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."