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    Green Elasticity

    Apr 23 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Environment, Government, Households, Thinking Economically • 573 Views

    Sales of Nature’s Source Scrubbing Bubbles tub have plunged by 61%. At Stop & Shop, “Eco-friendly” people are switching from Clorox Green Works All-Purpose Cleaner to traditional Fantastic. Why? Because Fantastic is 40 cents cheaper. According to the NY Times, “…if it’s one or two pennies in price higher, they’re not going to buy it.” Only green brands with a more affluent customer are not experiencing a similar decline.

    Food columnist Mark Bittman has a suggestion. Focusing on food, he says the US government should subsidize organic, small farmers who sell directly to customers. The result? “Green” products will be cheaper. Should we take this a step further and propose green subsidies for household cleaners. And maybe, still, a step beyond that and raise the tax on gasoline so that we conserve energy?

    Your opinion?

    The Economic Lesson

    With incomes falling during the recent recession, the green response has been elastic. Called the income elasticity of demand, we tend to buy less of certain products when our purchasing power decreases and more when it rises. For other products, our quantity demanded is inelastic because, as with medication, quantity demanded changes less. 

    With gasoline and price subsidies, an economist would take us to the price elasticity of demand. Here, the principle is the same as with income but instead, the price is the key variable affecting how much we buy. When price changes have a large impact on the quantity we demand, then our demand is elastic. If our response to price change is minimal, then our quantity demanded is inelastic.

    Should government policy use our demand elasticity to influence our buying decisions?

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    Income Tax Matters

    Apr 22 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement • 395 Views

    Woodrow Wilson once said that paying taxes was a “glorious privilege.”

    However, a recent Gallup poll confirmed what we probably already knew. Most of us do not want to pay higher taxes.

    Upper income households (67% of those polled) say current taxes are too high. Middle income households (51% of those polled) also believe their taxes are too high. And almost everyone agrees that lower income households should not pay more.

    Should anyone pay more to diminish the deficit? This Marist poll indicates that 83% of all Democrats, 43% of all Republicans, and 63% of all Independents who were polled said, “increase taxes on incomes over $250,000.”

    Perhaps, though, Steven Weisman, in the Epilogue to his book The Great Tax Wars, best sums up the debate when he says it is really all about our attitude toward wealth:

    The income tax “… has been an … appealing tax for those who … see wealth as a product of good luck, exploitation of others, political favoritism, and predatory conduct…It has been objectionable tax for those who tend to see wealth as the logical reward for hard work, thrift, ingenuity and other admirable forms of behavior.” (p. 350)

    You might also look at this past econlife for other “taxing issues.”

    The Economic Lesson

    In his Teaching Company lecture on taxes (#11), Professor Robert Whaples explains the complex issues that need to be resolved when we want to create an efficient tax system that is fair, simple and enforceable.

    Or maybe we should just remember what Jean Baptiste Colbert, Minister of Finance under Louis XIV said, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”

     

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    Federal Spending Questions

    Apr 21 • Economic Debates, Government, Households, Macroeconomic Measurement, Thinking Economically • 395 Views

    Hearing the following, one Washington Post reporter said, “Four pinocchios.”

    In a February survey of 801 “likely” voters, a majority (63%) said that the biggest budget items were defense and foreign aid. Also, they suggested controlling waste, fraud, and abuse as the best way to substantially diminish the deficit. In an Ipsos/Reuters Poll, 75% of the respondents said that foreign aid should be cut. Another survey quoted people suggesting that foreign aid should go down to 13% of the budget. (You could look here at a list of results from several surveys to see what Americans believe about the budget.)

    Our fact check (based on the President’s 2012 budget proposal):

    1. Yes, representing close to 20% of all federal spending, defense is a huge budget item.
    2. Foreign aid, though, is less than 1% of the federal budget. And, looking at the rest of the world, our spending on foreign aid, based on our relative affluence, is tiny.
    3. Social Security represents 20% of all spending.
    4. Healthcare spending, primarily through Medicare and Medicaid, are almost 23% of the whole budget.

    You can see where this is going. How can voters learn the facts so that the budget debate can become more realistic?

    The Economic Lesson

    Here is a wonderful budget interactive for the President’s 2012 budget proposal.

    What would you cut?

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    Aspirational Pecans

    Apr 20 • Businesses, Demand, Supply, and Markets, Developing Economies, Households, Innovation, International Trade and Finance, Macroeconomic Measurement • 510 Views

    Our story starts with the walnut. Loved in China, and always cheaper than pecans, during 2007, suddenly, the walnut became relatively expensive. Following the law of demand, Chinese consumers bought fewer walnuts and more pecans.

    And that was when they decided they not only liked pecans better but also that they were better for you. Chinese nut eaters believe that pecans nurture the brain. And beyond that, across Asia, pecans have become an aspirational nut, associated with middle class living. 

    Meanwhile, in the US, pecan ice cream eaters, pecan pie eaters, and Stuckey’s “gourmet” pecan buyers–even Christmas fruitcake lovers (27% pecans) are experiencing price increases or, with Stuckey’s, smaller cans. Correspondingly, the entire supply chain–from the farmer to the seller of tree shaking harvesting machines, to the sheller–is adjusting to a transformed market.

    The result? The price of “junior mammoth halves,” which the Chinese prefer, soared from $3.35 in 2008 to $6.95 in 2010.

    The Economic Lesson

    Developing nations are affecting world prices. With the growth of a middle class, eating patterns change. More meat, oil, cars, and now, pecans are shifting demand and supply curves.

    Professor Timothy Taylor’s Teaching Company explanation of the race between supply and demand conveys an ideal explanation of why world commodity prices fluctuate.

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    Who Does the Housework?

    Apr 19 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Gender Issues, Households, Labor, Thinking Economically • 383 Views

    Who makes dinner in your home? Walks the dog? Goes to the supermarket?

    A study from the Organization for Economic Cooperation and Development (OECD) compared unpaid work in 29 countries. Predictably, they concluded that women do a lot more than men.

    But, where do men do the most? Denmark. The least? India. Specifically, in Denmark, women devote an hour more per day to “household jobs.” In India, the difference is 5 hours.

    The 30 page study, “Cooking, Caring and Volunteering: Unpaid Work Around the World,” focused on 1998-2009. The paper presents fascinating facts comparing division of labor at home between women and men (women cook more while men do the gardening). Totally, people average 3.4 hours per 24-hour day on unpaid work. They also found that when women do more paid work, men’s household tasks increase.

    The Economic Lesson

    An important source of productive activity, household work is excluded from GDP calculations. People who believe it should be excluded point out that quantifying the value of work at home is difficult because the market has not priced it. Those who disagree say it is too massive a part of production to ignore.

    With which group do you agree?

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