Tuesday, September 22, 2009

The Distortionary Effects of Taxes and Regulations

Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor. Their first stop in America is a low-slung, brick warehouse in Baltimore where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out. The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled.

Workers cut out the rubber window seal with a special knife and popped out the glass using suction cups. The space is plugged with a metal panel that cures for 15 minutes before being tested outside for waterproofing. Another worker unhooked a rear seat belt as easily as he would pop the top off a soda bottle. Using a drill, he quickly unscrewed six bolts to free the seats. Workers at the other end dump the seats into cardboard boxes, which are hoisted onto an open tractor-trailer and shipped to Ohio. Ford says the shredded seat fabric and foam become landfill cover, while the steel is processed for other uses.

Reason? Find out here in the WSJ article "
To Outfox the Chicken Tax, Ford Strips Its Own Vans," although you probably guess that it has nothing to do with economics and everything to do with politics. Thanks to Michael Kelly.

MP: This story perfectly illustrates why taxes and regulations are almost always distortionary: because people and companies can change their behavior to avoid or circumvent them. Other examples include free food on airlines to circumvent ticket price-fixing by the government, employer-sponsored health insurance to circumvent price/wage controls during WWII, free "stuff" (toasters, etc.) at banks in the 1960s and 1970s to avoid interest rate controls, etc.

Update: As Greg Mankiw points out, this story also illustrates the "deadweight loss" (loss of economic efficiency) of a tariff.

14 Comments:

At 9/22/2009 7:24 AM, Blogger Colin said...

Busted link. Try here:

http://online.wsj.com/article/SB125357990638429655.html#mod=WSJ_hpp_MIDDLETopStories

 
At 9/22/2009 7:29 AM, Blogger Mark J. Perry said...

Thanks, Colin, it's fixed now.

 
At 9/22/2009 7:33 AM, Anonymous Anonymous said...

Looks like the Europeans got the better part of the deal. European cars have gotten in and our chickens still remain locked out.

Now, if we could just find a way to get the chickens in.

By the way, the auto companies probably fought for the tariff, so the chicken guys are the only ones hurting.

 
At 9/22/2009 10:05 AM, Blogger Jack Miller said...

Anonymous has no appreciation for the benefit of trade, the Europeans are the ones who are paying extra for chicken. In the 1960's, President Johnson did a favor for his auto buddies and the Chancellor of Germany did a favor for his farming buddies. The average American and German lost while the politicians and their buddies pocketed the spoils of a contrived war. The guise of retaliation was the excuse for "legally" transferring wealth from the people to special interest, including the politicians. Ford's ruse to get around the tariffs has lowered the price of vans for American businesses. Again, the Europeans are the ones who are paying too much for chicken.

 
At 9/22/2009 12:26 PM, Anonymous Benny The Real Man said...

I wholeheartedly concur that taxes and regs distort.
I am glad you all support me in eliminating all state and federal Departments of Agriculture, and all farm subsidies.
I am sure we will see repeated posts about the evils of US farm policy, and lots of anecdotes about lazy farmers who make money not growing crops, and how Minnesota farmers take all winter off, etc. etc etc.
Seriously, the ethanol program needs a huge takedown. Maybe AEI would to tackle that. Oh, sure.

 
At 9/22/2009 1:31 PM, Blogger 1 said...

"I am glad you all support me in eliminating all state and federal Departments of Agriculture, and all farm subsidies"...

LOL!

Good luck with that...

Note this year old story: Federal officials reject Gov. Perry's request to trim ethanol mandate

 
At 9/22/2009 2:54 PM, Blogger sethstorm said...

Close the loophole, bring production to the US. That is, not in the "auto parts" way, but in full assembly and parts from ground up.

 
At 9/22/2009 2:56 PM, Anonymous Anonymous said...

Given this is a long term program, it clearly is bi-partisan. As with other tarrif rules once in place you get a lobby to keep it there. Note that in this case both mgmt and labor want to keep it.
So we are back at the arguement of 1832, why South Carolina wanted to nullify the tariff, some benefit while most loose. Historically the group that benefits squawks louder than the many who loose, and the louder squawker wins the political argument, because they care more.
Historically the US won with protectionism in the late 1800's since it was just becoming a common market (the railroads did this), and that market was large enough to push demand across the board. Note as a protectionist measure the first transcontinental railroad had to be built with US iron, and for a long time the US had a tariff that was designed to keep British steel out of the railroads. So this issue has turned philosophical, and like all such arguments will never be resolved, but is fun to continue.

 
At 9/22/2009 3:13 PM, Blogger 1 said...

"Close the loophole, bring production to the US. That is, not in the "auto parts" way, but in full assembly and parts from ground up."...

Great ideas! It could easily happen once we've gotten rid of the EPA and dumped those asinine CAFE standards...

 
At 9/22/2009 3:23 PM, Blogger sethstorm said...



Great ideas! It could easily happen once we've gotten rid of the EPA and dumped those asinine CAFE standards...

Or just exempt GM, Ford, and Chrysler for vehicles with 85%+ domestic content and are <$25000.

 
At 9/22/2009 10:18 PM, Blogger bob wright said...

Close the loopholes and bring all the GM production back to Flint, MI [the birthplace of GM] and Ford production back to Detroit [the birthplace of Ford].

All factories in other states in the U.S. will be closed and the equipment moved to MI.

We should stop outsourcing Michigan jobs.

 
At 9/22/2009 11:28 PM, Blogger Jack Miller said...

Yes, and while we are at it let's dictate that all those condos built in former Florida Orange Groves be torn down. Send all those old fogies living in them back to Michigan where they belong. The price of orange juice is too high!

 
At 9/23/2009 12:49 AM, Anonymous Ian Random said...

sethstorm:

I've always wondered why doesn't the government exempt from rules, production it likes rather than subsidize them. But then again, I'd force draconian environmental rules on any farmer accepting government cash just for fun.

 
At 9/23/2009 2:34 AM, Blogger 1 said...

"Or just exempt GM, Ford, and Chrysler for vehicles with 85%+ domestic content and are <$25000"...

Ha! ha!

Well sethstorm you just may be onto something there pal...

Something like funny looking puppy here maybe?

It does get 66 miles per gallon, and is available in England for approximately $16,400...

 

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