Taxes destroy wealth

It is interesting that the Republican challenger to Ted Kennedy's senate seat is using clips of Ted's brother, JFK, to tout his 1962 tax cuts.  Every Senate Republican, including Barry Goldwater, voted against the 1962 tax cuts.

Adjusting to risk

A new paper  finds that after they get sick, insured people re-balance their portfolios in the obvious way.

We find that insured individuals are significantly likely to divest from risky asset holdings in response to a decline in health while the risky asset accounts of uninsured individuals demonstrate no correlation with health status when controlling for variables such as income, age, and out-of-pocket medical expenses.

The finding is somewhat counter-intuitive because one would think that health risk is bigger for uninsured individuals.

Venezuela devalues the Bolivar

As a consequence, producers are helped, but consumers are hurt as import prices increase.  If the votes do not punish Chavez, the markets will:

"It was a Black Friday, tinted red," said sales executive Diana Sevillana in reference to the crimson color of Chavez's socialist party. She stood in a line of 30 people outside an electrical goods store in a middle class neighborhood.

The socialist Chavez believes the state should have a weighty role in managing the economy. During his 11 years in office he has nationalized most heavy industry, and business and finance are tightly regulated.

The devaluation is politically risky but means every dollar of oil revenue puts more bolivars in government coffers. That allows Chavez to lavish cash on social projects and fund salary increases ahead of parliamentary elections in September.

Is China the next bubble to burst?

Why is the recovery so mild?

Because of the uncertainty that goes along with it:

In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.

Congressional "reforms" of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.

Consumers vs. voters

Why voters are likely to make worse decisions than consumers:

One underappreciated fact about the experimental and survey evidence relied on by advocates of the new paternalism is that it models voter decision-making far more closely than market decisions. Unlike market participants, voters have little or no incentive to either acquire information about the issues they decide, or to analyze the information they do have in an unbiased fashion.

The Heat is on in Iceland

The amazing story of Iceland's boom and then bust is the lead story in the new chapter on trade, bubbles, and market making in the second edition of the text. The saga continues.

As part of the boom, Icelandic banks offered very attractive interest rates to foreign depositors in the UK and the Netherlands through Icesave accounts. When the bust came, the foreign governments ended up picking up the guarantees on the deposits. And, they want their money back.

As part of the bailout negotiations, the Icelandic government had agreed to repay the UK and the Netherlands for the amount of the guarantees (which come to about $17,000 per citizen in Iceland - ouch!), and its parliament recently passed a bill authorizing the re-payments. Yesterday, however, President Olafur Ragnar Grimsson vetoed the bill, which about 70% of the population reportedly opposes.

Optimal Toll Pricing?

Tolls on the New York Thruways are 5% higher today, the second increase over the last year. According to Thruway Authority officials, the increase was necessary because of a decline in traffic. The logic here might sound a little goofy on initial read: "we raised price last year and traffic went down, so let's raise price again." But, what we don't know is what the effect has been on revenue. If demand for use of the tollway is fairly inelastic (I would guess that it probably is), raising price and decreasing quantity would lead to higher revenue.

Happy new decade

From Calculated Risk:

There has been zero net job creation since December 1999. ... Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 ... And the net worth of American households ... has also declined when adjusted for inflation ...

Mathematica Demonstration project

Mathematica is a high level computer language that simplifies programming the kind of models that economists use.  They have a big library of programs that can illustrate the effects of models, like bubbles.