Econ Reading Summaries

Econ Reading Summaries 2004-05

Globalization Reduces Inequality in China  Relevant indicators not compatible internationally  Variations in legal systems  Others say china is an example of country with increased inequality because of globalization  Study finds that openness leads 2 reduction in inequality  Offers rurals opportunity 2 industrialize, catch up 2 urban people

Does globalization make the world more unequal?  Bigger gaps in inequality between nations, but not within nations  Study finds that globalization mitigated effects of inequality between nations  Those who exploit get most  Income gap widening lessened by globalization, but globalization would not eliminate inequality – it would be less tho

Social costs of globalization  Economic progress in itself may not mean social progress  Trade liberalization may not lead to economic growth n stability  Poor countries have no hope to compete with industrialized world  Tax competition shifts tax burden to individuals, away from companies  Managed globalization is better

Where free trade hurts  Eu and US end apparel quotas, china soon will dominate  Quotas insured mkt access 4 unlikely nations  Race to the bottom, china will become dominant textile manufacturer  Primary victim – us textiles  Guaranteed quotas to smaller, poor nations will end, kill their industries

Free trade on trial  Nafta becomes 10 yrs old  Critics – would destroy jobs, lead to environmental race 2 bottom  Avocates – proportional growth 4 poor  Nafta unpopular, partly because advocates oversold case  Trade policy affects the pattern of jobs, does not create them  A success – raised income rates, lessened manufacturing jobs  Mexico has problems, not due to nafta  Tequila crisis – people pulled out money  Migration to us continues en mass  China going 2 wto has already caused mexico to lose much of advantage  Dumping of us crops on mexico New jobs migration  Basic principles of globalization must be tweaked, say people  Protectionism reinvented  Fact that competition affects manuf. N services not a problem  Disruption of jobs argument exaggerated  New jobs will fill lost ones

Trade is not bad for the American job market  Productivity growth outweighs job losses  Better productivity is better than increased employment  Growing import will not undermine employment if the labor market is flexible  Government intervention will only slow economic advance  Create growth in demand to solve employment problems, better education

Sticky situation  Taxpayers subsidizing sugar purchases  Cane sugar growers benefit from price floor on sugar  Consumers and sugar processors lose, pay artificiallyhigh prices

Big steel doesn’t need any more propping up  Steel receives protection from government  Subsidies sustain inefficient companies  Steel industry reluctant to make investments in technology, hurts consumers  Competition for big steel from mini, scrap mills n intl producers  Complaint that foreigners dump steel on market, but its not  Democrats say bush did not go far enough – wrong market

Thinking outside the box recycling  Fewer trees if we stopped making paper, not more  Recycling as a guilt trip

A better way to fight pollution  Us right not to join in explicit carbon dioxide emission cuts  Co2 subject for international debate  Damage of co2 doesn’t matter where produced  Identify countries that can reduce co2 at lowest cost  Agreement should deal with developing countries  Should be system of tradable pollution permits

Its immoral to buy the right to pollute  Making it easier to meet obligations sacrifices good of the environment  Developing nations created trading  Clinton wants trading at center of environmental policy  Kyoto creates too many loopholes  Pollution as a commodity removes moral stigma  Distinction between a fine and a fee – fined after the fact, fee before

What price pollution?  Clinton signed Kyoto – a bad agreement  Does not buy global warming argument  Exempts 130 nations  Polluting industries will simply go to developing nations  May worsen pollution – developing nations with lower standards  All countries should get allowances on greenhouse gas emissions  Allowances should be bought and sold

How much is the right to pollute worth?  Cap and trade overly simplified  Allowances create value from thin air  Government gets rich off them  Cost of allowances passed on2 consumers in the form of higher prices  Pollution program is recessive – passed on price hits lower income people harder  Must find some way to deal with price increases

Vouchers can free us from foreign oil  Us should set goal of oil independence by 2020  Reduction in oil use necessary  National security gain outweighs extra costs  Cut amount of gasoline used in cars  Economical cars have more expensive engines  Raising gasoline tax mite help - $1 increase takes price to more true cost  Increased gas tax would not mean lower other taxes  Proposes using tradeable electronic oil conservation vouchers  No revenue is collected  Positive cash reward from selling excess vouchers

Tax rules raise firm health benefits  No tax on healthcare benefit, benefits employers n employees  Firms are very responsive to changes in the tax subsidy 4 health  Subsidy is large  Individual buyers do not benefit  Regressive – greatest help goes to highest payers  Subsidy may lead to over-insurance  Removing part or all of subsidy = great decrease in coverage  Small firms more receptive to offering with greater subsidies

Health and taxes  Large amt of buying low deductible insurance, huge subsidy for buying wrong type of insurance  Healthcare savings accounts provided, give same benefit to those who save  Traditional tax rules reason why people chose to take low deductibles  When it comes from HSA, people balance costs more rationally

Why health costs are soaring  Rise in healthcare costs and decreasing quality not problems to populace – for those who have healthcare, quality is good  Doctor salaries and prescription drugs not a major part of increase  Hospitals are normally npos that do not profiteer  Insurance companies not making major profits – blue cross an npo  Tax code gives incentive to get employment compensation in healthcare  Low copays lead to overly expensive procedures

True price of depression treatment is declining  Badly constructed price indexes in healthcare impediment to gaining deeper understanding of healthcare costs  Flat supply costs but rapidly rising consumer prices because of higher copays and deductibles  Real price of care has fallen  Large # of effective treatments have led to increases in price

Is health insurance affordable to the uninsured?  Health insurance is affordable to ¼ - ¾ of uninsured adults  Low income households less likely to be insured  Health insurance as a choice for most  Policymakers can either force them to insure or not worry about them  Affordability of healthcare not a good predictor – different definitions of poverty lead to different indicators of affordability

Economic efficiency of cancer drugs  New cancer drugs increased life expectancy  Increased incidence of cancer due to decline in mortality from other causes  Cancer survival rates increased

New drugs and increased longevity  Individuals better off if ailment is common  Drug companies have greater incentive to create cure for common disease – get more money from it  Orphan drug act – gave incentives to create drugs for rare diseases  Includes 7yr exclusivity in distribution, possible tax credit for clinical research  Large increase in rare disease survivors, but they still die younger on average

Benefits of newer prescription drugs exceed their costs  Newer, more expensive drugs replacing old ones  Higher initial cost of new drugs, but reductions in mortality and total cost  Less likely to die, miss workdays  Generic drugs not always better

Expanded medical coverage crowded out private insurance  Increase in Medicaid coverage led to reduction in private insurance coverage  When children put on Medicaid, workers dropped family plans and went to individual private insurance  Some uninsured are eligible but don’t sign up until they need it

Us loses up to 130 billion annually…  Large money loss for early death n poor health of uninsured  Improved health leads to much lower economic dent  Impaired health = absenteeism and reduced productivity

How tax credits help overcome the obstacles facing the uninsured  Government programs not as effective as health care tax credits  Inefficient tax treatment of healthcare, big tax break when sent thru employer  3 complications facing uninsured – work status (most working), income status (cost prohibitive insurance), age status (young)  Tax credits address these problems – no longer bound to employer, get the help they need, young would have tax incentive to get covered

Medicare should include drugs  Can include prescription drug benefit without raising total cost  New benefits for prescription drugs  Increasing cost for individuals, seniors with financial hardships  Medicare costs rising rapidly  Rising cost of program should not stop prescription drug benefit  Deductibles and copays should be increased in order to do this

Do cigarette taxes make smokers happier?  Clear evidence that higher prices deter smoking  Taxes cause reductions in consumption  Higher cigarette taxes lead to large increase in self-reported wellbeing  Increase not present for other excise taxes  Happier thru reduced smoking

Theres nothing natural about natural monopolies  Natural monopoly (difficult to compete with) used as justification for government ownership  Largely irrelevant  Companies no longer constrained to small countries  New technologies can destroy natural monopoly status  Government enterprises slow down introduction of better technologies, no competition, political pressure, bad service  New companies regularly improve efficiency, get good profits

Shock therapy – Nigeria  Nigeria as Africa’s largest oil producer – money goes to rich  Government subsidizes oil  Price ceiling lifted on petrol  Fuel subsidies cause corruption, shortages, expensive, discourage other energy source use  Deregulation should decrease negatives

How deregulation spurs growth  Barriers to entry negatively related to investment  Regulatory reforms spur investment, tight regulation restricts investment  Liberalization of entry most important deregulation step  Privatization does not appear to affect investment significantly  Nationalized companies might overinvest

Case studies – marginal v. average cost  Failure of franklin natl bank – banks must also pay for the money they lend out  Largest source of funds – customer deposits [must pay interest on]  Can attain funds in fed funds market if lending out more than saving  Financial planners looked at average cost instead of marginal cost  When the marginal is greater than average, it pulls up average  Mc was greater than mr, so franklin lost money when creating new loan  Success of continental airlines – marginal flights, not average  Using average cost includes fixed costs, irrelevant to flight running  They determined the additional cost of running a flight

The economics of the Microsoft case  Divided technological leadership [dtl] – supply of key platform components by multiple firms  Dtl leads to increased competition in each layer of a platform  Also leads to rivalry between existing firms that sell complements  Unified technical leadership [utl] better at distinct alternatives  Government said that Microsoft was keeping up barriers to entry thru monopoly power  Tried to prevent dtl by bundling explorer

True price of saving lives  Strengthening the worldwide protection of intellectual property problematic  Until this is changed, little incentive to distribute pharmaceuticals around the world  Trips problematic – knowledge is a public good, but necessary to protect creators from losing claim to discoveries  Intellectual protections difficult among countries rather than within  Raises prices of goods  Extending patent system worldwide unlikely to give firms incentive to create vaccines to diseases unique to developing world  Poor countries contribute little to the overall world market for drugs  These drugs will not be created in rich countries because the diseases are extremely rare or nonexistent  Solutions – stop exempting vital medicines form patenting, investment of public funds in research - Global diseases, patents could be sought in rich or poor countries, but not both  Effective control of bootleg drugs necessary

If there was a new economy, why wasn’t there a new economics?  Never a new economics to go along with the new economy  Coase paper asked why market not used within firms if it is a great tool for allocating resources  Negotiation rarely happens – primary unit of capitalism looks like central planning  Coase’s answer to question hinges on costs of making transactions  Better communication tech ( internet) should lead to downsizing and outsourcing – doesn’t always happen  Reduction in company size if they reduce the costs of using markets by more than they reduce internal communication costs  3 gen categories of transaction costs – search and info costs, bargaining and decision costs, policing and enforcing costs  If certain suppliers are critical to success, need them within fold  Incentives that spinoff will have if spun off  Effect of internet depends on competing force analysis

Venture capital spurs innovation  A dollar of venture capital is more likely to produce patented innovations than traditional r&D spending  Could mean that such firms don’t innovate more, just patent more – other measures say this is not the case  Venture capital might follow rather than cause innovation

Heavens! Deregulation works  Deregulation started in 70s  Microeconomists argue that deregulation makes consumers more well off  Freer access to markets, regulation of markets  Regulation over entry creates monopolistic profits – deregulation makes them more competitive  Also caused inefficiencies that raise costs, checked growth of profits, raised costs  Economists too quick to assume that workers who lose jobs will immediately find other jobs  Deregulation caused a big increase in profits in airline industry

The games economists play  Until game theory came along, most economists assumed that firms could ignore effects of behaviors on actions of others – true when market is competitive, monopolistic  Nash equilibrium – no player wants to change his strategy, given full knowledge of other strategies  Nash’s game only works for games played more than once – continual interaction in real life  Not realistic to know whats in other’s mind, info not that perfect in real life  Theory is difficult – lots of tricky math  Not for certain – theoretical, not good to give advice to government