Saturday, April 30, 2011

The Social Security Tax Is Progressive

See The Truth About Taxes and the Rich by Veronique de Rugy. Once you take into account benefits recieved, it is progressive. She has a table at the end that shows the net tax for each quintile.

Starting from the bottom:

20% -12.7%
40% -10.4%
60% -2.6%
80% 1.4%
100% 1.8%

Keynes Liked Hayek's "Road To Serfdom"

See Keynes v. Hayek, Round 2 at EconLog by David Henderson. Excerpt:

"...but I wonder how many other viewers know that this is what Keynes wrote in his blurb for Hayek's Road to Serfdom:

In my opinion it is a grand book.... Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.

I was shocked that the University of Chicago Press chose not to keep that blurb in its 50th anniversary re-issue."

U. S. "Decline" In Manufacturing Mirrors That Of The Entire World

See "Decline of Manufacturing" is Global Phenomenon: And Yet the World Is Much Better Off Because of It from Carpe Diem. Excerpts:

"As a share of GDP, manufacturing has declined in most countries since the 1970s. A few examples: Australia's manufacturing/GDP ratio went from 21.3% in 1970 to 9% in 2009, Brazil's ratio went from 24.6% to 13.3%, Canada's from 21.7% to 11.3%, Germany's from 35% to 19%, and Japan's from 35% to 20% (I'll maybe create a chart with a more complete list).

Bottom Line: The complaints about the "decline in U.S. manufacturing" are really a somewhat misguided acknowledgment of the global shift in production that has taken place since we entered the Information Age with the commercial introduction of the microchip in 1971 and gradually left the Machine Age behind. When we complain that "nothing is made here anymore," it's not so much that somebody else is making the stuff we used to make as it is the case that we (and others around the world) just don't need as much "stuff" any more in relation to the size of the economy.

The standard of living around the world today, along with global wealth and prosperity, are all much, much higher today with manufacturing representing 16-17% of total world output compared to 1970, when it was almost twice as high at 26.7%. And for that progress, we should applaud, not complain."

Friday, April 29, 2011

More On Underfunded Public Pensions

See Faulty Public Pension Accounting: A Problem too Big to Ignore by Ivan Osorio of the Competitive Enterprise Institute Blog. In addition to the excerpt below, it has a good discussion of how the rules are different for public and private pensions and how this is part of the problem.

"The Pew Center on the States made headlines with a new entry into this debate this week. State employee pension funds are underfunded by at least $1.26 trillion, according to a new Pew study. Staggering as that figure is, some analysts have noted that it may in fact be too low, because it is estimated based on state pension managers’ faulty accounting methods — which helped obscure the extent of underfunding for years in the first place.

However, now the critique of the numbers is gaining wider attention. As The Washington Post reports:

In making its calculations, Pew used the states’ assumptions for what their pension funds would earn in annual investment returns, typically 8 percent — a figure that states have mostly met in recent decades but that some analysts think is now overly optimistic.

If states calculated their investment returns the same way that private firms are required to for their pensions, their obligations would balloon to $1.8 trillion, the report said. If states pegged their returns to 30-year Treasury bonds, an even more conservative standard, the liability would be $2.4 trillion."

The High Cost Of Regulations

See Substantive Reform Must Include Cutting Regulatory Burdens by Ryan Young of the Competitive Enterprise Institute Blog.

"Spending, deficits, and taxes are getting all the attention from reformers in both parties. In today’s Investor’s Business Daily, Wayne Crews and I argue that regulation is not to be forgotten:

Regulations cost the average business $8,086 per employee per year. Small businesses are especially hard-hit. Firms with fewer than 20 employees pay $10,585 per employee per year for regulatory compliance, according to the Crains’ report. When hiring employees becomes more expensive, fewer get hired. No wonder unemployment is so persistent.

We also offer up some reform ideas:

One reform is to purge the books of obsolete and clearly harmful rules. There is no need for Washington to have rules still on the books for a Y2K crisis that never even materialized. Nor is there any need for it to regulate the size of holes in Swiss cheese, which it does in great detail.

President Obama should appoint an annual bipartisan commission to comb through the Code of Federal Regulations and recommend rules for elimination. Congress would then be required to vote up-or-down on the package without amendment.

Read the article here; for more intellectual ammunition, see the just-released 2011 edition of Wayne’s “Ten Thousand Commandments” study."

Obama Subsidizes Job-Killing Outsourcing, While Attacking Job-Creating Outsourcing

See this post at the Competitive Enterprise Institute Blog by Hans Bader. Excerpt:

"In his 2008 campaign, Obama demagogued about “outsourcing,” but his own policies have outsourced thousands of American jobs, at taxpayer expense, as I explain today at The Washington Examiner.

As ABC News notes, “Nearly $2 billion in money from” the stimulus package has “been spent on wind power,” but “nearly 80 percent of that money” — $1.6 billion — “has gone to foreign manufacturers of wind turbines.” Indeed, “a recent report by American Wind Energy Association showed a drop in U.S. wind manufacturing jobs last year.” These subsidies effectively outsource American jobs, driving up America’s trade deficit.

Weirdly enough, Obama supports this taxpayer-subsidized outsourcing, which wipes out American jobs, even while opposing non-subsidized (free-market-based) outsourcing, which can actually save American jobs by reducing the cost of finished goods that are produced mostly — but not entirely — in America. (How can firms’ decisions to outsource save American jobs? Here’s how: An American manufacturer of a finished product, facing stiff cost competition from overseas manufacturers, can reduce its overall costs, and thus avoid going out of business, by outsourcing low-skill jobs producing crude components of the finished product to low-wage overseas workers, thus enabling the more valuable finished product designed or assembled by skilled American workers to be cost-competitive with finished goods produced entirely overseas.)"

Should The Oil Price Drop In 2008 Have Been Investigated?

See Good Question About Oil Traders at Carpe Diem.

This prompted a great question in the WSJ.

"WSJ Letter to the Editor from John Malgar -- "The challenge for investigators isn't proving that traders drove up oil prices. The real puzzle is, why did these public enemies suddenly have a change of heart during 2008 and drive prices down?"

See chart above showing gas prices falling from $4.12 per gallon to $1.61 in 2008."

Oil Companies: Low Profit Rates, High Taxes Paid

See QI: Exxon Paid Almost $1M per Hour in Income Taxes and Its Effective Tax Rate Was 42.3% at "Carpe Diem" by Mark Perry. Excerpts:

"ExxonMobil spent $7.8 billion in the first quarter on capital equipment and exploration (73% of its earnings),...Over the next five years, the oil company plans to invest about $175 billion in capital equipment and exploration."

"Dwarfing Exxon's first quarter profits of $10.65 billion, are the total taxes paid or collected around the world by Exxon from January to March, which totaled to$26.2 billion..."

"Exxon Mobil paid $8 billion in income taxes in the first quarter on $18.9 billion of income, which translates into a 42.3% effective income tax rate on its income."

"The 6.1% average profit margin for Exxon's industry "Major Integrated Oil and Gas" ranks #112 among all industries for the most recent quarter..."

Thursday, April 28, 2011

American Income Inequality in Perspective

From Veronique de Rugy. Excerpt:

"...even the poorest 5 percent of Americans are among the richest people in the world — richer than nearly 70 percent of the world’s population."

Emissions of volatile organic compounds have fallen while gasonline usage has risen

See Energy Fact of the Week: Gasoline Consumption and Emissions of Volatile Organic Compounds by Steven F. Hayward of AEI.


"...much of this reduction would have occurred as a result of market forces in the absence of a regulatory mandate. One large chunk of VOC reductions from cars came from the move to fuel-injected engines, which vastly improve engine efficiency and combustion. What would not have occurred without a mandate are the sealed caps on auto fuel tanks that prevent evaporation, and the evaporation abatement nozzles on gas pumps. This is why, for example, a pre-1970 car parked in the driveway with its engine shut off will emit more VOCs through evaporation than a new car running at 60 mph on the highway."

Spending Rise Has Much To Do With Policy

This from John Taylor:

"The running debate between Paul Krugman and me is bringing more facts to bear on important budget and policy issues. Since I wrote my reply yesterday to Krugman’s criticism of my Wall Street Journal article, he has responded three times, with Taylor Digs Deeper, 2021 and All That, and One More Point about 2021.

Krugman now admits that spending as a share of GDP would rise from 19.6 percent of GDP in 2007 to around 24 percent in 2021 under the budget proposed by the Administration on February 14, which is what I showed in my original graph.

And since spending averages around 24 percent of GDP in 2009-2011, this confirms my point that “Mr. Obama, in his budget submitted in February, proposed to make that spending binge permanent.” Krugman also reports some of the components of the rise in entitlement spending, showing that Social Security, Medicare, and Medicaid spending rise as a share of GDP under Obama’s proposal.

But Krugman now argues that “the great bulk of this projected rise has nothing whatsoever to do with Obama’s policies.” This is wrong on two accounts.

First, in proposing his February 14 budget, Obama chose policies that did not control the growth of spending by enough to prevent an increase in spending as a share of GDP, even though he could have chosen such policies. In fact, the policies he chose for his second budget on April 13 did impose such controls including “setting a more ambitious target of holding Medicare cost growth per beneficiary to GDP per capita plus 0.5 percent beginning in 2018” (White House Fact Sheet April 13). These recent spending controls were proposed after the House budget proposal was put forth, and they take spending in the direction proposed by the House. That Obama’s second budget has lower spending than the first demonstrates that the rate of spending increase has very much to do with Obama’s policies.

Second, the Obama budget does propose new spending programs, including the new health care law. And there is a step increase in entitlement spending as a share of GDP in 2009-2011 which goes beyond what would be expected from the recession, and spending remains at the higher level through 2021. If demographic changes were the only reason for the increase in spending as a share of GDP, then you would not see such a step increase.

In the latest post on this subject, Krugman expands his criticism to include Senators Corker and McCaskill. Here Krugman admits that the rate of increase in government spending is affected by Obama’s policies, but he now gives reasons “why federal spending shouldn’t stay at or near the share of GDP it was at in 2007” arguing that Obama should not choose such policies. I disagree. Even with current demographic projections it is possible to institute good reforms which keep Medicare and Medicaid from rising so rapidly as a share of GDP and also deliver better health care services. And of course it is possible also to reduce other types of spending as a share of GDP, including national defense."

Why Behavioral Economists Are So Often Mystified

See this post at AEI by Fred Smith.

"Over the last decade, waves of studies have claimed that individuals aren’t rational — that they often reject options that are in their best interest. That literature is being used to justify government “marketing” efforts to persuade people to accept government “advice” on everything from light bulbs to school lunches to home purchases. Cass Sunstein’s famous “nudge” approach — extolling the moral case for public interest propaganda is indicative of a growing interest in this approach by statists.

Auren Hoffman, a creative West Coast individual, recently wrote this related comment “Differences of Entrepreneurs and Consultants.” He describes a standard “test” similar to those produced by behavioralists.

I toss a coin. Heads you win $10,000. Tails you lose $6,000. Do you play and, if so, why?

To our elite friends, the answer seems simple. The expected payoff is $4,000 and, thus, you should play. People often reject that option, leading the Chattering Class to argue the irrationality of the individual.

But, Auren notes that the entrepreneurial individual will view this question in a larger context:

How do I know the coin is fair? Maybe tails is much more likely to come up. Can I test the coin by flipping it 500 times to gain more information?

How do taxes affect my wins and losses? Can I apply losses only to gambling gains? How are state and city taxes affected?

Do I have the cash to pay if I lose and do I get cash if I win? Will I have to show up with the money and, if so, is the transfer secure? Can I get frequent flyer miles if I pay by credit card?

How can I be sure I’ll be paid if I win? Will the money be held in a third-party escrow account? How much will that (and other transaction costs) affect the overall economics of this bet?

Real world bets are made in context — there are always questions to be raised before rushing into a transaction. Many policy proposals from behavioral economists ignore that insight — that transactions have transaction costs. This is one reason why those policies are so often foolish."

Bias At The New York Times

See Being The New York Times: the Political Behaviour of a Newspaper. Research by Riccardo Puglisi, University of Pavia.

I analyse a dataset of news from The New York Times, from 1946 to 1997. Controlling for the activity of the incumbent president and the U.S. Congress across issues, I find that during a presidential campaign, The New York Times gives more emphasis to topics on which the Democratic party is perceived as more competent (civil rights, health care, labor and social welfare) when the incumbent president is a Republican. This is consistent with the hypothesis that The New York Times has a Democratic partisanship, with some “anti-incumbent” aspects, in that—during a presidential campaign—it gives more emphasis to issues over which the (Republican) incumbent is weak. To the extent that the interest of readers across issues is not systematically related with the political affiliation of the incumbent president and the election cycle, the observed changes in news coverage are consistent with The New York Times departing from demand-driven news coverage. In fact, I show that these findings are robust to controlling for Gallup data on the most important problem facing the country, which I use as a proxy for issue tastes of Times’ readers.

Submitted: May 20, 2008 · Accepted: March 2, 2011 · Published: April 11, 2011

Recommended Citation
Puglisi, Riccardo (2011) "Being The New York Times: the Political Behaviour of a Newspaper," The B.E. Journal of Economic Analysis & Policy: Vol. 11: Iss. 1 (Contributions), Article 20.
DOI: 10.2202/1935-1682.2025
Available at:"

Government Gets More Money From Gas Sales Than Oil Companies

See Gasoline Taxes vs. Exxon Profit, per Gallon at Carpe Diem. Excerpts:

"...gasoline taxes by state (combined local, state and federal), ... range from a low of 26.4 cents per gallon in Alaska to a high of of 66.1 cents per gallon in California, averaging 48.1 cents per gallon across all states. How does that compare to oil company industry profits per gallon?

According to this post on Exxon Mobil's Perspective Blog , "For every gallon of gasoline, diesel or finished products we manufactured and sold in the United States in the last three months of 2010, we earned a little more than 2 cents per gallon. That’s not a typo. Two cents."

"Exxon also reports that in 2010 it "made less than 8 cents for every dollar of revenue from all of our businesses around the world."

So even if Exxon would have been able to earn its full 8% profit margin on gasoline sold in the U.S., it would still only have made about 23 cents per gallon at the average price per gallon in the last quarter of $2.88. And that would have been less than half of the average 48 cents per gallon gasoline tax."

Wednesday, April 27, 2011

How ObamaCare Hurts Work Incentives

See Notches and Disincentives in the Health Care Law by John Taylor:

"My colleague Dan Kessler writes in today’s Wall Street Journal that Obamacare creates large disincentives to work. I've found the following graph useful for showing students why. (The same type of graph is used in of my economics text Chapter 14, p 404.)

The graph shows income from work and the corresponding health care subsidy for a family of 4 headed by a 55-year old. The subsidy is paid to households earning up to 400 percent of the poverty line. With a poverty line of about $23,300 for a family of 4 in 2014 (when the legislation goes into effect) families earning as much as $93,200 will get a subsidy.

Observe how the subsidy declines with income and then is slashed to zero when 400 percent of the poverty line is hit. You can even see the V-shaped “notch” in the graph, which has become the technical term used to describe such sudden drops in subsidies. Consider the Lee family, for example. They earn $80,000 and thus get a subsidy of $16,100, bringing their total income to $96,100. But suppose they decide to work more. If they increase their income from work by $14,000, bringing their work earnings to $94,000, then their health care subsidy drops to zero. So they get less income by working more, and that's a big disincentive."

Paul Krugman Versus Budget Facts

This is from John Taylor:

"Yesterday Paul Krugman, citing Brad DeLong's post earlier in the day, joined the commentary on my Wall Street Journal article of Friday which I further discussed in my blog of Sunday. Krugman takes issue with my statement that “Mr. Obama, in his budget submitted in February, proposed to make that spending binge permanent” and instead claims to see no “huge expansion of the federal government” once one takes account of the slowdown in nominal GDP growth due to the recession.

Krugman is wrong. The Administration's budget did propose spending levels which make the recently increased rate of government spending as a share of GDP permanent, regardless of the reason for the recent increase. If you want to see this in a way that takes account of changes in nominal GDP growth related to the recession, then you can compare actual spending before the effects of the recession began with proposed spending after the effects of the recession are over. For all of 2007, spending was 19.6 percent of GDP. For all of 2021—after the impacts of the recession and the final year of the budget window—the budget submitted in February proposed spending equal to 24.2 percent of GDP. These two budget facts are part of the data presented in my Wall Street Journal chart and are taken directly from CBO tables. The 4.6 percentage point increase represents $1 trillion more federal spending per year at 2021 levels of GDP.

Much of the increase comes in the form of mandatory spending. Using the CBO baseline of January 2011 (which is below the February budget), mandatory spending would increase from 10.4 percent of GDP in 2007 to 14.0 percent of GDP in 2021.

DeLong mainly quotes from another post which focuses on the increase in spending during the Bush Administration. But in the Wall Street Journal I said explicitly that spending increased from 18.2 percent of GDP in 2000 (at the end of the Clinton Administration) to 19.6 percent in 2007, and my chart shows that spending started increasing more rapidly in 2008. The increase in 2008 was in part due to the stimulus package passed in February of that year; I have been critical of that stimulus package as I have been of the discretionary fiscal actions taken in 2009. My critique of policies leading up to the financial crisis Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis was written before any policies were enacted by the Obama Administration."

Tuesday, April 26, 2011

Megan McArdle vs. Paul Krugman On Consumer Driven Health Care

See People, or Rules? Excerpts:

"I found it very odd to see Paul Krugman complaining that "patients are not consumers" as if "consumer" were some sort of horrible, low-status role that should never taint the sacred realm of health care. In my economics classes, "consumer" was not a value judgement; it was a descriptor. A consumer is someone who consumes, just as a producer is someone who produces and a distributor is someone who distributes. So I was a bit befuddled to see an economist arguing that "The idea that all this can be reduced to money -- that doctors are just "providers" selling services to health care "consumers" -- is, well, sickening. And the prevalence of this kind of language is a sign that something has gone very wrong not just with this discussion, but with our society's values." Patients consume health care resources. Providers provide them. And the system through which labor and resources are allocated in our society remains money--an arrangement that I'm pretty sure that Paul Krugman doesn't want to change."

Krugman says it does not work, citing Medicare Advantage's high cost. But McArdle says it has more benefits. She also shows that the US is low in consumer driven health care since the consumer himself is not spendig that much of the health care dollar out of pocket here (less than 15% in the US, other countries are higher).

"...while consumers may be stupid, rules are often stupid too. Evidence-based medicine is certainly a good idea, but we are nowhere near being able to generate solid rules that a) cover all major possibilities and b) provide the highest chance of survival for the money. People are incredibly complicated. This makes outcomes hard to measure--and solid guidelines hard to develop."

"But even if we had the kind of data we'd need to develop a comprehensive set of rules, the problem remains: rules are stupid. You need to leave room for individual discretion. And individual discretion on the part of doctors and hospitals is a loophole you could drive a truck through.

Nor do I think the possibility of reducing costs through individual discretion is quite as impossible as Krugman makes things sound. Sure, a lot of decisions are life-or-death last minute things. But a lot of them aren't."

"It's all very well to say that people shouldn't have to make those decisions on the basis of money. But that's all the government is going to do. Sure, there are some procedures that people just shouldn't have (like a lot of back surgery). But a lot of this is value judgements: hip replacements for elderly patients, expensive chemotherapy that may extend life by a few months, more convenient dosing schedules or better side-effect profiles for brand name drugs. Unless we simply rely on across-the-board reimbursement cuts--which would be moronic on every level--the government is mostly not going to be deciding which treatments are effective; it's going to be deciding which treatments are cost-effective. We haven't taken doctors out of the business of selling health care to patients; we've just added a middleman.

Now, maybe you think that the government is smarter than the consumers it's speaking for. But how does the government know what you value most: an extra three months of life when you have cancer, or an extra five years of walking after age 89, or an extra $4,000 right now?

I think that people who favor a central board probably put more faith in technocrats than I do..."

Everyone Got Richer From 1979-2007

See 1979-2007: Rich Got Richer, Poor Got Richer by Mark Perry at Carpe Diem. Here it is:

"WASHINGTON – "Today, the Employment Policies Institute (EPI) announced the publication of new research by economists Dr. Richard V. Burkhauser of Cornell University, Dr. Jeff Larrimore of the Joint Committee on Taxation and Dr. Kosali Simon of Indiana University, the results of which appear in the most recent issue of the Journal of Policy Analysis and Management (link fixed).

In his recent speech on deficit reduction, President Obama defended his support of higher taxes on wealthy Americans by echoing a widely-held view that the rich are getting richer while the poor and middle class are falling behind. But Burkhauser et al. find that this popular notion is mistaken; in reality, growth in after-tax household income has been substantial across the entire income distribution over the last thirty years (see table above).

“By leaving out additional sources of income – like fringe benefits or employer-provided health insurance – past studies have dramatically understated American households’ access to after-tax resources.” said Dr. Burkhauser. “What we found is that the rich did get richer over the last 30 years, but so did the middle class, the working class and the poorest.”

By taking into account previously unmeasured shifts in household size and the tax units in them, the taxes and transfers of government, and the increasing importance of fringe benefits, the research shows a picture of growth that spans all income groups.

Burkhauser continued: “For instance, the conventional wisdom holds that the poorest households saw their income shrink by a third over the last three decades. But accounting for income transfers and the value of fringe benefits, this research shows that the bottom 20 percent of households actually experienced after-tax income growth of more than 26 percent.”

Burkhauser concluded: “This isn’t a zero sum game, where one group wins at the expense of others. The growth in productivity of Americans in the top twenty percent of tax units increased the size of the economic pie sufficiently to register major gains across the entire distribution of after-tax income.”"

Monday, April 25, 2011

Why John Quiggin Is Wrong About *I, Pencil*

Great post by Lee Doren at Competitive Enterprise Institute Blog. Here is the intro to that post:

"In 1958, Leonard Read published I, Pencil, an essay written in the first person from the point of view of a pencil. In the essay, the pencil explains the unbelievable complexity of creating such a simple product. However, despite its simplicity, Read also argues, “Not a single person on the face of this earth knows how to make one.” In fact, there are no central planners dictating its creation.

Read’s seemingly unbelievable claim is argued to perfection after he cites the numerous raw materials, capital and labor required to produce a pencil, and the millions of people unknowingly cooperating throughout its production. Although the story is educational, the final message that Read attempts to convey is this: Leave all creative energies uninhibited. Society must have faith that free men and women will respond to the Invisible Hand without government coercion.

However, a few weeks ago, John Quiggin, wrote a response to I, Pencil. In Quiggin’s rebuttal, he argues that a pencil is really a product of the mixed economy, not the product of the Invisible Hand. Moreover, Quiggin makes the astounding claim that markets aren’t the best way to organize production. Unfortunately for Quiggin, he fails miserably to argue his case, while ignoring numerous facts that refute his assertions."

Doren shows that Quiggin ignores that much of our wood comes from private forests, that private railways work very well, that much education takes place outside of schools (education that people learn on the job that makes them more productive), etc.

Liberal Historian Questions High Speed Rail Subsidies

See Fast Train to Nowhere By RICHARD WHITE, a professor of history at Stanford, is the author of the forthcoming Railroaded: The Transcontinentals and the Making of Modern America. Here are excerpts from The New York Times article (4-24-11):

"For the country as a whole, the Pacific Railway Act of 1864 and subsequent legislation subsidizing the transcontinental railroads — the lines that crossed the continent from the 98th meridian to the Pacific Coast — were the worst laws money could buy. By encouraging dumb growth, those laws sacrificed public good for private gain, and Americans came to regret it.

It is not that either transcontinental railroads or high-speed railroads are always bad ideas. A compelling case can be made for high-speed rail between Boston and Washington, for example, but the administration proposes building high-speed lines in places where there is no demonstrated demand. In California, construction of the new high-speed rail line from San Francisco to San Diego will begin with a line from Borden to Corcoran in California’s Central Valley. It is already being derided as the train to nowhere. The reduction of federal subsidies has not stopped the project, which now threatens to become a forlorn monument to hubris.

Proponents of the transcontinental railroads promised all kinds of benefits they did not deliver. They claimed that the railroads were needed to save the Union, but the Union was already saved before the first line was completed. The best Western farmlands would have been settled without the railroads; their impact on other lands was often environmentally disastrous. For three decades California commodities could move more cheaply, and virtually as quickly, by sea. The subsidies the railroads received enriched contractors and financiers, but nearly all the railroads went into receivership, some multiple times; the government rescued others.

As more astute members of Congress came to recognize, the subsidies were a mistake. One described the major drawback of a proposal for the government to guarantee bonds: “If there be profit, the corporations may take it; if there be loss, the government must bear it.”

After 1872, the country turned against the subsidizing of large corporations. It was a little late. Fraud and failure left a legacy that would lead to four decades of government attempts to get back what had so carelessly been given away. In the 1890s, Congress was still trying to recover money from the Pacific Railway."

Gary Becker: new regulations imposed on airlines are mainly a mistake

See How Can Governments Help Consumers-Becker. Here is that post:

"The new rulings announced by the Department of Transportation to force airlines, among other things, to return the fees for checking baggage if the baggage is lost, to post full prices including taxes, and to raise the compensation for being bumped involuntarily from flights, are not very onerous to airlines. However, they do add to the many rules that already require airlines to post various prices, to compensate passengers for bumping, and to engage in other behavior that is supposed to protect passengers. The new and old rules regarding passengers, and many rules of behavior imposed on companies in other industries, such as the so-called consumer protection components of the Dodd-Frank law on financial regulation, all reflect a fall in government confidence in the ability of consumers to make reasonable choices.

I believe this lack of confidence greatly underestimates the capacity of the great majority of consumers to make forward-looking choices in their own interests. It also underestimates the degree to which the forces of competition protect consumers against the consequences of the bad decisions they do make. I briefly defend each of these claims.

Low cost airlines that provide cheap tickets and minimal services grew rapidly after the deregulation of airlines that began in the 1970s allowed the entry of new airlines. Their growth shows how sensitive passengers are to price, and how many are willing to exchange lower prices for fewer services, such as no meals, or no assigned seats. Southwest Airlines started only in the 1970s after facing much opposition from regulators, and it is now the largest American airlines in terms of domestic traffic.

Or consider whether most passengers know that many airlines now add separate charges for checked baggage, even though these charges are often not displayed prominently in advertising or in passenger contracts with airlines. It is obvious from the fact that many more bags are being carried onto planes since these changes went into effect (and thereby delaying the departures of planes) that many passengers both know about these new checked bags fees, and they have responded to them. For those who may be ignorant of these fees, Southwest Airlines constantly reminds consumers in their advertising (“bags fly free”) that they are one of the few airlines that do not charge for the first or second checked bags.

This is not to deny that some passengers are ignorant of the separate charges for baggage and food, do not realize that sizable taxes add to the full cost of airline tickets, forgot about frustrations due to long and unpleasant flight delays, and are unaware of other aspects of the full monetary and psychic cost of flying. However, if significant majorities of passengers are reasonably well informed about full prices of tickets and other aspects of the flying experience, their behavior helps protect the ignorant passengers. For airlines usually have to make their pricing and other decisions on what the clear majority of passengers know and respond to since they usually cannot separate the more active customers from the passive ones. If that majority is responsive to charges that are not prominently displayed, to taxes, and other aspects of the total cost and experience of flying, airlines will tend to keep prices and charges lower to all, including the more ignorant flyers.

Competition among airlines may be an even greater protection for uninformed consumers than the behavior of reasonably well-informed and responsive consumers. As Posner indicates, if government regulations impose costs on airlines, ticket prices will tend to rise since airlines have been struggling for decades just to earn a decent return on their capital.

Suppose, to illustrate the effects of competition, that one airline discovers its profits increase when some of the costs to passengers are placed in small print on the passenger ticket contract because enough passengers act as if they are not aware of the costs found in small print. Then other airlines competing for passengers will copy the first airline, and also put these costs in small print. Furthermore, their desire to get more of the now more profitable passenger business will induce them to reduce prices on other dimensions of travel, or add to services, such as providing assigned seats when seats were not previously assigned, or adding individual videos for each seat. The end result will be that competitive pressures that lower prices or increase services to passengers will help compensate passengers who do not recognize the costs in small print, although to be sure they may be only partially compensated.

So I clearly agree with Posner that the new regulations imposed on airlines are mainly a mistake. They add to the costs of airlines and to the costs of flying in the mistaken belief that most consumers are easily tricked by airlines. Beyond that, the regulators fail to see that competition is the most effective way to protect even ignorant consumers from the consequences of their ignorance. The competitiveness of the airline industry is evident from the many new airlines that have entered and existed this industry during the past 30 years, and from the low profits during the decades after deregulation. Encouraging competition in this and other industries is the only really effective way to help the great majority of consumers, including ignorant and easily fooled consumers."

Sunday, April 24, 2011

How Much Has Federal Spending Increased In The Last 10 Years?

See Obama's Permanent Spending Binge By JOHN B. TAYLOR in the WSJ, 4-22-11.

"In 2000 spending was 18.2% of GDP. In 2007 it was 19.6%. But in the three years since 2009 it's jumped to an average of 24.4%.

Second, and perhaps even more striking, the chart shows that Mr. Obama, in his budget submitted in February, proposed to make that spending binge permanent. Spending would still be more than 24% of GDP at the end of the budget window in 2021. The administration revealed its preference in the February budget for a much higher level of government spending than the 18.2% of GDP in 2000 or the 19.6% in 2007.

Third, the House budget plan proposed by Rep. Paul Ryan (R., Wis.) simply removes that spending binge—it gradually returns spending as a share of GDP back to a level seen only three years ago.

When I show people this chart they ask why Washington is even having the debate. They say: If government agencies and programs functioned with 19% to 20% of GDP in 2007, why is it so hard for them to function with that percentage in 2021, when GDP will be substantially higher and with many opportunities for reforms and increased efficiencies? And if GDP and employment grow more quickly, as they would if private investment increased as a result of lower government spending and debt, then that 19%to 20% share of GDP could provide much more in the way of public goods."

The High Cost Of Collecting Taxes

SeeThe 30-Cent Tax Premium: Tax compliance employs more workers than Wal-Mart, UPS, McDonald's, IBM and Citigroup combined By ARTHUR B. LAFFER, from the 4-18-11 WSJ. Excerpts:

"To start with, individuals and businesses must pay the government the $1 in revenue plus the costs of their own time spent filing and complying with the tax code; plus the tax collection costs of the IRS; plus the tax compliance outlays that individuals and businesses pay to help them file their taxes."

"In a study published last week by the Laffer Center, my colleagues Wayne Winegarden, John Childs and I estimate that these costs alone are a staggering $431 billion annually. This is a cost markup of 30 cents on every dollar paid in taxes. And this is not even a complete accounting of the costs of tax complexity."

"David Keating of the National Taxpayers Union provides a useful perspective on how big the tax compliance industry is. According to his research, as of 2009 the income-tax industry employed "more workers than are employed at the five biggest employers among Fortune 500 companies—more than all the workers at Wal-Mart Stores, United Parcel Service, McDonald's, International Business Machines, and Citigroup combined." Without diminishing in any way the professionalism of tax attorneys, accountants and financial planners, all of these efforts produce nothing other than, well, tax compliance."

Saturday, April 23, 2011

The Problem With Sustainability

See David Friedman on "Sustainability" from EconLog. Here it is:
"As I mentioned in an earlier post, my university is big on "sustainability;" it has just been having an extended event designed to boost the idea. I responded to an email urging faculty members to introduce sustainability into one of their classes by asking if it was all right if I argued against it in mine, and suggesting that a program which consisted entirely of presentations on one side of an issue looked more like propaganda than education.

This is from David Friedman, "Sustainability: Empty Rhetoric or a Bad Idea." In his post, he links to a 50-minute audio of his talk at Santa Clara University. I haven't listened to the talk yet, but I'm guessing that in it, he makes some of the points he made in some earlier posts.
Specifically, after he had proposed a definition of sustainability and pointed out its problems, a commenter wrote:

The generally accepted definition comes from the Brundtland Report, which defines sustainable development as: "development that meets the needs of the present without compromising the ability of future generations to meet their own needs".

David replied:

There are two problems with this definition. The first is that implementing it requires us to predict what the future will be like in order to know what the needs of future generations will be. Consider two examples:

1. The cost of solar power has been falling steeply. If that fall continues, in another couple of decades fossil fuels will no longer be needed for most of their current purposes, since solar will be a less expensive alternative. If so, sustainability does not require us to conserve fossil fuels.

2. A central worry of environmentalists for at least the past sixty years or so has been population increase. If that is going to be the chief threat to the needs of future generations then sustainability requires us to keep population growth down, as many have argued.

A current worry in developed countries is population collapse, birth rates in many of them being now well below replacement. With the economic development of large parts of the third world, that problem might well spread to them. If so, sustainability requires us to keep population growth up, to protect future generations from the dangers of population collapse and the associated aging of their populations.

It's easy enough to think of other examples. Generalizing the point, "sustainability" becomes an argument against whatever policies one disapproves of, in favor of whatever policies one approves of, and adds nothing beyond a rhetorical club with which partisans can beat on those who disagree with them.

David has never been intimidated by some university administrators' or faculty's desires to turn their universities into propaganda mills. But think about the unseen: what happens at the hundreds (at least) of universities where there is no one like David Friedman?"

Almost 90% of health care costs are paid with "other people's money"

Great post from Mark Perry at Carpe Diem. See Because They're Not Spending Their Own Money, Patients Aren't Consumers, But They SHOULD Be. Here is a very telling graph:

Air Quality Improved From 1980-2009

See Today Is Earth Day: What About a Capitalism Day? at the "Carpe Diem" blog. Here is a chart it shows:

Coal Is Cleaner Than Ever And Might Keep Getting Cleaner

See Energy Fact of the Week: Sulfur Dioxide Emissions from Coal Have Declined 54 Percent By Steven F. Hayward of AEI. It has a great graph. Here is that post:

"Since it’s Earth Day this Friday, it’s worth having a look at one especially instructive energy-pollution linkage—in this case, the trend in the amount of coal used to generate electricity and in other industrial processes, and sulfur dioxide emissions from that use of coal.

As the figure below shows, the amount of coal used in the United States has more than tripled since 1970 (up 225 percent); as mentioned here previously, we moved heavily to coal starting in the late 1970s as a means to discontinue using imported oil to generate electricity. But over this same time period, sulfur dioxide emissions from coal have declined by 54 percent. Moreover, the Environmental Protection Agency projects a further 50 percent decline in SO2 emissions from current levels over the next 25 years, as shown in the second figure below.

This is one of the best examples (I’ll show others next week) of how fossil fuel consumption can increase while pollution can fall at the same time. The chief causes of this decline are technology—cost-effective “scrubbers” to remove sulfur dioxide from the waste stream—and resource substitution: we started using much more low-sulfur coal from the western United States. (Deregulation of railroads in the 1980s also plays a part in this story."

Public Pensions Might Still Be Underfunded, Despite What The Association of State Retirement Administrators (NASRA) Says

See Public Pensions Fire Back on Investment Returns By Andrew Biggs of AEI. It has a good chart. Here is that post:

"Reuters and Pensions and Investments report on a new study released yesterday by the National Association of State Retirement Administrators (NASRA) that supposedly “slams” a 2010 paper by Northwestern’s Josh Rauh and Rochester’s Robert Novy Marx for concluding “that unfunded state pension liabilities total $3 trillion by using inaccurate liability and return assumptions.”

The NASRA study presented a chart similar to the one below that tracked public pension assets over time, arguing that the Rauh/Novy-Marx study was misleading because it focused on pension assets when they were at a low point and ignored their recovery since. This, the NASRA paper argues, shows why pension accounting shouldn’t worry very much about plans’ investment risk. Over time it all evens out, they argue.

NASRA is right that plan assets have recovered from their 2008 lows, if not yet back to 2007 levels. What the paper doesn’t mention is that public plan accounting assumes that investments will earn 8 percent per year, every year. So to truly catch up, pension assets not only need to make up for their dollar losses but also for the assumed 8 percent annual returns that they have been missing. The red line in the chart indicates the level of plan assets assuming 8 percent annual interest.

What the red line shows is that the recovery has been a lot less healthy than you’d think. In 2008, assets were 33 percent below their projected level. By 2009 the gap had been closed to 28 percent, and by 2010 to 27 percent. And those were years with pretty solid investment returns. But even if pensions continued at that pace, which well exceeds their 8 percent expected returns, they wouldn’t catch up to 2007 funding levels until around 2020.

A broader point: NASRA argues that proponents of market valuation for public pension liabilities are saying “that a public pension fund with a diversified portfolio can be expected to return 4 percent to 5 percent over next 20 to 30 years. We believe that is an unrealistically low expectation.”

That’s actually not at all what market valuation says. What it argues is that the value of a liability doesn’t go down if you fund it with riskier assets. If I have a liability in the future that I will fund with assets set aside today, shifting those assets from bonds to stocks changes the value neither of the assets nor the liability. When pensions invest in riskier assets—as they are doing—they lower their current contributions, but place a higher contingent liability onto taxpayers to bail out the pension fund should investment returns go south. The total cost of funding the liability—upfront costs plus contingent liabilities—is always the same. (See my Retirement Policy Outlook from last year for more details. Also see this Reuters story with details of recent congressional hearings.) But since public pension accounting cares only about upfront costs and ignores contingent liabilities, pension managers think that more risk equals better funding. That’s a point of view that seems worth slamming."

Friday, April 22, 2011

Could Biofuel Policies Increase Death and Disease in Developing Countries?

Click here to read this paper by Indur M. Goklany. Here is the abstract:

"Higher global demand for biofuels, driven mainly by policies in industrialized countries with the stated purpose of enhancing energy independence and retarding climate change, has contributed to rising global food prices. As a consequence, more people in developing countries suffer from both chronic hunger and absolute poverty. Hunger and poverty are major contributors to death and disease in poorer countries. Results derived from World Bank and World Health Organization (WHO) studies suggest that for every million people living in absolute poverty in developing countries, there are annually at least 5,270 deaths and 183,000 Disability-Adjusted Life Years (DALYs) lost to disease. Combining these estimates with estimates of the increase in poverty owing to growth in biofuels production over 2004 levels leads to the conclusion that additional biofuel production may have resulted in at least 192,000 excess deaths and 6.7 million additional lost DALYs in 2010. These exceed WHO’s estimated annual toll of 141,000 deaths and 5.4 million lost DALYs attributable to global warming. Thus, policies intended to mitigate global warming may actually have increased death and disease indeveloping countries."

Megan Mcardle Explains Why Kevin Drum At Mother Jones Is Wrong About Taxes

See Just a Little Tax Hike ... Here is that post:

"Kevin Drum doesn't think it will be so hard to solve our fiscal problems with tax hikes:

I said that federal taxes had averaged 21% of GDP over the past 30 years, and Ross correctly points out that it's federal spending that's averaged 21%. On a macro level this might or might not matter ("to spend is to tax"), but it does matter if we're trying to figure out how voters will react to an increase in the total tax take. However, I continue to believe that the impact would be much less than Ross thinks. The federal tax take was around 20% of GDP during the Clinton era, so here's what we're talking about: letting the Bush tax cuts expire in a couple of years and then raising tax rates by about four or five points of GDP over the next 20 or 30 years. Done reasonably and fairly, I just don't believe that an increase this gradual would be wildly oppressive.

This is not true, and it's important to point out why it's not true. First of all, while it is technically true that the federal tax take was "around 20% of GDP" during the Clinton era, this was only true at the height of the stock market bubble. Tax revenues exceeded 20% of GDP for exactly one year: 2000. The average tax take under Clinton was 19%. And if you exclude 1999 and 2000, the very height of the bubble, it was more like 18.5%.

Without arguing about whether our tax system is fair or not, the fact is that the federal income tax is the most variable part of the code, and the federal income tax is now very progressive; it collects most of its revenue from people at the top. (Whether it should collect even more is an argument for another day.) Because it collects most of its income from people at the top, and because the incomes of the wealthy are more variable than the incomes of the poor and middle class (Warren Buffett's income can drop by $300,000; mine can't), we're going to get deep troughs in recessions, and high peaks in boom times. We will get particularly high peaks when the booms are delivering huge chunks of income to a handful of people in a very short timeframe. According to the CBO, capital gains receipts alone, which more than doubled in Clinton's second term, accounted for more than 30% of the increase in income tax receipts above the rate of GDP growth. Obviously the ancillary ordinary income, like banking fees, also contributed substantially. Between 1996 and 2000, payroll taxes increased a tidy 30%. But income taxes increased by 55%. In 1996, social insurance receipts were about $500 billion, while income tax receipts were $650 billion. By 2000, payroll tax receipts had grown to $656 billion--but the income tax was collecting over a trillion. Today they're roughly at par again (though that won't last--social insurance contributions will drop as the worker to population ratio declines.)

Saying "all we have to do is go back to the tax rates under Clinton" is effectively saying "all we need is another asset price bubble that funnels a huge amount of money into the pockets of the rich". This seems neither particularly feasible, nor desirable.

If we pick, somewhat optimistically, the mean tax take of the Clinton years, that means that we need a tax hike of 5-6% of GDP. And not over 20-30 years. The CBO's baseline projection of the budget deficit, which assumes that the Bush tax cuts expire (and that the AMT is allowed to hit middle class incomes, and that the "doc fix" doesn't happen), is for budget deficits in the range of $750 billion. If you allow the Bush tax cuts to expire, but assume that we are not going to slash Medicare reimbursements for doctors by 30%, or let the AMT hit people making $75,000 a year, then it's more like $900 billion. If you assume that discretionary spending grows roughly in line with nominal GDP, it will be $1.2 trillion. Maybe that's only 5% of GDP by 2021. But it's still not a healthy and sustainable level of borrowing; we're going to have to raise taxes pretty quickly.

A tax hike of 5-6% of GDP doesn't sound like much. But that's a big tax hike if your baseline is 19%--it means that everyone's taxes go up by about a third. If the equilibrium tax revenue at Clinton rates is more like 18-18.5% of GDP, then obviously, they have to go up even higher, from a lower baseline. If you try to concentrate the pain on the wealthy or corporations, it's an even bigger whack. Meanwhile, state and local taxes will be going up too; they have many of the same pension and entitlement problems that the federal government does.

These aren't little adjustments. They're huge changes in the overall tax burden, and they will have big effects on peoples lives, and the economy."

Since 1979, The Top 1% Of Income Earners Have Increased Their Share Of Taxes Paid Despite Lower Rates

See Tax Rates and Share of Tax Revenues from Top 1% at Carpe Diem by Mark Perry. It shows a great chart. Here is that post:

"The chart above shows the relationship over time (from 1979 to 2007) between: a) the top marginal income tax rate, and b) the share of total income taxes paid by the top 1% (data). In 1979 the top marginal income tax rate was 70% and 18.3% of the total taxes paid were collected from the top 1% of taxpayers. By 2007 the top tax rate was 35% (half of the 1979 rate), and the tax share of the top 1% had more than doubled to 39.5% (from 18.3% in 1979).

The historical record shows an inverse relationship between the highest marginal income tax rate and the share of taxes collected from "the wealthy." It's a relationship to keep in mind during the current tax policy debate, where Obama wants to increase tax revenues by raising tax rates for "the rich," and Rep. Ryan alternatively suggests a cut in the top marginal rate to stimulate economic growth, which would likely increase tax revenues from the wealthy, and increase overall tax revenue. "
Here is the info from the Tax Policy Center Historical Shares of Federal Tax Liabilities for All Households

Thursday, April 21, 2011

Can Taxing The Rich Generate Enough Revenue To Balance The Budget?

See Where the Tax Money Is, a WSJ editorial from 4-17-2011. Excerpts:

"Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.

Say we take it up to the top 10%, or everyone with income over $114,000, including joint filers. That's five times Mr. Obama's 2% promise. The IRS data are broken down at $100,000, yet taxing all income above that level throws up only $3.4 trillion. And remember, the top 10% already pay 69% of all total income taxes, while the top 5% pay more than all of the other 95%.

We recognize that 2008 was a bad year for the economy and thus for tax receipts, as payments by the rich fell along with their income. So let's perform the same exercise in 2005, a boom year and among the best ever for federal revenue. (Ahem, 2005 comes after the Bush tax cuts that Mr. Obama holds responsible for all the world's problems.)
In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren't nearly rich enough to finance Mr. Obama's entitlement state ambitions—even before his health-care plan kicks in."

Taxing the Rich Won't Increase Revenues

See Mr. Obama: Taxing the Rich Won't Increase Revenues by Michael Barone AEI. Excerpt:

" a matter of simple arithmetic, as is clear from a chart reproduced on the Wall Street Journal editorial page showing the total amounts of taxable income of each group.

The chart showed that if the government had simply confiscated every dollar from those reporting more than $1 million taxable income in 2008, it would not have gotten the $1.3 trillion needed to close the current federal budget deficit."

The Folly of Renewable Electricity

Great post by Benjamin Zycher AEI. Excerpts:

"The energy content of wind flows and sunlight is unconcentrated, which means that massive amounts of land and materials have to be employed to make renewable power even technically practical. A 1,000-megawatt gas plant needs about 10-15 acres; a 1,000-megawatt wind farm needs about 50,000 acres (78 square miles). A square meter of solar receiving capacity even in theory is only sufficient to power one 100-watt light bulb; a solar plant of only 100 megawatts would require about 1,250 acres (2 square miles).

Unlike conventional power plants, wind and solar facilities have to be sited where the wind blows and the sun shines with sufficient intensity. The upshot: higher transmission costs, estimated by the California Public Utilities Commission at $12 billion for the 33 percent requirement. Moreover, good sites are limited; as the production of renewable electricity is expanded, increasingly unfavorable sites will have to be used, and so the cost of renewable power will rise and its reliability will fall. This means, among other things, that future scale economies in renewable power production--promised so blithely by so many--are a mirage.

It gets worse: Wind and solar facilities are only about a quarter to a third as reliable as conventional power plants, because wind and sunlight cannot be scheduled, and neither can renewable electricity production. Therefore, conventional backup capacity must be built along with the wind farms and solar stations in order to prevent blackouts. A study done for the California Energy Commission estimates that this needed backup capacity will be almost 5,000 megawatts; estimates from the Energy Information Administration suggest that the capital costs alone will be well over $5 billion.

These are among the reasons that the EIA estimates that wind and solar power cost 100-300 percent more than conventional power. This is consistent with a recent finding by Professor Constant Tra that each percentage-point increase in a renewable requirement raises commercial and residential rates by 4-10 percent. The proponents' claim that the 33 percent requirement will increase costs by only 7 percent is a pipe dream.

A cleaner environment is worth it, you say? Not so fast. As counterintuitive as it may seem, increased reliance on wind and solar power will hurt the environment, not because of such phony issues as endangered cockroaches, used by the environmental left as a tool with which to obstruct the renewable energy projects that they claim to support. Instead, this damage will be real, in the form of greater air pollution. The conventional generators needed to back up the unreliable wind and solar production will have to be cycled up and down because the system operators will be required to take wind and solar generation when it is available. This means greater operating inefficiency and more emissions. That is precisely what a recent engineering study of the effects of renewables requirements found for Colorado and Texas."

Does A Soda Tax Reduce Obesity?

See Slim Odds: Empirical studies provide little evidence that soda taxes would shrink Americans’ waistlines by Jonathan Klick (University of Pennsylvania School of Law)and Eric A. Helland (Claremont McKenna College). Excerpt:

"The most sophisticated research in this field using actual state soda taxes to identify the effect of such taxes on obesity is done by Jason Fletcher, an economist at the Yale School for Public Health, and co-authors. Fletcher et al. have examined the effects of taxes on consumption and ultimate weight effects for both adults and children. During the period 1989–2006, an average of 21 states taxed soda, with an average rate ranging from 4.1 to 5.1 percent. In a research paper published in the Journal of Public Economics, Fletcher et al. used panel data methods to account for baseline differences across states (e.g., people are generally fatter in Pennsylvania than in Utah) as well as underlying national trends. Controlling for those factors, the researchers found that a one percent increase in the soda tax leads to a five percent reduction in calories consumed from sodas among young people age 3–18. While this result is statistically significant, Fletcher et al. call the reduction “modest” because sodas are only a small part of the average person’s total caloric intake.

Interestingly, the researchers did not find that the children substituted toward diet sodas or water, as is generally assumed by proponents of sugarsweetened soda taxes. Instead, they found that the 6-calorie reduction in soda consumption is accompanied by an 8-calorie increase in milk consumption and a 2-calorie increase in juice and juice drink consumption. That is, any obesity-related benefit of decreased soda consumption that comes from a soda tax is, on average, more than offset by increased caloric consumption from other beverages. As expected, given these results, when the researchers directly examined data on the body mass index of the children in their dataset, they found no statistically significant effect of soda taxes on body weight or the likelihood of being obese or overweight. In fact, although the results are not significant, they found a positive relationship between increases in soda taxes and these metrics."

Speculators Don't Seem To Be Driving Up Oil Prices

See Are Speculators Gouging Us at the Pump? by Jerry Taylor and Peter Van Doren of Cato. Excerprt:

"If this [speculation] is going on we would expect to see some sort of inventory buildup. While crude inventories in the U.S. are increasing, they always increase at this time of year, and this year's increase is well within the normal range. More important, gasoline inventories are decreasing and decreasing much more rapidly than normal. Hence, there's no evidence that speculators are reducing the supply of crude or gasoline through increased storage.

Producers, however, could react in the same way to higher futures prices by decreasing current production to allow more future production at higher prices. Alas, we see no evidence of suspicious reductions in producer output that might give this story credence.

More formal statistical tests (known as "Granger-causality tests" to economists) examine the impact of traders' behavior on prices within futures markets. Do futures prices follow the bets taken by market participants or do those bets follow prices? A federal interagency task force undertook one such econometric analysis in 2008 and found that futures price changes from January 2000 to June 2008 preceded net position changes by any group of traders. An updated and more rigorous econometric study by economists Bahattin Buyuksahin and Jeffrey Harris found the same thing for July 2000-March 2009.

These findings undermine the claim that speculators' behavior increases gasoline prices. "The lack of even Granger-causality (let alone true causality) between positions and prices undermines the prospect that speculative trading has driven recent dramatic price swings in the crude oil futures market," concludes Buyuksahin and Harris. "Rather, we believe it more likely that both prices and positions react to the same factors, such as global demand and supply.""

Wednesday, April 20, 2011

Paul Zak On Why And How Markets Promote Morals

See Moral Markets: Virtuous Business is Not an Oxymoron. Excerpt:
"Encroaching on this "all about me mentality" comes a number of books that argue that profitable businesses promote virtues. A compelling one I read recently was T.R. Malloch's Spiritual Enterprise: Doing Virtuous Business. Malloch shows, though theory and examples, that being in business for the long-haul not only means creating economic value, but creating spiritual value. The theme of Malloch's book is that transcendent values matter for managers, employees, and their customers; as a result, businesses ignore values at their peril. My late colleague Peter Drucker promoted the view that businesses were societies in miniature, and were therefore places individuals sought to fulfill human needs such as the desire for accomplishment and respect, well beyond simply earning a living (see The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management. Malloch's vision takes this a step further by advocating for the provision of transcendent needs.

Through a series of interesting case studies, Malloch shows that fostering virtues such as compassion, generosity, and trustworthiness results in fewer days lost to sickness, improved morale and higher productivity. All this occurs by changing "work" from a task that one must do, to a calling that draws on our better social natures. Seems reasonable to me, and the companies that have done this are impressive.

Of course, I'm biased. I recently put together book called Moral Markets: The Critical Role of Values in the Economy. This book was the culmination of a three year research program by a transdisciplinary group of scholars funded by the John Templeton Foundation and organized by the Gruter Institute for Law and Behavioral Research. Anthropologists, neuroscientists, philosophers, lawyers, psychologists, and economists came together to ask if there was any relationship between morals and markets. Spanning disciplinary boundaries, we found not only that markets require morals, but that markets can promote moral behaviors. Markets require morals because in modern impersonal exchange, a police officer or lawyer cannot be in every transaction-it is too costly. Thus, most exchange occurs in the shadow of enforcement, but absent explicit oversight and thus requires that parties transact in good will. Anthropological studies have also shown that people in small scale societies are more likely to "play fair" in experiments run in the field when they engage in market exchange. This suggests that they understand that uncoerced exchange benefits both parties, and they have applied the win-win idea to other aspects of their lives (see Joe Henrich's and coauthors' book Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies."

More on this topic at Reason by Ronald Bailey:

Do Markets Make People More Generous?: A recent study of 15 small-scale societies suggests yes

Science Shows That Markets Make People Fairer

Veronique de Rugy separates economic fact from economic myth in ObamaCare

See The Truth About Health Care Reform and the Economy at the Reason site. Excerpts:

"Myth 1: Health care reform will reduce the deficit.

Fact 1: Health care reform will increase the deficit.

The Patient Protection and Affordable Care Act includes many provisions that have nothing to do with health care: the CLASS act, a student loan overhaul, and many new taxes. These provisions don't change the health care system. They just raise money to pay for the new law. Strip them away and the law’s actual health care provisions don't lower the deficit—they increase it!

...the Congressional Budget Office estimates that the health care act will reduce deficits by $210 billion (note that this estimate differs from the widely cited $143 billion figure used during the lead-up to the passage of the act). During this same time period, however, the actual health care reform provisions of the law will increase deficits by $464 billion.

Myth 2: The U.S. health care system is a free-market system.

Fact 2: Roughly half of all U.S. health care is currently paid for by the government.

Even in the absence of the health care reform law, government programs including Medicare and Medicaid already fund almost half of American health care. Roughly a third of the remaining expenditures are funded by private insurers—mainly through subsidized and highly regulated employee plans. Not exactly a free market.

... state and federal entities make up over half of the health insurance market. Of course, the Patient Protection and Affordable Care Act will only increase the share of government involvement in the health care market.

Myth 3: Medicare spending increases life expectancy for seniors. Reductions in Medicare spending will therefore reduce their life expectancy.

Fact 3: Increases in life expectancy for seniors are due to increased access to health care, not to Medicare.

While Medicare spending has certainly decreased seniors’ out of pocket health care expenses (by 1970, Medicare reduced out of pocket expenses by an estimated 40 percent relative to pre-Medicare levels), the program’s effect on mortality is much less clear.

[looking at]... mortality rates by age during the periods immediately before and after Medicare’s implementation... there is little difference in the observed mortality of men and women during these time periods. This observation is supported by the economic literature.

Economists who examine the effects of Medicare on mortality have found little evidence of a causal relationship, especially in recent years. For example, MIT’s Amy Finkelstein and Wellesley’s Robin McKnight used several empirical approaches and found no evidence that Medicare played a role in the substantial declines in elderly mortality that followed its implementation. Instead, they write, their evidence suggests that,

the explanation lies in the fact that, prior to Medicare, lack of legal access—rather than lack of insurance—was the main barrier to receiving hospital care when individuals had life threatening, treatable conditions.

Other economists, writing at the Chicago Federal Reserve, have found that Medicare did reduce mortality rates immediately following its implementation. But they also found that the effects of Medicare on mortality have been diminishing ever since. These researchers found that by the mid-1980s, there is no evidence of Medicare having any effect on mortality. As legal access to the health insurance market for the elderly has expanded over time, whatever effect Medicare once may have had on mortality has since disappeared."

Limo Companies Try To Reduce Competition In Nashville

See IJ Takes on the High-End Limo Cartel in Nashville at Carpe Diem by Mark Perry. Here is that post:

"From the Institute for Justice: "Until 2010, sedan and independent limo services were an affordable alternative to taxicabs in the Music City. A trip to the airport only cost $25. But in June 2010, the Metropolitan County Council passed a series of anti-competitive regulations requested by the Tennessee Livery Association - a trade group formed by expensive limousine companies. These regulations force sedan and independent limo companies to increase their fares to $45 minimum.

The regulations also prohibit limo and sedan companies from using leased vehicles, require them to dispatch only from their place of business, require them to wait a minimum of 15 minutes before picking up a customer and forbid them from parking or waiting for customers at hotels or bars. And, in January 2012, companies will have to take all vehicles off the road if they are more than 7 years old for a sedan or SUV or more than 10 years old for a limousine.

These regulations have nothing to do with public safety. Nashville is stooping to economic protectionism to put affordable car services out of business in favor of more expensive services that happen to have more political power. Many Nashville residents who regularly use limos and sedans will be forced to spend twice as much money for exactly the same service and hard-working sedan drivers will be driven out of business.

The Institute for Justice teamed up with three Nashville entrepreneurs and will file a federal lawsuit today in the U.S District Court for the Middle District of Tennessee to vindicate the right of Nashville's limo and sedan operators to earn an honest living free from excessive government regulation."

MP: This reminds me of something I read recently on Seth Godin's blog:

"Companies that operate in a free market generally work as hard as they can to make that market not free. The free market is a great idea, which is why we need to be careful when market incumbents lobby to make it un-free."

Thanks again to the Institute for Justice for its ongoing efforts to battle economic protectionism and challenge market incumbents, who are always looking for ways to use the political process to thwart competition, raise prices and make the free market less free."

Tuesday, April 19, 2011

Federal Tax Rules: 72,536 Pages

This from Chris Edwards of Cato. In 1984 it was 26,300.

Ten Thousand Commandments (and big government)

Great post over at the Competitive Enterprise Institute Blog by Ryan Young. Here it is:

"The 2011 edition of Wayne Crews’ “Ten Thousand Commandments” was released today. The annual study gives a big-picture view of the regulatory state. You can read it here. Some of the main findings:

■Federal regulations cost $1.75 trillion per year. That’s equivalent to about half of federal spending. Government’s cost is actually about 50 percent bigger than most people think.
■Agencies issued 3,752 final rules in 2010. At that pace, a new rule comes into effect every two hours or so.
■Another 4,225 rules are in the pipeline right now.
■The Federal Register hit an all-time high 81,405 pages in 2010.
■Economically significant regulations are way up. These are defined as rules that have over $100 million of economic impact. There were 224 in 2010. That’s a 22 percent increase over 2009′s 184.

Wayne and other CEI scholars will have a lot more to say about regulations and how to reform them in the coming weeks; keep an ear out."

Sunday, April 17, 2011

Some More Problems With NY Cit's Rent Controls

See Silver's wrong on rent: Making regulations even more ridiculous by Nicole Gelinas of the NY Post. Excedrpts"

"Consider what Lopez had to say: “This legislation will help stabilize our working-class neighborhoods.” Well, no. Nearly a quarter of rent-regulated households earn more than $70,000 a year, showing how random a process it is.

Moreover, because rent regulation holds down apartment supply, lots of other poor people have to pay more. As of 2008, non-regulated tenants paid more of their income in rent — 31.9%, compared to 31.7% for stabilized tenants. Plus, their rents are higher — $1,200 a month on average, compared to $925 for regulated rents.

Silver stayed away from the poor, focusing on the middle class. “This legislation will help keep middle-class families from being priced out of their homes,” he promised. Does Silver seriously think that people earning $300,000 desperately need the state’s protection? Does he think that people with the resources to pay $2,500 or $2,800 for an apartment need the might of the state’s resources?

There’s no reason why middle-class people in the city should get special “protection” from, well, life. Everyone wants to live near a nice city, and in a nice place — that’s why prices go up.

Indeed, the city’s middle class seems to understand this, despite Silver and the best efforts of housing “advocates.” When I first wrote on this topic a month ago, I braced for negative comments when real-estate website Curbed tagged my piece. Instead, out of 14 relevant comments, only three favored rent regulations. “Anyone that is capable of basic reason can figure out supply and demand,” one commenter wrote. “These laws continue because of pandering, plain and simple.” Wrote another: “If you go to [The] Bronx or Brooklyn you will find a 2 bedroom renovated apt under $1300/month. Why does everybody have to live in Manhattan?”

Social activist Mary Jones said her job was to comfort the afflicted and afflict the comfortable. Silver is doing exactly the opposite — keeping those lucky enough to be comfortably cocooned in a cheap apartment happy, while making rent difficult for the rest of us."

The top one percent paid 27.6 percent of all federal taxes in 2005

See David Cay Johnston Plays with the Facts at EconLog by David Henderson. Here is that post:

"In the latest issue of our local left-wing weekly, the Monterey County Weekly, David Cay Johnston has an article, "Tax Facts Hardly Anyone Knows." He lists and discusses 9 purported tax facts. Many of them are right. But I want to focus on one that, although correct, he presents in a misleading way, as if his goal was to mislead.

Johnston writes:

It's true that the top 1 percent of wage earners paid 38 percent of the federal income taxes in 2008 (the most recent year for which data is available). But people forget that the income tax is less than half of federal taxes and only one-fifth of taxes at all levels of government.

The top 1 percent of wage earners paid 38 percent of the federal income in 2008. But the income tax is less than half of federal taxes and one-fifth of taxes at all levels of government.

Social Security, Medicare and unemployment insurance taxes (known as payroll taxes) are paid mostly by the bottom 90 percent of wage earners. That's because, once you reach $106,800 of income, you pay no more for Social Security, though the much smaller Medicare tax applies to all wages. Warren Buffett pays the exact same amount of Social Security taxes as someone who earns $106,800.

All true statements. But if he wanted to inform the reader without misleading, he would have presented the data on the percent of all federal taxes paid by the top 1 percent. In their book, Public Finance, 9th edition, Harvey S. Rosen and Ted Gayer, give a table showing that in 2005 [and things haven't changed much since then] the top one percent paid 27.6 percent of all federal taxes.

Oh, and the same table in Rosen and Gayer shows that the average tax rate (all federal taxes) on the bottom quintile is 4.3% and on the top 1% is 31.2%. The top 1% pays a bigger percent of its income in federal taxes than any other part of the income distribution. But David Johnston doesn't tell you that."

Saturday, April 16, 2011

Alan Reynolds On The Problems Of High Taxes

See Obama's Soak-the-Rich Tax Hikes Won't Work: Income tax revenues have been remarkably stable at 8% of GDP, regardless of tax rates. The way to increase revenue is to grow the economy from the 4-14-11 WSJ. Excerpts:

"The individual income tax brought in 7.8% of GDP from 1952 to 1979 when the top tax rate ranged from 70% to 92%, 8% of GDP from 1993 to 1996 when the top tax rate was 39.6%, and 8.1% from 1988 to 1990 when the highest individual income tax rate was 28%. Mr. Obama's hope that raising only the highest tax rates could keep individual tax receipts well above 9% of GDP has been repeatedly tested for more than six decades. It has always failed.

Federal revenue from the individual income tax exceeded 9% of GDP only eight times in U.S. history—during World War II (9.4% in 1944), the recessions of 1969-70, 1981-82 and 1991-92, and the tech-stock boom-bust of 1998-2001. Revenues were a high share of GDP during the three recessions because GDP fell.

The situation of 1997-2000 was unique. Individual income tax revenues reached an unprecedented 9.6% of GDP from 1997 to 2000 for reasons quite unlikely to be repeated. An astonishing quintupling of Nasdaq stock prices coincided with an extraordinary proliferation of stock options, which the Federal Reserve's Survey of Consumer Finances found were granted to 11% of U.S. families by 2001, and with a reduction in the capital gains tax to 20% from 28%, which encouraged much greater realization of taxable gains through stock sales. Revenues from the capital gains tax rose to 10.8% of all individual income tax receipts in 1997 and 13% by 2000. The unexpected revenue windfalls in President Bill Clinton's second term were largely a consequence of lower tax rates on capital gains.

Using IRS data, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley have estimated that realized capital gains accounted for just 13%-22% of reported income among the top 1% of taxpayers from 1988 to 2006, when gains were taxed at 28%—but that fraction swiftly reached 29%-32% in 1998-2000, when the capital gains tax fell to 20%.

The average tax rate of such top taxpayers was mechanically diluted by the greatly increased realizations of capital gains after 1997 and 2003, since a larger share of reported income consisted of capital gains. Yet the amount of taxes paid by top taxpayers reached record highs for the same reason—there was more revenue to be had from taxing many gains at a low rate than from taxing fewer gains a high rate. Nobody can be forced to sell assets in taxable accounts. To complain that a low tax on realized capital gains is "unfair" is to suggest it would be fairer for affluent investors to sit on unrealized gains, as though an unpaid tax is morally superior to one that collects billions."

"Among the top 400 taxpayers (rarely the same people from one year to the next), the average tax rate fell to 22.3% in 2000, when the capital gains tax was 20%, from 29.9% in 1995 when the capital gains tax was 28%. But that same IRS report also shows that real tax revenues from the top 400 more than doubled after the capital gains tax fell, rising to $11.8 billion in 2000 from $5.2 billion in 1995, measured in 1990 dollars.

The same thing happened after 2003, when the capital gains tax was further reduced to 15%. The average tax rate of the top 400 fell to 16.6% in 2007 from 22.9% in 2002. Even though there was no stock market boom as in 1997-2000, real revenues of the top 400 nevertheless doubled again—to $14.5 billion in 2007 from $6.9 billion in 2002. Instead of paying less when the capital gains tax rate went down in 1997 and 2003, the top 400 instead paid much, much more."

Schumpeter Meets The iPad

Great post by Don Boudreaux at Cafe Hayek. See iCreative Destruction.
"Not long ago people complained that Borders and Barnes & Noble were causing independent book retailers to shut their doors. Now Rep. Jesse Jackson, Jr. is warning that the iPad and other e-book readers are hurting Borders and Barnes & Noble.‘ (HT Charlie Frey and Nick Mueller)

The jobs they are a-changin’. Competition and progress are like that."

Here are the links:

Borders patrol - competition in the book industry by Nick Gillespie of Reason. It is fairly long and was written in 1995.

Rep. Jesse Jackson Jr. Blames The iPad For Killing Jobs

Do We Need To Raise Taxes On The Wealthy?

I submitted an op-ed article to the San Antonio Express-News about this issue. It looks like it will not get printed. In it, I disagreed with the idea that we need to raise taxes on the wealthy and upper income groups. The article that I responded to was Millionaires and their tax request.

What I submitted is below. One thing I should add is that economist Veronique de Rugy wrote at the Reason magazine site the federal government has never been able to collect 21 percent of GDP in tax revenues. Even in the 1950s when the highest tax rate was over 90%.

"I disagree with investment banker John Kortenhaus who wants to increase taxes on the wealthy (“Millionaires and their tax request,” April 2).

For one, he says “trickle-down” economics doesn’t work, that the spending of the rich won’t create jobs. But we would have to compare this to how well government spending creates jobs and some economists are skeptical of that, too. There is no guarantee that the federal government will spend the money wisely.

Then he says “the wealthy ought to pay progressively higher percentages of their incomes in taxes because they benefit more” from government. It might be true the rich get more from government, but that does not necessarily prove progressive taxes are a good idea.

Let’s look at a flat-rate tax system. With a tax rate of 20%, someone earning $100,000 pays $20,000 in taxes, ten times what someone who earns $10,000 pays.

That seems equitable: You make ten times as much, so you benefit ten times as much from government. Paying ten times as much in taxes covers your benefits.

I am not aware of any scientific study that proves the rich receive disproportionate benefits from government.

He also says “many inherited their wealth.” But according to the book The Economics of Macro Issues, “current living standards are chiefly determined by the incomes people have earned for themselves” and not inheritance.

He then also says some inventors are lucky and don’t deserve their high incomes. But how would the government figure out who was lucky and should have to pay progressive taxes and who was not lucky?

I don’t think they could and making all high-income people pay progressive tax rates and punishing some who don’t deserve it seems like using guilt by association.

Maybe someone like Bill Gates could not have gotten so rich one-hundred years ago since there were no computers.

This only shows that all of us are much better off than people once were. It does not tell us that the rich have disproportionately benefited from progress. The typical low-income person is also much better off now, too.

Where does all this progress come from? Partly from entrepreneurs, some of the people Mr. Kortenhaus wants to tax so much.

Recently the eminent economic historian Deirdre McCloskey said around the year 1800 economic growth took off because societies started to treat entrepreneurs, their innovations and their drive to earn high incomes with dignity.

High taxes on the rich might hurt the innovation that benefits us all. Is punishing them a good vision for America?

We have income mobility, too. From 2001-2007, 44% of the top income earners fell out of the top bracket (top fifth). High incomes may be fleeting. Why punish some for having a good year with extra-high taxes?

Relying too much on the rich for tax revenue can hurt budgets in a recession. The Wall Street Journal recently reported that high income earners saw even bigger losses than everyone else in the recession. That partly explains the big deficits in many states.

In 2007, 37% of federal income tax revenue came from the top 1% of income earners. If we tried to get even more revenue from them, when the next recession hits and they see larger than average income drops, the federal deficit will grow even more.

I do agree with him on eliminating some deductions and loopholes that allow the rich to pay less in taxes, but let’s be careful before we make the system even more progressive.

Finally, full disclosure: I am not a millionaire even though the one car I own is a Honda Civic."