• economic news summary and sales taxes

    When to Tax a Bologna Sandwich

    Jan 8 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Gender Issues, Government, Lifestyle, Regulation, Thinking Economically • 125 Views

    “When you go to the grocery store and buy a pound of bologna, a pound of cheese, and a loaf of bread, these items are not taxable. But when these items are made into and sold as a sandwich, they become a taxable food item, whether you eat the sandwich where you buy it or take it with you to eat somewhere else.”

    From: www.tax.ny.gov

    Selecting the items they will tax, many state and city governments try to avoid necessities. So, they assume a bologna sandwich at home is a necessity but one that a store prepared for us is not.

    Where are we going? To deciding which purchases to tax.

    Should Tampons Be Taxed?

    The French National Assembly just reduced the tampon tax from 20 percent to 5.5 percent while Canada has eliminated the tax entirely. In the U.S. the tampon exemption battle has moved to California. You can see (below) that only five states don’t tax tampons.

    State taxes, tampons, and necessities

    From: Fusion

    More than feminine hygiene products, the tampon tax is about a dilemma. Each state has to decide whether to tax necessities. If they answer yes then their revenue will probably be higher because people need the taxed items. However, taxing necessities creates questions about incentives. For items that we need, it might not be ethical for society to levy a tax that creates the incentive not to buy it. (The Huffington Post estimates that a woman spends $1773.33 on tampons during her lifetime.)

    As the municipality imposing the sales tax, state decisions about necessities have varied. Connecticut taxes baby diapers but not the diapers that adults wear. Colorado does not tax pregnancy tests. Illinois actually says items with the following descriptive data are unqualified for a low medicinal tax:

    A) “cools”; B) “absorbs wetness that can breed fungus”; C) “deodorant” or “destroys odors”; D) “moisturizes”; E) “freshens breath”;

    As you go from state to state it gets more and more complicated. However, at the heart of the debate are questions about revenue, fairness (and I guess whether it is an election year).

    Our Bottom Line: Inelasticity

    The sales tax debate takes us to two economic ideas.

    Elasticity: The first is elasticity. Referring to how much a change in price affects the amount we buy, demand elasticity predicts the impact of a tax. If our demand (really price elasticity of demand) is inelastic then changes in prices have little impact on how much we buy. Consequently, a state might as well charge a higher sales tax on necessities if they want to generate more revenue. For milk or pharmaceuticals or tampons, a tax on items with inelastic demand will bring more money into state coffers.

    Regressive Taxes: When all of us pay the same sales tax because we purchased the same item, those with less income feel the tax bite more. The reason? Whatever they pay is a larger percent of their income than the percent paid by a more affluent individual. Because sales taxes are regressive, they can be unfair.

    We could say that a tampon tax is a regressive tax levied on an item that has inelastic demand. The result is a tradeoff…

    More revenue or more equity.

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  • Uber

    Uber’s Unintended Consequences

    Jan 7 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Government, Labor, Lifestyle, Regulation, Thinking Economically • 140 Views

    In NYC, where the owner of a taxicab could have paid as much as $1 million for the right to pick up fares, drivers are told what to charge, which payment system to use, and the color of their car. A lime-green cab can pick up fares in the outer boroughs and above West 110th street or East 96th while the area surrounding midtown is yellow cab territory.

    Meanwhile, in Chicago a cab must have its medallion number in “plain black gothic figures” on the driver’s side hood and both rear seat doors. The city’s fare structure, the $2 for the airport departure/arrival tax and the $50 vomit cleanup fee have to be clearly posted on the back of the driver’s seat.

    Cab drivers seemed satisfied with the constraints. Yes, they were regulated but they had a guaranteed market. And they knew they were the only ride in town. When a cab ride was unsatisfactory, the most passengers could do was complain. You can see below that reckless driving received the most complaints:

    Uber impact on taxicab complaints

    From: “The Competitive Effects of the Sharing Economy: How is Uber Changing Taxis?”

    Where are we going? To the unexpected impact of Uber.

    Passenger Complaints

    Quite unintentionally, Uber has probably improved the quality of a NYC or Chicago taxi ride. Concluding that NYC and Chicago are receiving fewer complaints, the author of a recent study suggests the reason is Uber and other ride sharing services. He concludes that some of the dissatisfied taxicab riders are now complaining less because they switched to an Uber or Lyft alternative.

    Also though he believes that cab riders have less to complain about. Since regulation prevents drivers from competing by reducing fares or changing their payment methods, instead they are modifying their behavior. They can be more polite, their cabs can be cleaner and more comfortable, they can turn off their cell phones.

    Although complaints appear to have started to diminish just before the Uber entered the market, afterwards they clearly trended downwards:

    Uber and the taxi industry

    From: “The Competitive Effects of the Sharing Economy: How is Uber Changing Taxis?”

    Our Bottom Line: Externalities

    Defined as a beneficial impact on an uninvolved third party, positive externalities result from vaccines when fewer unvaccinated people become ill or if education leads to widespread innovation.

    So, when Uber elevated the quality of your taxicab ride, it too created a positive externality.

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  • economic news summary, stock markets and presidential elections

    Stock Markets and the Presidential Election

    Jan 6 • Behavioral Economics, Economic Growth, Economic History, Economic Thinkers, Financial Markets, Government, US Presidential Election • 141 Views

    The warning that past performance is no guarantee of future results was particularly true for 2015. Up during Year 3 for the past 17 four year presidential cycles, in 2015 the S&P 500 was down 0.73%. The Dow also has not had a decline during a pre-election year since 1939.

    You can see (below) that Year 1 of the 4-year presidential cycle has been the least likely time for the S&P 500 to go up:

    Election economics and the S&P 500

    From: Federatedinvestors.com

    Where are we going? To some election cycle analysis (that might not be useful but is interesting).

    Presidents and Stock Markets

    During 2012, former NY Times financial columnist Floyd Norris assessed stock market performance between 1900 and 2012. His goal was to see if we could predict presidential elections. His conclusion? When the stock market soars, so too will the incumbent political party…probably.

    Election economics and the Dow Industrial Average

    From: NY Times

    Our Bottom Line: Stock Market Indices

    Since we’ve used the Dow and the S&P 500 as stock market yardsticks, we should take a brief look at them. Both can be called barometers of stock market activity.

    First published in 1896, the Dow Jones Industrial Average has been composed of 30 major firms since 1928. We could call the Dow a stock “Hall of Fame” because its components, all pacesetting companies, are removed from the average when they decline.

    Much more recent, the S&P was created in 1957 and rapidly became a “world standard” for market performance because of its 500 leading companies. Also an index that is updated as the economy and firms evolve, it has seven industry groups:

    • Materials
    • Energy
    • Consumer Discretionary
    • Industrials
    • Utilities
    • Telecom Svc
    • Consumer Staples
    • Health Care
    • Financials
    • Information Tech

    And finally, xkcd has provided an alternative image of market activity.

    new stock markets and stock market activity

    From: xkcd

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  • economic news summary and recession shopping

    Our Shopping Behavior During the Great Recession

    Jan 5 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Labor, Lifestyle, Macroeconomic Measurement, Thinking Economically • 108 Views

    Asked about the cost of food shopping during the Great Recession, many of us would say we spent less.

    Not necessarily.

    Where are we going? To the changing cost of time.

    The Cost of Food Shopping

    During October 2009, unemployment peaked at 10 percent. With households experiencing cutbacks at work, troubled stock markets and a declining GDP, they changed how they bought their food. Rather than organics and premium brands, they searched for coupons, purchased sale items, bought in bulk, and visited multiple stores.

    Based on slightly more than 4.2 million transactions for food with a barcode from 112,837 households over 32 consecutive months, researchers from Northwestern University concluded that while the dollar cost of food shopping declined, its time cost increased. People had to look through newspapers and online for coupons. They needed to identify sale items and stores with cheaper merchandize. Speaking economically, we could say the economy was experiencing “intratemporal reallocation.” More simply, we switched how we used our time.

    The reason? The recession made time less valuable. Whereas pre-recession we used more money and less time for food shopping, during the recession, the tradeoff changed. The marginal value of the dollar went up while the marginal value of time went down. As a result, especially for the jobless, time spending ascended.

    You can see below how our shopping behavior changed from 2008 onward. And, even before the Great Recession (12/2007-6/2009), the over-65 cohort (yellow line) engaged in time-consuming shopping.

    Life cycle and business cycle changes in the cost of time and shopping

    From: “The Elasticity of Substitution Between Time and Market Goods: Evidence from the Great Recession”


    Our Bottom Line: The Cost of Time

    Economists have actually calculated that the cost of time declines by 27 percent by the time we are elderly. In Venezuela, Hugo Chavez catered to individuals with more time when his price controls created long lines. Smart businesses make coupons somewhat difficult to access so those of us who have more money and less time pay full price.

    Whether looking at the business cycle or the life cycle, the cost of time influences the dollars we spend.

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  • economic news summary and missing productivity

    Why We Should Worry About U.S. Productivity Growth

    Jan 4 • Businesses, Demand, Supply, and Markets, Economic Growth, Economic History, Economic Thinkers, Innovation, Labor, Lifestyle, Macroeconomic Measurement, Thinking Economically • 115 Views

    At the beginning of the 20th century, in one place, teams of workers gradually assembled a car. The chassis took 12 hours to finish while magneto production required 15 minutes and 29 workers. (A magneto helped to start the ignition.)

    Imagine people’s astonishment when the Ford Motor Company experimented with conveyor belts that streamed parts to the worker. Yes, they suspected they would slice some time off production. But the results were stupendous. Using 14 workers doing repetitive tasks, magneto assembly time plunged to five minutes. Chassis production time dropped from 12 hours to 2.3. The result? Output soared and per car cost dropped. By the mid-1920s, the lowest priced Model-T was $260.

    An economist would say that productivity had created an affordable car.

    Productivity from moving assembly line

    Magneto production on one of Ford’s first moving assembly lines. From: Car and Driver

    Where are we going? To why our productivity growth slowdown is a 2016 worry.

    Productivity Growth

    U.S. productivity growth has been declining:

    Slowing U.S. productivity growth

    A Productivity Mystery

    No one is sure why U.S. productivity growth has been declining.

    Unpaid services

    One possibility is the understated output for unpaid services. We could look for example at Wikipedia. During the 1990s, having purchased an economy set of the Encyclopedia Britannica for $1500I would have boosted the recorded output of the U.S. economy. Now though, when I use Wikipedia to read about the history of Britannica, I give the U.S. Department of Commerce no indication that a service had been produced.

    Similarly, a record of national output could exclude data about any of the following:

    Productivity omissions

    From: “Beyond Goods and Services: The (Unmeasured) Rise of the Data-Driven Economy” (2012)


    It is also possible that the productivity problem is capital. Defined as the tools, equipment and inventory that we use to make goods and services, our capital stock has been growing more slowly. Less of a boost in capital can mean a decline in the growth of output.


    Or we could have an innovation pullback. Whether from less entrepreneurial zeal or a dearth of new technology, the problem could be creativity. A University of Maryland economist says that since the 1980s we’ve had insufficient “creative destruction” through which firms die and more successful start-ups ascend. To that we could add economist Tyler Cowen’s hypothesis in The Great Stagnation that, having picked all of the low hanging fruit, innovation has plateaued.

    Princeton economist and former Fed Vice Chair Alan Blinder perfect sums up our productivity woes at the end of a WSJ column: Asking whether we really have a technology slowdown or just a temporary hiatus, he says, “Tune in 20 years from now to find out. In the meantime, worry.”

    Our Bottom Line: Why Productivity Matters

    Because productivity is all about getting more output per unit of input, our standard of living has been able to rise during the last century. And that returns us to where we began. One result of more productivity was the Model T and the countless ways that an affordable auto elevated our standard of living.

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