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It is common to talk about "reducing our dependence on foreign oil" as a way to fight terrorism. I question that connection in this essay.

If we reduce oil consumption by 10 percent, then we will not cut 100 percent of our imports from Saudi Arabia. We cannot arrange to consume only American oil and no Saudi oil. Oil is oil. If we reduce demand by 10 percent, we probably will reduce our demand for Saudi oil by 10 percent, not by 100 percent.

Discussion Question. Why is a higher gasoline tax less attractive politically than regulations on the fuel economy of SUV's?

In Paul Krugman's model, government spending is given, and tax cuts increase deficits.

It's O.K. to run a deficit during a recession, as long as the deficit is clearly temporary. But both the numbers and the administration's search for excuses tell us that there's nothing temporary about the red ink. On the contrary, we'll probably be on a deficit bender until the baby boomers retire — and then it will get much worse.

In Milton Friedman's model,

History suggests that Washington spends whatever it receives in taxes plus as much more as it can get away with.

Virginia Postrel pointed out that this story and this sidebar in USA Today seem to confirm Friedman's model, at least for state and local governments.

State governments are struggling to pay for expensive programs that were approved or expanded during the economic surge of the late 1990s. Although the economy began to cool in 2000, state and local spending has continued to grow, increasing by an annual rate of 4.2% in the first nine months of 2002.

Discussion Question. How would economists prefer to determine the level of government spending and taxation?

Discussion Question.

Hal Varian does a nice job analyzing the proposal to make dividends tax-free for individuals, from the perspectives of macroeconomics, microeconomics, and--most important--portfolio theory.

What about municipal bonds? Odds are we would see their prices fall, since dividend-paying stocks would be pretty close substitutes under the Bush proposal...

One way to estimate the likelihood of the Bush plan's passing is to watch the prices of municipal bonds over the next few months: the more likely the plan is to pass, the lower those prices are likely to go.

What I was most struck by was Varian's final comments.

If paying dividends became the norm, companies would have to subject more investment plans to market scrutiny, which, by and large, would be a good thing.

But...the Bush plan allows a company to declare a dividend, but not pay it out to shareholders, instead keeping the money as retained earnings. This provision weakens a substantial benefit of changing the tax treatment of dividends.

Discussion Question. One goal of eliminating double taxation of dividends is to encourage more dividend payments. How does this conflict with the goal of the retained-earnings provision, which is to try to minimize changes in the relative tax status of dividends and capital gains?

One more noteworthy item from The Atlantic Monthly. Shannon Brownlee finds that health care spending differs by location.

A sixty-five-year-old in Miami will typically account for $50,000 more in Medicare expenses over the rest of his life than a sixty-five-year-old in Minneapolis.

She extrapolates from this that there are opportunities to reduce health care costs by getting the high-cost states to change their service patterns to match those of the low-cost states.

She cites this paper by John E. Wennberg, Elliott S. Fisher, and Jonathan S. Skinner.

Studies at the population level indicate no net advantage in terms of life expectancy for Medicare enrollees living in regions with more hospital resources (and hospitalizations) and greater care intensity as measured by more aggressive treatment patterns during the last six months of life. Longitudinal (cohort) studies of patients with similar diseases (such as hip fracture) who have been followed for a number of years also show that patients living in high-care-intensity regions gain no survival advantage over those in low-intensity regions.

Discussion Question. Why would economists expect to see different results if people were paying for their own medical care?

Discussion Question.

Can money buy happiness? In the latest Atlantic, Don Peck and Ross Douthat review the research.

data indicate a robust, if inexact, relationship between per capita income and "life satisfaction." ...That said, there are clear limits to what money can buy. Although improvements in income produce large improvements in happiness for poor countries...the law of diminishing returns takes effect at higher income levels.

Discussion Question. Does the finding of diminishing returns strengthen the case for income redistribution?

The Atlantic Monthly is indispensable, in spite of the fact that its online publication lags (hence no links to articles here) and in spite of the fact that the latest issue brings some truly insipid policy proposals under the rubric of a "State of the Union." Among the citable articles in the current issue is one by Thomas Edsall, who writes,

Whereas elections once pitted the party of the working class against the party of Wall Street, they now pit voters who believe in a fixed and universal morality against those who see moral issues, especially sexual ones, as elastic and subject to personal choice.

The data that Edsall cites to back his claim strike me as persuasive. His view also coincides with that of George Lakoff, author of Moral Politics, who sees a conflict between the "strict father morality" of conservatives and the "nurturant parent morality" of liberals.

Discussion Question. Why might an economist prefer to see voting determined by economic class?

Derek Lowe explains the tiff between U.S. pharmaceutical companies and Canada over drug prices.

What's happening is simple, and seemingly unspeakable: American customers are subsidizing the low prices in Canada. The prices are higher here so they can be cheaper there.

If drug research were manna from heaven, then it would be economically efficient to charge the marginal cost of production everywhere. What happens is that foreign countries impose price controls, so that pharmaceutical companies must pay for their research (which does not come from heaven) out of profits in the United States.

The problem is compounded by re-importation of drugs from Canada. As 'Jane Galt' describes it,

Okay, one million is the number of people who order drugs from Canada. Those are not all people ordering drugs they can't afford. Can't afford is when, after you pay for rent or mortgage, taxes, food, and enough clothing to cover your body, you do not have sufficient cash to pay for your drugs. I'm willing to bet that many or most of those seniors have greens fees, grandchildren's birthday presents, travel expenses, meals out, and assorted other things that could be scaled back sufficiently to cover their drugs if they wanted to. They don't want to pay a lot of money for their drugs;

Discussion Question. If you were a drug company, would you sell your products in Canada?

David Warsh points to a short essay by Stephen Cecchetti on the need for long-term fiscal discipline.

We should restrict federal government revenues to the 40-year average of 19 percent of GDP and estimated public debt 75 years from now should not rise above 50 percent of GDP. All current and future tax or spending proposals should be evaluated relative to this objective.

Brad DeLong disagrees with this solution, and so do I. As an economist, I think that policy should be decided on the basis of cost-benefit analysis, not arbitrary accounting limits. My proposal for dealing with the long-term fiscal threat is to phase out Medicare.

Discussion Question. Other things equal, why would there be higher deadweight loss if the economy used government spending rather than private-sector resources to pay for health care?

Did you ever wonder why printers are cheap and replacement cartridges are expensive? Zimran Ahmed explains that the answer is price discrimination.

toner usage is a good way to price discriminate between heavy users and light users, and charge heavy users more because they're willing to pay more. If you take away the ability to price discriminate, toner prices will fall and printer prices will rise. This is an unalloyed good for heavy users, but makes life worse for light users.

Discussion Question. What happens if a competitor is able to sell compatible cartridges?

In this essay, I argue that new licensing tools will not help content authors.

Creative Commons is based on a naive ideology that believes that raw content is gold, which then gets stolen by the evil media companies. In reality, the economics of content are that most of the value-added comes from the filtering process, not the creation process. If you want to overthrow incumbent publishers with Internet-based alternatives, you are better off starting from the assumption that Content is Crap.

Discussion Question. The essay argues that content publishers add value by filtering the content of authors. Is this the main way that they add value?