Like a Deer in Headlights

One element of the US slowdown that has been overlooked (at least I don't recall seeing it mentioned before) in the media thus far is the election--not in terms of how elected officials plan on fixing it (which is talked about), but rather, how the election itself might affect the economy. As of right now, US residents have no idea as to who will be in office in 2009, be it the neo-populist Hillary Clinton, the enigmatic John McCain, or the New Deal inspired Barack Obama. As of last night, the Iowa Electronic Markets have the Democrats trading at .513 and the Republicans at .473, pretty much a dead heat. And while Obama is currently well ahead of Clinton in terms of the Democratic nomination, it is only very recently that Hillary has fallen well behind.

The upshot of all of this is that the participants in the market are pretty much clueless as to who will win the election, and as a result, as to what direction the new leader will attempt to push the economy. Add to this the fact that the economy is one of the most salient issues in the US right now, along with the traditional "100 day honeymoon" where new presidents are pretty much given what they want in terms of policies, and you will expect to see some significant change in the American economic landscape come January-April 2009.

So maybe we should ask a different question. Is the US economy faltering? Or is it just a deer in the headlights of an 18-wheeler sized election barreling down on it, frozen due to the unpredictability the outcome? If so, we might see an economic recovery start as we get closer to the election--not because of Bush's silly stimulus package, but rather because the likelihood of each possible election outcome will become a lot more clear at that time!

Alcopop Tax Folly

The Australian Government's new Alcopop Tax Hike, in addition to being an unfortunate attempt at paternalism, suffers from an even greater shortcoming: failure to understand what economists call the substitution effect. It is fairly obvious that increasing the tax on the alcohol content of premixed drinks by 70% will reduce the consumption of these drinks, but the Rudd Government doesn't seem to have asked the question of where these consumers will now choose to spend their money. I'm pretty sure the answer is not bubble gum and soda pop. I'm willing to bet that we simply see a substitution away from premixed drinks into hard liquor, beer, or wine, and I'd be surprised if this substitution wasn't pretty much on a 1-for-1 basis.

Butter Crisis in Japan

This article from The Age was recently brought to my attention, with the attendant question of "if free markets are so good, why can't they get butter in Japan?" The article argues that it is a result of supply and demand. Supply and demand shocks in an unfettered market might lead to shortages in the very short run, but these shortages would cause prices to rise. As prices rise, domestic producers would be expected to increase output and foreign producers would export more butter to Japan. While it is true that the short run elasticity of supply is very inelastic, the price should simply rise to the point where supply equals demand. In other words, after an initial shortage of short duration, rising prices would lure more butter to Japan. Sure, prices would be higher. But there would still be butter on the shelf. Supply and demand shocks alone cannot account for this long lasting shortage. The question remains, then, what is to blame?

I will address this question by starting with a bit of history. In 2006, commentators on Japanese markets noted a large reduction in dairy demand, including butter. Accordingly, dairy prices fell dramatically, and domestic suppliers left the dairy industry. A large proportion of the Japanese dairy cows were slaughtered, leaving the domestic dairy industry incapable of increasing output in response to the recent increase in demand. However, as stated above, this shouldn't lead to a drastic shortage, as imports should enter the Japanese economy to meet the surging demand. Something else must be interfering with the market's ability to respond, and as it turns out, that something else is the Japanese government's protectionist trade policy.

Japan has set a tariff on butter at a rate of 30%, plus 1,159Y per kilogram. Evaluated at the current world butter price of approximately 350Y per kilogram, this implies an import price of around 1,600Y, an effective tariff of nearly 450%. Add on various shipping costs and retailer markups, one would expect the price of butter on the shelves at Japanese supermarkets to hit prices around 2,000Y per kilogram, which is roughly $20 per kilo (or $9 per pound). These are high prices to be sure, but even this high tariff wouldn't be expected to cause shortages.

The key to understanding the butter crisis comes toward the end of the article:

Last week, as the prices of wheat and barley continued their relentless climb, the Japanese Government discovered it had exhausted its ¥230 billion ($A2.37 billion) budget for the grains with two months remaining. It was forced to call on an emergency ¥55 billion reserve to ensure it could continue feeding the nation.

In addition to the hefty tariffs, the Japanese government has an additional layer of protectionism called the ALIC (Agriculture and Livestock Industries Corporation). The ALIC, a government agency, has exclusive importing rights to butter. It is illegal for any corporation other than ALIC to import butter. And the ALIC is a government agency, with a government budget, which effectively limits the amount of butter they can afford to import. The stiff tariff, combined with the ALIC's monopoly status and limited budget, add up to a highly prohibitive quota system. In a market with highly inelastic (perhaps perfectly inelastic, due to livestock import restrictions) domestic supply, the result is widespread and pervasive shortages.

Office Hours Poetry

Here is what I have posted on my office doors in lieu of office hours:

Office Hour Poetry

Office Hours (a Haiku)

No I will not tell
You what is on the exam
So don’t freaking ask!

Office Hours (a Sonnet)

Professor, Professor, open your door,
The syllabus says that you’re here ‘til four!
I know you are there, I saw you before!
I’ll just be a minute, that and no more!

Please open the door, I’ll be quick, you’ll see!
I just have one question, or two, or three
A small query on the economy
Just a minute or two, and you’ll be free!

He’d heard this before, this story of woe,
The student wants just a minute or so
Sometimes it’s just a quick little hello
The professor bought it once, long, long ago

But now he’s no longer quite so naive
He knows that, once they come, they’ll never leave!

Ode to Office Hours

Office hours, how do I love thee? Let me count the ways.

(this space left intentionally blank)

Communist victory in Cyprus

In an election result that surprised me, the
Communist Party has won the election for president in Cyprus. What does this mean? I think it depends on just how quickly the reunification of the island happens, and the extent to which the Communist Party honors their pre-election promise to give the right-wing party control over the economy. If the reunification takes up a considerable portion of the new regime's energy and drags out for a long time, I doubt the Communists will spend much time on domestic reform. If, however, the reunification happens quickly, and they decide to get their hands dirty in Communist reform, then I fear the reunified Cyprus will wind up looking a lot more like the north part of the island (GDP per capita around $7,000US) than the south (GDP per capita around $22,000US).

Inflation in Zimbabwe

100,000%? Can that be right? Personally, I'm betting the official figures are actually too low, but who knows. I sincerely hope he gets voted out of office next month. I just worry that he won't leave...

Did the Dead Vote Too?

I'm not sure how we all missed this, but Cyprus just had their Presidential primary elections. The current president from the left-centre party, Tassos Papadopoulos, has been eliminated by the Communist party candidate Demetris Christophias and right wing candidate Ioannis Kassoulides. The big issue in Cypriot politics is reunification of the island, as the northeastern portion is controlled by Turkey.

But the most interesting thing about the article is this statement: "Cypriots living abroad, in Britain and Greece, were flown home on specially-chartered planes to take part in the vote." To me, it doesn't really seem like this is good for democracy. It's already expected to be a close election (the primary was decided by under 800 votes--that's not very many flights!), and it appears that whoever has the most money to charter the most planes might in fact tip the balance. Sure, I know that in the US the parties hire buses to shuttle people to and from polling places, but something about chartering planes to fly people in for an election seems to go way beyond that.

But maybe that's just me.