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    A First For Denmark

    Oct 4 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Government, Thinking Economically • 513 Views

    Denmark just became the first country in the world to have a fat food tax. That means butter, milk, pizza, any food with more than 2.3% saturated fat content is more expensive. To be precise, for every 2.2 pounds (one kilogram), the tax is $2.90 (16 kroner). Predictably, in response, demand soared for fatty foods just before the tax went into effect.

    This was not a policy reverse. Denmark had already increased taxes on chocolate, other sweets, sugary drinks and alcohol while limiting trans fats.

    And they are not even as overweight as we are. The obesity rate in Denmark is close to 10% while the ratio is closer to 1 in 3 for adults in the U.S.

    Here, more on how Denmark is regulating what its citizens eat.

    The Economic Lesson

    If a society pays all or part of the health care expense for its citizens, should the opportunity cost be individual freedom?

    An Economic Question: Some people say that sales taxes are unfair because they are regressive; those who earn less have more of a burden. Your opinion?

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    Averting Disasters

    Oct 3 • Businesses, Developing Economies, Economic Debates, Economic Thinkers, Government, Macroeconomic Measurement, Thinking Economically • 564 Views

    Disaster spending is setting records this year. At 81, the number of tornadoes, earthquakes, snowstorms, hurricanes and wild fires is equal to the total for all of 2010 and more than each of the previous 3 years.

    Disaster spending almost created a disaster for the Congress.

    At the end of the summer, the Congress could not agree on giving FEMA (Federal Emergency Management Agency) extra funding because the Democrats said, “yes” while Republicans wanted cuts elsewhere to offset the new spending. A FEMA impasse would have stalled a larger spending bill and shut down the government.

    But then, FEMA said it could wait several days. Once the new fiscal year began on October 1, they would get funding already allocated to them. As the Washington Post described it, “Who averted a government shutdown, FEMA or Congress?”

    The bottom line?

    The FEMA impasse was about a lot more than the relatively small amount they needed. It returned us to the Democratic/Republican budget disagreement. The next deadline is November 18 when another shutdown is possible.

    Here, in a digitalsurgeons infographic, you can see lots more about this year’s disasters.

    The Economic Lesson

    Knowing that disasters lead to clean-up spending and reconstruction, people have suggested disasters could fuel economic growth. Calling it “the fallacy of the broken window,” economist Frederic Bastiat (1801-1850) questions the assumption that a broken window can be an economic blessing. He agrees that a glazier would receive, for example, 6 francs to fix it. However, he then says, “…if…you conclude…that it is good to break windows, that it helps to circulate money…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.”

    Bastiat then points out that the money given to the glazier would otherwise have been spent on new shoes or a book. And, having been able to spend the 6 francs on a new pair of shoes, their owner would have had new shoes and the old, unbroken window.

    An Economic Question: Told by a building contractor that he benefits financially from rebuilding after a natural disaster, could you use the “fallacy of the broken window” to disagree? Explain.

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    California and Greece

    Oct 2 • Financial Markets, Government • 597 Views

    • It is good to pay fire fighters and police officers generously.
    • It is good not to raise taxes.
    • It is good to give voters what they want and get re-elected.

    As Michael Lewis describes in Vanity Fair, San Jose, California did everything that was “good.” As a result, libraries are closed several days each week, parks offer fewer services, a civic center cannot open and less money is available for education. Still though, soaring employee obligations are engulfing municipal finance.

    Similarly, the state of California is spending 65% more on employee pay and benefits than 10 years ago. But its higher education outlays are 5% less, state pension funds are not getting the 8% return they expected, health plans are underfunded and tax revenue and federal funds have decreased. Meanwhile, University of California tuition has soared from $776 in 1980 to more than $13,000. ($776 in 1980 is equal to $2133.48 in 2011.)

    Commenting on his financial plight, the mayor of San Jose said, “We’re not as bad as Greece, I don’t think.”

    More econlife info here and here on California’s financial challenges.

    The Economic Lesson

    Called the tragedy of the commons, when a resource is shared by many rather than privately owned, it tends to be “misused” or “overused”. For a pasture, “misuse” is over grazing; in the ocean, fish populations are depleted; in the air, factories pollute. And, with municipal finance too much money is spent.

    An Economic Question: After checking here, discuss whether your state has a finance problem. 

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    A Surprising Car Fact

    Oct 1 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Labor, Thinking Economically • 668 Views

    2 car price facts:

    • A car whose mileage is 79,900 will cost approximately $10 less than one with 79,800.
    • A car whose mileage is 80,000 will cost approximately $210 less than one with 79,900.

    For both, the rise was 100 miles. But the drop in price at wholesale car auctions was very different. Why?

    The reason is left digit bias.

    Defined in the NBER Digest, left digit bias is “the tendency to focus on the left-most digit of a number while partially ignoring other digits.” Briefly discussed here and then considered in detail in this NBER paper, left digit bias affects the demand and supply sides of used car auction markets. Wholesale car buyers tend to pay much less at 10,000 mile thresholds. Predictably, auto dealers try to avoid 10,000 mile thresholds.

    While the authors of this study focused on wholesale used car auctions, they believe their conclusions have broader implications. They ask whether a similar bias could affect admissions decisions, treatment of medical results, and even a response to government spending programs

    The Economic Lesson

    There are 5 determinants that can change our demand and shift the position of a demand curve. They include changes in…

    • income
    • substitutes
    • complements
    • utility and taste
    • number of buyers

    The utility for a car that crosses a 10,000 mile threshold will tend to diminish. As a result, demand will decrease and price will descend.

    An Economic Question: Where have you seen left digit bias affect prices?

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    African Notes

    Sep 30 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor, Macroeconomic Measurement • 584 Views

    • If you were asked to select the world’s fastest growing economies, maybe you would place China at the top of your list.  This Economist Daily Chart sums it all up. 6 of the world’s fastest growing economies, 2001-2010, are located in sub-Saharan Africa. And Angola is #1.
    • Here, showing the growth of small-scale manufacturing in Africa, the WSJ focuses on a chocolate maker in Madagascar. Among the best in the world, the cocoa is premium. However, the transportation and communication infrastructures sound tough. Just getting a cell signal near one chocolate factory required walking to the top of a hill, 3 miles away. It echoes what Professor Timothy Taylor says in his Teaching Company lectures on Africa (#19 and #20) for “America and the New Global Economy.” (The course is excellent.).
    • And finally, back to the Big Mac Index. The only African country listed is South Africa where a $4.07 U.S. Big Mac costs $2.87.

    The Economic Lesson

    African economic development returns me to a wonderful econtalk lecture on Adam Smith and David Ricardo.  It takes us to the economies of scale that a larger market can facilitate. Then, as Smith and Ricardo told us, with specialization and trade everyone becomes more productive.

    How then to facilitate the growth of small African factories through world trade?

    The Economic Question: Looking at the Economist Chart on the world’s economic growth, you might check the GDP of Angola to see how its size compares to #2, China, with a GDP of $10.1 trillion (2010 US dollars).

     

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