.comment-link {margin-left:.6em;}

Saturday, May 12, 2012

Sustainable economic development: A market failure in our back yard!

Sustainable economic development: Market failure in our back yard!

I will start reminding that a market failure is mainly caused by below three major components-namely monopoly, public goods and externalities. Some several weeks way back, I learned that the board of Colorado Springs Utilities watered down a proposal of wind energy that has been championed by the Sierra Club.

The Sierra Club sustain that after a year and a half of dedicated work from diverse community members supporting renewable energy in this case “Wind” the Utility Board in Colorado Springs was asked on a moment's notice to assume that there would be "no wind customers in hand" to support their investment in 50 megawatts of wind energy (enough to power up to 15,000 homes).
Yet, several potential wind buyers including Fort Carson, University of Colorado at Colorado Springs, Colorado College, Shriever and Peterson Air Bases were never given the chance to invest in this renewable project in a manner that would keep rates low for all ratepayers (www.sierraclub.org/takeaction). On March 21 this year, a consultative meeting bringing in all concern experts in the matter convened to discuss with the board as well as asking the board to reconsider all the facts and make the right decision on wind energy but all efforts are only left with shallow hope.
In line of economic argument, the Colorado Springs Utilities is the sole and only one supplier of water and electricity for residents of Colorado Springs city. Thus, it is safe to say that the Sierra Club move was seen as of any potential competitor.  Come to think about it, it is fair insinuated that there is nothing that happen by accident, after all the Colorado Springs Utilities has a backing of local government so the government is a force behind the monopoly in water and energy supply in Colorado Springs.

Sunday, May 06, 2012

Why not a national sales tax?

3,000,000. That’s roughly the number of words in the IRS tax code. And that doesn’t even include the 6,000,000 plus number of words of IRS regulations. How many people are out there saying, “Yeah, that’s about what it should be”? Yet, nothing is done to change the system because, I suppose, it’s just too scary to do something different. Businesses and individuals spend over 6 billion (yes, billion) hours each year preparing and filing their taxes. The current system encourages not only tax avoidance, but tax evasion. And the IRS has a budget of over $10 billion a year in order to collect what the government is owed.

Why not a national sales tax? How verbose would the tax code have to be for that? How much time would people have to spend to prepare and file their taxes? To what extent could individuals and businesses avoid or evade their taxes? How much smaller would the IRS and its budget be under this system?

In addition to being simpler, cheaper, and less susceptible to scofflaws, it promotes both productivity and saving. People don’t make decisions on work versus leisure based on their gross wages, but rather on their take-home pay. Taxing consumption rather than income induces individuals to work more because they know they will get to keep what they earn. And now that the money is in the workers’ pockets, they decide for themselves whether to make a purchase, and thus pay taxes, or to save. The decision shifts from “work or leisure” to “consume or save”.  Because of this shift, people will have more incentive to save and this will mean that they will tend to carry less debt and be better able to fund their retirement.

One main argument against a national sales tax is the thought of it being a regressive tax. The less income one earns, the greater the proportion of that income that must be spent on necessities. Those who earn greater incomes are in a better position to forgo consumption and instead save. However, this easily can be overcome. Certain goods could be exempted from the tax. For instance, food, medicine, gasoline, used cars, and electricity could be completely exempt. A house or new car could be taxed only on the price above the median. Clothing, too, under a certain purchase price, could be exempted. In addition, rebates and credits, just like the Earned Income Tax Credit does now, could be granted to offer protection to the poor.

So, why not a national sales tax? Sometimes more complexity adds depth. Not many people would suggest that Steinbeck should have cut the length of The Grapes of Wrath in half. But sometimes more complexity is simply unnecessary. Our tax system is unnecessarily complex. It doesn’t have to be. The median amount paid by individuals for tax preparation is about $250. Wouldn’t that money be better utilized some place else?

Saturday, May 05, 2012

Local Economics

Thinking broadly about local economic policy including local and state leads me to believe that we must being dealing with bribes and incentives.  The idea being that our local government is using bribes and incentives to bring more businesses to Colorado Springs furthermore provoking enterprise zones.  Enterprise zones are run down areas that we target to develop.  The key is that there are tax breaks and low interest rates to entice urban renewal.  A good example of this is when the DIA or state government gives united tax breaks in order to influence businesses to migrate to El Paso County.  Ultimately, when we say local economics I think about trying to get someone or something to Colorado Springs through bribes, tax breaks and incentives.  Side note, it’s funny that it’s not really a decrease in tax/interest rate it’s more of the state government cutting you a check for a certain amount.

When we talk about Economic Development, we need to be more concerned with what type of subsidy there is for it and how they/we are designating an enterprise zone.  I feel that when the local government is trying to get support for their new policy or development/progression that they don’t tell us the whole story; not that they are actually lying to us, but more or less using nice, comforting, understandable words like jobs, employment, access ect…  That being said, it’s important to understand what they are really trying to say. 

From my knowledge I understand a job to be a “labor contract” that is voluntarily created.   A job is an agreement between an employee and employer for a dollar value based on the value they place on your production.  Now that we have clarified the meaning of a Job, we can further explore and analyze exactly the role of local economic government/development plus integration of a policy.

Honestly, the whole idea of jobs and subsidies doesn't’ fully make sense to me and i'm sure to most people; We must keep in mind that we are also exploring for inefficiency and market failures in all scenarios.  Before we can better understand jobs and subsidies, lets clarify what Economic Development is.  Economic Development is an increase in economic activity that provides the ability to make someone better off.  This sounds like they are really looking for a pareto improvement, or that economic development really is a search for continuous pareto improvements.  The key is that we are looking to make pareto improvements so we can reach pareto optimal.

The problem is we need to stay local and not look at the whole state or country.  Remember, the idea is to bring people into your local economic society to entice people and businesses to spend more money in your county in order for us to be better off and more productive.  A good example is the Cheyenne Frontier Days, The locals leave town because of the mass increase in people, noise and congestion; even though the people are paying for it.  Seems to me that it’s more about giving the opportunity to have pareto improvement.  Again the key is that we cannot worry about EVERYONE, stay focused on local economic development otherwise we will never give opportunity to improve or be better off.

Being on the subject of local economics, development, jobs and pareto improvement/optimal I would like to talk about the production possibilities frontier.  Resources and technology are the only two things that can shift this curve out in order for us to be more productive and better off.  It’s our own personal choices of what we can/will do with our resources and technology that shift the PPF.  Even though it may be our personal choices that affect the PPF, Our PPF is a fact of life.    It is what it is but we do still have our own personal choices to help influence the shift.  A shift outwards of the PPF is Economic Development and now people have the opportunity for pareto improvement. 

So back to our topic of local economic government policy, what do jobs, subsidies and now resources have to do with it. As individuals we can make independent choices to shift our PPF out.  We can ultimately have Economic Development through local increases in resources, capitol and technology.  The key is that if we are inside our PPF then we have a negative externality; Furthermore, leading to inefficiencies that are the foundation to a market failure.  The only way we can make improvements is to force people to grasp the opportunity.  The government can provide opportunity but if we don't exercise it then we are no better off. 

If the government corrects market failures then we will see great expansion in economic development.  Again though, we have to keep in mind that we must think locally and about the pareto improvements we can make locally.  It’s all related to subsidies, all justified in the name of jobs.  Like I mentioned earlier, they like to use nice, comforting and understandable words so we will support them.  It’s important that the government has our support in order to persuade businesses to move here, leading the new business to believe that this is where they can be most productive and profitable.  Businesses settle where they do because they believe the cost are low and they have the greatest possibility to maximize profitability.  They/we must also think about the transportation cost, labor market access, electricity, water and wages when determining where to re-locate.  The hard part about analyzing these cost is that cost are changing in different locations, especially overtime.  I do believe though that businesses can make good location choices; No sources of market failure to make inefficient choices.  I would see it more as a location inefficiency choice.  Furthermore, I don’t really believe the local government can influence their location choice; Government is not really in control.  I think it’s the taxation rate that help influence location choice.  Texas is a good example of low rates and high re-location rates with improved productivity.  The tax rate fluctuation influence location across regions, but has a small impact on location decision.  I believe this because there are small tax differences within the region.

Tax incentives and bribes don’t always help or work because you may have competitors.  To know what type of market failure we are looking for we need to know that businesses with great risk are more likely to take these tax breaks and shift the risk and tax to the community.  That being said, I think we need to be looking at positive externality in the labor market through subsidies.  You hear that you will be better off, and that everyone needs jobs.  Think about subsidizing higher education, it’s the same idea.  They subsidize it thinking its creating a positive externality when in reality we are not better off.  The sad truth is there is no externality and that the market is doing it on it’s own.  If we really believe there is a positive externality or marginal social benefit, then we should be giving every business a subsidy; it’s kind of like Texas. The idea that most people are not grasping is when the government tells us they are creating jobs and bringing them to us locally, we overlook the fact that they are also importing employees.  I idea being that they have you supporting something that really isn’t helping you, maybe making you worse off and not telling you that of the 100 new jobs they created that 85 of them are already taken.

Talking about the increase in labor force within your local county leads me to believe there has to be a negative externality somewhere on someone.  We can take the simple case of the obvious increased pollution they bring with them.  So what we can do to fix the externality is just TAX it!  Maybe treat Colorado Springs like a club good and charge these new people a membership fee, tax them to control negative externalities, utilization fee (highways) and have them help with infustructure fees.

Thursday, May 03, 2012

Why Obama Care is wrong

Why is it that we are still hearing about the Obama’s health care reform outside of history books?   This legislation will still leave some Americans uninsured and will cost the nation an extra “$823 Billion in debt in just the first 10 years”.  Starting in 2014 tax penalties can be given to those who do not have some form of insurance.  This plan has helped get some Republicans elected to office by running on a “repeal or replace” platform.  “In January 2011 the House voted 245-189 to repeal the health care law”.  In poles across the nation there are more and more Americans who are opposed to this plan.

There are no sources of market failure that have led us to need a plan on such a grand scheme.  Health care packages are available from many employers and are also available in the open market.  Additionally some Americans are covered by current Medicare and Medicaid programs.   Some people do not have coverage due to not being able to afford it right now.  One reason for the high cost of insurance is the demand for services by individuals who do have coverage.   These individuals can also cause the cost of health care to go up thru moral hazard.  Since they are covered, they can afford to be more risky.  Adverse selection can also play a role since only those who are the most risky will attempt to get coverage. 

Subsides could be used to help the poor and those in need to acquire medical insurance.  This could reduce the number of Americans without medical coverage.  Unfortunately this would also drive up the demand for services which would in turn cause the cost of healthcare to rise. 

Another option would be to subsidize the providers of insurance plans to lower their prices on some of their plans.  This could increase the number of covered Americans while reducing the overall health care costs.

Wednesday, May 02, 2012

Excess burden of Income taxes

Excess burden is the economic loss to society due to the tax enforced by the government. In other words, consumers make different choices because of the tax, and these choices may not be the best or most efficient economically. For example, the income tax lowers the discretionary income available to consumers to use in the market, therefore buying less. Producers of goods and services have to account for the taxes in their costs, causing the prices of goods to rise. Overall, these taxes decrease how many goods are produced and purchased in the market, negatively affecting the economy. It has a negative impact on the overall social welfare, because less income is being used in the market. Markets, over time, decrease poverty, and by decreasing the amount of resources and money available for the market to be used, social welfare is diminished. Also, there are the administrative costs of enforcing and collecting a tax; this is money that could also have been used in other ways that are more economically efficient and improve the overall economy.
A better alternative is using consumption tax and no income tax. A consumption tax has excess burden (all taxes do that aren’t corrective taxes), but the excess burden is smaller compared to an income tax. This means less negative impact on overall social welfare, and when people talk about changes in taxes it often is related to social welfare and trying to relieve tax burden on certain groups, such as the middle class. A consumption tax has less excess burden, therefore is better on social welfare overall.  It also addresses other social welfare concerns that often come up in discussion, such as the lack of wealth and large amounts of debt people have in the US. If consumption was taxed, rather than income and wealth, it would incentivize saving. This would increase overall wealth of US citizens, addressing another common issue discussed about the economy and social welfare. People would have more discretionary income, which would make up for the possible higher taxation of purchasing goods. In most states, we already pay sales tax so it would not be that large of an adjustment to the change. If the effect taxes have on social welfare is one of the main concerns, this would be the best approach to take.

Danielle Pierson

Taxes and Inelasticity of Demand

The article Rolling back the nanny state: Live free and pay more tax, featured in the Economist, focuses on the government loosening its grip on liquor stores, gambling and fireworks as a response to its dire need to raise revenue. Instead of increasing income or sales taxes, some state and local governments have focused on obtaining extra revenue from excise taxes and fees. In Washington state alone, the licenses to 167 state-run liquor stores will be auctioned off into the private business sector by June 1, 2012. Several other states are minimizing alcohol regulations. For example, more states have recently lifted bans on liquor sales on Sundays. Several counties in Texas that were previously “dry” are now “wet”, meaning that it is now legal to sell liquor in these areas. Nearly half the states in the U.S. now allow casinos. Several states have lifted restrictions on the types of fireworks that may be sold and some states that previously banned the sale and possession of all fireworks now allow consumers to buy and sell certain fireworks.

It makes more efficient for governments to gain revenue through excise taxes and fees than through higher income and across-the-board sales taxes. There are two main reasons for this. First, the inelasticity of demand associated with liquor, gambling and fireworks (among other things) provides a relatively guaranteed source of income, with few consumers cutting consumption when changes in prices occur, even when the changes are due to rises in the taxes or licensing fees for the distribution of these products. There is also, of course, the fact that by increasing income and/or sales taxes, consumers have less money to circulate through the economy via personal consumption and for investing.  

Not only do these measures allow for a more sensible and economically efficient way for the government to raise money, but by loosening regulations, the free market is allowed to operate in a manner more aligned with the ideals of a capitalist society. This is sure to bring about a more appropriate market equilibrium with each good in the affected areas than exists when government is heavily involved.

It may be a bit of a stretch, but by loosening regulations and raising more revenue through taxing larger amounts of inelastic goods instead of raising income and across-the-board sales taxes, we may be moving toward an era of raising government revenue through consumption taxes, rather than income, and perhaps even sales, taxes. The excise taxes could even remain in place in this case, which may help lower the consumption tax paid by individuals/households every year.  The idea of paying consumption taxes instead of income taxes is more economically efficient, as it does not discourage individuals from obtaining higher wages and potentially being placed in a higher tax bracket, which can sometimes make an individual’s net income less than it was at the lower wage.

Tuesday, May 01, 2012

Social Security


This article discusses reasons for why Social Security is on unsustainable path. The article first presents the SS as a retirement program. Later it acknowledged the problem of annual deficit in Social Security Trust Fund, which basically means that SS is not a retirement program, but rather a redistribution program. This means that those who work, pay into SS, and then SS pays to those who are retired.  In case of growing trend of current

employees vs. retirees, this system will work, but as soon as the contribution into SS will be less than
payments to retirees, this scheme will not work, SS will run out of money. Is it possible? Yes it is. That's exactly what article is talking about. In recent years, payments from SS exceeded contributions to SS. The SS fund will not run out of
money immediately because it enjoyed surplus of funds for many decades. The only problem is that
those surplus funds were spent on other government programs. So, now other agencies have to repay
those “loans” to SS fund.

The author suggested that in order to solve the problem, the retirement age will have to be raised and SS tax will have to be increased as well in order to sustain SS.

The question is: why is it  the government got involved in this financing/retirement business? Is there a market failure that government has decided to provide Old Age insurance?

First of all, getting to an old age is not an insurable event.

So, is there a market failure?
1. Is it a public good? No. it’s easily excludable.
2. Is there a monopoly power involved in providing these services? No.
3. Are there externalities? Not that I know of.

4. Asymmetric information? I know that everyone will get old one day Also, there is something
that no one knows – the future. So I do not see any asymmetric information problems associated
with retirement.
5. Adverse selection. Will only neediest people invest into the future? Unlike health care,
everyone needs money to live. So, adverse selection is not a source of market failure.
6. Moral Hazard. Riskier behavior? I do not see a source for moral hazard as well.

Obviously, there is no market failure in retirement, which means that the government should not be
involved in this business. There are private companies that would do the same job better.

However, there still might be a role for the government to play in the retirement planning. If I invest
my savings into private companies, there is a chance that these companies might go bankrupt, which
will leave me with no savings. This is when, the government could provide me with a TRUE reliable
insurance policy (if I voluntarily want it), protecting me from the event, which I hope never happens
- private companies going bankrupt. In this case, the government will insure a small final portion of
the risk that the savings the person had accumulated will not disappear. If the person has never saved
anything, unfortunately that would be his or her own problem.

This page is powered by Blogger. Isn't yours?