Wednesday, October 12, 2011

[Environmental Economics] Case Study - Australia: Carbon Tax vs Camel Fart Regulation



Notes:
Australia has the highest carbon emissions, slightly more than the States
Carbon tax will be around for a few years
Opposition pledges to repeal the tax


The opposition opposes the Carbon Tax (fortunately there are some years to test its effectiveness, which will provide valuable information for economists) - the political problem is probably similar to the states as I read somewhere that Rupert Murdoch owns a great deal of media there. Even the report above, from Sky News, is of a company where Rupert Murdoch's son is the CEO.

Anyways, applying a carbon tax, keeping the tax burden on the source that you want to regulate (i.e. reduce carbon emissions from) is basic economic theory. The idea is that the factories will invest in clean technology and even a societal shift in resources could occur leading to more clean energy generation. Possible problems include the tax being too low or the cost of the tax being shifted onto the middle class and poor consumers which would mean the level of carbon emitted by Australia's industries would remain the same.


I thought it was funny that this solution was actually offered...

Australia Considers Killing Camels to Tackle Climate Change

1. Eliminating Camel Farts to help the environment: A commercial company, Northwest Carbon, has proposed culling more than one million camels in the Australian Outback to eliminate that gas emissions, according to AFP.

2. Innovative solutions from an innovative nation: "We're a nation of innovators and we find innovative solutions to our challenges -- this is just a classic example," Northwest Carbon managing director Tim Moore told Australian Associated Press.

The motivations for such an action could be 1. laziness to shift resources, 2. don't want to lose even a dollar of profit in the short run, 3. hate animals or don't care about anything but themselves.


Here is why an effective carbon tax is important:

Following extracts are from "Why high-carbon investment could be the next sub-prime crisis"

"More money is flowing into clean technologies than ever before – a record £150bn of investment last year – but money is also still pouring into coal, oil, gas, mining and other high-carbon sectors at a pace that severely undermines our efforts to tackle climate change and other environmental challenges. "

The more money that is invested into a method that will choke us also sets up the next 'too big too fail' companies, since if we get too a point where we have to cut down on carbon release to survive then we have to bail out the companies or face another contraction [although effective government spending (stimulus) may be too difficult for the US, we may be better off letting them fail when we get to that point.]

Too big too fail?

"But the known fossil fuel reserves declared by energy and mining companies is equivalent to 2,795 gigatonnes of CO2. That means, if the world acts on its climate change pledges, 80% of those reserves can never be burned and are stranded assets. If you look specifically at the UK, five of the top 10 companies in the FTSE 100 are almost exclusively high-carbon and together account for a staggering 25% of the index's entire market capitalisation."

Looking to the future...

‎"National and international responses to systemic risks in our economy and financial systems only tend to occur after massive crises. But we cannot wait for our over exposure to high-carbon and polluting sectors to result in a global economic, as well as environmental, meltdown before we act. When markets wake up to the real value of high-carbon assets, the chaos wrought and value lost could be devastating. "Horizon scanners" in international financial institutions, central banks and financial regulators, together with policy makers and politicians, must take notice and act now to manage this bubble."


Environmental Problems in Australia - Extracts from = "Australia's carbon tax is a brave start by a government still gripped by fear":

‎1. "Australia's Black Saturday fires of February 2009 burned over a million acres of land and killed 173 people. It happened because of record high temperatures and a 20% drop in rainfall over the previous 12 years. It was what climate experts had been predicting for some years: the megafire. A megafire is hell come to earth.

The energy equivalent to 1,500 Hiroshima-sized atomic bombs was released in a fire storm that saw rivers of flame – sometimes rising 100 metres in the air – flowing through the countryside, generating winds of up to 120km an hour with new fires spotlighting 35km ahead of the main fire front."

‎2. "Black Saturday reminded many Australians of what they know only too well: that of all the advanced economies, Australia is perhaps the one most vulnerable to climate change. And yet support for action on climate change, which was a key factor in the ending of 11 years of conservative government in 2007, has now largely collapsed."


Australia has begun taking measures to protect itself, the opposite is happening in the States...



Plus there is real damage being done to the environment in mountain top coal mining...

Watch the full episode. See more Need To Know.


Interview: Author Daniel Yergin discusses hydrofracking, alternative energy sources and America's decreasing demand for oil.

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Sunday, October 9, 2011

Expectations, Market Volatility and the Emerging Gold Bubble

Markets today fluctuate at the drop of a hat. For example in the following video you see that "After Rupert Murdoch gets hit with a pie, News Corp.'s stocks spike"...


This shows that an incident that has nothing to do with business or the proceedings at hand can boost the prices in today's stock markets a great deal.

So when Senator Bernie Sanders writes;

Why have oil prices spiked wildly? Some argue that the volatility is a result of supply-and-demand fundamentals. More and more observers, however, believe that excessive speculation in the oil futures market by investors is driving oil prices sky high.

A June 2 article in the Wall Street Journal said it all: “Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks’ profits.” ExxonMobil Chairman Rex Tillerson, testifying before a Senate panel this year, said that excessive speculation may have increased oil prices by as much as 40 percent. Delta Air Lines general counsel Richard Hirst wrote to federal regulators in December that “the speculative bubble in oil prices has concrete detrimental consequences for the real economy.” An American Trucking Association vice president, Richard Moskowitz, said, “Excessive speculation has caused dramatic increases in the price of crude oil, which harms end-users like America’s trucking industry.”

This is a claim that should be taken seriously about the unreliability of some of these stock market reactions (afterall, with much of the wealth with a small number of people (i.e. income inequality), it doesn't take much to skew a market)

In fact, it has been shown that even 'rumors can move markets'.


The Emerging Gold Bubble

Gold price hits all-time high on US debt concerns

The price of gold has risen to a fresh all-time high of $1,594.16 an ounce, and the dollar has fallen, on concerns the US may default on its debts.

The moves came after ratings agency Moody's said it may cut the debt rating of the US, warning there was a "rising possibility" it will default.


Uncertainty and concerns (fears) about the future cause the markets (which are free floating) to fluctuate. Since the supply of Gold is limited it has great 'store of value' (one of the measures/definitions that economists use to define money)

As the article further explains...

Gold is seen as the number one haven purchase in times of economic uncertainty, but analysts said its rise was also caused by the fall in the dollar, which makes the precious metal more affordable for holders of other currencies.

Taking market variability into account and the promotions to buy gold to a large number of consumers (such as Rush Limbaugh promoting gold through this page), the following analysis about a possible gold bubble makes sense...




Fareed Zakria: This is bizarre. A lot of it is simply scaremongering. The truth is that for two and half decades, between 1980 and the mid 2000s - gold prices actually declined. Unlike many other commodities which actually have an end use - oil, minerals - gold is just a symbol, and as such its price rises have to do more with psychology and emotion than reason. So, when it falls out of fashion, the price could really collapse. The next time you watch Goldfinger or you hear of the antics of a Hugo Chavez or a Donald Trump, be a little wary.

Gold isn't a stock with real earnings. It isn't a bond with interest payments. It isn't oil. It won't help you drive a car; it won't help you light a fire. Yes, you can wear it, but you can't eat it. If doomsday really arrives, a can of baked beans might be worth a lot more than a brick of gold.

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Added October 28th 2011


Approx 4 mins - Stock volatility actually helps the traders. (This has to do with the variety of maneuvers at their disposal to make money on market fluctuations - Note: This does not include any big money players up to their own plans for better or worse).
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Friday, October 7, 2011

Corporations

There seems to be some misunderstanding of what Corporations are and what they have become as Mitt Romney illustrates with his "Corporations Are People" comment...



(Note: The Supreme Court ruled that restrictions on money that can flow to help/promote political campaigns is against the first amendment (i.e. money has free speech rights /first amendment protection)

The above statement made many people angry, including Stephen Colbert...



So the following are definitions and comparative examples to better understand the modern Corporate structure...

What is a Corporation?

Basic dictionary definition:
1
a : a group of merchants or traders united in a trade guild b : the municipal authorities of a town or city
2
: a body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed with various rights and duties including the capacity of succession
3
: an association of employers and employees in a basic industry or of members of a profession organized as an organ of political representation in a corporative state

Basic economic/business definition:

A legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.


The most important aspect of a corporation is limited liability. That is, shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company's debts.


Corporations are often called "C Corporations".


Compare and Contrast:

Context to understand some of the strange rules Corporations are allowed (more than an average person/family for sureb)...


In other words, besides free speech rights for corporate money, there are ways for corporations to get out of paying taxes and a whole bunch of other nonsense that seems to be just part of the reason for the present financial chaos.


Compare and Contrast - Case Study:


A Shell Corporation: Switching fundraising approach by creating a company (approx 4 mins into video) - this new company is called a 501 (c)4 - Allows donations from unknown donors , notice the dramatic increase in donations! (the example used is Karl Rove's Super Pac and a new one he created to shield it);


To compete with Karl Rove, Stephen creates his own Shell Corporation (this approach allows corporate donations in secrecy as their shareholders or customers may object to their practices)...





The following video is the amusing result of the above two videos...


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Added December 28 2011: Useful Information About Modern Corporations...



Documentary website

Watch full the documentary in 23 parts here.
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Wednesday, October 5, 2011

An Overview of "Short Selling"

Short selling involves 'selling' something you don't own expecting the price to go down in the future. In extreme cases this technique can destroy an economy like an old fashioned, panic induced, bank run.

Definition of Short Selling:

What Does Short Selling Mean?

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

Investopedia explains Short Selling

Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.

This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales.


The markets rise after some EU countries ban short-selling but will it have a lasting effect?

Click Here to Watch Video


Notes on above video:

1. 20 secs - Rumors can move markets

For example; "Every day cold hard facts are the fuel that drives the markets: News about a company or country, favorable or not. But markets are living organisms, made up of Alpha type men and women desperate to take advantage of situations real or perceived. So in the absence of facts, they will listen to rumors and try and judge whether those rumors are likely to be true; then buy or sell on the back of them.".

‎2. 1min 36 secs - 'professional investors would look at this with allot of misgiving... cause of suppression being forced in the market place... by agencies, typically market authorities or governments, which shouldn't be stopping natural market appetites and that will spook the professional investor' - note: if this 'professional investor' deals in rumors to spook markets to sell stuff they don't have in hope of making money... then maybe you have your priorities messed up?

3. Clear cut regulations with explanations are needed in areas where market manipulation is dangerous to an economy.


4. Video explanation of short selling.

Some historical perspectives:

‎"The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.

“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”


Arguments For and Against Short Selling:

Against

"The argument for restricting short-selling runs as follows: betting that catastrophe will befall a bank can become a self-fulfilling prophecy; if a bank's shares or bonds can be forced down to distressed levels, its cost of funding will increase as counterparties lose faith in its solidity; in this way real damage is done to the bank; thus the odds are skewed unfairly in favour of the short-seller."

For

"The trouble is, this argument is a little too unworldly. Short-sellers may not be the most cuddly creatures in the financial jungle, but they do contribute to biodiversity. Even the Committee of European Securities Regulators, the predecessor to the new EU regulator, acknowledged last year that legitimate short-selling helps markets run efficiently. It can help to prevent bubbles – miserable Eeyores are a useful check on excitable Tiggers."

Samantha from The Daily Show Illustrates Short Selling (with a bias towards fairness)

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Sunday, October 2, 2011

Social Safety Nets

Social safety nets are used for stabilization of a section of society.

Definition of a safety net (For this post we are only concerned with the second definition):

safety net

1. a net used in a circus to catch high-wire and trapeze artistes if they fall
2. any means of protection from hardship or loss, such as insurance

Social Safety Net Example 1

For many, summer means vacation, sports, camping or just time off to relax, but not for millions of kids living in poverty in the United States. There are few camps or beach trips for them, and sometimes not even three meals a day.

During the school year, public schools provide breakfast and lunch to millions of students in the United States. But when summer arrives, parents struggling to feed their children can no longer rely on those meals.

More than 21 million children receive free or reduced-price lunches at school. But in the summer, the number of kids participating in food programs drops to fewer than 3 million, despite efforts to raise awareness and increase community support, the U.S. Department of Agriculture said.


Social Safety Net Example 2

People living in poverty and hunger are extremely vulnerable to crises.
Social safety nets have traditionally been used to help people through
short-term stress and calamities. They can also contribute to long-range
development. Targeted programmes such as food-for-work, school feeding,
microcredit and insurance coverage can help alleviate long-term food and
financial insecurity, contributing to a more self-reliant, economically
viable population.


Social Safety Net Example 3 

An example of a few people surviving on low budget social safety nets such as a church:

"These people have been reduced to living on handouts from the local church and friendly restaurants and the community is a sad look at troubles caused as the world's most powerful country struggles with its finances."

[Other examples of social safety nets include medicare and social security]

A social safety net with grassroots development:
An initiative that brings struggling families together to help each other out of poverty is providing a new model for social welfare.

What FII does is create a structure for families that encourages the sense of control, desire for self-determination, and mutual support that have characterized the collective rise out of poverty for countless communities in American history."

Possibility of this strategy: Social safety net plus an actual plan to help grass root economic development. [Solution has a hold and develop strategy which has promise as people working together in groups can help social development and therefore business development as well. ]
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Monday, September 26, 2011

Efficiency and Inefficiency in Economics

When you make plans you have to balance income with expenditure while making sure your plans for growth exclude inefficiencies that would make your economic policy ineffective on a small or large level depending on the size of the inefficiency.

Dictionary Definition of Efficiency;

1: the quality or degree of being efficient
2a : efficient operation b (1) : effective operation as measured by a comparison of production with cost (as in energy, time, and money) (2) : the ratio of the useful energy delivered by a dynamic system to the energy supplied to it

Definition from Investopedia:

What Does Efficiency Mean?

A level of performance that describes a process that uses the lowest amount of inputs to create the greatest amount of outputs. Efficiency relates to the use of all inputs in producing any given output, including personal time and energy.

Investopedia explains Efficiency

Efficiency is an important attribute because all inputs are scarce. Time, money and raw materials are limited, so it makes sense to try to conserve them while maintaining an acceptable level of output or a general production level.

Being efficient simply means reducing the amount of wasted inputs.

Read more.

When a project is efficient you minimize waste. You put in money into a project and attain specific short-term and long-term goals. In some cases, efficiency and inefficiency is difficult to estimate, however in other cases it is easy.

Here is an example of gross inefficiency from Greece (money wasted into unfulfilled projects):

In the southern suburbs of Athens, the abandoned terminal building at the city's old international airport stands as a symbol of promises unfulfilled.

Closed down a decade ago, the site includes 170 acres of prime coastal land on the shores of the Aegean sea and for some time there have been ambitious plans to sell it for redevelopment to the Gulf state of Qatar.

But so far they are just that - plans. And that makes the rest of the eurozone jumpy.

Here is another example of gross inefficiency (money wasted by putting it into a project that was known to fail - a level of inefficiency that really is impressive);


Note: 4 mins and 30 seconds into the video above you discover that a report actually shows that this project would run out of money this month of this year. Clear sign of inefficiency.

The following is an extract from a news report about the same inefficiency in the video above:

Energy-related loan guarantees arose from the stimulus legislation of 2009. Policy makers thought a huge infusion of low-cost loans would create many thousands of jobs at solar- panel factories, alternative-energy power plants and the like. There was an implicit assumption that most of these ventures would succeed. Barring fraud, Solyndra’s failure reflects the company’s bet on an inadequate technology. Its tubes, coated with an unusual four-metal compound, were supposed to cut power costs more than 20 percent. That wasn’t nearly enough. Production costs fell much faster for a rival technology, conventional flat silicon panels, and Solyndra couldn’t compete.

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Note: Oct 5 '11
An example of government inefficiency in tax implementation (and spin associated with corporate journalism):


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Added Oct 25, '11 - More incredible inefficiencies...

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Sunday, September 25, 2011

Sectors of the Economy and The Chain of Production

Every economy is divided into at least 4 sectors. The primary sector which includes basic production such as farming, mining or drilling. Then there is the secondary sector which includes all of manufacturing, such as making wheat into bread or steel into cars. Next is the tertiary sector which includes retail outlets and all services associated with getting the basic production, through its manufactured state to the consumer (these first three sectors are also the basic divisions in the chain of production from basic product to finished good to distribution). Next is sector 4 which involves government services such as libraries and roads. Then there is a fifth sector, or so its argued, of the very top elite of decision makers on the global and political scene which is supposed to constitute a separate sector of the economy. Since entrepreneurship is covered in the first 4 as are government services I will just be using the first 4 as the basic sectors of an economy. [Read about these classifications in full on About.com]

The first 3 sectors of an economy, the primary, secondary and tertiary; constitute the chain of production that all businesses are concerned with:
Business activity is the process of transforming inputs into outputs by adding value. There are three main sectors of business activity:


Primary sector Involves the extraction and production of raw materials, such as coal, wood and steel. A coal miner and a fisherman would be workers in the primary sector.


Secondary sector Involves the transformation of raw materials into goods e.g. manufacturing steel into cars. A builder and a dressmaker would be workers in the secondary sector.


Tertiary sector Involves the provision of services to consumers and businesses, such as cinema and banking. A shopkeeper and an accountant would be workers in the tertiary sector.


Goods move through a “chain of production”. The chain of production follows the construction of a good from its extraction as a raw material through to its final sale to the consumer. So a piece of wood is cut from a felled tree (primary sector), made into a table by a carpenter (secondary) and finally sold in a shop (tertiary).

It is important to note that any one business can own the farm, the factory and the retail outlets (or services) related to a particular product. In such a case the business is large enough to have itself firmly establish in the whole chain of production.

In this case study the whole process is outlined, which the image below (also from this site) condenses into a simple visual representation...



It is possible to move a business to another country in every sector of the chain of production. Both for companies specializing in any one part of a sector and for those businesses that cover all the sectors and are thus somewhat self-sufficient (such as large multi-national conglomerates). In these cases, the global picture of the forth sector provide the structure for the business to maximize profit and countries will generally adjust their policies concerning all three sectors of the economy, concerned with the chain of production,  to maximize their own economic growth (all other factors remaining  equal).

In a democratic society economic growth is theoretically supposed to be balanced with appropriate distribution and burden sharing for balanced democratic structures (such as education increasing intellectual capital) and social balance (such as keeping society fair for all its citizens).

Basic question and answers of how the chain of production works are here.
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Collective Bargaining: Labor Unions

Economics perspective: Generally large employers(such as large corporations or the government) dictate how much employees get in terms of wages and benefits. To maximize profit, the less labor costs the better it is. So on one side there are employers attempting to keep costs as low as possible to make as much money as possible (extreme example are 'sweat shops') and on the other side are labor unions which seek to maximize the welfare of its members (i.e. a higher paycheck or benefits). Having logical and rational discussions are key to attaining balance between the two to help economic and social balance.

Definition of LABOR UNION
: an organization of workers formed for the purpose of advancing its members' interests in respect to wages, benefits, and working conditions


Here is a fuller explanation from a basic economics tutoring page (in this example they call labor unions, 'trade unions'):

Trade unions are organisations of workers that seek through collective bargaining with employers to protect and improve the real incomes of their members, provide job security, protect workers against unfair dismissal and provide a range of other work-related services including support for people claiming compensation for injuries sustained in a job.

The following link is to a video that illustrates today's sudden economic challenges and the contradictions to a balanced economic approach one particular solution brings to the table... Click here To Watch Video: Are Public Sector Strikes Always Right?.

As far as economic and social balance goes, Ronald Reagan phrased it appropriately when he said, "Where free unions and collective bargaining are forbidden, freedom is lost".

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Sunday, September 4, 2011

Government Spending in a Mixed Economy - Subsidies, Grants and the 'Stimulus' (Part 1)

[To understand this properly first read my posts on Opportunity Cost, then Laissez-Fair Capitalism and then Taxation]

A subsidy is the opposite of a tax. You give a subsidy to someone who is facing a loss to help break even, maybe make a little profit for the sake of survival. OR you give a subsidy as an incentive to encourage a certain type of industry to grow (such as a tax break or tax loop hole).

A stimulus is also a form of a subsidy as it pours income into sectors of the economy (or parts of the country) that need income or jobs.

Definition of subsidy:

A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.

Politics play an important part in subsidization. In general, the left is more in favor of having subsidized industries, while the right feels that industry should stand on its own without public funds.

Investopedia explains Subsidy

There are many forms of subsidies given out by the government, including welfare payments, housing loans, student loans and farm subsidies. For example, if a domestic industry, like farming, is struggling to survive in a highly competitive international industry with low prices, a government may give cash subsidies to farms so that they can sell at the low market price but still achieve financial gain.

If a subsidy is given out, the government is said to subsidize that group/industry.


The following is an example of a type of subsidy that has been called "stimulus" (stimulus and investing in infrastructure - a vital part of an economy - has been given an extremely negative connotation through 'echo chambers'), that allows investment in environmentally friendly energy while creating a few jobs.

FLAGSTAFF, Ariz. (AP) — A major manufacturer of small wind turbines will continue to call Flagstaff home for at least the next five years because of a major federal stimulus grant. The $700,000 grant puts to rest fears that Southwest Windpower would leave higher-cost Flagstaff for another city or even another country. The funds were funneled through the Arizona Commerce Authority and are expected to be approved by the Flagstaff City Council on Tuesday. They will help retain the existing 65 jobs and help expand Southwest Windpower in Flagstaff as the North American headquarters for at least the next five years. The company is expected to use the funds to underwrite the retooling of equipment to begin production on a new turbine.


Government spending to balance an economy is normal in all economies around the world. There is echo chamber rhetoric saying government spending is bad which flies in the face of the evidence of using government money (subsidy/stimulus/grant/handout) to help the economy and individuals. For example; Rick Perry used government money to balance the Texas budget (there would unlikely have been a good job rate in Texas if Rick Perry didn't do that). Rick Perry did the smart thing as a politician in a mixed economy seeking to help the local (Texan) economy. The negative echo chamber rhetoric about using stimulus/subsidies to boost the economy is a political tactic to stall the economy to win an election.

Proof:

Gov. Rick Perry used federal stimulus money to pay 97 percent of Texas's budget shortfall in fiscal 2010--which is funny, because Perry spent a lot of time talking about just how terrible the stimulus was. In fact, Texas was the state that relied most heavily on stimulus funds, CNN's Tami Luhby reports. "Even as Perry requested the Recovery Act money, he railed against it," Luhby writes. "On the very same day he asked for the funds, he set up a petition titled 'No Government Bailouts.'" It called on Americans to express their anger at irresponsible spending. Thanks to the stimulus funds, Texas didn't have to dip into its $9.4 billion rainy day fund. Still, now that the stimulus is spent, Texas, like many other states, is facing severe cuts--$31 million must be carved from the budget.

Government spending is normal in modern economies. The debate should be over which direction spending should be made in so that it boosts the economy with a minimum amount of inefficiency (basic economics principle). To be against government spending itself is not economics, it's an echo chamber tactic to create negative perceptions around a normal economic policy tool to win elections through increase an in negativity and hate.

[Note September 5th 2011: I don't know how Rick Perry used the money he got from the government. If he just paid off debts without any expenditure for long-term growth then the Texan economy will crash soon. The balancing the budget act will just postpone the inevitable. But that may be all Rick Perry needs for the upcoming election.]
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Taxes, Tax Burden and A Little Context for the Modern Tax "Debate" in The US

[The post on Opportunity Cost is important to understanding tax increases/decreases - note the nature of modern economies i.e. they are all 'mixed economies'].

Anyone who is a part of a society has to pay taxes. The taxes support the society by providing public goods (such as streets and street lights and libraries), social safety nets such as social security and medicare which help keep the elderly from dying on the streets (which, if allowed, would be a big moral and social problem - social safety nets makes society more livable and pleasant).

Anyone who doesn't want to pay taxes in their fair share is welcome to leave that society. [This sentiment is expressed by people saying "I'm American and Proud to Pay Taxes" - i.e. taxes are part of the American Society and its standard of living, as well as its way of life. You pay taxes to benefit on a social level. Third world countries where taxes go into government pockets and the military cannot offer a better society for its members for this very reason. A country using taxes appropriately for the benefit of all is like a beacon for democracy and of higher standard of living for the whole planet.]

For people who don't want to pay taxes, you can just say, "Just return all the profits you made by doing business in that society and you are even and you both can go your own ways". That is the benefit for a business paying taxes in a modern economy. You gain social benefits, infrastructure (such as roads so trucks or railways can carry your goods to market) and a population that has a higher standard of living and thus provide a market for your goods.

The Problem; Greed. We want all the benefits of a fully functioning and balanced society and democracy but we don't want to pay taxes. Thus you have the modern political problem in a mixed economy.

In the United States this natural problem with taxes is further compounded by people who are against tax increases for any reason, even if a decrease was bad economic policy. [Note: This modern economic problem can be understood as a result of 'echo chambers' employed by a small minority which seem to be above the law (at least as far as individuals in an environment without regulations/law can manipulate them to their own benefit. This has created an overly negative atmosphere. Sad thing is that this fake economics, if repeated often enough, can be believed as if it was actually economics.]

What is 'Tax Burden'?

[ Definition of tax burden: The amount of income, property, or sales tax levied on an individual or business. Tax burdens vary depending on a number of factors including income level, jurisdiction, and current tax rates. Income tax burdens are typically satisfied by deductions from an individual's paycheck each time he or she is paid. Depending on the amount of allowances claimed by the individual, a tax burden may exceed the total amount of money deducted during the taxable period.

Understanding tax burden is easy. If an increase in taxes weighs heaviest on the poor and middle class then these sections of society have a higher cost of living. For example; an increase in the price of bread by one dollar will effect the poor the most, middle class next and it will have no effect on the rich. So an increase in price by one dollar on bread has its heaviest tax burden on the poor.

[The following images to explain tax burden are from here .]

Another sign of a poorly balanced economy is a taxation system that presses heaviest on those least able to pay.

Larger amount of a poorer person's income is spent on food, so sales taxes press heaviest on the poor and middle class.


The following is an example of the tax burden being pushed onto the poor and middle class:


The video below summarizes how the 'conservative' echo chamber reacted to Warren Buffets article in the NY Times (Stop coddling the rich).


Note: A 10% tax on both rich and poor will have a greater tax burden on the poor as they have less money to buy basic goods for survival while it makes no difference to the rich (i.e. the rich get one less vacation or car while the poor has less to eat or no vacations or luxury items). To say that a rich person is paying more is correct as 10% or a rich person's wealth is allot more than 10% of a poor persons wealth. However, the tax burden is clearly on the less well off in society. When dealing with small percentages of tax increase, to fight it and push it onto the poor is the very essence of Laissez-Faire Capitalism.

Origin of today's tax debate;


4 notes on the above video:

1. Stephen Colbert keeps saying, "Taxes are job killers". This is a political slogan that has been emotionally charged with the use of echo chambers.

2. Important note about reversing a failed economic policy (i.e. The Bush Tax Cuts): The 90's were good for the economy and did not require a tax decrease.

3. The Bush Tax cuts have not created jobs but have done the opposite. This is an example of a failed economic policy (see opportunity cost)

4. The deficit can be solved without raising taxes on the rich by decreasing medicare and social security (this trade-off represents a society that is moving more wealth into the hands of the few, i.e. Laissez-Faire Capitalism )


Other problems in raising taxes:

Grover Norquist (in the interview below) is an example of someone who gets right-wing politicians, who are supported by a segment of the super rich who have the lowest taxes and tax burden in the States, to sign a pledge never to increase taxes.


Then Grover Norquist uses his access to huge monetary funds to attack anyone who goes back on their pledge to him for whatever reason. Thus many politicians refuse to raise taxes whatever the cost and will pretend there are other reasons that they don't raise taxes for.

Add all of the above to the new 'conservative' echo chamber (controlled by a few) and you have the nonsense that is today's tax "debate" in the United States of America.
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Laissez-Faire Capitalism, Robber Barons and Another Reason for Mixed Economies

One reason for Mixed Economies is presented here. Another reason is presented below. First;

The definition of a mixed economy:

An economic system in which both the private enterprise and a degree of state monopoly (usually in public services, defense, infrastructure, and basic industries) coexist. All modern economies are mixed where the means of production are shared between the private and public sectors. Also called dual economy.

Laissez-Faire Capitalism is the idea that there should be no rules that in any way hinders private enterprise.


Here is the definition of Laissez-Faire Capitalism: 

Laissez-faire capitalism is an economic system. Capitalism involves the ownership of property by individuals. The individual's goal is to use this property, or capital (buildings, machines, and other equipment used to produce goods and services), to create income. Individuals and companies compete with one another to earn money. This competition between companies determines the amount of goods produced and the prices company owners may demand for these goods. The French term laissez-faire literally means "to let people do as they wish." Thus, supporters of laissez-faire capitalism do not want the government to interfere in business matters, or if governments do involve themselves in business matters, to keep government influence to a minimum.

One result of no rules in private enterprise is that a person with money and thus the ability to buy influence (i.e. allot of money equals greater power, political and social) can destroy any chance of a competitor entering the marketplace. In fact, without rules and law, people tend to be greedy and selfish. Something which is normally well-known.

With no law there is no control over anyone with power using it unfairly against someone who is socially and politically weaker. Generally, this is seen as immoral by all religions and philosophies as being ruthless means there is no 'charity' and others must be manipulated to gain even more wealth and control (a never ending process).

That is why religious sources tend to be against the 'might is right' belief embedded in Laissez-Faire Capitalism.

The following is a religious explanation(from Christianity) which is naturally against the type of behavior which takes from fellow human beings to the detriment of society;

Darwin's ideas played a critically important role in the development and growth, not only of Nazism and communism, but also of the ruthless form of capitalism as best illustrated by the robber barons. While it is difficult to conclude confidently that ruthless capitalism would not have blossomed as it did if Darwin had not developed his evolution theory, it is clear that if Carnegie, Rockefeller, and others had continued to embrace the unadulterated JudeoChristian worldview of their youth and had not become Darwinists, capitalism would not have become as ruthless as it did in the late 1800s and early 1900s. Morris and Morris (p. 84) have suggested that other motivations (including greed, ambition, even a type of a missionary zeal) stimulated the fierce, unprincipled robber baron business practices long before Darwin. Darwinism, however, gave capitalism an apparent scientific rationale that allowed it to be taken to the extremes that were so evident in the early parts of last century.

The basic argument against Laissez-Faire Capitalism (as opposed to a mixed economy with laws to help keep the market fair - see definition above) is that without rules, ruthlessness and "might is right" reigns supreme. Allowing the rich and powerful to take advantage of the weak.

In the feudal system, allot of power (through control of land and resources) was given to a few people by a king. These people would then do everything they could to take whatever they could at the cost of society and every other human that could be conned (that is generally in a different clan or family, though this didn't hold in all cases).

Such economic behavior (and an effect of Laissez-Faire Capitalism) was and is referred to as "Robber Barons"; 

What Does Robber Barons Mean?

A disparaging term dating back to the 12th century which refers to:

1. Unscrupulous feudal lords who amassed personal fortunes by using illegal and immoral business practices, such as illegally charging tolls to passing merchant ships.

2. Modern-day businesspeople who allegedly engage in unethical business tactics and questionable stock market transactions to build large personal fortunes.

Regulating immoral business practices is an old function of modern democracies and modern economies. This is another reason why in the modern world government is mixed with private enterprise. To provide rules and a framework for a fairer society with more opportunity for all its citizens not just a few who happen to be on top and thus have the wealth and influence to get more and more while giving back less and less to the community that these individuals are from.
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Opportunity Cost and One Reason for 'Mixed' or 'Dual' economies

 Definition of Opportunity Cost from Invetopedia:

What Does Opportunity Cost Mean?
1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

In economics, opportunity cost refers to what you can produce at the cost of another. 

For example; you could allocate more of the budget to weapons or more to a social safety net such as medicare. In choosing one over the other you face a 'tade-off'. An economy with all resources used up for war or all resources used up for social services only exist in extremely unbalanced economies and political systems and even then don't exist in its pure forms.

In economics you seek to balance one choice against another to find a balance that is right for that particular society. Going to extremes is not something economists are supposed to do (at least not as I was taught in my O and A levels and my undergraduate economics studies... so this is 90's education onwards). Reducing taxes to a degree can stimulate the economy and even create jobs. After a certain point it ceases to be useful and that point will change for each time and situation (economics is about understanding the currant situation and formulating a solution. Politics often works in reverse, particularly new Republican economics - see True Republicanism ).

If tax cuts already havn't worked so increasing them will also not work. In other words, decreasing taxes can be useful to a point and beyond that point they are detreminental to society. No taxes (revenue for a central authority) in a society would mean no public goods, i.e. parks, no streets, no street lights, no libraries, no medicare, no social security, no military (Since no society can exist without taxes this scenario is reffered to as 'hypothetical' by economists). In the same way, raising taxes to 100% or 90% or even 75% would be too much and it would be bad for the economy.

In social applications of economics going to an extreme in either direction is generally NOT done. Politics does take extrme views, however, it is important to keep in  mind that some political policies often have nothing to do with economics and are therefore extremely bad for an economy no matter how they are framed as the 'solution to everything'.

Balancing the public good with private enterprise (so that there is, at least some, opportunity for ALL citizens is one reason why economies exist as 'mixed economies'. i.e. government and the private sector is melded together to provide social and economic growth. This will hold true unless subverted by a few (such as an aristocracy) for personal gain.

Definition of mixed economy:


An economic system in which both the private enterprise and a degree of state monopoly (usually in public services, defense, infrastructure, and basic industries) coexist. All modern economies are mixed where the means of production are shared between the private and public sectors. Also called dual economy.
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Thursday, July 7, 2011

The Case for Monopoly/Oligopoly Regulation In The News Media Industry- Part 1

A basic definition of Monopoly and Oligopoly:

What Does Monopoly Mean?
A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.

According to a strict academic definition, a monopoly is a market containing a single firm. 

 In such instances where a single firm holds monopoly power, the company will typically be forced to divest its assets. Antimonopoly regulation protects free markets from being dominated by a single entity.

Investopedia explains Monopoly
Monopoly is the extreme case in capitalism. Most believe that, with few exceptions, the system just doesn't work when there is only one provider of a good or service because there is no incentive to improve it to meet the demands of consumers. Governments attempt to prevent monopolies from arising through the use of antitrust laws.

Of course, there are gray areas; take for example the granting of patents on new inventions. These give, in effect, a monopoly on a product for a set period of time. The reasoning behind patents is to give innovators some time to recoup what are often large research and development costs. In theory, they are a way of using monopolies to promote innovation. Another example are public monopolies set up by governments to provide essential services. Some believe that utilities should offer public goods and services such as water and electricity at a price that is affordable to everyone.


What Does Oligopoly Mean?

A situation in which a particular market is controlled by a small group of firms. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market.

Investopedia explains Oligopoly
The retail gas market is a good example of an oligopoly because a small number of firms control a large majority of the market

Extracts are from here and are in italics:

Why do economists object to monopoly? The purely “economic” argument against monopoly is very different from what noneconomists might expect. Successful monopolists charge prices above what they would be with competition so that customers pay more and the monopolists (and perhaps their employees) gain. It may seem strange, but economists see no reason to criticize monopolies simply because they transfer wealth from customers to monopoly producers. That is because economists have no way of knowing who is the more worthy of the two parties—the producer or the customer. Of course, people (including economists) may object to the wealth transfer on other grounds, including moral ones. But the transfer itself does not present an “economic” problem.

Rather, the purely “economic” case against monopoly is that it reduces aggregate economic welfare (as opposed to simply making some people worse off and others better off by an equal amount). When the monopolist raises prices above the competitive level in order to reap his monopoly profits, customers buy less of the product, less is produced, and society as a whole is worse off. In short, monopoly reduces society’s income.

Explanation:

By having a monopoly in the news media you reduce the quality of media across a whole spectrum of media. for example; Murdoch's tabloid style newsmanship is a model that works for business, in that it attracts attention, and makes money and can direct attention of viewers for advertising purposes.

[Note: To assume that a business model is correct simply because it works is the equivalent of assuming that slavery should be accepted because it has economic value, i.e. cheap labor.] 

The more Monopolistic or Oligopolistic power he gains, the more other news media has to follow him to compete with him for market share... and the more the news media will sound, 'like the gossiping of a 14 year old girl'. [Keeping in mind that the type of news structure that works best for a democracy is different from the gossipy /rumor mongering style - click here for more info.]

The growing monopoly of Murdochs rumor mongering type news media rests upon the deregulations put into effect by George W. Bush ...


By deregulating the market the result is that one type of 'newsman' gets more power over dessimination of news and thus the quality of the product (i.e. news) becomes lower. (i.e. Rupert's style is of a rumor mongerer, so, at the very least, that is what we will get).

Especially notice that Colin Powell's son states that "[this deregulation] will advance our diversity and localism goals and maintain a vigourously competitive environement". Obviously, the opposite has happened - decrease in competition is the very definition of conglomeration.

Another reason for regulation:

By removing regulation towards monopolies, the ones with large amounts of capital can control a larger and larger share of the global news market. This can create a bias in news that can blind the public from proper perspectives - for example; this video clip shows how a large segment of the news media was focused on an outdated 'new' product rather than news from a region that wasn't deemed interesting by high level exec's;


The market share for polticheck is much lower (i.e. less people 'view' the website about facts in politics than they do Fox News, so Fox News's view AND it's bias will dominate)... this also means that Fox News views will predominate the public debate and influence public policy (as the debates are centered around media manufactured issues). I think this is an iron-clad case to regulate monopolies and oligopolies in media, especially when you take these three pieces of evidence into account:

1. How a large media conglomerate can manufacture and promote news



Notice how one newspaper is used to comment on (or more accurately, 'advertise') another paper.

Stephen Colbert : The Post isn't saying she's a lesbian, they are just asking the question

By asking a question you place a thought in someone's head. For example; I f I were to say, "DON'T think of a PINK elephant, for 5 minutes and I'll give you ten thousand dollars!" - Unless you are a yogi, you will be thinking of pink elephants for the next 5 minutes continuously. by constantly talking about an idea - whether it's true or not - will place that idea firmly in the minds of the listeners.

Notice the placement of the story in relation to other stories, the idea of that woman (whoever she is) as a lesbian, is most certainly being promoted as a matter of policy - irrespective of whether it worked or not.

The train of planting News goes as follows - First story in the Wall Street Journal, Second Story in the NY Post and finally, news story on Fox News - Seems like different news sources commenting on a story but in reality it's ONE news story, created and promoted by the SAME news source.


2. Fox News has a large market share for news in America and look at its types of news bias...



Partial list of Fox News's FALSE Statements as checked by PolitiFact.com

Less than 10 percent of Obama's Cabinet appointees "have any experience in the private sector."


Texas board of Education may eliminate references to Christmas and the Constitution from textbooks


Healthcare reform is a government takeover of healthcare


The Muslim brotherhood has openly stated they want to declare war on israel


American troops have never been under the formal control of another nation


Florida's Gov. Rick Scott's approval ratings are up (lol!)


Massachusetts health care plan is wildly unpopular among state residents


There's been more debt under Obama than all other pPresidents combined


Health care bill includes death panels


Cash for clunkers will give government complete access to your home computer


Halting gulf drilling costs 8 billion a day in imports


Democrats plan largest tax increase in history


John Holdren proposed forced abortions and putting sterilants in drinking water


Nobody at Fox News ever said you're going to jail if you don't buy health insurance


3. Fake perspectives on the countries economy can be created, thereby delaying taking action to remedy the economic situation - The United States of America led the whole planet into a depression with the antics of its last administrators (and ideologies begun there are beginning to show their fruits in Europe as well). The news media is just one example but it is still an important means for spreading disinformation,and, if it is not regulated can affect the entire political and economic debate across the nation causing allot of short-term and long-term political and economic damage;



Notice this statement: "Wall Street Journal has been sold to Rupert Murdoch, This is good news for the economy because from now on Wall Street Journal will only report good news on the economy"

During George W. Bush's administration Fox News only reported good news about the economy (it's reporting has been so 'biased' that one commentator (Goldberg) even got fed up!). Even though the huge debt, the housing crises, the problems in wall street, the water wars, etc. All began or reached fruition with that administration. Because of Rupert Murdoch's Monopolistic position he has manged to influence the national (and global) debate away from science and on to ideology, creating, dare I say, the possible beginning's of a new Dark Age.

More info on Fox News is here (sorry, some videos are blocked).

Also, please note the war mongering stance taken by Hannity and Glenn Beck. If Rupert Murdoch is aware of these activities, understands their implications AND approves. Then this is very serious indeed.
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Monday, June 27, 2011

What is Perfect Competition?

From BasicEconomics.info

In competitive markets there are:
  1. Many buyers and sellers - individual firms have little effect on the price.
  2. Goods offered are very similar - demand is very elastic for individual firms.
  3. Firms can freely enter or exit the industry - no substantial barriers to entry.
Competitive firms have no market power. Recall that businesses are trying to maximize profits, and Profit = Total Revenue (TR) - Total Cost (TC).


Principle of Economics #7: Governments can sometimes improve market outcomes. Markets do many things well. With competition and no externalities, markets will allocate resources so as to maximize the surplus available. However, if these conditions are not met, markets may fail to achieve the optimal outcome. This is also known as "market failure".

If a big business is involved in activities that, say pollutes water, then it is harming fellow citizens and it's own consumers. This is called a 'negative externality'. This is an example of perfect competition NOT working efficiently. In such situations the government steps in a balances the situation so immoral business practices creating negative externalities can be controlled creating a better community and business atmosphere for everyone. That is why in practice (i.e. in the Real World) perfect competition with no regulation rarely exists, instead we have 'mixed economies' which is what exists in all democracies (and helps a democracy function better if the laws are set and administered appropriately)


More about Perfect Competition from Investopedia:

What Does Perfect Competition Mean?
A market structure in which the following five criteria are met:

1. All firms sell an identical product.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices
charged by each firm.
5. The industry is characterized by freedom of entry and exit.

Investopedia explains Perfect Competition
Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry.
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What is a Market Economy?

Adam Smith popularized the idea of the 'invisible hand' that guides market forces. The idea is that the demand of individual and groups of consumers when matched with the supply of the goods that are demanded will create a fixed price which will distribute all the goods (supply) to all the consumers who can afford it (demand).

Adam Smith did say that government intervention may be needed to balance the market forces. i.e. a large business can force out a small business, or find a way to cheat or scam consumers etc. (will be explaining this more in 'perfect competition' next)

The following are some extracts to help explain what a market economy is, then I will be getting into some of the basics of economics...

From Investopedia:


What Does Market Economy Mean?

An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning. This is the opposite of a centrally planned economy, in which government decisions drive most aspects of a country's economic activity.

Investopedia explains Market Economy

Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well-being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations.

While most developed nations today could be classified as having mixed economies, they are often said to have market economies because they allow market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability. Although the market economy is clearly the system of choice in today's global marketplace, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations.



Since the government will always have some level of regulatory control, no country operates as a free market in the strict sense of the word, but we generally say that market economies are those in which governments attempt to intervene as little as possible, while mixed economies include elements of both capitalism and socialism.

Note above that in a centrally planned economy EVERYTHING is planned by the government, i.e. how many crops are to be produced, which crops are to be produced, who get how much of the crop and in what proportion. This means that if you don't want something (ex. rice) and want something else instead (ex. bread) you have no choice in the matter as the government has made that decision for you.


Also note that in a free market economy subsidies are unheard of as subsidies are meant to either protect a producer of goods or promote the development of an industry. In a free market economy the kind of oil subsidies that exist in the States would not exist.

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