The Everyday Economist

Chrysler is promising to fix the price of gas for $2.99 per gallon for new customers. Justin Ross explains the perils of the “deal.” My favorite quote:

I hope Chrysler customers will be allowed to put their cards up on e-Bay, this would be fun to watch unfold over the next three years.

Indeed.

Readers of this blog know that I am no fan of the Pigouvian tax scheme (nor, for that matter, Pigouvian welfare economics). Advocates of such taxation often ignore the problems of attempts to aggregate preferences and valuation given the inherent difficulty in doing so because of the fact that knowledge is dispersed and cannot be communicated to a single mind. Thus, I was delighted to see this challenge from Peter Klein:

Please name the activities you believe deserve Pigouvian subsidies. For each activity provide the efficient subsidy amount, explain how this was calculated, and say how the revenues should be raised.

Any takers?

As somewhat evidence from the previous post, Bryan Caplan likes Hillary — well, in a Caplan-esque sort of way.

I am a proud signatory of the “Open Letter From Economists Opposing the Gas Tax Holiday.”

Meanwhile, Bryan Caplan defends the policy on the grounds that it will satisfy voters while doing the least possible harm. (His points are well made, but I remain unconvinced.)

John Taylor and John Williams have recently written an interesting paper on the “black swan” of the money market and the effectiveness of the new term auction facility. Here is the abstract:

At the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions—including the introduction of a new term auction facility (TAF)—to reduce them. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity
demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.

…and a non-gated link.

Tyler Cowen has written an excellent piece in the New York Times about the food crisis. Here is the conclusion:

Lately, it’s become fashionable to assert that, in this time of financial market turmoil, the market-oriented teachings of Milton Friedman belong more to the past than to the future. The sadder truth is that when it comes to food production — arguably the most important of all human activities — Mr. Friedman’s free-trade ideas still haven’t seen the light of day.

Read the whole thing.

Nicholas Kristof on the desirability of the proposed free trade agreement with Colombia.

Today’s pictures are different. “This is a silent tsunami,” says Josette Sheeran of the World Food Programme, a United Nations agency. A wave of food-price inflation is moving through the world, leaving riots and shaken governments in its wake. For the first time in 30 years, food protests are erupting in many places at once. Bangladesh is in turmoil (see article); even China is worried (see article). 

So begins the story in The Economist.  Of course, this has led to outrageous claims that food “doesn’t spontaneously show up on grocery store shelves.”  It does, however, when the market is allowed to operate.  In reality, it is the fact that governments around the world have subsidized biofuels and established protectionist regimes to prevent the cheaper, foreign competition thereby pushing prices above the levels of affordability for many in the developing world.

There is little doubt that the market will continue to get the blame, while governments scramble to demagogue markets and offer solutions that involve more government involvement.  The solution is quite simple.  As Sean Corrigan explains, “Feed the world? — Then free the market!”

Our friend David Beckworth is doing some interesting work on religiosity and the business cycle. Here is an excerpt:

The first thing economic theory says is that the cost of being religious can change over the business cycle. During an economic boom individuals may find increased opportunities for higher earnings. The potential for higher earnings, in turn, make time-intensive religious activities like church attendance costly for these individuals. Consider, for example, a Southern Baptist from a low-income family being offered the opportunity of getting overtime pay to work at a retail store on Sunday morning. For this Southern Baptist, going to church suddenly becomes a lot more costly and thus, increases the likelihood of him opting for work instead of church. On the other hand, during an economic downturn, time-intensive religious activities become less costly as opportunities for earnings decline. Here, the overtime opportunity for the Southern Baptist disappears and church attendance suddenly becomes more affordable. This idea that higher earnings lead individuals to substitute out of leisure activities, like going to church, into more work and vice versa is called the substitution effect. It implies there should be a countercyclical component to religiosity.

Here is a non-gated version of the paper.

On a side note, I recommend reading David’s blog for a unique and insightful perspective on macroeconomics.

Our friend Don Boudreaux offers his thoughts on Earth Day.