Bastiat’s Bastions

How could we at Bastiat’s Bastions turn down an opportunity to promote an award in journalism called the “Bastiat Prize?” The International Policy Network is the sponsor of this competition.

According to their website, “IPN’s Bastiat Prize for Journalism was inspired by the 19th-century French philosopher and journalist Frédéric Bastiat.

“The prize was developed to encourage and reward writers whose published works promote the institutions of a free society: limited government, rule of law brokered by an independent judiciary, protection of private property, free markets, free speech, and sound science.”

The Bastiat Prize for Journalism provides 3 monetary awards, a first prize of $10,000, a second prize of $4,000 and a third prize of $1,000. In addition, they have begun a new prize this year to recognize the influence of bloggers and the new media, the Bastiat Prize for Online Journalism, which has one winner with a monetary award of $3,000.

The purpose of the prize is certainly consistent with what we try to do here at Bastiat’s Bastions and something we wholeheartedly support, even though we are not sponsoring the prize (if we had that much money to give away here at Bastiat’s Bastions, I am sure it would more likely to go toward the Chad Turner Sports Economics Field Research Fund, the Morris Coats Rent Seekers’ Lobby, and/or the Norbert Michel “Tax Rebates for Norbert Michel” Foundation).

For more information about the awards, take a look at IPN’s press release.

-MC

According to this article in the Washington Post by Lori Montgomery (”Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look,” Washington Post, 5-27-2009), the Democrats in Washington are looking at the European-style Value-added tax (VAT), a stealth version of the sales tax, to finance the Obama health care plan. In 1993, just a little earlier in Clinton’s first year in office, the VAT was proposed as a way to finance the Clinton health care plan. Back in 1993 I wrote an op-ed article for my local Chamber of Commerce magazine, and that article is still appropriate. Below is the article.

“A Tax at Every Turn,” R. Morris Coats, Thibodaux Chamber of Commerce Magazine, 24(4):10-11 (August, 1993).

With the worst possible political timing, Clinton’s team floated a trial lead ballon on April 15, the idea of using a Value-Added Tax (VAT) to finance Clinton’s health care reform plan. (By the way, it still escapes me how we must come up with an extra $100 billion dollars to adopt health care reform so that we can reduce the federal budget deficit.) Just mentioning the word “Tax” on that dreaded day signifies the administration’s lack of understanding of the plight of America’s taxpayers. Suggesting that we use a Value-Added Tax to finance anything in this country signifies either the administration’s lack of understanding of public finance or its intent to play slight-of-hand tricks with the federal budget.

For now the Clinton administration has abandoned the Value-Added Tax. It is fortunate that they were not politically astute. This is a tax idea that is likely to resurface in this administration in a few years. The administration’s suggestion that we adopt this tax because all our friends are doing it is a reason that never washed in my adolescence. I hope that voters are adult enough not to ever let the Stealth Tax to become law.

In his camaign for president, Obama said over and over, that if elected, taxpayers in the bottom 95% of taxpayers would not see their taxes go up by one cent. The word to stress there, apparently, was “see” because the VAT tax would certainly raise taxes, and raise them the most on the poor, but it is indeed a stealt tax, and taxpayers will never see this coming. If we adopt a sales tax, let us adopt a real sales tax.

-MC

Ok, not that smart, but every once in a while, I wake up and I’m glad I know some economics. As I’ve stated before, when you figure it out, it makes the world make just a bit more sense. You can explain things that others have a tougher time explaining.

For example, read this article, a cornucopia of economics. The topic is products that are “bucking the trend” of the recession.

A partial list of products are mentioned in the article that are doing well during the recession: running shoes, gardening seeds, condoms, cheap wine, mac & cheese, gold coins, tanning products. The article goes on to offer various explanations.

Let’s see what types of explanations are offered up in the article — first from some who don’t quite get the economics — or at least aren’t looking at this behavior through the lens of economics:

“The focus on the family hearth is something that has happened in nearly every recession. It’s, `How can I have more fun at home?’” said Paco Underhill, whose company, Envirosell, monitors the behavior of shoppers and sellers across the U.S. and in other countries.

He then continues…

“People are much more focused on their homes and their immediate happiness and they’re buying things that they can use themselves – seeds, fishing equipment. Lipstick and chocolate are small rewards that make you feel better.”

The author of the article chimes in with:

“Recession shoppers also are drawn to items that make them feel safe, both personally and financially.”

Ok, well and good, but here is a better way — a 30 second explanation of a simple model that explains it better — Gary Becker’s time allocation model.

It the model, there are three uses of time. Working, household production, and consumption.

Work is to earn money to buy goods – we call it market time because it is time spent in the labor market. If we want more goods, we need to work more. Cooking, cleaning, doing laundry is called household production time. And finally, the time we spend enjoying stuff is consumption time.

A key insight is that most enjoyment generating activities involve the combination of all three types of time and there are different ways to get the same end “commodity”.

For example, I enjoy eating lasagna. Consider making some lasagna from scratch. You’ll buy some ingredients (which involved some market time to pay for them), cook it up (household prodution time), and then eat the meal (consumption time.) Alternatively, you can buy Stouffer’s lasagna in box. Likely more market time (higher price), but less household production time (just defrost), and a comparable amount of consumption time.

Likewise, you can get a nicely pressed dress shirt by sending to the cleaners (relatively more market time) or wash and iron it yourself (relatively more household production time.)

We haven’t explained what is going on with the recession, but here we go.

During recessions, people often observe a decrease in their wage — sometimes people lose their jobs a very big reduction in their wage. In Becker’s model, there are two things that happen when people’s wages decrease.

First, the value of market time declines. Basically, folks will not earn as much per hour. This makes people substitute away from market time (work less) and engage in more household production.

Second, people change the types of “goods” they enjoy. We say that people switch from “goods-intensive commodities” to “time-intensive commodities”. A time-intensive commodity involves relatively few goods and relatively more consumption time. An example would be reading a novel. It takes up a lot of time in reading, but you don’t have to work much to get the goods (the novel). On the other hand, A goods-intensive commodity involves relative more goods, and relatively little consumption time. An example there would be a roller coaster. It doesn’t take very long (let’s imagine short lines), but you do have to pay a good amount for the ticket (and hence requires a fair amount of market time.)

The article talking about eating-in more and gardening are perfect examples of the first type of change. What used to be achieved through market time (purchasing goods) is now “produced” at home (household production time.)

Examples of the second?

Running? Sounds time-intensive to me. One pair of shoes (a bit of market time) and hours of enjoyment. Not surprising. Consider the alternative explanation:

Those on the go are not shying away from footing the bill for sturdy running shoes. Sales increased 2 percent in 2008, said Tom Doyle at the National Sporting Goods Association in Mount Prospect, Ill. “Runners aren’t going to hurt themselves to save a few bucks,” he said. Likewise, sales of bicycle helmets are up as parents continue to spend money to protect youngsters, he said.

I like mine better. The same goes for kids on bicycles.

Sex? I can’t speak for everyone, but I think for most people, this is a time-intensive activity. There is some market time involved (see the article for what is happening to condom sales), but there shouldn’t be that much market time involved (unless you are David Vitter?).

Please fellows (and ladies), no comments on dinner tabs and jewelry store receipts as examples of my underestimating how goods-intensive sex is for even regular folks.

Two last quotes from the article — I think they get it…

There’s a general tendency to trade down, according to Leo J. Shapiro & Associates, a consulting firm in Chicago. That means eating dinner at the kitchen table instead of restaurants, … and shopping at do-it-yourself auto parts stores.

“If you’re used to eating out, maybe you’re now buying a high-end steak at the supermarket,” said Bill Patterson, a senior analyst in Chicago with Mintel International, which supplies consumer, product and media intelligence.

Gee whiz, those ideas sound familiar I’d rather work for Leo J. Shapiro or Mintel than Envirosell…

Maybe next post I’ll pull out some macro for gold coins and some micro to explain why inferior goods aren’t really about being inferior (chocolate sales?). On that note, off to eat my left-over mac & cheese — but I assure you that has nothing to do with the recession — I just like my spirals.

–CT

Immigration is a contentious topic. Rather than add to the contention, I wish to clarify a poor economic argument that is frequently used in immigration policy debate. Many people support immigration because, “Americans aren’t willing to do the jobs that immigrants are willing to do.” This statement is potentially erroneous in that it confuses the notion of quantity of labor supplied with that of labor supply. Whereas quantity of labor supplied is the amount of labor a person or group provides at a given wage, labor supply is a schedule specifying a person or group’s quantity of labor provided at each possible wage level.

The statement quoted above stems from an observation—that some U.S. jobs are held almost exclusively by immigrant workers. From this observation, a fallacious conclusion—that domestic workers would not work in such jobs at any wage level—is drawn. To say that a group’s quantity of labor supplied is zero for a given job and wage is to say nothing about the group’s behavior at other wage levels. The graph below represents a possible depiction of a labor market with and without immigrant labor.

The graph features two supply curves, one showing quantity of labor supplied by citizens at each possible wage and another showing quantity of labor supplied by the combination of citizens and immigrants at each possible wage. In the absence of immigration, citizens would earn a wage of w_zero an hour and work q_zero hours in the featured labor market. However, if immigrants enter the country and work in the same market, the supply of labor shifts right (quantity of labor supplied increases at any given wage). In equilibrium, workers in this market now earn w_one per hour and work q_one hours. However, by looking along the labor supply curve of citizens, we find that citizens supply zero hours of labor to this market at a wage of w_one . Given their work and non-work alternatives, citizens opt out of the type of labor depicted in the presence of immigration (and its wage-depressing effect). However, citizens will rejoin this workforce if the wage rises above w_one .  Economist Chad Turner points out that this inducement of domestic labor at the higher wage will not obtain if the domestic labor supply curve is sufficiently leftward-shifted.   

Though immigrant laborers do benefit other members of our economy (e.g., consumers and producers), jobs would not go undone without them. Rather, in the absence of immigrant laborers, relevant market wages would move upward and induce the participation of citizens.

-SS

There are two types of people in this world—those who would root for the Los Angeles Lakers and those who would root for the Los Angeles Clippers. It doesn’t matter where you live, if you’ve heard of either of these organizations, or if you’ve even heard of basketball. These two organizations are as class symbolic as East Egg and West Egg in The Great Gatsby. The Lakers have trophies and Hollywood fanfare. The Clippers have cheap tickets and cheaper tickets. In that it was largely created by the people of Los Angeles, this dichotomous sports scene is a reflection of our cultural values.

In reality, the Lakers are a collection of really good basketball players, and the Clippers are a collection of really good basketball players. Each team plays in the same building of the same city. In other words, the two teams are substantially quite similar. However, substance means little to status-seeking humans. Somewhere along the line, the Lakers became a symbol for status. They won prolifically with Elgin Baylor and Jerry West in the 1960s and later with Kareem Abdul Jabbar, Magic Johnson, and James Worthy. All this winning begat high-powered fans, and high-powered fans begat more high-powered fans. If you wanted to be considered somebody in L.A., it became a pretty good idea to be seen at a Lakers game, and the closer to the sweat the better. In economics, we call sitting courtside at Lakers games a likely “status signal” in that such an action is typically less about seeing and more about being seen. Courtside Lakers fans signal that they know how to choose and break into a high-powered group of individuals. For a signal to be effective, it must separate the individual from others in a desired way. Therefore, a signal cannot be accessible to all individuals. Courtside Lakers tickets are anything but accessible. At around $90, average ticket prices were 57 percent higher for the Lakers than for the Clippers in 2007-2008, and this number gravely underestimates the proportional difference for quality seats. Such a substantial price difference existed despite the fact that the Clippers garnered more combined victories than the Lakers in the three seasons prior to 2007-2008. It wasn’t the basketball game but the status game that drove up demand for (ticket prices of) home Lakers games.

Despite all of this focus on the Lakers, the Clippers do exist. I saw them play on television once. Moreover, the Clippers have people who attend their games. One might call such individuals basketball fans, but one wouldn’t be entirely correct. It seems that Clippers fans are a mix of basketball fans and fans of counter-culture. Counter-culturalists get a perverse thrill out of paddling upstream in the river of society. They like to do things so completely opposite of societal norms as to give the rest of society the proverbial middle finger. Counter-culturalists engage in what economists might call, “countersignaling.” Whereas attending a Lakers game typically signals that a person has status, attending a Clippers game might countersignal that a person wants to see some quality basketball and could care less about such associations or labels. This does not imply that a famous person could not be a Clippers fan. However, it does indicate that a famous person who decides to root for the Clippers places less value upon being a visible part of an established status club. Billy Crystal is a classic example of the countersignaling celebrity. Crystal roots for the New York Mets in baseball and the Clippers in basketball (In terms of status, the Mets are to the Yankees as the Clippers are to the Lakers). Crystal is proof that to have status is not necessarily to engage in superficial status games.

The distinction between the Lakers fan and the Clippers fan is as much about ideology as it is about position. One might take fan countersignaling as a form of rebellion from the oppression of status contest. It is a rejection of the notion that we should, or even can, love something selfishly.

-SS

(and everyone else who has rooted for the other set of really tall guys in L.A.)

As we should all know by now, there is an outbreak of swine flu spreading around the world. While this strain of flu has proved rather deadly in Mexico, it has not yet been so fatal in its U.S. cases. While most of the response in the U.S. and the rest of the world has been cautious, some voices have been on the panic end of the scale. Vice President Joe Biden, always ready to open his mouth wide enough to fit his foot, told the press that he advises his family to avoid air travel, and any other mass transportation mode, such as trains and buses (see the USA Today’s “Today in the Sky” air travel blog by Ben Mutzabaugh).

The problem is that many people will take Biden’s advice. But shouldn’t that reduce the spread of swine flu? Maybe. But there is something else that people need to keep in mind that may not occur to them. By thinking that air travel is now more costly, in terms of one’s health and the risk of getting the flu, this increase in the non-monetary cost flying will reduce the amount of miles traveled by plane and will surely increase the miles traveled by automobile if there is a significant positive cross-elasticity of demand between air and auto travel. Shane Sanders, Assistant Professor of Economics at Nicholls, had a paper published recently in the Journal of Economic Education that should help us think about value of Biden’s advice.

In his paper with Dennis Weisman and Dong Li, Sanders discusses the substantial cross-price elasticity of airline and automobile travel, which suggests that higher prices for airline travel induces people to substitute auto for air transportation. Of course, health fears, as they raise the perceived cost of air travel, should also induce substitution into auto travel.

The problem is that auto transportation is not as safe as air travel, and it is not even close. According to the Department of Transportation’s statistics (shown and cited in the Sanders, Weisman and Li paper), for every 100 million air passenger miles traveled, there are .3 fatalities, while for every 100 million auto passenger miles traveled, there are .97 fatalities, so passenger mile for passenger mile traveled , auto transportation is over 32 times as deadly.

So, without realizing the relative safety of air and auto transportation, when people hear that Vice President Biden is suggesting to his own family that they avoid air travel, some people will switch from air travel where the chance of a fatality is very small, even after factoring in the very minute chance of getting swine flu, and passing it on to family members. In this case, the number of fatalities, including swine flu, is likely to increase.

-MC