• The state tax incentives that attract TV and film makers need more cost and benefit analysis.

    When is a Tax Credit Like a Groupon Coupon?

    Aug 21 • Businesses, Demand, Supply, and Markets, Economic History, Government, Labor, Macroeconomic Measurement, Media, Thinking Economically • 168 Views

    New York City lost the $79 million that Law & Order generated annually because NBC cancelled the show. Just feeding the actors for 14 years meant $1.5 million to David’s Gourmet Catering and Craft Service. One person on the show’s design staff said, “We spent an enormous amount of money in Saks Fifth Avenue and Barneys, dressing the lawyers.”

    The show hired actors, camera operators and costume designers. They needed hair and make-up stylists and local carpenters. People stayed in hotels, they ate at restaurants, they drank at bars. They purchased duct tape and boom microphones. Broadway actors could supplement their incomes with a one-day acting role. The NYC Commissioner of the Mayor’s Office of Film, Theater and Broadcasting said Law & Order was responsible for 4,000 jobs and maybe $1 billion in spending during its 20-year tenure.

    States are willing to fight for the millions in revenue they can get from TV and film production. Their ammunition includes tax credits and rebates.

    When Hawaii wanted to be sure that The Descendants filmed there, they offered a tax credit of approximately 20% for in-state expenditures on items like travel, equipment and wages—even George Clooney’s salary. New York State gives tax credits equal to 30% of production costs.

    Some states even let businesses transfer unused tax credits. Just like there is a market in Groupon coupons that buyers cannot use, so too can tax credits be sold. There are actually middlemen called “tax credit brokers” who, for a fee, match sellers and buyers of tax credits.

    And here is where we need to flip our perspective from the attractiveness of tax incentives to their cost. According to 2012 Pew Research, most states inadequately balance the cost and benefit of the tax incentives they offer for economic development.

    Using cost and benefit to asses state tax incentives

    Our bottom line: While tax incentives can create jobs and promote economic growth, states need to be more aware of their costs and benefits.

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  • Everyday economics: U.S. law does not mandate that wages and salaries be paid for vacations and holidays.

    Should Your Boss Require Vacations?

    Aug 20 • Behavioral Economics, Businesses, Economic Debates, Economic History, Government, Households, Labor, Lifestyle, Money and Monetary Policy, Thinking Economically • 127 Views

    Assume that you just started your annual 3-week vacation when disaster struck. Running for your tour bus, you tripped and broke your ankle.

    If you work in Spain, all is not lost.

    In a June 2012 decision, The Court of Justice of the European Union said the purpose of paid annual leave is to “enable the worker to rest and to enjoy a period of relaxation and leisure.” By contrast, sick leave “is given to the worker so that he can recover from an illness that has caused him to be unfit for work.”

    So, even though your vacation has already begun, now it will be called paid sick leave. It is okay to schedule another (paid) vacation.

    Where are we going with this?

    Just to pondering the wages and salaries that labor should receive for vacation days, holidays and other out-of-the-office obligations.

    Mandated by law, Spanish workers get 12 public holidays and 22 paid vacation days annually, another 15 to get married and extra days for a birth, death, hospitalization, a 16-week paid maternity leave, 2 days for paternity, and 18 paid consecutive months for an illness.

    In the following chart, you can see that the number of paid vacation days and holidays in most OECD (Organization for Economic Cooperation and Development) countries seems rather high when compared to the U.S.

    Most developed nations legally require wages and salaries for vacation days, the U.S. does not.

    From: Center For Economic and Policy Research


    The Bottom Line: U.S. Vacation Time

    While the United States has no laws that require paid vacation days, according to The Economist, we take an average  of 15 vacation days and 10 holidays off each year. Recently though, we seem to be taking fewer days off. Compared to 1976 when 80% of the labor force took a week’s vacation, today the proportion is closer to 56%. Similarly, an Expedia survey indicated workers used 10 out of 14 vacation days each year.

    Trying to explain why, studies indicated that where vacations are the law, people took them. And yet, in the U.S., at firms like Netflix where vacation time is unlimited, few people take any time off.

    Our bottom line: I wonder if vacation attitudes in the U.S. reflect the Prisoner’s Dilemma. Related to game theory, the Prisoner’s Dilemma explains how your behavior is based on what you expect someone else to do. If you predict a co-worker will not take some time off, then, fearing disapproval from a boss and your associates, you will not take any either. Add that to a work ethic that is a social norm and the happiness that Americans say they derive from work, and you have less vacation time.

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  • A family invests in land, labor and capital to "produce" children.

    The Cost of Raising Children

    Aug 19 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers, Education, Households, Labor, Thinking Economically • 183 Views

    The family is a factory.

    First explained by Nobel Laureate Gary Becker, the family combines land, labor and capital for the shelter, clothing, food, education and all else it needs to “produce” children. Household members engage in a division of labor whereby some individuals participate in workplace market activities while others remain at home. The numbers even indicate that families can benefit from economies of scale because each additional child requires less of an investment.

    Where are we going? To the land, labor and capital investments that produce children.

    The Cost of “Producing” a Child

    In 2013, an average American middle income family spent $245,340 on raising a child until age 18.

    Average spending on a child

    From: USDA


    With the urban Northeast most expensive and rural areas the cheapest, the cost of raising a child depends on where you live.

    Land, Labor and Capital to raise children in U.S.

    From: Washington Post


    Looking at how families allocate land, labor and capital to “produce” children, you can see below that housing receives the most resources and child care/education is #2.

    Factor resource allocation items

    From: USDA


    Also, though, the investment in land, labor and capital changes with a child’s age.

    Resource allocation by age for producing children


    And, depending household income, the investment varies.

    Land, Labor and Capital resource allocation by income


    Finally, as with all economies of scale, the more children you have, the cheaper per child it gets. Single child families spend 25% more on their offspring than the average amount spent in 2-child homes. And, it gets better still. Households with 3 or more children spend 22% less on each child.

    The Bottom Line: Family as a Factory

    Our bottom line: If you think factory rather than family, a new image of your household emerges. That crib you just purchased is capital, a dad and mom are labor and the backyard is land. Together, your land, labor and capital compose the factor resources you use to “produce” children.



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  • With universal healthcare, improved health could come at the expense of free choice.

    Do You Want a Healthcare Nudge?

    Aug 18 • Behavioral Economics, Businesses, Economic Debates, Government, Health Care, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 191 Views

    Primarily for fiscal reasons, in Japan, most 40-74 year olds get their waist size checked each year. A part of the required annual physical exams from local government or employers, waist size is monitored because an obese population can be expensive.

    It all began in 2008 with the “Matebo Law.” Because the Japanese population is aging and their diet is becoming more Western, legislators were concerned that obesity related diseases like diabetes and hypertension would increase. As a result, the law said that women whose waists exceeded the maximum of 35.5 inches and, men, 33.5 inches, had to lose weight within 3 months or get counseling if they had a weight-related ailment. Meanwhile, employers who did not meet the guidelines would have their national health insurance payments increased by close to 10%–potentially a $19 million expense for computer maker NEC.

    You can imagine the new incentives that the law created. For individuals, it meant crash dieting just before the physical exam. At work, it now made sense to offer gym memberships, healthy cafeteria food, and to hire slim employees.

    The Bottom Line and Opportunity Cost

    And that takes us to the United States and an opportunity cost dilemma.

    According to a recent study from researchers at the Olin Business School, Washington University in St Louis, individuals who do not save for retirement also tend not to take care of their health. Commenting on these results, one of the researchers said, “If you think health is really critical for productivity or health insurance costs, you really need to constrain free choice…You have to have mandates.” The mandates to which he refers could range from high sugary drink taxes to Japan’s “Matebo Law.”

    Opportunity cost: Better health for the elderly or free choice

    From: Washington University Newsroom

    Our bottom line: We have a pretty tough opportunity cost dilemma:

    A healthier and wealthier elderly population or a population with more free choice.

    Or, as expressed by Cass Sunstein and Richard Thaler in Nudge, government needs to decide how much to “nudge” our behavior toward a desired goal. The bigger the “nudge,” the less we have the freedom to make our own good and bad decisions.

    Sumo Wrestlers?

    You might be wondering about sumo wrestlers. Most are younger than 40 so the law does not apply to them.

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  • Everyday Economics — Sunday Chart of the Week

    A Closer Look at the EU 28 Economic Growth Rate

    Aug 17 • Economic Growth, Financial Markets, Government, Labor, Macroeconomic Measurement, Thinking Economically • 152 Views

    Our Sunday Charts

    For the most recent data on the EU 28, the real GDP growth rate is .2%, the overall unemployment rate is 11.5% and government debt averages 88%.

    Not so good.

    As aways, though, the averages can be misleading. So let’s look a bit more closely.

    The Charts

    Considering the growth rates of different countries, Greece, Italy and Cyprus have a contracting GDP.

    European GDP growth rates

    From: Graphic Detail, The Economist

    Similarly, for unemployment, Greece, Italy and Cyrus are close to the top of the list.

    Europe's Economic Growth details

    From: Graphic Detail, The Economist

    Finally, for the relative size of their public debt, Greece, Italy and Cyprus borrowed a disproportionate amount when we compare their loans to GDP.

    Why compare debt to GDP?

    Just think of a home mortgage to grasp why we compare debt to GDP. Someone who earns $50,000 a year—sort of comparable to GDP as national income—should not borrow $1 million. However, a household with an annual income of $5 million can afford a $1 million loan.

    Economic Growth and debt for Europe

    From: Graphic Detail, The Economist

    The Bottom 3 and The Bottom Line

    Because of ongoing problems, I selected Greece, Cyprus and Italy as the bottom 3. We should add, though, that Germany’s GDP contracted and France’s stagnated during the past quarter.

    Our bottom line: When you have disparate rates of economic growth, unemployment and debt, for the 18 countries in the euro zone, the separation of monetary and fiscal power is problematic. Consequently, Greece, Italy, and Cyprus have less control over their economic difficulties.

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