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    A High, Low, or No Soda Tax?

    Jun 19 • Demand, Supply, and Markets, Government • 277 Views

    States debating a tax on soda have to decide whether they want to raise revenue or diminish obesity. If a sales tax on soda is not very high, people will continue buying sugary drinks. The result? The state gets more money. On the other hand, if the tax is high enough and people buy fewer sugary drinks, then a major cause of the “obesity epidemic” in the United States will be addressed. 

    When will a tax impact sales? A recent study described in the American Journal of Public Health concluded that soda prices need to increase by 35% (45 cents up from the baseline price) for people to diminish soda purchases by 26%. With health care costs soaring and obesity spreading, all a state needs to do is levy a 35% soda tax. Are they? According to a 2009 Kaiser Family Foundation study, the highest soda tax rates, at 7%, are in California, Indiana, and New Jersey.

    With state budget crises erupting everywhere, do you expect state lawmakers to opt for health over a revenue stream?

    The Economic Lesson

    An economist would say the sales tax debate is about the price elasticity of demand. If price changes a lot and the quantity we buy remains the same, as with medication and gasoline, then our demand is inelastic. By contrast, if price swings have an impact on buying, then our response is elastic. With soda, within a certain price range our demand is inelastic. Once we reach the 35% level, though, we switch to an elastic response. 

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    Fashion Rules

    Jun 18 • Economic History, Regulation • 300 Views

    If Miuccia Prada sees a vintage designer jacket that she likes, she can copy it. She can even replicate it exactly and call it a Prada. Illegal? No. And yet, if Michael Lewis included a page from another writer’s book, he would be accused of violating intellectual property rights.

    In a TED talk, Johanna Blakley explains that a jacket and most other clothing cannot be copyrighted because they are “utilitarian”. A logo on the jacket can receive copyright protection but not the jacket or blouse or coat or shoe. Contrary to what I would have expected, she believes that the industry is helped by the absence of protection. Copying begets trends; copying stimulates innovation. The threat of copying makes people repeatedly move onward to newer, better, and more unique designs.

    Writers of jokes, designers of furniture, and inventors of autos also find it tough to secure patent protection.

    Your opinion for protecting music? 

    The Economic Lesson

    I wonder whether Alexander Hamilton would have disagreed with Ms. Blakley. Convinced it would foster invention, protect infant industries, and thereby stimulate economic growth, as Secretary of the Treasury, during the 1790s, Hamilton promoted a patent system. 

     

     

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    Transportation Matters

    Jun 17 • Economic History, Macroeconomic Measurement • 205 Views

    Reading about India’s inadequate railway system, I thought about the Erie Canal. Currently, massive freight containers that took four or five days to travel from Singapore to Mumbai will then take 28 days to reach New Delhi because trains and tracks are too congested. To continue growing, India will need a better transportation network.   

    By contrast, during the nineteenth century, a transportation system of roads, canals, and railroads increasingly crisscrossed the United States. Dug between 1817 and 1825 from Albany to Buffalo, N.Y., the Erie Canal was the last link of an all-water route between the port of New York and the Great Lakes. Because of the Erie Canal, eastern manufacturers could easily trade with western suppliers of raw materials. Instead of traveling via slow and expensive overland routes, goods could move across the Erie Canal more cheaply and quickly.

    Specifically, to ship freight 100 miles by land during the early 1820s would have cost $32 a ton. By canal, the expense dropped to $1 per ton. Several decades later, in 1852, moving over rivers and canals between Cincinnati and New York City, freight arrived in 18 days. By rail, it took 6 to 8 days.

    The Economic Lesson

    Canals and railroads could also be called capital. Defined as tools, buildings, and inventory, capital is crucial for economic development because it saves time and increases knowledge. Because capital investment involves postponing current consumption, India has politically difficult choices.

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    Fiscal Insight

    Jun 16 • Government, International Trade and Finance • 258 Views

    Picture this political cartoon: In some unknown ocean, a Chinese submarine confronts a U.S. navy vessel with the Chinese submarine captain saying, “Turn around or we sell all your T-bills.” The caption says, “Chinese sub threatens U.S. Navy.”

    As expressed by Harvard Professor Niall Ferguson in a recent talk, the People’s Republic of China holds “a substantial chunk” of the U.S. federal debt. Professor Ferguson referred to China because he was discussing the connection between massive debt and global power. First though, through three questions, he presented a primer on debt:

    1. How can we identify a debt crisis? We can look at the ratio between the GDP and the debt; we can compare interest payments to tax revenue; we can look at dependency on foreign funding.

    2. Why have debt crises been tough to eliminate? They are difficult problems because they are political phenomena, cutting spending and raising taxes are unpopular, and irrational exuberance can be uncontrollable.

    3. How can countries exit a debt crisis? They can grow their economy, lower interest rates, get a bailout, create fiscal pain, print money, or default.

    Because the world’s advanced economies share a debt crisis (except for Norway and Canada), Professor Ferguson concluded his talk with, “It’s not a thousand years that separates imperial zenith from imperial oblivion. It’s really a very, very short ride from the top to the bottom.”

    And that returns us to U.S. global power, the U.S. debt, and to our political cartoon (which you can see in Dr. Ferguson’s slide show, slide #32.)

    The Economic Lesson

    Perhaps our fiscal challenges remind us that there is no free lunch. Beyond the money that was spent, the stimulus program can be very costly.

     

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    Is Fannie Mae Your Friend?

    Jun 15 • Economic Thinkers, Financial Markets, Households • 231 Views

    I was surprised to hear that when Fannie Mae was created in 1938 as a federal agency, a part of her mission was to move money. At the time, because of the 1927 McFadden Act, interstate banking was prohibited. As a result, there could be (and was) insufficient money for mortgages in California and too much unused mortgage money on the East Coast. By buying mortgages from banks and brokers, Fannie Mae was able to move money to areas that needed it. Meanwhile, by selling the mortgages she purchased, she could attract funding from the areas that had it to lend.

    Fundamentally, Fannie Mae was supposed to help people buy homes. During the 1930s, she made 30 year mortgages more common when 5 year mortgages were the norm. Yes, she typically required a 20% deposit and strict credit guidelines but she guaranteed the mortgages that she purchased. She let people live the American Dream.

    30 years later, everything changed. In 1968, under President Johnson, Fannie Mae became a private corporation but retained a connection with government as a GSE (government sponsored enterprise). No longer a federal agency, she was a profit seeking business with stockholders. Still though, the federal government implicitly guaranteed the mortgages she purchased.

    As a result, especially since 2003, when Congress asked her to assist the effort to extend home ownership, Fannie Mae reduced her credit requirements. Initially, profits and home ownership soared but both depended on home prices rising. When prices started to fall, recipients of NINJA mortgages (No Income, No Job or Assets) and 3% down payment mortgages defaulted. The result? The government’s implicit guarantee has become an $84 billion dollar bailout reality.

    The Economic Lesson

    Arthur Okun’s Equality and Efficiency:The Big Tradeoff (Brookings, 1975) discusses the tension between our democratic heritage and our economic aspirations. Equality implies a smaller economic pie while with efficiency we get a bigger pie and more individual wealth and power. 

    Do you support the smaller pie that would accompany a government that facilitates widespread home ownership?

     

     

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