Category Archives: Macroeconomics

Econ 101: Gas Tax

500px-Supply-and-demand.svgFor those of us who have not taken a survey econ course never fear…I’ll get you up to speed.  The graph above shows supply and demand curves.

The horizontal line (Q) is Quantity of a product or service and Q2 is a larger quantity (more supply) than Q1.  The vertical line “P” is Price to purchase the good or service.  P2 is a larger price than P1.

The blue line S is a supply curve for the product or service.  As with most supply curves is increases and tells us that as price (P) rises, the quantity (Q) of the product supplied also rises. Simply put if people are willing to pay more for pizza then more people will go into business selling pizza.  Common sense made difficult as a professor of mine used to say.

The line D1 is a demand curve for the product and tells us that as the price falls, the quantity Q of the product demanded rises. So, if the price of pizza drops more people will buy it.

The point where S crosses D1 is a market equilibrium, where the supply and demand for the product are equal. Easy to graph, hard to achieve.  If the price is below equilibrium, less of the product will be supplied resulting in a shortage and the price will rise.

Now, John McCain has proposed a Gas Tax holiday which would suspend federal gas taxes for three months.  The gas tax is 18.4 cents and 24.4 cents on diesel.  Some estimates have the government losing 10 billion in revenues.  McCain argues that the savings would trickle down to the consumer (you & I) and “help spread relief across the American economy.”

Being the dismal science that econ is, it’s impossible to say what the results of this gas tax holiday would be in reality.   However here are some more believable scenarios:

  • Assuming we are currently at a market equilibrium (debatable given how much gas prices change) reducing the cost of gas will increase demand which could increase supply but since summertime gas supply is mostly fixed…supply cannot increase. So price will rise but not supply and the benefits will go to the oil companies.
  • The tax reduction will be split between the producers and the consumers (you & I). In a real reduction of price, demand will rise raising the price slightly but not as much as in the first scenario.  This will increase consumption and therefore increase U.S. carbon footprint.

Either scenario seems like a losing proposition to me but it does make for a good speech.

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Singularity and the End of Poverty

poverty-ball-and-chain-940px  In his book The End of Poverty, Jeffrey Sachs discusses the global poor and how to eliminate poverty within a generation.  The idea is that global poverty, described as those who live on less than a dollar a day, could be eliminated by the year 2025 with the careful use of development and aid.  He describes the problem as a poverty trap in which the global poor are unable to reach the “bottom rung” of the economic ladder; once that rung is reached a country and a people could pull themselves out of poverty and into the market economy.  The dilemma that Sachs attempts to tackle is how to boost the world’s poor to reach that rung.

Economists love simple theories and the poverty trap is no exception.  The mechanics of it are very straight forward…your income today influences your income in the future. What you have today directly impacts the food you can buy, the medicine you can buy, what you can invest in your children’s education, the seeds you can buy to grow more food these are all determined by current income and thus determine what you will have tomorrow. If you cannot buy enough fertilizer to improve your crops, generate more income, and increase spending power you are trapped in poverty.  Imagine the game “Shoots and Ladders”, but every ladder leads directly to a shoot.   To deal with the poverty trap dilemma Sachs advocated for a clinical economics stating that countries like people require a unique diagnosis to treat poverty.

I am not entirely convinced that the poverty trap exists as I don’t typically put stock in the rational actor model, which is implied by the poverty trap for reasons I will not address here but is discussed in the book Poor Economics.  However, for the sake of argument lets say that it does exist and the world’s poor really do need a boost to get out of poverty.  Enter the singularity…

In math and physics the “singularity” means something not behaving as it did, but instead growing by leaps and bounds.  It is the threshold in the predictability of human development where past and present models can no longer be used to give reliable descriptions of the future due to the creation of a strong A.I. or enhancement of human intelligence.

Sound to outlandish? The expanse of technology is exponential as each piece builds upon the advances of the last. Think about the advance of technology in your own life. In the 1969 the U.S. put a man on the moon and one of the biggest expenses was being able to fit a computer into one room, forty years later your iPhone is thousands of times more powerful and at a fraction of the price. Not to mention it fits in your pocket.  It’s not unreasonable to think that the iPhone 20 will be the size of a red blood cell, connect to a new internet we haven’t imagined and cost 50 dollars. This is also known as Moore’s Law.

So whats this got to do with macroeconomics and the global poor? Simple. This is the next technical frontier that represents a post industrial economy.  Nanotechnology represents the ability to make things very cheaply. Nanotech could produce food, building materials and fuel without the energy intense process of the Industrial Revolution because it builds on an atomic level, thus, is the best form of recycling.  Give me your tired, your poor. Your broken and used molecules yearning to be free…and I’ll make you a house and a hamburger.

In short the singularity allows the global poor to climb out of poverty traps that Sachs mentioned because food, shelter, clothing and medicine will be no cost.  In the post industrial economy the productivity (GDP/hoursworked) is hugely greater  because technology has radically reshaped our global society.