Saturday, October 24, 2015

How Currency Exchange Rates Are Determined

Key excerpt:

"Currency rates of exchange appear to be moving in response to so many factors that it makes it almost impossible to ascertain where the rate of exchange is likely to be headed.  Rather than paying attention to the multitude of variables, it is more sensible to focus on the essential variable.

As far as currency rate of exchange determination is concerned, this variable is the relative changes in the purchasing power of various monies. In short, it is the relative purchasing power of various monies that sets the underlying rate of exchange." 

Read more here: How Currency Exchange Rates Are Determined | Mises Wire

Thursday, October 22, 2015

Pro Sports Great, Just Not for the Local Economy-Mercatus Center

Pro Sports Great, Just Not for the Local Economy by Dennis Coates

If Forbes’ latest ranking of National Football League franchise values is any indication, the owners of the Oakland Raiders, San Diego Chargers and St. Louis Rams – all competing to move to the Los Angeles area – figure to find a goldmine here. At an estimated $4 billion, the Dallas Cowboys are the world’s most valuable sports team. Large-market teams round out the NFL’s value top five. An L.A. team would be poised to join that top tier.

As Forbes put it, “The bigger your domain, the greater the opportunity to cash in on the fantasy and reality of the NFL.”

Most people believe that pro football would also be a goldmine for Southern Californians – but the economic facts may not support this claim.

To attract or keep a team, cities typically offer perks like public subsidies for a new stadium or tax breaks. Rival stadium proposals in Carson and Inglewood rely on private funding but would likely involve some public costs. Conventional wisdom also says a sports-fueled economic boom will result and more than make up for these costs.

Think of the joke about a fellow looking for his car keys, crawling on his hands and knees under a streetlight. The punch line is that he is looking there, rather than by his car, where he dropped them, because the light is better. Supporters of subsidies usually look under the streetlight for the economic benefits – local income, employment and tax revenue – of stadiums, arenas and professional sports franchises.

But, as independent economists repeatedly point out, not everything that looks shiny under the streetlight is a set of car keys – and, if you really want to start the car, you may have to look elsewhere.

Few deny that sports facilities must be paid for. The issue is who should pay. Usually, but not always, owners argue that they need help for various reasons.

Whatever the reason, they ask the public for help. But the question for policymakers and for voters should be simpler: Will the investment produce a real return? Even when the private sector is funding the project entirely, as is arguably the case in Carson, the public should question whether transferring public land to the private sector for a stadium is the best use of that property.

I co-authored a study in 1999 with Brad Humphreys. It examined the sports environment in every city with at least one NBA, NFL or Major League Baseball franchise at some time from 1969-96. Our findings were clear: Professional sports had no positive impact on an area’s economy, and actually harmed residents’ per capita incomes.

I recently updated the data, added the NHL and Major League Soccer, and examined the full set of U.S. cities, rather than only those with a team. The analysis also benefits from the stadiums and arena-building boom of the ’90s.

The lesson for cities, unfortunately, is the same. The sports environment still has little effect on the financial resources of most people. For example, across all seasons and cities, sports contributes about 0.2 percent to the wage earnings of the typical worker, about $50 per year to someone earning $17,000 a year.

Now, as then, the data disprove the claim that a city can use stadium and arena construction, or the attraction or retention of a professional sports franchise, to enhance the income of its citizens.

There are valid reasons for supporting professional sports subsidies. Millions of people enjoy watching, reading about and discussing their team. For them, the enjoyment of following a team is undoubtedly greater than the costs they bear.

Good public policy, however, requires a comparison between the costs and benefits of supporting the franchise. In the economics of both sports and public policy, resources are scarce and must be put to their best use. Not all subsidies will make the cut.

Tuesday, October 20, 2015

Star Trek Is Wrong: There Will Always Be Scarcity | Mises Daily

Scarcity is a condition created by time. Humans must decide to prioritize their lives based on a time constraint. Something can be done now, as that would be a higher priority, as compared to doing it later. Read the rest of the article here:

Star Trek Is Wrong: There Will Always Be Scarcity | Mises Daily

Monday, October 19, 2015

Gary Shilling: Why Commodity Prices Continue to Fall

One explanation could lead to the notion of elasticity of demand. As prices rise, some buyers may seek alternatives to that particular good or service. As buyers stop buying those goods, the demand falls, causing the price of those goods to fall.

Key excerpt from the article:

“Supplies of almost every commodity are huge and growing,” writes Shilling in his latest Insight report. At the same time, demand is falling due to the slowing global economy, says Shilling, president of A. Gary Shilling & Co.

Read the rest here 

The Poor in the US Are Richer than the Middle Class in Much of Europe | Mises Wire

In this week's debate, Bernie Sanders claimed that the United States has the highest rate of childhood poverty. CBS reports that Sanders said: "We should not be the country that has the highest rate of childhood poverty of any major country and more wealth and income inequality than any other country,"

As even CBS notes, according to UNICEF, which is probably the source of Sanders's factoid, the US has lower childhood poverty rates than Greece, Spain, Mexico, Latvia, and Israel, all of which are OECD countries or regarded as peer countries. The US rate (32.2 percent) is also more or less equal to the rate in Turkey, Romania, Lithuania, and Iceland.

Read more here:

The Poor in the US Are Richer than the Middle Class in Much of Europe | Mises Wire

Wednesday, October 7, 2015

Tuesday, October 6, 2015

Can Trade be Balanced and Equal?

With the notion of free trade, many see the need to ensure that trade is "balanced" and it is "fair". Politicians will state that, "We need fair trade practices with [Fill in the blank country]" While these seem to be reasonable ideals, are they realistic? Are they practical? Can free trade be "unfair"?

What is Trade? 

Before exploring if free trade is "unfair", let us explore the notion of trade.  Free Trade is simply the exchange of goods and services between two parties, without coercion or restraint from outsiders.(e.g Government) For example, if I go to the store to purchase a can of black olives, I provide my dollars, in exchange, for the black olives on the store's shelf. This is an simple example of trade. This does not change in the aggregate, as the aggregate is simply a collection of the aforementioned "trades" in the marketplace. Also, countries do not engage in "trade", individuals in those respective countries engage in trade. Suppose I purchase a new Nissan 350Z, and it is made in Japan. I am not trading with Japan no more than Nissan is trading with the United States. It is a simple trade between Nissan and me. I purchase the 350z with cash, in exchange, for the 350Z.

Why does Trade take place? 

People seek to improve their position in life. Economists call this behavior: "Utility seeking behavior".  Humans seek to improve their position in life for their "selfish" desires, goals, dreams and aspirations. While engaging in that process, trade will occur.  Individuals, or actors, in the marketplace will trade goods of "lessor" value for goods that will improve their lot in life, or they have greater value.

Is Trade Equal?

Let us go back to the example of the black olives purchase from earlier in this analysis. Suppose the can of black olives is $5. In this exchange, I give my $5 to the store, and the store, in turn, gives me the can of black olives. From a bookkeeping and accounting standpoint, this trade is equal, as debits and credits balance: $5 debit to cash, $5 credit to Revenue for the store.

On the surface, this is an equal trade. All debits and credits equal, thus there is no trade surplus or deficit. This works in a similar fashion in the aggregate. Commentators and experts lament about having a "trade deficit" or "trade surplus". Their analysis typically is one sided. They only focus on one side or one variable in the equation. Staying with the black olive theme, the experts would state: "The Store sells more black olives as compared to Robert! There is a trade deficit! We must place tariffs on The Store's black olives."  But, is this trade really "equal"?

Is Trade Unequal? 

From an accounting/bookkeeping standpoint, trade is equal. However, Economics is not accounting. Accounting is about the explicit costs/benefits, Economic analysis is about qualitative "costs/benefits". Going back to our Black Olive example, on the surface, the trade is equal. $5 dollars for $5 worth of black olives. But, using Economic analysis, one must look at the value or "utility" ranking of these items. It is quite clear that the person with the $5 values the $5 less than he/she values acquiring the can of black olives. On the other side of the ledger, the store values the $5 more than the black olives, thus the sale of the black olives. Both parties value the black olives unequally, and they also value the $5 unequally. Thus, from an economic perspective, the trade is unequal. However, the trade is unequal simply because value is subjective. Each party values their respective item differently.  It is not truly something that can be quantified. The money/currency measurement is simply a method of accounting/bookkeeping.


Critics of international trade mistakenly believe that trade is unbalanced from an accounting perspective. It is not, as shown here in our analysis. From an economic perspective, it is subjective, making it unequal. Without trade, mankind can not progress. Free trade is the pith of the human existence. One person is an excellent farmer, and sells his fruit and veggies at the farmer's market to individuals who are not skilled at planting crops. All of us are blessed with skills that others do not have, making the trade unequal, but quite fair.