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    “Buy Australian?”

    Apr 25 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 517 Views

    In Australia, concerned about the impact of twin disasters in Queensland this summer, Australia is saying, “Buy Australian.”  But they just faced an unexpected problem.

    The T-shirts they are using to publicize the campaign were made in Bangladesh and the U.S. Buying Australian made T-shirts would have cost up to $10.00 each. The Bangladesh T-shirts were $5.12.

    Is that bad?

    It depends on who you are. Shirts North, a T-shirt seller in Cairns, was unhappy. Consumers and taxpayers, though, should have been pleased.

    Nobel prize winning economist Milton Friedman (1912-2006) would have reminded Australians that buyers were saving money on cheaper imports while sellers would create new jobs in exporting industries. Commenting on publicity received by the local businesses harmed by floods, he would have called them “visible.” By contrast, consumers are “invisible.” Anonymous and invisible, the millions who benefit typically have no newsworthy evidence.

    The Economic Lesson

    David Ricardo (two hundred years ago) stated the classic defense of free trade when he expressed the principle of comparative advantage. Trade, trade, trade, he said because each nation then can do what it does best (where it has the comparative advantage) and the whole world benefits through greater efficiency.

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    Egg Surprises

    Apr 24 • Businesses, Demand, Supply, and Markets, Thinking Economically • 488 Views

    Egg prices are actually down. Averaging $1.73 a dozen during March, egg prices have fallen by 5% from March a year ago. So, yes, the CPI says the increase for food prices is up 2.7% during the past 12 months (March 2010-March 2011). But not for eggs.

    We could say that egg producers are in a squeeze between higher costs and lower demand. The higher costs come from more expensive corn feed and higher transportation costs. Meanwhile people are eating fewer eggs. This year, consumption is projected to be equal to last year at 247.7 eggs per person. (In 1950 it was 389.)

    Usually, egg demand increases during Easter. But even that is predicted to be less than usual. Did you know that Thanksgiving and Christmas are the biggest holidays for eggs? Easter is #3.

    The Economic Lesson

    The egg industry is composed of many small producers. And therein lies the problem from the supply side. We have a competitive environment where producers are price takers.

    Imagine a line representing different competitive market structures. The far left side of the line is labeled perfect competition while the far right side is monopoly. Very similar products such as eggs and unpackaged lettuce tend to be sold in markets that are on the left side of the scale. Their producers have little power over price because their goods look just like someone else’s.

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    Green Elasticity

    Apr 23 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Environment, Government, Households, Thinking Economically • 662 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 • 423 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 • 426 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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