Chicken Soup for the Economy’s Soul (Or Lack Thereof)

5 06 2011

We, as members of a pseudo-capitalist society often find ourselves bombarded with stories in the newspaper, on TV among other places about economic problems we are planning to face in the future. While things may seem grim, many of these problems are not as bad as they seem. That said, there are several issues that we as consumers, investors and even members of government should keep in mind when planning out the future of our finances.

Shortages:

The Problem:

The very fundamental economic problem is scarcity. It is something we are taught in business class in the earliest of high school years; how much we do have, and how are we going to use it most efficiently. Since the advent of the Industrial Revolution, we as humans have gotten really good at ripping dull, useless things from the ground and turning them into shinier and more useful things for others to buy. The problem is, these 160-something years have taken a huge toll on the number of resources we have at our disposal. So much so, that experts say that if we continue to exploit our planet’s natural resources at our current rate, by 2050 we will have no resources left to use.

Earth’s population will be forced to colonise two planets within 50 years if natural resources continue to be exploited at the current rate, according to a report out this week.A study by the World Wildlife Fund (WWF), to be released on Tuesday, warns that the human race is plundering the planet at a pace that outstrips its capacity to support life.– Tyler Hamilton, The Toronto Star

Now, from a morality standpoint, the statistics are heartbreaking, but one must also consider the economic aspects of this issue. With decreasing supply of resources, manufacturers will start to pay more to produce these products and in turn the cost will be paid from the consumer. Having higher prices on these commodities will leave consumers with less disposable income, spending less on other consumer items and instead investing it. This has a negative effect on the economy as this directly relates to the “C” portion of the GDP formula and with lower level of consumer spending comes a lower GDP. The relationship can be graphed like this:

The solutions:

For the consumer:

In order to determine what you should do about scarcity as a consumer, you should determine the elasticity of the product. It goes without saying that scarcity for computer monitors should be treated a lot differently that that of water.

If the product has an inelastic demand, you have the choice of doing one of two things. Firstly, the easiest thing to do is to buy it anyways. If what you want is a necessity (thereby having a completely inelastic demand) for example water, because basic survival is key, you as a consumer should buy it anyways. Another option is investing into newer alternative technologies. The idea behind this is to reduce consumption of the more expensive product (in this case, fuel) by either lowering the amount required to use or requiring something else entirely.

For the business owner:

One of the few benefits of having scarcity in our economy is that it allows businesses the opportunity to get very, very rich. The logic behind this is that as resources that we use most commonly (fuel, lumber, etc) begin to become more and more scarce, prices will rise as a result. Because of this, consumers will naturally begin to try and look for cheaper and better alternatives and new markets for alternative products will arise, meaning big bucks for those who can find a viable substitute. An example of this can be found in fuel prices and alternative energy. Since the relatively recent rise in fuel prices, we’ve also seen an increase in hybrid and electric car sales. One thing to consider if you’re new to a business is trying to tap into these markets as they can prove to be very beneficial if done correctly.

Another step that businesses can take is attempting to increase their productivity by using their current resources more efficiently. Although this seems like something a business should strive to do regardless, when resources become more scarce, those who can use what they have most effectively will naturally be dominant.

For the Member of Parliament:

One thing to strive towards as a governments is being able to control the inputs and outputs of companies. By limiting the amount of resources able to be used in a market scenario, you not only help with the problem with scarcity, you also force businesses to re-evaluate themselves. By creating a pseudo -scarce environment in the marketplace, you raise the prices for that particular resource and businesses are forced to think about their production levels and innovate to use the resources more effectively. Systems such as the cap-and-trade are easy to implement, have low operations costs, allow insurance of resource usage and coax development of cost-effective technologies.

Conclusion:

As we inch closer and closer to completely exhausting our planet’s resources, we must constantly re-evaluate what we are doing and how we can improve on it. By creating and investing in newer, cleaner and more cost-effective technologies, we slow down the process of resource exhaustion and help to sustain our life on this planet. The interlocking between consumers, businesses and government is so strong that by working together, we can find a steady middle ground between profitability and responsibility.

Looney Loonies:

The problem:

The dollar value is a country’s staple. It reflects how strong their Canadian buying power is as well as how other countries stack up when buying Canadian goods. It also directly co-relates with the amount of products a country imports and exports. This is especially important now due to it’s recent increase in value over the past 4 months.

Exports were supposed to be the engine of Canada’s economic growth this year. Instead, they’re acting as a drag.

Exports tumbled 4.9 per cent in February, outpacing a 4-per-cent drop in imports and slicing the country’s trade surplus to just $33-million, trade figures showed Tuesday.

– Tavia Grant, Globe and Mail Business

In order to understand the entire issue of the dollar, though, one must see it from two sides: the Canadian consumer/Non-Canadian government side and the Non-Canadian consumer/Canadian government side. Canadian consumers and Non-Canadian governments prefer stronger Canadian dollars.

Canadian consumers/Non-Canadian Governments prefer stronger Canadian dollars for a variety of reasons. Canadian consumers with more valuable Canadian dollars have more purchasing power in the international market and are thus able to buy more of other countries products for the same number of Canadian dollars. Non-Canadian governments enjoy this for two reasons, firstly, with higher purchasing power from Canadians, they will be likely to spend more internationally and portions of money that once went into the Canadian economy now circulates into other governments in the form of foreign investment. Secondly, with higher dollar value for Canadians, many Non-Canadians will stop buying Canadian products as they are getting less for what they used to. This money that was once used for Canadian imports can then be used for purchasing goods from that country, helping the economy.

On the other side, Non-Canadian consumers and Canadian governments prefer a weaker dollar value for opposite reasons. Non-Canadian consumers are able to purchase more Canadian goods for the same number of their dollars, increasing the value gained from their foreign investment. Canadian governments reap the benefits of Non-Canadian consumer spending and money from around the world is caught in Canadian circulation.

The solution:

Although there are no real “solutions” that can be given to consumers as their buying decisions are based on rationality (buying what’s cheaper), my main advice goes out to the businesses. When the value of your countries dollar is high, take advantage of your purchasing power in order to try and reduce your cost of factors of production (by buying resources, machinery, etc). You can also further utilize this in the form of global expansion by using your purchasing power to buy companies for a cheaper price or even outsource labor and factories in these areas.

Conclusion:

The strength of the dollar is something that consumers should acknowledge and understand when making purchases as they may be paying more than should be. Businesses should also taking advantage of their ability to outsource at correct times in synchronization with the value of the dollar. Finally, governments should understand that printing more money in the economy does not necessarily make for richer people, only lower dollar values.

Boildown:

As a whole, there are many things that we should strive to understand about our economy especially in the future. I believe that scarcity will become a greater and greater problem in the future and that the strength of the dollar is particularly relevant to what has been happening in our economy lately. If following my advice, the economy still fails, I blame this.





New Tax Policies May Aggravate Gap Between Rich and Poor: A Recipe for Risotto

30 05 2011

Free cookies

Key Points:

– In most recent years, Canada has been experiencing among the highest rates of gap expansion. Meaning that the distance between the rich and poor is gaining significantly.

– Between 2005 to 2009, the total monetary wealth that the top 3.8% of Canadian households controlled jumped from 60.6% to 66.6% and is estimated to head to over 70% in 2018.

– Despite this, as well as a 30 Billion Dollar deficit, Stephen Harper plans on making even more corporate tax breaks, costing an estimated 6 billion dollars in forgone revenues for next year.

– This “trickle down economic” theory states that companies with tax breaks will use that money on machinery, making new jobs, among other things that give back to the country’s economy.

– This sounds good on paper but the majority of Canadian companies, despite extensive tax reductions, have been reluctant in recent years to make the investments in machinery and equipment needed to strengthen the country’s economic prowess.

Questions:

1) What do you believe should be the right gap between rich and poor? Smaller, or larger? Should the richer control more or less and why?

2) How do you propose the government taxes citizens and should it change?





High Times: The Economics of Marijuana

14 05 2011

Historically, marijuana has been dated back to China around 2737 BC. In later years, it has been tracked in the cultural scriptures of almost all cultures. It gained worldwide popularity as not only a recreational drug, but as a utility that could be made into other useful products such as fabrics, papers, ropes, jewelery among other things. In Canada, marijuana was first banned in 1923 under the Opium and Drug Act. Nowadays, it is still criminalized, but the many courts declare it to be “of no force and affect”. There has been an ongoing debate since then as to why it should be legalized once more and in this entry, I plan to outline the economics of the plant as both a recreation drug as well as it’s other uses, where it can go in the future as well allowing you to take a ride on my train of thought.

This debate over the legalization shares a great number of similarities to the the Canadian Alcohol Prohibition of 1918. With the criminalization of alcohol, booze simply became underground, bootlegged and opened up thousands of black markets, leading to the rise of crime in both the smuggling as well as the illegal production. This led to the eventual disbanding of all alcohol-related prohibition laws. I believe, that by utilizing the same concepts we have learned from 1918, legalizing, taxing and regulating marijuana will allow for benefits both economic and social.

Seeing Green

The legalization of marijuana would provide many positive externalities to society.

Marijuana has a huge following around the world, in spite of it’s illegality. In 2004, the most recent year cited, it was estimated that “16.8% of Canadians aged 15 to 64 smoked marijuana or used other cannabis products”, four times the the global rate. Although due to it’s secretive nature, it is hard to estimate the monetary value of marijuana in Canada, many economists and agencies believe that it is in the range of around $20 Billion per year, making it Canada’s single largest agricultural product. By legalizing and using excise taxes (or “sin” taxes) on marijuana, similarly to the tax on cigarettes and alcohol, the government can make use of the industry and gain profits to be reallocated to other places, which is a huge positive externality within itself.

Another positive externality of the legalization of marijuana would be the freedom of our policing and judicial systems. One gripe that many have with the current criminalization of marijuana is that it strains our cities public resources on an issue that shouldn’t be dealt with. Like any other crime, it comes with three main (and costly) aspects; policing, judgment and detainment. When people are caught for marijuana-related crimes, they must first be physically caught by the police. Afterward, they are put through a court system and finally, if found guilty, they are then detained for the sentence deemed by the judge. This may seem regular, but in the grand scheme of things, marijuana-related crimes make up around 3% of all crimes in Canada (excluding traffic). Though this seems like a small number, this would mean that 3 in every 100 court cases would not need to happen, affecting the system greatly in the long run. The entire three-prong system itself is extremely costly to the government and with that small chunk of crimes need not worried about, it is evident that we should see a smoother system overall.

Thirdly, the legalization of marijuana would almost destroy the underground black market of marijuana and thus the criminals behind it. With marijuana able to be sold more freely, those who currently sell it will have less market power due to the number of sellers in the marketplace. With the huge number of sellers in the market, there will be no use in violent crimes over turf or selling grounds that is commonly associated with illegal drug rings.

Combating the Negative

Many people argue that with the legalization of marijuana, many negative externalities will arise. One main concern with marijuana is the second hand smoke it provides. Although this is a very valid point, there has yet to be any research showing the co-relation between long-term marijuana  usage (as well as the smoke it produces) and health risks.

The quality of the evidence suggesting a link between long-term use of marijuana and cancer is neither as strong nor as comprehensive as the evidence regarding tobacco and cancer. A number of studies have reported an increase in head, neck, lung and throat cancers. To date, no epidemiological studies have consistently confirmed an association between long-term marijuana use and cancer risk because there is no standard amount of THC (the main active ingredient in marijuana) in every marijuana cigarette.

– Canadian Cancer Society
Another potentially hazardous externality that is often discussed is the “gateway” aspect of marijuana. Many believe that though not as harmful, marijuana actually coaxes the users into trying more addictive and dangerous drugs (ex. cocaine, heroin, etc). Many also go on to argue that the legalization of marijuana will lead the government to legalize the more dangerous drugs aforementioned. This gateway theory has yet to be proven yet and produces inconclusive evidence of the co-relation between the two. As for the legalization of more dangerous drugs? Fallacious. It would be a stretch the say that because of the legalization of marijuana would lead to the legalization and leniency towards more harmful drugs.

Most people who experiment with marijuana do not go on to use harder drugs.

Still, “the vast majority of people who we see who do cocaine or heroin have done marijuana in the past, or are likely to do it at some time in the future.” But “if we could push a button and all the marijuana would go away, by no means will that stop the drug problem in this country.”

– Dr. Neil Capretto, Medical Director, Gateway
So what do we do now?

From a supply and demand standpoint, I believe that marijuana can be graphed like so. The supply is inelastic as it is tough to increase production as a result of an increase of demand. Demand is inelastic because it is tough to find a drug with the same effects without the same low levels of addictiveness and the consumer does not spend a large amount of their income on the good. With the criminalization of marijuana, we decrease it’s supply (higher price, lower quantity) and decrease it’s demand because of the illegality of possession (lower quantity, lower price). I propose that the strongest way to go about really utilizing marijuana’s economic power is by legalizing and regulating it the same way we do with cigarettes. Because of the relatively inelastic nature of the good, a heightening in price, no matter how large won’t have as much affect on the quantity consumed and thus is easy to tax.

The boil-down

Overall, I feel marijuana does more help than harm for our society. The legalization and taxation of it would bring us some economic gains similar to the money we make by taxing 28 billion dollar cigarette industry. Not only that, it would free up our judicial system and policing systems and allow them to focus on more important issues. Finally, it would also reduce drug related violence that is often based off of the underground nature of the industry. Marijuana will be used whether we legalize it or not, the only real question is if we’ll harness it’s potential, or let it go to waste.

“That is not a drug. It’s a leaf” – Arnold Schwarzenegger





Income Tax- Pros and Cons.

25 04 2011

(Aparently I didn’t get to posting this, I could have sworn I had, my mistake

Regards,

Unicorns Everywhere)

PROS:

Fairness: Canadian income taxes are a progressive tax based on marginal income and tax brackets. Simply put, your income is put into levels and then you are charged accordingly. Because of this those who make more income then others are taxed more and conversely those who make less are charged less. Because the heaviest burden is put on the backs of those who can afford it the most, the system works to achieve a level playing field for all.

We all remember those times in monopoly where your jerk of a friend lands on the Income Tax square and decides to count up all his assets and take off 10% instead of paying the $200. Yeah, that’s income tax.

Quick to impliment: From a government standpoint, because the reaction of the public is so quick, the government can quickly lower or raise taxes in order to achieve certain results. For example, in a government deficit, the government can raise taxes in order to quickly gain money in order to pay these loans off.

“Mr. President, we’re in a deficit” “Shut. Down. Everything.”

Stability: Income taxes are imposed on everyone who earns income, but unlike other kinds of taxes, they are relatively stable. For example, in an depression, the unempl0yment rate may rise to 10% and even then, the government will still gain money off of the other 90%. Because of this, the system does not take as much of a hit as other taxes.

Benefits to society: Sure, you may be paying through your nose with these taxes, but at least our parks are pretty.

CONS:

It’s taxes: Taxes are solely based on government benefit. From an economic standpoint, we know that because we are taxed, we lose money to spend which in turn affects the demand curve of all products. Because consumers don’t have money to spend, the economy generally falls with higher taxes.

Loopholers: When you have taxes, you have people who don’t want to pay taxes. People exploit the system by using loopholes, cutting money or just not paying them. Because of this, Revenue Canada has to hire over 90,000 people trained in auditing who simply revise the taxation system to make sure that it is air-tight and impossible to scam. These thousands of people could easily be put into better use and are an example of implicit costs (HEY MRS. CUTTLE, I’M LEARNING.)

Inconsistent Taxation: One gripe many people tend to have with income taxes is that it’s inconsistent. Warren Buffett, one of the world’s richest investors is only submitted to 17% tax, where his secretary has to pay 30%. The unfairness of the system tends to outrage people and because of the huge amount of people being taxed, there is very few resources able to be allocated to dealing with case-by-case basises.





Wal-Mart: Save money, be better.

31 03 2011

Is the world better or worse off because of Wal-Mart?

When you think low prices and one-stop shopping, what do you think of? I, like  hundreds of millions around the world think of Wal-Mart. Established in 1962 by American businessman Sam Walton, Wal-Mart has created a name for itself as an economic powerhouse, with it’s 8,100 big box stores worldwide and 405 billion dollar revenue. But, like every other successful thing, with great fortune comes great criticism. Wal-Mart has been pinpointed by worker’s unions, political figures and store owners, but overall, I do think that the world  has greatly benefited from Wal-Mart.

The Good.

Wal-Mart is a great example of a winning combination of the things that make a business successful: adaptability, innovation and stretching the boundaries. They are one of the first businesses to successfully export labor overseas and use it to their advantage. It led the way for other companies (and even countries) to begin a new era of foreign investment, providing jobs worldwide and sparking a newer, cheaper way to produce any kind of good. With Wal-Mart’s innovation in outsourcing (importing goods from other places in the world at a much lesser cost), it has become one of the top importers of Chinese goods which improves foreign investments as well as promotes trade with other countries.

From a consumer standpoint, Wal-Mart provides thousands of goods to hundreds of millions of people. It seems pretty obvious that people would prefer to buy things for less than they would for more. Those with lower incomes prefer to shop at Wal-Mart and many people even make trips from far away places in order to shop. Even for those who don’t shop at Wal-Mart, other places will mark down their prices in order to compete against Wal-Mart, benefiting the customer either way.

Wal-Mart has also brought on new horizons for people who want their products on the shelf. Wal-Mart, a monopsony (perhaps a oligopsony), buys from 61,000 suppliers worldwide. By being able to harness such a high traffic store, suppliers are given the opportunity to put their products out into the eyes of millions and creates massive amounts of sales. This has made a symbiotic relationship that benefits both suppliers and Wal-Mart as well as the consumers, who are able to shop through a variety new and emerging products.

Did I mention they also give back? From a philanthropic standpoint, Wal-Mart is one of the top corporate donors in the entire world, giving back $296.2 million dollars (US) to charity.

Now, the bad.

Wal-Mart’s business structure is one of many things. To consumers, is classified as being in an oligopoly with other one-stop retailers such as Target, but has much more control over the prices due to it’s size and it’s economies of scale. They have also many suppliers overseas who produce their products at a much cheaper price. Because of it’s cheap production costs, it has the ability to bully other companies (even the larger Target and Zellers) and their prices with such a high market power and control over goods. This has driven a lot of criticism from owners of smaller companies because they simply cannot compete with these low, low prices, giving Wal-Mart the title of “category-killer”. But these assumptions are not entirely true, as a matter of fact, in many cases, it has been known to bring in economic prosperity to otherwise lesser cities.

In 2002, Ryerson University completed the first major study on the company’s impact on nearby small retailers, and found the opening of a new outlet is generally an economic boon for the whole area — attracting other retailers and driving up sales at nearby stores. In metropolitan areas, a new Wal-Mart was generally followed by an increase of $56.8 million in local sales, and the opening of 12.9 new stores. In rural areas, the commercial boost was $74.1 million and 16.7 new stores on average.

Steve Maich, Macleans Business

Additionally, it should be noted that we cannot blame Wal-Mart for what it has done. Wal-Mart got where it was (competing against the, at the time, largest retailer, K-Mart) by revolutionizing and coming up with new ways to gain a competitive advantage. How is it fair that we are blaming a company when it’s only fault is being successful and innovative? I believe that if anything, Wal-Mart is doing something good, as it promotes creativity in new businesses in order to find a way to gain competitive advantage. By closing the market to only the strongest of businesses, we’ll see a better and more efficient market that constantly strives to make new conveniences to the customer, or die trying.

Another common point of criticism Wal-Mart often takes is it’s under-paid employees and lack of benefits as well as the borderline ethics of their international suppliers. But why should Wal-mart be responsible for that? Being an employee at Wal-Mart is a low-paying and lackluster job only because it doesn’t have to be anything else. There are no credentials required, no education required and no skilled labour involved. Why, then, should people working there expect anything more than what they are getting? Because almost anybody can apply for the job, there will be thousands of applicants for the same position, and therefore it’s only natural that Wal-Mart lowers the wages for these jobs.  

In conclusion, Wal-Mart has taken a lot of flak in the past for things that it’s just not deserving of. As a successful business model, it cannot be liable for low-paying jobs or beating the competition. On the other side of the coin, it is a very powerful tool that helped pave the way for foreign investments, helps put suppliers into the global market, saves money for the customer and creates a more innovative and competitive marketplace for smaller businesses. Wal-Mart also promotes the hiring of the mentally handicapped as well as the elderly in many stores for those who are trying to be independent, a program that very few other stores have.

Wal-mart… do they like make walls there?

Paris Hilton

Resources:

http://www.flickr.com/photos/gdsdigital/4306320990/sizes/l/in/photostream/

http://www.macleans.ca/business/companies/article.jsp?content=20050725_109503_109503

http://www.slate.com/id/2144517/entry/2144705/





Supply and Demand: “iPad cuts “dramatically” into laptop sales”

6 03 2011

http://money.cnn.com/2011/03/03/technology/tablet_pc/index.htm

Recently, with the release of tablets, laptop sales have been projected to lose a significant amount of growth in the next 5 years. This new surge of popularity for iPads and other tablets has lead to a decrease of general laptop sales, reducing the sales increase from 15.9% to 10.5%. Mainly, we see a change in consumer preferences, technology-wise, tablets are continually getting more popular as a replacement for portable computing devices, because of this, the market is moving more towards tablets and growth will begin to decline for laptops. I have modeled the changes as such, which in my opinion, accurately portray the situation.