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August 31, 2009

When a loss is a gain

The latest report on the broadest measure of the economy was greeted with much excitement and hope, yet it actually wasn't a positive report. So what, then, is all the hoopla about? Listen

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

"Well, this was the latest report on the aggregate production in the economy. Again, it's the broadest measure of our economy. And the initial estimate for the second quarter of this year was that that measure was down 1 percent. So it means the economy is still in recession. We're still declining. We're still receding. So then, why, you may ask, why are people excited? Well, because in the two previous quarters, that same measure was down 5 percent and 6 percent. So I think what analysts are looking at is the fact that, yes, the economy has still been in a state of decline, but the rate of decline is slowing. So that's giving optimism. Maybe in the third quarter and fourth quarter, rather than a decline, we may actually have an increase. And, indeed, that seems to be right now the standard forecast. Actually, the forecasts that most economists put out have become more encouraging. We're actually expecting an increase in production in the economy in both the third and the fourth quarters."

Posted by Dave at 08:00 AM

August 28, 2009

It's a record

This is likely a record we wish was never set. What we're referring to is the recession and the just released news that the losses during this recession have now set a record. Explain what this means.

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

"Well, of course, there are many measures of the economy. What economists look at for this particular issue is something called gross domestic product. That's simply the value of everything we produce in the economy - production. It includes production of services. And we look at how that changes. And what happens during a recession, this actually goes down. And the last report we had is that during this recession, gross domestic product - GDP - has gone down by 4 percent since the recession began. This is now a post World War II record. It just exceeded the loss we had in the 1957-58 recession. Now, I think to make matters worse, the last recession we had in 2001, gross domestic product fell hardly at all. So I think people obviously have a sense that this has been very big. Now, we would still have a long way to go to beat the Great Depression and also the economic decline following World War II. Gross domestic product fell 27 percent during the Great Depression and fell 13 percent following World War II."

Posted by Dave at 08:00 AM

August 27, 2009

An analogy for the economy

People are trying to make sense of the economy and of the government's efforts to fight the recession. Can you perhaps give us an explanation that gives us a viewpoint from another perspective?

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

"Sure. Let's say you come home from work or whatever you're doing in your day, and your house is burning down. Let's say you're in an area where there's no fire department, so you're looking at your house on fire. All your belongings, all your valuables are in that house. You've got to save it. Well, you're going to go around to the neighbors, and you're going to say, look, hey, come help me put out this fire, and I'll pay you whatever, later. I'll promise to pay you big bucks, just come and help me put out this fire. And they do, and then of course, after the fire is doused and your house has been saved, then you in the future have to worry about how do I pay these people back. Maybe you have to borrow money to do that. Well, that's sort of what we've done in the economy. Last fall, many economists say, our economic house was in danger of burning down. So the government went out and borrowed. The federal government borrowed. The Federal Reserve printed money, and we now think that we have saved the economy. We still have issues, but we think that fire has been doused. Now, however, comes the important part in the future. How do we pay back those loans? How do we come back and say, yes, we're going to put our economy back on track and repay all that money. That's really the big decision that's facing our legislators, facing the Federal Reserve in the coming years."

Posted by Dave at 08:00 AM

August 26, 2009

No easy choices

As this program is being taped, the North Carolina General Assembly has yet to come to an agreement over a new state budget. The question everyone's asking is, why is it taking them so long? Do you have a simple answer? (Note to listeners and readers: The General Assembly approved a state budget Aug. 5.)

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

"I sure do, and it's because it's very hard. One option, of course, is to cut spending. Well, if you cut spending on programs, that's going to affect the recipients or beneficiaries of those programs. It's also potentially going to mean fewer state jobs, so some state workers may lose their paycheck. And of course, you always have supporters behind every program in the General Assembly, so you've got to get some widespread support for which programs to cut back. Another option would be increased taxes. Well, what you're doing then is taking spending power away from citizens during a recession just when many citizens would need more spending power, especially to help us get out of the recession. Now, some say, well, just tax the rich. But the rich are the people who invest. They're often the entrepreneurs, and that may make us a less attractive place for entrepreneurs to come and set up new businesses. Now, a third way that I think everyone agrees upon is to eliminate waste. But there's no agreed upon definition of what are wasteful programs. Really to know if a program is wasteful, you've got to go in and evaluate it. That takes time. That takes a lot of effort. So this is very much heavy lifting, and it's not surprising, at least to me, that it's taking a long time, given the size of the shortfall our legislators are looking at."

Posted by Dave at 08:00 AM

August 25, 2009

Unemployment as a lagging indicator

We're all looking for crystal balls to tell us where the economy is going. One crystal ball that economists say is very cloudy is the unemployment rate. Why is this?

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

"Well, as many people have heard, unemployment is a lagging indicator. That is, the broader economy will turn up first - will improve - before, for example, we see a decline in the unemployment rate. I think there are two reasons for this. One, employers need to be absolutely sure the economy is back before they go to the very important task of hiring new workers. So they'll need to have some evidence over several months that their sales are up, their revenues and profits are up before they say, ok, it's time for me to go ahead and hire permanent new employees. Secondly, the reason the unemployment rate tends to go up after the economy improves has something to do with how unemployment is measured. A worker is only considered unemployed if that worker is without a job, wants a job and is actively looking for work. And the problem we have is that many times, unemployed workers simply stop looking for work. They give up. And so we don't even count those folks as unemployed. Then, however, when the economy improves, those so-called discouraged workers will actually come back into the labor force, start looking for work, and until they get a job, they drive up the unemployment rate."

Posted by Dave at 08:00 AM

August 24, 2009

Who gets Ph.D. degrees?

Higher education is becoming increasingly important to our economy. At the same time, our economy has gone more global, with now almost one third of economic transactions linked to other countries. Is there an intersection in these two trends in terms of who gets advanced degrees at our universities and colleges?

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

"There certainly is, and what we're seeing is an increasing percentage of advanced degrees at U.S. institutions are going to foreign students. In fact, foreign students now account for over half of the Ph.D. degrees in science and engineering, double the proportion 35 years ago. And in my field, economics, two-thirds of the Ph.D.s now being granted in economics are going to foreign students. And there are two reasons for this. First of all, more foreign students are simply going to college, and so there is a bigger base for them to, perhaps, want to come to the U.S. and get degrees. Secondly, the U.S. is widely regarded in the world as having the absolute best universities in the world. So if you're a student getting a bachelor's degree, for example, in China, and you want to go on and get a Ph.D., the U.S. is a perfect place for you to come to. Now, importantly, there is now no evidence that foreign students are taking the place - that is, there is no evidence they are displacing domestic students. But certainly the increase in foreign students getting Ph.D. degrees is affecting the supply of those with advanced degrees, which could ultimately affect salaries."

Posted by Dave at 08:00 AM

August 21, 2009

Foreclosures and home values

We're all concerned about the housing market. Of course, one of the big stories in this market has been the tremendous increase in foreclosures. Here's a question for you. Lets say, I own my home and am having no trouble making the mortgage payments. Can a foreclosure that occurs down the street affect me?

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

"It can, and actually this is the basis of a study from the very prestigious National Bureau of Economic Research. And the impact can be that a foreclosure down the street can impact your home and you by decreasing what your home is worth. In fact, this study calculated that for every nearby foreclosure - and by nearby, we mean something within a couple of miles - every foreclosure of a home can lower your home value by up to 1 percent. And I think there are two reasons for that. One, foreclosures obviously increase the supply of homes for sale. So you have more supply, the same number of people wanting to buy homes, that's going to decrease what you can get if you try to sell your home. Also, foreclosed homes often sell for less, and therefore, they're going to affect what you're going to get for your home, because it's actually costly for a bank to hold on to a foreclosed home. They've got expenses related to security, perhaps cleaning up the house because there's not an owner there taking care of it. And so a bank will accept less than if an owner was selling that home. So the fact that these foreclosures can have a broader impact not just on that home but on homes around them I think is a rationale for why we have the public - that is, the government - come in and try to stem the level of foreclosures."

Posted by Dave at 08:00 AM

August 20, 2009

Increasing the minimum wage

The minimum wage was just increased 70 cents, to $7.25 an hour. There seem to be divided views on this action. Some applaud the move to help low-wage workers, while others worry what it will do to the already weak job market. Explain these divergent viewpoints.

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

"The minimum wage, of course, has been around since the 1930s, and it's been studied almost as long. In fact, this is one of the most-studied areas of economics of all time. And there actually is a fairly conclusive result here from the studies. And it says that there are really two big effects. On the one hand, those minimum wage workers who keep their jobs are obviously going to benefit from a higher minimum wage. On the other hand, the studies indicate that on average a business person will now look at his or her workers and say, 'Gosh, now that I have to pay them more, I'm going to have to get more out of them. They're going to have to be more productive. And if a particular worker isn't productive, based on the new higher minimum wage, ultimately - maybe not immediately, but ultimately - I'm going to have to let that person go.' So there is a lot of evidence that suggests that you do see unemployment among low-skill workers go up when you have a higher minimum wage. Now, there would have been a way for the government to actually have both - that is, help minimum-wage workers and avoid higher unemployment - and that is rather than increasing the minimum wage, to increase something called the earned income tax credit. The downside of that is that (the earned income tax credit) is money that comes from the government, whereas when the government says that businesses have to pay a higher minimum wage, that comes out of the business's pocket."

Posted by Dave at 08:00 AM

August 19, 2009

What are derivatives?

One term continually mentioned with respect to the financial crisis the country has gone through is derivatives. What exactly are derivatives and how are they related to the problems banks and other financial institutions have faced?

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

"It's really a simple idea. A derivative is an investment, but it's an investment where the returns are derived from some other underlying basic investment. That is to say, derivatives can be based on almost any core investment, like a stock, a bond, real estate and increasingly over the last few years, mortgages. The focus has really been, as I said, on derivatives based on mortgages, and what banks and financial firms did over the last roughly 10 to 15 years is they would take mortgages that were loaned out to home buyers, they would chop them up into little pieces, and they would combine mortgages with different risk levels, and then sell them to investors. This would be the derivative that would be sold to investors. And many times, investors could earn a little bit more rate of return - a quarter percentage point, maybe a half percentage point - because they felt like, well, yea, there's some risky subprime mortgages in that derivative, but they're counter balanced by the really safe mortgages. And so the attitude was, hey, you're getting a higher rate of return with very little additional risk. And this actually worked for a long time - people forget that - and it actually expanded the amount of money that was available for home buyers and helped increase our homeownership rate to record levels. Where it all fell apart, of course, is when the housing market collapsed. And when those buyers of derivatives realized, hey, the housing market is not a sure thing, it can indeed fall, and with it fell many of the financial institutions."

Posted by Dave at 08:00 AM

August 18, 2009

Saving with gambling

For many years, Americans have not been savers, and many financial experts say we need to save more. Now, there's a unique program being used in Michigan that actually uses gambling to encourage saving. How does it work?

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

"Well, this sounds contradictory, doesn't it? But actually it's not. It's a program being used by a credit union in Michigan, and here's what they do. They say if members of the credit union deposit a minimum of $25 into a one-year CD - that's certificate of deposit, not compact disc - they are eligible for raffles of monthly prizes of up to $400, and they're also eligible for one annual prize of $100,000. Now, the CDs pay a little bit lower than normal CDs, and that's how the credit union comes up with the prizes. But what they have found in the six months the program has been in place, it has attracted over $3 million in new deposits. And so obviously what they're demonstrating here is that on the one hand, yea, people like to get a normal, kind of average run-of-the-mill rate of return on their savings, but maybe what will really entice people to save more is a chance - a chance - even though it may be low to earn really big money."

Posted by Dave at 08:00 AM

August 17, 2009

Who pays for health care now?

In the national debate over health care, financing is a critical issue. When we look at who pays the health care bill today, how has it changed over time, and what are the implications for health care reform?

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

"There are three players in health care payments: the government, insurance companies and patients. Right now, the government pays about half of the health care bill, insurance pays roughly a third, and around 10 percent is paid directly by patients either through things like deductibles and copays or simply when you go to a doctor, you hand over a check or cash. Now the portions coming from the government and insurance, those portions have been rising dramatically over the last three decades, while the portion coming directly from the patient has been going down. Now, that said, of course, ultimately, individuals pay everything because where does the government get its money? Well, it gets it from taxes, and individuals pay taxes, and obviously the insurance companies get their money from charging premiums to people. But the point here is that at the time or at the point of payment, when a bill is presented, patients increasingly have become shielded. And on the one hand, many say, well, that's good. That means that you and I, our parents, don't have to worry about paying a hospital bill or a doctor bill when it's presented. The downside, though, is that we don't know the bill and if we don't make a direct contribution to the bill, maybe we won't be as careful in monitoring health care costs and trying to decide is this procedure or this prescription drug really worth it. And this is a key part of health care reform. Many, economists especially, think we have to get the patient more involved in economic decision making about health care."

Posted by Dave at 08:00 AM

August 14, 2009

Has the stimulus failed?

The $800 billion federal stimulus plan passed in February was supposed to cushion the blows of the recession on people and businesses and help the economy move to recovery. But since the stimulus was passed, the national unemployment rate has continued to rise. Some say, therefore, that the stimulus has been a failure. Are they correct?

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

"When the stimulus was passed in February, the non-partisan Congressional Budget Office, which is charged with analyzing government spending, said that most of the spending from the stimulus actually wouldn't kick in until 2010. So I think it's really premature to say that the stimulus either failed or succeeded. Also, it's a misnomer to think that all the stimulus was designed to build things. In fact, only about a third of the $800 billion was for infrastructure spending. The rest was in tax cuts as well as aid to the states to help needy families weather the recession. I think the broader question is how much worse would the economy have been without the stimulus, and we really can't answer that right now. That's actually not going to be answered until well into the future."

Posted by Dave at 08:00 AM

August 13, 2009

A good leading index

We all want some clues about where the economy is going. Of course, there is no perfect crystal ball, but economists do look at several indicators. Does any single indicator stand out as being better than the others?

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

"One indicator that's getting a lot of attention today is the initial claims for unemployment insurance. Now this happens when someone becomes newly unemployed. They go to their state and they file for unemployment insurance. And economists like this index, this measure, for three reasons. Number one, it comes out weekly. Number two, it's available for every state. And number three, it has a fairly good track record of signaling changes in the economy. Now the good news is that this index, both for the nation and for North Carolina, has dropped, meaning that we are seeing fewer people file their initial claims for unemployment insurance. This suggests that the labor market is still bad, but the deterioration is slowing. Now nationally, we're seeing about 500,000 to 600,000 people file initial claims for unemployment insurance. In North Carolina, the claims are between 20,000 and 25,000, but these are well off their highs of three or four months ago. However, we do need to see these numbers go down at the national level to about 400,000; in North Carolina to about 15,000 for that to signal a coming drop in the unemployment rate. So this is a very important index to follow, and we are seeing some signs here for hope about the economy."

Posted by Dave at 08:00 AM

August 12, 2009

The cycle of fuel

Everyone knows our economy is very dependent on oil as a fuel, but it wasn't always that way, and it likely won't last. First, what prompted the change to oil, and what will cause us to move away from that fuel?

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

"I think if you look at the history of fuel, you find the overriding factor is simply price. For example, when oil was first discovered in Pennsylvania over 150 years ago, it was considered a nuisance. And it was simply burned off. The reining fuel then was whale oil. But then whale oil became very expensive as the number of whales became very scarce because of overhunting. And then it was discovered, aha, we can take this wasteful oil - at least what people considered wasteful - and convert it to kerosene, and that was used for illumination. So that began the dawn of the oil age. And then, of course, more oil was discovered and pumped, and then it became very cheap. In fact, oil in the early part of the 20th century was only 10 cents a barrel in today's dollars. And then we had the development of the automobile - vehicles - and of course, everything past that is history, and we've become very, very dependent upon oil. But I think the lesson here is that as oil becomes more expensive over time, as supplies diminish and the price per barrel and price per gallon goes up, that is what fundamentally spurs the search for and development of new alternatives."

Posted by Dave at 07:51 AM

August 11, 2009

Spending on the essentials

Traditionally, when we think of consumer essentials or necessities, we think of food, housing, clothing and transportation. Over time, has it become harder or easier for us to afford these must-haves?

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

"Well, let's take a trip down memory lane. In 1950, 83 percent of consumer spending was just on those four items: food, housing, clothing and transportation. By 1975, it had fallen to 77 percent, and today it's a little over two-thirds, 68 percent. So we have made progress, if you will, in being able to afford the essentials. But there are dramatically different trends. If you look at the individual necessities, what we spend on food and clothing has come way down. However, what we spend on transportation and housing is up. Now does that mean transportation and housing is more expensive? Not necessarily. Economists who look into this find that the main reason that we're spending more relatively on transportation and housing is that we're consuming more of those items or goods. We have more cars. We have better cars. And housing, we have more square footage with more amenities. So overall, I think the picture on spending on the essentials looks very, very good."

Posted by Dave at 08:00 AM

August 10, 2009

How can it be free?

Many things are free today, especially on the Internet. You can go on line for free information and Web sites and even many newspapers and periodicals can now be downloaded for free. But how can companies that post this free content make any money?

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

"Well, because it's part of a broader strategy on the part of the companies. Obviously, they're not in the business of providing things free. They have to make a profit. Now certainly some of those on line sites make money by selling advertising. So if you go to a site, you'll frequently see advertisements on the borders of that site. Some people use them. Some don't, but obviously there are enough used that they make some money for the owner of the site. But beyond that, what many on line sellers of information content do when they provide that information free is they're using that to entice people to want more. So, for example, if you go to a newspaper Web site, usually you're not going to have all the content of the newspaper on that Web site. And so what newspapers are banking on is you may get so involved, so interested, so wanting that information in the newspaper that you want it all, and you say I'm going to subscribe, I'm going to get a hard copy, and I'm going to go ahead and pay the full fee. So they're using that Web site, that free Web site, as an enticement, if you will, for people to go beyond that and pay money for the broader content. Now, free now, but we have to ask, is it going to be free in the future? People need only to remember television. Television used to be free, back in the good old days of the 50s, 60s and 70s. Obviously, with cable, part of television is no longer free. Many people think that the Internet will evolve to that model."

Posted by Dave at 08:00 AM

August 07, 2009

An important appointment

Fed Chairman Bernanke's term will expire next year, and there's already speculation about whether President Obama will reappointment him. Why is this appointment decision by the president important to all of us? Listen

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

"Well, it's because simply of the enormous power that the Fed chairman has, and we've certainly seen that power at work over the last two years. Some say that the chairman of the Federal Reserve Board is the second most important job in the world, after the U.S. presidency. Now if President Obama reappoints Chairman Bernanke, in some sense that's implicitly saying the president agrees with what the chairman has done over the last two years. And of course there's a lot of controversy about what he has done. If, on the other hand, the president doesn't reappoint him, that may indicate some displeasure, some move by the president to put his own stamp on the Federal Reserve. The president also, however, has to consider the reaction of the financial markets. Financial markets do not like change. Bernanke is a known quantity. Many in the financial market have actually applauded what he has done. So this is a big deal. Another element here, of course, is that the president has proposed major increases in financial regulation by the Fed, so the next Fed chairman presumably could have even expanded powers. So this is an appointment that certainly bears watching. Already, the guessing game has started in Washington."

Posted by Dave at 08:00 AM

August 06, 2009

North Carolina's rebound

Most people are down in the dumps today about the economy. The recession has hit us hard, especially here in North Carolina. Do you see any signs of economic hope for the future?

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

"Recessions can actually be a period of rebirth. If you look at history, many of the new companies and technologies and ways of doing things were actually developed during recessions or shortly thereafter. And North Carolina has a tradition of rebuilding or transforming its economy. As most people know, we went from a very low-wage economy based on things like textiles, tobacco and furniture - all excellent industries, but they paid low wages - to an economy today that's really mixed. We're a mix of high wages and technology and information and health care. We still have some of our low-wage industries, of course, but overall, our economy has made big strides. Our per capita income as a percent of national per capita income has gone from 80 percent a generation ago to 90 percent today. And I think this change will continue. I think as we look ahead, there are lots of ideas about new industries in areas like food and nutrition, health care, communications, even in manufacturing. People are excited about areas like nanotechnology, precision engineering and smart materials. This is all very hard to predict and guide about where the economy will go, but I'm very optimistic that our North Carolina economy will continue to move ahead."

Posted by Dave at 08:00 AM

August 05, 2009

Will the dollar be dropped?

For over 50 years, the U.S. dollar has been used as the international currency of choice. But now several countries are calling for a change. Is some other currency about to replace the dollar? And if so, how would that affect you and me?

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

"Many countries have voiced concern about the dollar. It is sort of the world's main currency right now. Many economists, however, don't think this is going to occur - at least any time soon - because there's not an obvious replacement for the dollar. The Chinese currency isn't there yet. Some have talked about a collection of currencies. I don't think that idea has much traction. So despite the bluster, so to speak, about replacing the dollar, this is not going to happen anytime soon. This should not, however, detract from, I think, the reasons for the concerns being voiced. And the concerns simply have to do with the value of the dollar and whether it will maintain its value over time. Countries like China that have invested a lot of their savings in dollar-denominated investments are obviously very concerned. If the value of the dollar falls, that means their investments get worse over time. So I think this is a wake-up call to us to worry about our twin deficits, both the budget deficit and the trade deficit."

Posted by Dave at 08:00 AM

August 04, 2009

When is regulation right?

The president has proposed some sweeping new regulations for the financial services industry. Freedom of economic choice is one of the hallmarks of our economy. When is it reasonable to overrule that freedom of choice with regulations that limit what we can sell and buy?

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

"The regulations the president proposed would limit what the financial services industry - the banks - could do as well as perhaps limit choices by consumers. So this is a very, very important question. I think there are three situations traditionally given by economists where we say the government can come in and sort of overrule freedom of choice. One is if the decision maker is incapable of making informed decisions, and we see this, for example, with restrictions on what young people - people, say, under the age of 18 - can both buy as well as what retailers can sell to them. Most people say that's not very controversial. Secondly is when the choices by one person may have an adverse effect on the health or the well-being of other people. This is where you get into, for example, restrictions on smoking if smoking by one person through second-hand smoke may harm someone else, then some say the government should come in and restrict that. Where I think the financial services regulations come in is in the third reason. That's where the seller has a lot more information about the product than the buyer. And we typically see this in medical care decisions or financial decisions where most people simply are not going to be able to educate themselves and know as much about medicine and finance as the sellers of those products. And so here the notion is the government comes in and sort of levels the playing field by restricting what sellers can offer as well as perhaps restricting choices of consumers. I think this is how we should look at these new regulations proposed for the financial services industry."

Posted by Dave at 08:00 AM

August 03, 2009

Tradeoffs in state budgeting

North Carolina's governor and the General Assembly are working hard to put together a state budget, which by law must be balanced. Since the recession has had a devastating impact on state tax revenues, the choice for our public leaders isn't easy. It involves either increasing taxes or reducing spending or both. How can we think about these decisions?

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

"All these decisions involve tradeoffs, and I think that's why they are so difficult to arrive at and why the legislative process this year will likely be very long. For example, do you not change the public budget in order to keep a teaching assistant or do you keep a health care worker? If you have to cut one or the other, which one do you cut? Do you raise taxes so you can keep both the teaching assistant and the health care worker? But then that means that you're taking more money away from families in this economy, and many families are having trouble making ends meet now. Do you, for example, cut state workers' pay to prevent layoffs, or do you dismiss some workers so that the rest of the workers can keep the same rate of pay. Obviously these are all very, very difficult issues. They're not fun issues to deal with, and I think that's why it's going to take so long to resolve this current budget situation. My guess - only a guess, based on looking at past recessions and how the General Assembly and the governor dealt with them - is that the budget will be balanced in North Carolina with a combination of tax increases and spending reductions."

Posted by Dave at 08:00 AM