Our Planet Today » Economics

Pigovian taxes save lives

admin — Sun, 08 Jan 2012 11:23:19 +0000

n January 1, 1991, the federal excise tax on beer doubled, and the tax rates on wine and liquor increased as well. These changes are larger than the typical state-level changes that have been used to study the effect of price on alcohol abuse and its consequences. In this paper, we develop a method to estimate some important effects of those large 1991 changes, exploiting the interstate differences in alcohol consumption. We demonstrate that the relative importance of drinking in traffic fatalities is closely tied to per capita alcohol consumption across states. As a result, we expect that the proportional effects of the federal tax increase on traffic fatalities would be positively correlated with per capita consumption. We demonstrate that this is indeed the case, and infer estimates of the price elasticity and lives saved in each state. We repeat this exercise for other injury-fatality rates, and for nine categories of crime. For each outcome, the estimated effect of the tax increase is negatively related to average consumption, and that relationship is highly significant for the overall injury death rate, the violent crime rate, and the property crime rate. A conservative estimate is that the federal tax reduced injury deaths by 4.7%, or almost 7,000, in 1991.

This article was originally posted on Greg Mankiw’s Blog

The Increased Role of the Minimum Wage

admin — Sun, 16 Oct 2011 16:34:55 +0000

I am in the process of revising my intermediate macro book. As I was updating the section on the minimum wage, I was struck by how much the data has changed over three years. The minimum wage has a much larger role now than it did three years ago, in large part because of the legislated increase in the minimum wage from $5.15 to $7.25 an hour. For example, comparing the 2010 data with the 2007 data, one finds the following:

The percentage of all hourly-paid workers paid at or below the minimum wage rose from 2.3 to 6.0 percent.
The percentage of part-time workers paid at or below the minimum wage rose from 5 to 14 percent.
The percentage of teenage workers paid at or below the minimum wage rose from 7 to 25 percent.

Question for class discussion: In light of what is occurring with the overall economy during this period, how would you evaluate the policy change regarding the minimum wage?

This article was originally posted on Greg Mankiw’s Blog

Left-Digit Bias

admin — Thu, 29 Sep 2011 19:52:19 +0000

Chapter 22 of my favorite textbook discusses various ways in which individual decisionmaking deviates from standard notions of rationality. Here is a new one to me (from the NBER Digest):

In Heuristic Thinking and Limited Attention in the Car Market (NBER Working Paper No. 17030), authors Nicola Lacetera, Devin Pope, and Justin Sydnor focus on the used car market and ask whether it is affected by consumers exhibiting a heuristic, or short cut, known as left-digit bias: the tendency to focus on the left-most digit of a number while partially ignoring other digits.

Using data that come from wholesale auctions encompassing more than 22 million used car transactions, the authors document significant price drops at each 10,000-mile threshold from 10,000 to 100,000 miles, ranging from about $150 to $200. For example, cars with odometer values between 79,900 and 79,999 miles, on average, are sold for approximately $210 more than cars with odometer values between 80,000 and 80,100 miles, but for only $10 less than cars with odometer readings between 79,800 and 79,899.

This article was originally posted on Greg Mankiw’s Blog

Fred Bergsten on Net Exports

admin — Thu, 29 Sep 2011 13:26:19 +0000

In today’s NY Times, Fred says government policy should focus more on increasing net exports. He says a lot of wise things, especially regarding the need for better intellectual property protection abroad. One part of the article, however, puzzles me. He writes:

The artificially low value of the renminbi — it is 20 to 30 percent less than what it should be — amounts to a subsidy on Chinese exports and a tariff on imports from the United States and other countries.

Think about this for a moment. As I discussed in this old Times column, the way China affects the exchange rate is by buying dollars in foreign exchange markets and using them to buy dollar-denominated assets (such as Treasury bonds). Yet the exact same mechanism is at work whenever any foreigner invests in the United States. All capital flows into the US raise the value of the dollar in foreign exchange markets and make our exports less competitive. Does Fred object to all capital flows into the US? Would he prefer some degree of capital flight from the US because it would lower the value of the dollar and promote exports? That seems to be the logical implication of what he is saying, but I doubt that’s what he intends to suggest. So I am puzzled.

This article was originally posted on Greg Mankiw’s Blog

Why I am not very worried about inflation just now

admin — Fri, 23 Sep 2011 17:39:21 +0000

Click on graphic to enlarge.

Several people have asked me in recent days if the Fed’s aggressive attempts to get the economy going will lead to galloping inflation to go along with our weak economic growth. It is possible that this might occur down the road, of course, but I don’t see it happening just now. The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm’s costs. A persistent inflation problem is unlikely to develop until labor costs start rising significantly. Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data. The same thing is not happening now. This is one reason I think the Fed is on the right track worrying more about the weak economy than about inflationary threats.

This article was originally posted on Greg Mankiw’s Blog

18. Impact of Trade Deficit on crisis and drop of Industrial production in the USA and 5 European major countries: France, Germany Italy, Spain and UK

admin — Tue, 13 Sep 2011 18:00:32 +0000

Graph 1. Real Value-Added of Industry per capita in France, Germany, Italy, Spain, the United Kingdom and the United States. Source: Elaborated by Guisan(2011) from OECD statistics.

Graph 2. Trade Balance of EU27 and industrial real value-added of EU5. Source: Elaborated by Guisan(2011) from Eurostat Statistics. Left axis for Extra-EU27 Trade Balance. Right axis for Value-Added of Industry. Source: Elaborated by Guisan(2011) from Eurostat and OECD statistics.

Industrial production in the Europea Union for 2000-2010: The lack of enough european policies of support to industrial production have led to decreasing real Value-Added of industry and increasing trade deficits in the balance of goods of EU27, as it is shown in the graph 2 above.

The impact of wrong policies on industrail development of many European countries has been very strong for the period 2008-2010, and some politicians and citizens are showing concern and disagreement with the EU policies in this regard. Diminution of industrial production implies negative consequences for the European Union such as lower production in other sectors, more unemployment and increse of international debt.

Graph 1 shows the evolution of real Value-Added of industry per capita in the 5 major European Union countries (those with highest levels of Gross Domestic Product and Population) for the period 1985-2010.

European Union problems: The European Union documents usually assumes that “The EU´s external trade policiy contributes to Europe´s competitiveness in foreign markets” and includes declaration as the following one: “The EU has a common trade policy whereby the European Commission negotiates trade agreements and represents the EU´s interest on behalf of its 27 Member States. The European Commission consults Member States through an advisory committee which discusses the full range of trade policy issues affecting the Community including multilateral, bilateral and unilateral instruments”. In spite of these declarations many people think that policies for industrial development and less deficit should be addressed.

It is clear that the European public opinion and many leaders do not agree with those trade policies that have led to increase indebtness and diminution of industrial development. Some reactions are active in France and the United Kingdom, and surely in other countries, which may be of interest to recover industrial development and favor a balanced trade of the European Union with extra-UE partners, or at least to diminish the trade deficit.

Trade deficit in EU27: In fact in year 2009 the trade balance was negative in 17 countries, positive in 10, and negative for EU27 as a whole.

Countries with positive trade balance of goods in 2009: Belgium, Czec Rep., Denmark, Finland, Germany, Hungary, Ireland, Netherlands, Slovakia and Sweden.

Countries with negative trade balance of goods in 2009: Austria, Bulgaria, Cyprus, Estonia, France, Greece, Italy, Latvia, Lithuania, Luxembourg, Malta, Portugal, Romania, Slovakia, Spain and the United Kingdom.

The most positive balance in Euros per capita, more than 1000 € in year 2009, corresponded to Belgium (1194), Denmark (1465), Germany (1644), Ireland (8568), Netherlands (2380).

The most negative balance in Euros per capita, less than -1000 € in year 2009, corresponded to Cyprus (-5918), Greece (-2531), Luxembourg (-4940), Malta (-3283), Portugal (-1787), Spain (-1081) and the United Kingdom (-1513).

Crisis and solutions: The European Union should show concern about high deficits in extra-EU trade, particularly if those deficits lead to diminution of industrial production per capita, particular if dismantling EU´s industry is not accompanied by an increase in the International Investment Position or in other variables that can guarantee sustained development. European Economic Policies should be adressed to diminish deficit in extra-EU balance for the EU as a whole and to make sustainable the intra-EU imbalances among countries. Sustainability presents to options: 1) all EU countries would promote industrial development to a degree enough to guarantee real convergence with the most advanced economies. 2) European Unions would guarantee flows of credit from EU countries with superavit to EU countries with deficit, like among different regions of a single country. European Parliamente and Commission may choose a mix of both options, but they should offer to all EU countries opportunities for sustainable development.

Selected newspaper article on industrial problems in EU countries:

Telegraph: Where will Britaint´s manufacturing revival come from?, by Louisa Peacok, 2nd June 2011.

This article was originally posted on Euro American Association of Economic Development Studies

Krugman on Barro

admin — Tue, 13 Sep 2011 02:14:46 +0000

Paul’s comment on Robert’s latest column confuses me. Paul shows a graph establishing that the investment share of GDP is procyclical, as if that refutes Robert’s viewpoint about what ails the economy. But that fact is hardly a surprise. As I put it recently, “the most volatile component of G.D.P. over the business cycle is spending on investment goods.” Moreover, I know Robert well enough, having been his colleague for about a quarter century, to know that he knows the macroeconomic time series as well as anyone.

The problem that Paul glosses over is that correlation does not imply causation. Paul appears to jump to the conclusion that this correlation establishes that the the business cycle is the driving force behind investment spending. But it could just as easily be the opposite (or a third factor driving both). I am completely confused as to why Paul thinks this graph establishes much of anything at all.

I should note, as an aside, that Robert is the second most cited living economist. That fact does not imply that everything he says is correct. (And indeed Robert and I disagree often in Harvard seminars.) But it does suggest that one should not be so glib in summarily rejecting his point of view.

This article was originally posted on Greg Mankiw’s Blog

17 Crisis, Development, Voice of Good Economists in Greece, Portugal and Spain, and comparison with other OECD countries. Euro-American Association Development Report 2011.

admin — Wed, 27 Jul 2011 22:57:53 +0000

Source: Guisan(2011) based on OECD National Accounts Statistics

Greece: beautiful Egina

The graph shows real value-added per capital in industrial sectors. One of the main causes of economic crisis in Greece, Portugal and Spain is their low level of industrial development in comparison with more advanced OECD countries. Countries with low levels of industrial production per head very often experience twin deficits: 1) unbalanced foreign trade, with more imports than exports, and 2) government deficit because, as a result of the low level of industrialization, income from taxes and other sources is below the amount needed to provide satisfactory levels of public services. The attemps to foster production in building and services without a proper development of industry per capita, like it has happened in Spain and other countries for the period 1995-2007, is usually unsustainable and lead to economic crisis as it has happened in Spain for the period 2008-2010.

There are good economists in those countries but unfortuantely policy makers usually do not listen to their good advice. People do not expend too much, but instead most people in those countries work hard and expend little. It is not fair to throw blame on citizens for the causes of the crisis when the main cause is the lack of good economic policies, at national and European Union level, in order to foster industrial development.

Here we will include references to interesting articles and Websites where good economists give useful advice to improve development and avoid economic crises in those countries.

LISTEN TO THE VOICE OF GOOD ECONOMISTS AND GET OUT OF THE CRISIS

Recommended readings about crisis and development in Greece:

“Development is the only solution. Seventeen Proposals for a New Development Stategy”, Azariadis, C.(Washington Universitry, MO, USA), Ioannides, Y. (Tufts University,MD,USA), Pissarides, A. (LSE, London UK) (2010).
“Is there a strategy that can free Greece from the grip of today´s unprecedental economic and social crisis and place her on a path of sustainable development and solid prosperity? The signers of this article believe that the answer is yes if the country is willing to go beyond the measures of fiscal austerity and market reform advised by the EU-ECB.IMF “troika”. We predict that market reforms will not succeed unles they are supplemented by powerful pro-growth policies. The real choice of Greece is not between solvency and default or between reform and stagnation; it is between prosperity and underdevelopment”. See full article

Website on Greek Development: http://greekeconomistsforreform.com/

Recommended readings about the positive impact of manufacturing on development, through intersectoral relationships in Europe, America and other areas:

Guisan, M.C.(2006).”Industry, Foreign Trade and Development: Econometric Models of Europe and North America, 1965-2003” International Journal of Applied Econometrics and International Development, Vol.3-1. Article free on line: click on ”Download”" at: http://ideas.repec.org/a/eaa/ijaeqs/v3y2006i1_1.html

Guisan, M.C.(2007).”Industry, Foreign Trade and Development: Econometric Models of Africa, Asia and Latin America, 1965-2003” International Journal of Applied Econometrics and International Development, Vol.4-1. Article free on line: click on the Abstrac page and then on “Download”" at the Web site of Journal IJAEQS.http://ideas.repec.org/s/eaa/ijaeqs.html

GUISAN, M.C. and AGUAYO, E. (2007). “Production by Sector in The European Union: Analysis of France, Germany, Italy, Spain, Poland nnd The United Kingdom, 2000-2005″. Regional and Sectoral Economic Studies, Volume 7-1. On line at: http://ideas.repec.org/a/eaa/eerese/v7y2007i7_3.html

Other interesting articles at our journals AEID and RSES

This article was originally posted on Euro American Association of Economic Development Studies

A Question About Tax Incidence

admin — Mon, 25 Jul 2011 20:14:52 +0000

A reader alerts me to this story:

The expiration of the FAA reauthorization on Friday means some aviation taxes are no longer being collected. These include a 7.5 percent sales tax on U.S. air transportation and a 7.5 percent sales tax on the purchase of air miles, said fare watcher FareCompare.com. Additionally, taxes on jet fuel are also reduced.

“Friday evening we adjusted prices so the bottom line price of a ticket remains the same as it was prior to the expiration of federal excise taxes, etc.,” [said] American Airlines spokesman Tim Smith.

The reader asks how to reconcile this story with the basic theory of tax incidence, according to which consumers and producers share the burden of taxes.

What a good exam question! Stop and answer the question yourself before proceeding. If you need help, click through and read the article. It provides some clues.

—–
My answer: It appears that the supply of airline seats is perfectly inelastic. With inelastic supply, the incidence of the tax falls entirely on producers; conversely, all the benefit of the tax cut is enjoyed by producers.

Is the assumption of inelastic supply realistic? Not generally, but here the situation might be different. The story goes on to say:

Neidl also said the benefit to airlines would be minimized if Congress reached a deal soon to resolve the partial FAA shutdown.

“It looks to me like it’s going to be very temporary,” Neidl said. “So whatever effect it has, it’s going to be very minor.”

In response to a change that is expected to be very temporary, airlines might be reluctant to adjust the quantity of seats supplied. That is, the assumption of inelastic supply might not be so bad.

If the tax cut were to persist, however, the larger profit margins would encourage a supply response. In that case, some of the tax cut, perhaps most of it, would be passed on to consumers.

This article was originally posted on Greg Mankiw’s Blog

A Good Exam Question

admin — Tue, 05 Jul 2011 03:02:46 +0000

Dean Baker endorses and expands upon an idea of Ron Paul’s. I think the idea is crazy, but at least it is crazy in an interesting way. Here it is, in a nutshell:

According to Congressman Paul, to deal with the debt-ceiling impasse, we should tell the Federal Reserve to destroy its vast holding of government bonds.
Because the Fed might have planned on selling those bonds in open-market operations to drain the banking system of the currently high level of excess reserves, the Fed should (according to Baker) substantially increase reserve requirements.

This would be a great exam question: What are the effects of this policy? Who wins and who loses if this proposal is adopted?

STOP READING. Think about the question yourself for a few minutes.

—–
DID YOU REALLY ANSWER THE QUESTION?
—–

Okay. Here is my answer:

Part 1 is just an accounting gimmick. Since the Fed is really part of the government, the bonds it holds are liabilities the government owes to itself. Destroying the bonds has no direct economic effect. It is just like an increase in the debt ceiling, without any other policy changes attached.

Part 2 is a form of financial repression. Assuming the Fed does not pay market interest rates on those newly required reserves, it is like a tax on bank financing. The initial impact is on those small businesses that rely on banks to raise funds for investment. The policy will therefore impede the financial system’s ability to intermediate between savers and investors. As a result, the economy’s capital stock will be allocated less efficiently. In the long run, there will be lower growth in productivity and real wages.

This article was originally posted on Greg Mankiw’s Blog