Sunday, March 19, 2017
Comments due by March 31, 2017
The post for this week is slightly different than usual. Actually there is nothing to read, it is a 21 minute video that is 10 years old but that is still one of the best efforts to explain in plain language The Story of Stuff. Give it a look. Enjoy.
Click on the above link and watch the 21 minute video. (If the link is dead then copy and paste)
Sunday, March 12, 2017
Sunday, March 05, 2017
Comments due by March 11, 2017
Philadelphia supermarkets and distributors say beverage sales have dropped 30 percent to 50 percent after the city instituted a 1.5-cent-per-ounce tax on sugary and diet drinks. On one hand, these are the same people who want to get the tax repealed, and we don’t have hard numbers yet, so take this with a grain of salt. On the other hand, the whole point of the tax is to reduce consumption of stuff that will kill you anyway, so … good job?
To measure the responsiveness of consumers to price changes, economist use what is called the 'price elasticity of demand.' In simple terms, the price elasticity of demand tells us whether consumers react a little or a lot when the price of a good changes.
In technical terms, the price elasticity of demand is equal to the percentage change in the quantity demanded divided by the percentage change in the price. Because of the law of demand we know that the quantity demanded and the price will move in opposite directions, so the elasticity demand is a negative number. To confuse everyone, we report the price elasticity of demand as a positive number (the absolute value).
If the price elasticity of demand is greater than 1, then we say that demand is elastic and that means that consumers are pretty sensitive to price changes.
If the price elasticity of demand in greater than one, then we say that demand in unit elastic (the percentage change in the quantity demanded is exactly equal to the percentage change in the price).
If the price elasticity of demand is less than one, then demand is price inelastic and that means that consumers are not very sensitive to price changes.
One reason we care about the price elasticity of demand is because there is a relationship between price elasticities and revenues collected. If demand is inelastic, an increase in the price will increase revenues. If demand is elastic, a similar percentage increase in the price will decrease revenues. The reverse is also true.
This is why we see goods with elastic demand (furniture, groceries, clothing) going on sale more than goods with inelastic demand (gas, liquor).
So what does this mean for the sugary drink example above?
Let's look at the numbers (and make some assumptions). The tax imposed on sugary drinks is $0.015 per ounce. For a 12 ounce soda (pop?) that's an increase in the price of $0.18. To make the math easy let's say a 12 ounce soda costs $0.50 ($3.00 a six pack?) before the tax. An $0.18 increase in the price is a 36% increase in the price. That's pretty big.
How much does the quantity demanded react. If grocery stores are to be believed, the quantity demanded fell between 30% and 50% in reaction to the tax increase. That means the elasticity of demand is between 0.83 (30/36) and 1.39 (50/36).
So it looks like demand is slightly inelastic to elastic.
Now we can ask question like:
- If the goal is to raise tax revenues, will an increase in the tax increase, or decrease tax revenues?
- Tax revenues will increase if demand is inelastic and decrease if demand is elastic.
- If the goal is to decrease sugar consumption, how effective will an increase in the sugar tax be?
- It looks like consumers might be price sensitive, so an increase in the tax might be pretty effective at reducing sugary drink consumption
(Keep in mind that elasticity is a numerical measure of responsiveness i.e one, usually is interested in finding how responsive is A to a change in B. Ex. What is the change in the grade if one is to increase study hours?)
Saturday, February 25, 2017
Comments due by March 5, 2017
Carbon-tax haters can relax. The proposal for a national carbon tax released on February 8 by high-level Republicans, including über-GOP consigliere James Baker, isn’t going anywhere. Financially and ideologically, the American right is wedded to carbon fuels. Trumpism runs on and reeks of them. Predictably, not a single Republican in Congress, and no one in the White House, has uttered a single positive word about the new carbon-tax plan.
Nevertheless, the proposal’s intended audience may not be Beltway Republicans but rather those ordinary Americans, majorities in both parties, who say they want action on climate, and who therefore might yet figure in the political equation over climate policy. That group includes progressives. We should pay attention: Carbon taxes matter. ...But progressives can’t just walk away from carbon taxes. Carbon taxes are the only policy tool that, by slashing demand in a rapid, predictable way, divests our economy from fossil fuels and enables governments, business, and consumers to make investments in the transition to clean energy. Carbon taxes also have the best chance of catching fire globally.The carbon tax James Baker brought to the Trump White House on February 8 on behalf of the new Climate Leadership Council has a lot in common with I-732: The Council’s proposal is also avowedly revenue neutral. But rather than lowering an existing tax, it relies on a so-called tax-and-dividend model: As the state of Alaska does with oil revenues, revenues from the Council’s national carbon tax would be returned equally to all American households in quarterly “dividends” digitally deposited in Social Security accounts. The tax would start at $40 per ton of carbon dioxide.Earmarking all of the revenue to these dividends creates the political will to raise the tax every year, since the dividends rise in tandem with the tax rate. Ramping up the tax by $5 a year would shrink the use of carbon fuels so drastically that, by my calculations, US carbon emissions in 2030 would be 40 percent less than they were in 2005 (a standard baseline year).
I agree that "progressives" need to get on board the carbon tax train. One hang up might be labeling this as a "conservative" approach. I'm not sure why this is being labeled a "conservative" carbon tax. If there is anything conservatives don't like these days, it is higher taxes. The "conservative" proposal for a carbon tax used to include revenue-neutral tax recycling -- lowering income taxes with an equal amount of carbon taxes raised. Now "conservatives" want to give the money back to the public as dividends. I guess both of these options differ from the "progressive" approach to the government keeping the revenue. Whatever, I don't think the ideological labels are helpful.
One big quibble (er, a big quibble is probably not a quibble, it is more like a beef): "Carbon taxes are [not] the only policy tool that, by slashing demand in a rapid, predictable way, divests our economy from fossil fuels and enables governments, business, and consumers to make investments in the transition to clean energy." I added the bracketed term because cap-and-trade could do the exact same thing.
The Carbon Tax Center has six objections to cap-and-trade. The style is to compared an idealized textbook carbon tax with the sort of cap-and-trade that might actually be put in place by Congress (e.g., Waxman-Markey):
- Whereas carbon taxes lend predictability to energy prices, cap-and-trade systems aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy.
- Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we don’t have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations.
- Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system.
- Carbon taxes aren’t easily subject to manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness.
- Carbon taxes address emissions of carbon from every sector, whereas some cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.
- Carbon tax revenues would most likely be returned to the public through dividends or progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants.
I think the first five of these are easily debunked:
- A price collar can limit the carbon permit price volatility.
- This is an assertion that assumes a carbon tax would not have lengthy negotiations.
- Markets are not all that difficult to understand and I need to see some empirical evidence that transparent and easily understandable leads to increased public support.
- I would predict that special interests would make try to make sure that there are loopholes so that they don't pay the flat tax rate. It is a bit naive to think otherwise.
- Why can't cap-and-trade cover every sector too? Answer: it can.
Number 6 takes a little more discussion. Carbon permits in a cap-and-trade system can be auctioned off to collect just as much revenue as a carbon tax. I'm not sure why you would choose cap-and-trade over a carbon tax with full permit auctions since there would be no trading as firms would bid up to their marginal abatement cost. Cap-and-trade with freely distributed permits would provide polluters with an asset. Relatively clean firms will make money as they sell their permits. I'm not sure why the always-evil "lawyers and consultants" will make more money off a real-world cap-and-trade plan than a real world carbon tax.
To summarize, two points:
- The carbon tax with dividends is a great proposal.
- The cap-and-trade option should not be dismissed as easily as some would like to dismiss it.
Saturday, February 04, 2017
Comments due by Feb 11, 2017
I’m a capitalist for one reason: to raise living standards in my community. A familiar mantra of capitalism guides me: Markets are powerful and efficient.
I’m also a realist, so I temper that mantra: Markets are powerful and efficient. And markets fail.
Market failure is an established, well-understood field of study in mainstream economics. Generations of economists accept the basics of market failure.
However, American economists turn their heads away at the mention of it, because it sounds like heresy.
Consider the four biggest market failures in human history:
- Climate change: $40 trillion, so far
- Health care in America: trillions per year, ongoing
- The housing-financial asset bubble: at least $8 trillion
- Free trade: $8 trillion, so far
According to the chief economist for the World Bank, Nicholas Stern, climate changeis the greatest market failure in human history. Greenhouse gas emissions are a classic externality, where everyone on earth subsidizes oil companies and consumers of fossil fuels. Fossil fuels are under-priced by $40 trillion — a rough estimate of the cost that future generations will pay for damage we’re doing to the Earth.
Health care in America wastes roughly $1 trillion per year, compared to other wealthy countries, and the problem is steadily worsening.
First, health care is not a market. A market involves buyers and sellers. In American health care, we’re not really sure who is a buyer and a seller.
Figure 1. Find the buyer and the seller in American health care.
As a result, market incentives are badly misaligned.
Very few patients shop around for deals. After the doctor says the word “cancer,” most people lose their shopping instincts.
The housing and financial asset bubble is a classic market failure. Mortgage brokers misled home buyers into bad mortgages. Banks bundled unaffordable mortgages into bogus securities and sold them to investors. Rating agencies provided false security to investors. Herd mentality and massive group-think inflated the asset bubble. Losses in housing values alone exceeded $8 trillion.
We should add costs for the recession, millions of foreclosed homes, personal bankruptcies, lost opportunities, millions of workers unemployed and careers damaged permanently.
Markets rewarded bad behavior and punished millions who behaved responsibly.
Free trade is a market failure, but it is also an intellectual failure for the economics profession, and a policy failure on the part of elected officials. Our cumulative trade debt since NAFTA is well over $8 trillion. Our economy is de-industrializing, with thousands of factories closed, millions of jobs lost, and no improvement in sight.
Free trade has enjoyed inexplicably unassailable reverence since David Ricardo introduced it in 1817. It was unrealistic in 1817, and it is unrealistic today.
It starts with hopelessly idealized assumptions, applied blindly in the complex global economy, where trading partners and multinational companies exploit those assumptions for their own purposes. We were promised mutual gain, but we suffer huge deficits, concentration of wealth and power among trade’s “winners” and loss of bargaining power, de-industrialization and stagnant wages for the rest of us.
If the study of free trade were moved from economics departments in universities to mathematics departments, it would be discredited on logical grounds by the end of the first day. Similarly, its half-life in a physics, astronomy, or chemistry department would be a week or two — the time it would take to send graduates students to the lab to collect data.
It is worth noting that conventional free trade theory is considered largely irrelevant in business schools, where students learn the realities of how to move capital and production around the world.
Worse by far, our so-called free trade agreements are really designed to protect and enrich global companies. These agreements toss aside democratic checks and balances, weaken civil society and erode the middle class.
Under the right conditions, markets will, in fact, produce broad-based well-being. In 1776, Adam Smith argued that beneficial market control occurred when merchants in the village were personally connected to the well-being of their neighbors, who lived and shopped in the village. Social and economic cohesion would prevent market failure.
But globalization, as we’ve managed it, de-couples modern corporate decision-makers from any obligation or connection to communities anywhere.
Figure 2. Globalization de-couples investor interests from public interests.
The test of a market economy is whether it raises living standards. We fail that test when we look at growing inequality and reduced career prospects for the next generations of Americans. As a society, we have stopped sharing the gains from productivity and trade. Almost all new income goes to the top 1 percent — more than $1 trillion per year.
Some economists object that inequality is beyond the narrow scope of economics, so it’s not “really” a market failure. Granted, our looming inequality has broad dimensions — social, political and moral, as well as economic.
However, when economists duck responsibility for inequality, they are really acknowledging that free markets and free trade will predictably create inequality, without strong intervention in the form of public policy and social values. That sounds like market failure to me.
Here’s the take-away message. The narrow orthodoxy of free markets and free trade says that markets will solve all our problems, and government intervention is bad. Look at politics in America, today.
Unfortunately, the real world is a very large system with many interacting forces and interests.
Markets fail. A legitimate purpose of public policy is to intervene in markets to prevent market failure. Public policy has a necessary role in protecting the environment, human rights, labor rights, education and public health, managing growth, regulating markets, and managing global trade.
That’s capitalism for realists.