Friday, June 13, 2008

The Train is Pulling into Inflation Station

Inflation rose .6 percent last month, which anyone who has not been living in a cave knows. This is big news in a country whose recent history has been inflation in the twos per year. One good effect of this inflation rise comes in the likelihood of a Fed rate rise rising. Import prices last month rose 17%, which means that Wal Mart, Target, Costco are all gonna be raising the prices to keep their Chinese goods coming in. Hurray globalism.

Wednesday, June 11, 2008

Today's Lesson-Corporate Taxes are Paid by Consumers

While there is little good to be said of Congress lately, they made one intelligent move by having the windfall profits on oil tax filibustered. While I am as pissed as the next guy about paying four dollars a gallon in gas, basic knowledge of how economic systems work will dictate that taxing profits fails to do anythign about the price of oil, in fact it will raise it.

To understand why a tax on the profits beyond the normal corporate tax will be passedo nto consumers, one must understand that in any economy there are two sides. One side, the demand side, is made up of the businesses and households and governments which spending money or taxes to get goods and services. The other side, the supply side, is the producers(businesses) who create the goods and services the consumers want based on this old law called supply and demand. When there are more buyers than sellers, price rises, and when there are more sellers than buyers price falls. When income shrinks, demand falls, yada,yada,yada. To cut the story short, in the total (aggregate) supply of goods in this country there are two factors which have exogenous variables-output and price. When a tax occurs on a corporation, the price of producing a good goes up because the tax is added into the price in order to maintain profit margins. If the tax were not added into the price, the company would be unable to make money as the would soon have costs exceeding revenue from all of the costs of labor, taxes, overhead, etc. By increasing the taxation on oil companies, the cost of each barrel will rise to maintain profit margins, increasing the price of each barrell. At the same time, fewer people will be able to drive because of the increased prices, which lowers demand. This causes the amount of tax revenue from gas taxes to decrease, which leads to infrastructure problems, and so on and so forth.

In conclusion, businesses seek to make profits, otherwise they would be charities. By increasing the cost to produce on a company, the price of each product rises and demand falls. With oil the price of every product rises due to the use in transportation and being a factor in so many different goods. Even if one did not own a car, the cost of the bike tires would go up, as would the helmet, the backpacks, and the water bottle all rise since all are made from petroleum-based plastics and use petroleum biproducts. Enjoy

Sunday, June 8, 2008

Taking a break from studying

I am taking a break from studying upper level macroeconomics to report on the news of the day. First it appears that John McCain, aka the old guy running against Barack Obama, is not doing so hot . If the election were held today, he would lose 304-234 to Barack Obama, conceding formerly R states in Ohio, Colorado, Missouri, New Mexico, Iowa, and barely hanging on in Florida and Virginia.

Will this abysmal showing hold true, or is it a reflection of McCain's invisibility for months with a contested Democrat primary? We shall see

Economically the price of gas is destroying the budgets of Americans and putting our entire economic system at risk if these prices continue without real wage growth. Today I filled up and paid $91, and noticed that diesel prices are close to five dollars a gallon. Diesel prices are the more worrisome of the two since the equipment used ot harvest our food and transport it is all diesel. If farmers cannot make a profit due to diesel prices, we will be exposed to shortages for the first time in thirty years. Of course the government excludes fuel and food prices from inflation, so they claim inflation is under control. Cut out discretionary spending as much as possible is all I can say.