Economics in the News – Aug. 15-21, 2022
Economics impacts our lives every day. Below are some of the top storylines from this past week related to economics.
o The surge in demand for products such as bicycles and furniture in the early part of the COVID-19 pandemic caused many retailers to increase their supply of such discretionary consumer goods. Because of such, retailers amassed significant extra inventory and are now struggling to sell with customers changing their spending patterns. Other discretionary products, such as grills, patio furniture and luxury mattresses, have experienced similar excess supply, prompting discounts at major retailers such as Target and Walmart.
According to market research group NPD, bicycle sales declined seven percent in the first half of 2022 versus last year. That compares to a whopping 46 percent increase in sales in the first six months of 2020. Peloton, a stationary bike company, saw increased demand for their product while consumers were looking to stay active while quarantining at home. As a result, and in anticipation of long-term elevated demand, Peloton manufactured the bikes in-house to avoid supply issues, but they have since scrapped their plans due to a drop in demand. [The Wall Street Journal]
o The cost to process a credit card transaction is increasing. As a result, many businesses are passing on that expense to customers through higher prices and incentives for customers to use cash. Some businesses are adding a surcharge of three percent to use a credit card. But businesses have little control over the credit card fees they are charged.
When a credit card is used, a series of behind-the-scenes transactions take place from the card’s network system – such as Visa or MasterCard – to the bank, with fees throughout the process. The transactions cost an estimated 2.5 to 3 percent of every sale. Interchange fees are charged by banks to merchants who process a payment. Merchants paid banks roughly $55 billion in interchange fees, set by Visa and MasterCard last year. The fees help to fund the reward programs. There is support from Congress to make the credit card system more like the debit card system, which provides merchants a choice in which network to use to complete the transaction. [The Wall Street Journal]
o The Big Ten Conference has signed the richest annual deal for any college sports league. The league sold its television rights for an average of $1 billion per year for seven years. The new deal, which will begin in 2023, more than doubles the conference’s expiring agreement, worth an estimated $430 million annually.
The agreement will split the Big Ten’s football games among broadcast networks FOX, CBS and NBC. Peacock, NBC’s streaming service, and Big Ten Network, owned by FOX, will also broadcast games. It borrows a strategy from the NFL in having each network broadcast a marquee game. In addition to football, the contracts cover men’s and women’s basketball and all other sports sponsored by the league. [The New York Times]
o The Inflation Reduction Act of 2022 – the climate and health care bill recently approved by Congress and signed by President Joe Biden – offers a $7,500 tax credit for a purchase of a new electric vehicle or $4,000 for a used one. But with many caveats ranging from a buyers’ income level to which models qualify, many electric cars are ineligible for the credit. According to the Alliance for Automotive Innovation, no vehicle on the market will qualify for the tax credit when battery requirements take effect in 2023.
Only singles with an income up to $150,000 and couples who file jointly and earn up to $300,000 qualify. The income cap requirement is an incentive for automakers to expand their customer base, as the average price of an electric vehicle is currently $66,000. In addition, for an electric vehicle to qualify for the tax credit, the vehicle must be produced in North America. Sedans must be priced under $55,000, and trucks, vans and SUV’s must be priced below $80,000. A certain percentage of minerals for the EV battery must also come from North America. [NPR]
o A summer heatwave and drought on top of Russia’s gas cuts to the European Union have impacted most areas of the European economy. France has been experiencing massive wildfires, Italy is in its worst drought since the 1800s. In Germany, the Rhine River is so dry that it has stranded and impacted riverboat cruises and has impacted the transportation of key imports and exports, such as coal. In Norway, salmon have lacked enough water to migrate upriver.
Hydropower reservoirs, which are responsible for 90 percent of Norway’s electricity, are at their lowest levels in nearly 25 years. Norway exports much of its electricity, and the drought and heat wave have only increased the demand. Nuclear reactors in France have cut back to prevent the discharge of heated water from threatening wildlife. The spike in demand for Norwegian energy has escalated electricity bills in Norway to record levels. According to officials, this summer’s drought has heightened the need for widespread energy transformation and new renewable energy sources. [The New York Times]