Monday, April 28, 2008

Clinton and McCain are out of the Pigou Club: Cutting Gas Tax Helps Producer Profits Not Consumers!

So the latest political news is that Hilary Clinton is attacking Obama on his refusal to decrease the federal gasoline tax over the summer. John McCain has made a similar proposal (see article here).

This proposal does not make economic sense. When supply is relatively fixed like oil (i.e. inelastic) removing a tax will only increase the price received by producers instead of decrease the price for consumers. In other words, lowering taxes will not lower prices to consumers as much as it will increase profits for oil companies.

This result has been well highlighted by Greg Mankiw, Econ blogger/Text book writer/Harvard Econ Prof, through his pet cause the Pigou Club. The club is named for those who support higher gas taxes and Dr. Mankiw has even written a Pigou Club Manifesto. Why support higher taxes? Because driving creates a negative externality, you drive and it hurts me through pollution and highway congestion. A Pigovian tax is a corrective tax on negative externalities, that is charge people more to do stuff that is bad overall for society. Take a look at the list of members of the Pigou Club from Gore to Greenspan to Krugman to Arthur Laffer and this blog writer. Will Obama add his name to the list?

update: Mankiw's reaction

Austin Economics: The Nerd Bird, Hacienda Prices, Ribs and Migas

I just got from a weekend visiting friends in Austin. On the way home I picked up a copy of the local newspaper, the Austin American Statesman, which had an article on the Austin Airport, which I was sitting in at the time. In the nine years, since Austin-Bergstom airport has opened it has gone from regional airports with flights only to Houston and Dallas, to an airport with 44 flights to destinations outside of Texas. I was happy to take a direct flight from BWI on Southwest as changing planes always adds a few extra hours and an element of risk of further delays. The change in the airport from spoke to mini-hub all started with a direct flight from Austin to San Jose in the early 90s, which took tech workers between Silicon Valley and Austin’s tech companies including Dell. With the tech clientele, the flight was nick-named the “nerd bird.” I might need to call it something else as my wife is taking it today as she ventures into Silicon valley for the summer (more on that another day).

From the paper and talking to my friends I got the sense that housing prices were not falling as bad in Austin. This is likely because Austin runs on the University, the state government, and the tech industry. All three industries seem not be doing as poorly as others, so housing prices are holding for now.

What trip to Austin (or blog post about a trip) would be complete without some BBQ and Tex-Mex food? I headed over to Country Line and got some ribs, brisket and sausage. If you have a hankering for the same they have “air ribs.” What could contrast with slow roasted brisket and ribs, but fast Tex-Mex food? Specifically, migas a combination of eggs, peppers, tomatoes, tortillas and cheese (lots of cheese). Basically it’s combination of left over stuff, just perfect for breakfast. With BBQ you had what once was considered the least desirable cuts of meat (ribs and brisket) and tex-mex with combos of eggs, flank steak, onion, peppers, and tortillas. With rising food prices, perhaps a new great cuisine is yet to be born. Until then pass the ribs and migas.

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Friday, April 25, 2008

International Malaria Day and Towson Associate Contest

So Today is International Malaria Awareness Day. Malaria is a big problem as:

“The World Health Organization reports that 300 to 500 million new cases of malaria occur each year, and over one million people die, mostly children. Pregnant women and non-immune adults are also especially vulnerable to severe disease.”

Another reason that malaria is a popular cause is that
“malaria can be prevented with protective insecticide treated nets, insecticide spraying, and the elimination of mosquito breeding sites.”

In other words lives can be saved for just a few dollars for a protective bed net the chance of contacting malaria can be greatly reduced. The question is how best to get nets to people. Jeffery Sachs has been a strong advocate for giving away nets, while others have suggested that bed nets should be sold for a small price (good link here). The idea being is that if people pay a small price those who will actually use the nets get them, while those that would not use them would not pay.

Analysis of these studies have come out on both sides in terms of what is best way to distribute the nets (free or small cost). It is an ongoing debate in development economics and my sense is it depends on local conditions.

I was thinking about all of this yesterday when I went to get a cup of coffee from a fund raiser outside my office. The funds being raised were going to be used for free bed net distribution in Tanzania. The woman running the coffee sale was Kim Hawk who is one of two finalists in Towson’s the Associate Contest. The contest is like Donald Trump’s the Apprentice, except instead there are eight Towson students competing to work after graduation with John Tolmie who is CEO of St Joseph’s Hospital. Out of curiosity I asked Ms. Hawk about her opinion about giving away the nets versus selling them, she seemed well versed on the subject I was impressed that part of the experience was learning about these issues. She would certainly get my vote (although I have not met the other finalist), the big decision day is Tuesday so best of luck.

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Thursday, April 24, 2008

Tigers’ Bidding: Auction for Baseball Tickets

I was listening to the Detroit Tigers game on my way home from work last night. Not only did the Tigers score 11 runs in one inning, but 19 in the game. During the game the announcers advertised that the Tigers were now selling tickets through an auction. Currently up for bid are the three upcoming home series against some of the AL greats (LA, New York, and Boston). So it looks like they are selling their good tickets to their good games.

I have often wondered why teams like New York or Boston who sell out every game do not do auctions, before their slow start the Tigers were expected to also sell out most of their games. From an economic point of few if people were going to resell the tickets on Ebay anyways, why not charge more for the tickets to begin with? Perhaps public relations is part of it, but I think the public getting used to varied prices more and auctions, and running auctions now has an extremely small cost.

I don’t think the Tigers are advertising enough though, as it appears they have received hardly any bids even on tickets that have auctions ending tonight.

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Wednesday, April 23, 2008

Who Cares about Rising Grain Prices? Beer Drinkers!

There are more serious problems with global inflation, which I talked about a few days ago here. However, my friend Dan, a fellow beer drinker and home brewer, pointed me to a recent article in the Miami Herald. Earlier I discussed the hops crisis, but grain price increases are also leading to price increases in beer. It seems the price of beer is rising on the order of 40% for microbrewed beers, which Dan and I like to drink. How are people responding, I like this quote from the article.

''It is a big hit,'' Foye said as he leaned over a microbrew at the bar of Beachwood BBQ in Seal Beach, Calif. He doesn't drink enough beer to make higher prices a ''budget buster,'' yet Foye still finds it ``irksome. . . . . It's like gas prices; what are you going to do about it?

Beer consumption is also being impacted by the housing price crisis (OK I’m not sure by how much), but this Miami couple is drinking less beer in response to a dive in their home prices. Although this should lower beer prices.

Even home brewers are not immune to the price shocks. As noted on the Northern brewer forum, grains for home brewers have seen price increases of 20% in the past 9 months.

How big a deal is this increase. People in my age group spend only about 1% of their total budget on alcoholic beverages according to Consumer Expenditure Survey, compared to about 5% on gas. Wonder what it would be for the average college student?

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Tuesday, April 22, 2008

Matzo Shortage in San Francisco

So as I alerted you yesterday, there is currently a shortage of matzo in the San Francisco bay area. The New York times highlights Jews wandering from store to store in search of their Passover staple.

So what could the economic reasoning be for the shortage? The times and several other articles have blamed Manischewitz, the major matzo producer, transition to a new oven that did not seem to be working yet. Manischewitz knew this problem was coming, so the economic lesson in the short run it is difficult to change production.

I think another possibility is that Passover was on Saturday this year so this left opportunities for two weekend Seders. So the opportunity cost of Seders fell, since preparing a Seder is easier on the weekend likely shifting the demand curve for Matzo.

Markets only work if there is good information on demand for suppliers. Maybe we can blame Wal-mart as this article on the shortage in Reno points out "Wal-Mart brought it in for Easter, not Passover," he said. "They put it up for clearance after Easter."

The good news is I think it should all be resolved by next year, when the new ovens come online. Typically shortages only last if there are constraints on prices or productions.

So to mix sayings “Let My People Eat Matzo!”

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Monday, April 21, 2008

Breaking News! Matzo Shortages in San Francisco!

Through a comment on marginal revolution, I learned of a breaking news story in San Francisco apparently there is a shortage of Matzo ! Two ads on craigslist (here and here) are looking for matzo in the bay area.

Stay tuned tomorrow for an economic analysis of the matzo shortage.

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Diminishing Returns Explained: A million in a 401k is about enough

So this blog is named the “The Blog of Diminishing Returns.” Part of the goal of the blog is to explain basic economic concepts. So today we take on the blogs title. Everyone has experienced diminishing returns, it is your realizations that you not gotten as much done the 11th hour of the all nighter you are pulling as the first hour. Economists usually look at marginal product (that is the production one more hour working). Many times when you produce something after a while the benefits from working an extra hour starts falling or may even become negative. When the extra product of working one more hour is less than the last hour you have hit diminishing returns.

A related concept is diminishing marginal utility. In this case utility is just a measure of how happy something makes us, so if something has diminishing marginal utility the extra benefit we get from one more keeps falling. Think of when you are hungry how happy the first slice of pizza makes you compared to the fifth. Yes the fifth pizza slice makes you happy, but not as happy as the first slice did. At some point the 15 slice may even make you lose all your utiles!
So on that note, a reader asks a question on these lines.

“I am curious if there is a breakeven point and/or a point of diminishing return for someone in their late 40's early 50's to stop contributing to their 401k and just spend the contribution money and enjoy life?”

Yes, here is why. Imagine you had a 10 million dollars, how much extra happy would you be (a lot?) Imagine if Bill Gates had 10 million more dollars would he be much happier, probably not. So for the most part economists assume money has diminishing marginal utility at some point. What is the decision here it is spending today versus saving for retirement? Because of diminishing marginal utility it is probably best to spread out your money a bit between now and retirement. However, as economists would point out most people would rather have something today then 20 years from now (since we might not make it 20 years), so having a dollar in retirement is worth less than enjoying it now. So factoring that all in.

Taken to extreme if you had 5 million dollars in your 401k and you were 40 and wanted to live off of 200,000 a year you could probably stop contributing to your 401k, given that with savings bonds you could easily cover that.

So where exactly is that cutoff point. I don’t know, but I think a good idea can be found in a paper by Jonathan Skinner in the Journal of Economic Perspectives. His basic analysis says it clearly depends on the household, but if you are in your late 40s to early 50s and have a million bucks in your 401k and want to live off of less than 200k year. Dr. Skinner basic conclusion is that you have reached that point and should spend some money now. See his linked paper, which should be quite readable, particularly Table 2 on pg 66.

Back to Bill Gates and his buddy Warren Buffett. At this point they are giving away lots of money, perhaps diminishing marginal utility does not sink in so fast with charity as it does with pizza. So perhaps it is time to give more money away and let other people enjoy life.

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Friday, April 18, 2008

An Economist look at the ten plagues: Let my people go!

Tomorrow is Passover and my wife and I will be hosting our (quasi)-traditional Seder. My Economists Chanuka song amused a few people, so I thought continuing in the Jewish economist tradition, here is an economic look at the ten plagues. If you recall in the Passover story, Moses declares “Let my people go!”, however the Pharaoh does not so God punishes the pharaoh with plagues. Below is a brief economic analysis of the plagues.

Plague #1: Blood: sure blood all over the place is not going to foster trade and economic growth. Particularly, if that plague turns the rivers to blood. In a sense this plague attacks the very foundation of Egypt agricultural society that benefited from the waters of the Nile.

Frogs #2: A plague with Malthus in mind. Frogs not only ate a bunch stuff, but they quickly multiplied much like Malthus predicted with the human population destroying resources.

Lice #3: An itchy worker is a less productive worker. A large line of economic literature shows that healthy workers are more productive, clearly these lice were aimed at decreasing labor productivity.

Flies/Beasts #4 and Pestilence #5: The plagues are going right at the live stock now, both plagues were aimed at killing live stock. Given that in many developing countries wealth is held in livestock, this is the equivalent of screwing with the stock market.

Boils #6: Again attacking labor productivity

Storm/hail a#7 and locust #8: These were aimed at orchard crops and the current harvest, basically striking right at the heart of cash crops.

Darkness #9: You try being productive in the dark.

Death of the first born #10: Hitting likely the most productive workers. Since first born were likely to inherit businesses they likely held the most human capital.

A more theoretical framework. So what you have is a two player repeating signaling game between Jews and Pharaoh. Jews have two choices plague or no plague. Pharaoh has two choices “Let the people go” or “not”. Given the backing of God, Moses threats were not cheap talk, it appears the plagues were a dominant strategy, but one might question the rationality of the Pharaoh to continue to go with the strategy do not “Let the People Go”.

Happy Passover everyone!

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Thursday, April 17, 2008

GDP per capita and Happiness: you can't spell happy without y

Justin Wolfers and Betsey Stevenson present new research linking happiness and GDP per capita. Check out the graph from the New York Times on the right. Their data comes from the Gallup World Poll and looks to be one of those polls where they ask people how happy they are on a 1-10 scale. Previous work by an economist Richard Easterlin had found that there was no relationship once basic needs were met between GDP and happiness, this finding of no link between two was referred to as the Easterlin paradox. Wolfers claims on the freakonomics blog that the link is now apparent due to the increase in data availability.

I’m still not sure of these 1-10 happiness scales, but I look forward to Wolfers posting on the freakonomics blog this week.

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Wednesday, April 16, 2008

Three more questions about inflation

In response to my previous post to reporter and fellow Grinnellian, Courtney Sherwood, asks three more questions. Let’s take them one at a time.

* How is inflation being experienced now? (In this community, across the U.S., around the globe.)

Inflation is being seen mostly through increases in food prices energy. Food prices for basic staples have increased about 50-100% and energy prices about 20% for gas.
In the US and Europe households spend less than 10% of their budget on food. So what happens when food prices go up. Not a lot, people reduce spending in other ways, save less, or shop at Walmart instead of Whole Foods (as this article in the economist suggests).

Around the globe, in the typical developing country food spending can be anywhere from 50-80% of the household budget. Protest over rising bread prices are occurring in Egypt and India. In Egypt as highlighted in this economist article, lines are getting out of control and causing violence. The problem is well summed up by a Egyptian who was interviewed by the story.
“I don't want a car, I don't want cinemas, I don't want to eat Kentucky chicken,” declared Masoud Hafez, an electrician who has worked in the factory for 28 years, brandishing a monthly pay-slip of 249 Egyptian pounds ($46). “I want bread for my children.”

* What is causing it?
Focusing on the high food prices. Increased demand for food from growing Asian economies. The increase demand for grain for biofuels due to high oil prices. Droughts also seem to be impacting the ability of farmers to produce. (another economist article)

* What should we do in the face of rising inflation, as individual consumers?
Not a lot individual consumers can do. As basic economic theory shows usually individuals can’t impact prices. Filling the pantry with some pre-package foods might help or even starting your own garden. You might need to shift your food budget around.

For long term savings I-bonds might be a more attractive investment, although the stock market should figure inflation into prices.

Finally, I would like to note I found all the articles for this post in the Economist Magazine, if you want to keep up to date on how inflation may impact you, that is probably the best source.

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Tuesday, April 15, 2008

USA Steady Prices Since 1981!

Beloit College where I used to teach annually puts out a mindset list of things people entering college that year have not experienced. If they didn’t do it a few years ago may I suggest students entering college now have never experienced an inflation rate of more than 5.5%. The last time inflation for the year was above 10% the year was 1981 and this economist couldn’t even say the word inflation. This Washington Post article highlights some kids learning about inflation as food prices go up. A friend from Grinnell, Courtney Sherwood, asks some good questions to consider in the face of inflation on her blog:

“Is there any value in saving money, when its purchase power declines with each passing day? What should I spend on now, with the knowledge that it will cost more tomorrow? What is the best way to plan for my future when I don't know what the future holds? I've never been through this before.”

So here is a simple inflation primer.
What is inflation? It is a measure of the increase in prices between years

How does the government measure inflation? Basically they have a set of typical goods called a basket and they see how much the price of that basket changes.
Sometimes reports talk about inflation without food or energy prices in the basket (core inflation), why not include food and gas in inflation? These prices are volatile to weather and political shocks, so they might not reflect well the overall changes in prices.

Why is inflation bad? Some inflation is not necessarily bad, the problem is when it gets too high people realizes prices will soon be going up again so they should buy things sooner, causing more short term inflation. If it gets too out of hand people will have to continually run to the store as soon as pay day hits, causing long lines and a real problems.

So what to do? As Simpsons news anchor Kent Brockman might ask "Professor, without knowing precisely what the danger is, would you say it's time for our viewers to crack each other's heads open and feast on the goo inside?"

No I don’t think it is time to panic. I have heard a few grumblings of worries about inflation from economists, but there seems to be little worry about prices increases in the US, although there may be greater problems internationally. To hedge yourself against inflation you can always buy stuff sooner, but if you want to be part of the solution and not part of the problem consider investing in Ibonds. These are bonds offered by the US government that pay a fixed interest rate plus inflation. If inflation goes up you get a greater return. I own some Ibonds, they probably didn’t do as well as some of my other short term cash investments, but they are now beating my money market account.

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Monday, April 14, 2008

Grinnell Recap: A look back at conditional cash transfers

I have returned from a visit to my alma mater, Grinnell College. On Thursday I commented about the improved dining hall conditions at many colleges, Grinnell has entered a new era. It was probably the made to order Thai beef stir fry that sealed the deal. I loved talking to my professors and the current students who were doing international internships, field work, and applying to grad schools and still partying like it was 1999 (i.e the way my friends and I used to).

Anyways I wasn’t just back at Grinnell to eat, I gave a talk on my own research and had a chance to speak with a global development studies class. In the talk I really just did an overview of my own dissertation, which focused on schooling in Honduras and Nicaragua. It was good to look back over things and I’m still left with this basic thought:

Sending a kid to school (assuming there is a school to go to) in a developing country comes down to a choice of giving up income from work. If the family needs money that child is more likely to go to school. If the rate children get paid is higher than children go to less school. The impact of anything on the schooling decision should take into account these two forces.

So to combat this Mexico and Brazil have national programs that pay households if their children go to school, called conditional cash transfers. Here is a good short description of the program and their success stories from the economist.

My other work has focused on how these successful programs vary in their impacts
depending on characteristics particular to a household or community. Looking back I think what is missing is the differences between where the programs continue to thrive (Brazil and Mexico) and where they have not become a budget priority of the national government (Honduras and Nicaragua).

Comparing these countries there is not only a difference in size large versus small, but also in terms of economic well being. Can the successes of these programs really be translated?

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Wednesday, April 9, 2008

Thai Food in the Iowa Corn Fields

So tomorrow I’m off to give a talk at my Alma mater, Grinnell College. My wife will also be speaking with students and has been invited to eat in Grinnell’s new local ….. Thai Restaurant? For those of you not familiar with Grinnell College it is located half way between Des Moines and Iowa City in a town of roughly 9,000 residents.

What gives? When I graduated just under 6 years ago the only non-American food was one Chinese takeout place. There was some decent pizza, a good bar and grill, a great small restaurant called Café Phoenix, and of course the back alley deli home of the best sandwiches anywhere. One final shout out to the cinnamon rolls at Saints Rest still my favorite coffee shop.

It is not just Grinnell. In Columbus Ohio where I grew up my parents can now boast of their copious restaurant selection. America’s food tastes are changing. An increase is salaries and women in the work forces makes prepared food a more attractive option. A quick look at internet sources suggests Americans are eating half of their meals outside of the home. As we go out more we look for food variety, also our taste become more varied.

This trend is coming to college campuses too. This recent NY Times article highlights a wave of sophisticated menus sweeping across college campuses. Will Grinnell’s cafeteria compete with Virginia Tech’s steak house or Bowdin’s vegetable ragout over polenta?

I just hope they still make chicken patty parmesan like they used to.

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Stolen Credit Cards and Economics

Maybe you have had your credit card number stolen and the thieves purchased computer equipment, electronics, or gasoline. With all the reports of stolen credit card numbers it is unlikely that anyone hacker who steals you number is going to use it, but instead that hacker is likely to resell that information.

So what is your credit card information worth? About 40 cents. At least according to the market place story I heard last night, criminals can purchase credit card numbers for a mere .40 cents. So what determines price, marketplace says supply and demand. I think that is true but a little more accurate would be for demand.

Demand: Willingness to pay for credit card = expected payoff of credit card – opportunity cost of using credit card – negative value of expected jail time for using credit card.

Banks are getting better at stopping fraudulent use of credit cards so the expected payoff is going down. The time it takes to use a stolen credit card is about the same (just order something or buy something).

Supply: Willingness to supply (least hacker would sell info for) = time to steal + negative value of expected jail time for using credit card.

Jail time is a factor, but it is also important how likely are people to be caught.

I think I'll keep my credit card number to myself though.

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Tuesday, April 8, 2008

Job Market for College Seniors

One of my colleagues forwarded me an article from the Wall Street Journal on starting salaries by major for graduating college seniors. From on average of $49,000 for Engineers to $28,000 for Philosophy there is quite a range.

Economics majors rank fourth behind Engineering, Computer Programming, and Math, with average starting salary of $43,000.

So Towson business majors take note, economics majors make on average almost $8,000 more starting out than business and marketing majors.

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Monday, April 7, 2008

Soylent Green: Economics of famine

Over the weekend Charlton Heston passed away. From Ape Agitator to Dr Zaius (in the remake), he made some great movies. I have always been partial to the movie Soylent Green. In a dystopic future the world is short on food and heavy on pollution, Charlton Heston lives in New York City of 40 million people with few supplies left. Most of the population subsists on a food product called soylent green. Spoiler alert!

Soylent green is made out of people, its people!

For those of you who know me, you know I have a habit of responding to the question about anything “what is this object made out of?” with “ITS PEOPLE! (insert name of object) Made out of people!”

Despite my love of this movie (or at least that line), I’m still an optimist about the future of the world. In fact a lot of economists have made the term dismal science a little bit of a misnomer.

So a couple of soylent green related examples. Nobel Prize winning economist,
Amartya Sen, in his work on famines has generally found that lack of distribution and not production has been the problem or as he notes:

“If we took the waste of the Western World and gave it to those who are starving then there would be no famines.”

Another famous optimistic economist was Julian Simon. Critic of population bomb author Paul Ehrlich (not an economist), Simon argued that:
“..There is no reason why material life on earth should not continue to improve, and that increasing population contributes to that improvement in the long run.”

After reading Sen and Simon’s work, I generally feel good about humans ability to overcome problems. Although I have not seen any economic writings on how to defend against a class of extremely intelligent Apes.

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Thursday, April 3, 2008

Bonus Post: More on the Farm Bill

My friend with a lot more knowledge about agriculture than me points why the Farm Bill is so screwed up, its not about farm policy, from a recent story on the bill

Ways and Means Committee Chairman Charles B. Rangel , D-N.Y., wants more funding for nutrition if he’s going to agree to find scarce offsets to support about $10 billion more in funding, Senate Agriculture Committee Chairman Tom Harkin said.

“If they give us more money, sure,” said the Iowa Democrat. “We have scrubbed really hard” to get the $9.5 billion in funding for food stamps and other nutrition programs that Rangel’s New York City constituents rely on, Harkin said.

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Rebate Checks, Direct Deposit: Testing how to fool people

A friend from Grinnell was discussing how she thought the NPR’s Marketplace April Fools’ joke about sending everyone a gift like an air conditioner could have been true. She also thought it would be just like the government to do something like that or send everyone Visa gift cards so people could not repay debt, but had to spend the money.

In turns out my friend is not alone. Not only did Wednesday's post on the April Fools’ joke generate the most hits ever for this blog (so many people must have believed it to). But her visa comment might need some thought too. Dan Ariely, MIT Economist, suggested today that the government should test how households will make decisions to spend based on how the rebate is receive (e.g. by check, direct deposit, or debit card. )

As Dr. Ariely pointed out on Marketplace (link) :

“The field of behavioral economics has rather convincingly shown that money given in different forms can have different effects. For example, paying for dinner in cash feels very different than paying the same bill with a credit card. And an increase in monthly salary has a different effect on a person's spending than the same amount in an equivalent yearly bonus. These results suggest that how you deliver the stimulus package will have a considerable effect on how the money is spent.”

As my friend from Grinnell suggests, if we received Visa cards we would be less likely to pay down debt. Dr. Ariely, suggests the only way we will know which system will work the best is to try to send some people checks and some people direct deposit and some debit card. This type of suggestion is part of a growing trend in economics to test impacts of a policy by running experiments where you give treatment to some and no treatment to a comparable control group just like you would with a new pharmaceutical drug. Compare to the treatment and control group and you have an experiment!

If the government needs any test subjects, they can send my rebate check, deposit it directly, or give me a debit card. Just don’t send pennies.

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Contrasting Agricultural Policies: Cry for the Argentine Farmers

Although, it probably is not getting a lot of press the US farm bill is currently being debated in the Senate. As I see it the main debates are how much subsidies to give out and who should get them. In particular, farmers of food stuff crops like corn, wheat, and soybeans get subsidies while growers of fruit do not. Take this NY Times OP Ed from a Minnesotan farmer, where the farmer complains that he cannot afford land prices because they are inflated by grain growers getting subsidies. Another point of contention is that most payments go to large farmers, highlighted here by the USDA. So in the US we are debating how much to pay farmers.

In Argentina, the debate is over how much in taxes to charge exporting farmers. As this LA Times article details strikes by farmers over a tax increase on Soy Bean exports. The strikes have led to food shortages, although farmers are currently taking a break from their strike because of this.

So why would Argentina place high taxes on their farm exports. The government needs money and it is difficult to collect taxes from individuals, but exports are easier to tax if they must go through major ports they are easier to verify.

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Wednesday, April 2, 2008

April Fools: The Government Used Your Tax Rebate to Buy You a Gift.

I usually detest April Fools jokes. However, marketplace had a great one yesterday. (link) They had a fake story where the IRS instead of sending a check to an Arizona couple behind on their mortgage, they sent them an air conditioner. The story goes on to say how the IRS will look into charactestics based on where people live to find out what should be sent to them. As Robert Reich, former Labor Secretary and my college graduation speaker, points out in the piece:

Also, the government is not terribly good at knowing what individual people want, even in the same neighborhood. I mean, my neighbor might want, say, Viagra, but if the government ships a toaster oven to my neighbor and ships Viagra to me -- and by the say, I don't use Viagra -- that's not going to be terribly efficient; I would much rather get the toaster oven. Now, I suppose my neighbor and I could barter, but then I would have to know exactly what the government shipped my neighbors and it would be difficult for all of us to get together and know that fact.

The humorous piece make a couple of good economic points.

1.People will always prefer a cash transfer of equal value to a transfer of an item if with that cash they could buy that item or something else they prefer more they must be better off with the cash or at least just as well off.

2.The point of the cash payments is a short term increase in consumption, but if people save it will not stimulate the economy.

One final thought in some cases giving people something instead of money might actually be better than cash if there are benefits to people besides the recipients. An example of this might be vaccines or school supplies. As vaccines prevent the spread of disease, while school supplies might promote education and therefore long term economic growth.

In case Uncle Sam wants to know what transfer I want, let me go on record as saying baseball tickets or good local DC restaurant gift certificates would be more fun than stashing the rebate check in the housing fund.

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Tuesday, April 1, 2008

Nickel and Diming Penny Pinching Airline Travelers

Delta Airlines recently raised prices on checking extra bags, booking flights on the phone, and ticket prices for cats, in this news story discusses the fee hike. Why should raising prices on services that used to be free or cheaper be better at customer retention then raising ticket prices?

It is probably a function of how customers search for plane flights. Basically people keep going for the cheapest ticket prices, with little attention to extra charges. I think the same thing goes for service. Most airline passengers are not willing to pay enough to make it worth their while to get better airline service, it might also be that extra cost are too high. Delays could likely be reduced if more spare planes and flight crews served as backup, or if airlines would put you on other airlines if your flight was delayed more than a few hours.

So the result is that airlines are providing less service for the same amount of money (as highlighted in this article). At least Southwest still gives you peanuts.

If you are one of the budget minded travelers, you might want to checkout my friend's blog Nobudgettravel where you can learn to travel Europe and the world on less than a shoe string.

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