« October 2009 | Main | December 2009 »

November 30, 2009

Capitalism and negative impacts

It's sometimes claimed that the economic system we use, called capitalism, ignores some of the bad impacts that occur in our economy, such as pollution or environmental degradation. As a professional economist for over 30 years, how would you respond to this charge?

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

"Well, I would argue that capitalism actually does take into account the impact that we're talking about, because capitalism actually works best when people and companies are responsible for the actions they take. Capitalism really is a system that says that all costs should be recognized and the people imposing those costs should pay for them. So it's not a system that says, hey, if you pollute, you should be able to get away scot-free. No, capitalism actually argues that resources are used most efficiently if a polluter, in this case, is forced to pay a cost. In economics, we call this assigning property rights. That is, if you pollute, you should be assigned the property rights, if you will, to that pollution. You're the owner of that pollution, and so you should be forced to pay for that. The problem in our economic system sometimes - actually, political system - is that property rights are often not clearly defined, and one role of the government is to specify those property rights. So one role of the government may be to say to me, a driver, ok, Walden, if you're driving, you're emitting some pollution. You're responsible for that pollution. So the government is going to impose a tax on me that proxies the cost that I'm imposing through my pollution. So actually, I would argue as a professional economist that capitalism does take those impacts into account; however, we don't often apply that."

Posted by Dave at 08:10 AM

November 27, 2009

Where's the stimulus money?

The $800 billion stimulus package was passed in February. Questions have been raised about what impact this program has had on the economy. So far, how much of this money has made its way into the economy?

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

"A little bit over $100 billion; in fact, the latest estimate specifically is $113 billion. And that $113 billion has been concentrated on helping states with their budgets, providing money to states, for example, to help with their public assistance programs, their unemployment insurance programs and basically helping states balance their budgets. Spending on infrastructure and construction has actually been much slower than anticipated. Even if you have what's called a shovel-ready project, where you have identified, for example, a road to be built, and you know it can be done, you still have to do environmental studies. You still have to identify contractors, and there are other hoops to jump through. So the construction infrastructure projects have been much slower to use their portion of the $800 billion. On the other hand, this means that most of that money has yet to be spent, and will be spent next year. So that actually gives rise to some hope about economic growth. Once the bulk of this $800 billion gets into the economic system next year, we may have much better economic growth."

Posted by Dave at 08:00 AM

November 26, 2009

Who should pay for systematic risks?

A year ago the banking system in our country was on the verge of collapse. Fortunately, the calamity was avoided due to the intervention of government agencies. However, this effort has cost the public potentially trillions of dollars. Who should pay for this?

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

"Let me back up a minute and say that what we were trying to avoid was a calamity based on systematic risk. And that's a term you hear used in the banking area, and what it means is that banks are highly interrelated. Banks have loans and investments with each other, so if one bank, particularly a big bank, goes down - goes bankrupt - it can affect a lot of other banks and, in fact, can affect the entire financial system. That's exactly what the government was worried about a year ago. And in particular, almost 100 years ago, one of the reasons we set up the Federal Reserve system was to act as an insurance policy to guard against this, to step in and provide funds to banks that were under stress. However, we have never, ever had an effort by the federal government and particularly the Federal Reserve this big, this costly as what we've gone through over the last 18 months. So, should we think about, perhaps, who should pay for this. Should it be the general taxpayer, which is what has happened over the last couple of years? Or, should there be, for example, a new assessment - call it a fee, call it a tax - charged to banks? Banks would pay into a fund when they are healthy, but then that money would be tapped to help banks that are in trouble and in the future to prevent this systematic risk from turning into a calamity. In fact, people in Washington right now are discussing this. Who should pay that fee? How big should that fee be? And particularly, when should it be paid? Should it be paid before the fact or should we wait until after the fact, and then raise that money? These are all very big and important questions."

Posted by Dave at 08:00 AM

November 25, 2009

Jobs gained and jobs saved

There seems to be a new term used today - jobs saved. It's used in the context of the stimulus plan where it is stated that stimulus spending has resulted in a certain number of jobs created or jobs saved. What does the jobs saved part mean?

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 new term, and it's actually become somewhat of a controversial term. The jobs created, I think, is easy. You can argue that, ok, if you have a government program, for example, that is going to fund the building of a road, you go out and hire people to work on that road. You can argue that, well, the government program actually created those jobs. And those should be counted as jobs created by that stimulus program. The jobs saved component comes in when you say, well, you have a government program, for example, that's going to help North Carolina fund it's K through 12 education. And the argument may be that if you didn't have that government program - that government stimulus money - North Carolina would have had to cut thousands of teachers across the state. So even though you didn't create a new job, you still had teachers teaching last year and this year. The notion is that if you didn't have that government money, teaching positions this year would have been cut. Therefore, you should count the fact that jobs continue, that jobs were saved, as part of the overall jobs total. So the government is doing that now in terms of figuring out how many jobs were created or saved with the stimulus package. This is a very controversial idea because some say, well, you don't really know if that job would have been cut or not. Nevertheless, it is a new term in our economic lexicon. It does make, I think, conceptual sense. The counting part may be open to interpretation."

Posted by Dave at 08:00 AM

November 24, 2009

N.C. manufacturing making a comeback

Manufacturing output and manufacturing jobs in North Carolina have really taken it on the chin during the recession. Do we have any signs of an improvement?

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

"First of all, we typically do see manufacturing go down during a recession. The simple reason is that people refrain from buying durable goods - cars, computers, furniture - because they're short on money, and they can get by with what they have. So manufacturing takes it on the chin, and we see that in the data for North Carolina. The good news, however, is if we look at the last data we have, which is for the spring, the estimate is that North Carolina manufacturing output actually went up. So that's a very good sign. Obviously, it's a good sign for those in manufacturing. It's also, I think, a good sign for the economy. Manufacturing, just as it takes it on the chin during a recession, is actually one of the first sectors to come back when we have an economy recovery. So, it's a piece of data that suggests brighter days may be ahead. Now, one real important point, some people may ask, well, if manufacturing companies are producing more, why do we see manufacturing employment continue to go down? And that's because of improvements in worker productivity. You're average, typical manufacturing worker today can do a lot more than his or her predecessor years ago. He or she is using better technology, better management skills, etc. So you don't necessarily see a correlation with manufacturing employment and manufacturing output. But the fact that output is up, again, is a very good sign for our state."

Posted by Dave at 08:00 AM

November 23, 2009

Third quarter growth

The economy got a good shot in the arm recently with the announcement that economic growth was positive in the third quarter, and by a substantial amount. What does this mean, and in particular, does it mean the recession is finally over?

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

"Well, we did have good growth. We had a 3.5 percent annualized increase in growth in the third quarter. Prior to that, we had a decline of 1 percent, and in the two quarters in front of that, we had declines in each of those quarters of almost 6 percent. So this was a big turnaround. But economists have raised some questions about, well, how sustainable is this? If you go behind the numbers, you do see that spending by consumers was led by spending on cars and houses, and the concern there is whether we're borrowing, if you will, against future spending, because of, number one, the cash from clunkers program stimulated car spending. So the idea there is people aren't going to buy cars next year because they bought them this year as well as the $8,000 tax credit for first-time home buyers - the same idea. Also you see that federal government spending was up a lot. The concern there is whether that is temporary; can that continue? And finally, inventory replenishment. Businesses have sold out their inventory, so they're replenishing those inventories. But again, that's something that comes in fits and starts. It isn't sustainable. So while good and while the stock market, for example, that day had a very good run, the next day, I think, when some of these 'ifs' came into play, we actually saw a big drop in the stock market. So, no, I don't think this means an end to the recession. It's certainly a good number. We have to wait and see what the future holds."

Posted by Dave at 08:00 AM

November 20, 2009

Discounting future taxes

The federal government has borrowed a tremendous amount of money during the last two years to fight the recession. Could this borrowing have any impact on consumer behavior, especially on consumer spending?

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 very interesting question. Actually, it's a question that goes back hundreds of years. Economists over 200 years ago looked at this exact question. And here's the deal. If consumers accept that in the future - not now, but in the future - taxes are going to go up, that can actually affect their behavior today. And here's what consumers would do, they would actually start saving for those anticipated higher taxes, meaning that they would spend less and save more, so that in the future they would have the money available to pay those higher taxes. We have a term for this. We call it discounting future taxes. And economists over 200 years, especially the last 50 years, have done a lot of research trying to see, does this really make sense? Do consumers really do this? And this is not a matter of going and asking consumers. You actually study behavior. And the answer is, yes, this is a viable concept. Now, the implication today is that a lot of folks are talking about higher taxes, particularly federal taxes to pay for all the borrowing we've done to fight the recession. And if consumers believe there are going to be higher taxes, this could actually be contributing to a slower economy, because it would be contributing to consumers not spending as much in the future and saving more, and in fact, spending is down, and saving is up. But here the reason is not concern about debt. It's concern about future taxes."

Posted by Dave at 08:00 AM

November 19, 2009

Social Security checks

For the first time in over 30 years, recipients of Social Security checks won't get a cost-of-living increase. Why is this happening? Is the government just being stingy, or is there another logical reason?

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 a logical reason, and Social Security checks and the change in those checks are based on how the cost of living changes. The cost of living is measured by something called the Consumer Price Index, and that index actually went down over the past year. That's why people are not getting an increase in those Social Security checks. The law does say if the index goes down, the payments to retirees won't go down, but they won't get an increase. Now, there are a couple of ways to look at this. One way is, well, that's the rule. The second way is that actually before 1975 there were no cost-of-living adjustments. So Social Security recipients at least know that when we do have a turnaround, and the cost of living goes up again, they'll get higher checks. However, retirees have long said that the index used to measure the cost of living - the CPI - doesn't adequately measure the costs that retirees face. And in some sense, they've got a point, because someone over age 65 spends their money differently than the rest of us. In particular, they spend more on health care. So representatives for elderly folks have long lobbied to have that COLA - cost of living adjuster - changed to directly reflect the cost of retirees rather than, as it does now, reflect the cost of living faced by everyone."

Posted by Dave at 08:00 AM

November 18, 2009

Improvements in the housing market

There's optimism about the housing market. This is crucial, because most experts say we need a healthy housing market for the economy to recover. Is the housing market back?

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

"Well, a little bit of background, everything in economics comes down to supply and demand. The problem we had in the housing market was too much supply relative to demand. When the economy went into recession - part of that was caused by the housing market - but demand really fell. People were not buying homes. We still have the inventory out there, the supply. And what this did was put downward pressure on housing prices. In many markets, housing prices have fallen at well over a double digit rate. Now though, we've had enough time for the housing market to in some sense self correct. That is to say, builders didn't build any more homes, so that brought the supply down, and people took advantage of lower prices as well as, for example, the $8,000 tax credit for new buyers to increase sales, and so now we have the supply and demand lines, if you will, at a much more equal level. So that gap between supply and demand has definitely shrunk, and that's why housing prices are stabilizing. But there are a lot of questions about whether this will be maintained. We still have very high unemployment. We still have foreclosures going on. We have the $8,000 tax credit expiring at the end of November. So although the housing market certainly is back and better than it was a year ago, there are questions about whether that health will be maintained."

Posted by Dave at 08:00 AM

November 17, 2009

Incompatible markets?

Recently, the Dow-Jones industrial average, the most-watched indicator of the stock market, broke through the 10,000 level. Since March, this index is up just under 50 percent, yet at the same time, the number of those without jobs has hit records, and the national unemployment rate has continued to climb. So how can Wall Street be doing so well when Main Street isn't?

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

"Wall Street focuses on one thing: profitability of companies. And the fact is, profitability of companies overall has been improving. Now, one reason is that labor costs have been falling, while productivity from those workers has been rising. And also, we've moved well beyond the danger point in the economy where we were a year ago. So I think improved profitability, less fear about the future economy - we're not going fall off a cliff - I think that has contributed immensely to the Dow Jones industrial average and other stock market indices moving to new highs. The question becomes - and this is really where economists are debating - is this sustainable? Is this growth in the stock market and stock market indices sustainable when we get beyond, let's say, the end of this year? We're probably going to see fairly good economic growth this year because we're replenishing inventory. But next year is a question mark. Can the economy continue to grow if we have these very high unemployment rates? And that's why you have a constant debate between people who try to guess where the stock market is going? You have one half that says, yes, we can - unemployment, if comes down just a little bit, that will be enough to keep the economy growing and continue to have companies increase their profits. But you have another camp that says, no, after this year, we're going to perhaps have another dip down in the economy, and that will actually pull the stock market down. This is one reason - another great example - why trying to guess where the stock market is going is so, so much fun."

Posted by Dave at 08:00 AM

November 16, 2009

Economic ties

Gov. Perdue recently made a trip to Japan and China to drum up economic prospects and linkages in those two important countries for North Carolina. What do these trade trips do, and how might North Carolinians be impacted?

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

"These trips have been taken by several governors. I think they're important for two reasons. First of all, Japan and China are both important markets for North Carolina products. That is, we have companies that are selling our products into those markets, particularly China. Of course, China is the fastest growing economy in the world. It's a very large country with a booming middle class. So we want to make sure North Carolina companies are known in China, and we can get our products there. So I think that's one important reason. Secondly, we'd like money to come back to North Carolina from Japan and China in terms of investments. Japan and China both have a lot of money to invest. They look around the world to where they can invest that money, and we want them to come here, to North Carolina. They have, but we want more of it. We want them to set up companies and hire our good workers. And also I think the fact that we have a governor who is obviously the highest representative of the state in those countries; I think it says something about the level of importance that we put on ties with China and Japan. So I think that personal touch can aid in developing these relationships."

Posted by Dave at 08:15 AM

November 13, 2009

North Carolina scores well

The much-watched National Assessment for Educational Progress test results were just released for grades four and eight in all states. How did North Carolina do?

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

"Well, first of all, the National Assessment for Educational Progress, or NAEP for short, is considered the gold standard, if you will, of educational testing. It's administered nationally. The same test is given to all students across the country. So this is really the go-to place, the go-to source when you want to find out how your students are doing in public schools. And the good news is that in 2009 North Carolina students actually did very well. Now, this test is given only to fourth and eighth graders, and we only have the math scores right now. But in 2009 in fourth grade, scores there were the highest this decade. In eighth grade the 2009 scores were the same as the last time the test was given in 2007, but in both years those scores were the highest level this decade. Additionally, North Carolina students and scores in fourth and eighth grade were above the national average on these math tests. So this is good news for North Carolina. It's something that we can be proud of, and we should continue to track and encourage."

Posted by Dave at 08:00 AM

November 12, 2009

A different explanation for the downturn

The largest economic recession since the 1930s has prompted much analysis and many explanations. There's a new perspective that puts the spark for the recession on globalization. Please explain that idea. <

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

"Of course, globalization means the process by which we've actually become a worldwide economy. Many factors went into that, but a big one was in 2000, when China joined the world trade organization. Economists argue that one of the impacts of globalization was essentially to bring three billion more people into the worldwide economic system. These are people in Asia and Eastern Europe who were really outside of world trade. So that's step one. Step two was that many of these countries flourished. They prospered enormously due to globalization, China being the most pointed example. Those countries accumulated a lot of money, and in many of these countries - again, China is an example - the opportunities for spending that money were either limited or restricted by the government. Of course, the saving rates were very high. Thirty or 40 percent of income in China typically is saved. Those savings had to go somewhere, and they found their way into investments in the U.S. as well as in Europe. Then, if we fast forward to today, what happened was residential housing markets in many of those countries were doing well, so that money was invested in homes, provided the source for mortgage lending. That created this speculative boom in the housing market, then there was a pull back and a crash, which brought us to the point we are today. So this explanation really says that the spark - the impetus, the genesis - for all this goes back to globalization and saving rates and the fact that you have three billion more people participating in the worldwide economy."

Posted by Dave at 08:00 AM

November 11, 2009

The challenge of renewable energy

Renewable energy, such as wind, water, solar and biofuels power, is all the rage. Everyone wants to increase our power usage from these sources and decrease it from fossil fuels, such as oil. But how are we doing with this goal?

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 increasing, but we've got a long way to go. Renewable energy now accounts for 8 percent of our total energy consumption, so it's not a lot. It is up from 5 percent a decade ago, but it's actually lower today than it was in 1983, when renewable energy accounted for 9 percent of energy consumption. And you can see an ebb and flow here, and it really goes with oil prices. When oil prices go up, energy from renewable sources goes up. When oil prices go down, people back out of renewable energy. Now, in the last five years, we've had some big increases in certain sources. We've had a 200 percent increase in renewable energy from biofuels. One reason is that's starting for a very, very low base. On the other hand, we've actually had a decline in power coming from wood and water sources. All of these sources are fledgling; they really depend on what people think is going to be the future of the economy. There's a lot of uncertainty there, and one policy recommendation would be for government to put some certainty in the market by perhaps putting a floor, a price floor, on things like oil and gasoline. Obviously, that's a very controversial idea."

Posted by Dave at 08:00 AM

November 10, 2009

The original reason

There's much debate going on about the effectiveness of the federal government's stimulus plan for the economy. But let's go back to basics. What was the original rationale or reason for the idea of the government spending money to jump start the economy?

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

"I want to bring this up because this shows that economic ideas do have origins and oftentimes these things get criticized, which, of course, we don't go into on this program. But there are some basic origins for a lot of these economic ideas, and one, of course, is for the stimulus plan. And this really goes back to the 1930s and an English economist named John Maynard Keynes. Up to that point, the conventional reasoning was that if you had a recession, it was due to problems on the business side, on the production side. Businesses simply weren't producing enough; therefore, they weren't hiring enough people, so incomes were down and that was the problem in the economy. Keynes broke with that, and said, no, equally, there could be a problem on the consumer side, on the spending side; that is, that consumers simply aren't spending enough money, maybe because they're fearful, they're uncertain about the future. But the bottom line is they're not spending enough. And if they're not spending, then businesses aren't going to produce. So what he was trying to do is see where was the crux of the problem. So he argued that if it was a problem of spending on the consumer side, therefore, one way to address this would be to have the government come in and in the place of the consumer, directly spend money. His argument was by the government spending money that would stimulate the economy, that would stimulate businesses to produce more. They would hire more people, and so on and so forth. He also argued this would not spark higher inflation or higher interest rates because you did have so much slack in the economy at the time of a recession. And this idea, which is really the origin for our current stimulus plan, is still being debated by good economists today."

Posted by Dave at 08:00 AM

November 09, 2009

Changing the state tax system

Many groups have recommended that North Carolina make some major changes to its state tax system, addressing issues like the level of rates, the size of the tax base and volatility of tax revenues over time. Do we have any ideas from other states that might be helpful in this endeavor?

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

"We do, and we have an interesting new set of recommendations from a tax commission in California. Now, California, as most people know, has had tremendous economic problems. They have issues with their tax system just like we do. They're probably ratcheted up several degrees, however. So this tax commission was appointed by Governor Schwarzenegger about a year ago. They just made their recommendations, a rather bold set of recommendations. Let me just summarize them. First of all, they recommend actually reducing the tax rates for the individual income tax, limiting the number of deductions but allowing a large standard deduction - $45,000 for joint filers. So that means that if you are a family - a husband-wife, for example, who are filing jointly - you wouldn't pay any state income tax if your taxable income was under $45,000. They also recommend totally eliminating the corporate income tax and totally eliminating the state sales tax. In place of these taxes, they would institute a net receipts tax on businesses. Businesses would be taxed on the difference between their receipts and their non-labor costs. Essentially, in economics lingo, this is a tax on value added. So the commission argues this would be pro growth because of lower rates and no corporate income tax. They also argue, however, it would help low-income people - no sales tax and a very large standard deduction. But it would make businesses contribute to the tax system with the new net receipts tax. We'll see how far this set of recommendations goes, both in California as well as, potentially, in other states."

Posted by Dave at 08:00 AM

November 06, 2009

The real unemployment rate

The unemployment rate receives the most attention as an indicator of the health of the economy. In North Carolina, this rate has been above 10 percent for most of the year. Yet does the usually stated unemployment rate give the most complete picture of the job market?

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

"Well, as in all things, there are lots of ways to measure a concept, and unemployment is no exception. The official unemployment rate - the one that's around 10 percent - has a fairly strict rule that determines whether people are counted as unemployed. Most importantly, they have to be actively looking for work. If they don't have a job, they have to be sending out resumes; they have to be going on job interviews. If they're not doing those things, they're not counted as unemployed. Now the government actually does include folks who aren't actively looking for work in alternative unemployment rates. And so when we look at those, we see - as you might expect - that the 10 percent rate for North Carolina actually becomes higher. For example, if you include those folks who don't have a job but are not actively looking for work, that would add about 1.2 percentage points to our state unemployment rate. And then there's another measure, which includes folks who are actually working; however, they're working part-time because they can't find full-time work due to the economy. If you add those folks to the unemployment rate, that would add six percentage points to the unemployment rate. So we would be looking at an unemployment rate in the state of around 16 percent. So as with many things, it depends on what you want to measure, but clearly, there are many different ways to look at unemployment, and as you move up the scale, you also move up the scale in terms of the rate."

Posted by Dave at 08:00 AM

November 05, 2009

Is borrowing bad?

Borrowing seems to be out now. Consumers are trying to pay down on debts, and the government is receiving a lot of criticism about all the borrowing it has done to fight the recession. But have we moved too far the other way? Aren't there some good times to and good purposes for borrowing?

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

"Absolutely, and let me give you three examples. Let's say a business borrows money today to build a new factory from which they will earn profits and easily pay off that loan over time; well that borrowing, therefore, was very good for the business. Or let's say a household - a young household with children; and they need a house in order to raise those children; that's going to be a better environment for them, more control over their space - they borrow money to buy a house. They're happy in the house. They pay off that loan easily over time. Obviously, they've benefited. Or finally, government; let's say government borrows money to build a road. That road is going to last decades. That road is going to get people from point A to point B much more efficiently. The government is going to pay that off over time. People who use the road will finance it. So again, that was a good purpose for borrowing. So you have to look at both the cost of borrowing - which, of course, I think we're very hypersensitive to right now, rightfully so - but you also have to compare that to the gains from borrowing, and make a decision, are those gains greater than the cost? If so, then actually borrowing in that case is very good."

Posted by Dave at 08:10 AM

November 04, 2009

Gains from college

There's no doubt that getting a college degree is a big plus for most people in getting a good-paying job. But how have those gains held up in our turbulent economy?

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

"Well, first of all, if you look at the benefits of getting a college degree right now, it's clearly beneficial. People with college degrees will make much more money - I think upwards of $1 million more in pay over their lifetimes - than will someone who stops at high school. But that said, what we have found this decade is that the gains from getting a college degree have actually fallen slightly. In fact, adjusted for inflation, those gains have fallen 11 percent from 2000 to 2008. And economists think there are two reasons. Number one, we've had two recessions this decade, one at the front end, one at the back end. And those recessions have really hit industries with many college grads - technology in 2001 and finance now. So that's hurt the pay that those college grads are getting. And secondly, the supply of college grads has been increasing rapidly. Whenever you have a market where supply increases relative to demand, you're going to put downward pressure, in this case on salaries. So the bottom line is certainly the gains - the financial gains - of going to college are big but perhaps not quite as big as they were eight years ago."

Posted by Dave at 08:00 AM

November 03, 2009

Consumer spending

One of the economic numbers we frequently hear is that we consumers account for 70 percent of all spending in the economy, and therefore, the economy moves as consumer spending moves. Is this accurate?

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 interesting. Some economists say, actually, it's not accurate, and they give two reasons. One is health care expenditures, which actually takes up 20 percent of consumer spending . . . well, if you look at who actually makes health care expenditures, it's not you and me, it's not the consumer; 85 percent of that comes from a third party, either insurance companies or government. So consumers here aren't the driving force. The other factor is consumer spending on imports, on imported products. That takes up 18 percent of consumer spending. So when this spending slows, it's not domestic producers who are hurt, it's foreign producers. So if you take out these two factors, and you look at the out-of-pocket consumer spending that directly affects the U.S. economy, it comes to about 43 percent of all spending, not 70 percent. That's still important, still very important, but perhaps not as dominant as you might think."

Posted by Dave at 08:00 AM

November 02, 2009

A long view of the stock market

The stock market has certainly been volatile in the past year, falling dramatically and then staging a partial rebound this year. Many people are understandably very shy about investing in the market. But give us the long view of the stock market. Has it really made money for people over several decades? Listen

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

"The key part of the question is over several decades, because the answer to that specific question is certainly yes. Let me give you a couple of examples. If you invested $1 in the stock market in 1980, you'd have $17 today. If you invested $1 in the stock market in 1950, you'd have $1,200 today. So over long periods of time, over several decades, yes, the stock market does tend to make money for you. But it doesn't always make money for you in the short term. For example, if you invested $1 in the stock market at the beginning of this decade, in 2000, you'd have less than a dollar today. So it really depends on when you get in the stock market and when you get out, but the evidence clearly says the longer that you stay in, the more the likelihood that you'll make money."

Posted by Dave at 08:00 AM