Tooth Fairy and Money Supply

This is great. I hope James Kwak at Baseline Scenario didn’t bite his tongue – it’s pretty far into his cheek. Read the whole thing at Paul Ryan Criticizes Bernanke for Failing to Contain Tooth Fairy:

In a Congressional hearing today, Representative Paul Ryan (R-WI), chair of the House Budget Committee, strongly criticized Federal Reserve Chair Ben Bernanke for failing to contain the severe inflation threat posed by the Tooth Fairy…

Healthcare Act – Unintended Consequences

So far I’ve largely stayed away from commenting on the lawsuits and Republican/Tea Party attempts to repeal the Affordable Care Act of 2010 that everyone refers to as Obamacare (odd choice of name since it doesn’t set up any government-operated healthcare facilities – it’s mostly about insurance, not care delivery). It seems that there are three sources of opposition to the healthcare reform act. There are those who are opposed to the “mandate”, the requirement that individuals buy healthcare insurance or suffer financial penalties for failing to do so. This is basis it appears of the opposition that has become several lawsuits trying to stop the act. Then second, there are those, primarily many Congressional and Senate Republicans who are simply opposed because Obama proposed it, despite the fact that the program as passed is essentially the same thing that Republican Mitt Romney created in Massachusetts. Finally there are those who opposed to any attempts to find affordable ways in which less privileged Americans can obtain healthcare – they prefer an everyman-for-himself world.  Best as I can tell, these are the folks calling it “socialism” despite the fact the program is best thing to ever happen to privately-owned insurance companies.

This post is relevant to the first opposers, the ones who claim to want affordable insurance to be available for all but oppose the “mandate” on some sort of liberty and constitutional grounds. Now a caveat first.  I am no great fan of the bill as passed. It is far, far from what I would have preferred.  My preference would have been for Medicare eligibility for all,not just seniors – a single payor system with private delivery of care. But, I think those who oppose the mandate, may find, should they win their lawsuits, that they run into that bane of economic policy proposals in the real world: unintended consequences. It seems to me there’s two likely types of unintended consequences that these people will find unpleasant.  First is that should the mandate fail, then the only way to achieve affordable health insurance for even just a majority of Americans is to go to a public-option or single-payor system. The reason is because the healthcare insurance market does not and cannot work successfully without the broad-based coverage that only a mandate, public option, or single-payor can provide. Healthcare insurance, with private insurance companies leading the way, is prone to serious adverse selection problems. Insurance companies only want to insure people who have no claims and only people who need healthcare want to buy coverage until the unexpected happens. It’s the dynamic that caused the nation to have this debate and why every developed nation has some sort of public-option, mandate, or single-payor. The Incidental Economist explains more here and  gives examples of the Massachusetts experience here. So if opponents succeed and get the mandate repealed, they may very well find  that healthcare affordability is more popular than they perceive and the nation may be forced to their even-less liked options: single-payor or public option.  Oops, unintended consequence.

Another possible unintended consequence has to do with a variety of other  laws that most of the mandate-opponent conservatives favor.  Constitutional law scholar Laurence Tribe observes that should the Supreme Court strike down the mandate as unconstitutional, the logic they would have to use would reverse and/or jeopardize a wide range of other federal laws that the court and conservatives have upheld. Such as the ability of the Federal government to “regulate” or prohibit the growing and use of marijuana in one’s own backyard for your own consumption. Through some tortured logic, the same Supreme Court justices that would have rule against the mandate held that growing something for your own use that your state doesn’t prohibit still constitutes “interstate commerce”.  Hmm.  So it the mandate goes, it might create a whole meaning for “medical marijuana”.

Why Are Food Prices Are So Volatile?

Food and energy prices are notoriously volatile and make it difficult to read consumer price indices.  But why are they so volatile? Why are things that we buy everyday in relatively constant quantities so volatile in their prices?  Well, it’s all explainable by looking at the price elasticities and the slopes of the supply and demand curves.  Since we do buy them in relatively constant quantities, that makes demand relatively inelastic.  Since supply in the short term is also inelastic (it takes time to plant and grow more food), the result is that even very small shifts in demand (more people or a preference for meat which takes more grain) or small shifts in supply (a poor harvest in some country) will make price shift a lot. For a more detailed explanation and graphs, see below the fold how EconomicsHelp.Org explains it:

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Cross-Price and Income Elasiticity of Food

From EconomicsHelp.org, an example of cross-price and income elasiticities of food.  The data comes from an interactive, query-able database of international food elasticities at the US Dept of Agriculture. By using these elasticities, we can estimate the impact(s) of food price increases. In times such as 2011, when international foodstuff commodities such as wheat, corn, and soybeans are rising significantly because of drought, bad harvests, and rising demand, economists can use these estimates to figure out the impact in different countries, both in terms of total money that must be switched from other spending to food, but also which other products or services will be hurt or helped by such budget re-allocations  consumers.

This graph shows the Cross Elasticity of demand for various goods with respect to food.

I choose two countries – Bangladesh (low income) and the UK (relatively high income)

Source: [link]

What this means is that if the price of food rises 10%, then in the UK, demand for education falls by about 0.05%.

However, Bangladesh has a Cross Elasticity of demand of 0.32. Therefore a 10% rise in food prices would cause a 3.2% fall in demand.

The highest cross elasticity of demand is for recreation. Recreation is what we would call a luxury good. If income falls, we can lose spending on recreation because it is not essential.

It shows that for a poor country like Bangladesh, if food prices go up, it means a significant fall in spending on recreation. Demand in the UK remains mostly unchanged.

It’s a good example of how rising food prices will have much different effects in different countries. When food prices rise in the UK, it is an inconvenience. When food prices rise in developing countries, it makes families rearrange their whole budget.

Empty Threats

One argument often provided for against raising the state taxes on rich individuals and large corporations is the belief that higher taxes will simply cause them to move to low-tax states.  Now there’s data on how serious the threat to move is: not very. Yves Smith at naked capitalism writes of a study by Young and Varner. In a nutshell, using New Jersey as a test case since it raised taxes to very high levels for the rich yet is very close to neighboring states which makes moving plausible, they found the tax increase worked. A less than 0.1 response of people moving and net the tax raised a billion dollars and reduced income inequality modestly. Even stronger evidence was provided by a study of Swiss cantons. See complete comments at the link.

Quelle Surprise! Tax Increases on Rich Do Not Lead to Exodus

A solid paper by Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes” (hat tip Matt) helps debunk the idea that high income individuals will pull up stakes if their taxes go up. The case study is an interesting one: New Jersey’s tax increases on top earners. New Jersey made the biggest increase of all US states, and also has the distinction of having a low income tax state (Connecticut) nearby, meaning that tax-sensitive residents had an option of moving not all that far to escape the increase, which presumably would allow them to maintain family ties.

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The study results might be labeled “Millionaires are People Too.” Economists and lobbyists love to stress often base their arguments upon economic rationality and contend that everyone is out to maximize his personal bottom line. But moving is a hassle and costly, and most people’s social lives are grounded in their community and their workplace. Relocating is likely to result in a longer commute for those still employed, would cause disruption to any children still in school and would weaken many existing social relationships. ..

…The general conclusion of the paper is plausible: that moderate tax increases on the rich, even if no neighboring jurisdictions follow suit, is unlikely to lead to much in the way of emigration and will thus be a net plus in terms of tax receipts.

Inflation Erodes Real Value of Minimum Wage

Although the minimum wage in 1968 was $1.25, prices were a lot lower then. In terms of today’s purchasing power using today’s 2010 dollars, the real value of the minimum wage in 1968 was $9.86.  Since the minimum wage (Federal) was increased in 2009 to $7.25, that means that the minimum wage is still 25% lower than in 1968.  Graph of the changes over time and source data at ReMapping Debate. and at TableauSoftware.com.