In the debt ceiling debate going on i Washington the question has come up if the closing of tax loopholes is a tax increase or not. Since Republicans refuse to raise taxes, instead closing tax loopholes is seen as a potential compromise. I would argue that the question to be asked shouldn't be if the closing of loopholes is a tax increase or not, rather we should ask if the effects on the economy of closing tax loopholes is the same as the effects of raising taxes. Since it is the economy we should care about and not semantics.
A tax increase has a negative effect on the economy largely because it leaves less money in peoples pockets leading to lower consumption, which is the driving factor of economic growth. The effect of closing tax loopholes is that people and companies will pay more taxes, so it would have the same negative effects as a tax increase.
Progressive taxes, making the rich pay a higher percentage of their earnings, has the effect of making hard work, education and risk taking pay less, thereby discouraging it and negatively effecting the economy. The American tax system is highly progressive in theory but not in practice since there is a multitude of tax loopholes keeping taxes on high earners low. Economist Milton Friedman has argues that if it wasn't for all these loopholes Americas progressive tax system would have destroyed the American economy. So the closing of tax loopholes would mean a higher tax burden on wealthy Americans, which would discourage the kind of activity that is beneficial to the economy, the same way a new tax on the well off would.
Higher taxes might well be necessary to keep down the American deficit, but we should not pretend that the negative effects of closing tax loopholes is not the same as the negative effects of a tax increase. They are.
Wednesday, July 27, 2011
Tuesday, July 26, 2011
Starving the Leviathan
The more ideological wing of the American Republican party is convinced that the growth of the state is a threat to their liberty and their way of life. Their chosen tactic in combating this nemesis is tax cuts. By withholding the necessary founds they intend to keep the size of the state in check. This plan sounds pretty reasonable and everyone hates to pay their taxes, so it should have a wide appeal beyond the ideological hard core.
The plan however seems to ignore the fact that the American government can borrow money freely and doesn't have to pay for its spending with the taxes it collects, it has been borrowing to pay for its lavish ways for years. Sure there will come a point where borrowing is no longer a possibility, but that far off in the future. Investors feel no anxiety over lending money to America as evident by the very low interest it is required to pay on its bonds. So any tax cuts are more likely to feed the deficit then starve the state.
If it is their wish to shrink the state this is better done in a more direct way by cutting spending, even if this sound much less pleasant then lower taxes in the ears of the electorate. This could even be done in combination with higher taxes. As long as the taxes go to paying off the deficit and not pay for new government spending.
The plan however seems to ignore the fact that the American government can borrow money freely and doesn't have to pay for its spending with the taxes it collects, it has been borrowing to pay for its lavish ways for years. Sure there will come a point where borrowing is no longer a possibility, but that far off in the future. Investors feel no anxiety over lending money to America as evident by the very low interest it is required to pay on its bonds. So any tax cuts are more likely to feed the deficit then starve the state.
If it is their wish to shrink the state this is better done in a more direct way by cutting spending, even if this sound much less pleasant then lower taxes in the ears of the electorate. This could even be done in combination with higher taxes. As long as the taxes go to paying off the deficit and not pay for new government spending.
Tuesday, July 12, 2011
The more the merrier - Does the launch of Google+ benefit consumers?
With the rapid decline of MySpace, Facebook has quickly acquired a near monopoly position among social networks. Now Google is entering the arena with its new Google+ product, potentially threatening Facebook’s dominant position. Is this a good thing for consumers? The knee-jerk reaction is ‘Yes, competition always benefits the consumer’ but this might be one of those odd cases where it is not necessarily so.
Competition is usually thought of as necessary to force companies to better service their customers and keep prices down. In the case of Facebook this would mean continuous improvements to their product. The recent introduction of the geo-tagging feature Places allowing users to ‘check-in’ to visited locations would be good example of an action to keep the service relevant and competitive. It is also likely the threat of competition that is keeping Facebook a free service and probably more importantly it prevents them from terrorizing the consumer with more and excessively intrusive advertisements.
At the same time Facebook’s dominant position greatly benefits consumers by gathering all their friends and family on to one service. Imagine a system where people owned phones of different colors, red, green, blue and purple - and only a red phone could be used to call another red phone and so on. Requiring users to own multiple phones and keep track of which color phones their friends own. It is hard to see this situation benefiting consumers, it is more likely to drive them mad. Social networks are usually not developed to interact with each other so a situation with several large competing networks would likely look very much like our different colored phone scenario, requiring users to jump between different services depending on who they wish to interact with.
So what conclusion can we draw from this? It would appear to me that the most beneficial situation for consumers would be one where one social network has a near monopoly position, let’s say this company is Facebook. But other services like Google+ are successful enough to keep the dominant network on its toes and force it to stay competitive but not successful enough to challenge its position as most peoples primary social network. Alternatively completely replacing the old giant and taking its monopoly position.
It might be that social network market is a natural monopoly which can’t sustain more than one major player and the market leader can maintain its monopoly only as long as it offers the best alternative for consumers, supposedly both features and user base would be taken in to account when evaluating this. Once it fails to satisfy its customers it is quickly cannibalized by another service which then takes its place as the new dominant service.
Competition is usually thought of as necessary to force companies to better service their customers and keep prices down. In the case of Facebook this would mean continuous improvements to their product. The recent introduction of the geo-tagging feature Places allowing users to ‘check-in’ to visited locations would be good example of an action to keep the service relevant and competitive. It is also likely the threat of competition that is keeping Facebook a free service and probably more importantly it prevents them from terrorizing the consumer with more and excessively intrusive advertisements.
At the same time Facebook’s dominant position greatly benefits consumers by gathering all their friends and family on to one service. Imagine a system where people owned phones of different colors, red, green, blue and purple - and only a red phone could be used to call another red phone and so on. Requiring users to own multiple phones and keep track of which color phones their friends own. It is hard to see this situation benefiting consumers, it is more likely to drive them mad. Social networks are usually not developed to interact with each other so a situation with several large competing networks would likely look very much like our different colored phone scenario, requiring users to jump between different services depending on who they wish to interact with.
So what conclusion can we draw from this? It would appear to me that the most beneficial situation for consumers would be one where one social network has a near monopoly position, let’s say this company is Facebook. But other services like Google+ are successful enough to keep the dominant network on its toes and force it to stay competitive but not successful enough to challenge its position as most peoples primary social network. Alternatively completely replacing the old giant and taking its monopoly position.
It might be that social network market is a natural monopoly which can’t sustain more than one major player and the market leader can maintain its monopoly only as long as it offers the best alternative for consumers, supposedly both features and user base would be taken in to account when evaluating this. Once it fails to satisfy its customers it is quickly cannibalized by another service which then takes its place as the new dominant service.
Wednesday, July 6, 2011
Why are Vending Machines such a common sight in Tokyo?
If you were to walk around in Tokyo or any other major city in Japan you are likely to be struck by the extraordinary amount of vending machines. Vending machines selling everything from soup to flowers to CDs. This isn’t something we westerners are used to and is likely to strike us as somewhat odd. It is only natural to wonder why this is?. How come vending machines are so much more prevalent in Tokyo than in big Western cities like Berlin or Stockholm?
A friend of mine who is studying Japanese in Tokyo explained that this is typical of the anti-social culture in major Japanese cities. But being an economics student I couldn’t help to wonder if there isn’t an economic dimension to this question as well.
Economists love to think about the cost of things. One thing Japanese cities are famous for are their high costs of living. Their highly centralized population’s demand for housing is enormous, which is driving up the price of apartments. When the cost of living is high, workers will demand higher wages. High wages makes hiring more costly. Vending machines could be an easy way to get around paying expensive workers.
Of course its not only apartment prices that are high as a result of dense living conditions. Renting space for your business will also be expensive, even if it is just a small shop. Vending machines take up very little space and are usually placed outside on the sidewalk. That way they do not take up valuable business space. When rents are high these things matter.
Another thing Japan is famous for is the country’s unusually low level of immigration. It is almost impossible to become a Japanese citizen and it is very hard to get permission to stay and work. Combining this with an aging population and we have a shortage of cheap labor. The supply of cheap labor will affect wages. Wages eat into profits which makes vending machines look even more attractive.
Another result of Japans highly centralized population is that there will likely be a demand for a wide variety of products at all hours. Of course there is always a small part of the population who would like a cup of soup or a bouquet of flowers at 2 in the morning. But only when a large amount of people reside within a relatively small area will that demand be large enough to be worth serving. It's not much more expensive to have a vending machines turned on 24 hours a day then 12 hours a day, so that market made up of sleepless tokyoites is easy to service. In comparison hiring workers for the night shift will be expensive, not only is the costumer base smaller at night, workers are likely to be more expensive. Working retail at night is both uncomfortable and less safe then working days. Workers will likely demand to be compensated for this inconvenience. Demands you will not be hearing from vending machines.
A friend of mine who is studying Japanese in Tokyo explained that this is typical of the anti-social culture in major Japanese cities. But being an economics student I couldn’t help to wonder if there isn’t an economic dimension to this question as well.
Economists love to think about the cost of things. One thing Japanese cities are famous for are their high costs of living. Their highly centralized population’s demand for housing is enormous, which is driving up the price of apartments. When the cost of living is high, workers will demand higher wages. High wages makes hiring more costly. Vending machines could be an easy way to get around paying expensive workers.
Of course its not only apartment prices that are high as a result of dense living conditions. Renting space for your business will also be expensive, even if it is just a small shop. Vending machines take up very little space and are usually placed outside on the sidewalk. That way they do not take up valuable business space. When rents are high these things matter.
Another thing Japan is famous for is the country’s unusually low level of immigration. It is almost impossible to become a Japanese citizen and it is very hard to get permission to stay and work. Combining this with an aging population and we have a shortage of cheap labor. The supply of cheap labor will affect wages. Wages eat into profits which makes vending machines look even more attractive.
Another result of Japans highly centralized population is that there will likely be a demand for a wide variety of products at all hours. Of course there is always a small part of the population who would like a cup of soup or a bouquet of flowers at 2 in the morning. But only when a large amount of people reside within a relatively small area will that demand be large enough to be worth serving. It's not much more expensive to have a vending machines turned on 24 hours a day then 12 hours a day, so that market made up of sleepless tokyoites is easy to service. In comparison hiring workers for the night shift will be expensive, not only is the costumer base smaller at night, workers are likely to be more expensive. Working retail at night is both uncomfortable and less safe then working days. Workers will likely demand to be compensated for this inconvenience. Demands you will not be hearing from vending machines.
Rejecting the ‘blood for oil’ myth while not dismissing the importance of Gulf oil
When discussing the Iraq war someone inevitably makes the loony claim that America went to war to war to steal Iraq’s oil. There is usually not much more behind this accusation then Iraq has a lot of oil so obviously President Bush being an old oil man must be out to steal it. But those people are still not quite as out there as those who claim the moon landing was a fake or the CIA blew up the Twin Towers, since the oil buried beneath and around the Persian Gulf is central to the conflict, it is just not as simple as someone trying to get his hands on someone else’s oil.
Even if it started out that way in 1990, the year we have to start in order to understand the US-Iraq conflict. Back then Saddam wanted to build himself an Arabian empire starting with his invasion of tiny oil rich Kuwait. Weak, nearly undefended and sitting on immense oil resources Saudi Arabia along with its Gulf neighbors feared they would be next. So they invited in American troops to defend them in what is known as operation Desert Shield. This huge sacrilege of infidels on holy Muslim ground was what would kick off Bin Laden’s anti-western crusade, but that’s another story. Dessert Shield soon turned in to Dessert Storm as America went on to liberate Kuwait. This solved the most imminent problem of how to respond to Saddam’s invasion but not the bigger problem of the threat a powerful Iraq run by a seemingly mad dictator posed to the oil resources on which the free world’s economies depended. Here the Bush senior and junior differed in their opinions. The father wanted to leave Saddam in power with restrictions on what kind of weapons he could possess while the son thought it better to march on Bagdad. Since the father was the president that was obviously the course taken but the views of the son are equally important given later developments.
These weapon restrictions mainly involved so called WMD such as chemical and nuclear weapons, the former Saddam had used in his genocidal campaign against the Kurds and the second he was known to be developing (at least until the Israelis bombed the reactor ten years earlier). But restrictions were also placed on the Scud missiles Saddam had indiscriminately rained down on Israeli cities in an attempt to gain Muslim support for his war. These restrictions proved to be inefficient as Saddam toyed with the weapons inspectors leading President Clinton to repeatedly bomb Iraq in order to make them comply.
Then came the September 11 attacks which made America feel vulnerable like never before. While an enemy like Saddam was barely tolerated before that was now seen as unacceptable. So even if saying the second Gulf War was a war for oil is wrong, oil plays a central role in understanding why America and Iraq were enemies in the first place. America’s like all other industrial economies is dependent on oil imports, America with its dominant military force has taken on the old British role of making sure the world economy’s oil supply is safe. Looking at the war as something that started in 2003 it is easy to understand how some might believe it was fought to gain control over Iraq’s oil, especially when told so by various America haters. But with a longer perspective one should be able to understand how this is foolish while still appreciating the role oil plays in America’s relationship with the Middle East.
Even if it started out that way in 1990, the year we have to start in order to understand the US-Iraq conflict. Back then Saddam wanted to build himself an Arabian empire starting with his invasion of tiny oil rich Kuwait. Weak, nearly undefended and sitting on immense oil resources Saudi Arabia along with its Gulf neighbors feared they would be next. So they invited in American troops to defend them in what is known as operation Desert Shield. This huge sacrilege of infidels on holy Muslim ground was what would kick off Bin Laden’s anti-western crusade, but that’s another story. Dessert Shield soon turned in to Dessert Storm as America went on to liberate Kuwait. This solved the most imminent problem of how to respond to Saddam’s invasion but not the bigger problem of the threat a powerful Iraq run by a seemingly mad dictator posed to the oil resources on which the free world’s economies depended. Here the Bush senior and junior differed in their opinions. The father wanted to leave Saddam in power with restrictions on what kind of weapons he could possess while the son thought it better to march on Bagdad. Since the father was the president that was obviously the course taken but the views of the son are equally important given later developments.
These weapon restrictions mainly involved so called WMD such as chemical and nuclear weapons, the former Saddam had used in his genocidal campaign against the Kurds and the second he was known to be developing (at least until the Israelis bombed the reactor ten years earlier). But restrictions were also placed on the Scud missiles Saddam had indiscriminately rained down on Israeli cities in an attempt to gain Muslim support for his war. These restrictions proved to be inefficient as Saddam toyed with the weapons inspectors leading President Clinton to repeatedly bomb Iraq in order to make them comply.
Then came the September 11 attacks which made America feel vulnerable like never before. While an enemy like Saddam was barely tolerated before that was now seen as unacceptable. So even if saying the second Gulf War was a war for oil is wrong, oil plays a central role in understanding why America and Iraq were enemies in the first place. America’s like all other industrial economies is dependent on oil imports, America with its dominant military force has taken on the old British role of making sure the world economy’s oil supply is safe. Looking at the war as something that started in 2003 it is easy to understand how some might believe it was fought to gain control over Iraq’s oil, especially when told so by various America haters. But with a longer perspective one should be able to understand how this is foolish while still appreciating the role oil plays in America’s relationship with the Middle East.
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