Economics in Plain English » Cost/Benefit Analysis

Has the Baby Market Failed?

Jason Welker — Thu, 10 Nov 2011 08:34:50 +0000

The tools of economics can be applied to almost any social institution, even the decision of individuals in society whether or not to have children. All over the rich world today, potential parents have decided against having babies, the result being lower fertility rates across much of Europe and the richer countries in Asia, including Japan, South Korea and Singapore. Lower fertility rates have some advantages, such as less pressure on the country’s natural resources, but the disadvantages generally outweigh the benefits.

The story below, from NPR, explains in detail some of the consequences of declining fertility rates in the rich world, and identifies some of the ways governments have begun to try to increase the fertility rates.

The problem of declining fertility rates can be analyzed using simple supply and demand analysis. In the graph below, we see that the marginal private cost of having children in rich countries is very high. The costs of having children include not only the monetary costs of raising the child, but the opportunity costs of forgone income of the parent who has to quit his or her job to raise the child or the explicit costs of child care, which in some countries can cost thousands of dollars per month. Marginal private cost corresponds with the supply of babies, since private individuals will only choose to have children if the perceived benefit of having a baby exceeds the explicit and implicit costs of child-rearing.

The marginal private benefit of having babies is downward sloping. This reflects the fact that if parents have just one or two children, the benefit of these children is relatively high, due to the emotional and economic contributions a first and second child will bring to parents’ lives. But the more babies a couple has, the less additional benefit each successive child provides the parents. This helps explain why in an era of increased gender equality, families with three or more children are incredibly rare. The diminishing marginal benefit experienced by individual couples applies to society as a whole as well, therefore the market above could represent either the costs and benefits of individual parents or of society at large.

Notice, however, that that the marginal social benefit of having babies is greater than the marginal private benefit. In economics terminology, there are positive externalities of having babies; in other words, additional children provide benefits to society beyond those emotional and economic benefits enjoyed by the parents. The podcast explained some of these external, social benefits of having children: a larger workforce for firms to employ in the future, more people paying taxes, allowing the government to provide more public goods, more workers supporting the non-working retirees of a nation, and more competitive wages in the global market for goods and services. Higher fertility rates, in short, result in more economic growth and higher incomes for a nation.

When individuals decide how many children to have, they make this decision based solely on their private costs and benefits, since the external benefits of having more babies are enjoyed by society, but not necessarily by the parents themselves. Therefore, left entirely alone, the “free market” will produce fewer babies (Qe) than is socially optimal (Qso).

So what are Western governments doing about low fertility rates? The podcast identifies several strategies being employed to narrow the gap between Qe and Qso. In Australia households receive a $1000 subsidy for each baby born. In Germany mothers receive a year of paid leave from work. Here in Switzerland mothers get three months of government paid leave and $200 a month subsidy to help pay for child care after that. Each of these government policies represents a “baby subsidy”. In the graph above, we can see the intended effect of these policies. By making it more affordable to have children, governments are hoping to reduce the marginal private cost to parents, encouraging them to have more children, which on a societal level should increase the number of babies born so that it is closer to the socially optimal level (Qso).

Unfortunately, as the podcast explains, it appears that parents are relatively unresponsive to the monetary incentives governments are providing. This can be explained by the fact that the private demand (MPB) for babies is highly inelastic. Even if the “cost” of having a baby falls due to government subsidies, parents across the Western world are reluctant to increase the number of babies they have.

As we can see in the graph above, a subsidy for babies reduces the marginal private cost of child-rearing to parents. But the MPB curve, representing the private demand for babies, is highly inelastic, meaning the large subsidy has minimal effect on the quantity of babies produced. Without the subsidy, Qe babies would be born, while with the subsidy only Qs are born, which is closer to the socially optimal number of births at Qso, but still short of the number of births society truly needs.

The “market for babies” in rich countries is failing. Because of the positive externalities of having children, parents are currently under-producing this “merit good”. One of two things must happen to resolve this market failure. Either the marginal private costs of having babies must fall by much more than the government subsidies for babies have allowed, or the marginal private benefit must increase. Either larger subsidies are needed, or some moral revival aimed at encouraging potential parents to consider both the private and social benefits of having children when making their decisions.

Don’t you love economics? We make everything seem so logical! And like they say, it all comes down to supply and demand!

Discussion Questions:

What makes low fertility rates among parents in the rich world an example of a “market failure”?
What are the primary reasons fertility rates are lower in the rich world than they are in the developing world?
What are the economic consequences of lower birth rates? What are the environmental consequences of lower birth rates? Should government be trying to increase the number of babies born?
Why have government incentives for parents to have more babies failed to achieve the fertility rates that government wish they would achieve?
Do you believe that government can create strong enough incentives for parents to have more babies? If not, what will become of the populations of Western Europe and the rich countries of Asia given today’s low fertility rates? Should we be worried?

Too much debt or not enough demand? A summary of the debate over America’s fiscal future

Jason Welker — Tue, 16 Aug 2011 13:33:16 +0000

As yet another school year begins, we once again find ourselves returning to an atmosphere of economic uncertainty, sluggish growth, and heated debate over how to return the economies of the United States and Europe back onto a growth trajectory. In the last couple of weeks alone the US government has barely avoided a default on its national debt, ratings agencies have downgraded US government bonds, global stock markets have tumbled, confidence in the Eurozone has been pummeled over fears of larger than expected deficits in Italy and Greece, and the US dollar has reached historic lows against currencies such as the Swiss Franc and the Japanese Yen.

What are we to make of all this turmoil? I will not pretend I can offer a clear explanation to all this chaos, but I can offer here a little summary of the big debate over one of the issues above: the debate over the US national debt and what the US should be doing right now to assure future economic and financial stability.

There are basically two sides to this debate, one we will refer to as the “demand-side” and one we will call the “supply-side”. On the demand-side you have economists like Paul Krugman, and in Washington the left wing of the Democratic party, who believe that America’s biggest problem is a lack of aggregate demand.

Supply-siders, on the other hand, are worried more about the US national debt, which currently stands around 98% of US GDP, and the budget deficit, which this year is around $1.5 trillion, or 10% of GDP. Every dollar spent by the US government beyond what it collects in taxes, argue the supply-siders, must be borrowed, and the cost of borrowing is the interest the government (i.e. taxpayers) have to pay to those buying government bonds. The larger the deficit, the larger the debt burden and the more that must be paid in interest on this debt. Furthermore, increased debt leads to greater uncertainty about the future and the expectation that taxes will have to be raised sometime down the road, thus creating an environment in which firms and households will postpone spending, prolonging the period of economic slump.

The demand-siders, however, believe that debt is only a problem if it grows more rapidly than national income, and in the US right now income growth is almost zero, meaning that the growing debt will pose a greater threat over time due to the slow growth in income. Think of it this way, if I owe you $98 and I only earn $100, then that $98 is a BIG DEAL. But if my income increases to $110 and my debt grows to $100, that is not as big a deal. Yes, I owe you more money, but I am also earning more money, so the debt burden has actually decreased.

In order to get US income to grow, say the demand-siders, continued fiscal and monetary stimulus are needed. With the debt deal struck two weeks ago, however, the US government has vowed to slash future spending by $2.4 trillion, effectively doing the opposite of what the demand-siders would like to see happen, pursuing fiscal contraction rather than expansion. As government spending grows less in the future than it otherwise would have, employment will fall and incomes will grow more slowly, or worse, the US will enter a second recession, meaning even lower incomes in the future, causing a the debt burden to grow.

Now let’s consider the supply-side argument. The supply-siders argue that America’s biggest problem is not the lack of demand, rather it is the debt itself. Every borrowed dollar spent by the goverment, say the supply-siders, is a dollar taken out of the private sector’s pocket. As government spending continues to grow faster than tax receipts, the government must borrow more and more from the private sector, and in order to attract lenders, interest on government bonds must be raised. Higher interest paid on government debt leads to a flow of funds into the public sector and away from the private sector, causing borrowing costs to rise for everyone else. In IB and AP Economics, this phenomenon is known as the crowding-out effect: Public sector borrowing crowds out private sector investment, slowing growth and leading to less overall demand in the economy.

Additionally, argue the supply-siders, the increase in debt required for further stimulus will only lead to the expectation among households and firms of future increases in tax rates, which will be necessary to pay down the higher level of debt sometime in the future. The expectation of future tax hikes will be enough to discourage current consumption and investment, so despite the increase in government spending now, the fall in private sector confidence will mean less investment and consumption, so aggregate demand may not even grow if we do borrow and spend today!

This debate is not a new one. The demand-side / supply-side battle has raged for nearly a century, going back to the Great Depression when the prevailing economic view was that the cause of the global economic crisis was unbalanced budgets and too much foreign competition. In the early 30′s governments around the world cut spending, raised taxes and erected new barriers to trade in order to try and fix their economic woes. The result was a deepening of the depression and a lost decade of economic activity, culminating in a World War that led to a massive increase in demand and a return to full employment. Let’s hope that this time around the same won’t be necessary to end our global economic woes.

Recently, CNN’s Fareed Zakaria had two of the leading voices in this economic debate on his show to share their views on what is needed to bring the US and the world out of its economic slump. Princeton’s Paul Krugman, a proud Keynesian, spoke for the demand-side, while Harvard’s Kenneth Rogoff represented the supply-side. Watch the interview below (up to 24:40), read my notes summarizing the two side’s arguments, and answer the questions that follow.

Summary of Krugman’s argument:

Despite the downgrade by Standard & Poor’s (a ratings agency) there appears to be strong demand for US government bonds right now, meaning really low borrowing costs (interest rates) for the US government.
This means investors are not afraid of what S&P is telling them to be afraid of, and are more than happy to lend money to the US government at low interest rates.
Investors are fleeing from equities (stocks in companies), and buying US bonds because US debt is the safest asset out there. The market is saying that the downgrade may lead to more contractionary policies, hurting the real economy. Investors are afraid of contractionary fiscal policy, so are sending a message to Washington that it should spend more now.
The really scary thing is the prospect of another Great Depression.
Can fiscal stimulus succeed in an environment of large amounts of debt held by the private sector? YES, says Krugman, the government can sustain spending to maintain employment and output, which leads to income growth and makes it easier for the private sector to pay down their debt.
With 9% unemployment and historically high levels of long-term unemployment, we should be addressing the employment problem first. We should throw everything we can at increasing employment and incomes.
Is there some upper limit to the national debt? Krugman says the deficit and debt are high, but we must consider costs versus benefits: The US can borrow money and repay in constant dollars (inflation adjusted) less than it borrowed. There must be projects the federal government could undertake with at least a constant rate of return that could get workers employed. If the world wants to buy US bonds, let’s borrow now and invest for the future!
If we discovered that space aliens were about to attack and we needed a massive military buildup to protect ourselves from invasion, inflation and budget deficits would be a secondary concern to that and the recession would be over in 18 months.
We have so many hypothetical risks (inflation, bond market panic, crowding out, etc…) that we are afraid to tackle the actual challenge that is happening (unemployment, deflation, etc..) and we are destroying a lot of lives to protect ourselves from these “phantom threats”.
The thing that’s holding us back right now in the US is private sector debt. Yes we won’t have a self-sustaining recovery until private sector debt comes down, at least relative to incomes. Therefore we need policies that make income grow, which will reduce the burden of private debt.
The idea that we cannot do anything to grow until private debt comes down on its own is flawed… increase income, decrease debt burden!
Things that we have no evidence for that are supposed to be dangerous are not a good reason not to pursue income growth policies.
When it comes down to it, there just isn’t enough spending in the economy!

Summary of Rogoff’s argument:

The downgrade was well justified, and the reason for the demand for treasuries is that they look good compared to the other options right now.
There is a panic going on as investors adjust to lower growth expectations, due to lack of leadership in the US and Europe.
This is not a classical recession, rather a “Great Contraction”: Recessions are periodic, but a financial crisis like this is unusual, this is the 2nd Great Contraction since the Depresssion. It’s not output and employment, but credit and housing which are contracting, due to the “debt overhang”.
If you look at a contraction, it can take up to 4 or 5 years just to get back where you started.
This is not a double dip recession, because we never left the first one.
Rogoff thinks continued fiscal stimulus would worsen the debt overhang because it leads to the expectation of future tax increases, thus causing firms and households increased uncertainty and reduces future growth.
If we used our credit to help facilitate a plan to bring down the mortgage debt (debt held by the private sector), Rogoff would consider that a better option than spending on employment and output. Fix the debt problem, and spending will resume.
Rogoff thinks we should not assume that interest rates of US debt will last indefinitely. Infrastructure spending, if well spent, is great, but he is suspicious whether the government is able to target its spending so efficiently to make borrowing the money worthwhile.
Rogoff thinks if government invests in productive projects, stimulus is a good idea, but “digging ditches” will not fix the economy.
Until we get the debt levels down, we cannot get back to robust growth.
It’s because of the government’s debt that the private sector is worried about where the country’s going. If we increase the debt to finance more stimulus, there will be more uncertainty, higher interest rates, possibly inflation, and prolonged stagnation in output and incomes.
When it comes down to it, there is just too much debt in the economy!

Discussion Question:

What is the fundamental difference between the two arguments being debated above? Both agree that the national debt is a problem, but where do the two economists differ on how to deal with the debt?
The issues of “digging ditches and filling them in” comes up in the discussion. What is the context of this metaphor? What are the two economists views on the effectiveness of such projects?
Following the debate, Fareed Zakaria talks about the reaction in China to S&P’s downgrade of US debt. What does he think about the popular demands in China for the government to pull out of the market for US government bonds?
Explain what Zakaria means when he describes the relationship between the US and China as “Mutually Assured Destruction (MAD)”.
Should the US government pursue a second stimulus and directly try to stimulate employment and income? Or should it continue down the path to austerity, cutting government programs to try and balance its budget?

Rational behavior, opportunity cost, marginal analysis – An intro to the Economic way of thinking

Jason Welker — Sun, 23 Aug 2009 04:36:59 +0000

Freakonomics – Laid-Back Labor – New York Times

If you’ve spent much time on this blog, you know that I’m a fan of the boys at Freakonomics, the book that so aptly applies economic theory to the seemingly benign happenings of everyday life. In the article above the Freakonomists examine the difference between labor and leisure. I thought this article did a good job of introducing some of the basic concepts behind how economists think about the world.

As this year’s AP students begin to delve into the world of economics, one of the early topics they study will be the concept of humans as rational beings engaged in the constant pursuit of utility (the economist’s word for happiness). According to our text, “Economics assumes that human behavior reflects ‘rational self-interest.’ Individuals look for and pursue opportunities to increase their utility.”

If, as economists say, the purpose of life it the pursuit of utility, then presumably work is only a tedious but necessary means to an end, which we assume to be leisure. So why, as pointed out in the article above, do so many people willingly choose to spend so much time and money doing things like cooking, knitting, gardening, working in the yard, and other tasks that appear to be work, when they could easily pay others to do these menial chores for them, thus giving them more time for leisure? As the authors say, “Isn’t it puzzling that so many middle-aged Americans are spending so much of their time and money performing menial labors when they don’t have to?”

Where exists the line between work and leisure? This seems like an apt question to explore from an economic perspective. Here’s the author’s view:

“Economists have been trying for decades to measure how much leisure time people have and how they spend it, but there has been precious little consensus. This is in part because it’s hard to say what constitutes leisure and in part because measurements of leisure over the years have not been very consistent.

Economists typically separate our daily activities into three categories: market work (which produces income), home production (unpaid chores) and pure leisure. How, then, are we to categorize knitting, gardening and cooking? While preparing meals at home can certainly be much cheaper than dining out and therefore viewed as home production, what about the ‘cooking for fun’ factor?”

Why a professional (let’s say a lawyer) who spends 50 hours a week in his office, earning somewhere in the range of $100 an hour for his labor, would choose to spend two hours mowing his lawn on a Saturday, rather than hiring the neighbor boy to do it for him, truly poses an economic paradox.

Let’s see why: If this man’s labor is worth $100 and hour, then we can calculate the opportunity cost of mowing his own lawn as $200 plus the value to this man of the leisure he could have enjoyed by not mowing his lawn. The man probably could have hired the neighbor boy to mow his lawn for $20, which would have then freed him up to pursue his own leisure activities (reading, working out, watching a movie, etc.) during those two hours, and compared to the $200 value of his own labor the $20 seems like a bargain. So is a lawyer who mows his own lawn acting irrationally?

It would seem the line separating leisure from work has blurred in modern times. A hundred years ago an activity such as sewing or caring for a lawn would certainly have been viewed as work, but today the behavior of millions of Americans would indicate otherwise. As a science rooted in the belief that humans are rational pursuers of their own happiness and leisure, the paradox of the lawn mowing lawyer poses several interesting questions for students of economics.

Discussion Questions:

According to chapter one of our text (McConnell and Brue’s Economics, 17th Edition), “Purposeful (rational) behavior does not assume that people and institutions are immune from faulty logic and therefore are perfect decision makers. They sometimes make mistakes.”

Is the lawyer who mows his own lawn defying a fundamental rule of economics, that people act rationally? Is he making a mistake by not hiring the neighbor boy to do it for him?
What is meant by opportunity cost? Give an example of a decision you have made recently that involved an opportunity cost.
How is the lawyer’s decision whether or not to mow his lawn rooted in marginal analysis? Describe a choice you’ve made recently that involved marginal analysis.

America Has Gone Mad! (The AIG Bonus Payments Should Be Defended!)

Steve Latter — Sun, 22 Mar 2009 16:41:15 +0000

The $165 M in AIG bonuses that we have heard so much about this past week should have, in my opinion, been paid and then defended by Congress and the President!

As a former CFO, I can say with certainty that I have never paid an employee a bonus for poor performance. To underscore this point, I am 100% against any publicly-traded company ever making any bonus payment to an employee for poor performance regardless of the circumstances. The recently paid AIG bonuses are not an exception to my strong conviction. The true facts surrounding the $165 M in AIG bonus payments have not been made clear to the American public. Moreover, our cowardly American leadership (President, Treasury Secretary, Congress, AIG CEO) refuse to do what is right and defend the bonuses because, in my opinion, of their fear of public opinion.

The $165M in recently paid AIG bonuses, funded with a portion of approximately $170B in taxpayer “bailout” funding, are not PERFORMANCE bonuses being paid to the same AIG executives that got us into this financial mess in the first place. That is what most of America mistakenly believes. In fact, the senior executives, including the CEO, whose decisions caused the company’s collapse, are long gone. Moreover, the top 7 officials currently at AIG have agreed to forego all bonuses. The recent bonus payment outrage also excludes the next 43 highest ranking AIG leaders whose bonus payments are appropriately being linked to restructuring the company and paying back the taxpayers the $170B that has been already sent to bail them out.

So what exactly are these bonus payments for that all of America has gone mad over? The $165 Million in recent bonuses paid to AIG employees were RETENTION or STAY bonuses and not performance bonuses. AIG employees assigned to unravel the mess were offered retention bonuses to stay and work out the problems of AIG’s Financial Products division which has already been announced to be shut down. These retention bonuses were paid to incent remaining and new workers to stay until the billions of dollars of derivatives, still at risk, were unwound. Using basic common sense, which is why retention bonuses have been paid for decades, no reasonable, talented worker would agree to work in a discontinued division receiving hate mail and death threats without receiving a retention bonus. A retention bonus helps keeps top employees working on problems of a division being shut down rather than them resigning and moving on to another company.

As Congress tries to recover these just recently paid bonuses, either through the AIG employees paying them back or having them be taxed close to 100%, the tax payer is already losing as these employees working out the problems that they did not create are already starting to resign. Yes, America and the taxpayer will not save $165 M but rather lose far more than we save as those working the issues are resigning.

So, why didn’t the new AIG CEO, Edward Liddy, defend the $165 M in retention bonuses in front of Congress this past week and explain to Congress that these were not performance bonuses paid to the people that got us into this mess? Why didn’t Tim Gheitner, U.S. Treasury Secretary, defend his decision to allow the retention bonus payments as outlined in the recently passed stimulus bill? Why didn’t Ben Bernanke, Chairman of the FED, defend the retention bonuses that were know by him since last summer? And of course, where was our Harvard-schooled president when we needed his articulation skills the most as he could have clearly explained and defended these payments so we would not have to rehire new employees for all of the AIG employees who are now turning in their resignations for having to repay their contractual retention bonuses?

In summary, our U.S. government has increased the exposure to the American taxpayers by not supporting the AIG retention bonuses being paid to the workers that did not create the problem and who are assigned to fix up the mess. This is cowardly leadership, in my opinion. It is an easy path to for our leaders to keep the AIG bonus discussion at a very surface level and say “bonuses shouldn’t be paid to business leaders that fail”. Well, of course, everyone agrees with that! But that is not what is being paid at AIG.

Negative externalities of consumption: Britain’s “inebriated hooligans”

Jason Welker — Tue, 10 Mar 2009 01:31:02 +0000

Some Britons Too Unruly for Resorts in Europe – NYTimes.com

According to the article above, Great Britain exports more trouble to the rest of Europe than any other nation.

A recent report published by the British Foreign Office, “British Behavior Abroad,” noted that in a 12-month period in 2006 and 2007, 602 Britons were hospitalized and 28 raped in Greece, and that 1,591 died in Spain and 2,032 were arrested there.The report did not distinguish between medical cases and arrests associated with drunkenness and those that had nothing to do with it. But it did say that “many arrests are due to behavior caused by excessive drinking.”

The unruly behavior of Britons does not always end when the vacation is over, either:

Earlier this summer, flying home to Manchester from the Greek island of Kos, a pair of drunken women yelling “I need some fresh air” attacked the flight attendants with a vodka bottle and tried to wrestle the airplane’s emergency door open at 30,000 feet. The plane diverted hastily to Frankfurt, and the women were arrested.

How is this story related to economics, you may be wondering? Well, it’s really about a market failure. The over-consumption of alcohol by British tourists is creating spillover costs for the societies (and police forces) of the nations in which the tourists get themselves into trouble.

As governments often do when market failures exists, some British consulates have begun taking action to reduce the negative externatlities associated with their nationals’ drunkenness.

Worried about the increase in crimes and accidents afflicting drunken tourists, the British consulate in Athens has begun several campaigns, using posters, beach balls and coasters with snappy slogans, to encourage young visitors to drink responsibly.

“When things do go wrong, they go wrong in quite a big way,” said Alison Beckett, the director of consular services. “What we’re trying to do here is reduce some of these avoidable accidents where they have so much to drink that they fall off balconies and are either killed or need huge operations.”

Because British tourists only consider their own enjoyment (benefits) while on vacation, they consume alcohol at a level that fails to take into account the social costs of their behavior. In economic terms, the marginal private benefit of alcohol consumption exceeds the marginal social benefit, representing an overallocation of resources towards alcohol in tourist towns. Government action by British consulates is aimed at reducing demand (marginal private benefit) among tourists, shifting the MPB curve back towards the MSB curve, in the hope that alcohol consumption will decline to the socially optimal level, where marginal social benefit equals marginal social cost.

There seems to be a fine line between too much drinking and not enough in the tourist spots of Europe. As far as the impact that British drunkenness has on business, some in the tourist trade believe the very prospect of wild parties and cheap booze is what keep the local economies afloat. Crack down too much on the wild Britons, and business could collapse as customers attracted to the anarchy stop arriving.

Discussion questions:

Is overconsumption of alcohol a market failure? If so, what type could it be classified as?
If the tourist nations were serious about cracking down on drunk tourists, what economic actions could they take in the resort communities where most of the trouble occurs?
How are proprietors of bars and clubs in resort communities benefiting at the expense taxpayers from other parts of the tourist nations? Does the private cost of running a bar in a place like Malia, Greece reflect the social cost? Explain.

Obama vs. McCain and Clinton on gas tax relief

Jason Welker — Tue, 29 Apr 2008 04:10:39 +0000

As Clinton Seeks Gas Tax Break for Summer, Obama Says No – New York Times

Times are tough for American consumers. Rising food and fuel prices have increased the proportion of household incomes that must be allocated towards these two necessities, both for which demand is highly inelastic, meaning that as their prices rise, the quantity demanded by consumers remains relatively high.

In response to the pinching of Americans’ pocketbooks, two presidential candidates are advocating action at the federal level.

Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season.

Sounds like a good idea, right? If Americans are finding it burdensome to pay more at the pump, and the government can do something to relieve that burden, why shouldn’t they do it?

Let’s do a little calculation here: At 18.4 cents per gallon, how much per fill-up will Americans save?

I drive a ’94 Toyota pick-up, has a 15 gallon tank and gets notoriously poor mileage. I’ll save $2.76 per tank of gas I buy. I usually fill up my truck about once a week during the summer, meaning I’ll save that much each week. McCain wants to suspend the gas tax from Memorial Day until Labor Day, or for a total of about 12 weeks. If Clinton and McCain get their way, I could very well save as much as $33.12 this year! ASTOUNDING!! What a deal for Americans!

Clearly, repealing the gas tax will have only a minor impact on disposable incomes in America. Obama seems to understand this better than the other candidates:

Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports…

Mr. Obama derided the McCain-Clinton idea of a federal tax holiday as a “short-term, quick-fix” proposal that would do more harm than good, and said the money, which is earmarked for the federal highway trust fund, is badly needed to maintain the nation’s roads and bridges.

The decision to suspend or not suspend federal gas taxes is essentially a cost-benefit decision. The benefit? Well, apparently around $30 per driver, or about half a tank of gas, compliments of the US government. The cost? Read on…

The highway trust fund that the gas tax finances provides money to states and local governments to pay for road and bridge construction, repair and maintenance. Mr. McCain and Mrs. Clinton propose to suspend the tax from Memorial Day to Labor Day, the peak driving season, which would lower tax receipts by roughly $9 billion and potentially cost 300,000 highway construction jobs, according to state highway officials.

There you have it; $9 billion dollars and hundreds of thousands of jobs that won’t be created in order to put half a tank of gas in each American’s car, which if you think about it, will only lead to Americans driving more this summer. Repealing the gas tax may actually induce Americans who weren’t planning road trips to go ahead and take one, increasing the overall demand for gas and driving the price up to the level it would have been with the tax.

And what about the much needed government revenue the tax creates? Hillary has another plan for recouping that loss:

Mrs. Clinton would replace that money with the new tax on oil company profits, an idea that has been kicking around Congress for several years but has not been enacted into law. Mr. McCain would divert tax revenue from other sources to make the highway trust fund whole.

Clearly, Mrs. Clinton needs a refresher course in basic microeconomics. If she had paid attention in AP Economics (did she even take AP Econ?), Clinton would know that a tax on producers of a highly inelastic good such as oil can be passed almost entirely onto the consumers. In this case, the oil companies, when faced with additional federal taxes on profits, will respond by restricting output, which reduces overall supply in oil market, raising the price of the main input for gasoline. Higher input costs for gasoline refineries will reduce overall supply of gasoline, increasing the price paid by consumers at the pump, negating any price-reduction induced by the suspension of the gas tax.

Ultimately, all taxes are borne by the consumers of an inelastic product: gasoline in this case. Whether the tax is levied on drivers directly, or the oil companies “upstream” in the production process, the outcome is the same: supply is restricted and price is higher.

The suspension of a gas tax that only costs Americans $30 over 3 months appears to impose a much greater cost to society than benefit. At least Obama seems to understand the basic economic reasoning behind this fact.

Obama on State Gas Tax Suspension

Habitat for Humanity, Philippines: a Reflection

Jason Welker — Sat, 06 Oct 2007 15:10:15 +0000

Shanghai American School Habitat for Humanity – Lucena City, Philippines. October 2007

This afternoon my wife and I returned to Shanghai after an amazing week in the Philippinese where we led 16 students on a Habitat for Humanity house building project on the island of Luzon (see map here). While this experience is still fresh in my mind, I wanted to share a few comments about how my thinking about Habitat for Humanity evolved over the last eight days.

A week ago right now, the 18 of us from SAS were bouncing scarily southward along Luzon’s main north-south highway, which is only a highway in the western sense for about 30 km outside of Manila, beyond which it turns to a two-lane, pot-holed, multi-use thoroughfare shared by buses, three-wheeled motorcycle taxis, lorries, a handful of personal automobiles and thousands of jeepneys. Three hours of nerve and bone rattling travel brought us to our lovely guest house near the southern Luzon city of Lucena, where we would spend five days building a house in a community on the outskirts of the city.

During the bumpy drive, I got to thinking a lot about this, my first, Habitat trip, and the whole concept of Habitat for Humanity, which brings people from the rich world great distances at a great expense to poor countries to help construct affordable housing to get families out of unsafe and unsanitary situations into stable and clean houses. I calculated that between the 16 students I was chaperoning this week, their total expenses for the seven day trip totaled around $19,200, including airfare, transport, accommodation, food, and a contribution to the local Habitat office. I could not help but think to myself on that first night: wouldn’t $19,000 go a lot further and have a much greater impact on the people of the Philippines if it were simply given as a cash donation to a community? I mean, how could the benefits of this trip really outweigh the incredibly high costs?

I will admit, I was a bit skeptical as to the motives and ethics of a program like that which we were about to embark on. If helping poor communities was our goal, then surely a cash donation could do a lot more for a community than 18 inexperienced builders over five days. In fact, in a discussion with our local host, Rudy, I gleaned that the raw material and labor costs of a Habitat house usually come to around $1,500 in the Philippines. That means that a cash donation equal to the amount paid by our 16 students for their trips could have built around 15 houses! Assuming our group would build one house, how could this possibly be a worthwhile program given the opportunity cost of 14 houses that could have been built had we simply donated the cash instead of coming to the island ourselves? My initial cost/benefit analysis seemed to indicate that the idea of a Habitat trip was somewhat flawed and, economically speaking, irrational given the narrow goal of helping get poor people into quality homes. It was with this pessimistic calculation in my head that I showed up to Saint Dominic Village on the morning of October 1, work gloves on, ready to build.

Over the next five days the 18 of us, along with many local high school kids who came to volunteer and the guidance of three professional builders, literally built a house from the ground up! When we arrive Monday morning, there was little more than a 6 by 6 meter square marked off with fishing line on a sloping hillside covered with mud and brush. The first day consisted of nothing more than digging through Luzon’s rock-filled soil a trench in which we would build the foundation walls.

By the end of day 2 we had built walls up to waist height, and with the help of 20 volunteers from a local high school, we had filled the foundation with 12 cubic meters of dirt using the highly technical method of “bucket-passing”. Our goal for the end of day 2 was to have the foundation filled and the dirt compacted, ready to poor the concrete floor the next morning. Question: What’s the best way to compact a 6 by 6 meter square foundation filled with 12 cubic meters of dirt in a village with 200 children? Answer: DANCE PARTY! With the boom box blasting and the children screaming with glee, day 2 concluded with our house’s first dance party, attended by about 50 of the coolest, hippest cats in Saint Dominic Village, all bouncing to the rhythm of the music, successfully compacting the foundation for the next day’s concrete poor.

This meant we had two and a half days to build the walls of our house, a task which by mid-day on Friday, we had successfully accomplished. By the time we finished our work, all that was left was the roof beams, a corrugated tin roof, a layer of plaster, and Tivo to make the house liveable! What an accomplishment! 16 students who barely knew the difference between a nail and a screw (inside joke), had actually built a house from mud to roof beams!

Over the five days of our Habitat build, I came to settle my misgivings regarding the costs and benefits of the program. I realized that Habitat for Humanity is not only about helping the poor by building them houses to help them live affordably and safely. It dawned on me by the end of the week that the humanity we’re helping does not only refer to the poor villagers, or the Filipino people, or the people of the developing world in general; rather, the humanity at stake exists within the builders themselves.

Humanity has two definitions: one refers to “humans as a group; the human race”. The other refers to “the quality of being humane; benevolence”. I used to think Habitat for Humanity was about the first definition, that it was mainly about building houses for poor people. Now I know that the program is also, and perhaps most importantly, about the second type of humanity, that it’s just as much about building humaneness, benevolence, empathy and an appreciation for others within the volunteers, the locals, and all people involved in the program, rich and poor alike.

The growth I saw among the students this week was greater than simply an improvement in carpentry skills. They became more humane and caring individuals. That’s what they were paying for, and for that reason, my economic critique of one week ago needs to be reconsidered. The opportunity cost of not simply donating $19,000 to the Philippines may indeed by 14 houses. But the opportunity cost of not going to the Philippines with students, not experiencing the humanity and love of a community like Saint Dominic Village, of not building something with our own bare hands to make others’ lives a little bit easier, and the subsequent growth and strengthening of the humanity within the 16 students (and two lucky chaperones) themselves, outweighs any other considerations of costs.

In other words, the benefits of a Habitat trip are bestowed not only on the village where the house is built, but within the communities to which each of the volunteers belongs now and forever in the future. The tranformation within the builders is the greatest benefit; because of their experience this week, these students will forever be better people, more willing and able to act humanely in their communities in a way that makes the world a better place for all people. My conclusion is therefore that the intrinsic and implicit benefits of Habitat for Humanity far outweigh the explicit costs. For that reason, my wife and I have already decided we can’t wait to lead another Habitat trip.

It was truly a blessed and transformational week for everyone. The village itself (especially its 200 children) was touched by the humanity and love of our students, as were the students by the village. Please follow the link at the top of this post to see the pictures from this amazing week. And if you haven’t already, consider joining a Habitat for Humanity trip in your own country; trust me, the benefits far outweigh the costs!

The opportunity cost of sex

Jason Welker — Tue, 11 Sep 2007 14:38:13 +0000

From the Undercover Economist:

FT.com / Weekend columnists / Tim Harford – Dear Economist

Is there a relationship between a student’s decision of whether to have sex and his/her performance in school? Tim Harford finds there just might be.

There is little doubt that virgins achieve better grades. Yet is this because sex kills brain cells, or because kids who are already bored at school look harder for ways to amuse themselves?