An example of a product price rising less than an increase in a tax

See U.S.-Canada spat raises building costs from The Houston Chronicle.

"As a wave of pent-up home-buying emerges across the U.S., a pesky and oft-forgotten trade dispute with Canada is boosting building costs.

A long-simmering spat between the U.S. and Canada over softwood lumber is adding to the expenses homebuilders face in the fallout from disruptions related to the coronavirus pandemic, said David Logan of National Association of Home Builders. Lumber mills in the Pacific Northwest cut production amid lockdowns, and builders are buying more wood from Canada, he said.

Canadian producers are paying average tariffs of more than 20 percent on timber shipments to the U.S., and that translates into an average price increase of about 8 percent in the U.S., Logan said. Construction is topping forecasts, and builders will be forced to absorb the additional expenses. Framing lumber accounts for as much as a fifth of the material costs of erecting a home.

“The majority of homebuilders in America are truly small businesses, building fewer than 10 homes a year,” Logan said in a telephone interview. “So the effects that the pandemic has had on the economy make it a lot more difficult for builders to absorb those costs.”

The Trump administration slapped punitive tariffs on Canadian softwood lumber in 2017, saying the industry is unfairly subsidized."

Below is something that I do in class that explains why price does not rise as much as the tax.

Here we will look at an excise tax or a per unit tax. Every time a unit of a good is sold, the seller must give the government a flat amount, like $1 (not a percentage). If the government enacts an excise tax, the supply curve must shift up by the amount of the tax.

In the graph below, suppose that an excise tax of $1 is enacted. There is a new supply curve. Every point on the new supply line is exactly $1 above the old supply line.

Notice that every point on S₂ is exactly $1 above S₁. This because the firms in this market now need $1 more dollar for each quantity supplied. Before the tax was enacted, the market needed $1 to supply 1 unit. But now, because of the tax, they need an extra dollar or $2 to supply 1 unit.

The price has gone from $5.50 to $6.00. This means that buyers must pay 50 cents more (or $.50 more). So they are paying $.50 of the $1.00 excise tax. That means that the seller also pays $.50 of the $1.00 excise tax.

When you buy the product, you give the seller $6.00. But they must give $1.00 to the government. Before the tax, you gave the seller $5.50. So now they get $.50 less.

In this case, buyers and sellers evenly split the cost of the tax. But if the slopes of the supply and demand curves were different, the buyers or sellers could pay more than half the tax.

Texas seeks millions from unemployed workers after state ‘overpaid’ benefits

By Eric Douglas of The Houston Chronicle.

This might be a sign of how unusual this recession is. The full article has many details on individual cases and how rules and red tape are affecting people.

Here is an excerpt from the article:

"The state is trying to recoup tens of millions of dollars in unemployment benefits that it mistakenly paid to thousands of Texans, many of whom have already spent the money and face difficulties paying it back.

The Texas Workforce Commission has sent 46,000 notices to jobless workers seeking repayment of unemployment benefits that the state says were too high or for which the workers were not eligible. But people who received the notices say they applied for the benefits and spent them in good faith, approved by the state after navigating a difficult and confusing application process.

Cathy Rohde, a substitute teacher in Conroe, applied and was approved for unemployment benefits after the school district shut down in March and she stopped getting paid. But the first week of June, Rohde got a notice that she owes the state more than $1,800 because, under provisions preventing teachers from collecting unemployment during annual summer breaks, she was not eligible.

The overpayments are estimated at $32 million so far, according to data provided by the state. It’s the latest glitch in an unemployment system that was overwhelmed by claims following mandatory business shutdowns to slow the coronavirus pandemic in late March and the continued social-distancing measures that have kept many employers operating well below capacity. Some 3 million Texans were thrown out of work in less than three months, and nearly 650,000 are still waiting for unemployment benefits applications to be processed, according to the Texas Workforce Commission.

The agency said it has a team that audits unemployment claims to ensure that workers are eligible and receiving the right amount of benefits before checks go out. But that team may later find problems with benefits that were issued.

“TWC may receive new information that changes the outcome of a claim that can result in overpayment,” said Cisco Gamez, spokesperson for the TWC, in a statement."

The Paycheck Protection Program and Type I & Type II Errors

See The Paycheck Protection Program Is a Mess. Here's Who Is Benefitting From the Dysfunction by Christian Britschgi of Reason Magazine.

I use the book The Economics of Public Issues in my micro classes. Chapter 1 is called "Death by Bureaucrat." It discusses how the Food and Drug Administration can make either a Type I error or a Type II error.

Type I error: The FDA approves a drug before enough testing is done and when people take it, there are harmful side effects.

Type II error: The FDA tests a drug longer than necessary to stay on the safe side. But people might suffer because the drug is not yet available. 80,000 people died waiting for Septra to be approved.

The FDA would rather make a Type II error because the public can blame the FDA if a Type I error occurs.

Something like this might be happening with the "PPP." If we wanted to help businesses keep their employees, the money had to get out quickly. But that meant it would be harder to make sure it only went to "deserving" companies (Type I error). If we took more time to look at each application to make sure only "deserving" companies would get the money, then it might take too long (Type II error).

Excerpts from the article:

"The list of companies and organizations that received loans through the federal government's flagship coronavirus relief program includes firms linked to powerful politicians, celebrities, lobbyists, and government spending hawks.

On Monday, the Small Business Administration (SBA) released a list of organizations that each received more than $150,000 through the Paycheck Protection Program (PPP).

That program, first approved as part of the $2.3 trillion CARES Act in late March, allocated $670 billion to purchase loans made by banks to businesses and non-profits with fewer than 500 employees. The government would forgive those loans so long as the recipients spent a certain portion of the money on retaining or hiring back employees.

Politico reports that PPP borrowers included companies owned or founded by members of Congress, as well as the educational arms of the Congressional Black Caucus and the Congressional Hispanic Caucus. Several lobbying firms, technically barred from receiving loans if over half their revenue comes from lobbying, also benefited from PPP."

"Congress has tried to reform PPP by passing a law that gives recipients more time and flexibility when it comes to spending the money received from the program. But Congress has devoted very little time to winnowing down who is actually eligible for the program in the first place.

To be sure, that's a difficult task. Any government program of sufficient size and complexity is going to send some benefits to those who don't deserve them or who won't use them efficiently. Stricter eligibility requirements necessitate more red tape that can slow down or deny relief to even the most worthy recipients. Or maybe ARI is right and anyone who paid taxes is definitionally a worthy recipient."

Recession Led by Services Sector Is Particularly Painful for Latino Workers

Recovery for in-person occupations heavily populated by Hispanics likely to be slow amid ongoing pandemic, economists say

By Harriet Torry of The WSJ. Excerpts:

"Prior downturns were largely led by lower spending on such things as cars, houses, and factories while this one is hitting the service industries. That change has meant Latino and Hispanic workers are being particularly hard hit, and economists expect the jobs recovery to be slow and halting as Covid-19 cases accelerate around the country."

"Hispanic or Latino workers last year made up 17.6% of the total workforce but accounted for about half of all maids and housekeeping cleaners, painters and roofers, according to the Labor Department.

Services sectors shed jobs in droves in April as coronavirus quarantine orders shut down swaths of the economy. In June, the jobless rate for workers of Hispanic or Latino ethnicity was a seasonally adjusted 14.5%, more than three times its rate at the start of the year."

"Restaurant owners say they have little sense of when and how consumers will feel safe to eat out again. Latinos make up more than a third of cooks and dining-room attendants, according to the Labor Department.

“This is a supply shock, in the sense that restaurants are no longer able to supply a meal that carries no health risks as they once were able to, as opposed to a demand shock in the sense of a reduction in purchasing power,” said Harvard University economist Raj Chetty during a recent online discussion of research documenting the real-time impacts of Covid-19.

High-income households have cut spending more than middle- and low-income Americans, mostly on in-person services like restaurants and entertainment, according to an analysis of credit- and debit-card data by the nonpartisan research group Opportunity Insights."

Developing World Loses Billions in Money From Migrant Workers

An economic pillar of developing economies is crumbling because of coronavirus impacts; ‘I’m scared sick.’

By Jon Emont of The WSJ. Excerpts: 

"Migrant workers—from Polish farmhands working the fields of southern France to Filipino cruise-ship workers in the Caribbean—who lost their jobs because of the pandemic’s economic impact are running out of cash to send home, dealing a blow to the fragile economic health of the developing world.

Tens of millions of Indians, Filipinos, Mexicans and others from developing countries working overseas sent a record $554 billion back to their home countries last year. That’s an amount greater than all foreign direct investment in low- and middle-income countries and more than three times the development aid from foreign governments, according to the World Bank.

The drop-off in the payments, known as remittances, has affected life for millions around the globe who rely on the cash for food, fuel and medical care. Families from South Asia to Latin America can’t afford mortgage payments and tuition.

“There are households that critically depend on the remittance lifeline, and that lifeline has been ruptured,” said Dilip Ratha, lead economist on remittances at the World Bank, which estimates that the transfers to developing countries will decline by 20% this year.

That drop would be four times as big as the fall that followed the 2008 financial crisis and the largest drop since the World Bank began recording remittance data in the 1980s."

Some San Antonio hospitals willing to pay more for front line workers amid coronavirus pandemic

By Laura Garcia of The San Antonio Express-News.

This is a good example of what economists call a "compensating wage differential." That is when a worker gets paid more for doing unpleasant or dangerous work. That is necessary to get enough people to do those jobs.

Excerpts from the article:

"Are hospitals willing to pay nurses more to work during the COVID-19 crisis?

They might not have a choice if the number of hospitalizations continues to rise.

“They are stretched to the limit,” said Bexar County Judge Nelson Wolff at a briefing Wednesday. “We think we have maybe two more weeks of this, but it’s not sustainable.”

 While San Antonio hospital officials would not discuss specific job offers or pay rates, nearly all hospitals have started to offer incentive pay for nurses willing to work extra shifts during the coronavirus crisis."

Some hospitals "are cross-training workers and redeploying them from other departments throughout the hospital." (this cross-training is costly and it reflects the "law of increasing opportunity" cost that I discussed a few days ago where it gets more costly to produce more of a good, like, in this case, more nursing care-the cross-training means that it is getting more costly)

"Christus Health, a nonprofit hospital operator with three Christus Santa Rosa Hospital locations and the Children’s Hospital of San Antonio, is offering supplemental staffing bonuses to meet the increased demand."

"Methodist also hired contract nurses who are expected to arrive in the next week or so.

These temporary jobs can be lucrative, with nurses making well over $100,000 per year. Offers from staffing agencies often include uniform and travel reimbursement, bonuses, health insurance and 401(k) benefits.

One recruiter on Facebook was looking for registered nurses to work in a intensive care unit for the next eight weeks in San Antonio. The job would pay $3,380 a week, or $65 an hour, plus weekly stipends of $450 for housing and $200 for meals.

The pay is attractive in part because the work is risky.

Health care workers are at higher risk of infection because of the prolonged, close contact with COVID-19 patients, according to the U.S. Centers for Disease Control and Prevention.

Cindy Zolnierek, CEO of the Texas Nurses Association, said while the organization supports “hazard pay” for nurses, incentive pay programs fail to recognize the long-term nature of the COVID-19 crisis."

The Urgency of Returning to Full Employment: Recessions have contributed to long-run rise in inequality; undoing this one’s effects will be hard

By Greg Ip of The WSJ. Excerpt:

"We now know the business cycle’s influences aren’t purely cyclical: In the labor market, they cast a long shadow, as a new study convincingly shows.

The study looks at earnings of prime-aged men (those 25 to 54 years old) since the early 1970s and finds two distinct trends: a steady rise at the top relative to the median, and a saw-toothed decline at the bottom, with all of the decline occurring around recessions.

Authors Jonathan Heathcote and Fabrizio Perri of the Federal Reserve Bank of Minneapolis and Giovanni Violante of Princeton University agree with the consensus that inequality mainly reflects the long-run rise in the premium paid to high-skilled workers as technology, automation and foreign competition encroach on low-skilled work. But they find those forces would have been far less potent without recessions.

A worker’s wages reflect both his own abilities and education plus training and experience acquired on the job. Low-skilled men whose wages have been squeezed by the shift to high-skilled work can still get ahead by gaining experience on the job. But when they lose their job in a recession, these men face a double-whammy: The shift to high-skilled work continues, while they miss out on the chance to learn new skills on the job. After a while, many simply drop out of the labor force altogether.

Wages do suffer in a recession, but they typically recover over the course of the expansion. Not so the decline in employment. Back in 1967 just 2.5% of prime-aged men weren’t working. By 2011 that had topped 14%.

Inequality would likely have increased even without recessions. Those at the top have continued to pull away from the middle. Racial disparities and other institutional obstacles would still exist. But the gap between those at the bottom and the middle may not have widened nearly as much. The study found that the expansions from 1991 to 2001 and from 2009 to 2020 lasted long enough to reverse all of the relative decline in incomes of the bottom 20%."

Ventilators and the law of increasing opportunity cost

See As Coronavirus Hospitalizations Surge, Ventilator Manufacturing Ramps Up—but Not Quickly Enough: Hospitals need the breathing machines for critically ill virus patients but can’t get their hands on the numbers they require by Peter Loftus and Melanie Evans of The WSJ.

It reminds me of  The Law of Increasing Opportunity Cost. That is the idea that as you try to produce more of one good (A), you have to keep giving up more and more of another good (B), to get 1 more unit of A. This is because different resources are better suited to different productive activities.

One example I give in class is a of a college needing to teach more math classes. They might first have a physics professor teach a math class. He might need to take just one refresher course. Then you might have an econ prof teach math. He would need to do more retraining than the physics prof. Then you move on to an English prof who would need even more retraining.

So the cost of teaching math keeps rising. The physics prof was better suited to math than the econ prof who, in turn, was better suited than the English prof. There is a cost in converting the resources which keeps rising.

It looks like something similar happened with ventilators. Excerpts from the article:

"Manufacturers are ratcheting up production. Yet companies say it takes time to move employees around, add production lines and arrange a supply chain for the hundreds of components in each machine.

Altogether, medical-device manufacturers are making on average 2,000 to 3,000 ventilators a week, compared with 700 a week before the crisis, said the Advanced Medical Technology Association industry group. It expects production to increase to 5,000 to 7,000 ventilators a week in the coming weeks."

"Medtronic, which is transferring employees from a pacemaker plant to its nearby ventilator factory in Galway, Ireland, plans to double production by the end of this month and make an estimated 30,000 ventilators in the next six months, said Bob White, head of the company’s minimally invasive therapies unit."

Related post

Flushing out the true cause of the global toilet paper shortage amid coronavirus pandemic

Colleges Spend Millions to Prepare to Reopen Amid Coronavirus

Schools solicit donations as they order masks, hand sanitizer and thermometers, upgrade heating systems

By Melissa Korn of The WSJ. Excerpts:

"As colleges around the country map out plans to reopen their campuses in the fall, they have embarked on some unique and pricey shopping expeditions: sourcing miles of plexiglass, hundreds of thousands of face masks and, in the case of the University of Central Florida, trying to get in an order for 1,200 hand-sanitizer stations before neighboring theme parks could buy them all up.
Costs for protective gear, cleaning supplies and labor for employees to take students’ temperatures and conduct hourly wipe-downs of doorknobs are already running into the millions of dollars.

"In Florida, one of the first states to reopen for business during the coronavirus pandemic, the University of Central Florida in Orlando will issue one reusable, washable face covering each to all students, faculty and staff—about 100,000 items. The school ordered another 250,000 disposable masks for visitors and those who forget their face coverings. The bill for masks was $309,000.
The school, which had 69,500 students last year and expects about 30% of classes to be taught face-to-face this fall, spent another $491,000 on 1,200 touchless hand-sanitizer dispensers, 600 stations for disinfecting-wipe dispensers and many thousands of refills."

"Other big-ticket items for Central Florida include $500,000 to upgrade ventilation systems with ultraviolet lighting that can help kill bacteria. It will spend $600,000 to retrofit doors with motion-sensor technology or foot-operated openers and to install $54-apiece plexiglass panels in the welcome center, student advising office and other high-traffic areas where social distancing isn’t really possible.The school is also budgeting an extra $3 million for labor and materials costs tied to increased cleaning of common areas, elevator buttons, door handles and bathrooms."

Other things schools are doing include:

-contract with Laboratory Corp. of America Holdings for mass testing, $350,000 for upgraded heating, ventilation and air-conditioning equipment, and $260,000 for all 8,500 students to get three washable masks

-infrared technology that can detect potentially feverish people entering high-traffic areas

-buying 5 miles of plexiglass to date to help protect faculty in classrooms

 Related posts:

How much are businesses spending and what are they spending it on to fight Covid-19 and stay in business?

The Covid Surcharge: Companies Confront the Unforgiving Economics of Coronavirus

World's oldest writing not poetry but a shopping receipt

By Rym Ghazal. This appeared in 2011 at a new site called "The National" from United Arab Emirates. I saw this recently on Twitter from George Mason University economics professor Alex Tabarrok. Excerpt:

"The neatly drawn lines are marked by impressions and imprints on a clay tablet.

The 5,000-year-old receipt for clothing, sent by boat from Ancient Mesopotamia to Dilmun - what is now Bahrain - represents the oldest writing in the world.

"The origin of writing is not very romantic, I am afraid," said Dr Irving Finkel, curator of the Middle East Department at the British Museum. "Writing was not invented for poetry and storytelling."

Dr Finkel was in Abu Dhabi last night at the Manarat al Saadiyat to present his work on the "world's oldest writing" as part of the ongoing Splendours of Mesopotamia exhibition.

For more than 42 years Dr Finkel has studied ancient languages and writings, specialising in the world's oldest known written variety. Cuneiform, which in Latin translates to "wedge-shaped", was done by pressing a reed stylus on to damp clay. The writing is believed to be even older than Egyptian hieroglyphics, arising out of the administrative and practical needs of the time.

"Mesopotamia was the site of the world's first international cities, and so its people needed a way of managing their lands and trade," said Dr Finkel.

Developed for book-keeping purposes, at first the clay tablets were most commonly used to jot down shopping lists, wages and the allocation of rations for temple workers. The writing expanded to include letters, art, official announcements and even historic records, which were then often buried with kings or kept in temples."

Gasoline Is Cheap. Americans Can’t Take Advantage.

Inexpensive gasoline normally boosts the economy, but that benefit likely won’t be realized because of the pandemic

By Amrith Ramkumar of The WSJ.

This was from last March. It is a little strange to say  "Americans Can’t Take Advantage." The same thing that caused the prices to fall is what is keeping them home.

Demand fell because of pandemic. Then price falls. That is the end of the story. Price changing is not a shift factor for demand.

Now the article does mention that there was a supply glut. That increase in supply would lower price and, in the absence of any change in demand, would lead to an increase in quantity demanded (or increase in gas purchased).

Since less gas was purchased, it seems like the fall in demand outweighed the increase in supply (if it truly increased-what they call a glut just might be all the gas that firms expected to sell but could not because price fell).

Excerpts:

"Demand for fuel around the world has plummeted because of travel restrictions and precautionary measures taken to contain the new coronavirus, which has sent markets into a tailspin and threatens to tip the world economy into a recession. At the same time, an expected glut of crude oil—due to a clash between Saudi Arabia and Russia over their share of energy markets—has amplified the decline in fuel prices."

"the average price of a gallon of regular gasoline in the U.S. has fallen to about $2.20 from $2.55 at the end of last year"