Friday, October 24, 2014

Matt Ridley on why falling oil prices are unambiguously good – they make the world richer and fairer

Via Mark Perry of "Carpe Diem.".


Matt Ridley has a great column on why cheap oil is unambiguously good news – it makes the world richer and fairer, and in the process allows us to abolish much more poverty, disease and misery. Here’s an excerpt:
So ingrained is the bad-news bias of the intelligentsia that the plummeting price of oil has mostly been discussed in terms of its negative effect on the budgets of oil producers, both countries and companies. We are allowed to rejoice only to the extent that we think it is a good thing that the Venezuelan, Russian and Iranian regimes are most at risk, which they are.
Yet by far the greater benefit of the oil price fall comes from the impact on consumers. Making this essential resource cheaper allows everybody, whatever their nationality, to spend less money on dull things like heat, transport, metal and plastic, which leaves them more money for things like movies, holidays and pets, which gives other people new jobs, which raises everybody’s living standards.
The price of Brent crude oil has fallen from about $115 a barrel in June to about $85 today (see chart above, prices are now below $85 per barrel and the lowest in almost 4 years – since November 2010). That will make a tank of gasoline cheaper (though not by as much as it should, because of taxes) but it will also make everything from chairs to chips to chiropody cheaper too, because the cost of energy is incorporated into the cost of every good and service we buy. The impact of this cost deflation will dwarf any effect of, say, a fall in the price of BP shares in your pension plan.
The industrial revolution itself was built around abundant cheap energy, mainly in the form of coal, which enabled mechanization, which vastly amplified the productivity of the average worker and therefore his income. Today a typical British family of four uses as much energy as if it had 400 slaves in the back room pedaling eight-hour shifts on exercise bicycles. It would use even more if it also fed those slaves!
The falling oil price is largely the Americans’ fault. By reinventing the extraction process for first gas, then oil, with horizontal drilling and hydraulic fracturing, engineers have almost doubled the country’s output of oil in six years. That ingenuity was made possible by the high price of oil, which promised fabulous riches to those who could get oil out of shale, but it is no longer dependent on the high price of oil. It is often said that the cure for high oil prices is high oil prices and so it has proved.
But is cheap fossil fuel not bad news for the climate? A new paper in Nature magazine argues that when the gas boom sparked by fracking goes global, prices will fall fast, economic growth will accelerate and so we will end up using more energy and producing more emissions than before, even if we give up coal. It forgets to mention that if we get that much richer, we will also abolish much more poverty, disease and misery, and have the investment funds to invent new, cheap and low-carbon forms of energy too.
HT: Warren Smith"

The Misleading CEO/Employee Pay Gap Lament

"Our recent Wall Street Journal op-ed highlights some of the problems with the notion that the CEO/employee pay gap is too big, a popular lament from union-backed groups who argue that the gap is justification for increasing the minimum wage.

In the piece, we highlighted the case of Yum Brands, the parent of well-known restaurants like Pizza Hut, Taco Bell, and KFC, and a popular target of SEIU-backed protests. Its five member executive team made a combined $30 million in compensation in 2013, according to SEC filings – seemingly a large pot that could be redistributed to its hourly employees. But because Yum also employs so many people - 539,000, 86 percent of whom are part time – these funds would have only negligible impact in hourly wages if redistributed.

For example, if the executive team could somehow take 25 percent of its total compensation and distribute it evenly to Yum’s 463,000 part time workers, hourly wages would only rise by a penny. Even if the executive team took a 100 percent pay cut, hourly wages would only increase by five cents.

Total Executive Compensation Total Part-Time Employees Raise Per Hour
Yum Brands $30 million 463,000 5 cents
Walmart $63 million 600,000 8 cents

Assumed part-time employees work 25 hours per week, 50 weeks per year
Data Sources: SEC 2013 company filings: Schedule 14-A, Schedule 10-K

The results of this analysis aren’t unique to Yum Brands. Take Walmart, for example, another multi-billion dollar company that union-backed activists groups like OUR Walmart have accused of paying its executives too much. Walmart’s five member executive team earned double that of Yum’s in 2013 at a combined $63 million. But they also have a ton of employees to distribute the money to: We estimate that Walmart has roughly 600,000 part-time employees in its workforce.* Even if Walmart’s executives took a 100 percent pay cut and distributed it equally to their part-time employees, hourly wages would only rise by eight cents.

Of course the truth is that executive compensation has very little bearing on what a company’s employees earn. It just serves as a misleading and – as these analyses show – moot talking point for those looking to push through big labor’s agenda.

*Note: Walmart doesn’t provide a breakdown of full-time and part-time employees in its annual report. However, recent news stories on the company’s decision regarding health coverage for 30,000 part-timers indicated that this represented five percent of its part-time workforce. Working backward, we arrived at roughly 600,000 part-time employees."

Thursday, October 23, 2014

IMF's Loungani: Demand for Labor is Downward-Sloping (Minimum wage laws in China lower employment)

From David Henderson of EconLog.
"Now to an interesting study that caught my eye.
Our study is the first to use data on minimum wage changes for over 2400 counties in China. We combine the information on minimum wages changes with employment data from the Annual Survey of Industrial Firms, which covers over 70 percent of China's manufacturing employment. While China instituted a minimum wage system in 1994, enforcement of compliance with the law was significantly tightened only in 2004; the results described below are based on post-2004 data. 
So what does the evidence show? On average across all firms, we find that an increase in the minimum wage leads to a small decline in employment: a 10% percent increase in the minimum wage lowers employment by a little over 1% percent.
This is from Prakash Loungani, "Does Raising the Minimum Wage Hurt Employment? Evidence from China," October 23, 2014. Loungani concludes:
But if raising the minimum wage lowers employment, and ends up excluding low-wage workers from employment prospects, it may have adverse effects on both welfare and efficiency.
Why does he say "may?" If "raising the minimum wage lowers employment, and ends up excluding low-wage workers from employment prospects," it will "have adverse effects on both welfare and efficiency." For that matter, why does he say "If?" Does Loungani not believe his own results? Notice, by the way, that the results he gets accord with the consensus view among U.S. economists for the United States circa 1981."

Infrastructure and other inputs do not turn themselves into valuable outputs.

From Don Boudreaux of Cafe Hayek.
"Here’s a letter to a student in New Jersey:
Dear Mr. Sloan:
Thanks for your latest note.  You remember correctly that I agree that Pres. Obama’s “You didn’t build that!” quip referred to infrastructure and other inputs – admittedly produced by others – that each entrepreneur relies on.  You’re mistaken, however, to insist that “because government makes businesses’ profits possible, even the most innovative” entrepreneurs and investors “earn only a portion of their profits.”
You confuse possibilities with actualities.  Infrastructure and other inputs do not turn themselves into valuable outputs.  That task requires entrepreneurial creativity, risk-taking, and effort.  The very existence of huge profits earned in markets suffused with infrastructure and other inputs implies that entrepreneurs who earn these huge profits produce something unusually rare and valuable - something that the vast majority of people, despite having the same access as do successful entrepreneurs to infrastructure and other inputs, do not produce.
In short, the outputs created by entrepreneurs would not otherwise have been produced.  Therefore, the profits of these entrepreneurs reflect the additional value to the economy of these outputs.  This is additional market value that, despite the use of infrastructure and other inputs, is created only through the actions of successful entrepreneurs.  These entrepreneurs, and they alone, are responsible for making actual that additional value which, without their efforts, would remain only an unrealized – indeed, unnoticed – potential.
This reality does not itself argue against taxation.  Infrastructure, like other inputs, must be paid for, and taxation is one way to pay for it.  But this reality does mean that it’s mistaken both to attribute to government a prime and uniquely important role in the creation of entrepreneurial profits and to suppose that government, by virtue of a politician quipping fatuously to entrepreneurs “You didn’t build that!,” becomes entitled to an open-ended claim on those profits.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030"

Wednesday, October 22, 2014

Deirdre McCloskey On Piketty

Via Cafe Hayek.
"from page 35 of the manuscript of Deirdre McCloskey‘s new, extensive, and brilliant review of Thomas Piketty’s Capital in the Twenty-First Century; (quoted here with Deirdre’s kind permission):
It is important in thinking about the issues Piketty so energetically raises to keep straight what exactly is unequal.  Physical capital and the paper claims to it are unequally owned, of course, although pension funds and the like do compensate to some degree.  The yield on such portions of the nation’s capital stock is the income of the rich, especially the rich-by-inheritance whom Piketty worries most about.  But if capital is more comprehensively measured, to include increasingly important human capital such as engineering degrees and increasingly important commonly-owned capital such as public parks and modern knowledge (think: the internet), the income yield on the capital is less unequally owned, I have noted, than are paper claims to physical capital.
Earlier in her review, Deirdre quite rightly criticizes Piketty for excluding the value of human capital from his [Piketty's] measure of nations’ capital stocks.  Such an exclusion is akin to, say, the decision of a scholar whose goal is to measure the number of automobiles owned by Americans to exclude SUVs and pick-up trucks from the class of vehicles classified as “automobiles.”"

Evaluating the Impact of Thomas Piketty’s Wealth Tax on America’s Poor, Rich, and Middle Class

From The Tax Foundation. Excerpt:
"In Capital in the Twenty-First Century, bestselling author and economist Thomas Piketty argues for a tax on wealth, ranging from 0.5 to 2 percent, in order to combat what he views to be the most pressing economic issue of our time: income inequality. This wealth tax is a fundamental element of Piketty’s policy recommendations. However, the implementation of this kind of tax in America is not only impractical, but could also result in large declines in investment, employment, wages, and national output, according to a new analysis from the nonpartisan Tax Foundation.
“We found that Piketty’s wealth tax would indeed reduce income and wealth inequality, but at the cost of making everyone significantly poorer,” said Tax Foundation Fellow Michael Schuyler, PhD. “Further, it would be profoundly impractical, considering the large, additional compliance costs it would place on many households, the difficulty of enforcing such a tax, and a constitutional barrier limiting the power of the federal government to impose a direct tax. These problems would not go away even if the wealth tax were global.”

The report finds:
  • The basic version of Piketty’s wealth tax would impose a tax rate of 1 percent on net worth of $1.3 million and 2 percent on net worth above $6.5 million. Piketty also contemplates additional tax brackets, including a bracket of 0.5 percent starting at about $260,000.
  • Piketty’s basic tax would depress the capital stock by 13.3 percent, decrease wages by 4.2 percent, eliminate 886,400 jobs, and reduce GDP by 4.9 percent, or about $800 billion, all for a revenue gain of less than $20 billion.
  • The addition of a tax beginning at a net worth of about $260,000 would reduce capital formation by 16.5 percent, decrease wages by 5.2 percent, eliminate 1.1 million jobs, and reduce GDP by 6.1 percent (about $1 trillion annually in terms of today’s GDP), all for a revenue gain of only $62.6 billion.
  • All income groups would be worse off under a wealth tax due to decreased economic activity; in the second scenario, the after-tax income loss for the top quintile would exceed 10 percent, but the losses for all lower quintiles would be in the 7 to 9 percent range.
Although the U.S. government will not be enacting a wealth tax any time soon, it is nevertheless worth evaluating a federal wealth tax so we can better judge whether Professor Piketty’s recommendations would lead us in the correct direction. Also, as tax reform ideas are generated in the future, it is important to know whether a wealth tax might be a constructive part of the mix or whether one should be scrupulously avoided.

This analysis uses the Tax Foundation’s Taxes and Growth Model, a dynamic tax scoring model which estimates the impact that tax changes have on wages, jobs, cost of capital, distribution of income, federal revenue, and the overall size of the economy."

Tuesday, October 21, 2014

Premiums to Rise For Obamacare's Cheapest Plans

From Reason
"What’s really going on with Obamacare premium prices? Are they going up? Going down? Well, ah, yes. The best answer is that it’s complicated; it depends on which premiums you’re looking at, in what areas of the country, and when.

Back in September, a Kaiser Family Foundation study found that, based on a study of 16 major metro areas, that "benchmark silver plans"—the second cheapest plans in the middle or "silver" tier of health insurance available through the law’s exchanges—would drop by 1 percent, on average. Plans in some places, like Nashville, would rise, but overall the price was going down just a little.
Great news! Obamacare premiums are going down! Or are they?

Last week, Jed Graham of Investor’s Business Daily reported that, after looking at premium prices in the largest city in 15 different states, plus Washington, D.C., he found that the cost of the cheapest "bronze" plans—the lowest tier of coverage available on the exchanges—would rise by 14 percent next year.

In some cities, Graham reports, they’ll go up by a lot more than that:
In Seattle, the cost of the cheapest bronze plan, after subsidies, will soar 64%, from $60 to $98 per month, for individuals at this income level. Some other cities seeing notable gains include Providence (up 38%, from $72 to $99 per month); Los Angeles (up 27%, from $88 to $111); Las Vegas (up 22%, from $100 to $122); and New York (up 18%, from $97 to $114).
Of the people who picked bronze-level plans, Graham notes, 39 percent picked the cheapest option. So this could impact quite a few people.

Depending on how you measure it, then, plan premiums are either going down or up in various parts of the country.

What we still don’t really know, though, is what the overall picture looks like, either in terms of the plans that are on offer or the plans that people are actually picking for themselves. That’s because a lot of information about premiums and subsidy amounts, especially in the federal exchanges, is on hold until the middle of next month.

Only then will we actually get a complete look at the various costs and options. The timing isn’t an accident either. Last year’s open enrollment period started in October. This year’s open enrollment, and thus the release of the information it makes available, was delayed until just after the election."