Prize-linked Savings Accounts

A Wall Street Journal article by Khadeeja Safdar asks the question “Can the lure of gambling be used to help people save?” A new study conducted with students from the University of Maryland looked at prize-linked savings, where people can win cash or other prizes through saving money. The study compared a prize-linked savings account with a standard interest-bearing account and discovered that the students were more likely to save when the possibility of winning a prize was set before them. In the past, research has discovered the poorer people are more apt to buy lottery tickets and those who earn less than $13,000 spend about 9% of their income on the tickets. In other words, “…low-income people who don’t save very much also spend a disproportionate amount of money on lottery tickets” as one of the researchers stated, which led to the idea for this particular study. The prize-linked savings program started at eight credit unions in Michigan in 2009, though as this program is considered a private lottery, it is illegal in many states. However, in the years since the program started some states of passed amendments on this ban, allowing financial intuitions to offer the prize-linked savings program. It turns out that Americans have been saving less money over the years. Personal savings rates, which sat at 12% in the 1980s, now sit around 3%. The researchers involved with the study hope to present this savings program as a substitute for state lotteries, not unlike South Africa.

The early findings presented in this article suggest that saving money does not seem to be a priority for the average American. I believe this idea would more easily fall in line with the Keynesian school of thought; people are spending more than they are saving. I tend to think that this program will be successful. Without this incentive to save presented by financial institutions, I think that it is harder for people to resist spending, especially if they are of a low economic standing. They cannot see a reward beyond what they can purchase an item in a given moment, be it something they really need or perhaps only think they need. With this program, people can really see a long-term reward that provides the incentive to save their money. It seems to me that people would be more willing to save if they were going to receive something for doing it rather than saving their money only to have to give it away again.

The Problem With Too Many Millionaires

This article, entitled The Problem With Too Many Millionaires, addresses the fact that the rich upper class is gradually becoming wealthier. The statistics found by RBC Wealth Management and Capgemini Financial Services show that the number of people who have more than 1 million dollars with which to invest went up to 12 million in 2012, which was a 9.2 percent increase from 2011. The overall wealth of that group went up to 46.2 trillion dollars; a ten percent increase over the prior year. The group studied consisted not only of wealthy people, but contained another layer of sorts of the richest of the rich- the wealthiest of the wealthy. Called the ‘ultra rich’ in this article, people with over 30 million dollars of money able to be invested are doing the best. These 111,000 people made up 35.2 % of the wealth for all of the millionaires in the world.

Alan Krueger, an economist at Princeton University, calls this monumental change a ‘rock and roll industry’. He states: “Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented — and it is often hard to tell the difference — have been doing better and better, while the vast majority has struggled to keep up.” Professor N. Gregory Mankiw of Harvard University wrote an economic paper entitled “Defending the One Percent” that comments on the global rise of the one percent. He uses the term egalitarian utopia. Egalitarianism is a way of thought that values equality in economics and general rights for everyone. Mankiw states that this idea of a egalitarian utopia has been interrupted by an entrepreneur with an idea for a new product. He uses examples of this entrepreneur such as Steve Jobs and the ipod and JK Rowling and the Harry Potter series. Once this product is put out on the market, all consumers want to buy it. They spend around 100 dollars on it, which is a voluntary exchange; benefitting both the buyer and the seller. This is not always the case. In examples such as JK Rowling, there is only one of her. She is the only one to write the Harry Potter books. While there is only one of her, there are many consumers wanting to buy the books. This makes the economy unequal and not distributed in the way it used to be. This makes the entrepreneur much wealthier than was expected. This scenario describes perfectly what has happened to the United States over the past few decades.

This presents the problem of income inequality. The issue is that many of the people who are ‘ultra rich’ are entrepreneurs who help the public and add to general wealth as well. This is not just happening in the US, China as well, is having this problem. There are two main problems with income inequality. First, labor productivity has increased about 85% since 1980, while real wages have only grown about 35%. The problem with real wages being flat, is that it means people are making less money. The second problem is declining social mobility. Studies have shown that a rise in income inequality means a decline of equal opportunity. Because the very wealthy are often born that way, it is becoming increasingly harder to become wealthy if one was not born with that privilege. 

Citation:

FREELAND, CHRYSTIA. "The Problem With Too Many Millionaires." The New York Times . 20 June 2013.

Michael Watts | Fed Releases Statement on the Economy

 Michael Watts

            

           On Wednesday, June 19^th, Ben Bernanke and the Federal Reserve issued a statement on the economy. An article on nbcnews.com discusses the statement and the impact. The report stated that the economy is increasing, unemployment is decreasing, and inflation is stable. Federal Reserve Chairman, Ben Bernanke said that the coming days will bring an end to easy money, including loans and bonds. Bernanke also said that if the economy persists to improve itself, the asset purchasing program may start to gradually come to a close at the end of 2013 and finish in 2014.

            The Federal Reserve is the central bank of the United States and consists of the Board of Governors, twelve regional Fed Banks, the Federal Open Market Committee (FOMC), and the Chairman of the Board of Governors. The Board of Governors consists of seven members nominated by the President and confirmed by the Senate to serve terms of fourteen years. The FOMC is composed of twelve voting members- seven governors and five presidents of the regional Fed Banks. The Chairman of the Board of Governors, currently Ben Bernanke, is nominated by the President and confirmed by the Senate for renewable four-year terms.

            One of the functions of the Fed is to conduct monetary policy by setting short-term interest rates. According to the article, the Fed stated that it would keep the interest rates near zero. The Fed also has maintained its target funds rate close to zero, where unemployment falls from 7.6% to 6.5% and inflation rises from 1.4% to 2.5%. The Fed predicted that unemployment target will be met in 2014 and cut predictions on inflation, the annual increase in price level. Another function of the Fed is maintaining stability of financial systems and containing risk as the lender of last resort. Furthermore, the Fed supervises and regulates banks and provides financial services to banks and the government.

In Wednesday’s statement the Fed stated it would keep the interest rates near zero and that it would maintain its bond buying plan, also called quantitative easing, which is to keep an increase in stimulus growth in central banks.  Markets sold off quickly with averages dropping to more than one percent. The five-year Treasury note reached its highest yield since August 2011 while the benchmark ten-year note broke a 2011 high. Markets have been waiting for when the Fed will stop its quantitative easing program, which lead to an increase of $3.45 trillion on the central bank balance sheet.

Actions and statements by Ben Bernanke, representing the Federal Reserve Board, can cause immediate and widespread reactions by the stock market, the bond market and global economy.  In turn these reactions can have strong impacts on the daily lives of average citizens. Following Wednesday’s statement by Bernanke, the Dow Jones average, an indicator for prices of stocks traded on the New York Stock Exchange (NYSE) fell more than 350 points or 2+ percent in one day. This was the largest drop in the Dow Jones since November 7, 2012. (See nbcnews article). 

Works Cited

Fed will keep pedal to metal on economic stimulus, for now. (2013, June 19). NBC News.

Retrieved from http://www.nbcnews.com/business/fed-will-keep-pedal-metal-economic-stimulus-now-6C10381923

JeeYeon Park. (2013, June 20). Dow slumps over 2 percent in worst trading day this year. NBC

News. Retrieved from http://www.nbcnews.com/business/dow-slumps-over-2-percent-worst-trading-day-year-6C10390725

Ashley Stoots

 

I read an article that talks about the high cost of unemployment. The article states that unemployment is not just a tragedy because of the aggregate output loss that comes with unemployment but it is also a tragedy because of the personal and emotional to the unemployed. Economists from the past thought that things would be much more leisurely by this point. John Maynard Keynes for example, speculated that within 100 years, which would be 2030, higher incomes would reduce the average work day to only a mere three hours. Obviously, he was wrong, even if there is seventeen years left. This article states that unemployment is a product of capitalism. People who are no longer needed are simply just let go. One way to help the unemployment problem is by something called work-sharing. Work-sharing can keep people marginally attached to their jobs during a time of recession, which could help preserve peoples self -esteem. Instead of a company laying of a percentage of its workers they could just reduce an employee’s hours from eight hours to six hours. With work-sharing it would be a more likely possibility that more people would be able to keep their jobs. Although this sounds ideal, like anything else, there are problems that come along with work-sharing, especially if it is increased too suddenly. One problem would be that some employees have fixed costs such as, transportation to work that do not decline when hours are cut. Another example could be is that the employee could have bought a smaller house if they had known that their hours were going to be reduced. Another major problem is that it would be difficult to reduce every employee’s job by the same amount because some jobs scale up and down with production while others do not.  Truman Bewley interviewed different managers that are involved with wage setting to try to get answers to these types of questions. One thing that he discovered was that the managers believed  that a serious morale problem would result in reducing every employee’s hours and pay because all of the employees would feel like they did not have a job. He also discovered that, at least from the managers, that the pain of reduced unemployment is focused on people whose grumbling is not heard by the remaining employees. This happens because employers are more focused on the moral of the workplace, than the moral of the employees that are being laid off.

 

Shiller, Robert. The High Cost of Unemployment. 2013. Web. <http://www.slate.com/articles/business/project_syndicate/2013/06/we_need_stimulus_not_austerity_to_combat_unemployment.html>.

Macro Control, Micro Problems

http://www.economist.com/news/finance-and-economics/21578654-history-shows-limits-macroprudential-policy-curbing-dangerous

The article “Macro Control, Micro Problems” addresses the issue that the Federal Reserve faces in attempting to spur economic growth by lowering interest rates and buying securities and bonds without fueling risky behavior and excess in specific financial markets. The article offers macroprudential policy as the remedy for this problem.  Macroprudential policy asserts the utilization of small-scale regulatory policy to prevent the generation of excess in specific financial markets and limit the development of systemic risk while reserving large-scale monetary policy to address inflation and employment.

In a very broad sense, macroprudential policy seeks to regulate the supply and demand for credit. The article’s illustration of how the Federal Reserve has historically regulated the supply of credit in financial markets directly connects to concepts that we are currently discussing in class. First, the Federal Reserve has employed regulatory policy and interest rate ceilings to limit the loans made by banks. In regards to banks, the interest rate is the return that the bank will earn from making loans. Therefore, higher interest rates are incentive for banks to increase lending. Immediately prior to the Great Depression, the Federal Reserve ordered banks to cease excessive lending to stockbrokers spurred by high interest rates—this action was a response to the dramatic increase of speculation in the stock market. Even though there was a sharp decrease in bank loans, total loans actually continued to increase as a result of the high interest rates set by the Federal Reserve. Corporations operating outside the jurisdiction of the Federal Reserve were prompted by the high interest rates to take up the loans that banks could no longer make.

The Federal Reserve has also attempted to set interest rate ceilings for banks. In this context, the interest rate is defined as the return that households earn by depositing their money in banks—the interest rate is the opportunity cost of holding onto money. This is the definition of interest rates that we have become most familiar with in class. In the 1950s, the Federal Reserve’s interest rate ceilings resulted in a decrease in bank deposits. However, this unintended negative effect did not surprise me. We have learned that as interest rates fall, there is a rightward movement along the demand curve for money and the quantity demanded of money rises. Lower interest rates cause the quantity demanded of money to increase because the lower return from investment is not incentive for households to take on the risk of depositing their money in banks.

Finally, the Federal Reserve has utilized higher reserve requirements to control the supply of credit. As we have learned, the reserve ratio is the portion of deposits that a bank is required to keep as reserves. The article asserts that during the period of 1948 to 1980, higher reserve requirements resulted in a decrease in the growth of bank credit. This is understandable considering that we have learned that excess reserves are equal to total deposits minus required reserves. We have also learned that excess reserves are used to make loans and investments. Therefore, if banks were required to keep a higher percentage of deposits as reserves, the funds unavailable for loans and investments would decrease. According to what we have learned thus far about macroeconomic principles, the reasoning behind raising reserve requirements to decrease credit supply is sound. However, the negative growth produced from higher reserve requirements between 1948 and 1980 was counteracted by the increase of lending by firms outside the jurisdiction of the Federal Reserve.

I believe that the Federal Reserve’s desire to address the economic issues of specific markets without impacting the health of the entire economy is quite reasonable. Further, macroprudential policy may be the solution to this issue. However, as is evidenced by the examples provided above, macroprudential policy retains many flaws at this time. While macroprudential measures may be able to address the economic issues stemming from specific markets, the Federal Reserve has not yet learned how to prevent such measures from having unintended effects on the entire economy. Macroprudential policy demonstrates much promise as a powerful monetary mechanism, but unfortunately it is still in the adolescence of its development.

Getting More Bang for the Buck in Higher Education

Josh Mowles

ECON122

Dr. Kassens

July 23, 2013

Click here for the article.

Higher Education

            The article that I will be discussing is about higher education.  In the article it states that the student loan interest rates will by sky rocketing in the next few years.  Along with this, tuition rates are at an all-time high and completion rates are at an all-time low.  The author discussed if higher education is a bad investment, and the answer was no. She said that it is still a good investment.  She stated, “[T]he increase in lifetime earnings associated with a college degree is now 75 percent higher.” (Tyson, 2013)  Also in the article she talked about a correlation between low income families and the lack of completion rate with those individuals.

            In the article, the author wrote that interest rates are supposed to double in the month of July in 2013.  (Tyson, 2013)  In class, we found that interest rates are the cost of borrowing money or the opportunity cost of holding money.  If completion rates are already at an all-time low, how would increasing the interest rate help this?  Most students are already up to their neck in debt from school.  This will just make the payments higher for them so there will be less of reason for them to stay in school. 

            Something else that we learned in class is that the government has two fiscal policies when trying to raise or lower GDP.  One of which, is lowering government expenditures.  This is what the government is trying to accomplish when they raise the interest rates for student loans.  This may have an impact of the GDP and help us out financially but what does it do to our future workforce?  The students that were barely able to afford a higher education will no longer be able to.  It will be harder and take longer for the graduates to pay back all the debt owed for these student loans as well.

            Throughout the article, the author states how higher education is still a good investment.  She talks about how there is a huge need to increase the completion rates.  I agree with her in this, but I think that if the government would control the tuition costs and keep the interest rates of the loans they offer at a lower level then the completion rates will fix themselves.  Also, the government could add some more financial aid to help these students.  It would be expensive but the government would be investing in its future with  this additional spending.

           

Works Cited

Tyson, L. D. (2013, June 14). Getting More Bang for the Buck in Higher Education. Retrieved from The New York Times: http://economix.blogs.nytimes.com/2013/06/14/getting-more-bang-for-the-buck-in-higher-education/?ref=economy