Carpe Diem

Steven Landsburg: The Case for a National Sales Tax

University of Rochester economist Steven E. Landsburg (author of Armchair Economics) comes out in support of Huckabee’s national sales tax in his most recent column titled “Huckabee’s Tax Plan Is Brilliant: So why is it getting trashed?”:

A national sales tax is the exact equivalent of an income tax with a provision for unlimited IRA contributions (and no withdrawal penalties). The merits and demerits of the Huckabee tax plan are identical to the merits and demerits of a vastly liberalized IRA policy.

A lot of economists, myself included, think that there’s a lot to be said for unlimited IRAs. Any conceivable tax system discourages work, which is unfortunate but unavoidable. But the current system also discourages saving, which is avoidable. A liberalized IRA policy—or, equivalently, a sales tax—eliminates that problem.

Bottom line: Unlimited IRAs, coupled with somewhat higher tax rates, have advantages and disadvantages, but the advantages are bigger. And whatever can be said about unlimited IRAs coupled with somewhat higher tax rates can equally be said of a national sales tax.

Carpe Diem

Globalization Makes US Economy Recession-Proof?

The chart above (click to enlarge) shows annual world real GDP growth from 1980 to 2008 (IMF estimates growth of 4.8% for 2008), using data from the IMF, along with shaded areas of years during which the U.S. economy was in a recession. During the last four U.S. recessions (1980, 1982, 1990-91, and 2002), world GDP growth fell below 3%, and averaged only 2.1%.

Assuming that world GDP grows at the IMF’s forecast of 4.8%, it would either be: a) inconceivable that the U.S. economy could go into a recession with such strong growth in the rest of the world, or at least b) unprecedented that we could suffer a recession while the world economy continues to grow at almost 5%.

I think it is worth considering that in previous U.S. recessions like in 1980, 1982 and 1990-91, there was no, little, or at least much less support from the global economy and emerging markets like there is today. For example, during those recessions, there was no support for the U.S. economy from countries like India, Brazil and China like there is today. And even compared to 2001, the world economy today is much stronger, more integrated, growing much faster; and the strong growth in the emerging markets is providing much more support for the U.S. economy than ever before.

Perhaps the dynamics of the U.S. business cycle are different now because of globalization, increased integration of world markets, and the unprecedented growth of emerging markets like the BRIC countries. Is it possible that globalization has made the U.S. economy recession-proof? At the very least, it’s something to think about, and I don’t think it has received much attention.

Carpe Diem

Strong Growth in Emerging Markets Helps DuPont

The IMF forecasts world GDP growth of close to 5% for 2008, continuing a five-year trend of above average growth for the world economy. In a post yesterday, I suggested that continuing, strong economic growth in the developing economies and emerging markets (the IMF forecasts 10% growth in China for 2008, 8.4% in India, 6.5% in Russia, etc.) could help support a weakening U.S. economy and prevent a 2008 recession.

Although anecdotal, here is a story from today’s NY Times Business section to support that the notion that continuing strong growth in emerging markets will help strengthen the U.S. economy in 2008:

Citing strong fourth-quarter results and prospects for growth in emerging markets, the chemical maker DuPont (NYSE:DD) raised its earning estimate for 2007 on Wednesday as well as its profit forecast for 2008. A DuPont spokesman said the agriculture and nutrition business had been particularly strong in Brazil and that growth in emerging markets like China, India and Eastern Europe had averaged about 15%. Shares jumped $2.03, to $44.78.

Carpe Diem

Automotive Globalization: Both Low-end ($2500) and High-end ($50k) Car Markets Thrive in India

From two-wheelers (above) to four-wheelers (below)!

Nano, Tata Motors’ Rs. 100,000 (US$2500)”people’s car” (pictured above) was unveiled at the Auto Expo 2008 in New Delhi today.

“This is a proud moment for India. It demonstrates India’s technological and entrepreneurial ability,” Commerce Minister Kamal Nath told reporters on Thursday. “It fulfils the need of the common Indian who aspires to move from a two-wheeler to a four-wheeler,” he added (see top picture above).

See a picture gallery of the Nano.

Watch the launch video here.

At the same Auto Expo, GM announced it may launch its Cadillac and Hummer models in India this year as incomes surge in the second-fastest growing major economy in the world, after China. The number of high net worth individuals in India rose 20.5% in 2006, the second-fastest growth in the Asia-Pacific region after Singapore, suggesting that there will be a growing demand for high-priced luxury vehicles in the $40-50,000 range at the same time that there is a thriving market for low-end $2,500 Nanos.

Comment: We hear a lot about the loss of U.S. jobs due to outsourcing to India, from Lou Dobbs and presidential candidates like Obama (”I’ll be a president who ends the tax breaks for companies that ship our jobs overseas and put a middle-class tax cut into the pockets of working Americans who deserve it.”) What receives considerably less attention are the significant number of jobs that are created when U.S. companies expand overseas by SELLING products to Indian consumers, who are becoming increasingly wealthy.

For example, GM already plans to sell 90,000 vehicles this year in India and aims for a 10% market share of the growing vehicle market there, and many other U.S. companies have established a presence in the second fastest growing economy in the world: Dunkin‘ Donuts, McDonald’s, Pizza Hut, Starbucks, Wal-Mart, Foot Locker, Harley-Davidson, etc. Trade works both ways.

Carpe Diem

Corruption Travels Globally


We exploit a unique natural experiment – the stationing in New York City of thousands of government officials from 146 countries around the world – in a setting of zero legal enforcement of parking violations to construct a revealed preference measure of official corruption. We find that this measure is strongly correlated with existing measures of home country corruption. This finding suggests that cultural or social norms related to corruption are quite persistent: even when stationed thousands of miles away, diplomats behave in a manner highly reminiscent of officials in the home country. Norms related to corruption are apparently deeply engrained, and factors other than legal enforcement are important determinants of corruption behavior.

See the top 15 countries for NYC parking violations in the chart above (click to enlarge), Kuwait is #1, by far.
Carpe Diem

IMF: World Economy To Grow At 4.8% in 2008

According to the IMF’s most recent “World Economic Outlook,” the global economy is projected to grow by 5.2% in 2007 and 4.8% in 2008. The IMF’s forecast for economic growth in the U.S. is 1.9% this year.

The expected world real GDP growth of 4.8% in 2008, is just slightly below the average, annual growth of 4.9% since 2003, suggesting a continuation of the very strong record of 5% world GDP growth in the last five years, compared to world growth closer to 4% in the 1990s.

The map above (click to enlarge) from IMF’s Data Mapper shows the IMF’s projected real GDP growth rates by country for 2008. Healthy economic growth of between 3-10% is projected for most of the developing economies and emerging markets (10% growth in China, 8.4% in India, 6.5% in Russia, etc.), which could help support a weak U.S. economy and prevent a recession here?

(HT for map: Fancy Plaid Pants)

Carpe Diem

Wal-Mart More Selective Than Harvard? Doesn’t That Mean That Wal-Mart Wages Are Too HIGH?

According to the NY Times:

Stanford University received a record 23,956 undergraduate applications for the fall 2007 term, accepting 2,456 students, meaning the school took 10.3% of applicants.

Harvard University received applications from 22,955 students, another record, and accepted 2,058 of them, for an acceptance rate of 8.97%.

Applications to Columbia numbered 18,081, and the college accepted 1,618 of them, for what was certainly one of the lowest acceptance rates this spring at an American university: 8.9%.

According to the Atlanta Journal-Constitution:

They came in droves — high school students, retirees, young moms, the unemployed — all for a shot at a job at a new Wal-Mart on Memorial Drive in central DeKalb County.

In just two days, and with virtually no advertising or even any signs, a staggering 7,500 people filled out applications for one of the 350 to 400 available jobs.

Bottom Line: Wal-Mart accepts only about 5% of its applicants, compared to the most selective universities, which accept 9-10% of their applicants. Alternatively, Wal-Mart has about 20 applicants per available job, compared to Standford, Harvard and Columbia, which have only 10-11 applicants per available opening.

Further, the standard assumption is that Wal-Mart’s wages are unreasonably low. A Google search of “Wal-Mart” and “low wages” results in 122,000 hits. But with Wal-Mart receiving 20 applications per position, you could make a stronger case that Wal-Mart’s wages are actually TOO HIGH. That is, Wal-Mart could lower its wages considerably and still have too many applications.

Carpe Diem

Indian Stock Market Continues to Set Record Highs

MUMBAI–India’s Bombay Stock Exchange benchmark index, the Sensex, crossed the 21,000 peak in early morning trading, adding the last 1,000 points in 49 trading sessions (see chart above, click to enlarge).

The BSE benchmark completed its 1,000-point journey in 49 business days after touching the 20K milestone on October 29, last year. In trading today, the BSE reached another new all-time high, trading above 21,100 before closing slightly lower.

Note: India’s stock market has increased by 50% over the last year.