Monthly Archives: October 2009

Average Marginal Tax Rate

From Mankiw:

From Barro and Redlick.



Fixed rates and protectionism: monetary stability as a guise?

Paul Krugman has an interesting blog post on comparing current protectionist policies in Ecuador put in place that are similar to those put in place in the U.S. during the great depression.   The reason? Krugman points to a new paper that yields evidence to suggest that protectionist policies were a crude means of attempting to gain monetary stability as opposed to the popular argument that it was just simply economic ignorance.   Assuming that this new paper is correct in its findings, ( which makes sense given the tumultuous environment of international exchange rates and the gold standard during the depression era) Krugman may have missed the difference between the Ecuadorian economy and the depression era U.S.

While the Ecuadorian dollar being pegged to the U.S. is an appropriate similarity to the gold standard, the U.S. was flush with gold reserves pre-depression, which marked it as an economic juggernaut for international lending.  This is a starkly different position than what Ecuador is in right now.

While the protectionist policies Ecuador has decided to use may help stabilize their monetary stability, Krugman failed to highlight an important peice of what Ecudor actually put it on: (from the article he quoted, here)

In January 2009 Ecuador announced a series of stiff import restrictions on 630 tariff lines, affecting 8.7 percent of its ‘tariff universe’ and 23 percent of the volume of imports. Duties were raised on 369 tariff lines and quota restrictions imposed on 271 others for a one-year period. They cover products ranging from processed foods and shoes to cars, mobile phones and sunglasses, as well as many other goods that can be manufactured in Ecuador.

Ecuador insisted that the measures it proposed were necessary to balance its widening current account deficit.

As you can see in bold, whether or not this really is a correct justification for stabilizing their monetary system, what Ecuador has done invariably (or intentionally) is take down the forced liberalization that the WTO places on many other developing nations.  In essence, Ecuador has made a move that will protect infant industries, which would hopefully help Ecuador be able to level the playing field concerning international trade.  This level of protectionism, for at least their infant industries, has been proven to work in many of the high growth Asian developing nations including South Korea, China, Malaysia, Taiwan, and Vietnam.   Ecuador has been able to use monetary stability as a guise for doing something more important for their economic development.  The best part? The WTO is unphased, as they will let Ecuador do what their doing for now and hopefully, they will keep it that way.

Krugman, there is a deep moral here and that is to give Ecuador the right to develop their economy, whether it is in the name of monetary stability or just plain old protectionism.

WANTED Analytics: Oct 09 Job Forecast -224,000

WANTED: Analytics posted their October 09 Job Forecast for the BLS numbers coming out on November 6th.   WANTED predicts that there will be a job loss of -224,000.  An upward trend since the previous month due to higher Unemployment Insurance claims.  Not as high as they wanted to forecast given marginal increases in the amount of online job ads.


Industrial hemp production begins in MT: Tests DEA’s hands-off policy

The DEA had just recently set out a directive that would not pursue those who used or distributed medical marijuana.   What I didn’t think of was that this would also may make tacit acceptance of industrial hemp farming, as I have blogged about KY trying to pass the legalization of industrial hemp production.

Hemp was already legal to produce in MT.  Now, a woman has decided to test the DEAs directive by being the first person licensed to grow over 160 acres of industrial hemp.

Russia raising taxes on beer

From Free Market Mogo on the Economist:

From the Economist:

The average Russian already drinks 30 litres of hard liquor a year, six times the amount in the EU, while imbibing a modest 77 litres of beer, a little less than a typical European. Pushing up beer prices is far more likely to encourage drinkers to swallow even more vodka or dodgy but cheap home-made spirits than to convince them to give up booze altogether. Then again, it will give Russia’s huge—and largely locally owned—vodka industry reason to raise a glass.

So I pose the question: Is this an intended or unintended consequence? If they seek to curb alcohol consumption, Russia could tax all alcohol, not strictly beer. If they seek to curb substitutes to vodka, which is largely Russian-owned, then they have applied the correct policy.

That’s interesting because during my research in alcohol demand, particular types of alcohol (beer, wine and liquor) are not considered substitutes.  Now, I am mostly familiar with the measured elasticities of beverage types in the U.S, but from what I have seen from the worldwide aggregate studies, (mostly Europe and U.K.) the same conclusions translate. Beer is the most inelastic of either of the three, so it makes sense that beer takes the hit in order to maximize revenue. (and maybe hopes of benefiting a Russian vodka industry) No doubt a cultural component is involved, but generally, I would put my money on not much of an increase in vodka sales other than seasonality and standard growth expectations.

Should we tax water?

If you ever read Henry George’s Progress and Poverty, you may already be familiar with his ideas on taxation.  If not, (I haven’t read it) he basically says this: just tax land.  Makes sense? Well, when trying to find money for a health care system, this article outlines it nicely:

Land, to George, was the resource for earning money, or just living: Only hoboes could get by without renting a slice of it. Land was not just natural but limited, so it belonged, in the truest sense, to the nation. Other taxes put an undue burden on human activity: Income tax weighed on productivity (wages and profits); a sales tax put a burden on trade; a “property tax,” which involves not just land but the structures on top of it, burdened development. To George, it was simple logic that a government should raise taxes from the value of land.

So, the benefits are obvious. The article then moves towards the idea of taxing water. And why not?

“The biggest thing is water,” Gaffney says. “In an arid state, water is worth more than land, or at least as much. But it’s totally exempt from taxation. It’s an enormous source of revenue that’s not being taxed at all. In fact, it wouldn’t even have to be a tax because, legally speaking, the state [of California] owns all the water. … So the state should simply charge a rental for the use of its water. But not only does it not charge for people taking water out — it subsidizes them by paying for the works that are necessary to store and distribute the water.”

I think the relevant term is “ass-backwards.” Meanwhile, Americans argue about their income tax and whether some of it should help complete strangers cover their medical costs.

So, tax land AND water, and the emotional component of state spending is unequivocally taken out of the equation.

I like this. I like this so much that we should go even further. Not only should we completely banish all sales and income taxes – minus sin and other special excise taxes – we should add to the list taxes for environmental hazard, degradation and other externality costs. (within reason of course) Therefore, society nets a triple benefit – increased incomes, internalized externality costs (both from private or public land value AND the true cost against third parties) and public revenue from a true progressive tax structure. One could only dream…


On Dairy Farm Subsidies

Obama just signed a bill of $350 million in emergency subsidies to help dairy farmers get through falling milk prices.  A good op-ed from Edward Lotterman on why it isn’t that simple.  Something to ponder:

Costs are complex, including fixed costs, which do not change with different levels of production, and variable costs that do. Moreover, both fixed and variable costs vary from one region of the country to another. Blanket assertions about what it “costs to produce” milk or corn or anything else may be true for some producers but false for others.

Government programs intended to cover such asserted “costs of production” for farmers as a whole invariably are well above the costs of production for many operators. They ramp up output in response to government-originated profits, thus increasing supply. This drives down market prices, and even more government help is demanded.

Across crop and livestock products, there is a long history of government programs that ratcheted up profits for lower-cost producers and, over the long run, helped drive high-cost producers out of business.

In a way, it seems that no matter what distortion is presented, the market reverts back to equilibrium. The only difference here is that farmers reap large profits from the government when otherwise the economic profits wouldn’t be present. The $350 million the treasury hands over will, in the long run, yield the same outcome.

Is the dairy lobby that strong? Why doesn’t the government take into consideration that a) milk isn’t necessarily a nutritional necessity as much as maybe corn would be (that’s arguable) or b) factor in the unneeded environmental waste caused by over production?

UPDATE (10/27): So dairy farms are effectively handling the oversupply of milk.  In a sad, but necessary, move for the industry, co-ops have ordered that dairy cows be killed in order to bring the milk price up.  So far it has been effective.  If dairy farmers are effectively handling the downturn, then why did we give dairy farmers $350 million?