Can We Blame Uncertainty for Drop in 4th Quarter GDP?

Wednesday’s news wasn’t the best.

For the first time since the recession ended, the economy contracted in the fourth quarter – it decreased at an annual growth rate of 0.1 from the third quarter.

Why?

There are the concrete numbers – spending cuts reduced national defense expenditure by 22.2 percent and exports fell by 5.7 percent. But that is only half the story.   

Uncertainty surrounding the fiscal cliff is presumed the other player.

But a recent article by David Wessel of The Wall Street Journal claims the opposite is true.

A recent survey by the National Association for Business Economics found three-quarters of respondents said the uncertainty surrounding the fiscal cliff had no effect on hiring or spending. Yet, time and time again, reports in the Federal Reserve’s most recent Beige Book cited it as a reason to hold off on in the same two categories.   The reports don’t exactly line up.

So how could uncertainty play into the coming year? Is it even a factor to consider at all?

As Wessel points out, we know what the tax rates will be for 2013.  We know the federal government won’t shut down – well, at least until March.

At the moment, the numbers – aside from GDP – are telling a good story.  The stock market is humming, the housing market is picking up, and auto sales aren’t too bad either.  The Federal Reserve put tied interest rates to the unemployment rate, announcing a target number for the first time in its history.  So borrowing is guaranteed to be cheap for a while longer.

With information, consumer confidence should return in full force. But most analysts predict a steady economic growth rate in keeping with the 2.2 percent growth we saw this year.  Will less uncertainty make a difference? Only time will tell.

Read David Wessel’s story here: If We Can’t Blame Uncertainty, What Is Weighing On Growth?

- Courtney Ridenhour

Oh No! Not the Wings!

As Super Bowl XLVII fast approaches, crisis looms over football fans. In a recent article in USA TODAY, reporter Oliver St. John announced the ever-popular Super Bowl party snack, the buffalo wing, has increased its prices due to the hard drought farmers experienced this past summer.

According to the National Chicken Council (first of all, who knew there was such a thing?), the amount of wings to be sold for the Super Bowl has decreased by 12.3 million. That, is a lot of buffalo wings.

The drought caused problems for the buffalo wing because it forced farmers to reduce their chicken stock because of the increased prices in chicken feed. Being from Wisconsin, I can relate to the fact that many crops suffered in the drought. Farmers were forced to sell their crops and produce for more, which made the grocery stores and restaurants charge customers more to make that profit.

With the decrease in the number of chicken comes the increase in prices of wings sold in restaurants, grocery stores, and even McDonald's. Restaurants are wary to increase prices, but have chosen to do so anyway in order to keep their businesses alive. For example, Anchor Bar, the "original" birthplace of the buffalo wing in Buffalo, NY chose to increase overall menu prices to encompass the rising chicken prices so their famous item could remain at the standard price.

Like many aspects of the economy, cause and demand is relevant for agriculture. As prices of items go up, we try to buy less or fork over that extra amount of money. Buffalo wings are not the first food to take an economic hit.

However, other restaurants are offering up alternatives to the tasty Super Bowl snack with sliders, boneless wings, and a plethora of dips.

In my own opinion, there is nothing quite like the sticky barbecue fingers being thrown in the air upon your team's touchdown. Sliders require concentration, chicken nuggets just aren't the same; wings require just as much stamina and endurance as the football game on TV (okay, that's an exaggeration, but you get the idea).

I say, go out and buy those wings, no matter the price. If Super Bowl ads cost about $3.7 million per 30 seconds during this time of the year, I don't think $2.00 wings will break the bank. As economists all over predict a moderate growth for 2013, I think we can all breathe a little easier for next year's Super Bowl snack.

(Oh and go 49ers!)

Katie Ackell

Sick-onomics

The unprecedented flu epidemic on campus that we're witnessing illustrates an economic phenomenon, and I wouldn't have realized that had a freshman boy not articulated it between sniffs and coughs in our accounting class the other day:  "I wouldn't have come except I just can't miss class." 

He was faced with the decision of how to exchange "resources" (time and energy, in this case) for some kind of benefit (enhanced knowledge of debits and credits).  

His insight illustrated the economic concept of the "opportunity cost." When you make a decision, you inherently give something up. He deemed the missed notes and attendance too high a price to pay to warrant staying in the dorms, resting and recovering. 

But he also demonstrated another economic concept, because his choice created "negative externalities". Externalities are unintended consequences associated with economic decisions.  By coming to class, he brought germs into the air in the room, onto the desks and on any door handle he touched on the way. He also created noise of sneezing and coughing, and possibly detracted from the overall learning environment by introducing distractions and not participating and offering the benefits he might have otherwise brought.  

According to W&L Professor James Kahn's economics textbook, The Economic Approach to Environmental and Natural Resources, externalities must be unintended, be real and not monetary consequences, and must affect production and utility.  I think this boy's action meets all three of these conditions. He didn't come to class with the intention of getting other people sick--I hope!  The externalities were real variables-- he didn't create an unintended price change in the supply and demand for accounting lessons, he just brought germs to class.  And last, the externality affected the production and utility function of the "classroom market," because I, for one, spent the class thinking of hand sanitizer, not income statements.

I know this sounds like more of a complaint than an economics lesson but this poor little freshman's decision-making process showed how people act in their own self-interest without considering the social cost of decisions.  This is true with gasoline consumption, pollution creation, and any other economic decision that creates externalities... the market cost doesn't equal the full social cost because it's hard to put a price tag on pollution, water quality, or germy air. 

For the greater good of the campus, the "market" must change to prevent negative externalities, meaning that the academic environment shouldn't be so intense that the opportunity cost of healing and getting better is too high for students. 

-Katy Stewart 

Go 49ers

In this Super Bowl season, investors should hope for the San Francisco 49ers of the NFC to win the big game. The quirky economic indicator goes like this: should the team from the old AFL, now the league's AFC, win the Super Bowl, the stock market will go down in the coming year. Should a team from the old NFL (now the NFC) win the game, the stock market will see a rise. According to Investopedia, the Super Bowl indicator has about an 80% accuracy rate, but economists hardly believe significantly in any correlation. An anomaly for consideration: in 2008, the New York Giants upset the previously undefeated New England Patriots in the Super Bowl. The Giants are in the NFC, but the stock market followed with its worst crash since the Great Depression.
This year's game is between the Baltimore Ravens and the 49ers, pitting brother against brother as head coaches of the two teams. If 80% accuracy is legitimate enough for economists to pay attention to, the 49ers will have some fans on Wall Street. 
Advertisements during the Super Bowl are the most coveted advertisement time slots on television at any point during the year, as over a hundred million people are expected to tune into the game. Selling the advertisements can itself be an economic indicator. In recent years, companies have scaled back the advertisements as the recession affected all phases of production, and some firms saw approximately $3 to 4 million per 30 second time slot as too steep of a price. For the 2011 and 2012 Super Bowls, however, hosting television networks saw major companies coming back, more willing to pay big money for ads as the economy climbs back to strength. CBS is predicting even stronger interest in advertisements in 2013.
The Super Bowl isn't unemployment or retail sales as an economic indicator, but it is an unofficial American holiday. Super Bowl Sunday is a huge single day for the economy and particular industries, like pizza delivery and alcohol. As far as the stock market goes, money-makers will be pulling for the NFC every time.

-Hamlet Fort

Ron Paul: Freedom from Government

Yesterday evening, January 15, 2013, Contact Committee brought former Texas Congressman Ron Paul to the Washington and Lee campus.  Having spent about 25 years in the House of Representatives and having led a handful of bids for the Republican nomination for President, Congressman Paul is known for his emphasis on freedoms, civil liberties, and as little government involvement as possible, all of which were expressed in his address to a packed Lee Chapel last night. 

            Touching on every imaginable issue facing Congress today, Congressman Paul discussed everything from abortion to war to the housing bubble in the last decade to legalization of marijuana.  Specifically in regard to the economy, he generally criticized Congress for their false understanding of economic policy.  Although he believed everyone in Congress to be Keynesian economists, Congressman Paul expressed that freedom and the free marketplace are the most important economic policies to implement and to maintain in the United States.

            Also known for his harsh criticisms of the Federal Reserve, Congressman Paul expressed last night that he thinks the Federal Reserve will end itself and that there is no need for a central bank.  He mentioned that the Federal Reserve and Chairman Ben Bernanke printed $15 billion “out of thin air,” during the recession.  This sort of leadership, Congressman Paul said, is not sustainable.

            “The last thing we need is the government getting involved,” Paul said, a sentiment that is the basis for most of his political philosophy.  In regard to banking, he thinks competition should be allowed among banks and that government should not bail them out, when they make mistakes.  Furthermore, because of the actions of Congress and the Federal Reserve, Americans are losing their purchasing power, and the middle class is hurting because of it.  The fewer government regulations there are and the smaller the role the government plays, the more prosperous our country will be.

            This political philosophy of minimal government influence was expressed in every topic he discussed.  You should be able to smoke marijuana as long as you don’t hurt anyone around you.  Everyone is allowed to have their own definition of marriage.  Less war is a “worthy goal.”

            With officials elected to Congress seemingly perpetuating the legacies of stalemate and gridlock they inherited, Congressman Paul seemed to represent an outlook that, perhaps, more politicians should adopt.  Not in his political philosophy, but in his attitude toward change of how leadership operates in Washington.

Emily Spanyer