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Wednesday, April 30, 2008

Strategic Rice Reserves

With "higher and higher" gas prices the public wants change, and ready or not, here come the politicians. The increases have already caused discussion of populist and protectionist policies, in the media and from presidential candidates. The issue has sky-rocketed to become the number one concern of American voters. Considering gas makes up a only a small portion of American incomes, it isn't hard to understand why there are widespread riots around the world because of rising food prices. The global food crisis is sending governments (and their politicians) into panic. The results are populist policies. Not only is this the result, it is also the cause... continuing the vicious cycle.

One of these problems is trade. Tyler Cowen, the Professor of Economics, examines this component in his article for the New York Times. Disruptions in the market for rice, such as export restrictions, subsides and other forms of intervention have both caused and worsened this crisis. India, Indonesia, Vietnam, China, Cambodia and Egypt all have made recent restrictions on rice exports. These policies have contributed to a decrease in the international trading of rice by 3%. This creates the terrible problem of sending the "message to farmers that their crops are least profitable precisely when they are most needed". Consequently, supply will not increase, keeping prices high and quantities low. One interesting action being taken is the "hording" of rice. Several Asian countries are cracking down on hoarders, charging them with "economic sabotage", which carries a life sentence in the Philippines. The irony here, however, is many Asian governments use what we might call a "Strategic Rice Reserve". How is this different from "hoarders"? Indeed, Cowen notes that these hoarders "are simply storing rice for the possibility of even harder times to come"

Yet another problem is when governments disregard the importance of using prices as a conservation mechanism. Egypt illustrates this idea unfortunately well. The staple food for the poor is bread, and the government subsidizes it heavily. Due to these subsidies, the price of one loaf of "baladi bread" is less than one U.S. cent. Accordingly, people consume inefficiently large amounts, as one Egyptian woman says, she buys "40 to 60 loaves" at a given time.

On the bright side of things, there is evidence that leaving market signals alone can help. In Africa, rice is not consumed nearly as much as in Asia. Consequently, the price has been able to rise, and people are now substituting spaghetti, which conserves rice. Hopefully, the world can learn the value of free trade and free markets. If not, the problems may just be beginning

It 'tis the season for political rhetoric

In the coming 2008 presidential election, candidates are looking for ways to gain support from the American people. A "hot topic" in this race between the Democrats and Republicans is the American economy. Each candidate is offering suggestions on how to better the economy and help the American people. In one news article, titled "McCain Calls Obama Insensitive to Poor," candidates are criticizing each other on their possible economic plans. How is this going to help the American voter understand the candidates position and its expected impact on the economy? This article addressed McCain's plan to help the people of America to pay for gas and other goods by suspending the fuel tax during the summer. From McCain's website this tax cut would only apply to federal taxes collected and last only from Memorial Day to Labor Day. This idea would help the American population according to the article by helping "low-income people who usually have older cars that guzzle gas...[and provide] a little bit of relief so they can travel a little further and a little longer, and maybe have a little bit of money left over to enjoy some other things in their lives." Could this summer tax holiday work to better the economy?

To better understand the benefits of this "holiday" I went to look up the federal fuel tax rate and found it, and all the state's rates, on this website http://www.taxadmin.org/FTA/rate/motor_fl.html. The current rate for federal fuel taxes is $0.184 per gallon for regular gas. The price for gas at the last station I filled up at was $3.459 per gallon for regular unleaded. If this nominal price were to remain the same during these summer months I would only pay $3.275 for a single gallon of gas at the pump with this gas tax holiday. But, is all of the tax being paid by the consumer? In actuality, the answer is no. This is because the supply of gas is not perfectly elastic. The seller of the fuel would also gain a benefit from the tax holiday, not just the consumer. The share of the tax may not be fifty-fifty, but the sellers are paying a portion of the fuel taxes. The plan McCain is projecting is just aiding the low-income people, but it is doing more than just that.

Could this plan be beneficial to the economy? By using basic microeconomics principles, one could see a change in individual situations by applying a simple budget line analysis. This analysis leaves everything else constant but allows the cost of gas to change. Individuals will then decide how much of their budgets they are willing to spend on gas and everything else by using their indifference curves. These individual situations then form the market demand for gas. Yet, the demand is not going to increase significantly. This is because prices would still be over $3 per gallon. While a $0.184 decrease in gas sounds like a nice idea, it will not provide "a little bit" left over in the end to be spent in another way. For example, roughly during this 13 week "holiday" I purchase 20 gallons per week. This means I will buy 260 gallons of gas. At the current price of $3.459 I would spend almost $900 on gas alone. If the tax holiday were to occur and the consumer got the whole benefit, I would only spend about $852 assuming the price stayed constant. I have saved only $48. I can't buy too much with that additional savings during a 13 week period. The equivalent would be only 1 free gallon of gas per week. The fuel tax holiday would not provide much in a way of relief to the climbing gas prices just by looking at the numbers.

The Analysis that Should Have Been…Or Was Blatantly Ignored

Perhaps it’s because of the onset of summer, and those who do the decision making know car trips are about to begin in earnest, but I seem to be encountering far more examples of the “Click-It or Ticket” campaign these days. With that in mind, and our recent focus in class, I offer an extremely abbreviated attempt at a policy analysis on this particular issue:

I recommend a policy of revoking seatbelt laws. Both the normative frameworks of liberty and efficiency reject these laws. It is only the grounds of paternalism that offer any reason to continue to allow seatbelt laws to exist. But paternalism can be safely rejected because it goes against the values expressed and allowed in the Constitution of the United States.

In terms of liberty one clearly can’t advocate seatbelt laws, because they restrict the freedom of citizens to engage in actions that hurt no one but themselves. To restrict freedom in this way goes against the very nature of the liberty ideal.

On efficiency grounds there is no identifiable market failure to be fixed in regards to wearing or not wearing seatbelts, and thus no law in either direction is advisable. The use of a seatbelt is obviously not a monopoly issue, expresses no externalities because it fails to harm or benefit anyone but the individual making the decision, and cannot be considered a public good because it is both rival and excludible.

Finally, paternalism advocates seatbelt laws. The idea here is to take a position of government knows best, and suggest that seatbelt laws are simply a case of protecting people from themselves. There is a very real and identifiable risk to driving without a seatbelt and to mandate usage is simply to ensure that people are protected from that risk.

However, this is not the role of government. Not only are seatbelt laws not among the enumerated powers, but there is also no way of knowing if the risks incurred by not wearing a seatbelt actually do outweigh the other concerns present in every single case. Only those in the vehicle are capable of knowing and deciding something like this and should be able to do so on a case by case basis.

You also may be confronted with the concern of saving taxpayer money in medical expenses incurred during car crashes where the participants were not wearing seatbelts. This is also not a good reason to advocate mandated seatbelt usage. In regards to this the old adage “seatbelts save lives” holds true. Those who are involved in car crashes without wearing seatbelts often die, and thus incur no medical expenses. Indeed it’s those who do wear seatbelts who are often generating massive medical bills. So while seatbelts save lives they do not save taxpayer money.

Tuesday, April 29, 2008

The collusion of banks.

Link to Article: http://redtape.msnbc.com/2008/04/did-banks-collu.html

The big credit card companies are now under fire for supposedly colluding together to change their members agreements to having all their members sign arbitration clauses to the contracts. This way when a dispute arises, it has to be settled in arbitration and not the court. The plaintiffs in this case are arguing that the major banks created the “arbitration coalition” to all agree to change their member contracts. The first court dismissed the case saying, there was no proof that consumers were harmed, which follows in line with anti-trust laws. However, the appeals court ruled that consumers could be hurt by change in the contract because (here is the courts thought) that having a card that only allows arbitration could be thought of as less valuable then a card that allows disputes to be handled in the courts. And by “forcing” customers to have the less valuable card could be seen as harm.

Yeah the whole “forcing” a customer to a less valuable card seems to be making a stretch. I personally have never been forced to have a credit card. In fact, I closed my Capital One card just last month because I didn’t want to pay the annual fee that was going to be charged this month and I wasn’t forced to stay with them at all. I then choose to go to a credit union and got a credit card there, with no annual fees or arbitration clause, wooo the power of choice. If the credit card companies did collude and it harmed the consumer then they should be charged, but if it was just them finding a good way for them to save their butts from frivolous law suits and was in their best interests to follow what the industry was doing then I don’t see why they should be charged. I don’t think there was any harm in what they did. Most of the people writing comments to this article below it, say that finally the big bad credit companies are going to get it. Haha I doubt it, they were just finding ways (within the law) to make more money. Apparently there is no law against signing away your right to a trial. Most of the people posting want the companies to change their contracts so they will get their fair trial in the court. My suggestion is that it’s the government that enforces these contracts and if the people don’t like the law allowing people sign away their right to a trial, I say look to the government to take away one more right. The credit card companies are just doing what they can to make a profit. Just like each and every one of us does every day. They found a way to save them time or money by adding this clause to their contracts and the government enforces it. If you don’t like what they do, go somewhere else. If you don’t like the law, vote to change it. And remember, read the fine print.

Monday, April 28, 2008

'Tax Rebate' checks expected to yield short term benefits, long term troubles

So, the first rebate checks go out today, the first of 152 billion dollars in rebates.

What is the impact here? Will this actually do anything to fix the economy?

I (and the article linked) fail to see that it will make a difference.

For one, most people don't plan to spend it- more to the point, they have ALREADY spent it, as many plan to use the rebate to pay down debt. Several sources expect that less than 25% will actually spend their rebate checks.

I find it objectionable that the implication continues to be that it is patriotic to spend money and bail the United States out of a recession, at the expense of personal stability. Isn't this the same message that got us in trouble in the first place? This is a recession built on the back of irresponsible spending, and we need to spend MORE to get out of it?

This is also inflationary- we have a huge pile of money dumped into the economy, with which to buy the same amount of goods. Inflation is a looming threat, and prices are increasing almost across the board due to input shocks as fuel prices skyrocket. Throwing more money onto the bonfire doesn't seem prudent, and inflation is much harder to correct in the long run than economic growth.

As the article states, inflation may not be a short-term issue as the credit crunch is creating a slow in the velocity of money- the banks that have taken it on the chin for 10 months now have to hold more in reserve for portfolio losses. Still, that situation will eventually reverse, and when it does, the money being dumped into the economy will only exacerbate the other inflationary issues (low interest rates, gasoline prices, etc).

So what are better options?

I hate to say this, but I think if the government really wants to spend out of a recession, they should directly do the spending. At least there all the money would actually be spent, providing more of a boost. If I am going to have to repay this in the future, I would like to think that it actually improved the economy instead of simply helping somebodies bank account.

However, I think the better response would be to try to reverse the velocity issue and strengthen the banks. Our economy would be better served if the financial industry was healthy and money was cheap to lend, and this should have less inflationary impacts. Unfortunately, it looks like the opinion in government is leaning the other way, seeking to punish banks (on top of the punishment they have received from making bad lending decisions) instead of helping them rebuild.

Sunday, April 27, 2008

Bull Testicles: A Brief Policy Analysis.

Here is the link to the full article: http://www.msnbc.msn.com/id/24328818/

In Florida Sen. Carey Baker is trying to ban the replica bull testicles that people hang from the rear bumper of their trucks. The senator says that they are offensive and should be banned before other obscene ornaments appear. If you don’t know what I am talking about you can go to trucknutz.com to purchase your own pair.

Under economic efficiency we need ask ourselves if there is a market failure with the fake bull testicles hanging from the bumpers of trucks. Well I don’t see any natural monopolies going on here; I can purchase many different kinds of bull testicles from many different bull testicle dealers. I can even become a bull testicle dealer if I so chose, so I don’t see any barriers to entry in to the fake bull testicle market.

Now are there any externalities associated with fake bull testicles? Well I do not see any non-market interdependence going on here. Some people would say that the obscene bull testicles are a negative externality to the people who are easily offended but it’s really not. Therefore the government should not tax or subsidize the displaying of the bull testicles.

For economic liberty the question needs to be asked if anyone is aggressing on another person. The objection the Senator is making to the bull testicles is that they are offensive to others which is another way of saying that they are aggressing on others. This is where people have different views on what aggression means. Some say that aggression can be a mental aggression of feelings and other say it can only be force used against another such as taking property or physical harm. I tend to agree with it being force and not the sissy hurt feelings rant some people spew. No one is forcing people to have bull testicles on their car and no one is forced to look at them ether.

The whole argument against the bull testicles started in Virginia when a girl asked her father what was dangling from the bumper of the truck in front of them. The father apparently didn’t like the fact he had to explain the natural reproductive parts of a bovine to his daughter. He felt he was being aggressed upon by the driver of the truck in front of him with his display of the six and one half inch life size replica bull balls. He must have felt that he was forced to explain what they were to his daughter. However, this is guy is an adult and he can chose to explain them to his daughter or not, no one is forcing him to explain anything.

In conclusion, economic efficiency does not say much about what to do other then do not apply a tax or subsidy to displaying bull testicles. As for economic liberty, no one is being aggressed upon so no liberty is being infringed on. Final conclusion is that the government should take no action on the subject and leave the bull testicles alone.

Friday, April 11, 2008

Iraq War?

Amir Taheri writes that Iran recently attacked Iraq in an effort to take Basra:
A GAMBLE that proved too costly.

That's how analysts in Tehran describe events last month in Basra. Iran's state-run media have de facto confirmed that this was no spontaneous "uprising." Rather, Iran's Islamic Revolutionary Guard Corps (IRGC) tried to seize control of Iraq's second-largest city using local Shiite militias as a Trojan horse.

[ . . . ]

In last month's operation, Quds commanders used the name and insignia of the Mahdi Army, a militia originally created by the maverick cleric Muqtada al-Sadr, as a cover for the Special Groups.

Initially, Quds commanders appeared to have won their bet. Their Special Groups and Mahdi Army allies easily seized control of key areas of Basra when more than 500 Iraqi security personnel abandoned their positions and disappeared into the woodwork.

Soon, however, the tide turned. Maliki proved that he had the courage to lead the new Iraqi Security Force (ISF) into battle, even if that meant confronting Iran. The ISF showed that it had the capacity and the will to fight.

Only a year ago, the ISF had been unable to provide three brigades (some 9,000 men) to help the US-led "surge" restore security in Baghdad. This time, the ISF had no difficulty deploying 15 brigades (30,000 men) for the battle of Basra.

Led by Gen. Mohan al-Freiji, the Iraqi force sent to Basra was the largest that the ISF had put together since its creation five years ago. This was the first time that the ISF was in charge of a major operation from start to finish and was fighting a large, well-armed adversary without US advisers.

During the Basra battles, the ISF did call on British and US forces to provide some firepower, especially via air strikes against enemy positions. But, in another first, the ISF used its own aircraft to transport troops and materiel and relied on its own communication system.

[ . . . ]

After more than a week of fighting, the Iraqis forced the Quds commanders to call for a cease-fire through Sadr. The Iraqi commander agreed - provided that the Quds force directly guaranteed it. To highlight Iran's role in the episode, he insisted that the Quds force dispatch a senior commander to finalize the accord.

The Iran-backed side lost more than 600 men, with more than 1,000 injured. The ISF lost 88 dead and 122 wounded.

Some analysts suggest this was the first war between new Iraq and the Islamic Republic. If so, the Iraqis won.
I think this is note worthy.

In the spirit of policy analysis and cutting through the "fog," does this suggest a useful recasting of public debate about our Iraq policy?

Here in the United States it seems to me we continue to talk about the circumstances in Iraq as the "Iraq War." I would like to suggest this is not an accurate description for our present "operations" in Iraq.

I think our war with Iraq ended a few years ago with the fall of Saddam Hussein's government. Iraq was then governed for some time by a "provisional government." Since that time, a duly constituted government has emerged to govern Iraq.

I suggest that we should think of the violence in Iraq since the creation of the present government of Iraq as violence, perhaps war, against the government of Iraq, not as part of a continuing American war against Iraq. Nor does it seem to me accurately described as a war against the United States. As such, it would seem that the American forces in Iraq are now, and have been, employed in the service of helping the duly constituted government of Iraq provide security and order for the country by demonstrating that the government of Iraq has the greatest capacity for violence.

I'm also thinking that it would be good policy for the United States, and probably also for Iraq, to formally negotiate a treaty between the United States government and the Iraq government. Such a treaty should probably make explicit that the Iraq government has asked the United States government to help it provide security within as well as security with respect to external threats from, for example, such sources as the government of Iran?

What do you think? Does what I've suggested here cut to a bottom line? Would policy discussions and policy decisions in the United States be improved if we began to think of Iraq in this way?

I would like part of our discussion in class on Tuesday to consider these questions.

Tuesday, April 01, 2008

Water may be the resource that is scarce, but the problem is something else!

I found an article by Sarah Wolfe, and wrote an analytical POV for my Geology course. Because it has to do with Economics-specific points pertaining to the new government of South Africa (new at the time of the article release) and how it would be "FAIR" to the the affluent AND the poorer people of the nation, I found it absolutely pertinent for this course!

Successes and failures of municipal water efficiency initiatives in South Africa contain valuable lessons for North American water purveyors.
By Sarah Wolfe


South Africa had a plethora of problems post-apartheid, but one of the biggest obstacles, had to do with getting water to the people of the nation. This could have been a unifying factor, but only in its basic human necessity aspect, and not as a cultural unifier. Along with a defunct water-supplying infrastructure, South Africa had to juggle other variables that resulted in a new nation comprised of an affluent (primarily white) population and a poor (primarily black) population.

These worlds combined to make a country inundated by urgent problems: a flagging economy based on a defunct social system, a population with high expectations and eager for immediate change, an out-migration of the professional corps because of perceived security problems and economic uncertainty, and a set of environmental conditions that limited the development potential and undermined the majority’s quality of life.[1]

Something like water supply has as much to do with economics as it does with geology. For one thing, water supply can be scarce and when there’s scarcity at play, and people, there will be occurrences of inequity. Another point is that regardless of scientific ingenuity, government can not control natural variables such as wet vs. dry seasons. But in post-apartheid South Africa, and other places, government attempts to deal with those natural variables and to come up with a way of fairly addressing scarcity.
So, with these problems being on the agenda for a new government, the nation experienced two setbacks:

Two situations catalyzed the ANC government’s efforts to give greater attention to water
First, a series of droughts in the early ’90s reinforced the need for immediate action and better,
more long-term decision-making.
Second, the ANC was publicly committed to meeting its citizens’ basic needs. In addition to
education, employment, housing, and health care, these basic needs included the provision of
services to the 14 million people without access to safe drinking water and the 21 million that
lacked reliable sanitation in the rural and informal settlements.
South Africa’s water realities—heavy water use by the agriculture and the mining industries and rapidly escalating requirements because of population increases and urbanization—meant that decision-makers had to think about water management in new ways. (Wolfe)

The “National Water Act of 1998” was the first step in handling the problem of getting good, clean water to the people of South Africa, regardless of social class or race. By developing riparian rights,[2] more efficient uses of the water (according to public sustainability), and rationing, programs and methods were developed to first make a nation that was able to rebuild with a water system in place. The section of government, DWAF[3], was responsible for this aspect. They first used a program that would allocate water in an efficient manner in the Hermanus municipality of South Africa. This proved to only show that the estimates of sufficient supplies would be wrong, and fall way below expected.

The biggest problem had to do with who was using the most water; the affluent portion of the municipality used a LOT more per capita than did the poor and middle-class members of the area. Not to mention that people were moving from rural areas to the urban for job opportunities and the numbers of tourists also weren’t taken into consideration. So, other programs were needed such as environmental education standards in schools, strict enforcement of policies, and the employment of workers who’d specialize in water supply. The approval ratings were very high, but dwindled because of the change in annual precipitation. People were misled to believe that there was less scarcity because of wet years, but then found a rude awakening to the problem during dry years.

People began to do what people do (‘rent-seek’) and use government as a means to find a better position at the cost of someone else. In this case, the program that had done well during wet years, but poorly during dry years would be dismantled and the money earmarked for the program wound up being spent on catering to a wealthy area. This project, intended to help the situation and to contribute towards the betterment of South Africa, fell apart and only made things worse. As Wolfe states:

This South African story highlights the complexity associated with a community-based water conservation and demand management project. The Hermanus case had many successes including the reduced consumption numbers, the delayed infrastructure construction, the economic and social progress through the Working for Water project, the extensive communication campaign, and the international recognition. Even during its “slump,” according to van der Linde, the program was still making a 25% profit from its water revenues.

Problems, however, remained: The social inequity issues were not adequately addressed while the profits made by the WDM program were continuing to be deposited into the municipal general accounts. These funds remained unavailable to program operations or program expansion, including a much needed communications campaign for the new areas of the recently amalgamated municipality.

She then goes on to describe the problem in terms of perpetual ideals. She believes that the engineer behind the demand management issue plaguing South Africa, van der Linde, was onto something, and that the water crisis could be assuaged if only the issue of demand for water could be curbed.

National Water Conservation Campaign’s main focus was on “changing the ethos of water management in South Africa away from a purely supply management paradigm to a demand management approach.” (Van

Unfortunately, changing demand is a process that is hard to track because it may work for some, but not for others. As well, the varying levels of change will be considerably inconsistent between those it does change for. So how can there be sufficient changes made and measured in demand? Perhaps attempting to change demand can be compared to attempting to change people’s preferences which is hard to do without incentives. In economics, it’s called free-rider behavior when the marginal social impact can include a variety of individuals who don’t change what-so-ever (free-ride) thus skewing the measurements of en-masse determinations of effectiveness. This doesn’t address the problem.

So, what’s the problem? If the program is operating in an efficient manner, though enduring setbacks during dry years, why does the program not work? In a simple answer, it doesn’t work because people can’t predict the weather, and when times are rough, dry seasons, people will exercise their strengths to get what they perceive to be their needs met even when it means that others will suffer. From an economics stand point, there are 2 normative views that are clashing. One is that government ought not to attempt assuming absolute understanding of the forces of nature and thus apply a numerical value to per-capita usage, but rather privatized suppliers of water should determine a price and thus efficiency will emerge. The second is that basic human necessities, such as water, ought not be privatized because of price-gouging tendencies and potential for monopolies to occur and cause harm to people who may not be able to afford the emerged prices of water and other ‘basic sustainability resources.’

So, what’s the solution? Perhaps, if the consumption of water is causing the scarcity (which it is) then there can be a role for government to play. Government can act as the monopoly of supplying water, and impose a consumption tax on it. Government would serve to prevent profit-hungry entities from gouging consumers’ basic human needs, while also limiting the consumption by attaching a value to the water usage. That way, the rich who may be wasteful with water, would being paying for means that may cause an increase in water supply, whether through converting sea water into potable water, or damming, or any variety of expensive means of accessing water.

[1] Successes and failures of municipal water efficiency initiatives in South Africa contain valuable lessons for North American water purveyors. By Sarah Wolfe

[2] According to legal-explanations.com, “(n) Riparian Rights are the inherent right an owner of a landed property situated in the banks of a river or collection of water have, to use the water in the river, ponds etc for the irrigation purpose or for consumption, subject to the rules existing in that state.”

[3] Department of Water Affairs and Forestry

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