Monday, May 05, 2008

Update: Where our money goes when things get tough

Dave Bath, in comments, reckons we spend it on lipstick.

The New York Times and the Economist both suggest that that we spend more on lipstick when our finances tighten:

"Last month, Betsy Stein made a beeline for Bloomingdale’s to buy a shirt, but the top she found was $280. Ms. Stein told herself that in the current economic climate, she shouldn’t charge it.

“With the scare of the downturn,” she said, “I decided to cut back on my shopaholic problem and exercise some restraint.”

But the next day at Sephora, she made a substitute purchase. “I could buy one or two lipsticks for about $40,” she said. “That’s far less than $280.”

The suggestion is that lipsitick is, in economic terms, an inferior good.

And below Alan Mitchell, economics editor of the Australian Financial Review makes a convincing case that we can have our tax cake and eat it too by heavily taxing alcopos. We can raise more money and cut back their consumption.

I have put two extracts from his truly-excellent article of Wednesday April 30, below the fold:

"Smoking and excessive drinking impose costs on the wider community, while the demand for tobacco and alcohol is also relatively insensitive to changes in prices.

The same is true of the consumption of carbon-based energy.

In those cases, governments can strike a compromise and raise additional revenue while, at the same time, reducing demand and the costs to the wider community.

That should be an attractive combination for governments and taxpayers in general.

"It is possible that Rudd's increased tax on alcopops also will disproportionately cut teenage consumption while raising more revenue for the government.

The rise will not tax alcopops out of existence and will switch demand to substitutes such as wine and beer, which will be consumed in greater quantities.

In this case, the availability of cheaper substitutes is part of the mechanism. It is also a reason to at least pause before increasing the tax on all alcoholic drinks. For teenagers, the cheap, untaxed substitutes for alcohol are illicit drugs."