Tooth Fairy and Money Supply

This is great. I hope James Kwak at Baseline Scenario didn’t bite his tongue – it’s pretty far into his cheek. Read the whole thing at Paul Ryan Criticizes Bernanke for Failing to Contain Tooth Fairy:


Healthcare Act – Unintended Consequences




Why Are Food Prices Are So Volatile?

Food and energy prices are notoriously volatile and make it difficult to read consumer price indices.  But why are they so volatile? Why are things that we buy everyday in relatively constant quantities so volatile in their prices?  Well, it’s all explainable by looking at the price elasticities and the slopes of the supply and demand curves.  Since we do buy them in relatively constant quantities, that makes demand relatively inelastic.  Since supply in the short term is also inelastic (it takes time to plant and grow more food), the result is that even very small shifts in demand (more people or a preference for meat which takes more grain) or small shifts in supply (a poor harvest in some country) will make price shift a lot. For a more detailed explanation and graphs, see below the fold how EconomicsHelp.Org explains it:

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Cross-Price and Income Elasiticity of Food

From, an example of cross-price and income elasiticities of food.  The data comes from an interactive, query-able database of international food elasticities at the US Dept of Agriculture. By using these elasticities, we can estimate the impact(s) of food price increases. In times such as 2011, when international foodstuff commodities such as wheat, corn, and soybeans are rising significantly because of drought, bad harvests, and rising demand, economists can use these estimates to figure out the impact in different countries, both in terms of total money that must be switched from other spending to food, but also which other products or services will be hurt or helped by such budget re-allocations  consumers.

This graph shows the Cross Elasticity of demand for various goods with respect to food.

I choose two countries – Bangladesh (low income) and the UK (relatively high income)

Source: [link]

What this means is that if the price of food rises 10%, then in the UK, demand for education falls by about 0.05%.

However, Bangladesh has a Cross Elasticity of demand of 0.32. Therefore a 10% rise in food prices would cause a 3.2% fall in demand.

The highest cross elasticity of demand is for recreation. Recreation is what we would call a luxury good. If income falls, we can lose spending on recreation because it is not essential.

It shows that for a poor country like Bangladesh, if food prices go up, it means a significant fall in spending on recreation. Demand in the UK remains mostly unchanged.

It’s a good example of how rising food prices will have much different effects in different countries. When food prices rise in the UK, it is an inconvenience. When food prices rise in developing countries, it makes families rearrange their whole budget.

Empty Threats

One argument often provided for against raising the state taxes on rich individuals and large corporations is the belief that higher taxes will simply cause them to move to low-tax states.  Now there’s data on how serious the threat to move is: not very. Yves Smith at naked capitalism writes of a study by Young and Varner. In a nutshell, using New Jersey as a test case since it raised taxes to very high levels for the rich yet is very close to neighboring states which makes moving plausible, they found the tax increase worked. A less than 0.1 response of people moving and net the tax raised a billion dollars and reduced income inequality modestly. Even stronger evidence was provided by a study of Swiss cantons. See complete comments at the link.

Quelle Surprise! Tax Increases on Rich Do Not Lead to Exodus


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Inflation Erodes Real Value of Minimum Wage

Although the minimum wage in 1968 was $1.25, prices were a lot lower then. In terms of today’s purchasing power using today’s 2010 dollars, the real value of the minimum wage in 1968 was $9.86.  Since the minimum wage (Federal) was increased in 2009 to $7.25, that means that the minimum wage is still 25% lower than in 1968.  Graph of the changes over time and source data at ReMapping Debate. and at