The Unfair Tax?

Dave Hornstein writes this opinion at examiner.com:

There is a proposal to replace the federal income tax with a national sales tax, dubbed by its proponents the "fair tax," a label that is not only dishonest but downright Orwellian. The British writer George Orwell, a man of uncompromising intellectual honesty, saw clearly that in politics something can be given a name that is the exact opposite of the reality

To call a national sales tax a "fair tax" is certainly Orwellian when sales taxes are highly regressive.  The less income a person makes, the higher percentage of it they have to spend.  With spending being taxed, the lower one's income, the higher the percentage of it that goes to taxes.

The fairest basis for taxation is ability to pay, which is based on income.  As a person spends a lower percentage of their income as they make more money, a graduated income tax is the fairest of all, for people at higher income levels have more money available to pay taxes.

What do you think of Hornstein's argument?  Use economic language and analysis in your explanation.  Is "ability-to-pay" the only criteria for determining the fairness of a tax?  How could a national sales tax be made more fair?  How might a national sales tax be considered "efficient"?  

Cap and Trade Debate

CHARLESTON, W.Va. (AP) - A global warming skeptic and a leading climate change expert  are going to debate the potential impact of cap and trade legislation on West Virginia's economy. Cato Institute Senior Fellow Patrick Michaels and Climate Change Director David Hawkins at the National Resources Defense Council will face off Dec. 7 at the University of Charleston.

Under legislation passed by the U.S. House and now under consideration in the Senate, the federal government would set limits on carbon dioxide emissions. Businesses would then buy and sell permits to emit the gases.

Michaels says the proposal would lead to job losses in mining, trucking, railroad and other industries.

Hawkins says it would provide opportunities for economic growth.

Explain one specific way cap-and-trade legislation may lead to job losses in mining, trucking, railroad or other related industries.  You don't have to talk about all of these -- just one specific way in one of them.  Then explain one specific way cap-and-trade legislation would provide an opportunity for economic growth.  You may not repeat what your classmates have already written; you must come up with a new idea.

Global Public Goods

The Zedillo Commission Report on World Bank Reform wants to "create the foundation for far-reaching reform of the World Bank as the premier global financial institution supporting sustainable global development and poverty reduction."  Among other things, it identifies the provision of "global public goods" as one of the three main challenges facing the World Bank:

Supporting the provision of global public goods: The report identifies global public goods, such as environmental protection, response to epidemics, protection of global financial stability, etc., as an important challenge, but does not specify what role the World Bank should play and what reforms are needed for it to play this role. In terms of funding, it will be important to explore making the World Bank the principal conduit for global public goods funding.

Talk about public goods.  How might this idea extend to "global public goods"?  Explain one other global public good not mentioned in the article, and why you think it is a global public good.  Why might it be important for the World Bank to become "the principal conduit for global public goods funding"?

Elasticity of crude oil

Ok, so we can't be at a school in the Gulf and not have a blog option on oil:

Oil is a dense, convenient form of energy, an essential ingredient of the modern economy. Testimony to its importance is the value spent globally on oil, around 3% of global Gross Domestic Product (GDP) on a trend basis. While there are substitutes for oil, these must be traded against their lower energy density and inconvenience. The key linkage therefore is price. By implication if oil ceases to be cheap, at least in a relative sense, its attractiveness is diminished.

Oil cycles tend to be resilient because both supply and demand are inelastic - at least in the short term. With a lead time between discovering oil and producing of just less than a decade, many of the projects we see coming to fruition today were conceived in an environment of sub-$30/bbl oil! Further, usage of oil is so prevalent in modern society that entire manufacturing and infrastructure systems are built to deliver it. The initial response to increased prices is thrift, with secular changes only possible once there is widespread belief that these high prices are sustainable and there is regulatory intervention.

Explain why the supply and demand of oil are both inelastic in the short-term.  What does this mean, practically, for consumers and/or the oil industry long-term?

Elasticity of pet food

Is your pet very important to your family?  Nestle is counting on it:

Muscovite Yana Repina gave up sushi dinners and cut down on salmon and brie so she could afford to give her cat Busya its preferred variety of Nestle SA pet food. “I’ve tried to buy cheaper brands, but she refused to eat those,” said 34-year-old Repina. Her cat devours a can of Nestle’s Purina Gourmet a day, costing Yana about 50 rubles ($1.17), three times the price of the low-cost Friskies label, which she says her pet won’t eat.  Even in Russia, where the economy contracted a record 10.9 percent in the second quarter, consumers find it harder to cut spending on pets than on themselves and their families. Nestle’s nine-month sales of petcare products rose at more than twice the rate of overall food and beverage revenue.

According to Euromonitor, the value of dog and cat food sold in North America will have risen 5.2 percent a year on average from 2004 to 2009, double the rate of packaged foods for humans such as rice and yogurt. Pet food sales will probably gain 2.5 percent on average each year through 2014, the market researcher forecasts, compared with 1.1 percent for packaged food.  Consumers’ reluctance to cut spending on their pets enabled Nestle to increase prices by more than any product.

Wow!  I think that's CRAZY!  What does this article imply about the price elasticity of pet food?  How do you know?  Economically justify your claim.  What does this article imply about the income elasticity of pet food?  How do you know?  Economically justify your claim.

PED of cooking oil

I bet you never knew there were so many cooking oils used in India:

Primarily used for human consumption, vegetable oils and fats are also used in animal feed, for medicinal purposes and for certain technical applications. These are extracted from a range of different fruits, seeds and nuts. Unlike industrial oils and fats, which are mostly produced from petroleum, vegetable oils and fats are usually non-toxic and biodegradable, without requiring any further treatment.
 
India is the second largest edible oil market in the world after China...  Groundnut oil is the major product derived from groundnut, a major oilseed crop of India. Groundnut oil is extensively used as a cooking medium, as a food constituent and lighting fuel. Groundnut oil is an excellent source of Vitamin E, mono and poly unsaturated fatty acids and it has better keeping quality than other edible oils like soybean, corn, and safflower oils.

According to the National Commodity & Derivatives Exchange Limited, the demand of groundnut oil for cooking purpose is reasonably price elastic.

Hmmm...  That's interesting.  I never knew that!  What does it mean that groundnut oil is "price elastic"?  Economically justify this claim.  What are the implications for other oil markets in India such as soya oil, mustard oil and sunflower oil ? 

Income elasticity of new housing

Peter Crabb writes here about the housing market:

The housing market is in these woes for the simple reason that supply exceeds demand. Like any market, the laws of supply and demand apply to houses. The demand side of the housing market is particularly dependent on income levels.

According to the law of demand, as the price of a good falls, the quantity demand rises. With the large drop we have seen in housing prices these past couple of years, you would think more houses would be bought and sold.  But many other determinants of demand — the total amount consumers want to buy at any price level — must be considered. Two important factors beyond the price of a good are income levels and expectations.  Both current income levels and expectations for future growth are way down.

Economists use a measure called income elasticity to predict the rise or fall in the demand for a product for any given change in income levels. The income elasticity of demand for housing tells us how much the quantity demanded for home purchases responds to changes in consumers’ income. Compared with many other goods, housing is highly income elastic.  In a 2006 study from the Joint Center for Housing Studies at Harvard University, income elasticity for housing in Western cities and suburbs was measured at 2.00.

In effort to spur residential housing demand, two U.S. senators announced this week new legislation that would extended the $8,000 federal tax credit for first-time home buyers passed earlier this year along with other economic stimulus plans. The new legislation would also raise the income limit to qualify from the current $150,000 for a married couple to $300,000.  It’s hard to think of many households earning $300,000 a year that don’t already own a home, but regardless, high unemployment and an economy in recession mean demand for homes just isn’t there. Tax incentives for first-time buyers do little to affect the income factor of demand.

The research shows that new home sales are income elastic.  What does this mean?  Economically justify why new home sales might be income elastic.  Why do you think the $8,000 subsidy "for first-time buyers [will] do little to affect the income factor of demand"?

New cheque regulations for Bahrain's banks

The Central Bank of Bahrain is requiring all banks to adhere to new standards for the cheques they issue. The specifications are outlined in this article from August 2009:

The Central Bank of Bahrain (CBB) has introduced a uniform set of cheque standards and specifications for designing and printing of cheques, which are processed through the clearing system. CBB has said that from now onwards there will be only one standard size for all cheques.  The standardization of the size of the cheque is expected to help speed up the cheque clearing process and increase efficiency of cheque clearing, storing physical cheques as well as archiving cheque images.

CBB has added that banks have to adopt the new standards and specifications for their next cheque printing order. In order to ensure smooth transition to new design cheques, CBB has given a five month period for them to make the required changes to their cheque designs. All cheques issued to customers after 1st January, 2010 must comply with these standards and specifications.

Salman Bin Isa Al-Khalifa, executive director of banking operations at CBB, said: "Introduction of a uniform set of standards and specifications for cheques is a major step towards increasing efficiency of the current cheque clearing process and modernizing the cheque clearing system."

Analyze this situation through the lens of supply and demand.  Please comment on these questions:

• What will this new regulation do in the banking market?  Why?
  
• What are the MSB and MSC in this case?  Is MSB>MSC?  Why or why not?
  

Bahrain raises minimum wage...again!

The government of Bahrain is deeply committed to a minimum wage for Bahraini citizens, as evidenced by this article from April 2009:

THE minimum wage ceiling for Bahrainis has risen from BD200 to BD250, Labour Minister Dr Majeed Al Alawi revealed at parliament yesterday.  He said several companies had already started the new minimum wage approach, with more to follow.

"There is no Bahraini earning below BD200 and I can guarantee that," he told MPs at their discussion of the Private Sector Law yesterday.  "I believe that any salary below that is unacceptable and I challenge anyone to say that Bahrainis are getting below BD200," he said.  "Around 17,000 have benefited from the minimum wage system, which we have introduced a few years ago. But more are now benefiting from the new BD250 approach we have started.  Bahrainis are in demand in the private sector at present and it is evident as employers are willing to give BD250 as a minimum wage and even BD300 in some cases."

MPs also dropped an added article that calls for the formation of a minimum wage council after the minister told them that it would make it oblige Bahrain to give equal wages to Bahrainis and expatriates.

Comment on parliament's decision from an economic viewpont.  Please address two of these questions:

• Why would the government want to increase the minimum wage for Bahrainis?
  
• Who will benefit from this increase?  Who will be harmed?
• What are market solutions the government could use to increase the wage of Bahrainis?
• What would be the implications of a similar law for expatriate workers?

Remember to use economic language, analysis, and evaluation.

What socialist planning might look like...

The Socialist Workers Party proposes this alternative to market capitalism:

SOCIALIST PLANNING

There are three main prerequisites for genuine socialist planning:

First, as we have seen, the major corporations must be taken into public ownership. Planning cannot work if elected representatives draw up a plan but do not [have] the means to implement it. The requirement for public ownership need not apply to every small business. But socialist planning only requires that the major levers of the economy are in the hand of the representatives of the people. ...We would need to take control of the banks, the major construction companies, the major manufacturing plants currently run by multi-nationals, the food industry and the major supermarket chains.

Second, planning requires that all economic information is available to the public. ... If people are to collectively decide how to allocate resources, commercial secrecy must be abolished. There will be no need for such secrecy in an economy built around co-operation rather than competition. The absurd notion that individuals can hold ‘intellectual property’ over knowledge will also have to be abolished. How can we develop the productive forces of society, if individual scientists ‘own’ the fruits of scientific research and can charge a fee for giving others access to the data?

Third, socialist planning requires a form of economic democracy that goes well beyond the limited political democracy of capitalism. It requires co-ordinating institutions where delegates discuss and deliberate on where the major funds for investment are to be allocated and what type and what quantity of goods are to be produced. To accurately reflect the needs to society, delegates will have to be mandated from gatherings of their constituents and will have to report back regularly. To safeguard against bureaucracy and elitism, there should be a facility to re-call them if they do not carry out their mandate.

What do you think? Could this work? What would be necessary for such a transition to take place? What would be the greatest strength of such an economy? What would be its greatest weakness?

Has the market system failed?

Don Boudreaux says no:

It's become an article of faith among lots of people that recent events prove (or at least suggest) that markets don't work very well.....

The vast majority of market exchanges and relationships work smoothly and to the advantage of all participants. Indeed, the market works so well and so consistently that it creates ever-higher expectations among the broad populace. When these expectations are dashed, if only for a handful of persons and if only rarely, the market is deemed to have failed.

But despite the current downturn, the market continues to work well in its typical silence. Do you have trouble today finding gasoline to buy? Are your local supermarket's shelves not stocked with food, wine, and (watch for it soon!) Easter candy? If your cat eats your socks, will you have trouble buying several new pair? If your car's battery dies this afternoon, must you resort to bicycling or public transportation because you can't replace your dead battery? If you're bored this evening with nothing to do, is there no movie you can go to or no DVD you can rent? If you miss your mom in Minneapolis or your boyfriend in Boston, can you not call them on your cell-phone — or even buy a plane ticket and go visit them?

What do you think? Has the market system failed? Why or why not? What specific characteristic has failed? What is the market system's greatest strength? Its greatest weakness? In what ways might the market system need government involvement?

Welcome to AP Microeconomics!

Hey there! I'm glad you're signed up for AP Microeconomics. This will be an intense class, but I also think you'll find it to be really interesting and relevant to what's going on in the world.

This discussion blog will be one way we look at real-life events and current issues. You'll need a Google account or OpenID in order to sign in and post.

In your introductory post, I'd like you to do three things:

1) Tell us why you're taking this class.
2) You received a letter from a student in last year's class. Write about two important or interesting things the student mentioned in that letter.
3) Respond to one of your classmate's posts: agree, disagree, or comment in some way. Then justify your response.

If you're one of the first five people to post, you don't have to do #3... So post early!

Can a tax cut deepen the recession?

We've seen that demand-sided policies always have a trade-off between unemployment and inflation, yet supply-sided policies don't have that same trade-off. Gauti B. Eggertsson, an economist with the Federal Reserve Bank of New York, makes quite a convincing argument that supply-sided policies may not work when the interest rates are close to zero:

At zero short-term nominal interest rate, tax cuts reduce output. They do so because they increase deflationary pressures. Policies aimed at stimulating aggregate demand work better. These policies include (i) a temporary increase in government spending and (ii) a commitment to inflate. The multiplier of tax cuts goes from positive at positive interest rates to negative once the interest rate hits zero, while the multiplier of government spending not only stays positive but becomes many times larger at the zero bound.

There has been much discussion in recent weeks about a stimulus plan to revive the US economy. Many economists argue that a recovery plan should include aggressive tax cuts. In this paper I show that under the special circumstances which the US is experiencing today — interest rates that are close to zero and deflationary pressures — tax cuts are contractionary in a standard New Keynesian model. Why? Tax cuts cause deflationary pressures in the model and thereby increase the real interest rate. The Fed can’t accommodate this by cutting the Fed Funds rates, since they are already close to zero. Higher real interest rates are contractionary.

Wow... That's a lot of economics! Can you summarize Eggertsson's argument? What are supply-sided policies, and why does he say that supply-sided policies won't work right now? What's the deal with the multipliers? What happens when the real interest rate increases? Why would this be bad for the US economy right now?

Negative interest rates?

My economics hero, N. Greg Mankiw, proposes an ingenious solution to the recession:

Until recently, most economists relied on monetary policy [to escape a recession]. Recessions result from an insufficient demand for goods and services — and so, the thinking goes, our central bank can remedy this deficiency by cutting interest rates. Lower interest rates encourage households and businesses to borrow and spend. More spending means more demand for goods and services, which leads to greater employment for workers to meet that demand.

The problem today, it seems, is that the Federal Reserve has done just about as much interest rate cutting as it can. Its target for the federal funds rate is about zero, so it has turned to other tools, such as buying longer-term debt securities, to get the economy going again. But the efficacy of those tools is uncertain, and there are risks associated with them.

In many ways today, the Fed is in uncharted waters. So why shouldn’t the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent? At that interest rate, you could borrow and spend $100 and repay $97 next year. This opportunity would surely generate more borrowing and aggregate demand.

The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress.

Unless, that is, we figure out a way to make holding money less attractive.

There is a way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

Having the central bank embrace inflation would shock economists who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.

Wow! What do you think? Evaluate Mankiw's proposal using sound economic theory on monetary policy, recessions, and inflation. [Remember that evaluate means to show pros and cons as you commit to a decision.]

Obama Gives Keynes His First Real-World Test

National Public Radio broadcast this report on January 29, 2009:

John Maynard Keynes is an unlikely hero for our time.

Keynes, a British economist who died more than 60 years ago, inspired President Barack Obama's plan to save the U.S. economy with a massive round of government spending. The British economist published his big theory, the one underpinning most of what Obama intends to do, in 1936.

Keynes corrected what he saw as a fundamental error in the economics that had come before. Classical economics teaches that if there's a downturn, the economy will eventually sort itself out. If people aren't buying enough, prices will drop to a point where people start spending. Keynes' radical insight was to look out the window in the 1930s and see that sometimes things don't right themselves. The economy goes into a downward spiral. The usual dynamic of supply and demand breaks down.

"A failure of effective demand is what he called it," says Alan Blinder, a Princeton economist who served as economic adviser to President Bill Clinton. Basically, people aren't spending enough money, either because they don't have any or because they got laid off or are afraid they're about to get laid off. If people aren't spending enough money, there's no way for the economy to automatically adjust. During the Great Depression, no one had figured out how to get people spending again. Then came Keynes.

"The Keynesian prescription is if all else fails, the government can spend the money," Blinder says. Normally, in a free-market economy, the public doesn't look to the government to prop up spending. "But Keynes' idea, which was revolutionary at the time, is if the private sector won't do it, then the public sector can do it as a fill-in stopgap," Blinder adds.

The Great Experiment

Many of the economists say they just don't know whether the Keynesian approach will work. Financial catastrophes don't happen often enough to prove theories like his. In fact, as economists like Blinder will tell you, this is the problem with economics.

Anti-Keynesians say this massive stimulus package is too risky an experiment on an unproven theory. It might not get America out of the recession, they say. It might cause vicious inflation and a bloated government, and leave a trillion more dollars in debt as a constraining burden on Americans' children and grandchildren.

The Obama administration is betting that won't happen. They're trusting this theory. They're trusting Keynes.

How might Neo-Classical and Keynesian economists look at this current crisis? Examine their differences. What are their respective strengths and weaknesses?

Responding to an Historic Economic Crisis: The Obama Program

Larry Summers, Director of President Obama's National Economic Council, made these remarks on March 13, 2009:

First, I'd like to describe how best to think about this crisis.

One of the most important lessons in any introductory economics course is that markets are self-stabilizing.

• When there is an excess supply of wheat, its price falls. Farmers grow less and others consume more. The market equilibrates.
• When the economy slows, interest rates fall. When interest rates fall, more people take advantage of credit, the economy speeds up, and the market equilibrates.

This is much of what Adam Smith had in mind when he talked about the "invisible hand."

However, it was a central insight of Keynes' General Theory that two or three times each century, the self-equilibrating properties of markets break down as stabilizing mechanisms are overwhelmed by vicious cycles. And the right economic metaphor becomes an avalanche rather than a thermostat. That is what we are experiencing right now.

What is the task of policy in such an environment?

The first component of the President's program is direct support for jobs and income to engage the multiplier process in favor of economic expansion. Increases in income lead to financial repair which supports further increases in income. Rising employment will lead to rising spending, which leads to further increases in income and employment.

The Recovery and Reinvestment Act is the largest peacetime economic expansion program in the country's history. It will inject nearly $800 billion into the economy, ¾ of it within the next 18 months. The Council of Economic Advisors' estimates suggest that the Recovery and Reinvestment Act will save or create 3.5 million jobs. It will at the same time do some of the work that the nation has needed done for a long time—doubling renewable energy capacity in the next 3 years, supporting middle class incomes, modernizing ten thousand schools, and making the largest investment in the spine of our national economy – the nation's infrastructure – since Dwight Eisenhower's investment 50 years ago.

It is surely too early to gauge the broader economic impact of the President's program. But it is modestly encouraging that since it began to take shape, consumer spending in the US, which was collapsing during the holiday season, appears, according to a number of indicators, to have stabilized.

What specific fiscal policy priorities seem to be at work here, and what are their pros and cons for AD or AS? You can view the line-item breakdown here. What specific things in this economic climate might hinder the multiplier effect of Obama's fiscal policy? Don't just write about general theory...

Robert Kennedy on GDP

In 1968, U.S. Senator Robert Kennedy gave an impassioned speech about using GDP as the measure of a nation's wealth:

We will never find a purpose for our nation nor for our personal satisfaction in the mere search for economic well-being, in endlessly amassing terrestrial goods. We cannot measure the national spirit on the basis of the Dow-Jones, nor can we measure the achievements of our country on the basis of the gross domestic product.

Our gross national product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.

Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.

What do you think, reading this 40 years later? Evaluate Robert Kennedy's ideas.

Are newspapers worth saving?

A recent article says "YES":

With many U.S. newspapers struggling to survive, a Democratic senator on Tuesday introduced a bill to help them by allowing newspaper companies to restructure as nonprofits with a variety of tax breaks... Cardin's Newspaper Revitalization Act would allow newspapers to operate as nonprofits for educational purposes under the U.S. tax code, giving them a similar status to public broadcasting companies.

Under this arrangement, newspapers would still be free to report on all issues, including political campaigns. But they would be prohibited from making political endorsements. Advertising and subscription revenue would be tax exempt, and contributions to support news coverage or operations could be tax deductible. Cardin's office said his bill was aimed at preserving local and community newspapers, not conglomerates which may also own radio and TV stations.

"We are losing our newspaper industry," Cardin said. "The economy has caused an immediate problem, but the business model for newspapers, based on circulation and advertising revenue, is broken, and that is a real tragedy for communities across the nation and for our democracy."

Newspaper subscriptions and advertising have shrunk dramatically in the past few years as Americans have turned more and more to the Internet or television for information. In recent months, the Seattle Post-Intelligencer, the Rocky Mountain News, the Baltimore Examiner and the San Francisco Chronicle have ceased daily publication or announced that they may have to stop publishing. In December the Tribune Company, which owns a number of newspapers including The Baltimore Sun, The Chicago Tribune and The Los Angeles Times filed for bankruptcy protection.

What do you think? Are newspapers going the way of horse-drawn carriages? Write about two in-depth connections to our intro unit on macroeconomics: GDP, the business cycle, unemployment, and/or inflation.

I, Pencil...

Another way to summarize all we've done in class so far is to look at all the economic interactions needed to produce a relatively simple good like a pencil.

A pencil, by almost any measure, is an exquisitely complex thing. Somewhere in a harvested forest was the stand of cedar trees that gave up their wood to provide the pencil's dowel. Somewhere in the Jamaican interior is the bauxite mine that provided the raw material for its little aluminum sleeve. Somewhere in the coal belt is the mine that provided the lump carbon for the graphite. Still elsewhere is the lab where the raw polymers were cooked up into rubbery erasers. And to those places that provided those things streamed still other things -- the smelting ovens for the metal plants, the autoclaves for the rubber labs, the blades for the sawmills, the backhoes for the carbon mines, the cotton to dress the lab workers, the bacon to feed the lumberjacks, the paymasters and truck drivers and box packers and shipping managers to keep all of the operations humming. A vast industrial machine rises up, switches on, and at its far end, spits out... a pencil, arguably one of the most complicated objects in the world. From Simplexity, by Jeffrey Kluger

Wow! Isn't that incredible? Think about all that in light of all we've learned in class. Choose another "simple" good and write about all the economic interactions that "magically" came together to get that good onto the shelves of Al Jazira market.

The Story of Stuff

Congrats on finishing AP Micro! We've learned a lot of good economics so far. But it's not the whole picture...

The Story of Stuff reveals the connections between a huge number of environmental and social issues, and calls us together to create a more sustainable and just world. It'll teach you something, it'll make you laugh, and it just may change the way you look at all the stuff in your life forever.

Please watch this video and post your thoughtful comments. How does it present another side of microeconomics and the market? What bias or agenda does the presenter seem to have? Does she influence your own decisions about your consumption? What specific change might you make in your lifestyle in response to this video, if any?

A fart tax?!?!

Proposals to tax the flatulence of cows and other livestock have been denounced by farming groups in the Irish Republic and Denmark.

A cow tax of €13 per animal has been mooted in Ireland, while Denmark is discussing a levy as high as €80 per cow to offset the potential penalties each country faces from European Union legislation aimed at combating global warming.

The proposed levies are opposed vigorously by farming groups. The Irish Farmers' Association said that the cattle industry would move to South America to avoid EU taxes.

Livestock contribute 18 per cent of the greenhouse gases believed to cause global warming, according to the UN Food and Agriculture Organisation. The Danish Tax Commission estimates that a cow will emit four tonnes of methane a year in burps and flatulence, compared with 2.7 tonnes of carbon dioxide for an average car.

Agriculture, transport and housing are not included in the EU's Emissions Trading Scheme (ETS), which enables industrial companies to buy and sell permits to emit carbon dioxide. Instead, EU member states are obliged to cut the emissions from non-ETS sectors by 10 per cent overall by 2020.

While Romania and Bulgaria will be allowed to increase emissions, Ireland and Denmark are each faced with cuts of 20 per cent in farming sector emissions.

The cow tax proposals would raise funds to buy allowances from other member states or to invest in technology that might reduce emissions. Denmark is believed to be further advanced with housing for pigs that captures and stores methane emitted from the animals. The gas can be used as a fuel for power generation.

A spokesman for the European Commission said that a cow tax was not its preferred option. “We would rather have solutions that reduce emissions by capturing methane from manure and new animal feeds that reduce methane.”

What do you think about this tax? What might this tax accomplish? Think about the things we've studied in class, and write your comments below.

And check out this follow-up article on fish oil!

Are Obama's tax increases "fair"?

Here are two opinions by well-respected economists on the tax increases proposed by U.S. President Obama:

ROBERT D. REISCHAUER

President of the Urban Institute; former director of the Congressional Budget Office

Is "afflicting the comfortable," as John Kenneth Galbraith liked to quip, fair, economically sensible and practical? In this case, yes! Unlike average Americans, those on the income ladder's top rungs have enjoyed very healthy income gains over the past decade. And, even more than those lower down, they have profited handsomely from lowered effective tax rates. To make the education, health and environmental investments that our society and economy need for the long run, why shouldn't those who have reaped most from society's past investments bear most of the burden of seeding tomorrow's opportunities?

Some fear that increased taxes on the top 5 percent will wreak economic havoc -- crimping entrepreneurial spirits and stanching charitable giving. But the overwhelming body of economic evidence suggests these effects are small.

Over the longer run, as the nation grapples with its entitlement promises, educational needs and infrastructure deficiencies, Americans at all income levels will have to accept somewhat higher levels of taxation.

N. GREGORY MANKIW

Economics professor at Harvard University; chairman of the President's Council of Economic Advisers from 2003 to 2005

The best data on the distribution of the tax burden show that the tax code, including all federal taxes, is already highly progressive. In 2005, the most recent year for which numbers are available, a household in the [bottom 20%] paid 4.3 percent of its income in federal taxes and one in the [next 20%] paid 9.9 percent. A household in the top 1 percent of income distribution paid 31.2 percent of its income in taxes.

The tax rate that top income earners face is not historically anomalous. It was higher during the Clinton years but lower during the Reagan years. In contrast, the tax rates now faced by the [bottom 80%] are unusual by historical standards. They were higher from 1979...until the passage of the Bush tax cuts in 2001.

President Obama's proposal to raise taxes at the top to further cut taxes at the bottom has one rationale: using the coercive power of the state to "spread the wealth around." In addition to the obvious disincentive effects, the policy raises deep philosophical questions. If one citizen of a nation can lay claim to the wealth of his more productive neighbor, shouldn't poor nations have the right to lay claim to the resources of richer nations such as the United States?

What do you think? Whose opinion do you agree with more, and why? Refer to the things we're learning in class. Post your comments below, or respond to someone else's comments.