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Monday, April 30, 2012

How to Scare Businesses Away 101

While reading The Wall Street Journal this weekend, I came across an article by Mr. Malanga titled “How Retirement Benefits May Sink the States.” The premise is that many firms are taking a close look at the long term implication of present fiscal policies adopted by the States when deciding where to locate their businesses. He cites the example of Illinois, where the cost of mounting pension will, over time, force taxes so high that no companies nor families will want to relocate there. 
Primarily, it is important to notice that, from an efficiency standpoint, the government has no reason to intervene with the provision of pension programs, albeit it has done it for decades. A retirement fund works very much like an insurance against the possibility of running out of money before one dies. None of the classical reasons for a market failure––externalities, public goods, or monopolies––are involved in this case, since insurances deal with unexpected events. Some economists believe such markets to be subject to asymmetric information, and hence, possibly affected by either Moral Hazard or Adverse Selection. Moral hazard is when the individual that is insured chooses to engage in more risky behaviors due to the coverage. Adverse selection is a situation where only the risk takers are seeking to be insured. The fact is that in any given society, there will always be a difference in the level of information between two parties, and this does not characterize a market failure. Although these problems appear when analyzing an economy in a static model, they become merely a part of the market process when taking the passage of time as a factor. Therefore, no market failures are involved, and government intervention will cause inefficiencies and wasteful allocation of resources in the market.
Regarding the main premise of the article, firms choose to locate their businesses where they believe will be the most profitable location for them. When weighting the pros and cons of each location, it is obvious that tax matters will change incentives and have an impact on the final decision. Through interventionism, the government is distorting the real costs and benefits of relocating to certain places, making it harder for entrepreneurs to foresee which locations would in fact be more lucrative. Such uncertainty could ultimately lead to the failure of some businesses that would have otherwise thrived had the market signals been unaltered. This also means that customers in many different places could be missing out on opportunities of having firms that would truly satisfy their needs due to the distortion caused by the government.

Does the government need to control your retirement

Contrary to what many believe, Social Security is designed to assist you in your retirement.  It is not intended to be a stand-alone system and most people will need an additional plan to realize their retirement goals.  There are many different ways to save and prepare for ones retirement without using the government’s social security program.  Some companies have retirement programs for their employees or programs that they can elect to contribute to.  The market provides additional options to easily invest in one’s retirement all without government interference.  “Opponents of allowing younger workers to privately invest a portion of their Social Security taxes through personal accounts have long pointed to the supposed riskiness of private investment.”  A properly formed retirement portfolio can be used to diversify away most of the risk in investing.  Long term investments in stocks, public bonds, and funds will produce higher returns on investment than the returns generated from Social security investments.  This would lead to having more money available to spend during retirement.
Presently the Social Security system is starting to come to grip with a few complex challenges.  To bring it to what is believe to be a properly funded amount would require taxes to be increased.  One way is to increase the “the current 12.4 percent payroll tax to at least 17.6 percent, a 42 percent increase”.  This increase would reduce the disposable income of wage earners which would then in turn slow down the US economy.  Another option is to reduce benefits by “24 percent”.  This would reduce the income of retirees and make it harder for them to make ends meet.  I believe that the best strategy would be to allow eligible employees to invest their portion of Social Security tax into a private account.  This would give them direct control over their retirement and control over how the money is invested.  By doing this we can reduce government liabilities and make people directly responsible for safeguarding their future.

Why Obama Care is wrong

Obama’s a worse offender than Warren Buffet

What a disrespectful President we have.  In front of administrative assistants President Obama campaigned for the creation of the “Buffet Rule”.  He obviously needs to take a long hard look in the mirror.  Only a few days after making this statement the US White House has made it known that President Obama has a lower effective tax rate than his secretary who only makes $95,000 a year; according to spokeswoman Amy Brundage. “She goes on to suggest that the President would be willing to pay more in taxes that he currently does.  His situation illustrates “exactly why we need to reform our tax code and ask the wealthiest to pay their fair share.”” 
How can Obama stand before a group people how are paying a higher tax rate and say that change is needed when is one of the offenders.  Warren Buffet has been calling for a 30% tax rate to be imposed on the wealthiest Americans for some time.  If the fact that Millionaires are paying fewer taxes than their administrative assistants, then why did the “Buffet Rule” get voted down in the US Senate by a 51-45 vote? And why was the vote split primarily down party lines.  And why do some believe that it would not have passed in the House either.  If President Obama really wants to fix the tax system should he not be getting his fellow Democrats on board with him?  I am very puzzled by the fact that nearly all Democrats are against him on this tax plan.  The 30% tax rate is still progressive as those who make more will be required to pay more in taxes.
            Many people have said that if the rich want to pay more in taxes they are free to do so.  So why doesn’t President Obama, an “American leader” show the rich how to do this.  If enough of them follow then there may not be a need to rework the tax code.

Wednesday, April 25, 2012

The Funny Thing about Taxes on Gasoline

     Ever heard that the true cost of gasoline is really between $8 and $15? Well, that's probably not far from the truth. Policy makers have the right idea taxing gasoline consumption since the use of fossil fuels to power vehicles from motorcycles, to airplanes, to cruise ships does produce significant amounts of air pollution annually. The thing is, for a excise tax to effectively force the marginal cost to gasoline consumers to be equal to the marginal benefit to society, there can't be subsidies present that cancel out the tax, and there certainly cant be subsidies that significantly offset the tax, like theere are presently.

     The article What Gasoline Really Costs Us addresses many of the subsidies and costs associated with the consumption of gasoline in the United States. Some of the listed costs and subsidies are not specifically related to the use of gasoline like the cost of upkeep for roads and bridges since alternative fuel vehicles use those as well, but many are useful for gaining insight into the real cost of gasoline consumption. Most direct subsidies to oil domestic oil companies come in the form of tax breaks, decreasing the cost of production for those companies. Other subsides include program subsidies include government programs that facilitate the production of oil and protection subsidies that involve military protection of oil rich regions around the world, taking away individual company's need to finance protection of their own interests. Costs to society of gasoline usage listed in the article don't provide major insights that anyone who has considered the negative effects of fossil fuel usage. It addresses the health costs associated with heavy localized use of internal combustion engines (as in large cities) and general environmental degradation as a result of vehicle emissions and oil extraction. 

     In recent years, we have seen some of the most evocative arguments in history for decreasing our dependence on gasoline to fuel our vehicles and production facilities (not noted in the above article). For one, BP's Gulf Coast oil spill back in 2010 revealed major oversights of safety regulations for oil production. The world was shocked that the Deep Horizons oil rig was not equipped with an emergency flow shut-off feature. Legal compensation to human victims of the spill totaled $7.8 billion, yes billion dollars. This figure does not include environmental cleanup or land restoration, the full costs of which are sill unknown as the efforts have not concluded yet. While events like these are rare, they provide an important illustration of the potential environmental costs of oil production, pardon my French, screw ups.

     The other major argument centers around the fact that oil extraction is becoming more and more difficult domestically, as we exhaust easily extractible sources. One method that companies have turned to is a process called fracking. In the past complaints about fracking mostly had to do with flammable tap water but recently this extraction method has been linked to an increased number of earthquakes. While the proof is still shaky (haha), the potential costs associated with earthquakes are much greater than any environmental concerns relating to oil that we have encountered in the past. I will not make the claim here that fracking is for sure causing earthquakes, but I will say that if it is, oil companies better prepare for some major lawsuits that will end up affecting the price we pay as consumers. 

     It is clear that there are external costs related to gasoline consumption and that an excise tax is the appropriate means of dealing with those externalities, so then why is gasoline subsidized in the United States and around the world? The answer is that the subsidies allow countries where oil production is more costly to artificially reduce the marginal cost of production and keep their domestic producers competitive with foreign suppliers. Given that the world oil market is generally "free," producers who are not able to keep their costs down and afford to remain in the industry should be allowed to fail, but governments do not take this economic perspective on gasoline production. Their goal is to ensure a steady supply to their country so that production of goods and services will not be debilitated in case of a war. I don't agree with them. There is no good reason to subsidize a private producer unless their product has a positive externality, which I'm pretty sure is not the case with gasoline. The subsidies that the US government supplies to oil companies make the tax they impose at the pump almost laughable since there is no way the $0.35 a gallon I pay in taxes offsets their $4.00-$11.00 a gallon subsidy. 

     I do think that a sudden increase in the price of gas that would result from elimination of oil subsidies would have negative economic effects in the short run since companies would not be able to adequately adjust their capital inputs, but in the long run, I believe that it would be beneficial. While costs of goods and services would assuredly increase, the lack of subsidies may prompt more research into less destructive alternative energy sources. Additionally, companies would only use those other sources if they were less expensive than the unsubsidized gasoline, which means that, should a suitable substitute be found, prices would end up decreasing again as soon as the economic and social costs justified it. Don't get me wrong, I would HATE paying $8-$15 for one gallon of gasoline, but just because my (and most likely everyone else's) preferences are such, does not mean that the subsidization of gasoline is efficient or that it should be continued for long into the future. 

Thursday, April 05, 2012

Higher Education — Our World Isn’t Flat Anymore

This is my April / final post for the semester...

Source: http://www.theatlantic.com/business/archive/2012/04/can-this-online-ivy-university-change-the-face-of-higher-education/255471/

            Here we are, 2012; the realities of post-recession economic stagnation (from the 2007-2009 recession) and lack of job availability loom in our minds. Throughout this spring semester, because I spend a lot of time at the college library, I have seen numerous tours for potential incoming students. American education mills (i.e. colleges) are nothing more than marketing machines, providing a nurturing environment for students. The schools serve as brokers to get educators and students together. They become our Alma Maters (Latin: “nurturing mothers”). We become byproducts of the goods and services provided to us (for hefty fees), as we are nurtured into independently thinking beings.

            Introduction to Business teaches of two terms: purple cow and pump & dump. Purple cow (a.k.a. the 5th P of marketing) refers to whatever makes you (or your business) stand out from the competition. Pump & dump refers to making yourself (or business) better than actual wellness (which is illegal in the business sense). I like to use these terms when I discuss education matters with others. I refer to the pump-&-dump students as those who race through college, get good grades (i.e. those who cram and reproduce the information with expertise) then forget the information; after graduation, they don’t remember any of it (or their educations were blurs to them). This style of education is very Cartesian (after Rene Descartes, best known for being the father of modern philosophy) where one breaks something down to see how it works, but what is broken down no longer functions. Systems theory, conversely, is very purple cow; in other words, considering the whole (i.e. not possessing self-destructive tendencies for one’s education) is one’s best chance to overcoming the current economic problems (i.e. focus on yourself as a business, and attend to your own S.W.O.T. analysis). Your purple cow is your well-roundedness, academically. Your success is whatever value-added proposition you can offer to employers (including minimizing weaknesses, not just focusing on strengths).

            S.W.O.T. stands for strengths, weaknesses, opportunities and threats. Strengths are what you do well. Weaknesses are what you don’t do well. Opportunities are what you do to improve your strengths (or minimize the effects of threats and your weaknesses). Threats are things your competitors (e.g. fellow job seekers) do well that you cannot. Your purple cow is your competitor’s threat.

            I bring the aforementioned to light, because “PKajen” (of our class), in another thread, wrote “according to the book ‘Academically Adrift: Limited Learning on College Campuses’ 45% of college US college students exhibit no significant gains in learning after two years in college.” I believe the book brings to light the problem of the pump & dump phenomenon. We all do it; it’s the best way to earn good grades (i.e. what is required of us for scholarships, graduate school admissions, etc.).

            In the link at the top of this post, Ben Nelson (founder of the Minerva Project) is attempting to revolutionize the education process. The Department of Education (D.O.E.) (http://www2.ed.gov/about/offices/list/os/technology/implications-online-learning.pdf) refers to online learning extensively. In the D.O.E. document, The Ohio State University reports of academic gains made by students (and decreases in the school’s financial investments) from online learning. The Ohio State University enrolls over 2,500 students, each semester, for Introduction to Statistics. They have reported (offering 3 learning types) cost reductions, 4% reduction in student failure, withdrawals down 3% and 248 more successful completions (than traditional instruction). I think Ben Nelson is bastardizing the concept, and is a rather competent snake-oil salesman with such phrases as his school making “analytical, thinking machines” at a reduction of the cost of the elite Ivy-League schools. His model, from what I can tell, is very pump & dump / Cartesian.

            Economically, market failure may exist in the form of positive externalities. I cannot see education being a public good (because it can be excludable). I do not see asymmetric information, moral hazard and adverse selection being sources of market failure (for education). Monopoly / market failure might exist (if Ivy-League schools are only considered), but many other options exist for students; therefore, it doesn’t exist (as a source of market failure). Subsidies (e.g. Pell grants for undergraduate studies) exist for students. This is a means to correct for the externality. The unintended, non-market interdependence (i.e. externality) exists in the form of subsidies (between the exchange of tax payer and government) to benefit third-parties (i.e. qualifying students) to serve as a government investment to increase future tax-payer income (and subsequent national income / gross domestic product).

            I am a proponent of going to college. The 120 credits required to graduate may be just enough to give our threats (i.e. S.W.O.T.) empowerment over us. Maybe we are Cartesian machines doing what has worked in the past (for others). In the age of innovation & technology, and ever-increasing job obsolescence (e.g. automation and loss of grocery cashier, bank teller & eventual K-12, teacher positions), perhaps our Cartesian, archaic ways will get us in trouble with the transnational competitors for our economic survival. Economics is the study of limited resources, and efficient allocation of said resources. The world is encroaching on our 4% of the global economy. Perhaps we are too stupid to realize how obsolete we are making ourselves even before we graduate with a bachelor’s degree. Perhaps we are too stupid, as a nation, to see how obsolete our government is becoming as well. Diversify your portfolios (educationally) and broaden your scope of employability; maybe we can strive for the middle-class life that seems to be so difficult to obtain in today’s global economy.

Monday, April 02, 2012

The politics of going to college

This week, as I was reading the New York Times, I came across this opinion article by Thomas Edsall regarding education subsidies (it can be accessed by clicking on the title of this post). The author's main claim is that the republican candidates for presidency do not want to fund higher education because those that pursue a college degree are more likely to become democrats. Disregarding the lack of clarity about the sources used to provide such information, I'd like to analyze the idea of subsidizing education based on efficiency grounds rather than political ones.

Higher education is definitely not a public good, since it can be made excludable to the parcel of the population that does to pay for it. Then, the only instance that would justify government intervention would be if higher education was a positive externality. The fact is that education is an interdependence reflected in the labor market through the wage system. If having a college degree increases the marginal productivity of labor, then that will be reflected either through higher wages or lower prices in the market. Either way, there is no positive externality, since the benefits are already internalized by the market. Therefore, based on efficiency grounds alone, it seems that the Republicans candidates might have a better understanding of the economics behind higher education than the author of the article.

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Sunday, April 01, 2012

Rate regulation of health insurance premiums

The state of CA talked about having regulation of health insurance premiums, so that any decision by a health insurance company to increase premiums would have to be approved by a state agency. When government regulation is involved, it’s to deal with a negative externality. In this case, the externality is that if premiums are too high, less people can afford the insurance, and uninsured people cost everybody money when they don’t pay their medical bills. This idea is a whole other issue to discuss from an economic view, but I want to focus on this idea of rate regulation. The government is creating a price ceiling here, assuming more people will be able to get health insurance this way. However, if you look at a graph; if the equilibrium the market would get is at one price, and the price ceiling is below this, essentially the market moves down the supply curve. This means that at this price, the health insurance companies will only be willing to meet a certain level of demand; it’s not worth it to them to do more than that. So, the government won’t be getting more people insured; less people will be insured. These people may be happier because their premiums are lower, but it won’t serve the purpose of getting more people insured.  Another way the suppliers could respond is to keep prices that low, they offer a lower quality product; for health insurance, that means changing how much they cover expenses, and what they cover. Since supposedly another huge concern for the government is the amount of underinsured people, this won’t help them either if everyone gets insured, but at an inadequate level (although, what is adequate coverage could also be another topic of consideration).
Overall, this is an example of force on the market causing the problems the government says it’s trying to correct. Competition among companies will drive prices down to a fair level over time. There’s no way of knowing how long that time will take, but allowing the market to act freely will achieve better, lasting results at lowering premiums and getting more people adequately insured than setting a price ceiling. 

Dani Pierson-Cook

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