Invisible Victims

Great example of the unintened consequences of government action from Walter Williams.

Cash or Couch?

NOTE: This post is going to be a little dense for non-economics majors. I'll do my best to make this clear, but if you want a further explanation, email us at bsingeconomics@gmail.com and we'll give you a crash course in public economics.

I hardly ever enter into those giveaways and sweepstakes you see advertised on t.v. They take forever to sign up for, your inbox is always filled with spam from them and the chances of actually winning are slim to none. My mom, however, is a huge fan of them; she enters everyone she sees and generally has good luck with them (she won a car several years ago from McDonald's). Just to prove to her that my luck is greater than her's, I entered. Well low and behold, I got a call yesterday from the local news station informing me that I have won a (bright) red sofa and love seat! Astonished, I thanked the gentleman on the phone and started wondering what I'm going to do with it. It was easy to figure out what what would maximize my utility- Sell it.

Its a proven fact in public economics that people prefer receiving cash rather than in-kind goods. Lets say Ryan, a food-stamp recipient, just picked up his monthly food subsidy card. He is given $100 of free food through the program but, due to his preferences, he only eats and therefore wants $80 worth of food. He would prefer to buy the lesser amount of food and spend the rest on some other goods (such as books, gasoline, and/or crack). If he could realize his preferences his utility would be maximized; however, he is forced to spend the extra $20 on food rather that what he really wants, and therefore is unable to buy the amount of food and crack that will make him the happiest (maximize his utility).

Consider this sofa I won to be the equivalence of a food-stamp. It is a payment to me in the form of an in-kind good rather than cash. Much like Ryan, I'd rather receive the cash value of the furniture so I can spend it in the way that maximizes my utility. I currently do not want a couch, so I'd purchase zero couches and instead buy thirty copies of Stephen Colbert's "I am America (And So Can You!)." My utility would be maximized and the news station would be making me as happy as they could. (The law of diminishing marginal utility does not apply to Stephen Colbert)

If maximizing utility is the goal of a public policy or random giveaway, writing a check to the recipient is the way to go not just because it makes the receiver the happiest, but also because it costs the same as the in-kind good if not less! In the food stamp situation, whether the money is given out in the form of a normal check or the form of a check earmarked for food makes no difference, the cost to the government is the same (We'll ignore any kickbacks from special interests). The only difference is one option has the potential to make people happier by giving them the option to buy less food and more of anything else! In my situation with the sofa, the news station could give me the sofa (which they would go through the expense of purchasing and having it shipped to them) or they could write me a check for the value of the sofa and not have to pay oversize shipping fees. So not only would them writing me a check make me happier than me receiving the couch, but it would cost the news station less!

Lets look at a snazzy graph about this:

Look at the first graph.  The red line is my original budget constraint and the green one is the constraint plus the sofa.  By giving me the sofa instead of cash, I am forced to shift to a corner solution on the new budget constraint. I am happier than before, but I'd rather be in the area above my original consumption of Other Goods and not have a bright red couch.

Graph number two shows what would happen if the news station gives me the cash value instead.  I have enough extra income to purchase the couch if I want to, but I'd rather spend it on the thirty-three copies of Colbert's book; therefore, I consume zero couches and thirty-three books.  I shift from Indifference Curve 1 (IC1) to IC2 and maximize my utility.

By them giving me the money, I'd be happier and therefore more likely to tell people to watch that particular news station, which is their goal in the first place. Now I'm off to enter more contests. Wish me luck.

Budget Cuts

State budget cuts are front page headlines these days, no matter where you are in the country. Recently the Georgia General Assembly asked for 300 million dollars of more cuts from higher education. Each University or College have proposed their share of the total, but as you can see from the table below, some schools are cutting more than others. There are various reasons (funding levels, recent funding grants, mission, lobbying, etc.) for the differences but what I find more interesting is the process and the economics behind it.

When each University or College announces their proposed cuts, they have an incentive to propose cuts that are less than what they could stand. Each schools also has an incentive to propose cuts that appear devastating (UGA cutting 4-H, GCSU cutting so many faculty positions that it would put programs at risk for accreditation, etc.). If proposed cuts appear devastating to a school, the Board of Regents or General Assembly may be less likely to cut from those schools. There are many more dimensions to this process and this type of bargaining goes on every year, in any sector.

Last week it was also announced that tuition for public colleges and universities in Georgia may have to increase as much as 77%. I, for one, do not believe that tuition will increase that much for various reasons. First, it will bankrupt the popular HOPE scholarship, which is already in trouble financially. Second, it is an election year and no state politician will want any mention of these type of cuts showing up in campaign ads and the reasons go on and on. I think that this is also a part of the bargaining process and that the 77% figure is meant to get press and apply pressure. That announcement was probably made to allow officials to settle on a smaller tuition increase later. If you announce a possible 77% increase and settle for a 30% increase, it looks better politically and when it comes to budget issues, politics is everything.

University	Proposed Cut as a % of 2010 Budget
Georgia Tech	3.70%
Medical College of Georgia	4.04%
Fort Valley State University	4.59%
Savannah State University	4.87%
University of Georgia	5.12%
Gordon College	5.15%
Georgia Southwestern State University	5.23%
Valdosta State	5.27%
Georgia College and State University	5.31%
Albany State University	5.34%
Clayton State University	5.43%
Georgia State University	5.54%
Kennesaw State University	5.72%
Gainesville State College	5.75%
Georgia Southern University	5.78%
University of West Georgia	5.88%
North Georgia College and State University	5.90%
Southern Polytechnic State University	5.93%
Georgia Gwinnett College	6.14%
Dalton State College	6.24%
Abraham Baldwin Agricultural College	6.34%
Armstrong Atlantic State University	6.48%
Middle Georgia College	6.58%
Columbus State University	6.58%
Augusta State University	6.73%
Macon State College	6.99%
College of Coastal Georgia	8.06%

An executive summary of proposed reductions: http://www.usg.edu/fiscal_affairs/documents/executive_summary.pdf

The overall summary of institutional reductions: http://www.usg.edu/fiscal_affairs/documents/summary_of_reductions.pdf

-Brandon and Brad