Downfall of Unionization and Rise of Licensing

The chart below comes from an economic study on the impact of licensing requirements on the economy.  This graph shows data from 1950 to 2008 illustrating how over the last 50+ years the amount of occupational licensing has increased while the amount of unionized workers has decreased!  Read the whole paper at http://ftp.iza.org/dp5505.pdf

The Difference A Mile Makes(Gas Price Differences Between States)

In economics 101 we learn about the impact that taxes and subsidies have on supply and demand.  The usual example that is given is a situation where the sales tax for widget A is increased.  As a result the demand curve shifts left resulting in a new before tax price and quantity demanded of widget A.  We then see that when you add in the sales tax, the price of widget A increases(P1 to P2) relative to when there was not tax(see below).




Despite being told that this impacts us in our everyday lives, the concept of taxes having a real impact on prices is still abstract for some.
To make this concept a little more concrete lets look at the differences in gas prices between US States.  Here is a list of the taxes that individual states charge on every gallon of gasoline as of January of 2012.  Here is a link showing the lowest to the highest average daily gas price by state.
When you compare these two sets of data you see that the states with higher gas taxes tend to also have higher overall gas prices.  Just drive from Williamsport Pennslyvania(has 15th highest gas tax in US) to Rochester New York(has the highest gas tax in US).  Rochester on 3/24/12 had an average price of 3.978 per gallon while Williamsport had on average price of 3.900, a difference of 9.78 cents.  The state averages differ by 15.7 cents.  The state gas taxes differ by 16.7 cents.
Part of this difference is a direct result of this tax difference.  When you look at the 25 states with the highest gas prices 21 of them also part of the 25 highest gas taxing states(Do remember that there are MANY other factors(supply and demand factors) at work here and that this is not a scientific comparison, just food for thought).

Just remember whether you believe higher taxes are right or wrong, taxes WILL impact prices!

An Essay on The Principle of Population Thomas Malthus

In 1798 the famous economist Thomas Robert Malthus introduced his essay on the principle of population with:

"At the end of each day, the world now has over two hundred thousand more mouths to feed than it had the day before; at the end of every week, one-half million more; at the close of each year, an additional eighty million.  Aware of these alarming statistics, many national governments, influential institutions, and private enterprises are trying to encourage increased production of all the necessities of life, particularly food, in the hope of preventing mass starvation...there has been enough success in recent years to forestall, at least temporarily, a major disaster..."

200 plus years later at the end of each day there are over 490,000 more people, 3,430,000 more each week, and 178,360,000 more people each year.
Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2008 Revision, http:/esa.un.org/unpp, Friday, June 26, 2009; 3:41:46 AM. 


Despite population growth more than doubling it is less expensive to maintain the basic necessities of life than any other period of history!  Food production has increase exponentially, prices have decreased, and land usage has remained constant.  Check it out here.

One example:

Environmental Benefits of Innovation

Over the last 50 years the earths population has more than doubled.

With such a large increase in world population you would think this would mean a larger portion of land and people would have to be devoted to producing food.  You would also think that this would have a negative impact on the environment through the cultivation of land, fertilizer run-off, etc.

Fortunately over the last 50+ years agricultural innovations have been developed and implemented which have   resulted in a decrease in the amount of land used for agriculture and an increase in land productivity.  Some of these innovations came from genetics others from engineering.

What Does Unemployment Really Look Like?

Why look at the recession of 1920?

The next couple of blogs are going to be about the recession of 1920.  Before we dive into this event I think it is important to give a reason why we are even going to look at it.  It is very important to remember that the Great Depression was not predetermined.  Specifically, the intensity and length of the economic downturn could possibly have been avoided.   If one looks back through American history there had been several economic declines before the Great Depression.  Some of these periods started out very similar to the early 1930’s, but they ended quite differently.  Most notably the length of these other economic downturns were far shorter than the decade plus span of the depression.  

By looking at the recession of 1920, we can have a comparison for when we look further into the Great Depression.  We can gain an understanding of what happens during a recession and that government policy likely has impact on the economy. In this blog we will look at the initial downturn in 1920 to the bottom in 1921.
From 1920 to 1921 the Dow dropped 32.9%(Close to the 33% drop in the DOW from 1929-1930), commodity prices dropped from 248% above 1913 levels to 141% above 1913 levels(there were also drastic declines in commodity prices from 1929-1930).  This downturn was felt by both American Industry and American Agriculture.  For example, if a an industrialist had merchandise that he was expecting to sell and profit from at prices 248% above 1913 prices and then prices take a nosedive to only 141% above 1913 price, that industrialist now has goods which he may have to sell at an unprofitable price.  
Fortunately American Industry and wholesalers were expecting this bust to happen after the boom from World War I.  Wholesalers like Wanamaker’s in early 1920 started selling off their inventory at high prices, expecting a decrease.  This way when prices decreased they would not have items on their shelves that were purchased at high prices.  Wanamaker could restock their inventory at the lower 1921 levels.  In addition to Wannamaker’s, American Industry also prepared for the bust.  During the wartime boom, American industry invested their profits in liquid assets and bought down their debt.  Doing this and not buying more raw materials or equipment, they avoided buying and getting stuck with materials that were relatively high in price as compared to the bottom in 1921.
American agriculture on the other hand did not fair as well.  During the boom years farmers bought more land, which was increasing in value because of high food prices.  Farmers made this decision because of the conventional wisdom that one should invest in what one knows and for farmers that was land.  What happened was as commodity prices fell farmers made less money off of their crops and the value of the land they invested in fell as well.
Interesting wages during this recession did not fall very much.  This was mainly due to the decline in immigration resulting from World War I.  What this caused was a decrease in labor supply, shifting labor supply up and increasing wages.
In sum, the recession of 1920 was a period of steap decline in commodity prices.  This resulted in both industry and agriculture suffering because they items they sold were now selling at lower prices.  Lastly, American industry ended up doing better during the recession than agriculture because of their choices and prediction of the decline.

Next time we will look at what caused this recession.

The Government of the 1930’s

The 1930’s marks a real change in federal government responsibility, power, and spending.  Much of this change can be listed under the title of FDR’s New Deal.  These changes vary from tax rates to banking regulations to labor laws.  It is important to understand that many of the political changes that were made during the 1930’s are still a very powerful part of our lives over 70 years later.

During the 1930’s there were dozens of new government agencies and economic regulations passed.  These include, but are not limited to Fannie Mae, Federal Deposit Insurance Corporation(FDIC),  Civilian Conservation Corps, Civil Works Administration, Federal Housing Administration, Securities Exchange Commission, National Recovery Act, Fair Labor Standards Act(Federal Minimum Wage), Social Security Act, Smooth-Hawley Tariff Act, etc.  If you have been paying attention to our current economic crisis I am sure you have heard of Fannie Mae(Yes this was on Glenn Beck, but watch it for Thomas Sowell), the FDIC, the Securities and Exchange Commission, and Social Security.  All of these programs were started throughout the 1930’s.  These agencies and laws dealt with helping home owners, subsidizing farmers, regulating wall street, minimum wage, increasing tarriffs on foreign goods, and even setting the prices of goods and services.

While most of the above changes were initiated during the four term(yes a four term president) presidential reign of FDR, some were instituted under the Hoover administration.  Most notable the Smooth-Hawley Tariff Act.  This act was signed into law by Herbert Hoover in June of 1930.  It raised foreign tariffs on imports to the US to “historically high levels” and likely contributed to US exports going from $1,334 million in 1929 to $390 million in 1932, due to foreign contries retaliating by raising their tariffs on US imports.  The reason I mention this act under the Hoover administration is because most people are taught the Herbert Hoover was a free market enthusiast, his actions show differently and we will devote a future blog post to this.

Another interesting change in the federal government was in taxes and non-wartime spending.  One would think that the last thing that the federal government would want to do would be to raise taxes during one of the most painful periods in our economic history, but that is exactly what happened.  In 1929 the top marginal tax rate was 25% for those earning $100,000 and above, that’s about $1.2 million in 2010 dollars.  The bottom marginal tax rate started for incomes of $4,000($50,000 in 2010 dollars) which were taxed at 1.5%.  By 1941 the marginal tax rate for those making $100,000 had risen to 69%.  The top marginal tax rate had changed to incomes of $5 million, these earners had to pay a federal income tax of 81%.  Not only did the top marginal tax rate increase, but the bottom did as well.  The bottom marginal tax rate in 1941 started at $2,000(an income of $4,000 in 1929 was a little over $3000 in 1941 dollars) and earners at this level had to pay 10%.  So not only were the wealth facing higher income taxes, but the poor were as-well.

Unlike the tax increases of the 1930’s, it should be no surprise that government spending drastically increased.  In 1929 total federal government expenditures made up 1.3% of Gross Domestic Product, by 1941 federal government expenditures rose to 7.1% of GDP.  For the time period this was a huge increase for a non-wartime period.  Interestingly, federal government expenditures as a part of GDP today are about 20%.

So, this is a glimpse at what the 1930’s looked like when looking at the US government.  Spending increased, taxes increased, federal power increased, and economic freedom and prosperity decreased.  We will discuss later on the impact of all of this on the economy later on.

We will discuss the recession of 1920-1921 in the next blog.