Economic Ideas Roundup:
- Creative destruction
- Fiscal policy
- Price floor
- Labor markets
Economic Ideas Roundup:
I was especially pleased to have read a WSJ column by University of Chicago economist Casey Mulligan about what he believes are the labor market tradeoffs of the Affordable Care Act (ACA). My goal today is just to consider some of the conclusions in his column and in his new Kindle book, Side Effects.
Alluding to the academic and political debate surrounding the Affordable Care Act, Dr. Mulligan tells us that labor markets need more attention. He then starts with the big idea that allocating more resources to healthcare means less land, labor and capital somewhere else unless productivity increases or we get a bigger workforce. Yes, he says that certain populations will get a bigger slice of the economic pie, but then he predicts the pie will shrink because of labor market “taxes”.
Explaining how the act will transform incentives in labor markets, in one example he details the “29er phenomenon”. The key, he says, is that 50 worker tipping point. Go from 49 to 50 full time workers and your firm’s insurance obligations multiply. However, because full-time is defined as a 30 hour work week, employers might just increase the number of people who come in for 29 hours. Employees, meanwhile, will respond to incentives that affect decisions about where and how much they work.
Discussing the supply and demand sides of labor markets, Dr. Mulligan concludes that healthcare financial incentives will nudge firms and individuals toward less productivity.
Dr. Mulligan’s predictions reminded me of a recent NY Times description of two French firms.
In France, hiring worker #50 means your business has to create worker councils, establish profit sharing, and report to employee representatives when firing people for economic reasons. As a result, in 2012, there were 2.4 times as many businesses in France with 49 employees as there were with 50.
One business owner in Provence explained a somewhat convoluted expansion decision. A former mountaineer, he had created a firm composed of individuals who could paint suspension bridges, scale cooling towers and handle height comfortably. Because the 50th employee would have made his expenses climb by 4%, he decided instead to start a new firm. And then, when he grew even more, he created yet another new business.
By contrast, a French artisanal chocolatier who chose to hire his 50th employee regretted the decision. He told a reporter that it meant “…50% of my time spent trying to apply rules that don’t advance the business and that distract me from finding new products and markets.” Not only did his operating costs spike by €32,000, but also he had to devote more time to administrative tasks. The government even asked him to project how much chocolate he could produce during wartime rationing.
With the ACA spawning 14,000 pages of regulations with countless incentives, labor markets will remind us that there is never a free lunch. Summarizing the ACA tradeoff, Dr. Mulligan says at the end of his book, “Time will tell whether the health reform is remembered for its intentions or its economic surprises.”
On July 10th, France outlawed free book deliveries and placed a floor under discounts. Hoping to protect independent booksellers, the new legislation perpetuates a 1981 law that said no discount could exceed 5% and prices have to be standardized. (In the 2014 law, the details about shipping and discounts are a bit more convoluted but we will not cover them here.)
Former French culture minister Filippetti said the law demonstrated “the nation’s deep attachment to books” and its quest to preserve “bibliodiversity.” Recognizing the threat, a bookseller called his clientele “l’amant infidel”—an unfaithful lover.
I am conflicted.
Yes, France has a special culture of independent bookstores, maybe 3500 in small towns and large cities. They also claim that Amazon is taking advantage of Luxembourg’s lower rates by reporting taxes there, is selling books as loss leaders and planning to raise prices when they outcompete everyone else.
Where are we going? The independent bookstore debate is all about equality or efficiency.
The same debate surfaced in the U.S. with a 2011 Richard Russo NY Times OP-Ed. Citing friends who said, “They don’t win unless they destroy their competition…” Russo lamented Amazon’s impact on the indies. He quoted one author who said “…losing independent bookstores would be ‘akin to editing…a critical part of our culture out of American life.'” Or, as a bookstore owner explained, “If you like seeing the people in your community employed, if you think your city needs a tax base, if you want to buy books from a person who reads, don’t use Amazon.”
Responding in a Slate column, journalist Farhad Manjoo focused on the benefits of paying less. Authors sell more books, consumers have extra money to spend locally and the economy enjoys more efficiency. Rather than doing harm, Amazon’s e-publishing and e-reader innovations have expanded the publishing world and could even be helping local communities. And yes, on Amazon, you can find comments from people who read.
You can see below how the price floor eliminates Amazon’s ability to discount and ship for free:
As always, a tradeoff: we can have a mandate for the equal prices that are created by a price floor, or we can have the efficiency of market competition.
Our bottom line: Price floors come in handy when you have an economic group to protect. But the opportunity cost is efficiency.Read More
Slovakia has a VAT gap because too many businesses are not paying the tax money they owe.
Slovakia’s solution to its VAT problem is a lottery. By sending in or registering a sales slip online, consumers can win a car, cash, or an invitation to be a contestant on the Slovakian “Price is Right.” (For the Macedonian VAT lottery, it is a house!) Once the government has the sales slip, it can see what the retailer owes in taxes.
So, where are we going? To the amazing gap in Value Added Tax receipts in the eurozone.
Sort of a distant relative of the sales tax, the VAT is a consumption tax. For a pretzel, if we levied a VAT, as with the sales tax, our pretzel would have a higher price at the cash register. But with a VAT, that elevated price is based on the value that is added to the product at each production stage, At the last stage, because businesses pass it along, the consumer covers the full VAT payment. (Sounds simple but the economics are much more complex because of the incentives.)
To go after the tax dodgers, Slovakia just needed to know that was happening at the cash register. Suddenly, businesses are being asked for receipts by customers who never cared about them. Having collected 64 million receipts since September 2013, the government says the lottery has been a huge success.
You can see below that Slovakian VAT gap is large. They are missing 37% of what they should have collected. As we might expect, with 39% less than what they should be collecting, Greece also has a gargantuan VAT gap. By contrast, Germany, at 13%, does not. Our bottom line? The VAT gap is further evidence of the vast fiscal discrepancies in the eurozone countries.Read More
Our story starts in Russia during the sixteenth century when vodka probably entered the Russian diet. It ends now with alcohol addiction a big problem for individuals and for the Russian government.
Where are we going? To sin taxes and inelastic demand.
The Russian government has been addicted to vodka money. It all began centuries ago when Ivan IV established government controlled taverns called kabaks. Spreading across Russia, the kabaks became the only taverns in town when the competition was outlawed. A source of monopoly and tax revenue by the 1800s, vodka sales might have been creating a superpower by generating at least one-third of all government revenue.
Surely trying to maximize revenue, Peter the Great proclaimed that a wife should be whipped if she took her husband home from a tavern prematurely. Catherine II later commented (we think) that a drunken people were easier to rule.
Fast forwarding to the 20th century, first Vladimir Lenin prohibited vodka and then Stalin reversed the policy because he needed the money for industrialization. Again recognizing the impact of inebriation on productivity, life expectancy and family life, in 1985, Mikhail Gorbachev initiated an anti-drinking campaign that was condemned in this Soviet joke:
“There was this long line for vodka, and one poor guy couldn’t stand it any longer: ‘I’m going to the Kremlin, to kill Gorbachev,’ he said. An hour later, he came back. The line was still there, and everyone asked him, ‘Did you kill him?’ ‘Kill him?!’ he responded. ‘The line for that’s even longer than this one!’”
As recently as 2010, the Russian finance minister said Russia state coffers need people to smoke and drink more.
Napoleon III summarized the sin tax dilemma when, urged to forbid smoking, he said “This vice brings in one hundred million francs in taxes every year. I will certainly forbid it at once–as soon as you can name a virtue that brings in as much revenue.” As Napoleon implies, demand for vodka, cigarettes and sugary drinks tends to be less sensitive to price hikes. Called inelastic, the quantity demanded minimally sinks when a tax or monopoly pricing elevates the cost.