."

Posted by Dave at 08:00 AM

January 09, 2009

The plunge in commodity prices

Gas prices are headed to perhaps $1 a gallon. This is incredible after they reached $4 a gallon within the last year. What's going on? Is this gyration in prices only happening to gas?

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

"No, it's not. Gas, I think, is just the most notable. This is happening, really, to many commodity prices. Commodities are fundamental, basic inputs into our economy, inputs that aren't processed much; think of it as almost taking it out of the ground or growing it, and then it goes to market. And so what we typically see during a recession as buying slows down and people don't buy as many commodities or buy products that use those commodities, those prices can take big dips. You mentioned gas prices, but for example, in the last year, wheat prices are down 30 percent. Iron and steel prices are off 9 percent. Lumber prices are down 5 percent. Cement is off 2 percent. Again, this is all a function of the worldwide economic recession. Demand is down; supply the same, so in economic terms, the price has to go down. We've seen this in all recessions. It is in some sense a necessary fact that this has to occur for people to become more optimistic and increase their buying and get us out of a recession. So in some sense, you can look at the drop in commodity prices as a forerunner of an eventual revival of the economy."

Posted by Dave at 08:00 AM

January 08, 2009

Inventing the supply chain

The term "supply chain" is a major concept in business economics today. What does it mean, and what is North Carolina's contribution to its development?

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

"A supply chain looks fundamentally at linkages and production. So, for example, you just don't look at the construction of a home on site, but you look at all of the supply lines that led to that construction. For example, if you were going to pick out the lumber component, you would go all the way back to the forest that grew the lumber, then sent it to the lumber mill, to the lumber yard and finally on site at the home. And to have a good functioning economic system, you have to have, for most of these products, a good functioning supply chain. Now where this ties into North Carolina is we have an industry in our state that has been a leader in the development of the supply chain. It's an industry that many people would not think about in this context, and it's the hog industry. In fact, you can argue that the supply chain was in some sense perfected in the North Carolina hog industry. And that today with our hog industry - which, of course, is big business in North Carolina - you have the linkages from the farm level, where the pigs are raised, all through the processor, where they're processed into meat, then to the wholesaler and finally to the retail buyers. And that's all been integrated. It's all been coordinated, and it's really helped agriculture revive in Eastern North Carolina."

Posted by Dave at 08:00 AM

January 07, 2009

Record bear markets

A "bear" stock market occurs when average stock values decline by at least 20 percent. The current bear market, which began in late 2007, has seen stocks decline by over 40 percent. Where does this put the current market in terms of the all-time worst bear markets?

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

"Well, if we look over the last 100 years, this is the 11th worst decline. The worst decline, of course, (many people would not be surprised to know) was in the early years of the Great Depression in the 1930s. But if we go back in recent decades, say the last three decades, the current decline has only been exceeded by the decline during the early 1970s. Now another way to look at these bear markets is, how long are they? And in terms of length of the bear market, our current bear market is the sixth longest at near 400 days in the last 100 years. The record is held for a 900-day bear market in 1901. We hope we don't go that long."

Posted by Dave at 08:00 AM

January 06, 2009

The global rescue

Our federal government has invested a large amount of money and resources in attempting to stabilize the economy during the recession. But with almost the entire world in a recession, have other governments also come to the rescue of their economies?

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

"Indeed, they have. Now, in terms of the dollar size of the rescue, the U.S. is by far the leader. We have devoted the most money to our financial rescue packages. China's actually second. But you have to realize, of course, that economies differ in size. We are by far the largest economy in the world. So if you look at the size of the U.S. financial rescue packages - that are directed primarily at the banks - as a percent of our economy, we're not the largest. In fact, the U.K. and China in terms of percentage of their economy devoted to the financial rescue, almost three times larger; Russia, almost twice as big. Now these rescue packages have been focused on things like loan guarantees, direct loans to banks, stimulus plans and infrastructure spending, and there's likely, of course, more to come."

Posted by Dave at 08:00 AM

January 05, 2009

Leaders in innovation

Experts say countries that do well in innovation and in development of new products will be leaders in the global economy. So in terms of innovation, how does the U.S. now stack up against other nations?

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 exactly right. The U.S. used to be known, of course, as a manufacturing economy. We're now known as an innovative economy. And indeed, we have to do that because we can't compete with low-cost manufacturers. So on that issue, are we viewed as an innovative country? And the answer from a new global survey of people, experts all around the world, is 'yes.' The U.S. still by far is viewed as the leader in all areas of innovation, in areas like technology, energy, computers and telecommunications. For example, 87 percent of the respondents said the U.S. was the world leader in software innovations. Second was India, mentioned by only 6 percent of the respondents. We have a similar big lead in biotech. Eighty-five percent said we were the leader. Three percent said the runner-up, Germany, was the leader. So this is extremely crucial because this is how the U.S. is going to compete in the future, developing, modifying and taking to market new, innovative products."

Posted by Dave at 08:00 AM

January 02, 2009

Consumption versus investment

"Mike, you and I are about to embark on a remodeling project at our home, replacing 40-year-old bathrooms and closets in our upstairs. Should we be worried about whether we'll recover the costs of this remodeling job when we eventually sell our home?" asks Mary Walden.

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

"Well, we probably won't. Studies show that you may recover 50 percent, maybe as much as 75 percent of most remodels. Now, should that stop us from going ahead? I don't think so. The reason is that a house really provides you with two different aspects in terms of economics. It provides you with an investment aspect. That is, people buy homes. They appreciate, or you do a remodel, perhaps you get some gain from that, and you look at that as an investment. Sometimes what people forget is a home also provides you with a consumption aspect. You simply enjoy living there, and you're able to do things you couldn't do, for example, in a rental unit. And so when we're embarking on our remodel, and what we discussed is, yes, we do hope that we get back as much of the cost that we put into it. But at the same time, if we don't, we know that we're going to enjoy our updated bathrooms and closets much more. And interestingly, over the last couple of years, the investment aspect of homes became more important because we had such high rates of appreciation. Now, with the slide in the housing market, people are looking more at homes as consumption."

Posted by Dave at 08:00 AM

January 01, 2009

The wider impacts of education

Most countries treat education differently. Elementary and secondary education is completely paid for by the government, and even higher education is heavily subsidized, especially here in North Carolina. But why is this? If the individual student is the main beneficiary from education, what is the rationale for public payment of these costs?

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

"Clearly, the individual student does benefit. I tell my students that probably the main reason they are here at the university is because they realize that getting a university degree is going to lead to more salary, more income for them down the road. They understand that. So certainly the student gets a lot of benefit from getting more education. But I think economists would argue that there are also public benefits. An educated worker is going to be more productive. That's going to make this state, for example, more attractive to businesses to come in. And lots of people can benefit from that. An educated worker with their higher salary is going to pay more taxes. They are likely going to use less public services. We also see links that studies have found between more educated citizens and better health, which therefore leads to lower health care expenses. So I think the point here is that education seems to be a key in improving life all across the board for many people. It provides these widespread benefits that go beyond just that for the individual. Therefore, there's public money involved in education."

Posted by Dave at 08:00 AM