U.S. and EU Leaders Discuss European Financial Troubles

Today in Brussels, Jacob Lew discussed European financial problems with European Union leaders, which continue to hurt the global economy. Lew, who took office as U.S. Treasury Secretary in February, fully understands the strong influence the European economy has on our own economy. He realizes the issues in Europe cannot exist independent of the US economy and therefore we have the incentive to help alleviate this issues as best we can.

European Council President Herman Von Rompuy is working with Lew to try to bring European banks under a unified banking union. This would give the EU more power to stabilize failing banks without having to go through individual national governments. Increased efforts in this area would help prevent flare-ups in the financial crisis like we saw recently when the bailout efforts in Cyprus failed.

Lew is especially concerned about the European economy in light of recent disappointing unemployment statistics. Although the unemployment rate dropped to 7.6%, only 88,000 jobs were added to the economy last month. Lew is concerned about sources of demand abroad during a tough period of unemployment.

Annie Howard

Sources:

http://online.wsj.com/article/SB10001424127887323550604578410310488074782.html?mod=WSJ_Deals_LEFTTopStories

http://www.guardian.co.uk/business/2013/apr/08/eurozone-crisis-portugal-spending-cuts-bailout#block-5162c204b579a0655085fc6c

Expanding the Unemployment Rate

Friday’s unemployment rate dropped to a four-year low of 7.6%.  While at first glance this looks like a step in the right direction for the economy, the unemployment rate does not take into account that only 88,000 jobs were created during the month of March, compared to February’s 268,000.  

What’s more, unemployment was driven down primarily by nearly half a million people leaving the workforce.  Since unemployment only tracks the employment status of people actively searching for work, it does not give a completely accurate estimate of how many people are without jobs.  

The Wall Street Journal’s table below shows a peak in labor-force participation rate from January-April 2000 with 67.3%.  In March, that percentage dropped to 63.3%, the lowest since May 1979.

One of the groups hit hardest is the under-25 population.  Over 236,000 young people left the labor force last month.  When the recession began in December 2007, 59.2% of the u-25 population was in the workforce.  That number has since dropped to 54.5%, which means that, if the u-25 participation rate remained unchanged, there would be 1.8 million more young people in the workforce.  Additionally, if these 1.8 million young people were to be counted in the workforce, the unemployment rate would rise to 22.9%.  

The US Labor Department’s table below shows the unemployment rate for 16-24 year olds in blue.  The green line represents what the actual unemployment rate for that age group would be if so many hadn’t dropped out of the workforce.

Granted, many people in this age group are still pursuing undergraduate or postgraduate degrees.  But many are graduating and facing a job market that demands work experience.  Many young people are forced to take low-skilled jobs if they want anything at all.

The restaurant industry has historically picked up some of these young workers.  Between the first quarters of 2012 and 2013, eating and drinking establishments added jobs at a 3.1 percent rate, doubling the 1.6% gain in total non-farm payrolls during the same period. Since March 2010, the sector has added 856,000 jobs, behind only the professional-and business services and health care sectors. 

But even restaurants slowed in March, adding only 13,000 jobs, the smallest gain since May 2012, according to the Bureau of Labor Statistics.  Additionally, according to the March 2013 Restaurant Industry Tracking Survey, only 25% of restaurant operators expect economic conditions to improve in the next sixth months.  It’s tough to be positive when representatives of the third largest job-producing sector are that pessimistic, but, for statistical purposes, for now March represents a dip in an otherwise positive trend in job market growth.

Andy Soergel

Sources:

http://economix.blogs.nytimes.com/2013/04/05/the-employment-rate/#more-162035

http://blogs.wsj.com/economics/2013/04/06/number-of-the-week-youth-unemployment-at-22-9/?KEYWORDS=unemployment+rate

http://online.wsj.com/article/SB10001424127887324600704578404271558802706.html?KEYWORDS=unemployment+rate

The Next Financial Crash

The next financial crash, whether you know it or not, may be happening as you read this.

But this crash is not tied to real estate, a foreign banking system, or student loans. Its a currency crash, one that you might never have heard of.

The currency I'm referring to is known as Bitcoin, a currency that is traded online and used to buy goods and services. Initially put into circulation in 2009, Bitcoin prices have recently risen in dramatic fashion. In the past several months, the Bitcoin has garnered increasing amounts of press due to attacks on Bitcoin exchanges by online hackers and its popularity in purchasing illicit substances. The following chart shows the price of Bitcoins over the past three years.

Two years ago, one Bitcoin was worth less that $1. Two months ago, a Bitcoin was worth $20. Last Wednesday, the Bitcoin reached a record high of $147, before falling back to $130 on Tuesday.

The Bitcoin initially began as a niche currency for hackers and cryptologists, and has gained immense popularity due to its anonymity; Bitcoins are very hard to trace back from a purchase. The lack of paper trail has helped spawn an online black market. By using certain browsers, internet-users can have their IP address bounced around the globe from computer to computer in a way that makes websites untraceable. In this little-known corner of the internet known as the "deep web," websites offer everything from delivery drugs to exotic pets. And all of it can be purchased with Bitcoins.

Supporters of the currency believe it to be capitalism at its purest form. It is an absolutely free market, free from any effects of monetary and fiscal policy. There is no regulation, and there is also no insurance; in recent weeks, hackers have targeted a website that provides online "wallets" for Bitcoins. Unlike an FDIC insured deposit-holder, anyone who had their Bitcoins stolen will receive little or no compensation.

There is evidence that federal authorities are cracking down on Bitcoins in order to curb the illicit trade that it facilitates. And while I think its prudent that the government does what it can to shut down the illegal websites, I think the Bitcoin market offers unique opportunities for economic research.

The Bitcoin market has a total value of about $1.4 billion. While that is minute compared to most currency markets, it is enough to support an entire underground, black market economy. Some computer hackers have given up their day jobs in order to trade Bitcoins. It is significant enough that it might be able to provide valuable insight into how currency markets operate in the absence of political and regulatory influences.

The Bitcoin market is truly unchartered territory. There has never been a currency so widely used and yet so mysterious, and I imagine a great deal can be learned from studying its trends. For example, the rapid increase in prices over the past month has triggered speculation that there is a Bitcoin bubble. It seems like the Bitcoin market could be used almost as a model to study how currencies react to potential crises.

Then again, the Bitcoin is so unorthodox that it might not offer any practical insight at all. For example, every ten minutes a new "block" of Bitcoins is created. Individuals and groups from all around the world run computer programs in order to unlock the 64-digit code that controls that block. However unlocks the code first is awarded the block of Bitcoins (blocks currently hold 25 Bitcoins.) This is how Bitcoins are created and circulated. This is slightly less precise than Federal Reserve open market operations.

Regardless of how valuable the Bitcoin market's economic insights may be, it is a fascinating story to follow. The underground cyber-economy may been in danger of an unprecedented monetary disaster if the Bitcoin collapses. Lucky for us, we don't have much use for the deep web.

-Alex Gannon

Sources:

http://buzz.money.cnn.com/2013/04/05/bitcoin-bubble/

http://www.forbes.com/sites/timothylee/2013/04/07/four-reasons-bitcoin-is-worth-studying/

http://articles.washingtonpost.com/2013-04-04/world/38280106_1_bitcoin-satoshi-nakamoto-monetary-policy

CEOs who took pay cuts

Though The New York Times published a long winded article about the increase in how much CEOs made last year in both salary and perks, two particular CEOs were mentioned for other reasons.

JC Penney CEO Ron Johnson worked for only two months in 2011, and made $53.3 million in stock and cash. In 2012, that number was cut by 96 percent to land Johnson at $1.9 million in pay and perks. That boiled down to a $1.5 million salary with the rest representing transportation and security costs. That's a huge drop in payment, obviously, but should we be surprised? JC Penney reported a $1 billion operating loss for the year, and a huge drop in stocks, which can be largely attributed to Johnson's failed attempt at changing the way JC Penney operated and advertised.

At Ford, where shares and earnings were down, Alan Mulally took a 28 percent pay cut.

Isn't that the way it is supposed to be? If profits go down and stocks go down, it seems only fitting that the highest paid executive's salary would also go down, both for financial reasons and to show solidarity with the company workers.

But instead, other than Johnson, Mulally, and a handful of others (think James Gorman and Morgan Stanley and Tim Cook at Apple), the NYT report shows that most high powered CEOs are earning more than ever in salary and perks, and have no problem discussing it.

Emily Mosh

Pay-as-you-weigh: how future airfares policy should be?

CNN on Monday delivered the news of Samoa Air introducing a policy that charges passengers only by their weight. According to the airline’s chief executive Chris Langton, Samoa Air would be the first airline in the world to issue such a fare structure.

The tiny South Pacific air carrier owns just three aircraft, including two 10-seaters and one four-seater. Samoa Air serves Samoa, American Samoa, Tonga, Niue, Tokelau, the North Cook Islands and Wallis and Futuna islands in French Polynesia. 

The company is planning to purchase a larger Airbus this year for service to international destinations in the region including Australia, New Zealand and Fiji.

Such a small-sized airline should not have a large influence on supply and demand with its controversial policy. But it argues that the pricing system is not only fair but the future for other airlines. 

"What makes airplanes work is weight. We are not selling seats, we are selling weight," said Langton. The airline’s website also states that, "your weight plus your baggage items is what you pay for. Simple."

To book online, travelers enter their approximate weight and that of their luggage and prepay based on that "guesstimate." Passengers and their luggage are weighed again at the airport.

As people are getting heavier and bigger, flight seats and fuel are becoming major issues. Airlines are consuming more and more fuel each year because of people’s increasing weight. Forbes cites government statistics to say that "the average weight of an American has increased 24 pounds since 1960." Writer Emily Stewart then does the math: 

 

Airlines flew 735 million passengers last year. Multiply that by 24 pounds and airlines are flying 17.6 billion pounds of extra weight around. It takes roughly a gallon of jet fuel to move 100 pounds on a domestic flight. That means 176.4 million gallons of fuel, costing $538 million (at an industry average price of $3.05 a gallon).

Airlines and experts have been arguing if there should be a fat tax, i.e. heavier people should pay more to fly. Last month, Dr. Bharat P. Bhatta, associate professor of economics at Sogn og Fjordane University College, Norway, recommended that air ticket costs be calculated according to a passenger’s weight in a published research. 

Some major U.S. airlines have policies for passengers of size, requiring those who do not fit into a seat comfortably to buy a second seat.

Some travelers have criticized the weight-based fare concept. They argue that they should get a larger seat if they pay more than someone who weighs less and pays less for the same type of seat. 

Anyway, as a 5-feet, 100-pound person, I totally support this “pay-as-you-weigh” policy.

By Clara Tran

The profitable* Final Four

Four teams remain in the NCAA Men’s Division I basketball championships.

Tomorrow, the number one-seed Louisville Cardinals will square off against the upstart Wichita State Shockers, a nine-seed, for a spot in the national championship. Four-seeds Michigan and Syracuse will play for the other.

If your bracket had those teams in the Final Four, you are in the minority.

In a tournament that reminded us why it’s called 'March Madness', each will play out the Final Four in Atlanta, Georgia. A tremendous sporting event that is sure to draw massive crowds and excitement to the city.

An estimated 100,000 visitors will descend on Atlanta this weekend for the games and festivities. Hotel occupancy rates are through the roof, and the weekend is projected to inject $70 million into the local economy.

But is it all worth it?

At first glance, a major sporting event like the Final Four, the Super Bowl, or even the granddaddy of them all, the Olympics, seems like great exposure for a city. They bring crowds, dollars, and put them squarely on the national, and often international stage. Cities and countries compete fiercely over the right to be a host for such draws and attention.

However, there is much debate over what the true costs of hosting such events are.

In a 2003 report from the College of the Holy Cross, economics professors Victor Matheson and Robert Baade conducted a study of the economic impact on Final Four host cities from 1970 to 1999. In their model, the median estimated economic impact came out to a loss of $6.44 million. Even if a city came out even, they’d be considered lucky.

This problem isn’t just isolated to the Final Four, or the United States for that matter.

The Olympics are the biggest drainers. Every Olympic host city since 1960 has overspent their budget, by an average of 179 percent. The influx of cash from tourism is typically negligible, if not negative considering the costs going into the games and infrastructure. And in the long run, the total financial impact is usually adverse.

Commentators love to talk about how great the Final Four and like-events are for cities, just be ready to take those statements with a grain of salt.

This is not to diminish the all the great things that go along with an exciting weekend like this one, but there is hidden side to all the glitz and the glory.

- Logan Allen

Painting the Economic Picture

We've studied all the traditional economic indicators: Gross Domestic Product, the Consumer Price Index, consumer confidence. We've even studied some unique, superstitious indicators, like the Superbowl outcome and lipstick prices.  But I recently heard about another economic indicator, and I think it has the potential to paint an accurate forecast of the strength of the economy:

Paint prices.

Specifically white paint.

Apparently, titanium dioxide, a commodity pigment that is used for making white paint (and keeping your nose from getting sunburned), is a leading indicator for how the economy will boom or bust. It makes sense. White paint is used to paint cars, buildings, and commercial homes. So the price of the paint would reflect how much paint producers think should be made. So if the price of white paint goes down, it might forecast a drop in demand, and therefore a shift in supply-- think back to Econ 101, basic Supply and Demand curves.

So economists track the price of titanium dioxide as another way to tell what's happening in the economy.

Along those lines, the paint industry seems to be recovering with gusto after the housing bust in 2009.

Sherwin Williams closed at $165.62 yesterday. A year ago, the stock closed at $110.77, and the stock bottomed out at $42.19 in February 2009.  It has recovered nicely and its growth is outpacing that of the Dow Jones Industrial Average.

Another paint brand, Valspar, is seeing similar strength. The brand closed yesterday at $61.43. A year ago, it closed at $50.00, and it hit a low of $15.13 in March 2009. The brand is also outperforming the Dow Jones Industrial Average. 

I take it as a good sign. 

-Katy Stewart