Cigarette tax shot down, unfortunately

My previous post talked about what I view as a good bit of legislation passing in Indiana. Now I want to talk about a bill that was narrowly defeated in the House recently.

Governor Mitch Daniels proposed an increase in the State's cigarette tax by 25 cents. Proceeds would help provide thousands of uninsured Hoosiers with basic health insurance coverage. This is pigovian taxation at its best (For my view of supposedly Pigovian taxation at its worst - see my views on gas tax hikes).

Why would the Governors fellow Republicans nix such a fine idea? The negative externalities of smoking are heavily documented and, unlike other goods like gasoline, it is not a necessity, it is a luxury that provides addicts with short-term enjoyment at the cost of their and others' long-run health.

(I should be clearer here: technically cigarettes are not luxury goods since the income elasticities are not greater than 1 in absolute value. In other words, cigarette consumption does not increase much (if at all) the more money you have. The reason of course is becuase poor people, one can assume, have more problems in life - and cigarettes act to calm the nerves and provide a sense of relief to those problems. So while it may not technically be a luxury item, it is most definitely a non-necessity item - it's a good that people consume purely for recreation or perceived mental health benefit - a benefit that is short-run and largely imaginary.)


The great thing about a tax on cigarettes is that while it's not at all a necessity good (and demand for non-essential goods are usually relatively more elastic than those of necessity like gasoline), it's demand curve is somewhat inelastic since it is an addictive substance (people won't change consumption patterns as much for a given tax hike. Thus, revenues would be easier to come by from an increase in a cigarette tax. And, because it is a non-necessity good (a frill) with large negative externalies, there is a sense that it is ok if it means some poor guy can't afford cigarettes anymore (unlike gasoline, where a gas tax could really have negative effects on people's lives in general).

Most researcherr think the elasticity (price) of demand for cigarettes is around -.40. A 10% increase in cigarette prices (via a tax, per se) would reduce cigarette quantity demanded by 4%.

Of course, it's relative inelasticity means a larger tax should be placed on it if one wants to have a useful effect on the negative externality problems. I think 25 cents is probably too low given the substantial evidence of the negatives of smoking to society (not just health), but $0 is even lower! Indiana Republicans should be ashamed for not touting this tax increase. They should be ashamed that they'd rather let people keep smoking than let people live healthier lives.

Indiana Senate approves lottery privatization

Sorry it's been a while since my last post - it's been hectic. I'm gonna get back into the swing of things though....

Yesterday, the Senate here in my homestate approved a measure that would privatize the State lottery system. The question is, is this a good idea?

The benefits are obvious: efficiency gains, immediate monetary reward to the State for "selling" the lottery system which could be used for a whole host of things. Note that "selling" is in quotes because the lottery would technically just be contracted out - not necessarily permanently so.

Besides, there are good reasons government might not feel it is ethically appropriate to be offering what some deem to be addict-creating behavior.

The cons however are not inconsequential. Most certainly, with privatization would come a more focussed marketing campaign and a greater output of lottery services. If we assume lottery to be a "sin," or a creator of some amount of negative externalities, then privatization - which would strip most all government meddling - may not be the best thing.

The Indiana lottery bill would give my State $1 billion upfront and royalty payments of $200 million annually. The great thing about the bill, which critics overlook is the following clauses:

"Specifies that the management agreement may require the manager to pay an additional royalty payment each year if the manager's gross revenues from the sale of lottery tickets in a year exceed the commission's gross revenues from the sale of lottery tickets in the twelve months preceding the date of execution of the management agreement. "

"that the management agreement must require that, beginning with the second full state fiscal year after the execution of the management agreement, the manager must make payments to the state lottery commission if the manager's revenue growth for a state fiscal year exceeds a baseline growth percentage equal to the average annual growth in revenue from the lottery during the last five state fiscal years preceding July 1, 2006."

"Provides that advertising of the lottery must be approved by the state lottery commission. "

Basically, that clause can help ensure that the money received from privatization would meet or exceed the net present value of expected revenues had the State decided not to privatize. It's not perfect, but it's a great check. It also helps ensure that other checks are in place such that the games offered and the marketing done by the private entity is in check by Indiana. There are tons more of these clauses in the curren legislation - all of which I think helps address the "cons."

Just like the leasing of the Indiana toll road, the legislation has been written in a way that provides our State with large upfront benefits, yet allows the government to maintain a fairly strong regulatory grip on the system.

What economists don't get about the critics of free trade

As I mention in my comments to Greg Mankiw's post, the reason the job of talking about the benefits to free trade and globalization is so "thankless" is not because non-economists don't want to listen, or just don't get it... it's because economists (most) completely ignore the negatives of free trade and the like. There are losers in free trade, and while there are more losers with protectionism in the long-run, the losers in free-trade are hit harder (the pain is felt more). Economists need to stop being political in focusing on only the good long-run aspects of free trade under X Y and Z assummptions and we need to start joining the more well-rounded discussion of, what are the real life short-run costs, how best can we alliviate those costs (can we?), how can we make the transition smooth, how long will it take, what are some of the intangible costs of free trade...?

In other words, stop preaching from the Ivory Tower.

How to measure Bigotry

Here is an econ paper from our friends across the pond (in N. Ireland) on how to measure bigotry across western nations. Specificially, it measures hatred toward groups of muslims, other race individuals, immigrants, jews, and gays.

How hateful is the US? We are mildly bigoted. What arethe most hateful countries? Germany, Greece, Italy, and Northern Ireland. Who are the most accepting countries? Sweeden and Iceland!

What types of people are more likely to be biggoted: the older, male, religious, unhappy, financially not-well-off, right-winged, orderly, uneducated, retired, non-student.

That's who.

Suburban Sprawl bites the hands that feed it

For the first time every in America, there are more individuals classified as 'poor' living in the suburbs than in urban areas.

This, to me, was an inevitable outcome. While I may have a somewhat libertarian bent to me, even I can see the benefits of good development planning. It is true the suburbs offers better schools, and more affordable nice housing - in some areas. The problem is that not all suburbs are created equal. For every nice suburb where soccer moms drive their Lexus SUVs there is a run-down no-growth suburb where a family of 4 struggles to survive.

From a game theory standpoint, cities should have saw this coming and acted. At the individual level, people may (initially) benefit from moving to the suburbs - but over time as class segregation happens and communities are destroyed as more and more like individuals sprawl out, these same people end up getting hurt. In other words, people may not internalize some of the costs of their choices to sprawl out.

People are fatter and less healthy in these slummy suburbs. The poor tend to stick together and richer suburbanites refuse to integrate less afluent suburban areas. Jobs are often scarce in these slummy suburbs so a family finds that it must drive sometimes an hour or more to another slummy suburb (or into the urban center - which is also in decline due to the sprawl) just to get to their job.

I'm reminded of John Edwards oft cited mantra in the 04 election cycle - there are two Americas. ... I don't know about that, but there definately are two different kinds of suburb.

"one cent" = five cents

This guy's point is the kind of thing where I'm sure hundreds of people thought about it for like a split second, then realized how stupid it was. First off, I'm against keeping the 1 cent piece and we talk about this very issue in my class, but the whole idea of revaluing pennies to 5 cents is just ...well, it's redneck. pennies are in circulation (life) a long time - does no one here see a problem?
Do this for me...Turn your penny over.
Thanks.
Now read the bottom.
What does it say?
Please note it does not say "five cents."
No, it doesn't - don't bother squinting, it won't change.

So...basically this guy wants to have the government mandate a change in value of the penny, without actually changing or removing existing pennies (at least for a long time). That just strikes me as very bootleg and unprofessional. Surely the richest nation in the world can use money that is properly inscribed! Imagine a foreigner coming here under this system. They get a penny and they think it's worth one cent (cause it says so), but it's really worth 5 cents. I see a scam ready to happen!