• Everyday Economics: While short term GDP spending increases, the impact on the economy from a disaster is probably not beneficial.

    Can an Earthquake Be Good for the Economy?

    Aug 26 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Labor, Macroeconomic Measurement • 126 Views

    Our story starts with a young boy who breaks a window. While witnesses express sympathy for the owner, they also remind us that a glazier will benefit. Charging 6 francs for a replacement, he will get extra business and the entire economy gets a boost.

    The Broken Window Fallacy

    Frédéric Bastiat, the 19th century economic journalist who first told this story replied, “I am obliged to cry out: That will never do. Your theory stops at what is seen. It does not take account of what is not seen.” Yes, the glass industry gets 6 francs. However, what is not seen is the business that might have been.

    Had the window not been broken, the money could have been spent on a new pair of shoes. And then, the owner of the window would not only have had his old window but also could be enjoying his new purchase. As for the entire economy, it would have added shoes to its stock of goods rather than winding up where it had been before with the same window.

    Where are we going? To the California earthquake and disaster economics.

    The damage caused by the 6.0 quake that hit Napa included broken bottles of wine and glassware, structural damage to roads and buildings, closed restaurants and burst water mains. Totaling close to a $1 billion estimate, the destruction will have to be repaired and the spending will be added to the state’s GDP.

    I wonder if someone will then say that the clean-up provides an economic.boost. With Hurricane Sandy, one Forbes title said, “Despite $50B in Damages, Hurricane Sandy Will Be Good for the Economy, Goldman Says.” But Bastiat would emphatically point out that the spending that we see is misleading. Instead we should be aware of the production and purchases that are sacrificed.

    Not everyone agrees with Bastiat. In a 2002 paper, researchers concluded that, “Disasters provide the impetus to update the capital stock and adopt new technologies, leading to improvements in total factor productivity.” They did though qualify their conclusions saying it depended on a nation’s ability to respond and that geologic disasters were tougher on recovery.

    Our Bottom Line and Disaster Economics

    A St. Louis Fed paper included this rather handy disaster impact idea framework:

    Questions about a GDP disaster boost.

    From: St. Louis Federal Reserve

    Our bottom line: Primarily composed of spending from consumers, businesses and government, the additional GDP spending created by a disaster probably will not represent a long term economic benefit.


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  • Condemned by many people including President Obama, corporate inversions might not be the problem. Instead we should reconsider the corporate tax.

    Corporate Tax Dilemmas

    Aug 25 • Behavioral Economics, Businesses, Economic Debates, Economic History, Economic Thinkers, Government, Regulation • 96 Views

    In a 1934 Appeals Court decision, Judge Learned Hand said,  “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”

    But still, the Judge concluded that the defendant in the case had illegally tried to dodge taxes by creating a new corporation that would diminish her tax bill. Agreeing, Supreme Court Justice Sutherland commented that the defendant’s strategy violated the intent of the statute.

    So where are we going with this? To corporate taxes…

    Corporate Inversions and the Corporate Income Tax

    Because corporate inversions let businesses lower their exposure to U.S. tax rates through foreign mergers and acquisitions, the device has been condemned. However, as Judge Learned Hand indicated, sidestepping taxes is not necessarily bad.

    So let’s say the corporate inversion might even be okay. Still though, it cuts corporate tax revenue and that takes us where we need to go. Instead of inversions, the problem could be corporate taxes.

    • Corporations tell us that the tax is complex and “counterproductive.”
    • The left-wing point of view emphasizes the loopholes that need to be plugged.
    • On the right, the cry is to eliminate the corporate tax.
    • Meanwhile, economists say the corporate tax is inefficient.
    • And everyone recognizes that corporations are no longer the domestic entities they used to be. As multinationals with multiple homes, their tax regulations are antiquated.

    The Bottom Line and Everyone’s Corporate Tax Rates

    Here is an OECD (Organization for Economic Cooperation and Development) list. There are other columns in the original table and a list of footnotes qualifying all of the numbers. While the data below display actual rates, it is quite evident from the footnotes that one number tells a very small part of the story. For starters, learning more would include loopholes, tax credits and “subcentral’ tax rates within a country.

    The numbers tell a very small part of the corporate tax story.

    Our bottom line: In a Brookings Institution article about corporate inversions and the corporate income tax, David Wessel expressed the perfect bottom line. “Either we are going to tax income at the corporate level in ways that make the U.S. a place where companies want to have headquarters, invest and create jobs. Or we should give up and find a better way to raise revenue on the owners of capital. If we don’t, we’ll be watching other made-in-America companies join the expatriate parade and the corporate income tax and the revenue it produces will wither away.”

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  • Everyday Economics — Sunday Chart of the Week

    Do You Prefer McDonald’s or Starbucks?

    Aug 24 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Humor, Education, Gender Issues, Households, Labor, Lifestyle • 161 Views

    Our Sunday Chart

    Responding to a 2009 Pew Research Center survey, 2260 adults indicated whether they would, “prefer to live in a place with more McDonald’s or more Starbucks.”

    As you can see below, 43% said McDonald’s, 35% said Starbucks and 22% had no preference. According to the study, a key variable is your political inclination. Liberals tend to favor Starbucks over McDonald’s.

    More specifically, if you are female, politically liberal, 18-29 years old, earn more than $75,000 a year, a college graduate, or religiously unaffiliated, you probably prefer Starbucks. On the other hand, a McDonald’s loyalist tends to be male, to earn less than $30,000, to have a high school degree but not college, and/or to be Protestant or Catholic.

    Starbucks and McDonald's are in markets with monopolistic competition.

    From: Pew Research


    The Bottom Line and Economists’ Preferences

    The Pew survey reminded me of research about economics majors that was in the news. Discussing the connection between education and civic behavior, a New York Fed Staff Report concluded that students who majored in economics tended to be Republicans. Taking a huge analytic leap, does that means that economists prefer McDonald’s?

    Our bottom line: Taking another leap to some basic economics, we can say that monopolistic competition shapes the behavior of McDonald’s and Starbucks. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. The competitive behavior of beauty salons, supermarkets, and clothing manufacturers is also shaped by a monopolistically competitive market structure.

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  • This week's everyday economics included opportunity cost, GDP, and externalities.

    Weekly Roundup: From Waist Size Checks to the Russian Embargo

    Aug 23 • Businesses, Demand, Supply, and Markets, Economic History, Government, Thinking Economically • 98 Views

    Our Econlife Roundup for the Week:


    Everyday economicsSunday Chart of the Weekl8.17.14 Some insight about the economic health of the EU28…more


    With universal healthcare, improved health could come at the expense of free choice.8.18.14 The reason that the Japanese government measures waistlines…more


    A family invests in land, labor and capital to "produce" children.8.19.14 What costs the most when you raise a child…more


    Everyday economics: U.S. law does not mandate that wages and salaries be paid for vacations and holidays.8.20.14 Deciding whether to take your vacation days…more


    everyday economics tax credit incentives8.21.14 The tax incentives that bring movie producers to your state…more


    Whether looking at the price of food in Russia or at exports to Russia, supply and demand can explain price changes from the Russian embargo.8.22.14 How the Russian embargo affects Ikea and other businesses…more


    Economic Ideas Roundup:

    • Entitlements
    • Supply and demand
    • Tax credits
    • Opportunity cost
    • Economic growth
    • Land, labor and capital
    • Wages and salaries

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  • Whether looking at the price of food in Russia or at exports to Russia, supply and demand can explain price changes from the Russian embargo.

    Impact of the Russian Trade Embargo on Ikea’s Swedish Meatballs

    Aug 22 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Regulation, Thinking Economically • 257 Views

    At the Moscow Zoo, the sea lions eat Norwegian shellfish, giraffes nibble on Polish apples, orangutans prefer Dutch bell peppers and the cranes consume Latvian herring. According to a zoo spokeswomen, “They don’t like Russian food.”

    But the animals might have to become less picky. With the Russian embargo on U.S. and European food, substitutions like shellfish from Iceland will be pricey.

    The Global Impact

    Around the world, businesses are feeling the impact of the Russian embargo. At a small cheese store in Moscow, while roquefort, camembert and brie sales have tripled, 30 miles outside of Paris, 100,000 pounds of brie that had been destined for Russia have no place to go. Similarly, bulk cheese purveyors in Germany and the Netherlands who sell edam expect to feel the hit from the embargo as do specialty cheese makers in France and Italy.

    You can see who is affected by the embargo.

    Places where supply and demand are affected by the Russian embargo.


    On the other hand, there are some smiles in Switzerland among makers of mozzarella, edam and gouda because of the surge in Russian demand. However, because the embargo could end in a year or less and changing supply chains takes time, they are worried about expanding their capacity.

    Elsewhere also, the response has varied. At the buffets in their Russian stores, Ikea has said that it will stop selling Norwegian salmon and Scandinavian cheese but not Swedish meatballs because they do not come from Sweden. Meanwhile, Chile and China hope to replace some of Russia’s salmon supply and Brazil is welcoming Russian demand for its meat. Even fishing quotas have been affected with Scottish mackerel skippers asking to “bank” this year’s quotas so they can use them next year when the Russian market could return.

    As for the United States, poultry and pistachios are at the top of the list. In 2013, the Russians were the second largest market for our poultry exports and are the seventh largest importer of our pistachios.

    Supply and demand in the U.S. from the Russia embargo.

    From: the Washington Post


    The Bottom Line: Supply and Demand

    Hypothetical supply and demand curves perfectly illustrate the impact of the Russian embargo.

    Here, we have an increase in demand for cheese from Switzerland because of the embargo. Note though that the supply curve is somewhat vertical because the quantity supplied is inelastic. As a result, quantity barely changes but price rises.

    Supply and demand for Switzerland cheese


    Supply and demand can also display a spike in chicken thigh prices.

    Supply and demand show why chicken thigh prices increased.

    Our bottom line: Everywhere, the impact of an embargo is classic supply and demand.

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