Monday, September 26, 2016

Problems with the “co-benefits” argument behid EPA’s Clean Power Plan (CPP)

See Comment on EPA Power Plan's Alleged Air Pollution “Co-Benefits” by Marlo Lewis, Jr. of CEI.
"Climate activists assure us that even if we don’t consider global warming a big problem, we should still support carbon taxes, renewable energy quota, and EPA’s so-called Clean Power Plan (CPP). Such policies, we are told, will save thousands of lives, delivering billions of dollars in net benefits, by coincidentally reducing airborne concentrations of fine particulate matter (PM2.5).
There are three main problems with this “co-benefits” argument. First, EPA’s own data show that total emissions of six principal air pollutants declined 62 percent since 1980 even though carbon dioxide (CO2) emissions increased by 14 percent. What’s more, PM2.5 concentrations declined by 34 percent just since 2000 (the earliest year for which national data are available). History refutes the claim that we need carbon taxes or climate regulations to clean the air.

Second, in the U.S., today’s historically low PM2.5 levels likely pose no threat to human life, as UCLA Prof. James Enstrom and nine other experts argue a letter summarizing their work in the field. Among other points, the Enstrom team explain:

No plausible etiologic mechanism by which PM2.5 causes premature death is established. It is implausible that a never-smoker’s death could be caused by inhalation over an 80 year lifespan of about one teaspoon (~5 grams) of invisible fine particles as a result of daily exposure to 15 µg/m³ [15 micrograms per cubic meter]. This level of exposure is equivalent to smoking about 100 cigarettes over a lifetime or 0.004 cigarettes per day, which is the level often used to define a never-smoker. The notion that PM2.5 causes premature death becomes even more implausible when one realizes that a person who smokes 0.2 cigarettes/day has a daily exposure of about 750 µg/m³. If a 10 µg/m³ increase in PM2.5 actually caused a 0.61 year reduction in life expectancy, equivalent to the claim of Pope [one of the chief studies on which EPA relies], then a 0.2 cigarettes/day smoker would experience about a 45-year reduction in life expectancy, assuming a linear relationship between changes in PM2.5 and life expectancy. In actuality, never-smokers and smokers of 0.2 cigarettes/day do not experience any increase in total death rate or decrease in life expectancy, in spite of a 50-fold greater exposure to PM2.5. Furthermore, hundreds of toxicology experiments on both animals and humans have not proven that PM2.5 at levels up to 750 µg/m³ causes death.

Third, even if we assume PM2.5 pollution in the U.S. poses mortality risks in some locales, EPA’s huge PM2.5 co-benefit estimates are implausible. As Anne Smith of NERA Economic Consulting explains, 99 percent of EPA’s estimated PM2.5 co-benefits occur in areas already projected to be in attainment with the NAAQS for PM 2.5. EPA illegitimately assumes the health benefits of PM2.5 reductions from concentrations already below the national ambient air quality standard (NAAQS) for fine particulate matter are as certain as the benefits of reductions from concentrations above the NAAQS. That is inconsistent with the basic concept of the NAAQS program, which is to set concentration standards at a level “requisite to protect public health . . . allowing an adequate margin of safety.”

Once we factor in the lower probability of PM2.5 health benefits in areas where exposures are already below the NAAQS, the lion’s share of the Power Plan’s purported health benefits disappears. For further discussion, see my blog post “EPA’s PM2.5 Co-Benefits PR Trick Exposed.”"

Milton Friedman’s Morals

As Trump and Clinton bang the drums for tariffs and renegotiated deals, where’s the popular voice for trade? 

By William McGurn of the WSJ. Excerpts:
"the Resolution Foundation study reports average real income growth for lower- and middle-class workers in the U.K. was much higher than for their American counterparts, even though the U.K. has an economy that is more, not less, dependent on trade."

"the following was Friedman’s response on “Free to Choose” when a union official challenged him on his bid to eliminate all tariffs over five years:

“The social and moral issues are all on the side of free trade. And it is you, and people like you, who introduce protection who are the ones who are violating fundamental moral and social issues.
“Tell me, what trade union represents the workers who are displaced because high tariffs reduce exports from this country, because high tariffs make steel and other goods more expensive, and as a result, those industries that use steel have to charge higher prices, they have fewer employees, the export industries that would grow up to balance the imports, tell me what union represents them? What moral and ethical view do you have about their interests?”"

Sunday, September 25, 2016

The Reasons Behind the Obama Non-Recovery

By Robert J. Barro, in the WSJ. Excerpts:
"The Obama administration and some economists argue that the recovery since the Great Recession ended in 2009 has been unusually weak because of the recession’s severity and the fact that it was accompanied by a major financial crisis. Yet in a recent study of economic downturns in the U.S. and elsewhere since 1870, economist Tao Jin and I found that historically the opposite has been true. Empirically, the growth rate during a recovery relates positively to the magnitude of decline during the downturn.

In our paper, “Rare Events and Long-Run Risks,” we examined macroeconomic disasters in 42 countries, featuring 185 contractions in GDP per capita of 10% or more. These contractions are dominated by wartime devastation such as World War I (1914-18) and World War II (1939-45) and financial crises such as the Great Depression of the 1930s. Many are global events, some are for individual or a few countries.

On average, during a recovery, an economy recoups about half the GDP lost during the downturn. The recovery is typically quick, with an average duration around two years. For example, a 4% decline in per capita GDP during a contraction predicts subsequent recovery of 2%, implying 1% per year higher growth than normal during the recovery. Hence, the growth rate of U.S. per capita GDP from 2009 to 2011 should have been around 3% per year, rather than the 1.5% that materialized.

Arguing that the recovery has been weak because the downturn was severe or coincided with a major financial crisis conflicts with the evidence"

"many of the biggest downturns featured financial crises. For example, the U.S. per capita GDP growth rate from 1933-40 was 6.5% per year, the highest of any peacetime interval of several years, despite the 1937 recession. This strong recovery followed the cumulative decline in the level of per capita GDP by around 29% from 1929-33 during the Great Depression."

"The growth rate of GDP per worker from 2010-15 was 0.5% per year, compared with 1.5% from 1949 to 2009."

"What could have promoted a faster recovery by enhancing productivity growth? Variables that encourage economic growth include strong rule of law and property rights, free trade, rolling back inefficient regulations and other constraints on market activity, public infrastructure such as highways and airports, strong institutions for education and health, fiscal discipline (including a moderate ratio of public debt to GDP), efficient taxation, and sound monetary policy as reflected in low and stable inflation.

The main U.S. policy used to counter the Great Recession was increased government transfer payments."

"The absence of inflation is surprising but may have occurred because weak opportunities for private investment motivated banks and other institutions to hold the Fed’s added obligations despite the negative real interest rates paid."

Reagan ended oil price controls earlier than scheduled andthe result was a semi-boom in U.S. oil production

See Notable & Quotable: Presidential Economics from the WSJ.
"From “Can U.S. Presidents Much Affect the U.S. Economy?” by David Henderson, writing Sept. 19 at the Library of Economics and Liberty:
We live in a regulatory state, with hundreds of thousands of regulations and tens of thousands of new regulations (both large ones and tweaks to current ones) annually.

Regulation has a big effect on the economy and a determined president can either increase regulation and make it much more punitive or decrease regulation and make it less punitive. Most regulations . . . are like a boulder in a strong-flowing river. Throw in one boulder and the river finds ways around it. But throw in a thousand boulders and the river’s flow slows considerably. . . .

When Ronald Reagan came into office on January 20, 1981, he inherited price controls on oil and gasoline that were originally imposed by Richard Nixon and extended by Gerald Ford. Jimmy Carter, even though he was a regulator at heart, saw some of the damage done by price controls and signed a bill in 1980 that phased out price controls so that they would end in October 1981. The bill, however, gave the president discretion to end the controls earlier. Reagan, who understood the effects of price controls and had spoken out against them during the campaign, used that discretion to end the controls on January 28, 1981, 8 days after getting inaugurated. . . .

The result was a semi-boom in U.S. oil production (from 8.6 million barrels per day (mbd) in 1980 to a 1980s peak of 9.0 mbd in 1985) and a body blow to the OPEC cartel. Oil prices fell and that helped the 1983-1984 economic boom. . . .

Now to President Obama. He has some of the most hostile regulators in recent U.S. history. One regulatory agency can hold up a pipeline, another can cause people to line up at airports (although George W. Bush did most of the damage on that front), another can reset the threshold pay after which employers have to pay overtime and can change the rules for unionization to make it easier for unions to monopolize the supply of labor to particular firms or industries, etc. Those boulders add up."

Saturday, September 24, 2016

Obama's Overtime Rules Hurt the Economy and American Workers

By Diana Furchtgott-Roth. Diana Furchtgott-Roth is a senior fellow and director of Economics21 at the Manhattan Institute. Excerpts:
"Twenty-one U.S. states filed suit on Sept. 20 to overturn the Obama administration’s new overtime rule, which requires employers to pay white-collar workers overtime if they earn less than $47,476 annually, instead of less than the current level of $23,660. (Manual workers generally have to be paid overtime at all earnings levels.) The rule is set to take effect Dec. 1."

"Consider what could be a real-life example: Peter, a fellow at a think tank who earns a salary of $45,000 a year. Now if he works late one night, he can come in later the following day, or take extra time off. He can duck out of the office to get a haircut without reporting to his boss. If he feels sick, he can ask to work from home. He can come home for dinner and catch up with his work in the evenings. His employer is free to say, “Peter, you worked a lot of evenings this week. Take some extra days off with your family over Thanksgiving.”

On Dec. 1, Peter and his employer will no longer be able to have such an arrangement. Along with others who make under $47,476 annually, Peter will have to keep track of his hours by clocking in and out. Because of his employer’s requirement to track his hours, telecommuting will be difficult. If he works longer in one particular week, his employer will not be legally allowed to give him “comp time” (time off instead of the extra hours), but will have to pay him overtime instead.

And for all that paperwork, Peter won’t necessarily earn more than what he is making now. His employer might tell him to make sure he never works more than 40 hours in a week. Or, since he makes more than minimum wage, his boss could lower his hourly pay rate to make up for the extra hours worked.

Even the Labor Department admits that most workers affected by the rule will never get the chance to work over 40 hours per week. The administration estimates that about 4.2 million workers would qualify for overtime in 2017, and they would earn $1.2 billion more in overtime payments.

In contrast, setting up the system for monitoring the employees could cost almost $20 billion in the first year because of the additional administrative costs.

One cost is familiarization, the time and effort that each employer must expend to understand the requirements and assess what needs to be done. Most employers reading this now have no idea that they will have to put in place different systems to track employees on Dec. 1.

Another cost is identifying each employee affected by the higher salary test, to decide for each case whether to raise their salary to the new threshold or to convert the status to non-exempt hourly. Converting salaried employees to hourly employees requires deciding what base hourly rate the employee earns. Plus, employers have to decide on a weekly hours requirement and policies to set for assignment and approval of overtime hours.

A third cost is management. Someone has to supervise the employees to make sure they fill in the time sheets and don’t work more hours than they are supposed to work — and pay them for extra hours worked.

The costs of the new rule could total $18.9 billion the first year — over 15 times greater than the $1.2 billion of increased wages that the administration estimates will be received by workers. In subsequent years, the ongoing management supervision costs imposed by the rule could total around $3.4 billion each year.

President Obama’s overtime rule would hurt those whom it is trying to help, by reducing flexibility in the workplace and discouraging job creation. The lawsuits are a common-sense reaction to harmful federal overreach."

Estate taxes are highly distortive of economic activity

See Stephen J. Entin on raising estate taxes from Marginal Revolution.
"The transfer [estate] taxes are highly distortive of economic activity. In fact, they probably do the most damage to output and income per dollar of revenue raised of all the taxes in the U.S. tax system. There are two reasons. First, they are an additional layer of tax on saving and investment, activities that are highly sensitive to taxation and very likely to shrink in response to the tax. Second, the transfer taxes are levied at very high, steeply graduated marginal tax rates on a very narrow tax base. The high rates discourage saving and investment at the margin, while the average tax rate and tax revenues are held down by the credit. A tax that has a large differential between its average and marginal tax rates does far more damage per dollar of revenue raised than a flatter rate tax on a broader base.
Here is the full study and pdf."

Friday, September 23, 2016

Can the economy handle a 20% fiscal contraction (at near zero interest rates?)

By Scott Sumner.
"Here's Matt O'Brien:
Libertarian presidential candidate Gary Johnson is a friendly guy, seems pretty moderate. But he could tank the economy. That's what trying to balance the budget all at once would do. Which, of course, is what Johnson says he would. He wants to cut spending by 20 percent next year to get the government back in the black, and then veto any legislation that would make the red ink return.
This probably wouldn't end well. The problem is the Federal Reserve might not be willing or able to really counteract this. In normal times, you see, the Fed cuts interest rates when the government cuts the deficit so that the private sector can pick up the slack for the public sector. But even eight years after the Great Recession, these are still not normal times. The Fed can't cut interest rates right now, because they're barely above zero. Now, it's true that the Fed could print money instead -- that's how it stopped austerity from starting a recession in 2013 -- but Johnson doesn't want the Fed to do that. He's said that quantitative easing, which is when the Fed buys bonds with newly created dollars, is just an attempt to "override the free market" that will only lead to "malinvestment, inflation, and prolonged unemployment." And since he would not only get to pick two Fed members in 2017, but also a new Fed chair in 2018, what he thinks matters.

I mostly agree with this, but not entirely. I certainly agree that the Fed could offset fiscal austerity with a more expansionary monetary policy, just as they did in 2013. But it's not quite right to say that the Fed cannot cut interest rates. The current rate of interest on reserves is 0.5%, and that rate could be cut by 100 basis points, to minus 0.5%. Nonetheless O'Brien is right that interest rate cuts might not be enough. 
But I also think he slightly exaggerates how much we know about this issue. Let's take the policy environment at the end of WWII. Here are some relevant facts:
1. There was massive austerity, as government spending fell by far more that 20%. We suddenly went from a deficit of 20% of GDP, to a surplus.
2. Several top Keynesian economists warned that this austerity would lead to another post-war depression.
3. Short term interest rates were very low, but slightly above zero (0.38% on T-bills, for instance.)
Sound familiar? Here's what happened next. After WWII, the Fed did not cut rates at all to offset the fiscal austerity. Indeed after holding them at 0.38% for about 2 years, they began gradually raising them in mid-1947. Nor did they do any QE. And despite all that, the economy remained fine, with the unemployment rate fluctuating between 3% and 5% throughout 1946, 1947, and 1948, despite millions of men suddenly being discharged from the military. The Keynesian predictions did not come true.

I recognize that there are lots of differences between 1946 and today. But even so, it should give us all pause to consider that well-informed Keynesian economists got this wrong. Maybe there is something wrong with the model.

And let's not forget that Johnson is also proposing many positive initiatives that would boost aggregate supply, such as tax reform.

This is not to say that I agree with everything Johnson is proposing. I disagree with him on the wisdom of balancing the budget so quickly, and I disagree with him on QE, at least as an option. Nonetheless, the post-WWII experience should make us all very cautious about predicting the impact of fiscal austerity.

PS. A few months back Trump proposed paying off the entire national debt in 8 years, which is an even more contractionary proposal. These sorts of proposals need to be taken with more than a grain of salt.

PPS. I recommend this David Beckworth interview of Jason Taylor, which touches on some of these issues. Taylor says that Keynesians predicted 25% to 35% unemployment if the government suddenly discharged 10 million soldiers, and also suddenly slashed massive military spending. The government did exactly that, and unemployment averaged 3.9% in 1946 and 1947. (The specific discussion occurs after the 47 minute mark.)"