• everyday economics free trade TPP

    Three Charts That Explain the TPP Free Trade Deal

    Apr 28 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Environment, Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 231 Views

    Sometimes it can be tough to sell free trade.

    Where are we going? To the complexities of the TPP (Trans-Pacific Partnership) trade negotiations.

    Trans-Pacific Partnership History

    Our story starts in 2003 with Chile, New Zealand, and Singapore. Joined by Brunei in 2005, the “P-4″ had a trade agreement the next year. Only the beginning, negotiations were continuing on finance in 2008 when the U.S. entered and soon was joined by Australia, Peru and Vietnam. With Malaysia, Canada and Mexico and later Japan, the talks (now at 20 rounds) wound up with 12 nations.

    The TPP 12:

    Free trade and the TPP.

    From: Congressional Research Service


    The 12 TPP countries already interconnect through existing trade agreements.

    Existing free trade agreements

    From: Congressional Research Service


    Negotiating Topics

    If we had to name one theme tying their huge list of topics together, it would be market access. Goods and services will be able to move with ease among the 12 nations as supply chains interlock, tariff and non-tariff barriers are eliminated and common protections are established for areas that include intellectual property, labor and the environment. If a mathematician were handy, she could compute the monumental number of permutations that 12 countries with 30 topics and countless subtopics have to agree on.

    Free trade and the negotiating topics for TPP talks.

    From: Congressional Research Service


    The U.S. Congress

    And finally, we can add to all of this what has to happen domestically. In the U.S. President Obama hopes for trade promotion authority (TPA). Also called fast track, it just means Congress cedes its right to debate the content of a trade deal. Instead lawmakers can only vote yes or no–approve or reject– within 90 days.

    You can see the benefits of fast track for this kind of a deal. Imagine if Congress added an amendment and the 12 nations had to return to the negotiating table and begin all over again!

    Our Bottom Line: Free Trade

    Talking about free trade, economists rarely say, “On the one hand but then on the other.” Almost all agree that free trade is beneficial. The reason takes us back to the early 19th century and David Ricardo. The economist who first explained comparative advantage, David Ricardo (1772-1823) said each nation should make whatever involves the lower opportunity cost in that country. Because we are all doing what we do best, productivity is optimized through specialization and trade. Meanwhile, consumers benefit because worldwide competition lowers prices.

    And yet still, free trade is a tough sell because people tend to focus on protecting domestic industry rather than the growth that globalization creates.

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  • everyday economics and progressive punishment for speeding ticks

    When Your Ability to Pay Determines Your Punishment

    Apr 27 • Behavioral Economics, Economic Debates, Economic History, fiscal policy, Government, Regulation, Thinking Economically • 143 Views

    Posting a Facebook image of his €54,024 speeding ticket (close to $58,000) and a Mercedes his fine could buy, a Finnish millionaire expressed his fury. In a 50 M.P.H. zone, he had been driving 64 M.P.H.


    Progressive punishment is like progressive taxation.


    Similarly, a Nokia executive was fined €116,000 ($103,000) for driving 75 km/h (47 M.P.H.) in a 50 km/h (31 M.P.H.) zone on his Harley-Davidson motorcycle and another gentleman was asked to pay $44,100 for zigzagging through Helsinki. After his ticket he commented, “if you earn enough you shouldn’t even touch a car.”

    Progressive Punishment

    In Finland, exceeding the speed limit beyond a certain amount and shoplifting are violations of the law for which your penalty is a fine based on your income. Called progressive punishment, the system penalizes the affluent more than those who have less. Day fine advocates say the system is more equitable because they make the rich experience as much pain as those with less.

    Simply explained (there is lots more detail), infractions are ranked by severity. A severity “unit” then gets a multiple of a person’s daily income. That would mean (hypothetically), traveling 15 M.P.H. above the speed limit creates a fine that is 15 times your daily income; 25 M.P.H. above would be a multiplier of 20 times what you earn each day.

    Called a day fine system because it seizes your day’s income, the approach was first implemented by Finland in 1921. Germany used it to diminish its prison population for any crime with a six-month or less lock-up span. While we did experiment with day fines in the U.S. during the 1980s in Staten Island, NY for crimes that ranged from loitering to theft and in Milwaukee, it never stuck. In Europe though, Sweden, Switzerland, Germany, Austria, and France have day fines.

    Our Bottom Line: Progressive Taxation

    Some say it is never fair for those with less to pay more and yet it happens everyday at the cash register. For every sales tax, whenever everyone pays the same amount, the poor are paying a higher percent of their income. For that reason the tax is called regressive. By contrast, as with the Finn speeder, when the more affluent pay a higher proportion of their income than those with less, the tax is called progressive.

    And, whether contemplating progressive punishment or progressive taxation, we just have to decide whether we believe ability to pay should be our rationale.

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  • everyday economics at Starbucks

    A New Message From Starbucks

    Apr 26 • Businesses, Demand, Supply, and Markets, Economic Humor, Innovation, Labor, Lifestyle • 215 Views

    Think Maxwell House and you have the coffee culture that preceded Starbucks. Made with low quality beans, sold in cans, pre-ground, sitting for months and maybe years, the coffee was terrible. So, when Starbucks came to town, it was transformational. Paying more than at the local luncheonette, the first Starbucks customers in the 1990s felt special. Perhaps because the idea was somewhat European, the concept of the coffeehouse had status. In a world of coffee that had been dominated by cans of Maxwell House, Starbucks was elite.

    No more.

    Now with a Starbucks (or two) on every block, Starbucks has become rather ordinary. Those of us looking for an aspirational coffee experience with a better bean from a small far-off farm have been flocking to places like Blue Bottle and Philz.

    In last week’s investor call, Starbucks’s CEO and founder Howard Schultz seemed quite aware that he had to recapture the gourmet coffee consumer. Describing Starbucks’s new Roastery coffeehouses, he used the words “ultra-premium, small batch, limited availability.” No longer called a barista, Coffee Masters assist us at Roasteries. And, at $20 a pound and more, prices also convey an elite message.

    Our Bottom Line: Competitive Strategies

    An economist might say that Schultz understands how to compete in a monopolistically competitive market structure. Because you just need an espresso maker and some beans, market entry is easy. But to be successful, you need something unique–the monopolistic part. Starbucks, through its beans, its barista training and its store design initially competed successfully.

    To regain that special image, the action is taking place at the margin. While Starbucks’s everyday coffee experience remains the same, its Roasteries are supposed to elevate its image. By retaining the masses and entering the ultra-premium coffee market, will Starbucks have its cake and eat it too?

    Moving closer to monopoly along a market structure continuum, firms become larger and more powerful.

    Starbucks competitive strategies


    And finally, for a laugh and a reminder of the Starbucks culture, below, Ellen sends Dennis Quaid to Starbucks.

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Raisins to BBQ

    Apr 25 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Economic Humor, Economic Thinkers, Entertainment, Environment, Financial Markets, fiscal policy, Government, Macroeconomic Measurement, Regulation, Tech, Thinking Economically • 141 Views

    Our Posts Roundup

    Everyday economics and competitive market structure Sunday 4.19.15

    What’s bad about popular movies…more

    • everyday economics and state taxes
    Monday 4.20.15

    The least taxing states…more

    everyday economics and smell pollution regulation Tuesday 4.21.15

    When a BBQ smell causes trouble…more

    everyday economics and sovereign debt Wednesday 4.22.15

    More insight on Greek debt…more

    Tweets that predict Stock Market Trading Thursday 4.23.15

    How tweets can predict the Dow…more


    everyday economics and raisin property rights Friday 4.24.15

    Why we have a raisin reserve…more


    Ideas Roundup

    • property rights
    • John Maynard Keynes
    • New Deal
    • financial markets
    • sovereign debt
    • default
    • cost and benefit
    • externalities
    • regulation
    • pollution
    • Pigovian taxes
    • fiscal policy
    • sales tax
    • incentive
    • state taxes
    • competitive market
    • structure
    • oligopoly
    • vertical integration


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  • Raisins shutterstock_57689659-2,jpg

    Is the Raisin Reserve “Unraisonable”?

    Apr 24 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Economic Thinkers, Government, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 131 Views

    During a Supreme Court hearing last week, Justice Samuel Alito asked, “Could the government say to a manufacturer of cell phones, ‘You can sell cell phones. However, every fifth one you have to give to us?’”

    Although his example was cell phones, Justice Alito was really talking about raisins. The case is Horne v. Department of Agriculture.

    Where are we going? To how much the government can legally help the economy.

    The Raisin Reserve

    Our story starts in 1937 when the Agricultural Marketing Act was created. A part of the New Deal, it was supposed to maintain farmers’ spending power by propping up farm prices. Raisins entered the picture in 1949 when the 47-member Raisin Administrative Committee was set up.
    The problem was raisin demand. After the Second World War ended, raisin demand shriveled because the army no longer needed all of the raisins they were feeding the soldiers. To maintain a higher price, the Committee just had to limit supply.
    You can see the USDA plan below. When demand shifted to the left, then raisin prices dropped,
    Property rights and raisin demand decrease
    So the raisin reserve just removed raisins from the market, decreased supply and up went price.
    Property rights and raisin supply decrease

    Property Rights

    Fast Forward to 2002. Told he would have to deposit 47 percent of his raisin crop–1.2 million pounds– in the raisin reserve, Martin Horne (and several other farmers who joined him) said, “…It’s robbery. It’s socialism. It’s feudalism…” His refusal to participate meant years in the court system and more than $650,000 in fines and fees that he refuses to pay.
    Already at the Supreme Court two years ago, they were told to return to the lower courts. Now they are back again and though the case involves multiple issues that relate to property, really it all is about one question. Fundamentally, we are just talking about the power of the federal government to take raisins from their owner.

    Our Bottom Line: John Maynard Keynes

    During 1934, with unemployment high and production low, British economist John Maynard Keynes was reported to have crumpled up a pile of towels rather than just one after washing his hands in a U.S. restaurant. His goal he said (if this really happened and no one is sure) was to create more jobs.

    More than what businesses could do, Keynes (1883-1946) believed that a contracting economy needed the job creation that government could provide through deficit financing. Government spending would then multiply as it passed from hand to hand. Just pay a worker, he or she spends that income, the recipient then spends it, businesses have to expand and an inflated total (called the multiplier) of spending enters the GDP.

    A part of 1930s Keynesian legislation, the Agricultural Marketing Act and the crop reserves that it subsequently created were the government’s attempt to buoy a sluggish economy by increasing farmers’ incomes. Now, perhaps violating the Constitution’s Fifth Amendment. it might be declared unconstitutional.

    This Daily Show segment on the raisin reserve is great for huge smiles. (I could not discover a direct youtube link.)


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