Higher Rock Education - Economics Blog

Tuesday, January 30, 2024

Economics in the News – Jan. 22-28, 2024

Economics impacts our lives every day. Below are some of the top storylines from this past week related to economics.

o   The cost of auto insurance has climbed 37 percent since Jan. 2020. Additionally, 2023 marked the largest annual jump in rates since 1976, as auto insurance costs rose 20 percent. The rise in rates has caused some drivers to opt to reduce their coverage and increase their deductible that they must pay out-of-pocket, while other drivers are opting to purchase older cars that are less expensive to insure.

Some of the increases stem back to the pause in premium insurance increases during the pandemic and the widespread parts shortages. Another element is due to cars becoming increasingly tech-heavy with cameras. The technology that comes standard on many cars today adds to the number of parts installed on the car, meaning that a minor fender bender can turn into an expensive repair bill if the computerized technology breaks. In addition, the LED headlights on most new cars are substantially more expensive than the halogen lights they replaced. Automakers have also turned to aluminum to build cars rather than steel because aluminum improves fuel efficiency and better protects passengers in an accident. [Bloomberg]

o   Ships using the Suez Canal have been faced with a dilemma for the last two months amid the attacks on the Red Sea by the Houthi militants. Whether to risk a missile or drone attack and pay higher insurance rates, or take a safer and longer route around Africa, impacting schedules and paying higher fuel costs. The impacts have been felt throughout Europe, forcing the shutdown of some automobile plants and raising fears of higher consumer prices. Shipowners still utilizing the Red Sea and Suez Canal have had to purchase war risk insurance, designed for vessels traveling in areas that are designated as high risk. The premiums for the insurance have increased fiftyfold, to an average of about 0.7 percent or an extra $700,000 for a ship carrying goods worth $100 million.

The Suez Canal typically handles 12 percent of global trade and nearly one-third of the global containership traffic. Most of the ships are opting to take the longer route around Africa, requiring an extra two weeks of travel and fuel costs. However, many logistics companies ordered many ships and containers during the pandemic which are now helping to ease the global supply chain. The longer shipping routes are helping the market to absorb what would have otherwise been an oversupply of ships. [The New York Times]

o   The US fracking industry is increasingly moving to electricity. Drillers have faced investor and public pressure to cut greenhouse-gas emissions and have made a greater effort to use electricity generated by wind and solar power. Wind and solar power have also allowed companies to save on fuel costs and more efficient operations.

However, with electricity sales booming in locations such as Texas, New Mexico and North Dakota, drillers are faced with a bottleneck amid limited capacity on the grid due to the lack of infrastructure. The US will need to invest heavily in grid infrastructure as more industries are moving to electricity, meaning that consumers will bear some of the costs. [The Wall Street Journal]  

o   Financial advisors typically suggest spending no more than 30 percent of your before-tax income on housing costs. However, that is becoming more and more difficult for many American renters. A research study from the Harvard Joint Center for Housing found that more than 22.4 million American renters in 2022 spent more than 30 percent of their monthly income on housing. Additionally, 12.1 million renters had household costs that accounted for more than 50 percent of their income.

Rent is the nation’s main driver of inflation, with other causes -- such as supply chain backlogs and worker shortages – improving significantly since the record high inflation of much of 2022 and 2023. While rent growth eased in fall 2023, the cost to rent isn’t expected to return to pre-pandemic levels, crowding out more tenants with tight budgets. A big issue for renters is that there is a shortage of units available, and most of the construction targets the higher end of the renter market – tenants who can more easily afford rent. Only 7.2 million units posted under $600 for rent in 2022, a decrease of 2.1 million compared with a decade before, adjusted for inflation. [The Washington Post]  

o   A new program designed to help Americans file their taxes directly to the government for free is being piloted by the Internal Revenue Service (IRS). The IRS plans to test the service, known as Direct File, with a smaller group of users in select states before opening it up to a larger group of taxpayers in the future. The pilot program will only be open to people who lived in the following states in 2023: Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming.

The IRS began developing Direct File after receiving $80 billion from the Inflation Reduction Act, signed into law by President Joe Biden. Republicans and TurboTax maker Intuit have opposed the free service. Direct File will only help users prepare federal tax returns, but some of the states participating in the pilot could develop a state-run tax filing service. [NPR]

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