PRIN ECONOMICS ECON 203
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Date Created: 09/30/15
Chapter 8 l A le ward shift in the aggregate supply curve will ceteris paribus cause in ation and more output Wrong It will cause in ation and less output B de ation and less output Wrong It will cause in ation and less output C in ation and less output Correct D de ation and more output Wrong It will cause in ation and less output 2 An increase in aggregate demand when the economy is operating in the vertical range of the aggregate supply curve will A cause only in ation Correct B increase real national output Wrong It will cause only in ation C will increase both prices and output Wrong It will cause only in ation D de ation Wrong It will cause in ation 3 The horizontal segment of the aggregate supply curve is also called the A intermediate range Wrong It is called the Keynesian range B classical range Wrong It is called the Keynesian range C excess capacity or Keynesian range Correct D none of the above Wrong It is called the Keynesian range 4 Which of the following will cause the aggregate supply curve to shift changes in the size of the labor force Correct but there are others changes in taxes levied on producers Correct but there are others changes in worker productivity Correct but there are others changes in technology Correct but there are others all of the above will shift the AS curve Correct WUOW 5 Which of the following will NOT cause the aggregate demand curve to shift a change in government spending Wrong This will shift AD a change in expectations Wrong This will shi AD C a change in net exports Wrong This will shi AD D a change in the overall price level Correct This would move the economy along AD but not shift AD 6 The long run aggregate supply curve A is horizontal Wrong It s vertical B slopes up and to the right Wrong It s vertical C is vertical Correct downward sloping Wrong It s vertical Ceteris paribus if the US dollar became stronger in foreign exchange markets this would shift the US aggregate demand curve to the left Correct Because the stronger dollar would reduce US net exports Shi the Us aggregate demand curve to the right Wrong It would shift it to the left because the stronger dollar would reduce US net exports Leave the US aggregate demand curve unchanged Wrong It would shi it to the left because the stronger dollar would reduce US net exports None of the above Wrong It would shift it to the le because the stronger dollar would reduce US net exports Which of the following in not a reason why the AD curve is downwardsloping the multiplier effect Correct There are three reasons real balances effect interestrate effect and net exports effect The net exports effect Wrong This is one of the three reasons Real balances effect Wrong This is one of the three reasons Interestrate effect Wrong This is one of the three reasons True or False Keynesians view the economy s aggregate supply curve as being more or less horizontal True Correct False Wrong Keynesians believe that prices are fairly in exible which means that prices don t change much as output changes at least in the shortrun The vertical range of the AS curve is known as the intermediate range Wrong It s called the classical range Classical range Correct Keynesian range Wrong It s called the classical range Supplyside range Wrong It s called the classical range True or False A drop in the price of crude oil would ceteris paribus shift aggregate supply to the left True Wrong The lower price of crude oil would lower production costs and therefore shift aggregate supply to the right False Correct The lower price of crude oil would lower production costs and therefore shift aggregate supply to the right The socalled Classical Economists believed that intervention by government in the economy is desirable Wrong They believed that the economy is inherently stable and that govemment s role should be very limited In Say s Law Correct That prices and wages are in exible Wrong They believed that prices and wages are exible such that markets quickly adjust to a new equilibrium That demand creates its own supply Wrong They believed that supply creates its own demand Prior to the Great Depression of the 1930s the most widely followed economy theory or model was what had been formulated by the classical economists Correct supplyside economists Wrong It was the classical economists Keynesian economists Wrong It was the classical economists New economists Wrong It was the classical economists When in ation occurs following a rightward shift in the AD curve its called costpush in ation Wrong It s demandpull in ation Sel sh in ation Wrong It s demandpull in ation Conspiratorial in ation Wrong It s demandpull in ation Demandpull in ation Correct In ation associated with a leftward shift in the AS curve is known as population in ation Wrong It s costpush in ation Costpush in ation Correct Greedybusiness in ation Wrong It s costpush in ation Corruptunion in ation Wrong It s costpush in ation Chapter 9 True or False Discretionary fiscal policy refers to changes in government spending and taX receipts that automatically occur due to the business cycle True Wrong It refers to deliberate or intentional changes in G andor T False Correct It refers to deliberate or intentional changes in G and or T If the MPC were 08 the simple government spending multiplier would be 125 Wrong It would 5 02 Wrong It would 5 06 Wrong It would 5 5 Correct Thinking in terms of simple multipliers and ignoring crowdingout if Congress wished to shift the AD curve to the right by 100 billion assuming an MPC of 08 it should increase government spending by 20 billion Correct Because the G multiplier would be 5 given the MPC of 08 decrease government spending by 25 billion Wrong This would shift AD to the left Decrease government spending by 20 billion Wrong This would shift AD to the left Increase taxes by 20 billion Wrong This would shift AD to the left If Congress wished to use fiscal policy to combat in ation Keynesians would favor a tax cut Wrong This would tend to shift AD to the right making in ation worse An increase in government spending Wrong This would tend to shift AD tot he right making in ation worse An increase in the money supply Wrong This would not be an example of fiscal policy A reduction in government spending or an increase in taxes Correct True or False The term automatic stabilizers refers to intentional changes enacted by Congress in G or in T True Wrong It refers to changes in G or T that occur automatically due to the business cycle False Correct It refers to changes in G or T that occur automatically due to the business cycle 0 A budget surplus means that exports exceed imports Wrong It means that tax receipts exceed government expenditures Imports exceed exports Wrong It means that tax receipts exceed government expenditures Government expenditures exceed tax receipts Wrong It means that tax receipts exceed government expenditures Tax receipts exceed government expenditures Correct If the govemment s budget is in balance when the economy is operating at full employment a recession will tend ceteris paribus to cause a period of in ation Wrong It will cause a budget deficit Budget deficit Correct Budget surplus Wrong It will cause a budget deficit Balanced budget multiplier Wrong It will cause a budget deficit True or False The socalled balanced budget multiplier predicts that under certain assumptions an equal increase in government spending and tax receipts will cause aggregate demand to fall by the amount of the budget increase True Wrong Aggregate demand would increase by the amount of the budget increase False Correct Aggregate demand would increase by the amount of the budget increase For a given MPC situation the size and sign of the taX multiplier is always equal to the spending multiplier but opposite in sign Wrong The tax multiplier is smaller than the spending multiplier Larger than the spending multiplier but opposite in sign Wrong The taX multiplier is smaller c equal to the spending multiplier and of the same sign Wrong The taX multiplier is of negative sign d smaller than the spending multiplier and has a negative sign Correct Supplyside economics focuses mainly on policies that will shift the AD curve to the right Wrong Shift the AS curve to the right Shift the AS curve to the right Correct Shift the AS curve to the left Wrong Shift the AS curve to the right Shift both the AD and the AS curves to the left Wrong The policies are intended to shift the AS curve to the right Examples of supplyside polices are taX increases on businesses Wrong It would be taX cuts Increased regulations on businesses Wrong It would be reduced regulations Increased tariffs on foreign goods Wrong Supplyside policies have nothing to do with tariffs Reduced taxes on businesses and reduced government regulations Correct 12 If the MPC is 08 the sizes of the government spending and taX multipliers respectively are 5 and 74 Correct 5 and 75 Wrong The tax multiplier is 1 less than the spending multiplier and opposite in sign 4 and 74 Wrong They are 5 and 41 respectively None of the above Wrong The are 5 and 74 respectively Assume that the economy is operating below full employment and that the marginal propensity to consume is 08 If Congress increased government spending by 400 billion the AD curve would shift to the right by 1400 billion Wrong The multiplier is 5 and therefore AD would increase by 2000 billion Shift to the right by 2000 billion Correct Shift to the left by 2000 billion Wrong The multiplier is 5 and therefore AD would increase by 2000 billion None of the above Wrong The multiplier is 5 and therefore AD would increase by 2000 billion 13 The most appropriate scal policy that Congress might use to combat a recessionary gap 1s A decreasing G Wrong This would likely make the recession more severe B increasing T Wrong This would likely make the recession more severe C decreasing G and T by equal dollar amounts Wrong This would likely make the recession more sever D increasing G or cutting T Correct Either of these would tend to increase aggregate demand 14 A politician claims we can reduce both government spending and taxes by the same amount without decreasing national income Keynesians would say he she is A correct since T must equal G Wrong Keynesians believe that the G spending multiplier is more powerful than the T multiplier B correct since S T I G Wrong Keynesians believe that the G spending multiplier is more powerful than the T multiplier C wrong since a change in G has a greater impact than an equal change in T Correct D wrong since a change in G has a lesser impact than an equal change in T Wrong Keynesians believe that the change in G would have a greater impact than an equal change in T 15 Which of the following statements is true A decrease in taxes on households will shift the AD curve to the left Wrong It would likely shift it to the right If current taX rates are high and are located along the downwardsloping portion of the socalled Laifer curve a taX cut would tend to spur economy activity and actually result in increased taX revenues Correct The size of the socalled balanced budget multiplier is zero Wrong The size is 10 because the government spending multiplier is l greater than the absolute value of the taX multiplier The formula for the simple spending multiplier is lMPC Wrong It s lMPS or llMPC Chapter 10 The largest single federal expenditure category is for Programs that assist the elderly or the disadvantaged ie for income security Correct National defense Wrong Defense was the largest decades ago but socalled income security is the largest currently Education Wrong The largest is socalled income security Interest on the federal debt Wrong The largest is socalled income security The largest single expenditure category at the state local level of government is Defense Wrong It s education Income security Wrong It s education Highways Wrong It s education Education Correct The largest source of revenue for the national or federal government is the sales tax Wrong The federal government does not levy the sales tax the largest revenue source at the federal level is the individual income tax The individual income tax Correct The inheritance tax Wrong It s the individual income tax Payroll taxes levied to support the social security workers compensation and unemployment insurance programs Wrong It s the individual income tax The overall tax burdenitaxes paid as a percent of GDPiis higher in the Us than in Europe Wrong US taxes are lower About 61 percent in the Us Wrong They are about 30 percent Lower in the Us than in Europe Correct Much higher in the Us as compared to England Wrong It is lower in the Us The best example of a tax based on the socalled bene ts received principle is the individual income tax Wrong It is the excise tax on gasoline A tax levied only on the purchase of expensive cars Wrong It is the excise tax on gasoline The excise tax on gasoline Correct The retail sales tax Wrong It is the excise tax on gasoline The best example of a tax based on the ability to pay principle is a retail sales tax Wrong It s the progressive income tax An excise tax on gasoline Wrong It s the progressive income tax An excise tax on cigarettes Wrong It s the progressive income tax A progressive income tax Correct The marginal tax rate is computed as total tax owed divided by total taxable income Wrong It s change in tax divided by change in taxable income change in tax owed divided by change in taxable income Correct Total tax owed Wrong It s change in tax divided by change in taxable income None of the above Wrong It s change in tax divided by change in taxable 1ncome A tax is regressive if the amount of tax paid in dollar terms increases as income rises Wrong The ratio of tax paid to income decreases as income rises The ratio of tax paid to income decreases as income rises Correct The ratio of tax paid to income increases as income rises Wrong The ratio of tax paid to income decreases as income rises The ratio of tax paid to income remains the same at all income levels Wrong The ratio of tax paid to income decreases as income rises Answer questions 9 thru 11 on the basis of the following information Income Level Tax Owed Average Tax Rate Marginal Tax Rate 20000 2000 30000 3200 The marginal tax rate as income rises from 20000 to 30000 is 10 percent Wrong It s 12 percent 12 percent Correct 1067 percent Wrong It s 12 percent 625 percent Wrong It s 12 percent The average tax rate for an income of 30000 is 1067 percent Correct 12 percent Wrong It s 1067 percent 6 percent Wrong It s 1067 percent Indeterminate Wrong It s 1067 percent The hypothetical tax structure shown above is Proportional Wrong It s progressive Regressive Wrong It s progressive Progressive Correct A atrate tax Wrong It s progressive The purpose of conducting a bene t cost analysis is to determine if a proposed governmental project is popular with the voters Wrong The purpose is to determine if the proposed project would utilize scarce resources efficiently or inefficiently Taxes are fair Wrong The purpose is to determine if the proposed project would utilize scarce resources efficiently or inefficiently The proposed project would utilize scarce resources efficiently or inefficiently Correct Majorityrule is effective Wrong The purpose is to determine if the proposed project would utilize scarce resources efficiently or inefficiently True or False Majority rule voting assures that the projects undertaken will produce societal benefits that exceed societal costs True Wrong This voting rule can lead to the approval of inefficient projects or to the rejection of efficient projects False Correct The concept of rational voter ignorance helps explain why The sales tax is progressive Wrong It helps explain why many eligible voters do not vote Congress reduced marginal tax rates in 2001 Wrong It helps explain why many eligible voters do not vote Many eligible voters do not vote Correct Some taxes are based on the abilitytopay principle Wrong It helps explain why many eligible voters do not vote Milk prices are administered by the 60yearold federal government system under which the price of milk is determined by a complicated formula based on the distance that dairy farmers in various states are from Eau Claire WI It is widely agreed that this pricing system benefits dairy farmers and that it is an example of the type of legislation that results from a The special interest effect Correct Dairy farmers in the Northeast or in other states who are located far from Eau ClaireWI benefit greatly at the expense of consumers from the higher milk prices that this Depressionera milkpricing system creates b An economy where taxes are primarily based on consumer spending Wrong It s an example of the special interest effect Farmers located far from Eau Claire WI bene t greatly at the expense of consumers from the higher milk prices that this Depressionera milkpricing system creates A Republican Congress Wrong It s an example of the special interest effect Farmers located far from Eau Claire WI bene t greatly at the expense of consumers from the higher milk prices that this Depressionera milkpricing system creates A Democratic Congress Wrong It s an example of the special interest effect Farmers located far from Eau Claire WI benefit greatly at the expense of consumers from the higher milk prices that this Depressionera milkpricing system creates Chapter 11 l The term national debt refers to a the total amount owed by all households businesses and governments Wrong It refers to the amount owed by the federal government b The total amount owed by state and local governments Wrong It refers to the amount owed by the federal government c The total amount owed by households on all types of debt including credit cards Wrong It refers to the amount owed by the federal government d The total amount owed by the federal government Correct 2 The US national debt exists because federal government spending has exceeded federal tax collections during most years Correct the Us is a poor nation Wrong It exists because federal government spending has exceeded federal tax collections Politicians are not responsive to the will of the voting public Wrong It exists because federal government spending has exceeded federal tax collections US exports in most years have exceeded imports Wrong It exists because federal government spending has exceeded federal tax collections 3 The federal budget Was in surplus for most of the 1980s and 1990s Wrong It was in deficit Was in deficit during most of the decade of the 1990s but the budget shifted to a surplus by the end of the decade Correct Was balanced during each year of the 1990s Wrong The budget was in de cit most years during the 1990s None of the above Wrong The budget was in de cit during most of the decade of the 1990s but the budget shifted to a surplus by the end of the decade 4 In terms of size of debt relative to GDP the Us national debt is smaller as compared to Italy Japan and Canada Correct Is larger as compared to Italy s debt Wrong It is smaller Larger today than at the end of World War II Wrong It s smaller today none of the above Wrong The US debt is smaller as compared to that of Italy Japan or Canada 5 True or False There is absolute no reason why we should worry about the socalled national debt True Wrong Even though it is true that most of the debt is owed to ourselves a large debt can make interest rates higher than otherwise which could reduce investment and economic growth False Correct Even though it is true that most of the debt is owed to ourselves a large debt can make interest rates higher than otherwise which could reduce investment and economic growth 6 According to recent data the largest share of the US national Federal Govt debt is owed to a foreigners Wrong The largest share is owed to Us individuals banks and corporations ie to ourselves bstate and local government Wrong The largest share is owed to Us individuals banks and corporations ie to ourselves c Japanese bankers Wrong The largest share is owed to Us individuals banks and corporations ie to ourselves d Federal Reserve Banks and Federal and StateLocal Governments Correct 7 The term crowdingout refers to the possible tendency for consumer spending and business investment to decrease if federal government borrowing causes interest rates to rise Correct b the possible tendency for business investment and consumer spending to increase due to lower interest rates associated with borrowing by the federal government Wrong It refers to the possible tendency for consumer spending and business investment to decrease if federal government borrowing causes interest rates to rise rude behavior by greedy business rms Wrong It refers to the possible tendency for consumer spending and business investment to decrease if federal government borrowing causes interest rates to rise 8 In the past the way the federal government has financed the gap between spending and tax receipts is to raise taxes Wrong It s sold bonds ie borrowed Cut spending Wrong It s sold bonds ie borrowed sold bonds ie borrowed Correct Sold assets such as public lands Wrong It s sold bonds ie borrowed 9 In year 2003 the US national debt was about what percent of GDP 200 percent Wrong It was 56 percent 62 percent Correct 100 percent Wrong It was 56 percent By year 2000 the debt had been paid off Wrong It was 56 percent 10 True of False Most economists believe that a socalled internal national debt is less of a problem ceteris paribus than an external debt True Correct False Wrong The reason why a national debt that is owed to it s own citizens is less of a problem is that each generation inherits bonds that are approximately equal to their share of the debt 11 Which of the following statements about crowding out is most likely to be true It is most likely to occur when government either directly compete with the private sector or when business investment decisions are very interest rate sensitive Correct It increases the size of the government spending multiplier Wrong To the extent that crowding out occurs the spending multiplier is reduced It is often mentioned by Keynesians as a reason why fiscal policy is weak Wrong It is often mentioned by Monetarists and New Classical economists All of the above are true Wrong The only true statement is that crowdingout is most likely to occur when government directly compete with the private sector and when business investment decisions are very interest rate sensitive 12 True or False The concepts national debt and budget de cit refer to essentially the same thing True Wrong The debt is the cumulative total of all past budget deficits whereas the deficit is the difference between government spending and tax collections for a single year False Correct 13 The amount of interest that the US government pays on the national debt depends on two things the size of the debt and the rate of interest Correct Represents about 10 percent of GDP in recent years Wrong It represents less than 3 percent Goes mostly to foreigners Wrong Most of the debt is held by individuals or businesses located in the Us All of the above are true Wrong The only true statement is that the amount of interest depends on the size of the debt and the interest rate 14 Of the nations shown in Exhibit 5 as of year 2003which had the largest and the smallest respectively national debt expressed as a percentage of GDP a Italy had the smallest while the Us had the largest b France had the smallest and the Us had the largest c Japan had the largest debt and Australia had the smallest d All the major nations of the world had about the same national debt relative to GDP 15 As of year 2003 the Us national debt was equal to approximately how many months worth of annual production a about 12 months Wrong The debt was equal to slightly less than 7 months production given that the debt in 2000 was about 54 percent of GDP b About 24 months Wrong The debt was equal to slightly less than 7 months production given that the debt was about 54 percent of GDP c Slightly more than 2 months Wrong The debt was equal to slightly less than 7 d Between 7 and 8 months worth of GDP Correct 62 percent of GDP amounts to about 744 months worth of GDP Working for Sears Goods I wish I had more time 7 or that my time weren t so valuable I would spend more time perusing my 1975 FallWinter Sears catalog I checked out a few items from that catalog that are reasonably 7 though hardly fully 7 comparable to similar items in 2006 Then I divided the average hourly nominal earning of production workers in 1975 487 in December of that year into the price of each of these more or less randomly selected items I did the same for 2006 items found with exceptions noted below at Searscom dividing these prices by the average hourly nominal earning of production workers in December 2005 1634 My data are found in at this BLS site My aim 7 copying the method used by Michael Cox and Richard Alm in part of their 1999 book M mm of Rich amp Poor 7 is to see how many hours this average American production worker must work to purchase each of these items Here s what I found Sears lowestpriced 10inch table saw 5235 hours of work required in 1975 734 hours of work required in 2006 Sears lowestpriced gasolinepowered lawn mower 1314 hours of work required in 1975 to buy a lawnmower that cuts a 20inch swathe 856 hours of work required in 2006 to buy a lawnmower that cuts a 22inch swathe Sears no longer sells a power mower that cuts a swathe smaller than 22 inches Sears Best freezer 79 hours of work required in 1975 to buy a freezer with 223 cubic feet of storage capacity 3977 hours of work required in 2006 to buy a freezer with 249 cubic feet of storage capacity this size freezer is the closest size available today to that of Sears Best in 1975 Sears Best sidebyside fridgefreezer 13962 hours of work required in 1975 to buy a fridge with 221 cubic feet of storage capacity 7956 hours of work required in 2006 to buy a comparable fridge with 220 cubic feet of storage capacity Sears lowestpriced answering machine 2043 hours of work required in 1975 11 hours of work required in 2006 A 12h0rsep0wer garbage disposer 2052 hours of work required in 1975 459 hours of work required in 2006 Sears lowestpriced garagedoor opener 201 hours of work required in 1975 to buy a 1Ahorsepower opener 857 hours of work required in 2006 to buy a 12h0rsep0wer opener Sears no longer sells garagedoor openers with less than 12h0rsep0wer Sears highestpriced work boots 1149 hours of work required in 1975 826 hours of work required in 2006 One gallon of Sears Best interior latex paint 24 hours of work required in 1975 184 hours of work required in 2006 Actually Sears sells no paint online so the price I got for a premium gallon of interior lateX paint is from Restoration Hardware Sears Best automobile tire with specs 165 13 and a treadlife warranty of 40000 miles 837 hours of work required in 1975 292 hours of work required in 2006 7 although the price here is of a Bridgestone tire that I found at another online merchant Judging from its website Sears no longer sells tires with specs 165 13 and a 40000 mile warranty I realize that you can accuse me of bias 7 perusing the 1975 catalog and choosing those goods whose real prices have fallen most dramatically over the past 30 years Certainly a catalog of 1491 pages has too many goods and services such as appliance installation to count I avoided clothing which is the first half of the catalog because most of the clothing Sears sold in 1975 was made of polyester or polyestercotton blends 7 stuff that few of us wear these days And some other goods are simply incomparable across this time span Take mattresses Sears does sell today some mattress and boxspring sets that today are comparable to the very best set that it sold in 1975 but Sears topoftheline mattresses today are not comparable to its topoftheline mattress in 1975 Likewise with photography equipment and audiovisual equipment how do you compare a 2006 CD player to a 1975 turntable A more fundamental objection to such a practice would go like this Sure prices of things sold in department stores are today much more affordable than they were in 1975 but what about healthcare housing and education These things require more hours of work What does your little catalog exercise really prove about Americans overall standard of living It s a good question 7 and I believe that I have an answer But that answer will await a later blog post for unlike Sears I don t want anyone to say that this post has everything Posted by Don BoudreauX in Standard of Living 1 Permalink TrackBack FROM THE ARCHIVES August 2 2002 The Great Retirement Scare The run of bears on Wall Street is being exploited for all kinds of political ends But the most disreputable is the campaign to scare grandma and the rest of us from investing in the stock market for retirement The people selling this line are the real threat to a secure old age quotWith stocks plummeting Americans nancial futures are in perilquot avers Time magazine implying that Baby Boomers will have to work oh until they keel over on the factory oor Then there are those using the bear market to discredit Social Security reform quotIf you needed any understanding of why it s a bad ideaquot intones House Minority Leader Dick Gephardt quotI39m sure you got that from what you39ve seen happen in the stock market in the last year quot To which the best reply is Stop trying to scare people out ofa good deal Stocks have long been and will continue to be essential to building a secure retirement and there s no reason to think that has changed As scary as some of the recent numbers look it s worth putting today39s stock market in perspective It39s true that the Dow Jones Industrial Average is down some 28 from its peak in 2000 but that was after several years of 20 returns Even taking into account the past year39s losses the Dow is still trading at what it was as recently as 1998 Moreover to look at today39s market in isolation is like looking at your bank balance only once a year Economists and financial advisers have long explained that profitable investing is a longterm affair According to Ibbotson Associates a financial consultancy in Chicago an analysis of the Standard amp Poor s 500 over the past 76 years showed a 29 chance that an investor would lose money if he invested for only one year The risk dropped to 10 over a fiveyear period to 3 over a 10year period and to 0 over 15 years The longterm investor has always fared better with stocks than with any other type of investment According to the Ibbotson analysis investors who held stocks for 20 years saw compound annual returns of about 11 in comparison to 53 for government bonds or just 38 for Treasury bills Yes there is always an issue of timing especially when retirement looms amid a bear market But that too goes to the heart of longterm investing strategy and the ability to change a portfolio over 40 years Younger investors can bet aggressively on stocks riding out the ups and downs Older investors those close to or in retirement can shield themselves from shortterm uctuations by shifting part of their holdings to less risky investments like bonds That s a strategy the new investor class is slowly but surely learning According to 401k administrator Hewitt Associates in 2000 the share of 401k money invested in stocks was 74 as investors sought to maximize wealth That number has since fallen to 65 as investors realize that the goal isn39t just to make money but to make it and keep it Which returns us to Mr Gephardt and the attacks on Social Security reform The case for voluntary private retirement accounts has never hinged on 20ayear annual returns The core of the argument is about using stockmarket investments to diversify Social Security assets and put the program on a more financially stable path for the long run As for individuals allocating a portion of their payroll taxes to personal accounts would give them more control over their own destinies Social Security is currently little more than a political promise The money that evaporates today from workers39 checks isn39t going into a future pot but is nancing current retirees and the program is set to start running a de cit in just 14 years Personal accounts would allow workers to build an asset that depended on more than some future political mood they would have a legal property right to their retirement funds that they could say pass along to heirs Americans who now die early in retirement never see any of the money they worked so hard to earn If politicians and the media want to talk about quotriskquot they should talk about all kinds One type is the market risk in which investors control their own retirement funds riding out shortterm price uctuations but with the expectation of solid longterm returns Another type is political or government risk in which taxpayers pay into a system that is slowly going broke and won t have enough money to pay them when they retire unless the politicians cut benefits or raise taxes That s the retirement debate we really ought to be having bear market or bull Deep Trouble Far Below Gulf39s Surface Ivan Wreaked Havoc on Oil Industry Mudslides Damage Pipelines Helping Fuel Price Increase A Hunt for Missing Pieces Mr Bea39s Theory Proves Correct By RUSSELL GOLD Staff Reporter of THE WALL STREET JOURNAL October 27 2004 Page A1 A few hours after Hurricane Ivan slammed into the Alabama coast last month Robert Bea got an urgent call An engineer with the French oil company Total SA wanted Mr Bea to send him everything he had ever written on underwater mudslides in the Gulf of Mexico Mr Bea an engineering professor at the University of California at Berkeley and former chief US engineer for Royal DutchShell Group had studied these unusual submarine avalanches on and off for three decades As early as 1971 Mr Bea argued that mudslides could be far more destructive to the growing Gulf of Mexico oil and naturalgas industry than hurricaneforce winds waves or currents Overnight Mr Bea s obscure theory had been validated Hurricane Ivan had triggered a multitude of mudslides that crippled production in a sizable chunk of the gulf a region that satis es about onequarter of the US thirst for oil Now the industry faces a titanic task finding and repairing pipelines that have been broken buried and slung about like pickup sticks across the sea oor Until they are fixed billiondollar oating platforms will be idled and unable to get oil to land 39 The storm some traders and analysts have taken to calllng quotIvan the Terriblequot is shaping up as one of the worst disruptions ever in US energy production It has knocked a total of more than 251 million barrels of oil off world Compare the recent surge in oil prices with gains in gasoline heating oil and natural gas Plus chart oil39s advance towards 50 Crude Facts A look at oil prices over more than three decades Adobe Acrobat required markets quot and continues to hOId back more than 400000 barrels a As Refineries Slow Heating Costs May Rlse day That is 25 ofthe gulfs normal Fund Buying Lifts Natural Gas Prices daily production of 17 million IE A Says Data were Comlgmmised barrels a day It could be six months before all the productlon can be restored This sudden shortfall has helped drive crudeoil prices up to 55 a barrel today from 43 a barrel before Ivan hit on the night of Sept 15 The hurricane39s body blow to the gulf came at one of the global oil industry s most vulnerable times in recent years Surging demand for oil in China supply outages in Iraq and other troubled nations and years of underinvestment in oil production have left the world with its thinnest buffer of spare oil pumping capacity in decades about one million barrels a day or 12 of global oil demand The prolonged loss of more than 400000 barrels a day from the gulf left world energy markets perilously close to a shortage quotEffectively we are running with no spare crudeoil production capacity and that s why the market blew through 50quot says Larry Goldstein president of the Petroleum Industry Research Foundation a US industry group The price tag on such a runup is huge A sustained rise of 10 a barrel of crude can erase half a percentage point from the growth rate in US gross domestic product according to Dallas Federal Reserve Bank research Making matters worse most of the crudeoil production that has been hobbled by Ivan is what39s known as quotsweet crudequot which is lower in impurities than the heavier crude available in Saudi Arabia Many US ref1neries can process only sweet crude and Ivan left them scrambling to find another source for their production of gasoline and heating oil The situation is so acute the Bush administration on Sept 23 decided to dip into the nation s Strategic Petroleum Reserve to loan re ners 42 million barrels of sweet crude something they said they39d do only in the most extreme emergency Just after Ivan hit repair crews initially focused on the enormous offshore production platforms that populate the deep waters of the gulf These behemoths some costing 1 billion are prized for their ability to tap large and previously unreachable oil reservoirs in up to 10000 feet of water Ivan battered them with 120 mileanhour winds and some of the tallest waves ever seen in the gulf including a recordsetting 53foot brute Several deepwater rigs moveable machines used to drill wells were ripped from their moorings Transocean Inc39s Deepwater Nautilus was blown 70 miles during the storm ending up in a region off the Florida coast that is offlimits to drilling It was hauled back into place after just a few days A 90foot tall derrick on Devils Tower a oating production platform owned by Dominion Resources Inc was blown over and sank 5600 feet to the bottom where it will stay The helicopter pad on ChevronTexaco Corp s Petronius a 500 million 1870foot tower that is one of the world s tallest manmade structures folded over and smashed into sleeping quarters Both are still being repaired To the relief of energy executives most of their pricey platforms survived the storm unscathed Yet many still aren t pumping oil into the energyhungry US mainland even as prices have set records The reason Critical pipelines were tossed about ripped apart and in some cases simply lost as if a marauding bulldozer had been set loose in the gulf Low Tech SLOW RESquot MP39I39ION Percentage 01 Gulf of Mexico oil production last to Hurricane Wan damage versLE the price of Nymextraded crudeGil futures per barrel 0 Percentage of 100 3 on shut down 50 quot3 Ms Despite all the engineering wizardry of the platforms oil and naturalgas production still ultimately depends on the gulf39s 33000 miles of lowtech pipelines laid along the seabed to move the oil A 50 and gas to shore Since the beginning of the offshore industry in the NW Gde 1950s most crude oil has been pumped to a cluster of terminals and ri mums p as re nerres located on the t1p of Lou1s1ana that extends 1nto the gulf 25 mg 5 45 The p1pe11nes feed1ng that cluster cut r1ght through the waters off 0 m the Mississippi Delta the very spot Mr Bea and other experts 1 24 I a 15 22 cons1der the most vulnerable to underwater mudslrdes 1n North Sept Oct Amerrca u raganerd Semce Hymn ms A arampsrraum So many pipelines feed into the delta quotit s like spaghetti out therequot says Chris Oynes Gulf of Mexico regional director for the federal Minerals Management Service which regulates offshore energy activities As the Mississippi River ows into the gulf the current carries huge amounts of clay and silt that settle onto the seabed This creates enormous ledges of sediment with the consistency of mayonnaise From the shoreline the sea bottom falls away gradually for several miles before dropping off sharply Large waves from Hurricane Ivan acted as a suction pump pulling and pushing the muddy ledges until they gave way and surged downhill possibly as fast as 50 miles an hour The wall of mud hit the underwater oil infrastructure including pipelines and platform legs with a force Mr Bea calculates as the rough equivalent of 12 Saturn V rockets It took only one of these rockets to launch the Apollo missions to the moon quotNothing else on the face of the earth deals with this level of forces Not the tallest buildings Not the tallest bridgesquot says the 69yearold engineering professor The resulting damage to pipelines was enormous Though Shell and PLC39s giant Na Kika platform suffered only a couple of minor scrapes a crucial pipeline leading from the platform was ripped apart preventing the companies from restarting production of 110000 barrels of oil per day One end ofthe pipeline which measures 18 inches in diameter was lost in the sludge for several weeks The Shelloperated pipeline was repaired and put back in service earlier this week Other pipelines may take far longer to repair Just nding the broken pipe is taking weeks A small armada of 100foot to 200foot research vessels has been deployed in the gulf to search for pipelines pushed far off their original track in pitchblack waters swirling with sediment What the crews are nding has surprised even industry veterans of past hurricanes A second 18inch BP pipeline was shoved more than a halfmile to the south stopping only when it slammed against the legs of an offshore platform Other pipelines were buried beneath 40 feet of mud The dif culty in nding the pipelines stems partly from an industry innovation that has prevented any signi cant oil spills Since the early 1970s many new pipelines have included what are known as breakaway valves When there is too much pressure the pipeline breaks at a predetermined point and a valve shuts to prevent spills This controlled rupture makes it easier to fix But the movement of the broken pipe has been so great that the ends are hard to nd Even before the storm hit the phone was ringing at Fugro GeoServices Inc an underwater surveyor owned by Dutch conglomerate Fugro NV The company runs siX ships out of Patterson La They have been slowly trolling through the gulf dragging torpedoshaped sensors called quottow fishquot that use sonar and magnetometers to map the seabed and look for the steel and concretecloaked pipes The ships come in every few days to refuel take on groceries and report the data they39ve collected The data stored on removable devices are driven from the docks an hour north to Fugro GeoServices s headquarters in Lafayette La where a team of analysts assemble the information and try to figure out which pipelines ended up where To speed the process many companies have put employees on the ships with satellite phones to call in preliminary findings On a recent evening in a windowless room W Kerry Behrens a senior manager with Fugro leaned over a large map ofa 1074acre block known as Main Pass 69 By patching together several dozen strips of data a picture emerges of the muddy seabed with deep furrows cut by the storm and the currents in a fanshaped pattern Trenches that once held two pipelines running in a fairly straight eastwest line are visible But now the trenches are empty and the pipelines loop in a southerly direction Despite weeks of poring over the data it s still not clear what is where The map has a notation that reads quotunknown pipeline segments debrisquot Mr Behrens a geologist by training points to a map of another part of the gulf traversed by ChevronTexaco and El Paso Corp pipelines that were missing quotWe re trying to help them locate their pipelinesquot he says adding with a shrug that success is elusive He s never seen a storm that could move pipelines laid as deep as 200 feet under the sea quotThat s an impressive stormquot Assessing Damage Once a surveyor such as Fugro GeoServices pinpoints a pipeline the next step is to send in a team of divers to assess the damage Dive teams working in waters up to about 300 feet deep have been slowed by choppy waters that have curtailed operations and an abundance of stirred up mud that has made it impossible to see anything quotThink about walking around blindfolded in an area where you sink up to your knees in mud and trying to find somethingquot says Mike PheniX a diver for Epic Divers Inc a closely held company in New Orleans His approach is low tech He usually taps a siX foot steel rod into the mud to feel around for the pipeline Mr PheniX has been working nearly nonstop since Ivan and has been told his planned vacation in December might have to be cut short Once pipelines are located and inspected the next step is usually to lift up sections a quartermile long or more with the aid of enormous airbags that are inserted underneath the pipelines and in ated That s what BP workers plan to do for the company39s 18inch oil pipeline that was pushed more than a halfmile to the south First they plan to move it 50 feet away from the legs of a ChevronTexaco platform That s a stopgap measure so they can test it to see if the pipeline has any leaks that need repair quotWe believe and hope that when we pressuretest it it s robustquot says Kenny Lang BP39s vice president of deepwater Gulf of Mexico production If so they can restart oil production at Marlin a oating citadel tethered to the sea oor nearly a mile down that produces 40000 barrels of oil a day Other BP deepwater platforms including Horn Mountain are also waiting for pipeline repairs before resuming a total loss to BP of 170000 barrels a day Mr Lang says he hopes to be back to full production by the beginning of December Since Marlin s naturalgas pipelines weren39t damaged the platform has restarted its gas wells But the wells also produce a liquid called condensate that is converted into propane and other fuels The condensate is usually sent into the oil pipeline now out of service BP got an emergency permit from the federal government to reinj ect the condensate into an idle oil well until it gets the pipeline up and running again BP also is exploring pumping oil into tankers that could then shuttle the fuel to shore Write to Russell Gold at russellgoldwsjcom
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