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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.

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

Saturday, March 31, 2012

The Problem with the Minimum Wage

The main argument made by those in favor of a minimum wage is that it raises the standard of living for the working poor and, thus, reduces poverty. The main argument against it is that it increases unemployment. A business owner will hire workers as long as its marginal product of labor doesn’t drop below zero. What this means is that if the owner can employ someone for $6/hour who gives him $6/hour worth of productivity, he will do so. However, if the owner is forced to pay the worker $7/hour, keeping him would actually cause the owner to lose money. Therefore, while some workers would make a marginally higher income, some would lose their jobs and make no income. Some are helped a little, while some are hurt a lot.

In addition, some of the costs borne by business owners due to higher wages will be passed on to consumers by way of higher prices. Higher prices are regressive in nature. By this, I mean the higher one’s income is, the less one is affected by higher prices. Conversely, the lower one’s income is, the more one is affected by higher prices. As a result, any price increase caused by a minimum wage will affect the very people the proponents are trying to help the most.

A third argument against a minimum wage is one not much talked about. A minimum wage essentially transfers income to unskilled workers. Normally, when the government transfers income – to help the poor or tornado victims or the Auto Industry, for example – these transfers are paid from tax revenue and all taxpayers bear the costs. However, the income transfer brought about by a minimum wage causes employers of unskilled workers to bear the brunt of the burden. (Some of this, as mentioned above, is passed on to consumers.)

So, are minimum wage laws even effective or, for that matter, even fair? A more targeted approach to helping the working poor seems more appropriate. The Earned Income Tax Credit, for example, gives unskilled Americans the incentive to be productive members of society and ending minimum wage laws would allow more of them to do so. In addition, according to the Bureau of Labor Statistics, half of minimum wage earners are aged 25 or less. The majority of these aren’t even the working poor that the minimum wage is intending to help.

The minimum wage is a feel-good policy that politicians use to show how they are helping poor people. And they don’t even have to raise taxes to do it! Many people have bought into the feel-good argument, but haven’t considered the drawbacks.

The Cost of Going to College: Students and Parents Feel the Pinch

While many people still believe that education is one of the best investments one can make in lifetime, you should never underestimate its price especially in the continued stagnant and sluggish moving economies that face the US. Many experts say that college tuition costs continue to skyrocketing at rate that outpaces inflation by a considerable margin (http://www.ibtimes.com/articles/214426/20110915/unemployment-jobs-economy-college-graduate.htm). Yet, college graduates almost struggle like everyone else to better off their lives. Conversely, decades ago, a college education was quite inexpensive and it was almost an automatic ticket to middle class life style but today dynamics are not certain given the economic uncertainty.

Alluding to a catchphrase “Planning for college, planning for debt” many people have even gone beyond questioning whether going to college worthwhile investment. 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. This shows that it is equally imperative to further education to make change but at what cost? For instance, Paul Davidson, in USA Today (http://www.usatoday.com/money/economy/employment/2010-12-06-collegegrads06_ST_N.htm) reports that unemployment rate for college grads is highest since 1970. The worrisome problem is the cost of college tuition that continues to go up. In this regard, let’s discuss  the question at hand whether there is a market failure because of government involvement in education sector on one hand, or whether the situation of high costs for college would have been different should education be handled by the free market.

First, based on any other good or service production theory that require a combination of land, labor and capitals that are directed at a particular objective, some economists argue that free market can actually yield more in education at reasonable price than what is done by government. On the other hand however, government defenders enlisted various economic arguments related to market failure to dispute the idea that parents in a free market should ultimately determine what educational services are offered. Next, without the government intervention some parents would not bother sending their children to school at all. Also, I find that without government involvement, in other words providing subsidies such as financial aid and others, children from poor families would not be able to go to school. On the same note, free market defenders fight back saying that based on entrepreneurship theory, education should not be seen as best when it is left to government; rather the free market is better positioned to efficiently allocated resources that are underused in many instances and the government is not up to that task. They continued saying that the government bureaucracy is seen as the opposite of enterprise. It stifles enterprise and therefore government domination of education assures that the entrepreneurial innovation and creativity are accustomed while entrepreneurship has precondition that encompasses freedom and private property on both the supply and demand sides. http://www.thefreemanonline.org/columns/can-the-free-market-provide-public-education/

Seen in the lenses of the above contentions, one would wonder whether cost of going to college would be any different. Arnold Kling may be right when he asserted that he is not sure where the market failure would be in current education system but he recognizes that the accreditation monopoly is one market imperfection to which he pointed out. Indeed, if we look at cost of going to college in the US everyone should be concerned. In fact, expert think that after the busting of bubble in housing industry, student loans bubble is about to bust. Dennis Cauchon in US Today reports that student loans outstanding will exceed one trillion this year (http://www.usatoday.com/money/perfi/college/story/2011-10-19/student-loan-debt/50818676/1). If economy does not improve to boost hiring college students so that they can pay off their student loans what would happen or what would the government do - or again what would have the free market done differently? Surprisingly, Tony Mecia reported that even the Federal Reserve son who is medical graduate has accumulated $400,000 in debt! http://www.creditcards.com/credit-card-news/student-loan-debt-time-bomb-1279.php

Needless to say, government involvement in education is a controversial matter in which it is hard to depict whether there is a market failure associated with the high cost of student loans. If everything has gone up in price how education would have been immune?

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