Category: Economics

downloadThe day after Christmas, presidential candidate Bernie Sanders asked on Twitter: “You have families out there paying 6, 8, 10 percent on student debt but you can refinance your homes at 3 percent. What sense is that?”

My snarky tweet in response was, “Because you can foreclose on a house but you can’t repossess an MFA in creative writing.”

A more thorough (and thoughtful) explanation is provided by Megan McArdle. She explains why loans secured (such a by a house) always have lower interest rates than unsecured loans (like student debt):
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sanders-tocquevilleBernie Sanders appears to think all we need to be happy is more money,” says Samuel Gregg, Acton’s director of research, but Alexis de Tocqueville dismantled that idea two centuries ago.

Tocqueville’s first reproach was that socialism—whatever its expression—has an inherently materialistic understanding of humans. “The first characteristic of all socialist ideologies is,” Tocqueville insisted, “an incessant, vigorous and extreme appeal to the material passions of man.” Tocqueville may have wrestled with religious questions for much of his life. Nevertheless, he refused to accept that we’re just another species of animal whose fundamental needs are purely material.

Read more . . .

the-new-york-times-website-is-back-after-two-hour-outageWhile it may be difficult to imagine, there was once an era when the New York Times was concerned about the poor.

Consider, for example, a 1987 editorial they ran with the headline, “The Right Minimum Wage: $0.00.” As the editors noted at the time,

[Raising the minimum wage] would increase unemployment: Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired.

If a higher minimum means fewer jobs, why does it remain on the agenda of some liberals? A higher minimum would undoubtedly raise the living standard of the majority of low-wage workers who could keep their jobs. That gain, it is argued, would justify the sacrifice of the minority who became unemployable. The argument isn’t convincing. Those at greatest risk from a higher minimum would be young, poor workers, who already face formidable barriers to getting and keeping jobs. Indeed, President Reagan has proposed a lower minimum wage just to improve their chances of finding work.

Back then the federal minimum wage was $3.35 ($7 in 2015 dollars) and the editors of the Times had a basic understanding of economics. Today, their editorial board is apparently comprised solely of those completely ignorant about economics, for they published an editorial last week calling for wage to be raised to $15 a hour.

Their reasoning? No real justification is given other than that the government must do something. In their conclusion they write:
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It's_a_Wonderful_Life[Note: This is the final post in a series highlighting some of the financial aspects and broad economic lessons of Frank Capra’s holiday classic, It’s a Wonderful Life. You can find part one here and part two here.]

Economist Don Boudreaux recently outlined ten foundational lessons that should be learned in every well-taught principles of economics course. Examples of nearly all of the ten lessons can be found in Capra’s Christmas classic, but for the sake of brevity I’ll merely highlight two of them.

Principle 1: The world is full of both desirable and undesirable unintended consequences – consequences that are largely invisible but that even a course in ‘mere’ principles of economics gives us great vision that enables us to “see”.

This holiday film may be attributed to Frank Capra, but it could have just as easily been called “Frederic Bastiat’s ‘It’s a Wonderful Life’.” The central theme of the film is a creative example of Bastiat’s “That Which is Seen, and That Which is Not Seen”—which is (as both Boudreaux and I claim) the most important essay in economics.

In the opening line of his essay, Bastiat writes,

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OK, this is going to be a tough call. But Acton Research Fellow Jordan Ballor has bravely stepped up with his nominee for the “Worst Christmas Song Ever” in a piece for Patheos. His pick? Band Aid’s syrupy “Do They Know it’s Christmas?” Ballor reminds us that the song …

… was released in 1984 as part of Band Aid, an effort organized by Bob Geldof in response to a famine that struck the east African nation of Ethiopia. The song certainly captures the spirit of the season, as its charitable aims are noble enough. The problem, however, is in how these good intentions are translated into word and deed. The song describes Africa largely as a barren wasteland, “Where the only water flowing is the bitter sting of tears.” It continues in this vein. Africa, the onetime breadbasket of the Roman Empire and home of the Nile River is a land “where nothing ever grows, no rain nor rivers flow.” The title question likewise plays into the supposed desperation of the continent. The only “Christmas bells that ring there are the clanging chimes of doom.” The response to this call is supposed to be charity from the affluent West, to “feed the world” and thereby “let them know it’s Christmastime again.”

In this depiction of Africa, “Do They Know It’s Christmas?” perfectly encapsulated the patronizing approach to international development that dominated the twentieth century and is still largely with us today. On this account, rich people in Europe and North America have a duty to help those who cannot help themselves in Africa, a place destitute not only of material resources but also spiritual and intellectual assets as well. As development economist William Easterly has argued, this attitude evinces a kind of tyrannical neo-colonialism, where the power, knowledge, and wealth lies entirely with the “First World” and those in the developing world are reduced to a kind of vassalage.

Agree with Ballor? Give us your pick for the worst Christmas song ever in the comment boxes below.

Blog author: jcarter
Wednesday, December 16, 2015
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baileypark[Note: This is the second post in a series highlighting some of the financial aspects and broad economic lessons of Frank Capra’s holiday classic, It’s a Wonderful Life. You can find part one here and part three here.] 

George’s Life Savings in a Life Insurance Policy

George attempts to secure a loan from Potter based on his life insurance policy. He says it has a $15,000 face value and a $500 cash value. Why is his life insurance policy worth cash?

George has a type of insurance policy—whole life insurance—that is guaranteed to remain in force for the insured’s “whole lifetime,” provided the required premiums are paid, or to the maturity date. As the New York Department of Financial Services explains,

The face amount is the amount of coverage you wish to provide your beneficiaries in the event of death. The cash value is the value that builds up in the policy. The minimum cash values are set by the Insurance Law and reflect an accumulation of your premiums after allowances for company expenses and claims. When you are young, your premiums are more than the cost of insuring your life at that time. Over time the cash value grows, usually tax-deferred, and the owner may be allowed access to that money in the form of a policy loan or payment of the cash value. The face amount of your policy will be higher than your cash value especially in the early years of your policy. If you surrender your policy you will receive the cash value not the face amount. If you die your beneficiaries will receive the face amount.

George could have cashed out the policy and received $500. But he was, as he says, “worth more dead than alive” since his family could get $15,000 if he died.
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bedford-fallsUpon it’s initial release in 1946, Frank Capra’s It’s a Wonderful Life was something of a financial flop, failing to reach the break-even point of $6.3 million. Although it was nominated for Best Picture at the Academy Awards, it wasn’t until subsequent decades that it became recognized as one of the greatest Christmas film ever made.*

The film is long overdue for another reappraisal, for it’s also one of the best films ever created about economics and financial services.

In a series of three posts (to be posted today, Wednesday, and Thursday), I’ll highlight some of the financial aspects of the film (the first two posts) and a few of the broad economic lessons from one of my all-time favorite films.
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