Bastiat’s Bastions

Ron Utt and Brian Riedl of The Heritage Foundation have a new paper out that examines the newest piece of pork in the US Senate.  The paper details what, it appears, would be the largest earmark in history, as well as earmarks for other pet projects. 

All of these projects are being added to the Senate version of a supplemental bill, one that is supposed to fund the war in Iraq and the rebuilding along the Gulf Coast.  Guess how many of the new earmarks are related to the war and the rebuilding?

 NM 

I know that our democracy is designed to move slowly, but this seems a bit ridiculous. From the April 14th Wall Street Journal:

The Treasury Department, following a series of hostile court rulings on the way it assesses the federal excise tax on phone service, is working on a plan to stop collecting the levy and refund billions of dollars to consumers and businesses, according to people familiar with the matter.

This is one of those taxes that many people probably don't realize they pay. In fact, I would bet even fewer people know that this tax was first instituted in the 1800's. The law was passed to help pay for the Spanish-American "war," and was put in place largely because phones were luxury items during that period. Even though the courts have said the tax must be eliminated, and even though Congress has killed it (at least) once, the tax still gets tacked onto your phone bill. From the same article:

When the tax was enacted in 1898, telephone service was something of a luxury and the levy affected relatively few Americans. As telecommunications expanded to become a fixture of modern life, the tax has become a steady revenue stream that administrations of both political parties have been loath to surrender. In 2000, Congress repealed the tax, at an estimated five-year cost of $24 billion. Former President Clinton vetoed the measure over budget concerns.

Maybe it will be stopped in time for its 110 year anniversary?

NM

I have yet to buy or sell one single item on eBay. My wife, however, frequents the site. Below, I’ve pasted an email that she just received from eBay.

Louisiana sellers - Protect your right to sell items on eBay

Dear Community Member,

If you sell more than two items a year on eBay, the Louisiana Auctioneers Licensing Board wants to force you to be licensed as auctioneers or auction businesses. You may have to pay a licensing fee, obtaining surety bonds, and submit a notarized copy of your voter registration card. All this just to sell a few items on eBay!

Nearly every eBay seller in Louisiana is at risk. One Louisiana seller already shut down his eBay business. Unless we act quickly, thousands more Louisiana businesses may be at risk.

Protect your right to sell items on eBay. Make your voice heard! Write your elected representatives today!

Sincerely,

eBay’s Government Relations team

I would guess this is the result of either (a) competition appealing to the government for help, or, (b) the government trying to increase its tax revenue. Either way, the issue does not seem to have made big news. If anyone has anything on this, I’d love to hear about it.

NM

***Note: The correct link is now included.

For those of you who are sick of discussing external costs in my class, here is one more example.

Ultimately, this post will be concerned with smoking as it affects small children inside vehicles. Click here for the article that lets you know what is being proposed in Arkansas (there is an identical link at the end of the post).

As you likely know, smoking creates an external cost. For the uninitiated, an “external cost” is the term used by economist to refer to a cost sufferred by someone other than the producer or decision maker. In the case of smoking, these external costs are referred to as “2nd hand smoke”.

Economic theory tells us that because the property rights to “clean air” are poorly defined, the level of smoking will be beyond the economically effiicent level. Essentially the problem is that the price of using clean air is zero for the decision maker. As with any economic good, when the price decreases, people use more of it. The decision maker is not forced to pay the costs they are incurring on others. The result is too much smoking.

There are a couple of solutions to the problem. The first is to tax the external cost generating behavior. Taxing the decision maker will cause the person to reduce the activity in question, and in a perfect world perhaps the revenues collected from the taxes could be given to the injured parties.

A second solution is for the folks to get together and bargain (the Coase Theorem). In the current situation, it is pretty difficult for a 4 year old child to bribe their parents not to smoke (I tried once with my mom - she demanded more cash that my allowance allowed).

Another solution would be to let people sort themselves out geographically. The non-smoking and smoking portions of restaurants would be an example. But again, a 4 year old child might not get a vote here (and some would argue that employees might not get a vote either).Finally, there is something economists call regulation - basically a rule or law. Same link as above, but click here to find out what is being proposed in Arkansas to solve the problem.

Do you think the regulation is too onerous? Too lax?

–CT

On March 21^st, I submitted a blog post titled “A Middle Eastern Petition,” about how some of the funding for the recent “Cartoon Riots” in Pakistan was coming from Pakistani merchants, in what looked like an attempt to reduce foreign competition. Today, my concern is with another attempt to squash foreign competition in the form of the labor coming over our southern border. Not only is Congress attacking the illegal immigration issue, but so are many state legislatures (see URL: http://www.breitbart.com/news/2006/03/29/D8GLH6H00.html).

There are now several different proposals floating around the halls of Congress. Some proposals of these are designed to keep people out whether they are criminals or not, skilled or not, have terrorist ties or not, or sick or not. Such proposals reduce the labor resources available to the country, limiting our ability to produce, increasing scarcity of both goods and resources.

Just as the Middle Eastern “Cartoon Riots” have a variety of motives, including the rent-seeking motive mentioned in my previous blog post, so does the clampdown on immigration in the U.S. Bastiat, in his first chapter of Economic Sophisms, wrote about “Scarcity and Abundance” (go to chapter 1 in series 1), and how we cannot make ourselves better off as a society by increasing scarcity. This, however, is exactly what so many of our citizens and their representatives seem to think. It is, to them, imperative to cut the country’s workforce.

Here, with us so close to New Orleans, we should notice that many of the workers that are in New Orleans now with the rebuilding effort are Hispanic. They are living in tent communities in places like City Park. I don’t know if any are illegal immigrants or not, but the fear that hiring immigrants that would come from some of these new immigration proposals would surely both increase the cost of rebuilding New Orleans as well as make it take a lot longer.

That keeping out foreign competition would make us worse off was shown clearly in Bastiat’s “A Petition,” (go to chapter 7 of the first series, and again, this little three page essay is a must read). Further, as mentioned in my “A Middle Eastern Petition” post, the rent seeking that goes on to erect entry barriers entails the use of valuable resources, resources that are used to keep production down instead of producing anything of value, so that there is an additional cost to putting up walls to competition. Not only is there a great deal of waste created in erecting the entry barriers, there is a similar waste that is created by laws designed to keep workers out in everything from the illegal smuggling of human beings and a significant number dying in trying to enter the country, as well as the waste in resources that are now devoted to related occupations, such as forgers, to produce fake documents.

While being more careful about the folks we let into the country may be a good thing, so that we can reduce the flow of criminals, terrorists and freeloaders, we need to welcome people who come here to contribute their labor in exchange for a better life.

Morris Coats

Read this article on changes the airlines are making in the way they are pricing flight amenities. There really are two issues in this article – perhaps this is too much for one post, but here goes.

The first issue is called bundling.

The idea is that there is more than one way a firm could “package” its product for pricing purposes. An airline, for instance, could charge one inclusive price and include “complimentary” blankets, beverages, and meals (called pure bundling). Another way would be to price the ticket, the meals, and the blankets separately (called unbundled). A third way would be to offer both an all-inclusive price and allowing consumer to purchase each separately (mixed bundling).

The economic theory behind bundling suggests that for bundling to be profitable, the prices that consumers are willing to pay for each component have to be negatively correlated. The people who place a low value on beverages are the people who place a high value on blankets. It would seem airlines are no longer finding bundling profitable (at least in the coach section).

The second issue, price discrimination, is what I find more interesting in this article.

For those of you who have never been exposed, or skipped my guest lecture in Dr. Coats’ class on Friday, price discrimination can be one of two possibilities:

(1) charging different prices to groups of customers despite the fact that the cost of servicing both groups is identical
(2) charging the same prices to groups of customers despite the fact that the cost of servicing both groups is different

An example of the first type is different prices for seniors and adults in movie theaters. An example of the second type is charging one price at an all-you-can-eat buffet. Firms will find it profitable to price discriminate if they can. A textbook example of price discrimination is business travels versus leisure travelers. As inelastic demanders, business travelers pay higher prices than leisure travelers pay.

But why not go further? Don’t you think that people will pay more for an aisle seat that the seat in the middle? Wouldn’t it increase the profits of the airline if they were to charge a higher price for this seat? Northwest Airlines does. Carol does not like it.

Some international carriers also charge for aisle or bulkhead seats. Northwest Airlines in March began charging $15 for exit rows some forward aisle seats.

Carol Mundt, a retiree who lives in the Washington area, travels frequently for visits and vacations. She heard about Northwest’s new seat assignment charges.

“I was appalled that they would charge me for my aisle seat,” she said while waiting to pick up a friend at Washington’s Reagan National Airport.

Sorry Carol. Might I recommend the seat in the middle?

Any thoughts as to why airlines just started this recently?