Wednesday, August 24, 2016

The Twenty-Niners

By David Henderson of EconLog.
""We're Hiring Economics Writers," says the headline of a post at the web site FiveThirtyEight.
Good for them.
Then they write:

This is a part-time staff position (up to 29 hours per week) and does not offer benefits.

Any idea why they chose 29 hours? Answer: Obamacare.
Here's how a video at Prager University puts it:

This is Kelly. She's a hard-working, independent college student. To pay for school, she works between 35 and 39 hours a week at her local grocery store. But today's been rough for Kelly. She has just been told that she's now part of a new group of Americans: the "29ers"...
Starting in 2015, the Affordable Care Act requires many companies to offer health insurance to employees who work 30 hours or more a week. As you may have guessed, the grocery store Kelly works for is one of these companies."

Secretary of the Treasury Timothy Geithner was correct when he said the problems at the heart of the financial crisis had “nothing to do with Glass-Steagall.”

See The Return of Glass-Steagall??? by Alex Tabarrok.
"The Atlantic writes:
Hillary Clinton and Donald Trump, have included plans to reintroduce the [Glass-Steagall] bill in their economic platforms. The argument for the act is that it could have prevented (or at least dampened) the 2008 financial crisis, and that reinstating it could ward off future ones. Is that the case?
The Atlantic’s editors reached out to economists and experts in financial regulation to ask them why Glass-Steagall is seeing renewed popularity right now, and what they think would make America’s financial system safer in the future.
Here’s part of what I had to say:
When Black Lives Matter calls for a restoration of the Glass-Steagall Act we know that the Act has exited the realm of policy and entered that of mythology. No, restoring the Glass-Steagall Act would not end racism. Nor would restoring Glass-Steagall have done much, if anything, to have avoided the 2008-2009 financial crisis. Secretary of the Treasury Timothy Geithner was correct when he said the problems at the heart of the financial crisis had “nothing to do with Glass-Steagall.”
The financial crisis is best understood as a run on the shadow banking system, that collection of financial intermediaries who based their credit creation not on deposits but on repo, money market funds, structured investment vehicles, asset-backed securitizations and other financial structures. Separate commercial and investment banking? Please. The problem was that by 2007 the shadow banking system had become so separated from commercial banking that the Federal Reserve didn’t know that a majority of credit was being generated by the shadow banks.
…“Nothing has been done!” may play well in some quarters but the Obama administration has in fact imposed systematic reform on the financial system. Most importantly, capital requirements have been increased (leverage has been reduced), forcing financial intermediaries to have greater skin in the game and to provide a cushion in the event of a fall in asset prices. Moreover, capital requirements have been extended far into the shadow banking system. Most recently, the Fed has imposed a capital surcharge on the biggest institutions i.e. the too big to fail institutions.
…Ironically, despite the political power of the financial sector it seems that more has been done to raise bank capital ratios than to require homeowners to raise their capital ratios by requiring larger down payments. There is a lesson there.
Robert Reich, Sheila Bair, Lawrence White, Stephen G. Cecchetti and others also comment. Only Reich, with some support from Blair, is enthusiastic."

Tuesday, August 23, 2016

Hillary Clinton’s “Exit Tax” Is an Unseemly Example of Banana Republic Economics

By Daniel J. Mitchell of Cato. Excerpt: 
"The Wall Street Journal opines on the issue and is especially unimpressed by Hillary Clinton’s irresponsible approach on the issue.
Mrs. Clinton is targeting so-called inversions, where U.S.-based companies move their headquarters by buying an overseas competitor, as well as foreign takeovers of U.S. firms for tax considerations. These migrations are the result of a U.S. corporate-tax code that supplies incentives to migrate… The Democrat would impose what she calls an “exit tax” on businesses that relocate outside the U.S., which is the sort of thing banana republics impose when their economies sour. …Mrs. Clinton wants to build a tax wall to stop Americans from escaping. “If they want to go,” she threatened in Michigan, “they’re going to have to pay to go.”
Ugh, making companies “pay to go” is an unseemly sentiment. Sort of what you might expect from a place like Venezuela where politicians treat private firms as a source of loot for their cronies.
The WSJ correctly points out that the problem is America’s anti-competitive worldwide tax regime, combined with a punitive corporate tax rate.
…the U.S. taxes residents—businesses and individuals—on their world-wide income, not merely the income that they earned in the U.S. …the U.S. taxes companies headquartered in the U.S. far more than companies based in other countries. Thirty-one of the 34 OECD countries have cut corporate taxes since 2000, leaving the U.S. with the highest rate in the industrialized world. The U.S. system of world-wide taxation means that a company that moves from Dublin, Ohio, to Dublin, Ireland, will pay a rate that is less than a third of America’s. A dollar of profit earned on the Emerald Isle by an Irish-based company becomes 87.5 cents after taxes, which it can then invest in Ireland or the U.S. or somewhere else. But if the company stays in Ohio and makes the same buck in Ireland, the after-tax return drops to 65 cents or less if the money is invested in America.
In other words, the problem is obvious and the solution is obvious.

But there are too many Barack Obamas and Elizabeth Warrens in Washington, so it’s more likely that policy will move in the wrong direction."

In today’s ‘challenging restaurant environment’ there’s no way to raise menu prices to offset minimum wage hikes

From Mark Perry.
"The CPI for Food at Home fell by 1.6% in July compared to the same month last year, marking the eighth straight month of annual food deflation at America’s grocery stores (see chart above). In contrast, the CPI for Food Away from Home (reflecting menu prices at restaurants) increased by 2.8% in the 12-month period through July – that was the 23rd straight month starting in September 2014 that the year-over-year increase in restaurant menu prices exceeded 2.5%. The 4.4 percentage point spread in annual food price changes (+2.8% for restaurants vs. -1.4% for groceries) is the biggest gap in nearly 7 years, going back to the end of recession in 2009.

 food foodprices

The second chart (table) above shows 11 of the specific food items that have fallen the most in price over the last year (see BLS data here), led by a nearly 40% drop in egg prices, from $2.57 per dozen in July 2016 to $1.55 last month. The next biggest price decrease was for ground beef, which fell 12.1%, from $4.20 to $3.69 per pound, since last July.

So guess what’s happening when cost-conscious consumers on limited budgets decide whether to eat at home or dine out? A Crain’s Chicago Business article titled “What’s to blame for slower restaurant sales? Cheap food” explains:
As prices for beef, chicken, eggs, milk and cheese go down at the grocery store, people cook at home more and eat out less. That’s bad news for companies like McDonald’s, which stumbled in the second quarter after two straight quarters of surpassing expectations, disappointing investors looking for more robust results under CEO Steve Easterbrook’s turnaround plan.
The world’s largest burger chain had plenty of company. Of the 25 largest restaurant chains in the country, just one—Domino’s Pizza—reported a same-store sales increase of 5% or better in the most recent fiscal quarter, the worst showing so far this decade, says Mark Kalinowski, a New York-based restaurant analyst at Nomura. “For chain restaurants, it was a weak quarter, no doubt about it,” Kalinowski says. The primary reason: Prices at restaurants are rising, while prices at grocery stores are falling (see top chart above), causing some consumers to skip the Big Mac to grill a burger at home.
Six of the largest chains—Taco Bell, Burger King, Applebee’s, Chipotle, Chili’s and Buffalo Wild Wings—reported negative same-store sales figures for the quarter. Oak Brook-based McDonald’s fared slightly better, reporting that same-store sales rose 1.8% in the U.S. in the second quarter. But that was far below the 3.2% increase expected by analysts and the 5.4% rise it reported the previous quarter.
“Compared with 12 months ago, if you’re shopping at a grocery store and cooking at home, you’re giving yourself a (bigger) discount, on average, versus eating at a restaurant,” Kalinowski says. And consumers, particularly low-income and middle-class families on tight budgets, tend to notice even small changes in prices and act accordingly. That has created what restaurant industry executives call a “challenging restaurant environment.”
Wendy’s CEO Tedd Penegor said during an Aug. 10 earnings call that cheap grocery prices are hurting his burger chain’s sales, which inched up a paltry 0.4% on a same-store basis in the most recent quarter. “It’s gotten a lot cheaper, relatively speaking, to get fresh beef at your local butcher and go home and grill it. . . .The continued gap in the cost of eating at home and dining out is at the widest point since the recession.”
That difference rose to 4.4 percentage points in July, the biggest gulf in nearly seven years, according to Shane Higgins, a New York-based analyst at Deutsche Bank. Price declines in grocery stores are being led by categories like meat and dairy, the stock in trade of most fast-food outlets. Store prices fell last month for the seventh time in the past nine months, according to the Bureau of Labor Statistics. They’re now down 1.6% from 12 months ago. Prices at restaurants, meanwhile, are up 2.8% over the same time frame.
“If I’m a grocer and I see those trends, I’d do more prepared foods, deli items and grab-and-go to try to appeal to the time-starved consumer on the way home from work,” Higgins says. “Not only are these very profitable areas, but they’re also (potentially) replacing a restaurant trip.”
The numbers posted by restaurant companies seem to bear that out. Despite low gas prices, a bullish equities market, low unemployment and high consumer confidence, restaurant traffic was down nearly 4% in July from a year earlier. And there’s no immediate sign that things will get better. Higgins expects grocery prices to be deflationary through the second half of 2016. That’s happening as McDonald’s raised menu prices about 3% over the past 12 months and may continue passing along rising labor costs as more states and municipalities raise the minimum wage.
MP: There are some important economic lessons here, with major implications for the $15 an hour minimum law (both enacted and proposed):

1. Consumers live on limited incomes and and tight budgets, and are therefore very price-sensitive and cost conscious about food prices, and “tend to notice even small changes in prices and act accordingly.”
2. Eating at home and dining out at restaurants are very close substitutes for most consumers, and they switch from one option to the other based on relative prices and relative price changes for each alternative.
3. As restaurant prices increase relative to food prices at grocery stores, price-sensitive consumers naturally tend to eat out less and eat at home more.
4. Restaurants operate on very thin profit margins, e.g. 5%. Under the best of circumstances, the ability of restaurants to raise menu prices, maintain customer traffic, and stay profitable is very, very limited, given Lessons 1 to 3 above, especially now that eating at home is becoming less expensive and more affordable relative to dining out.

5. In cities and states where the minimum wage is being increased to $15 an hour, and in those areas where a $15 wage is being considered, those wage hikes represent increases in labor cost for minimum wage workers of more than 100% in some cases. It’s just a simple matter of economics that if restaurants can’t raise menu prices in today’s competitive and “challenging restaurant environment” without losing customers, there’s no way they’ll be able to raise menu prices anywhere close to the level required to offset higher labor costs from huge minimum wage hikes and remain profitable and stay in business. Higher menu prices following minimum wage hikes will simply drive even more customers than currently away from restaurants in favor of eating at home.

Bottom Line: In the end, the $15 an hour minimum wage comes down to basic math, economics and consumer behavior, not politics and social justice. And the restaurant and consumer math of a $15 an hour minimum wage is an arithmetic for restaurant failures and reduced employment opportunities, not restaurant survival and an expansion of entry-level job opportunities. As I wrote on a recent CD post, the defects of the $15 an hour minimum wage can easily be seen by looking at the many things that law cannot do; that is, by looking at the many inevitable and negative outcomes that a mandated minimum wage cannot prevent or stop from happening. I provided 15 of those adverse outcomes from the things a $15 an hour minimum wage can’t do, and said there are perhaps more.

Here’s one more: A $15 an hour minimum wage hike, followed by higher menu prices at restaurants to offset the higher labor costs, can’t stop cost-conscious, price-sensitive customers from avoiding restaurants and instead choosing to eat at home to save money. In other words, it’s those pesky, greedy, cost-saving consumers who will thwart, foil and doom the $15 minimum wage. After all, if consumers weren’t so damn sensitive to higher food prices, they wouldn’t mind significantly higher menu prices following minimum wage hikes of up to 100% or more and would continue eating out just as often. And if consumers didn’t have the option to eat at home instead of dining out, they would tolerate higher menu prices at restaurants following minimum wage hikes because of limited alternatives for eating. But because consumers are very sensitive to food prices and because they do have the option of eating at home instead of dining out, it’s consumer behavior (“consumer greed”) in the end that makes the $15 an hour minimum wage a public policy that is doomed to fail. If greedy, price-conscious consumers are staying away from restaurants now that food prices at grocery stores are falling, would they act any differently in the future if restaurants try to raise menu prices to offset minimum wage hikes? I think it’s pretty clear the answer is No."

Sunday, August 21, 2016

Louisiana floods, but Wal-Mart, UPS keep trucks running

By Jennifer Larino of NOLA.com | The Times-Picayune.
"Wal-Mart trucks were among the first to deliver much needed supplies after Hurricane Katrina tore through the Gulf Coast in 2005. As many Katrina survivors still note, Wal-Mart trucks arrived well before the Federal Emergency Management Agency did.

Over the weekend, Wal-Mart was again among the large companies in Louisiana able to keep supply lines open and operations going despite catastrophe -- this time historic flooding that devastated whole communities and shut down major roadways.

Wal-Mart spokeswoman Erica Jones said the corporation's emergency operations center in Bentonville, Ark., kicked into high gear late last week as forecast warnings of record rainfall started to roll in. Wal-Mart has about 30 locations in the affected area, including stores in the heavily flooded communities of Denham Springs and Baker.

Jones said early planning included mapping alternate routes for trucks delivering to stores in and around Louisiana. Corporate meteorologists monitored the weather and helped inform plans. Preparations were made to ramp up shipments of essential supplies -- from bottled water to baby formula -- to the region as it became clear conditions would worsen.

Jones said eight Wal-Mart stores were closed because of various levels of flooding and damage. As of Thursday (Aug. 18), five of those stores had re-opened. A key distribution center in Hammond also remained open. The Hammond center serves stores in Louisiana and south Mississippi.
Jones said the current priority is ensuring Wal-Mart employees are healthy and taken care of and that trucks are safely re-routed to get to where they need to be.

"We are shifting our resources to be able to work around the road closures and damage to facilities," Jones said.

Big corporations have a clear motive in investing in disaster preparedness. Planning ahead minimizes the dent otherwise unpredictable natural disasters can make on revenues. And there's a sales advantage in being able to quickly get back to providing supplies and services to customers in a time of need. On the plus side, corporations can serve as a model for how disaster response should work. Experts point to Katrina. While FEMA's response was lethargic and inefficient, major companies ushered in needed supplies quickly.

Last December, FEMA gathered public and private sector officials in New Orleans for its fifth annual Building Resilience conference, during which leaders swapped ideas to improve response measures.

FEMA Administrator Craig Fugate called businesses large and small an "essential member of the team" when it comes to disaster response.

"The more resilient businesses are, the quicker they can recover and provide critical goods and services to help their communities rebuild," Fugate said in a release at the time.

UPS, the world's largest logistics company, has more than 2,860 employees at 19 facilities in Louisiana handling small package business.

UPS spokeswoman Susan Rosenberg said all UPS distribution centers were able to continue operations through the flooding, though there is now limited capacity at its facilities in four cities: Baton Rouge, Port Allen, Jeanerette and Gonzales.

Like Wal-Mart, Rosenberg said UPS started planning to re-route trucks and packages scheduled to pass through south Louisiana late last week. Five company meteorologists track weather patterns all over the world from a UPS hub in Louisville, Ky.

Distribution centers along the Gulf Coast have generators as a precaution for hurricane season. The company also has a phone hotline for employees in affected areas to call and check in.

Rosenberg said packages that are delayed or can't be delivered because of flooding are being marked as such in the company's electronic tracking system. Packages will be held at distribution centers until delivery resumes or for a few days until they are claimed, she said.

She noted UPS warehouses are typically slower this time of year, leaving enough room to store excess packages for the time being.

As floodwaters recede, large companies shift to meeting customer needs.

At UPS, the focus is getting delivery routes up and running as soon as possible and working with customers with high-priority deliveries -- for example, prescription drug orders, Rosenberg said. She added UPS is coordinating the transportation of trailers for the American Red Cross and for supply pickups at area shelters.

After years of tracking disaster recovery, Jones said Wal-Mart supply managers can anticipate what a region needs as it moves from flood to recovery. In coming days, shipments will shift from diapers and water to cleanup items, including shovels, gloves and bleach.

"Once it shifts from evacuation and immediate safety to more the recovery and cleanup, we know the supplies people are looking for," Jones said."

Why It’s So Hard to Get Rid of Tax ‘Loopholes’

Many of the biggest—and most popular—tax breaks benefit the upper-middle class

By Richard Rubin of the WSJ. Excerpts:
"the reality is that many of the biggest breaks are the ones that benefit the upper-middle class: itemized deductions. That’s why President Barack Obama and Democratic presidential candidate Hillary Clinton have proposed limits on high earners’ deductions. Republican presidential candidates Jeb Bush and Mitt Romney talked about deduction caps and Donald Trump is considering one, too.

Taxpayers can itemize deductions if their total exceeds the standard deduction—$6,300 for individuals and twice that for married couples. Some itemized deductions, such as the break for tax-preparation fees, are already subject to strict limits, but the big three are largely uncapped: state and local taxes, home-mortgage interest and charitable contributions.

Only about 30% of households itemize their deductions, and they tend to be higher-income households who have mortgages, significant state taxes and available cash to donate to charities.
To see exactly how much money is at stake and what happens if you repeal the breaks, here’s a tool from the Open Source Policy Center at the free-market-oriented American Enterprise Institute, which draws on ideas from technical contributors."
 Using the tool, we can see that the mortgage interest deduction saves about $6,600 for a someone (it seems like a household, actually) making $1 million or more a year. If you make between $500,000 and $1 million a year, it saves you about $4,100 per year. It starts falling rapidly after that.

If you make between $40,000-$50,000 you save just $68 a year and it just keeps falling as income falls.

If we look at all three of the big deductions, the households earning over $1 million per year save about $19,000 per year. If you make $50,000-$75,000, you save $218 and if you make $40,000-$50,000 per year you save $114 per year.

Saturday, August 20, 2016

Inequality is a distraction. The real issue is growth.

By Scott Winship in The Washington Post. Scott Winship is the Walter B. Wriston fellow at the Manhattan Institute and the author of the forthcoming study “Poverty After Welfare Reform.”
"Changes to the tax code certainly could reduce inequality, but the real question is whether we should try to reduce it. There is little evidence that we should.

Are American levels of inequality harmful? Some analysts claim that they hurt middle-class incomes or increase poverty. But child poverty is at an all-time low, and middle-class incomes are also at historic highs. Across developed countries, those with higher inequality have slightly higher middle-class incomes and less poverty.
Others argue — based on mobility measures constructed to look worse when inequality rises — that higher inequality causes lower economic mobility or leads to political inequality. In fact, research claiming that the rich get their way in Congress over other voters has been debunked; in truth, across most issues, rich, middle-class and poor Americans have similar policy preferences. And in the United States, mobility has remained flat while inequality has risen over the past generation. Areas of the United States with more income concentration at the top have no worse mobility than areas with low inequality. The same is true across countries — the best research indicates that low-inequality Sweden is no more mobile than the United States.

Still others, such as Nobel laureate Joseph Stiglitz, claim that higher inequality saps economic growth. The research on this question is all over the map, but studies by experts including Thomas Piketty and Emmanuel Saez indicate that countries with higher inequality growth tend to have higher economic growth too. Paul Krugman, another Nobel Prize-winning economist, put it well: “There just isn’t a striking, simple relationship between inequality and growth; all the results depend on doing fairly elaborate data massaging, which might be right but might also be teasing out a relationship that isn’t really there.”


To be sure, all this research provides little reason to think that marginally reducing inequality would worsen any of these outcomes. But it probably would not improve them either. Studies consistently find that the U.S. tax system is already among the most progressive in the world. Prioritizing inequality betrays indifference to policy outcomes and pure antipathy toward top earners.

In truth, nothing helps the poor and middle class like economic growth, and that is best pursued by policy reforms that ignore inequality. To promote growth, the next president should abolish corporate taxes and reform individual taxes to keep the overall burden of taxation the same across poor, middle-class and rich Americans. She should promote state and local reform of occupational licensing and land-use regulation. She should reform entitlements, including Obamacare, and reorient immigration policy in favor of admitting more higher-skilled and less lower-skilled immigrants. She should pursue a deregulatory agenda and nominate economists to the Federal Reserve Board of Governors who favor nominal GDP targeting, which prioritizes achieving desired growth rates over inflation targets and would tend to allow more wage growth.

Unfortunately, the distraction of inequality — or nationalism — makes it unlikely the next president will pursue any of these policies, and the poor and middle class will be worse off for it."