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Tag: Economics

  • FHFA’s Changes to Mortgage Fees Increases Risk in the Housing Finance System

    FHFA’s Changes to Mortgage Fees Increases Risk in the Housing Finance System

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    BYLINE: Clifford Rossi

    By Clifford Rossi

    On May 1, 2023, a set of new, loan-level price adjustment (LLPA) grids for mortgages purchased by Fannie Mae and Freddie Mac mandated by the Federal Housing Finance Agency (FHFA) will go into effect. FHFA’s director stated that the rationale for these changes is “to increase pricing support for purchase borrowers limited by income or by wealth.​”  

    Unfortunately, the FHFA has subverted the economically sound practice of risk-based pricing and in the process has undermined incentives for borrowers to improve their credit.  

    Imagine that as a safe driver over the years, you’ve enjoyed lower auto insurance premiums than riskier drivers. Then one day, you receive a notice that your premiums, with never having had an accident or moving violation, are going up 300%. Further, you find out that your new premiums are going to subsidize drivers with riskier driving habits and records. Essentially that’s what the FHFA is doing for mortgage borrowers.

    Differential or risk-based pricing of key attributes describing the degree of credit risk in a mortgage has been in place for years. Both Fannie Mae and Freddie Mac charge ongoing guarantee fees to compensate the agencies for credit risk on mortgage loans purchased from lenders. Those guarantee fees are based on the risk attributes of those loans and are embedded in a borrower’s mortgage rate. In addition, upfront delivery fees, or LLPAs, are imposed on selected risk attributes such as credit score, loan-to-value (LTV) ratio and loan purpose (e.g., purchase of a home or refinance). 

    The new LLPA grids differentiate risk via a fee based on whether the borrower is purchasing the home, refinancing the mortgage with limited cash taken back out, or a cash-out refinance. The current LLPA grids are risk-based in the sense that higher fees are assigned to riskier FICO and LTV cells. However, the new grids will increase the cost of borrowing for a sizable borrowing cohort that presents very low credit risk while greatly lowering the cost of borrowing for borrowers that pose significant credit risk to Fannie and Freddie.

    The changes between the current and new LLPA grid for purchase mortgages are shown in Table 1 below. The cells shaded in red depict increases in LLPAs while cells shaded green represent decreases.  Borrowers with credit scores between 720-759 with LTVs between 80.01- 85% will go up by .75% from .25% to 1%, or a 300% increase on May 1, for example, while borrowers with credit scores less than 620 with LTVs above 95% will drop by 2%.  

    To put this in perspective, according to Fannie Mae historical credit performance data, borrowers in the low-risk group had a net loss rate of .29% while the high-risk group’s net loss rate was 2.09%, or more than seven times the low-risk cohort. Similarly, the high-risk group has a historical late-stage (i.e., more than 180 days past due ever) that is 6.5 times the rate of the low-risk group on loans originated between 1999-2022. Credit risk clearly does not increase in a linear fashion with credit score and LTV but rather results in a sharp acceleration when lower credit scores are combined with higher LTVs.  Lowering fees invites more high-risk borrowers into the credit portfolios of both GSEs though they represent a very small portion of new GSE-eligible mortgages.  More than 25% of prospective borrowers will face an increase in LLPAs while borrowers with credit scores less than 660 make up about 2% of new originations.  

     

    Figure 1: Changes (in percent) in LLPAs Between Current and New Grids

    Note: numbers in red represent high risk credit scores or LTVs and blue represents high risk combinations of credit score and LTV.

    Table 2 provides a sense of the impact of these changes on borrowers taking out a 30-year fixed-rate mortgage assuming a loan size of $300,000 and a mortgage rate of 6.4%. Borrowers with FICOs between 720-759 with LTVs of 80.01-85% would see an annual increase of about $360 or about a 1.6 percent increase in their payment overall.  While this does not seem to be a substantial increase, on top of higher mortgage rates and inflation already embedded in the economy, it creates an additional financial headwind for these borrowers.  

    A countervailing argument can be made that higher risk borrowers will see significant reductions in their mortgage payments and that the risks to the GSEs from attracting more of these borrowers into their credit portfolios are offset by higher fees on the low credit risk borrowers.  Still, such a policy puts many high-risk borrowers at risk given their risk profile at the wrong time of the economic cycle.

     

    Table 2: Change in Monthly Mortgage Payment Under new LLPAs

    The FHFA forced both GSEs to essentially flatten the actuarially fair pricing relationships of credit score and LTV to credit risk for the sake of improving housing affordability of borrowers with poor credit characteristics. However, that policy does nothing for higher credit risk borrowers to improve the long-term sustainability of retaining their home once the loan is made. We found out during the years leading up to the 2008 Global Financial Crisis that policies intended to help marginal borrowers become homeowners ultimately resulted in many heartbreaking stories of foreclosure. While supporting homeownership across all communities and incomes is a laudable objective, imposing affordable housing policy on risk-based pricing is ultimately an ineffective policy mechanism that comes at the expense of burdening a large segment of borrowers including those intended to fare better after May 1.  

    Clifford Rossi is a Professor of the Practice and Executive-in-Residence for the University of Maryland’s Robert H. Smith School of Business. He has nearly 25 years of experience in the financial services industry where he held senior risk management positions at several of the largest financial institutions including Fannie Mae and Freddie Mac.

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    University of Maryland, Robert H. Smith School of Business

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  • Wealthy white homeowners more likely to see financial benefits from land conservation, study shows

    Wealthy white homeowners more likely to see financial benefits from land conservation, study shows

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    Newswise — KINGSTON, R.I. – April 25, 2023 – Land conservation projects do more than preserve open space and natural ecosystems. They can also boost property values for homeowners living nearby. But a new study finds that those financial benefits are unequally distributed among demographic groups in the U.S.

    The study, by researchers from the University of Rhode Island and University of Illinois Urbana-Champaign, found that new housing wealth associated with land conservation goes disproportionately to people who are wealthy and white. In the state of Massachusetts, for example, white households in the top wealth quartile received 43% of the roughly $63 million housing wealth generated by new conservation from 1998 to 2016. That’s 140% more than would be expected under an equal demographic distribution, the researchers found. The trends found in Massachusetts hold generally over the rest of the U.S., the study showed.    

    “There’s a lot of economic inequality in the U.S. and we show that, unfortunately, conservation is adding to that,” said Corey Lang, a professor of environmental and natural resource economics at URI and a study coauthor. “That’s not to say that conservation is bad, or that we shouldn’t do it. Our primary purpose with this study was to document these disparities, and hopefully spark some debate about it.”

    The findings are published in the Proceedings for the National Academy of Sciences.

    The U.S. Forest Service estimates that about 6,000 acres of open space in the U.S. are cleared for development each day. But across the nation, organizations like municipal land trusts are working to set aside land, protecting it from future development in perpetuity. Over the past 35 years, over $80 billion in conservation funding have been approved by municipal referenda across the U.S., the researcher say.

    Those conservation efforts produce amenities that are attractive to homeowners. Conserved land provides peace and quiet, beautiful views, and recreation opportunities that are guaranteed for the foreseeable future. The value of those amenities is reflected in higher property values for people living in the vicinity.

    “Economists have studied this for a long time as a means of understanding how people value land conservation efforts, which can be fed into a cost-benefit analysis to see if new conservation efforts are justified,” Lang said. “We take a different approach in that we look at which homeowners are more likely to receive that bump in equity.”

    To do that, the researchers looked at detailed conservation records and anonymized demographic data for homeowners in Massachusetts. The team used an econometric model to estimate the extent to which land conserved between 1998 to 2016 added to the value of properties within a quarter mile of conservation areas. They found that each acre of conserved land increases the value of nearby homes by 0.018%. That means that a median-priced Massachusetts home located near 10 acres of conserved land gets a bump in value of around $659. That translates into roughly $62 million in conservation-related property wealth gains over the study period.

    Looking at the demographic breakdown of the homeowners who received that new wealth, the researchers found that 91% went to white homeowners, and 40% went to households in the highest wealth quartile. Roughly 43% went to households that were both white and in the highest wealth category—140% more than would be expected under an equal demographic distribution. In stark contrast, Black and Hispanic households in the lowest wealth quartile received only 6% of the benefits that would be expected under an equal distribution.

    The results aren’t necessarily attributable to any active or implicit discrimination on the part of conservation groups, the researchers say. The results can be shaped, for example, by several factors that yield patterns in where people live—with Black, Hispanic, and Asian households being less likely to own homes near conservation areas. Those patterns can emerge from racial and ethnic patterns of urban versus rural living in the state, and a paucity of conservable land in urban areas. There are also longstanding racial gaps in overall home ownership.

    Though the highly detailed data available for Massachusetts simply isn’t available for the rest of the U.S., the team performed an additional study to see if the Massachusetts trends likely hold across the country. They found that of the $9.8 billion in property wealth generated by conservation from 2001 to 2009 nationwide, 89% went to white households, 9% to Black and Hispanic households and 2% to Asian households.

    “Economists have done a lot to document disparities in exposure to pollution, but we know much less about equity in the distribution of the benefits from investments in valuable nature conservation,” said Amy Ando, a study coauthor who is a professor of environmental and natural resource economics at UIUC and University Fellow at the non-profit Resources for the Future. “These findings make clear there can be large environmental justice issues in who gains from the environmental goods we provide and protect, and may serve as a call for more research identifying other such inequities.”  

    Taken together, the researchers say, the results show that land conservation plays a role in maintaining wealth disparities across the U.S. While the researchers say they firmly advocate for land conservation efforts to continue, they don’t advocate any particular policy interventions to address the resulting inequity. They hope that the findings will broaden the conversation about land preservation to include issues related to distributional concerns.

    “I think more can be done to bring different groups to the table when decisions are made,” Lang said. “Making sure there’s a diversity of voices involved in these decisions is at least a start in addressing the problem that we’ve been able to document in this study.”

    The research was supported by the U.S. Department of Agriculture National Institute of Food and Agriculture (2018-67024-27695).

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    University of Rhode Island

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  • The Financial System’s New Vulnerability to Accidents Will Rattle Investors

    The Financial System’s New Vulnerability to Accidents Will Rattle Investors

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  • China’s GDP Beat Expectations. Why Alibaba and JD.com Are Falling.

    China’s GDP Beat Expectations. Why Alibaba and JD.com Are Falling.

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    Alibaba



    JD.com


    and other Chinese stocks fell Tuesday despite the country’s economy rebounding at a faster-than-expected pace in the first quarter.

    China’s gross domestic product (GDP) rose 4.5% in the first three months of the year, convincingly beating the FactSet economists’ consensus for 3.4% growth.

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  • Housing Costs Are Cooling Off. Where the Market Could Be Headed.

    Housing Costs Are Cooling Off. Where the Market Could Be Headed.

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    Housing inflation has remained hot in recent months—but it could be approaching a turning point, according to a


    Zillow


    economist. 

    Housing costs—both the cost of buying or renting—climbed earlier in the pandemic. While data show that prices in both categories have cooled in recent months, the industry’s contribution to inflation has remained hot. 

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  • Understanding the Law of Diminishing Returns | Entrepreneur

    Understanding the Law of Diminishing Returns | Entrepreneur

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    The law of diminishing returns is a concept of economics that every entrepreneur should understand.

    Also known as the law of diminishing marginal returns, this law helps entrepreneurs and economists gauge how much additional labor or capital should be invested before it becomes counterproductive.

    What is the law of diminishing returns?

    Manufacturers strive to increase production while reducing costs, desiring to maximize output. This is what the law of diminishing returns is used for — finding the peak of the marginal product.

    This description is written out in this simple formula:

    Output = variable inputs + fixed inputs

    It’s essential to understand this formula to numerically calculate the efficiency or productivity of any operation occurring within a business.

    How does the law of diminishing returns work?

    This law promises to deliver the best results when considering one or multiple units of input.

    This law, as discussed above, uses the effectiveness of variable and fixed inputs to find the peak amount of output.

    When you increase the amount of one factor of production while keeping other factors constant, there will come a point where the profit produced per unit of that factor will start to decrease — this is the point of diminishing returns.

    This occurs because the fixed factors of production become relatively less efficient at utilizing the additional input. The law of diminishing returns aims to find the peak rate of output increase right before additional inputs yield a decreasing rate of marginal utility.

    What’s an example of the law of diminishing returns?

    Consider the following example to better grasp the law of diminishing returns.

    Say your variable factor of production is the number of workers measured in units of labor. Adding additional workers will, up to a point, yield an increasing rate of output.

    However, at the point of diminishing returns, each extra unit of labor (every additional factor of production) will yield smaller increases in returns.

    Since the wage you pay remains the same, you are increasing your cost of production in a manner inconsistent with your rate of product increases.

    What’s the difference between diminishing marginal returns and returns to scale?

    These two concepts are often thrown around and misunderstood but are crucial to understanding the concept of marginal returns.

    Diminishing marginal returns happen when a business increases one singular input while maintaining all other inputs.

    The marginal output from that input will always eventually start to decline. This only occurs because that one singular input is affected, eventually decreasing it. That is diminishing marginal returns.

    Returns to scale describe the relationship between a proportional increase of all inputs, thus increasing or decreasing the output. If the increase in output is proportional to the increase in inputs, then the business identifies this relationship as “constant returns to scale.”

    If the output exceeds the input increase, it is “increasing returns to scale.” And if the output is less than the input increase, you have “decreasing returns to scale.”

    Related: How to Manage the Supply and Demand of New Content

    What is an optimal result?

    The optimal result occurs when the marginal cost of one additional unit produced equals the marginal revenue from that output.

    This is because when marginal cost equals marginal revenue, the firm is producing at the point where it is maximizing its profits.

    Below optimal results

    This is what you would assume: When a business produces below the optimal level of output, it will not be making as much profit as it could be. These are below optimal results, and this is what businesses should be looking to avoid.

    Optimal results

    A business seeking optimal results should identify where the marginal cost of producing an additional unit of output equals the marginal revenue from that unit.

    This is the point where the company is maximizing its profits. Beyond this point, adding more inputs will lead to diminishing marginal productivity and a decrease in profit.

    Diminishing marginal productivity

    This marginal productivity refers explicitly to decreasing the additional output or productivity that occurs when applying an input while holding all others constant.

    At this point, the input increases too much and is, in effect, nullified: The input is oversaturated, and the output no longer increases. Too many workers can cause crowding, too much pesticide can kill crops and too much energy can cause an explosion.

    Related: How Businesses Can Leverage Tech for Optimal Business Insurance

    What is the difference between diminishing vs. negative productivity?

    Yet again, these two related yet distinct ideas can help you further your understanding of this law and how to apply it in your specific business situation.

    Diminishing productivity occurs, similar to diminishing returns, when one input is changed while the others are fixed. Diminishing productivity, however, refers to the actual input being changed, specifically when it diminishes the output. It has to do with the rate of production results.

    Negative productivity occurs when the total output decreases due to increasing inputs.

    This can happen for various reasons, but negative productivity is the opposite of productivity growth and represents a decrease in a producer’s efficiency. Negative productivity means negative returns.

    What is the history of the law of diminishing returns?

    During the Industrial Revolution (1760-1840), there was a rapid increase in both productivity and output. This was due to technological innovations and advancements in machinery.

    Consequently, the law of diminishing returns was more emphasized because of its relation to efficiency in the production process.

    Many authors and classical economists also developed this law throughout the revolution and beyond. Such names include Jacques Turgot, Thomas Robert Malthus and David Ricardo, who all specialized in economic theory.

    This revolution and the form of government America operated under brought about a significant increase in specialization.

    While this allowed for the division of labor and even more significant technological advances, this also created issues when managing the inputs and streamlining production to an optimal level.

    Related: How the Next Industrial Revolution Will Impact Our Future

    What are some use cases for the law of diminishing returns?

    So many understood laws and theories come into play here, but there are also numerous examples to observe when trying to comprehend this economic law.

    Social media marketing

    Social media campaigns are a great example. Any advertisement desires to get its total product seen and purchased. However, there are only so many effective ways to utilize the tools and maximize their reach with their budget.

    The quality of content is one type of input that affects this optimal result of traffic and sales. Any successful ad campaign requires quality advertisements that need time, investment and creation to be effective. So, a company needs to invest in quality advertising content creation.

    However, after investing and creating, they notice that the incremental gains from their efforts start to decrease. Despite continuing to invest the same amount of resources, they are not gaining as many likes, shares or comments as initially.

    This can be due to several things. The law of diminishing returns helps here by addressing possible factors and inputs.

    Various strategies might include:

    • Experiment with different content formats, such as videos or live streams, to keep the audience engaged.
    • Targeting a new audience segment or expanding their reach to different platforms, such as Instagram or Twitter.
    • Analyzing their metrics and performance data to identify which aspects of their campaign generate the most significant impact and optimize their efforts in those areas.

    The law of diminishing returns can help by considering all inputs, especially the most effective ones, to have a successful campaign by achieving that optimal result.

    Agriculture

    Another great and easy way to remember this law is through a farm as an example. This is a constant problem that farmers address to have the most efficient farm to produce the most money possible.

    Take, for instance, a farmer who wants to increase their crop yield by adding more fertilizer to their fields. Initially, adding fertilizer will result in a proportional increase in crop yield.

    However, at a certain point, adding more fertilizer will not result in a proportional increase in yield; the farmer will start to experience diminishing returns. The farmer needs to experiment with the amount of fertilizer in their fields to have the maximum crop yield.

    When the optimal yield has been found for fertilizer use, there are many more things a farmer can experiment with.

    They can try the following:

    • Conducting regular soil tests to determine the optimal amount of fertilizer needed for their crops.
    • Rotating crops to prevent nutrient depletion and maintain soil health.
    • Using precision agriculture techniques, such as variable rate application, to apply fertilizer more efficiently and effectively.

    What is essential to understand is that, in both cases, you can only find the optimal return through experimentation. There is rarely only one factor that affects factors of production.

    What does the law of diminishing returns mean for you?

    With this knowledge, you can maximize the efficiency of your business. It’s as simple as that.

    As a business owner, the law of diminishing returns means that there is a point beyond which investing more resources in a particular area of your business will result in a less proportionate increase in output or revenue. This principle can help calculate profitable business decisions in the long or short run.

    With these inputs, you must know how to steward them, which means knowing what lack and excess mean for your situation.

    By considering the law of diminishing returns when making business decisions, you can make more informed choices about allocating your resources to optimize your business’s profitability and growth.

    Check out Entrepreneur’s other articles for more information about economic laws and other financial topics.

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    Entrepreneur Staff

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  • New Braintrust Seeks to Launch Era of North American Regional Competitiveness

    New Braintrust Seeks to Launch Era of North American Regional Competitiveness

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    Newswise — Given the U.S.-China trade conflict and concerns over trade disruptions caused by Russia’s invasion of Ukraine, regionalizing supply chains is at the center of the discussion in North America. Now, a new working group spearheaded by the University of California San Diego is using this opportunity to propose policy recommendations for the relocation of global production chains in North America where it’s economically advantageous.

    The working group is a partnership between Center for U.S.-Mexican Studies (USMEX) at UC San Diego’s School of Global Policy and Strategy, the George W. Bush Institute, Canada’s Future Borders Coalition and the Mexican Council on Foreign Relations.

    “U.S. and China decoupling has prompted renewed interest in integrated North American trade and investment as well as considerations of a broader economic community that could include Central American nations,” said Caroline Freund, dean of the School of Global Policy and Strategy and working group member. “Our group is poised to propose policy approaches to ensure that the current opportunities strengthen North American economic integration, boosting the productivity, prosperity and competitiveness of the U.S., Mexico, Canada and neighboring countries.”

    The group hopes U.S. economic leadership can launch a new era of North American competitiveness. They cite President Joe Biden’s two signature legislative accomplishments, the CHIPS and Science Act (CHIPS Act) and the Inflation Reduction Act (IRA), which are aimed at strengthening the U.S. industrial base, particularly regarding the manufacturing of semiconductors, electric vehicles and products related to clean energy and the decarbonization of the U.S. economy.

    The consensus in Washington, D.C., that China represents a strategic rival to the U.S. also calls for exploration of stronger supply chains in North America, according to Rafael Fernández de Castro, director of the Center for U.S.-Mexican Studies and member of the group’s steering committee.

    “These regional opportunities are rare events in a century — North America cannot waste this opportunity,” Fernández de Castro said. “Our working group is developing a road map so that nearshoring becomes a reality for the region.”

    The timing is bolstered by North American alliances. Both Canada and Mexico have proved their worth as essential partners for U.S. supply chains because of their geographical location as neighboring countries, reliability as partners, complementary economic strengths and the framework provided by the United States-Mexico-Canada Agreement (USMCA).

    Although Central America has a narrower industrial base, it also presents cost and access advantages that make it a strong potential link in North American supply chains.  

    Members of the working group have backgrounds in government, academia, non-governmental organizations and private sector. They include the former Deputy Prime Minister of Canada Anne McLellan, former Undersecretary of Foreign Trade in Mexico Juan Carlos Baker, as well individuals from the Mexican firm Deacero and Harvard Kennedy School.

    “We have assembled a fantastic brain trust led by three women with very distinguished careers in public service and think tanks in Canada, the U.S. and Mexico to chair the working group: Louise Blais of the Business Council in Canada, Luz María de la Mora of the Atlantic Council and Shannon K. O’Neil of the Council on Foreign Relations,” said Cecilia Farfán-Méndez, head of research at the Center for U.S.-Mexican Studies and steering committee member. “Under their leadership, we are convinced the group will produce clear, implementable recommendations for the benefit of the North American region.”

    The working group will meet virtually during 2023 and will issue a series of policy recommendations in early 2024 — a key year for North America, since both Mexico and the U.S. will hold presidential elections.

    For information on the working group, go to this website.

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    University of California San Diego

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  • Out of the shadows and into the Light: UniSA reopens historic haunt as new Enterprise Hub

    Out of the shadows and into the Light: UniSA reopens historic haunt as new Enterprise Hub

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    Newswise — From publicans and pawnbrokers to vampires and exotic dancers, Light Square has a long and colourful history of interesting residents.

    Now, a new breed of business will occupy the north-western corner of Light Square as UniSA unveils its new state-of-the-art enterprise and innovation facility.

    Aptly named the UniSA Enterprise Hub, this collaborative space is a far cry from its heydays as the raucous Le Rox nightclub, or the ghoulish Night Train Theatre restaurant.

    Instead, the Enterprise Hub is designed to help businesses thrive by connecting them to UniSA’s renowned researchers and knowledge experts to help solve complex challenges and produce mutually beneficial outcomes for industry and society.

    Located in the heritage-listed premises of 9-19 Light Square, the Enterprise Hub officially opens on Friday 24 March.

    UniSA Deputy Vice Chancellor: Research and Enterprise, Professor Marnie Hughes-Warrington, says the  Enterprise Hub is South Australia’s ‘front door’ for industry to develop, and to extend partnerships, with the University community.

    “Industry professionals can come into the Hub with problems, projects and ideas, and our team will collaborate with them to produce cutting-edge solutions,” Hughes-Warrington says.

    “Our goal is to accelerate the strengthening and diversification of the South Australian economy, and to export SA innovations across Australia and the world.”

    UniSA currently collaborates with more than 6500 partners from industries including space, defence, manufacturing, agriculture, health and medicine.

    The re-build and refurbishment of the Light Square premises has transformed the iconic red brick building into a modern two-story hub, boasting workshop areas, laboratories, 3D printing facilities and co-working spaces.

    Enterprise Hub Director, Peter Stevens, says while the Enterprise Hub has undergone a significant facelift, the new facility pays tribute to the building’s legacy.

    “Nine Light Square has a rich, colourful history, and we wanted to memorialise this as much as possible,” Stevens says.

    “Of course, the red brick and vast arch windows have remained, but we have also incorporated iconic relics into the final design

    “We’ve kept the huge ‘bird cage’ that adorned the entrance to the nightclub, the eccentric vampire artwork from the 90’s Night Train scene and the original loading beam from the building’s construction in 1912.”

    Australia’s Managing Director of Operations at the Fortune 500 company Accenture, Michelle Cox, says the opening of UniSA’s Enterprise Hub is a historic milestone for industry and research alike.

    “We have been collaborating with UniSA since 2021 and in that time, we have worked with UniSA to disrupt the business sector, and, more recently, the technology and space industry,” Cox says.

    “By connecting Accenture with UniSA staff, we’re able to generate innovative solutions for our company, and wider industry, while also creating new jobs. 

    “This ‘outside-in’ approach will pave the way for significant industrial development thanks to its unique focus on enterprising research capabilities.”

    The UniSA Enterprise Hub at 9 Light Square opened with a launch event on Thursday March 23, where key industry partners and government stakeholders attended. This event also had a Kaurna smoking ceremony and a naming ceremony and official welcome. The building officially re-opens to the public on March 24.

     

    Notes to editors:

    • UniSA has high-res photos available for request. Email [email protected] for access or call +61 457 289 282.
    • Further background and history on the Enterprise Hub can be found here

     

    Contacts for interview:

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    University of South Australia

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  • Upward trend in ‘deaths of despair’ linked to drop in religious participation, economist finds

    Upward trend in ‘deaths of despair’ linked to drop in religious participation, economist finds

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    Newswise — Over the past 20 years, the death rate from drug poisonings in the U.S. has tripled and suicide and alcoholic liver disease death rates have increased by 30 percent — particularly among middle-aged white Americans, according to studies by the National Center for Health Statistics. 

    Further evidence shows that these dramatic changes in mortality rates within American communities actually began in the late 20th century, but researchers have been unable to pinpoint a cause for these “deaths of despair.” 

    To fill that gap in understanding, Daniel Hungerman, professor of economics at the University of Notre Dame, and his co-authors studied the connection between a sharp downturn of religious participation in the late 1980s and the swift rise in deaths of white Americans ages 45 to 54 in the early 1990s. Their findings were recently issued in a working paper by the National Bureau of Economic Research.

    While the post-1999 mortality increase has justifiably attracted a large amount of attention with the introduction of OxyContin, “this change in the early 1990s is perhaps as striking but has received little attention in prior work,” the researchers explained.  

    “It’s pretty unusual for an advanced country like America to see people start dying sooner, at a younger age,” Hungerman said. “And what we found is that there is a direct correlation between the effects of religious practice and these mortality rates from alcoholism, suicide and overdose.”

    Their study highlighted how changes in religious participation can have large consequences for the health and well-being of middle-aged, white individuals, wrote Hungerman and his co-authors. 

    “Our work provides evidence that religious participation matters,” they said.
     

    Bringing the data together, comparing

    Comparing mortality data from the Centers for Disease Control and Prevention’s Multiple Cause of Death files and religiosity survey data from the General Social Survey, the researchers identified a definite correlation between the decline in religious affiliation and church attendance and the increase in deaths of despair among middle-aged white Americans that began in the late 1980s and continued through the 1990s.

    Researchers also found that states that had experienced larger declines in religious participation in the last 15 years of the century saw larger increases in deaths of despair. Notably, the decline in religious participation was not specifically driven by males or females, nor was it initially observed for non-white Americans. 

    Hungerman and his co-authors presented evidence that this decline in religious participation was driven more by a collective resistance to formal or organized religion than by changes in personal religious beliefs or spiritual habits. 

    “What happened is that they quit going to church — they stopped affiliating with religious places,” Hungerman said. “But if you ask them, ‘Do you believe in God,’ then that is still a constant. It has more to do with the social aspect of the formal participation.”

    One explanation for the decline in religious activity is the shifting relationship between religion and politics, Hungerman theorized. “There are some indications that more progressively oriented individuals stopped affiliating with religion,” he said. “Another is an increase in education — those educational gains may have led to lower participation.” 

    The causes of the decline in religiosity and religious participation are less important than the consequences, however, Hungerman said. “We’ve accepted this decline has occurred, and now we want to show what it has caused in people’s lives.” 
     

    Historical ‘shocks’ contribute to decline

    The researchers considered two additional “shocks” occurring at different times in our history that seem to have also contributed to the decrease in faith activities and increase in mortality. One was the repeal of the blue laws in the 1960s and 1970s. These laws restricted commerce during a certain time of week, typically Sunday mornings. Unlike some blue laws of today, which limit alcohol sales on Sundays, the earlier iterations prohibited all labor on that day — which allowed more people to attend church versus working or going shopping. According to the researchers, repealing the blue laws led to a 5-10 percent negative impact on weekly attendance of religious services for middle-aged Americans and increased the rate of deaths of despair by two deaths per 100,000 people.

    The second shock occurred much later with the increase of opioid use in the 1990s, particularly following the introduction of the prescription drug OxyContin in 1996 and its subsequent abuse. 

    “With these sorts of shocks occurring, we see — for the groups affected — a coinciding change in suicides, heavy drinking and drug use,” Hungerman said. “We’re seeing these relatively smaller, earlier shocks as setting the stage for the later, larger effects (sharp mortality rate increases). We use that as another piece of evidence to help us better understand this relationship between what you’re doing on Sunday morning and your health outcomes.”
     

    Cultural influence or true despair?

    Scientists have had difficulty studying the cultural or social influences in this arena, Hungerman said. “Despite the title ‘deaths of despair,’ they have struggled to see whether or not despair actually plays any role here, or if it’s just a cultural anomaly, more generally. We think our research provides novel evidence that it does.”

    Hungerman and his co-authors noted that prior studies have indicated nonreligious organizations are unable to provide the same sense of community, closeness and social service that religious traditions have typically supplied. And while they acknowledged that their study confirmed the importance of religion alone in promoting well-being, future research can be done to see if other cultural institutions — including voluntary and community activities — could have similar large-scale effects on health and mortality.

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  • Democracy depends on the freedom of the press: The latest news on media and journalism

    Democracy depends on the freedom of the press: The latest news on media and journalism

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    “Freedom of the press is not just important to democracy, it is democracy.”

    -Walter Cronkite

    According to the Pew Research Center, more than eight-in-ten U.S. adults (86%) say they get news from a smartphone, computer or tablet. Americans say they prefer a digital platform – whether it is a news website (26%), search (12%), social media (11%) or podcasts (3%).* Traditional media remain important even for those people with the most gadgets. However, social media and non-traditional outlets are rising as the main source of how people stay informed. According to a report from the BBC, Instagram is the most popular news source among younger people.

    In this information age, it’s vital to have an open conversation on how the message is delivered. 

    Here are some of the latest stories in the Media and Journalism channel on Newswise. For a more in-depth look at social media issues, check out the Social Media channel.

    Newswise Live Event for March 15: What can we expect from AI and Chatbots in the next few years? 

    (How AI is transforming journalism)

    Study finds political campaigns may change the choices of voters – but not their policy views

    Researchers’ Model for TV Ad Scheduling Reaps Revenue Increase for Networks

    What distinguishes fans from celebrity stalkers?

    The claim that U.S. temperatures are not trending upward is false

    We cannot predict earthquakes with accuracy, despite claim

    Fact-checking the reporting of the explosion in East Palestine, Ohio

    Cinema has helped ‘entrench’ gender inequality in AI

    Experts split on ‘prebunking’ – shifting blame or empowering users?

    Geography, language dictate social media and popular website usage, study finds

    ChatGPT can (almost) pass the US Medical Licensing Exam

    Tweets reveal where in cities people express different emotions

    War tourists fighting on a virtual front, since Ukraine-Russia war

    Media literacy is an important tool in training police officers

    COVID-19 conspiracy theories that spread fastest focused on evil, secrecy

    How do news audiences respond to disclosures of preprint status?

    It isn’t what you know, it’s what you think you know

     

     

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  • Netflix password sharing outrage can be explained by behavioral economics, says expert

    Netflix password sharing outrage can be explained by behavioral economics, says expert

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    BYLINE: Riley Petersen

    Newswise — By the end of March, Netflix plans to crack down on password sharing for U.S. subscribers. This announcement has been met by surprise, outrage, and confusion as consumers ponder how their Netflix accounts will be affected. Jadrian Wooten, a professor of economics at Virginia Tech, provides his perspective on the issue. 

    “Password sharing has been a recurring issue for Netflix since they transitioned from a DVD-based subscription platform to a digital one,” says Wooten. “Initially, Netflix encouraged multiple people to login together, which was part of their brand. However, when reporting subscriber growth in their annual reports, they have noted that subscription numbers are missing many people who share accounts.”

    Nexflix didn’t implement this change until they realized the importance of measuring their viewership, especially as other streaming platforms were on the rise. To hold a strong competitive advantage, Netflix made the decision to end password sharing. 

    Since Netflix’s announcement, many subscribers have taken to Twitter to express their frustration. For many, password sharing accommodates family members who live out of state or alleviates financial burden amongst family members.

    “The frustration that many people are experiencing with the recent change can be explained by a concept in behavioral economics called loss aversion. This concept refers to the tendency for people to react more strongly to the prospect of losing something compared to the happiness they feel from gaining something,” explained Wooten. 

    One question stands: is this a good move for Netflix?

    “Although many people on social media are threatening to quit Netflix, it is unlikely to cause a significant drop in their overall subscription numbers,” says Wooten. “Netflix believes that cracking down on password sharing will realistically increase the number of subscribers, especially now that they offer a lower-priced, ad-supported option.”

    Other streaming services such as Disney+ have also adapted ad-supported streaming packages with lower costs. As for password sharing, Wooten predicts they may follow suit.

    “It is highly likely that other streaming services will follow Netflix’s lead in cracking down on password sharing, although they may initially delay to attract new customers who may cancel their Netflix subscription,” says Wooten.

    About Wooten

    Jadrian Wooten is collegiate associate professor at Virginia Tech within the Department of Economics and is the author of Parks and Recreation and Economics. Read more about Wooten’s economic perspective on Netflix’s plan for subscribers in his Monday Morning Economist newsletter.

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  • Economics expert explains how consumer price reports show ‘inflation is not done yet’

    Economics expert explains how consumer price reports show ‘inflation is not done yet’

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    Expectations that inflation has eased fueled recent stock market gains, but results from two major price-tracking indexes came in higher than expected, dousing that optimism with cold water. The statistics from these reports have economists predicting that the Federal Reserve will continue to raise interest rates to get inflation under control.

     “The latest figures underscore the risks of persistently high inflation. Much of the easing that was celebrated at the end of last year has been erased,” said David Bieri, an economics professor for Virginia Tech’s School of Public and International Affairs. He answered a few questions about the persistence of inflation and the Federal Reserve’s efforts to reverse it. 

     Q: What is the difference between the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE)?

    “The CPI is a measure of the average change over time in the prices paid by urban consumers for a basket of goods and services. This basket includes commonly purchased items such as food, housing, clothing, transportation, and medical care. The rate of inflation (or deflation) is then inferred by comparing the price of this basket to a base period. The PCE is the one used by the Federal Reserve. Unlike the CPI, the PCE measures not just goods and services for urban consumers, but the prices of all goods and services purchased by households. While the CPI uses a fixed basket of goods and services, the PCE uses a changing basket of goods and services that reflects consumers’ evolving spending patterns. Also, the PCE incorporates data on the quality of goods and services.” 

    Q: What can be deduced about inflation and the economy from these new statistics? 

    “Different components of the indexes react to different influences of the economic process, and they also do so at different speeds, or as economists like to say, with different lags. For example, fuel and gas prices react with very little delay and if the price of crude oil goes up, it does not take long for these effects to show up. But this is not the case for other important components. Quite a bit of the recent uptick in inflation has to do with the fact that it has taken so long for the post-COVID related upswing in housing to show up in the data. As for the most recent PCE numbers, these were unexpected and point in the direction of more entrenched inflation.  In other words, inflation is not done yet.”

    Q: What do these results indicate about the Federal Reserve’s efforts to curb inflation? 

    “The Fed has to be patient. If we take the image of interest rates working like a brake pedal, the Fed is driving a car on a windy road with a blacked-out windscreen and when it brakes, it can only guess how soon the car — that is, the economy — will slow down, let alone by how much and when the next bend will be. However, the Fed has one key trick up its sleeve: unlike the hapless driver of our car, the Fed can influence how many bends in the road might show up in the future. It does this by something that we call ‘forward guidance,’ which is a wonky term for how the Fed’s attempts influence consumer and market expectations of consumers and market participants. Essentially the Fed is saying that if we stop believing there will be inflation in the future, there actually won’t be any.” 

     About Bieri 
    David Bieri is an associate professor of urban affairs in the School of Public and International Affairs and an associate professor of economics. He also holds an appointment in the Global Forum on Urban and Regional Resilience. His teaching interests are at the intersection of public finance, monetary theory, and history of economic thought. He has held various senior positions at the Bank for International Settlements in Basel, Switzerland. Prior to his work in central banking, he worked in investment banking in London and Zurich. View Bieri’s full bio.

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  • Syria peacebuilding efforts must address causes of the country’s “failed” state

    Syria peacebuilding efforts must address causes of the country’s “failed” state

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    Newswise — Any attempts to build peace in Syria must address the factors which led to the country being a failed state before civil war began, research says.

    There must be more inclusive governance practices and structures to allow meaningful popular participation in the running of the country’s affairs, according to the study. Citizens should be allowed to air their grievances and have a new “social contract” with their leaders.

    The analysis shows how state failure was a factor in the uprising but has become more clearly apparent in the ongoing civil war. The Syrian state has ‘failed’ because it cannot meet its citizens’ economic, political and social needs and requirements.

    The study, published in the journal Journal of Balkan and Near Eastern Studies , was carried out by Samer Bakkour, from the University of Exeter, and Rama Sahtout.

    Dr Bakkour said: “The outbreak of the civil war was not due to the sudden deterioration of state capacity or the abrupt collapse of state institutions. Instead, it was more clearly due to the regime’s attempts to crush a peaceful uprising by using force. This strength was superficial, rested on shallow foundations and lacked popular support.

    “Any governance was distinctively ‘sectarian’ and state structures were ‘hollowed out’ by pervasive corruption. Even efforts to ‘modernize’ or ‘reform’ functioned to reinforce and perpetuate this.

    “State failure and weakness were established parts of the country’s political arrangement, and the appearance of state strength could hardly conceal the fact that the state was vulnerable to a broad-based uprising.”

    The study says repression pre-war was an inadvertent and implicit acknowledgement that it lacked both legitimacy and more subtle means through which to assert its authority. There was no social contract and the heavy-handed governance that served as an implicit acknowledgement of this would ultimately contribute to the outbreak of the civil war. Sectarian policies were deliberately planned to create divides and animosities between different groups.

    Involvement of other nations in the civil war has further underlined the weakness of the Syrian state.

    Dr Bakkour said: “The extent of the displacement of the country’s population, both internally and externally, is a further confirmation of state failure. Minority groups forced to leave their homes were the worst affected in terms of reported deaths, sexual violence, and poverty and malnutrition.

    “Rapid economic decline, huge demographic decreases and growing food insecurity are now long-established trends in the country, and clearly have the potential to ‘feedback’ into conflict and instability. Basic food items such as bread are still rationed and foreign sanctions have inflicted billions of dollars of damage on the country’s economy.”

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  • Understanding the Circular Flow Model: Here’s a Comprehensive Guide. | Entrepreneur

    Understanding the Circular Flow Model: Here’s a Comprehensive Guide. | Entrepreneur

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    Are you interested in learning more about the US economy and the capitalist economic system? The circular flow model is a way to understand its ebbs and flows better, as it helps to visualize the interactions between different actors in the economy and how they influence the overall level of economic activity.

    Keep reading for a comprehensive guide on the basic model of capitalist economies, including:

    • What the circular flow model is
    • The components of the circular flow model
    • The circular flow model’s limitations
    • The applications of the circular flow model

    What is the circular flow model?

    The circular flow model is a way to show the flow of money, goods and services in an economy. It shows people earning money by working for businesses and then spending it on the things they need and want from those businesses.

    The circular flow model represents the economy and its actors:

    • Household sector: This sector represents all the individuals or families that make up the economy. They provide labor, resources and capital to the firms in exchange for wages, profits and rents.
    • Firm sector: The firm sector represents all the businesses that produce goods and services in the economy. They use the resources provided by the households to produce the goods and services sold to the households and the government.
    • Government sector: This sector represents the government and all the public institutions involved in the economy. The government provides goods and services to households and firms and collects taxes from households and firms.
    • Foreign sector: The foreign sector represents all the actors outside the domestic economy, such as foreign countries, international organizations and international trade. The foreign sector plays a role in the economy by trading goods, services and capital with the domestic economy.
    • Financial sector: This sector represents the financial institutions, such as banks and other intermediaries, that are involved in the economy. They facilitate the flow of capital between households, firms, the government and the foreign sector.

    Related: The Importance Of A Circular Economy Post COVID-19

    What are the types of circular flow models?

    While the two-sector circular flow model is the most common type, other more complex models exist.

    Other types of circular flow models include:

    • Two-sector model: Households and firms are the participants.
    • Three-sector model: Households, firms and government are the participants, and the model depicts the flows of goods, services and money between households, firms and the government.
    • Four-sector model: Households, firms, the government and the foreign sector are the participants, and the model shows the flows of goods, services and money between households, firms, the government and the rest of the world.

    Some more elaborate models include financial markets and other institutions, but these models can become quite complex and are typically used by economists to study specific economic issues.

    Related: How One Small Button Can Transform the Creator Economy from a Buzz Word to an Actual Economic Model

    Circular flow model: What are injections and leakages?

    Injections

    Injections are additional inputs to the flow of goods, services and money and are visually represented by arrows pointing into the circular flow.

    The following are examples of injections:

    • Investment spending by firms: This is the spending by firms on new capital goods, such as machinery and equipment, that increases their ability to produce goods and services.
    • Government spending: This refers to spending by the government on goods and services, such as public infrastructure and social services, that increases the flow of goods and services in the economy.
    • Exports: This is the sales of goods and services by firms to foreign buyers, which increases the flow of goods and services in the domestic economy.

    Leakages

    Leakages, or withdrawals, are subtractions from the flow of goods, services and money and are visually represented by arrows pointing out the circular flow.

    The following are examples of leakages:

    • Saving: This refers to the portion of national income not spent on consumption, which reduces the flow of goods and services in the economy.
    • Taxes: These are payments made by households and firms to the government, reducing the flow of public goods, services and money in the economy.
    • Imports: This refers to purchases of goods and services by households and firms from foreign suppliers, which reduces the flow of goods and services in the domestic economy.

    In a healthy economy, injections must equal leakages to maintain the circular flow. In other words, for the flow of goods, services and money to continue, there must be enough injections to offset the leakages.

    If injections exceed leakages, the economy will grow, and if leakages exceed injections, the economy will contract.

    Related: 5 Reasons You Need to Adopt a Circular Economy Business Model

    How does the circular flow model relate to gross domestic product?

    Gross domestic product (GDP) is another critical term you will come across when researching the economy. GDP measures the total value of goods and services produced in an economy in a given period, usually a year.

    The circular flow model and GDP are related because the model provides a visual representation of the transactions that make up GDP.

    In the circular flow model, the value of goods and services produced equals the sum of household consumption, investment by firms, government spending and exports minus imports.

    The circular flow model is a way of visualizing GDP transactions and understanding how they are interconnected.

    Related: What Causes Inflation? Everything You Need To Know.

    How do you calculate GDP?

    There are three ways to calculate GDP, but the most common method is the expenditure approach, which calculates GDP as the sum of the following four components:

    • Consumption (C): The spending by households on goods and services, such as food, clothing, housing and medical care.
    • Investment (I): The spending on capital goods, such as machinery and equipment, and on structures, such as buildings and roads
    • Government spending (G): The spending by the federal, state and local governments on goods and services, such as national defense, education and healthcare
    • Net exports (X – M): The difference between exports (X), which are goods and services produced in the country but sold to foreigners, and imports (M), which are goods and services produced abroad but sold in the country

    GDP can be calculated using the following formula:

    • GDP = C + I + G + (X – M)

    Related: This Is the One Economic Indicator That We Should Completely Ignore

    What is a real-world example of the circular flow model?

    To better understand how the circular flow model works in the real world, see the step-by-step process below:

    1. Households receive income from wages, salaries or other forms of compensation.
    2. With their income, households buy goods and services from firms (comprising the product market), which is called consumption and represents the most significant part of the circular flow.
    3. Firms use the money they receive from household consumption to pay for factors of production, like labor, raw materials and capital goods.
    4. Factors of production comprise the factor market and receive income in the form of wages, rent and profit. With this income, they purchase goods and services from firms and households.
    5. Some households and firms save a portion of their income, meaning that money is not spent on consumption or investment. This represents a leakage from the circular flow, as it reduces the amount of money available for spending on goods and services.
    6. The government collects taxes from households and firms, which represents another leakage from the circular flow.
    7. The government then uses this money to finance its spending on goods and services, such as public infrastructure, education and healthcare.
    8. Firms use some money from sales to households to invest in new capital goods, such as machinery and equipment. This investment represents an injection into the circular flow, as it increases the amount of money available for spending on goods and services.
    9. Finally, some of the goods and services produced in the economy are exported to foreign countries, which represents an injection into the circular flow. At the same time, the economy also imports goods and services from foreign countries, which means a leakage from the circular flow.

    Related: How to Use Economic Regret Theory to Achieve Happiness

    What are the limitations of the circular flow model?

    Again, the most commonly used circular flow diagram is the two-sector model. While the two-sector circular flow model is a great tool that provides a simplified representation of the economy, it does have its limitations because of its simplicity.

    See some of its most significant limitations below.

    Ignores the financial sector

    The circular flow model does not consider the role of the financial sector, including banks, insurance companies and other financial intermediaries.

    In reality, the financial sector plays a crucial role in directing funds from savers to borrowers and influencing investment and consumption.

    Does not account for the international sector

    The circular flow model assumes a closed economy, meaning it does not consider the trade of goods and services with other countries.

    In reality, the international sector is an essential component of the economy, and trade balance changes can significantly impact economic growth and stability.

    Ignores distribution of income

    The circular flow model does not consider income distribution among households, firms and factors of production.

    In reality, the circular flow of income is not distributed equally, which can affect the level of consumption, investment and overall functioning of the economy.

    Does not reflect the complexity of the real economy

    The two-sector circular flow model is a simplified representation of the real economy. It does not reflect the complexity of the relationships between households, firms, factors of production and the government.

    In reality, many interconnections and feedback loops can affect the flow of goods, services and money.

    Related: Why Every Entrepreneur Should Study the Austrian School of Economics

    What do you need to know about the circular flow model?

    The circular flow model is a fundamental economic concept visually representing the flow of goods, services and money between different economic actors.

    The relationship between GDP and the circular flow model is also essential to understand, as the circular flow model visualizes the transactions that comprise GDP.

    Overall, the circular flow model is a valuable tool for understanding the basic functioning of the economy, and it provides a foundation for further study in economics and related fields.

    Ready to dive into other topics? Visit Entrepreneur.com for more on microeconomics, macroeconomics, finances and more.

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  • Research: Employees give better tips to taxi drivers when their company performs well in the stock market

    Research: Employees give better tips to taxi drivers when their company performs well in the stock market

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    Newswise — BINGHAMTON, N.Y. — With National OverTip Day coming up March 10, new research from Binghamton University, State University of New York reveals that employees at public companies tip their taxi drivers more on days when their companies perform well in the stock market. 

    While the effect on tipping is short-lived, the research finds it is stronger for firms offering more stock-based compensation. These findings have implications for how employees make a local economic impact in the areas where they work.

    “Employee spending is a big factor that governments consider when trying to attract companies into their area, as it can stimulate the local economy,” said Cihan Uzmanoglu, an associate professor of finance at Binghamton University’s School of Management.

    Uzmanoglu analyzed the GPS and payment data from around 2 million taxi rides that took place in New York City between 2009 and 2016. He focused on pickups that took place between 5 and 6 p.m. (the end of a typical work day and New York Stock Exchange trading hours) within 100 meters of public firms headquartered in NYC to account for the taxi rides of employees. Uzmanoglu then explored how a firm’s stock market performance impacted tipping for taxis taken near its headquarters location.

    “The taxi setting is great because you’re unlikely to bump into the same taxi driver again, so how you tip now isn’t going to influence the quality of service the next time you take a taxi,” he said. “How someone tips a taxi driver probably says something about how they feel in that moment — do they feel happier and wealthier? And is that being driven by the stock performance of their employer?”

    Uzmanoglu found that when a firm experienced a positive shock to its stock performance, its employees would tip their taxi drivers more. This increase of tipping would only happen on the day of the positive stock performance though, meaning the effect is short lived.

    “The short-lived nature seems to suggest that the employee feels good about the stock performance of their company that day, and that happiness is motivating them to tip more,” Uzmanoglu said.

    Some other findings:

    • The effect of stock performance on tipping is greater at firms that offer more stock-based compensation.
    • The number of taxis taken near a firm’s headquarters increases with the firm’s stock returns.
    • Increases in tipping also came after a firm’s initial public offering (IPO), particularly at the end of its IPO lock-up period, when employees are allowed to begin selling the stocks they hold in the firm.

    Uzmanoglu also found that tipping does not decrease significantly when firms’ stocks perform poorly.

    “There seems to be a socially acceptable minimum tipping amount that people follow, regardless of stock performance. So when you have a bad day in the stock market, I don’t see people tipping less than this socially acceptable benchmark,” he said.

    Uzmanoglu ran a number of checks to test the strength of his findings by looking at tipping activity at different times of the day and in wider perimeters around the companies he studied.

    “The further you get away from the physical locations of these companies, as well as the end of the work and trading day, the more the effect decays. This just points to the conclusion that the increase in tipping behavior is coming from employees of these firms,” he said.

    Uzmanoglu said these findings could have broader implications about the impact businesses have on the community around them.

    “Employee spending is an important economic driver for the location where a business is located. If employees are doing well, they are likely to spend more money in that local economy,” he said. “While I just looked at taxi rides here, these findings may indicate that the stock performance of a firm may influence the overall discretionary spending of employees.”

    The paper, “The stock market tips,” was published in the Journal of Empirical Finance.

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  • The unnecessary burden of war

    The unnecessary burden of war

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    Newswise — Governments could help millions of people and save a lot of money with targeted energy subsidies. Different kinds of households around the world suffer in various ways from the exorbitant energy prices and need different kinds of support, says Klaus Hubacek from the University of Groningen, the Netherlands, in a new study that was published on 16 February in Nature Energy.

    All around the world, households are affected by soaring energy prices due to the war in Ukraine. But these households are affected in different ways: ‘This depends on their income level, how they spend their money, and how and where the products that they are using are being produced,’ explains Hubacek, Professor of Science, Technology, and Society. 

    Poverty

    ‘Our study is one of the very first that quantifies—at an unprecedented level of detail—the impacts of the energy crisis, including its impact on households, within many countries and with a global reach,’ says Hubacek. ‘Without such detailed knowledge, it is impossible to know who to help and how. If the governments were to use this as a guide, they could save a lot of money.’

    The increased fossil fuel prices potentially push millions of people into poverty, or even extreme poverty. Government measures to subsidize towering energy bills for households are inefficient because they do not take enough details into account. ‘If you look at the responses of governments, for example in Germany, the UK, the US, or the Netherlands, they have been using policies that do not sufficiently help those who need it most,’ states Hubacek. ‘Meanwhile they spend lots of money on people who don’t need it. That really frustrates me.’

    Food

    Energy prices affect households in two ways. Directly, through high energy bills, and indirectly, through the goods and services that became more expensive due to fossil fuel use in their supply chains. ‘So, for example, if you use a cell phone in the Netherlands you need direct energy, which is not a lot,’ explains Hubacek. ‘But a cell phone is made of many different components that come from Japan, China, Austria, the US, and so on.’ Therefore higher energy prices effect the price of a new smart phone indirectly.

    The same is true for food: energy prices push up costs for fertilizer, transport, etcetera. Energy inputs are required in production and transportation all the way to the final product. The rising costs of energy are passed on to the consumer through the price of the product, thus indirectly increasing the burden on households.

    Straw

    Because different households spend their money on different things, the kind of burden that the energy price shock imposes varies as well. ‘We show this in detail in our paper,’ says Hubacek. ‘For example, in some countries it is the increase in food prices that affects households most, in other cases it’s mobility, and so on. Knowing what causes the increased costs exactly allows you to really subsidize the products and services that put the highest pressure on households.’

    For both high- and low-income countries, the indirect energy costs impose the biggest burden, whereas for middle-income countries, direct energy costs have the biggest impact. A possible explanation is that in high- and low-income countries, households’ direct energy availability is uniform, according to Yuru Guan, one of Hubacek’s PhD students and first author of the paper. Therefore, they are affected more by consumption patterns of other goods. ‘For example, Dutch people basically use natural gas for heating, so when energy prices increase, everyone suffers from the same rate of increase in direct energy costs,’ explains Guan.

    In middle-income countries, households show larger disparities when it comes to the availability of energy. ‘In China, the rich have access to natural gas for heating, while the poorest burn coal or even straw,’ continues Guan. Therefore, the total burden on household expenditure is dominated by direct energy costs.

    Windfall tax

    Hubacek makes another point. He suspects that the increase of energy prices due to the Russian invasion in Ukraine wouldn’t have been as extreme if better policies had been made before. ‘Governments could have saved money by helping people with lower incomes to insulate their houses instead of digging for coal and investing in LNG terminals that are hugely inefficient,’ says Hubacek. ‘Now they invest in a very expensive infrastructure that we shouldn’t have in the first place if we take climate change seriously.’

    Governments could moreover increase their income relatively easy. ‘Energy companies’ profits have increased considerably since the onset of the war,’ according to Hubacek. ‘And many other sectors benefited as well. They increase their prices more than required to cover the extra energy costs, thus increasing their profits.’ Special windfall and carbon taxes could help enormously in the fight against poverty. ‘It’s all linked,’ says Hubacek. ‘Polluting sectors could be taxed and the money could be used to help poor households. It’s simple. It’s just politically difficult.’

    It is up to policy makers to make decisions that take the bigger picture into account, and to not just stick plasters. ‘However, there is no free lunch,’ as Hubacek puts it. ‘Renewable energy contributes to climate change as well. So the focus should be on policies that fight poverty and energy use in the long term.

    Reference: Yuru Guan, Jin Yan, Yuli Shan, Yannan Zhou, Ye Hang, Ruoqi Li, Yu Liu, Binyuan Liu, Qingyun Nie, Benedikt Bruckner, Kuishuang Feng en Klaus Hubacek. Burden of the global energy price crisis on households, Nature Energy, 16 February 2023

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  • Can the Kunming-Montreal Global Biodiversity Framework fulfil its transformative potential?

    Can the Kunming-Montreal Global Biodiversity Framework fulfil its transformative potential?

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    Newswise — MOMBASA, Kenya – With the goals and targets of the Kunming-Montreal global biodiversity framework now set, attention turns to its potential for implementation and achieving its 2050 vision of living in harmony with nature.

    In a peer-reviewed commentary published in the journal One Earth on 17 February 2023, marine and sustainability scientist Dr. David Obura of CORDIO East Africa and the Earth Commission dissects the scope of the agreement, and its potential to mark a turning point in international policy. The commentary argues that the agreement contains all the ingredients for success, i.e. to halt and reverse biodiversity loss and achieve sustainability for all, but to do this countries and actors will need to overcome some particularly challenging and entrenched North-South divides. Without accountability for historic and current trends, nor full commitments to close the funding gap for proposed actions, the agreement could risk the same failed fate as the Aichi Targets of 2010-2020.

    The commentary reflects on experiences surrounding the adoption of the framework at COP 15, and in the preceding 3.5 years of layered negotiations. Obura concludes that in the coming years the global community needs to transform and fully adopt equity principles that remedy centuries of extraction and capital accumulation by imperialist-colonial-capitalist economies. Dr. Obura identifies three persisting challenges that if not addressed will undermine success of the new framework:

    • The drivers of biodiversity decline must be brought within planetary boundaries as a prerequisite for success;
    • Actors must fully finance the framework. This means transforming away from the imperial-colonial-capitalist tradition that dominates today and externalizes most biodiversity impacts, to circular sustainability-oriented principles that fully internalize all impacts into the costs of doing business.
    • Putting relationships between Global North and Global South countries on a fully equitable footing, and acting to assure the rights and agency of Indigenous Peoples and Local Communities in conservation.

    “Far from this being a radical take on the Kunming-Montreal Global Biodiversity Framework, all the elements needed to overcome these challenges are contained within its text,” said the author, Dr. David Obura, “so the test will be if countries and leading actors fully adopt these and transform, or pay lip service to them and stay within their comfort zones, just with a bit more money on the table, and with strings attached.”

    “It boils down to the Global North acknowledging the just needs of the Global South and at the same time realizing the funding required is not aid or charity, it is unpaid dues for unjust historic appropriation of biodiversity, resulting from their economic growth to date. The answers for the future are to specifically account for damage from the past.”

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  • What Causes Inflation? Everything You Need To Know

    What Causes Inflation? Everything You Need To Know

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    In the last two years, inflation has been a word on everyone’s minds. It seems unavoidable, whether you’re at the gas pump, the grocery store, or really anywhere else.

    So why is this happening? And what causes it? Keep reading for all you need to know about inflation.

    What is inflation?

    Inflation measures the rise in PCE (personal consumption expenditures price index) or the expenses of goods and services over a certain period.

    Generally, inflation rates are measured by year and examined on a broad scale of a country’s overall goods and services. However, inflation can also be measured using shorter or longer periods and can focus on one particular industry or product.

    Related: What New Entrepreneurs Should Know Amid Rising Inflation

    How is inflation measured?

    The measure of inflation follows a formula called the consumer price index. The consumer price index assesses the cost of living and how it changes over time.

    The CPI formula takes the value of the market basket from a particular year, divides it by the value of the market basket from the base year, and multiplies that by 100 to produce a percentage.

    • Consumer Price Index = Value of Market Basket in Particular Year / Value of Market Basket in Base Year x 100

    Once the CPI is calculated, the Inflation Rate Formula comes in. The Inflation Rate Formula involves two key variables.

    • A = CPI starting cost
    • B = CPI ending cost

    Keeping those two variables in mind, the Inflation Rate Formula is as such:

    To carry out this formula, begin by subtracting A from B to determine the price change for the good or service. Next, divide that result by A to achieve a decimal number. Multiply that decimal number by 100 to produce a percentage. That percentage change is the result and the rate of inflation.

    Types and causes of inflation

    Inflation is not always caused by just one thing. Several economic factors dictate inflation rates. Because of this, there are different types of inflation.

    Demand-pull inflation

    Demand-pull inflation occurs when an economy’s aggregate demand exceeds the aggregate supply. Demand-pull inflation comes into play when there is a higher demand than there is supply.

    While inflation is not something people generally look forward to, it can be a sign of a healthy economy. Aggregate demand indicates high employment rates and higher levels of disposable income.

    When workers have more disposable income, luxury and necessary spending rates increase, driving demand.

    There are a few leading causes that trigger demand-pull inflation:

    • Household spending: When consumers feel comfortable enough to make discretionary purchases, it throws off the consumer price index because it is a new factor in the economic ecosystem. The general rule is that when consumer demand increases suddenly, the cost will follow the same pattern.
    • Business spending: Business spending is dictated by an economy’s gross domestic product (GDP). When the economy is healthy due to consumer spending, businesses increase production to keep up with that spending. The aggregate demand of consumers creates price increases for goods and services.
    • Government spending: During a recession, a government’s central bank will often try to kickstart the economy by dedicating monetary policy funding to new infrastructures and programs to create more jobs. While this is meant to help an economy, it also brings new market capital and drives prices up.
    • Foreign investment: Foreign investment is most prevalent when one country’s exchange rate is more favorable for buyers in another country. This means that if a large portion of buyers from one country finds affordable properties in another country, that will cause demand-pull inflation in that country’s market.

    Related: Inflation Is a Different Beast for Entrepreneurs. Here’s How to Protect Yourself

    Cost-push inflation

    Cost-push inflation happens when an aggregate supply of goods and services experiences a decrease. An increase in raw materials generally causes this decrease in production cost or the labor it takes to produce those goods and services.

    There are a few leading causes that trigger cost-push inflation:

    • Labor market: Salaries, healthcare and other benefits qualify as labor expenses. When unions negotiate wage increases or a government mandates new benefit requirements from employers, those new expenses can trigger cost-push inflation.
    • Capital: Capital is essential for any business, and it is common for companies to borrow money supply. However, the problem arises when investors limit their funding, or a business must pay an increased interest rate because those factors cause that business to increase the price of its products.
    • Land expenses: Environmental events like natural disasters can affect inflation and the cost of rent and construction for a business.
    • Entrepreneurship: When a new business begins or an existing business decides to scale, many costs are involved. Company costs like raw goods, rising wages and workspace all cause an increase in product prices, which can result in inflation.

    Built-in inflation

    Built-in inflation is the natural inflation that happens over time. As the prices for goods and services rise, people expect higher wages with those prices to afford rising costs of living.

    Related: How To Negotiate Renewed Contracts During Periods of Inflation

    Inflation throughout history

    The Covid-19 pandemic threw the economy for a loop, and now the world’s economy is experiencing aftereffects in many areas, especially inflation.

    As the supply chain of major industries like retail, real estate, auto and travel race to catch up to the increased demand, prices are being driven up.

    This is not the first time in history that inflation hikes. To prepare for what might lie ahead, look at inflation trends throughout U.S. history.

    Related: How Does Inflation Affect Real Estate? Here’s What You Need to Know

    July 1946 – October 1948

    During World War II, the job market shifted, and people were conservative with their spending. However, once the war ended, the economy experienced a boom that it was not prepared for.

    Demand was more significant than supply as people became liberal with purchases they had not been able to make during war times. Because of this rapid shift, inflation rose to over 20 percent.

    December 1950 – December 1951

    As the Korean War began in June 1950, people were accustomed to wartime mandates. Families raced to purchase necessities to prepare for rations and supply shortages, significantly increasing demand.

    Once the war ended, people seemed to have learned from the late forties situation and did not rush to buy post-war like they did the first time. Because of this more reserved behavior, prices rose but not nearly as much as they had a few years prior.

    March 1969 – January 1971

    The economy and job market were booming during this period, increasing prices. Because inflation was so drastic, the government stepped in and mandated a wage and price freeze.

    April 1973 – October 1982

    The seventies brought the U.S. the most prolonged period of inflation to date. An oil embargo followed by a decline in oil production during the Iran-Iraq War caused lasting inflation rates.

    Again, the Federal Reserve (sometimes referred to as “The Fed”) had to step in. That meant increased interest rates to level out the inflation rate.

    April 1989 – May 1991

    The first Gulf War brought much uncertainty in the supply chain and relations. This trepidation drove up crude oil prices, leading to a short inflation period.

    July 2008 – August 2008

    While this was a short-term period, it took a considerable toll on the economy. Exponential rises in gas prices shot the CPI up five percent over these two months. The cost of crude oil doubled in only a year from $70 to $140.

    Pros and cons of inflation

    Inflation means rising prices, so how could there be positives to that? Like anything else, there are pros and cons to inflation.

    Pros of inflation

    • Enhanced economic growth: During inflation periods, businesses often experience higher demand, which causes them to increase production to keep up. To keep up with increased production, companies must hire more workers or provide current workers with more hours, leading to a healthier job market.
    • Provides for wage adjustment: Inflation creates a type of “new normal,” which allows companies to adjust the prices of goods and services and employee wages.
    • Better borrowing: Many people are given wage increases due to inflation. However, loan interest rates that were established before inflation do not increase. This means that employees who receive raises have more financial capital and might be able to pay off their loans faster or at least with less pressure.
    • Increased employment rates: Because goods and services become more expensive, businesses have more revenue to put back into their company with more jobs and production.

    Cons of inflation

    • Impacted savings: As goods and services become more expensive, a gap can often occur as the rest of the economy levels out. If living costs rise but wages do not, it becomes increasingly difficult for people to save.
    • Decreased investments: When there is uncertainty in an economy, investors become more tentative with their money. Investors also want their money to go as far as possible, and inflation slows that process.
    • Less competition: The economy needs competition. However, with countries that use the same currency, it can be challenging to evaluate currency value if one experiences inflation but the other does not. This slows the import and export system and ultimately slows the economy.
    • Disadvantages for pensions and minimum wage: During periods of inflation, the minimum wage is generally the last to experience a raise. Because the government controls the minimum wage, it is up to them to raise it rather than the employer. In addition, those who receive pensions on a fixed rate will receive the same amount of money even though inflation will affect how far the dollar goes.

    Related: This Is the Living Wage You Need in All 50 States

    Where inflation hits the hardest

    While no city has remained immune to inflation, some areas have been hit much harder than others.

    Some of these cities were becoming more affordable before the pandemic. However, the economy experienced such a shift during the pandemic years that most have experienced a yoyo effect.

    And it’s not only expensive cities that have continued to become more expensive; rather, some formerly affordable cities have experienced the most change. Take a look at the 15 cities that have experienced the highest rate of inflation based on the CPI change in the last year.

    1. Anchorage, Alaska

    • Score: 100.00
    • CPI change: 12.40%

    2. Phoenix – Mesa – Scottsdale, Arizona

    • Score: 68.38
    • CPI change: 12.30%

    3. Atlanta – Sandy Springs – Roswell, Georgia

    • Score: 56.22
    • CPI change: 11.50%

    4. Seattle – Tacoma – Bellevue, Washington

    • Score: 50.51
    • CPI change: 10.10%

    5. Baltimore – Columbia – Towson, Maryland

    • Score: 50.13
    • CPI change: 10.60%

    6. Miami – Fort Lauderdale – West Palm Beach, Florida

    • Score: 49.36
    • CPI change: 10.60%

    7. Houston – The Woodlands – Sugar Land, Texas

    • Score: 48.28
    • CPI change: 10.20%

    8. Detroit – Warren – Dearborn, Michigan

    • Score: 45.58
    • CPI change: 9.70%

    9. Tampa – St. Petersburg – Clearwater, Florida

    • Score: 45.22
    • CPI change: 11.20%

    10. Philadelphia, Pennsylvania – Camden, New Jersey – Wilmington, Delaware

    • Score: 32.57
    • CPI change: 8.80%

    11. St. Louis, Missouri

    • Score: 29.95
    • CPI change: 8.40%

    12. Dallas – Fort Worth – Arlington, Texas

    • Score: 27.65
    • CPI change: 9.40%

    13. Riverside – San Bernardino – Ontario, California

    • Score: 26.73
    • CPI change: 9.20%

    14. Chicago – Naperville – Elgin, Illinois

    • Score: 26.42
    • CPI change: 8.80%

    15. Denver – Aurora – Lakewood, Colorado

    • Score: 22.87
    • CPI change: 8.20%

    Inflation expectations: How much longer will it last?

    As history shows, inflation is an expected result after a considerable economic disruption. The pandemic was certainly a significant disruption, and the world’s economy is still experiencing aftereffects.

    In addition to the pandemic, other world events have had additional effects on the world’s economy. So, how much longer will inflation last?

    The economy has been relatively unpredictable in the wake of these events, and economists continue to gather and study data to offer predictions on what people can expect.

    The World Economic Forum’s data shows that in 2021, global growth was forecast at six percent, and it slowed to about three percent in 2022. Global growth is expected to slow even more in 2023 at just under three percent. As for inflation, deflation may be coming.

    Rates are expected to decline from just under nine percent in 2022 to six and a half percent in 2023 and four percent in 2024.

    However, economists also take history into account. While inflation rates are predicted to decline, a key caveat in the equation is the eight percent threshold.

    History indicates if inflation exceeds eight percent, which it did in September 2022, high inflation can take much longer to decline.

    What you can do to prepare for inflation

    With no clear answer about when inflation will recede, it can’t hurt to put a few precautions in place. Take a look below for four strategies experts recommend to help you prepare for higher inflation.

    1. Budget accordingly.

    You don’t have to change your whole lifestyle, but if there are little things you can cut out to save extra cash, now is the time.

    Whether combating food prices by cooking at home one extra night a week or pausing a subscription you don’t use that much, focus on the essentials for the time being.

    2. Create and maintain an emergency fund.

    Now is a great time to start if you don’t already have an emergency fund. Those small luxuries you just cut out? Input them into the fund and save them for a rainy day in preparation for hyperinflation.

    Related: 6 Best Savings Accounts Of 2022

    3. Invest.

    If you’re savvy with the stock market or have always wanted to get involved, study and find a suitable investment. If you don’t think that’s the right fit, take that emergency fund and convert it into something like a high-yield savings account that will build better interest over time.

    Related: 6 Best Investments For Inflation

    4. Keep a close eye on debt.

    From student loans to personal finance, sometimes debt can be unavoidable. However, the key is not to get in too deep.

    If you have to take on debt, make sure that you have a payback plan and that you are not committing to high-interest debt that will be more difficult to pay off in the long run.

    Related: 3 Strategies To Protect Your Business From Inflation

    What does inflation mean for you?

    Several factors cause inflation; unfortunately, those factors currently affect the entire world.

    While some hope inflation will recede in the coming year or two, other elements might slow that process. In either case, it is always prudent to prepare some backup funds if you ever need them.

    Explore the rest of Entrepreneur.com if you’re looking for more information on professional-impacting topics like the economy, unemployment rates or investing.

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  • The spillover effects of rising energy prices following 2022 Russian invasion of Ukraine

    The spillover effects of rising energy prices following 2022 Russian invasion of Ukraine

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    Newswise — Following the Russian invasion of Ukraine from February 24, 2022, energy prices rose by up to 20% worldwide for five months. WTI crude oil was $92.77 per barrel on February 24, 2022, but rose and averaged $106.96 (+15.3%) from February 28 to August 3. Furthermore, energy consumer price indexes (energy CPI) increased consecutively for five months, when comparing February and July, in OECD (18.0%) and G-7 (18.9%) countries, hitting their highest year-over-year growths ever since tracking began in 1971 in OECD (40.70%) and G-7 (39.43%) in June 2022. 

    Because energy use is merely an intermediate input, rising energy prices may have little impact on real gross domestic product (GDP). Meanwhile, rising energy prices may decrease social surplus, slowing economic growth. When energy prices rise, consumers primarily buy less durable goods, e.g., cars and new houses, and firms may reduce their investment spending due to uncertainty. Also, because fossil fuels are primarily used as intermediate inputs upstream in the supply chain, higher energy prices lead to higher global costs (due to spillover effects). 

    For such a shock analysis, input-output analysis (IOA) is favored to examine the spillover effects in the supply chain. In particular, the Leontief quantity model—the most popular demand-driven model—is the de-facto standard for both demand and supply analysis. However, it has issues. The model is not theoretically consistent with the supply analysis, and, more importantly, it is likely to overestimate monetary damage because price and quantity are inelastic.

    A new study from researchers at Kyushu University finds that if the price increases by 20% in Russia’s mining and quarrying (M&Q) sector alone, there will be almost no effects globally. That is, global prices will rise by only 0.13% across all sectors globally (weighted average), reducing social surplus by 0.28% of the pre-invasion monthly GDP ($22,295 million per month).

    Meanwhile, if prices increased by 20% globally in every M&Q sector, global prices will rise by 3.15% across all sectors, reducing the social surplus by 6.83% of the pre-invasion monthly GDP ($551,080 million per month). This case is roughly equivalent to Russian M&Q (energy) prices being five times higher (+497%), demonstrating the magnitude of geopolitical risk. 

    Research Lecturer Michiyuki Yagi and Professor Shunsuke Managi in the Urban Institute and the Department of Civil Engineering, Kyushu University, reached these conclusions by updating the world IO table to 2021 values (56 sectors in 44 countries) and analyzing the two scenarios above using the Leontief price model with the exogenous price elasticity of demand at the monthly level, a method developed by the authors in 2020*. As advantages, this model is theoretically suitable for supply analysis and will not overestimate monetary damages because price and quantity are perfectly elastic to each other. 

    Regarding the policy implications, with a price change of only 20%, Russia’s energy sector alone has little global impact because the economic scale is relatively small. Second, if energy prices rise globally, the most affected are three energy-related sectors (M&Q, coke/petroleum, and electricity and gas supply), metal, mineral products, electrical equipment, chemical products (manufacturers), air transport, and construction (service sectors). Finally, if energy prices rise, policymakers should focus on the downstream sectors of buyers or consumers. They will be more damaged than sellers or producers as they have to buy fewer quantities at higher prices. In terms of energy (fossil fuel) prices, the 2022 Russian invasion of Ukraine (was an economic shock that) cost consumers or buyers (in the world) primarily 2.85% of the pre-invasion annual GDP ($2.7 trillion) in five months following the invasion.

    The results of this research was published online in the journal Economic Analysis and Policy (the Economic Society of Australia) on January 4, 2023.

    For more information about this research, see “The spillover effects of rising energy prices following 2022 Russian invasion of Ukraine,” Michiyuki Yagi and Shunsuke Managi, Economic Analysis and Policy. https://doi.org/10.1016/j.eap.2022.12.025

    *Yagi, M., Kagawa, S., Managi, S., Fujii, H., Guan, D., 2020. Supply Constraint from Earthquakes in Japan in Input-Output Analysis. Risk Analysis. vol. 40 (9), pp.1811-1830. https://doi.org/10.1111/risa.13525

    ###

    About Kyushu University
    Kyushu University is one of Japan’s leading research-oriented institutes of higher education since its founding in 1911. Home to around 19,000 students and 8,000 faculty and staff, Kyushu U’s world-class research centers cover a wide range of study areas and research fields, from the humanities and arts to engineering and medical sciences. Its multiple campuses—including the largest in Japan—are located around Fukuoka City, a coastal metropolis on the southwestern Japanese island of Kyushu that is frequently ranked among the world’s most livable cities and historically known as a gateway to Asia.

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  • Attributing the rising costs of groceries to “price gouging” is not accurate

    Attributing the rising costs of groceries to “price gouging” is not accurate

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    Fact Check By:
    Craig Jones, Newswise

    Truthfulness: Mostly False

    Claim:

    Grocery stores need to be brought to heel over food prices. This isn’t ‘inflation’ because it isn’t caused by monetary oversupply. It’s just price gouging and we know that because we can literally see that they’re all reporting surplus profits.

    Claim Publisher and Date: Twitter user emmy rākete among others on 2023-01-21

    On social media, complaints regarding the rising costs of groceries are trending. It’s no surprise after all, the price of groceries has gone up around 13% compared to last year. According to the data from the Labor Department, the price of fruits and vegetables increased by 10.4 percent annually, while milk rose 15.2 percent and eggs soared 30.5 percent. Like other sectors of the economy, food prices are susceptible to supply chain complications and geopolitical unrest including the war in Ukraine. But some people have expressed their disdain for grocery store companies, accusing them of “price gouging” to increase their profits, which have been reaching exorbitant heights (corporate profits are at their highest levels in nearly 50 years, according to CBS MoneyWatch).

    For example, this tweet shared by thousands blames the rising prices of groceries on retailers engaged in price gouging: “Grocery stores need to be brought to heel over food prices. This isn’t ‘inflation’ because it isn’t caused by monetary oversupply. It’s just price gouging and we know that because we can literally see that they’re all reporting surplus profits.” 

    Is putting the blame on grocery store managers for your rising costs of orange juice accurate? It’s not quite that simple. The claim of “price gouging” at the grocery store is misleading because of the complex nature of the grocery business. Professor Lisa Jack, School of Accounting, Economics and Finance and lead of the Food Cultures in Transition (FoodCiTi) research group at the University of Portsmouth explains…

    Supermarket profits are complex and care should be taken with attributing them to any one cause. There are three main factors:

    1. Commercial income, also known as suppliers payments or back margin, contributes heavily to supermarket profits. These payments and support from suppliers to the supermarket include volume discounts and marketing fees. These can represent as much as 7% of a supermarket’s income: bottom line profits can average around 1-2% of income. Primary producers are seeing rapidly increasing costs for all inputs and having been squeezed to breaking point over the last 20 years, have no choice but to increase the prices of their output. Similarly for processors, packagers, distributors and every other business supplying supermarkets. The supermarkets themselves claim to be fighting on behalf of consumers to be keeping prices down and there is evidence that they are refusing price increase requests, which implies that commercial income is still being maintained. 
    1. In the last few years, supermarkets have been increasing profits by cutting overhead costs at head offices and in support services. Counterintuitively, the only economy of scale they have is bargaining power – see above. All their activities, including large stores, increase the overhead costs which can be as much as 75% of their spend. A significant amount of recent ‘soaring profits’ come from job losses, which are not sustainable in the long run. 
    1. Since their emergence in the 1920s, the business model for supermarkets has been to sell basics at little or no profit relying on high volumes to break even. Profits come from enticing customers to buy at least one impulse, premium item of food and non-grocery items. 8 of the 10 best sellers in supermarkets are the cheaper (but still higher profit margin) alcohol, confectionery and snacks. Since the pandemic and the cost of living crisis hit, more of us are exchanging going out for buying in ready-meals, alcohol and other treats, and buying more of our non-grocery items from supermarkets. These are where the profits come from, and they are being taken away from other sectors. Unsurprisingly, the food businesses that have the highest margins are those that produce brands of alcohol, confectionery etc – ‘Big Food’.

    Note to Journalists/Editors: The expert quotes are free to use in your relevant articles on this topic. Please attribute them to their proper sources.

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