Tea Party History

With April 15th marking tax day and the Tea Party movement becoming more vociferous--but not necessarily more coherent--now might be a good time to discuss the historical and economic aspects of the Tea Act of 1773, which engendered the Boston Tea Party. Not only do modern-day Tea Partiers have their economics wrong, they have their history wrong, as well.

Great Britain imposed the Townshend duties in 1767 to recover some of their expenditures from the Seven Years War. These duties (or taxes) were levied on many goods imported by the colonies--glass, paper, paint pigments, and tea. These external duties (or tariffs), save for the one on tea, were all repealed by 1771.

Then in 1773, British Parliament passed the Tea Act. This was not, contrary to popular belief, an additional tax on imported tea. Rather it was a modification of the Navigation Acts--the laws that governed trade relations between England, the American colonies, and other relevant trading partners. The Navigation Acts stipulated that any product heading to the colonies, including tea, had to first pass through English ports, where it would be subject to an English tax. The Tea Act of 1773, however, allowed the English East India Company to directly export Indian tea to the colonies without having to be routed (and thus taxed) through British ports.

This act also had the effect of eliminating a lot of colonial middlemen--merchants and wholesalers, primarily--who profited greatly from the tea trade. Needless to say, the Tea Act reduced the incomes these individuals received. This, combined with the elimination of the tax levied on goods that passed through British ports, reduced the price of imported tea for the colonists. Since most colonists did not drink tea, this act had little economic effect on the average colonist. However, colonial merchants saw their economic position being undercut by British merchants who could now export tea to the colonies duty free thanks to the Tea Act. The Tea Act eliminated the need for colonial middlemen and reduced the price of tea by reducing tariffs.

Colonial merchants responded to what they rightly perceived as a threat to their main income source--managing the importing and exporting of goods--by organizing the Boston Tea Party. The party itself was small; only 30-40 merchants partook. It was short, as well; it only lasted three hours. Over $1 million (in 2008 dollars) of tea was dumped into Boston Harbor. British Parliament responded by further tightening its grip on colonial commerce by imposing the Intolerable Acts in 1774. (These acts were largely political in nature and had little to do with economics, hence the name.)

In summary, the Tea Act of 1773 eliminated taxes on imported tea. And the Boston Tea Party itself was led by wealthy, urban colonial merchants who saw their wealth destroyed due to the elimination if the tea tariff. In other words, modern-day Tea Partiers name their movement after a revolt led by wealthy urbanites (not "real" Americans) in response to a tax reduction. Just like their economics, Tea Partiers have their history wrong, as well.

Markets at work

Gotta love the work that "This American Life" is doing on the financial crisis:





Bet Against the American Dream from Alexander Hotz on Vimeo.

And for more on how this might work, from Ezra Klein's interpretation of a new paper called "Financial Innovation and Financial Fragility" (pdf), Nicola Gennaioli, Andrei Shleifer, and Robert Vishny:

... the game runs like this: Investors want to make more money with less risk. Someone invents a financial product that appears to make investors more money with less risk -- in this case, subprime securities. Demand for this new product explodes. But few understand this new product, and even the people who do understand the new product don't know how it performs under stress (it's a new product, after all). At the beginning, this actually helps the product: because its risks aren't known, they're ignored, and so it looks like a better deal than it is and sells more of itself than it should.

Then something bad happens. The new product shows its flaws. And precisely because no one really understands it, the market cracks. Investors all run away at once, as they don't really have the tools to assess the situation. Where lack of knowledge about the product originally drove demand, now it accelerates flight.

Deficit Hysteria

Deficit hysteria is sweeping the nation--and confusing the nation. Wall Street Journal writer Gerald Shieb went as far as to call it a "national-security threat." Reports like this on the size and content of the U.S. budget deficit in 2011 tend to exacerbate this hysteria without providing any historical or comparative framework. The three graphs below attempt to place the projected $1.4 trillion deficit for 2011 in the appropriate context. Figure 1 shows the U.S. budget deficit as a share of GDP going back to 1923. It becomes clear, especially relative to WWII, that the size of the budget deficit, although large, is not abnormally large. While it is the largest peacetime deficit, this can be entirely explained by the fact that the U.S. is experiencing the longest and most severe contraction short of the Great Depression. Figure 1. Budget Deficit as a Percentage of GDP (nominal), 1923-2009 Many Republicans and Blue Dog Democrats accuse the Obama administration of lacking fiscal restraint. This criticism is misguided, as is shown in Figure 2. Almost half of the projected deficit in 2011 is a lingering result of the unfunded initiatives of George W. Bush--the 2001 and 2003 tax cuts, the wars in Iraq and Afghanistan, and Medicare Part D. The second largest source of the deficit is the result of declining tax revenue directly attributable to the current recession. The next largest contributor to the budget shortfall is the 2009 ARRA, or the stimulus bill. The final contribution comes from the bailouts of Fannie Mae and Freddie Mac, in addition to the TARP. In other words, aside from Bush's unfunded programs and the recession, there is little cause for alarm in the 2011 budget projections. Figure 2. Contributions to the 2011 Budget Deficit (nominal) Finally, when compared to the seven largest economies in the OECD, the U.S. budget deficit is in line with the other major nations experiencing the pains of a long and deep recession. This is shown in Figure 3. Figure 3. OECD Nations' Projected Budget Deficits as a Percentage of GDP (nominal), 2010-2011 When placed in a proper historical, political, and international context, the current size of the U.S. budget is not cause for hysteria. However, the long-term budget picture is indeed grim, but this is mainly due to rising health care costs. That is, the best deficit reduction plan is not the spending freeze or a balanced budget amendment, but rather serious health care and health insurance reform.

Specialization on the Freedom Rides

The new film "The Freedom Rides" documents the historic bus trips which helped spur desegregation. To get a sense of the whole effort, watch the clip or read the transcript.



To focus on the economic idea of specialization, its consequences, and its value, go to 36:20 in the clip.

New economic stimulus idea??

Via the Environmental Economics blog

Officials on the Town of Boone’s Greenway, Parks, and Gardens Committee will discuss the possibility of prohibiting bicycles and joggers on portions of the Greenway Trail at their regular meeting Tuesday evening. Officials with the Town of Boone’s Public Works’ Office said this topic would be open for public comment.

via www.goblueridge.net

Maybe those bicyclists and joggers would help the local economy if they got into their cars and drove to BK or the health club instead.

Hayek and Keynes do the rap

Check it out

Emmanuel Saez on income distribution

Congrats to Emmanuel Saez earning the 2009 John Bates Clark Medal.

One of his key contributions is showing us what is happening at the (upper) tail of the income distribution.