How a heat wave impacts the economy

It’s been over ninety degrees for days. If you are like most of us, it’s a bit harder to give it your all at work, even if you have an air-conditioned office job. Now imagine the same thing happening to millions of workers all over the nation. Heat waves like this one can have a devastating effect on productivity. As the thermometer climbs, workers feel decreased energy. Loss of concentration, muscle cramps, heat rash, and, in some cases, heat exhaustion or heatstroke. The impact is even worse if you live in a big city. If you have ever walked down a mid-town street in Manhattan or Boston on a hot summer day, it feels like an oven. That’s because it is. Concrete, asphalt, underground pipes, heating systems and subways conspire to raise the outside temperature exponentially. Throw in bumper-to-bumper traffic, and you have a virtual cauldron. Cities, by their nature, have high concentrations of people, infrastructure, and productive activity so any kind of disruptions can have a large impact on the economy. Energy costs are a big factor in times like this. The AC in offices, homes, commercial establishments, restaurants and shops are cranked to the highest levels. This year, as oil prices hit their highest levels in years, the impact on a business’s profits will be even greater. In many areas of the Midwest and Northeast, power consumption is hitting record levels. Obviously, consuming tons of AC will have a short-term impact on your power bill, but there are long-term costs as well. Heavy electricity use strains the power grid, forcing many utility companies to revert to using...

Currencies and trade wars

What’s up with the dollar? The greenback is strengthening and is having its best quarter since 2016 against an array of foreign currencies. Is this an accident, or is it something far more dangerous? Economists will tell you that the Trump tariff crusade is responsible. New trade barriers, which the president is suggesting, would usually lead to higher prices at home, according to economic doctrine. Products we import would cost more, whether we are talking about steel, automobiles, or baseball caps. As prices increase, so should the U.S. inflation rate. As inflation rises, bond holders will demand higher interest rates to keep up with inflation. In turn, higher interest rates would normally lead to a stronger dollar. In the real world, this explanation is not so cut and dried. There could be any number of macro scenarios that I could spin, which could alter the dollar’s rise. For example, the Fed (which controls U.S. interest rates) could decide not to raise interest rates for other reasons. The impact of tariffs might also end up being so minor that prices barely budge. In other cases, break throughs in technology (such as oil and gas fracking) or in a manufacturing process could lower the cost of certain products even while others are going up due to the tariffs. The dollar’s strength or weakness will also depend on what is happening overseas. The economic conditions of other nations will impact their own currencies relative to ours. In many countries, the exchange rate is not determined by market forces, as is the greenback. In many cases, currencies are controlled by a central government....

The next recession

Over half the economists on Wall Street believe that by the end of 2020 we will experience our first economic downturn in years. If so, when might you begin to prepare for a rocky two-year period for all of us? The good news is that we still have another year or so of stock market gains, job growth and more importantly, wage growth. As it stands, the U.S. is currently enjoying its second-longest economic expansion in history with an unemployment rate that hasn’t been this low in decades. Wage growth, after languishing for years, is expected to top 3% by the end of 2018, while GDP could achieve greater than 3% this year and a further 2.5% next year. So how does an economy go from blue skies to dark clouds in so short a time? This economic expansion is now entering its final stage, according to economists. As the good times grow, investors and consumers tend to overborrow and overspend. That’s human nature, but it almost always leads to inflation rising, which touches off a rise in interest rates that ultimately slows the economy. By that time, consumers are back in debt and paying more interest on that debt, while corporations are stuck with an overabundance of goods produced that no one wants. So, everyone pulls back, causing the economy to slow, and the rest is history. Normally, a recession will span a year or two before the economy recalibrates. In the meantime, the stock market falls anywhere from 15-30% and the mood is somber. I have seen it repeatedly in my career. And yet, for some reasons,...

The opioid effect

Opioids are killing us. Both literally, as well as from an economic point of view. The economy has already suffered over $1 trillion in lost potential and those losses appears to be growing by the hour. Last year, 62,000 Americans fatally overdosed on some form of opioid. It is getting to the point that almost every one of us knows someone who is either addicted or died from these drugs. However, while death is a tragedy, we tend to ignore how much this problem is costing our society. “You can’t put a price tag on the death of a loved one,” we say, but actually we can. It’s called the “value of a Statistical Life,” or VSL. Federal agencies routinely use VSL measures in estimating the expected fatality risk-reduction benefits of a proposed safety regulation. It is based on studies that track how individuals trade off wealth for reduced mortality risks. For the most part, the riskier the job, the more income a worker will demand to do it. Recently, the President’s Council of Economic Advisors incorporated this concept in assessing the economic costs of the opioid crisis. They found that for years, we have been underestimating the price tag of this crisis by not including VSL. To put this in perspective, in the next two years alone, by applying the concept of VSL the opioid crisis will cost the United States over $500 billion. Let me explain why: As more and more young people succumb to this scourge, the economic costs begin to accelerate year after year. Statistically, the average age of overdose victims is about 41 years...

Free trade versus fair trade

In today’s world, talk of tariffs is part of daily news headlines. Politicians use terms like “free” and “fair” almost interchangeably in discussing trade to justify their position for or against tariffs. Maybe it’s time to review the difference between the two concepts. While they may sound similar, free trade and fair trade are often at opposite ends of the pole. Free trade is a world where the gloves are off. It allows international cut-throat competition where the marketplace can drive the cost of products way below the price where anyone can make any money. Free trade makes things cheaper including the money we earn to produce those goods. Fair trade, on the other hand, is in the eye of the beholder. What may seem fair to you or me, may be the opposite from someone else’s point of view. That’s because fair trade places all kinds of restrictions on producers of goods and services. Overall, fair trade tends to make goods more expensive. That’s because it costs more money to guarantee a minimum wage or make sure that a coal mine or steel mill’s working conditions are safe. However, throughout history and into the present day, both concepts are abused quite often. Take our country’s attitude toward trade. After World War II, for example, North America was the only continent left standing. Europe, Asia and everywhere in-between had been decimated by warfare. Our allies needed help and free trade seemed to be the best answer to rebuilding the world in the shortest time possible. It was the age of Japanese transistor radios, cheap autos from Europe, and U.S....

Trade Wars: Episode II—attack of our trading partners

Last week’s spur of the moment announcement by President Trump that he plans to implement a 25% tariff on steel and 10% on aluminum imports sent the world into a tail-spin. This week, the world fired back and everyone from the Republican Party to the European Union is threatening dire consequences if the President follows through with his proposal. Clearly, tariffs on steel and aluminum benefits the few at the expense of the many. There are roughly 300,000 jobs and a handful of companies that would benefit from these tariffs. On the other side, 6 million jobs and countless industries would be negatively impacted by the inevitable rise in domestic steel (and aluminum) prices. Overseas, the response has been rapid. The EU promised to raise tariffs on motorcycles (manufactured in Paul Ryan’s state). The normally laid back Speaker of the House suddenly found his voice and has clearly stated his opposition to the tariff idea. American bourbon (produced in Senate leader Mitch McConnell’s state) was another target of Europe’s ire. The war of words has escalated and now includes threats on both sides to raise tariffs on automobiles. Now, that starts to get serious, since world trade in automobiles is a big factor for most developed countries’ gross domestic product. It is also quite complicated since auto parts can be manufactured just about anywhere and assembled somewhere else. A trade war in autos would be the world’s equivalent of a death star. The discord among supporters and detractors reaches all the way to the White House. Gary Cohen, the President’s Economic Council, resigned in protest. Even some of Trump’s...