• Luxury Cars Out to Pasture

    When Your Ability to Pay Determines Your Punishment

    Apr 27 • Behavioral Economics, Economic Debates, Economic History, fiscal policy, Government, Regulation, Thinking Economically • 54 Views

    Posting a Facebook image of his €54,024 speeding ticket (close to $58,000) and a Mercedes his fine could buy, a Finnish millionaire expressed his fury. In a 50 M.P.H. zone, he had been driving 64 M.P.H.


    Progressive punishment is like progressive taxation.


    Similarly, a Nokia executive was fined €116,000 ($103,000) for driving 75 km/h (47 M.P.H.) in a 50 km/h (31 M.P.H.) zone on his Harley-Davidson motorcycle and another gentleman was asked to pay $44,100 for zigzagging through Helsinki. After his ticket he commented, “if you earn enough you shouldn’t even touch a car.”

    Progressive Punishment

    In Finland, exceeding the speed limit beyond a certain amount and shoplifting are violations of the law for which your penalty is a fine based on your income. Called progressive punishment, the system penalizes the affluent more than those who have less. Day fine advocates say the system is more equitable because they make the rich experience as much pain as those with less.

    Simply explained (there is lots more detail), infractions are ranked by severity. A severity “unit” then gets a multiple of a person’s daily income. That would mean (hypothetically), traveling 15 M.P.H. above the speed limit creates a fine that is 15 times your daily income; 25 M.P.H. above would be a multiplier of 20 times what you earn each day.

    Called a day fine system because it seizes your day’s income, the approach was first implemented by Finland in 1921. Germany used it to diminish its prison population for any crime with a six-month or less lock-up span. While we did experiment with day fines in the U.S. during the 1980s in Staten Island, NY for crimes that ranged from loitering to theft and in Milwaukee, it never stuck. In Europe though, Sweden, Switzerland, Germany, Austria, and France have day fines.

    Our Bottom Line: Progressive Taxation

    Some say it is never fair for those with less to pay more and yet it happens everyday at the cash register. For every sales tax, whenever everyone pays the same amount, the poor are paying a higher percent of their income. For that reason the tax is called regressive. By contrast, as with the Finn speeder, when the more affluent pay a higher proportion of their income than those with less, the tax is called progressive.

    And, whether contemplating progressive punishment or progressive taxation, we just have to decide whether we believe ability to pay should be our rationale.

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  • Through marginal analysis, we can see how drive throughs are supposwd to maximize profit margins with less time, more accuracy and customer service.

    A New Message From Starbucks

    Apr 26 • Businesses, Demand, Supply, and Markets, Economic Humor, Innovation, Labor, Lifestyle • 72 Views

    Think Maxwell House and you have the coffee culture that preceded Starbucks. Made with low quality beans, sold in cans, pre-ground, sitting for months and maybe years, the coffee was terrible. So, when Starbucks came to town, it was transformational. Paying more than at the local luncheonette, the first Starbucks customers in the 1990s felt special. Perhaps because the idea was somewhat European, the concept of the coffeehouse had status. In a world of coffee that had been dominated by cans of Maxwell House, Starbucks was elite.

    No more.

    Now with a Starbucks (or two) on every block, Starbucks has become rather ordinary. Those of us looking for an aspirational coffee experience with a better bean from a small far-off farm have been flocking to places like Blue Bottle and Philz.

    In last week’s investor call, Starbucks’s CEO and founder Howard Schultz seemed quite aware that he had to recapture the gourmet coffee consumer. Describing Starbucks’s new Roastery coffeehouses, he used the words “ultra-premium, small batch, limited availability.” No longer called a barista, Coffee Masters assist us at Roasteries. And, at $20 a pound and more, prices also convey an elite message.

    Our Bottom Line: Competitive Strategies

    An economist might say that Schultz understands how to compete in a monopolistically competitive market structure. Because you just need an espresso maker and some beans, market entry is easy. But to be successful, you need something unique–the monopolistic part. Starbucks, through its beans, its barista training and its store design initially competed successfully.

    To regain that special image, the action is taking place at the margin. While Starbucks’s everyday coffee experience remains the same, its Roasteries are supposed to elevate its image. By retaining the masses and entering the ultra-premium coffee market, will Starbucks have its cake and eat it too?

    Moving closer to monopoly along a market structure continuum, firms become larger and more powerful.

    Starbucks competitive strategies


    And finally, for a laugh and a reminder of the Starbucks culture, below, Ellen sends Dennis Quaid to Starbucks.

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Raisins to BBQ

    Apr 25 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Economic Humor, Economic Thinkers, Entertainment, Environment, Financial Markets, fiscal policy, Government, Macroeconomic Measurement, Regulation, Tech, Thinking Economically • 50 Views

    Our Posts Roundup

    Everyday economics and competitive market structure Sunday 4.19.15

    What’s bad about popular movies…more

    • everyday economics and state taxes
    Monday 4.20.15

    The least taxing states…more

    everyday economics and smell pollution regulation Tuesday 4.21.15

    When a BBQ smell causes trouble…more

    everyday economics and sovereign debt Wednesday 4.22.15

    More insight on Greek debt…more

    Tweets that predict Stock Market Trading Thursday 4.23.15

    How tweets can predict the Dow…more


    everyday economics and raisin property rights Friday 4.24.15

    Why we have a raisin reserve…more


    Ideas Roundup

    • property rights
    • John Maynard Keynes
    • New Deal
    • financial markets
    • sovereign debt
    • default
    • cost and benefit
    • externalities
    • regulation
    • pollution
    • Pigovian taxes
    • fiscal policy
    • sales tax
    • incentive
    • state taxes
    • competitive market
    • structure
    • oligopoly
    • vertical integration


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  • Raisins shutterstock_57689659-2,jpg

    Is the Raisin Reserve “Unraisonable”?

    Apr 24 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Economic Thinkers, Government, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 64 Views

    During a Supreme Court hearing last week, Justice Samuel Alito asked, “Could the government say to a manufacturer of cell phones, ‘You can sell cell phones. However, every fifth one you have to give to us?’”

    Although his example was cell phones, Justice Alito was really talking about raisins. The case is Horne v. Department of Agriculture.

    Where are we going? To how much the government can legally help the economy.

    The Raisin Reserve

    Our story starts in 1937 when the Agricultural Marketing Act was created. A part of the New Deal, it was supposed to maintain farmers’ spending power by propping up farm prices. Raisins entered the picture in 1949 when the 47-member Raisin Administrative Committee was set up.
    The problem was raisin demand. After the Second World War ended, raisin demand shriveled because the army no longer needed all of the raisins they were feeding the soldiers. To maintain a higher price, the Committee just had to limit supply.
    You can see the USDA plan below. When demand shifted to the left, then raisin prices dropped,
    Property rights and raisin demand decrease
    So the raisin reserve just removed raisins from the market, decreased supply and up went price.
    Property rights and raisin supply decrease

    Property Rights

    Fast Forward to 2002. Told he would have to deposit 47 percent of his raisin crop–1.2 million pounds– in the raisin reserve, Martin Horne (and several other farmers who joined him) said, “…It’s robbery. It’s socialism. It’s feudalism…” His refusal to participate meant years in the court system and more than $650,000 in fines and fees that he refuses to pay.
    Already at the Supreme Court two years ago, they were told to return to the lower courts. Now they are back again and though the case involves multiple issues that relate to property, really it all is about one question. Fundamentally, we are just talking about the power of the federal government to take raisins from their owner.

    Our Bottom Line: John Maynard Keynes

    During 1934, with unemployment high and production low, British economist John Maynard Keynes was reported to have crumpled up a pile of towels rather than just one after washing his hands in a U.S. restaurant. His goal he said (if this really happened and no one is sure) was to create more jobs.

    More than what businesses could do, Keynes (1883-1946) believed that a contracting economy needed the job creation that government could provide through deficit financing. Government spending would then multiply as it passed from hand to hand. Just pay a worker, he or she spends that income, the recipient then spends it, businesses have to expand and an inflated total (called the multiplier) of spending enters the GDP.

    A part of 1930s Keynesian legislation, the Agricultural Marketing Act and the crop reserves that it subsequently created were the government’s attempt to buoy a sluggish economy by increasing farmers’ incomes. Now, perhaps violating the Constitution’s Fifth Amendment. it might be declared unconstitutional.

    This Daily Show segment on the raisin reserve is great for huge smiles. (I could not discover a direct youtube link.)


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  • Fast and Slow Stock Market Trading

    What Tweets Can Say About the Dow

    Apr 23 • Behavioral Economics, Economic Thinkers, Financial Markets, Media, Tech • 103 Views

    Assume for a moment that a vast number of tweets convey some anxiety. We might conclude that on the previous day, the Dow had plunged. Yes?

    Recent research suggests we reverse the sequence. Social media sentiment has correlated with a subsequent fall in financial markets.

    Tweet Studies

    In one study, the research targeted what they called emotional words that they then sought to correlate with financial market fluctuations. In the following table you can see the words they selected, the average number of times each one appeared in a tweet in one day (307 for “hope”), and a daily range (“hope’s” minimum was 54 and its max was 467).

    Predicting financial markets with social media

    From: “Predicting Stock Market Indicators Through Twitter ” I hope it is not as bad as I fear.”


    More specifically, when “hope, fear and worry” predominated, the Dow dipped; when they subsided, the Dow rose. As a result, the study’s authors cited an inverse relationship between those emotions and the direction of the Dow.

    Correlating social media sentiment and financial markets

    From: “Predicting Stock Market Indicators Through Twitter ” I hope it is not as bad as I fear.”


    In a similar study, looking at millions of tweets for emotional indicators, another research group concluded that a slew of calm tweets meant the Dow would probably rise. Anxious tweets and it fell. Their accuracy? An 86.7% success rate.

    And yet another group sought to correlate social media sentiment on an hourly basis with market fluctuation. Their data indicated that 12 out of 48 financial instruments could indeed have some connection to social media sentiment.

    While all of this research is pretty interesting, it left me with one question. Even if they are right–and the holder of the patent on a Twitter Predictor works–what about Flash Boys? Thinking of high frequency trading, Michael Lewis’s Flash Boys and what appears to be an algorithm revolution, I wonder if a sentiment index for social media targets the heartbeat of financial markets.

    Our Bottom Line: The Wisdom of Crowds

    Sentiment research on social media is about the crowd conveying more accurate information than individuals.

    In The Wisdom of Crowds, New Yorker columnist James Surowiecki says that crowds can usually make decisions that are more accurate than individuals. In markets, crowds accurately price sodas and broccoli and tennis lessons. Studies demonstrate that crowds’ guesses cluster around the true number of jelly beans in those huge glass jugs. Similarly, bubbles are an example of crowd behavior. Here though, we have “collective decision-making gone wrong”.

    Although we can debate the wisdom of financial sentiment research, tweet aggregates surely do provide crowd wisdom…or folly.

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