• Everyday Economics: The Coase Theorem has a market-based solution for the airline seat reclining problem that is a negative externality.

    Solving the Airplane Seat Problem

    Aug 29 • Behavioral Economics, Economic Debates, Economic Thinkers, Government, Regulation, Tech, Thinking Economically • 142 Views

    Assume that your neighbor turns up the volume just when you want to sleep. Although her property rights include her apartment, the sound spills beyond… to your property.

    Similarly, with that airline ticket you just purchased, you get some temporary property rights. You get a seat and also the right to recline. As you know, this is where—like with a neighbor’s loud music—the problems start. Leaning back, you have entered someone else’s “property.”

    On a recent United flight between Newark and Denver, when a man used a $21.95 Knee Defender to prevent the woman occupying the seat in front of him from reclining, she threw a cup of water at him. Diverting, the pilot landed in Chicago, ejected those two troublesome passengers, and continued to Denver. They arrived 1 hour and 38 minutes late.

    Negative Externalities

    Almost everyone on this flight suffered from a negative externality. Just as loud music results in a negative externality for apartment dwellers, a reclining flier creates a negative externality for the person in the seat behind him. Meanwhile, everyone on that United flight had a negative externality because of the delay.

    You can sort of see how the Knee Defender prevents a seat from reclining:

    The knee defender creates a negative externality for a seat recliner.

    From: Gadget Duck

    The Bottom Line and a Coase Solution

    What to do? Thinking of the recliner, an economist would have suggested some Coase-style negotiation.

    Nobel laureate Ronald Coase told us that externality problems can be privately solved when transaction costs are low and the cost/benefit numbers make it feasible. With our airplane dispute, let’s say the woman feels it is worth $50 to recline and the man seated behind her thinks the cost of the discomfort is $75. If she gave him $60 or any amount between $50 and $75, everyone could be happy.

    Other solutions leave us with less choice. United could have charged for the right to recline or installed the stationary seats that Spirit and Allegiant have on their planes.

    Our bottom line: The Knee Defender dispute was really about property rights and a negative externality.

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  • Everyday Economics: Chinese economic growth that is fueled by its urban population is a major cause f the center of economic gravity moving eastward.

    The Path of the Shifting Center of Global Economic Power

    Aug 28 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, International Trade and Finance, Labor, Macroeconomic Measurement • 161 Views

    Let’s start with a dot in the Atlantic Ocean, maybe 900 miles from Morocco, that we can follow as it glides eastward toward Izmir, Turkey.

    An Overview of Shifting Global Economic Power

    According to London School of Economics Professor Danny Quah, you are looking at the world’s centers of economic gravity. A center of economic gravity is different from a “cluster” of economic activity. As Dr. Quah explained, please imagine a world with only 2 cities having economic activity. The cluster of economic activity could be found in each city. However, the center of economic gravity would be an inactive spot between the two. While there are many clusters, there is only one center.

    By 2049, the center of economic gravity will have reached 92 degrees east and 30 degrees north where it would be surrounded by Urumqi, China; Kolkata, India; Dacca and Chittagong, Bangladesh.

    The Chinese Economy will draw the global center of gravity to the East.

    From: “The Global Economy’s Shifting Centre of Gravity” by Danny Quah (LCE)


    Also looking at Asia “rising,” Hans Rosling, in one of his wonderful TED talks, speedily takes us from 1858 to 2048 in a statistical horse race.

    Conveying a slightly different picture, the consulting firm McKinsey created a boomerang to show a changing economic center of gravity.

    originally close to China, and then located to the wets, now, fueled by the Chinese economy, the center of the global economy is again moving Eastward.


    How Cities Will Fuel Global Economic Growth

    McKinsey also gathered data from the world’s 600 top cities and concluded that 440 in emerging markets will fuel the world economy by investing in new buildings, water infrastructure and ports.

    Propelled by investment from developing world cities, the center of global economy moves eastward.

    And, if we look even more closely at those 440 cities, we see an increasingly affluent urban consumer.

    Shifting location of consumer spending moves center of global economy


    Our bottom line: Moving beyond our graphs, we need to imagine the people who are creating a shift in global income. Perhaps exacerbating inequality, a group of urban consumers in China and other emerging markets will become more affluent. These are very real people whose rising incomes are pulling the center of the global economy closer to their homes and jobs.

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  • Everyday Economics: With opportunity cost, planners can decide how much natural disaster preparation is worth the tradeoff.

    The Costs of Being Prepared for a Natural Disaster

    Aug 27 • Behavioral Economics, Economic Debates, Economic History, Environment, Government, Regulation, Thinking Economically • 162 Views

    10 seconds before the Napa quake last Sunday, a UC Berkeley lab saw an increase in P-wave activity. The non-destructive waves that are the beginning of a quake, P-waves are the warning that mean it is time to activate the ShakeAlert system. Still in its testing phase, the ShakeAlert went to BART (Bay Area Rapid Transit), Disneyland, the LA County Fire Department and other program participants.

    A sample ShakeAlert:

    In 10 seconds, trains going 30 MPH have enough time to stop while those at 70 MPH can slow to 40. In the operating room, surgeons can remove their scalpels and utilities have the time to turn off gas lines. (In an elevator, I would get off at the next floor.)

    Our basic issue, though, is how much to invest in natural disaster preparation, especially when it might never happen.

    How much should we prepare for a natural disaster?

    We do know that spending on a ShakeAlert decreases destruction. For a Japanese computer chip manufacturer, getting a pre-quake alert reduced disaster damage from $15 million in 2003 to $200,000 more recently because they could shut down robots and manage dangerous chemicals. However, does that mean California should use $80 million to create the ShakeAlert system? Only $10 million has been raised so far.

    In Italy, the preparation dilemma took a surprising turn when seven earthquake experts were convicted of manslaughter for inadequately conveying the likelihood of an earthquake in L’Aquila. It happened in 2009 when 297 people died and thousands were injured. Italian scientists knew that L’Aquila had a history of earthquakes and was experiencing tremors. Deciding to calm local uneasiness rather than encourage preparation, they were the target of local fury after the quake. Convicted, they now await a decision from an appellate court.

    Moving further on the natural disaster probability scale takes us to New Orleans and Hurricane Katrina. Yes, they had storms before but the likelihood of a Category 5 was small. Diverting land, labor and capital to fortify levees had too high a cost for a storm that would not happen. But it did.

    Our Bottom Line and Opportunity Cost

    How then to decide? Below, you can see, in dollars, the most costly natural disasters from 1990-2011.

    Our bottom line: As economists, whether looking at $80 million for a 60 second ShakeAlert or preparation for a natural disaster that can come in a day or a decade, the issue is opportunity cost. Because diverting land, labor and capital to natural disaster mitigation means not using it now, when is the tradeoff worth it?

    Disaster preparedness involves opportunity cost decision-making

    From: EMDAT


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  • Everyday Economics: While short term GDP spending increases, the impact on the economy from a disaster is probably not beneficial.

    Can an Earthquake Be Good for the Economy?

    Aug 26 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Labor, Macroeconomic Measurement • 177 Views

    Our story starts with a young boy who breaks a window. While witnesses express sympathy for the owner, they also remind us that a glazier will benefit. Charging 6 francs for a replacement, he will get extra business and the entire economy gets a boost.

    The Broken Window Fallacy

    Frédéric Bastiat, the 19th century economic journalist who first told this story replied, “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.” Yes, the glass industry gets 6 francs. However, what is not seen is the business that might have been.

    Had the window not been broken, the money could have been spent on a new pair of shoes. And then, the owner of the window would not only have had his old window but also could be enjoying his new purchase. As for the entire economy, it would have added shoes to its stock of goods rather than winding up where it had been before with the same window.

    Where are we going? To the California earthquake and disaster economics.

    The damage caused by the 6.0 quake that hit Napa included broken bottles of wine and glassware, structural damage to roads and buildings, closed restaurants and burst water mains. Totaling close to a $1 billion estimate, the destruction will have to be repaired and the spending will be added to the state’s GDP.

    I wonder if someone will then say that the clean-up provides an economic.boost. With Hurricane Sandy, one Forbes title said, “Despite $50B in Damages, Hurricane Sandy Will Be Good for the Economy, Goldman Says.” But Bastiat would emphatically point out that the spending that we see is misleading. Instead we should be aware of the production and purchases that are sacrificed.

    Not everyone agrees with Bastiat. In a 2002 paper, researchers concluded that, “Disasters provide the impetus to update the capital stock and adopt new technologies, leading to improvements in total factor productivity.” They did though qualify their conclusions saying it depended on a nation’s ability to respond and that geologic disasters were tougher on recovery.

    Our Bottom Line and Disaster Economics

    A St. Louis Fed paper included this rather handy disaster impact idea framework:

    Questions about a GDP disaster boost.

    From: St. Louis Federal Reserve

    Our bottom line: Primarily composed of spending from consumers, businesses and government, the additional GDP spending created by a disaster probably will not represent a long term economic benefit.



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  • Condemned by many people including President Obama, corporate inversions might not be the problem. Instead we should reconsider the corporate tax.

    Corporate Tax Dilemmas

    Aug 25 • Behavioral Economics, Businesses, Economic Debates, Economic History, Economic Thinkers, Government, Regulation • 134 Views

    In a 1934 Appeals Court decision, Judge Learned Hand said,  “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”

    But still, the Judge concluded that the defendant in the case had illegally tried to dodge taxes by creating a new corporation that would diminish her tax bill. Agreeing, Supreme Court Justice Sutherland commented that the defendant’s strategy violated the intent of the statute.

    So where are we going with this? To corporate taxes…

    Corporate Inversions and the Corporate Income Tax

    Because corporate inversions let businesses lower their exposure to U.S. tax rates through foreign mergers and acquisitions, the device has been condemned. However, as Judge Learned Hand indicated, sidestepping taxes is not necessarily bad.

    So let’s say the corporate inversion might even be okay. Still though, it cuts corporate tax revenue and that takes us where we need to go. Instead of inversions, the problem could be corporate taxes.

    • Corporations tell us that the tax is complex and “counterproductive.”
    • The left-wing point of view emphasizes the loopholes that need to be plugged.
    • On the right, the cry is to eliminate the corporate tax.
    • Meanwhile, economists say the corporate tax is inefficient.
    • And everyone recognizes that corporations are no longer the domestic entities they used to be. As multinationals with multiple homes, their tax regulations are antiquated.

    The Bottom Line and Everyone’s Corporate Tax Rates

    Here is an OECD (Organization for Economic Cooperation and Development) list. There are other columns in the original table and a list of footnotes qualifying all of the numbers. While the data below display actual rates, it is quite evident from the footnotes that one number tells a very small part of the story. For starters, learning more would include loopholes, tax credits and “subcentral’ tax rates within a country.

    The numbers tell a very small part of the corporate tax story.

    Our bottom line: In a Brookings Institution article about corporate inversions and the corporate income tax, David Wessel expressed the perfect bottom line. “Either we are going to tax income at the corporate level in ways that make the U.S. a place where companies want to have headquarters, invest and create jobs. Or we should give up and find a better way to raise revenue on the owners of capital. If we don’t, we’ll be watching other made-in-America companies join the expatriate parade and the corporate income tax and the revenue it produces will wither away.”

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