Thursday, June 30, 2011

The Problem With The Movie "The Inside Job"

See A Review of HBO's "Too Big To Fail" by Phillip Swagel. Excerpt:
"In contrast, Inside Job is all about assigning blame. The documentary makes a moralistic case that the crisis was all the fault of Wall Street villains and their helpers. To be sure, mistakes can cross over into villainy - some creators of toxic securities must have known that they were not doing God's work. But Inside Job takes this to a populist extreme, assuming malevolent motivations and spattering blame through ambush interviews of hapless crisis participants who agreed to speak on camera (I took a pass when the filmmakers called me in the spring of 2009). The portrayal of Eliot Spitzer is especially ironic, with the former New York Governor shown as a saint commenting on all the sinners.

In truth, the striking feature of the crisis was how many different people committed mistakes: banks and other firms made bad loans and packaged them into subprime securities; rating agencies rubber stamped them as AAA; pension funds bought the junk assets; government officials missed the mounting problems; and so on. But surely also at fault are the multitude of individual homebuyers who turned into mini-speculators during the housing bubble. These folks are off the hook in Inside Job."

Phillip Swagel is a non-resident scholar at the American Enterprise Institute and a professor at the University of Maryland's School of Public Policy, where he teaches courses on international economics and is a faculty associate of the Center for Financial Policy at the Robert H. Smith School of Business. He was Assistant Secretary for Economic Policy at the Treasury Department from December 2006 to January 2009.

Gary Becker Explains Why Supply And Demand Explain Oil Prices, Not Speculators

See Fluctuations in Oil Prices, Speculation, and Strategic Reserves
"The International Energy Agency (IEA) recently coordinated the release onto the oil market of some of the strategic oil reserves of the United States, Japan, and ten other countries that hold reserves. The release was motivated by the rapid run up in oil prices from about $95 a barrel at the beginning of 2011 to over $120 a barrel in April of this year. I will discuss the fundamental determinants of the sharp fluctuations in oil prices, the role of “speculators”, and why it was unwise at this time to release oil from these reserves.

After the initial huge increase in oil prices following the Arab oil embargo in 1973, the magnitude of the fluctuations in these prices has been impressive. In 2008 dollars (i.e., adjusted for inflation), prices were about $40 a barrel in 1973, rose to $75 in 1981, fell to around $20 in the mid 1980s, and then stayed low until the early part of this century. These prices rose spectacularly to reach over $140 a barrel before the financial crisis hit, then fell sharply, and they have been recovering rapidly since the world economy again began to grow more rapidly.

Fundamentals in the oil market, that is, the supply and demand for oil, explain the vast majority of the large fluctuations in oil prices. Demand for oil changes over time because of recessions that reduce world output and hence demand for oil, and also because of world economic growth, especially in the developing world. Economic development raises oil demand because the demand for cars, and hence gasoline, increases rapidly with development, and because manufacturing and other sectors increase their demand for oil-based inputs.

To get a feel for the effects of demand changes on oil prices, consider a 3% increase from one year to the next in world demand for oil. The induced increase in price depends on how responsive (or elastic, in economists’ terminology) is the quantity of oil produced to higher oil prices. Oil production is not easily increased in the short run, especially with Opec controlling about 35% of the world supply of oil. A typical estimate of the short run world supply elasticity for oil is quite low at about 0.1. This number means that to induce a 3% increase in the supply of oil would require a 30% increase in oil prices, which is ten times at large as the increase in world demand. This example shows that the low elasticity of supply implies that even modest changes in the demand for oil have very large effects on its price.

The sensitivity of oil prices to underlying shifts in the fundamentals is made even greater by the fact that the short-run elasticity of demand is also about 0.1. To show the effects of such low demand elasticity, suppose world production of oil falls by about 1.5%. This is about the magnitude of the reduction in world supply from the civil war in Libya that cut its daily oil output from 1.4 million barrels of oil to about 200,000 barrels. For world consumption to fall by a mere 1.5% would require a 15% increase in price, given the very low demand elasticity for oil.

The actual fluctuations in prices due to shifts in supply and demand would be smaller than in these examples. When Libyan production fell and oil prices rose, other oil producers raised their supply of oil to take advantage of the higher prices. But since the overall supply elasticity is also very small, that response was small, so that oil prices still rose by a lot. Similarly, when world demand for oil grows by 3% and oil prices increase, demand for oil falls because of the higher prices. However, since the elasticity of demand for oil is also low, that response is limited, so that oil prices would still rise by a lot. A general analysis of market equilibrium shows that given supply and demand elasticities of 0.1, the percentage increase in price, after taking account of all these adjustments, would still be 5 times (rather than 10 times) the reduction in supply or increase in demand.

Moreover, both supply and demand for oil are more responsive to prices over longer time periods. This implies that the price rise due to more permanent falls in supply would initially be quite high, but they would get smaller over time. A higher maintained price of oil induces consumers to economize on the use of oil by buying fuel-efficient cars, by carpooling, and by driving fewer miles. Companies would substitute gas, coal, and other energy sources for oil. Similarly, on the supply side, higher long run oil prices induce greater efforts to discover new oil fields, whether deep under the sea, or in other remote places. Inefficient oil fields would also be brought back into production since their higher costs would be covered by higher oil prices.

Of course, speculators also are active in the oil market. They may buy oil futures in the expectation that oil prices will increase in the future, or sell oil futures-go “short”- hoping that prices fall in the future. If their expectations are correct, they help stabilize oil prices by increasing supply when prices are rising, and raising demand when prices are falling. Put differently, speculation tends to be stabilizing when speculators are making money because they have correct expectations about price movements, and destabilizing when they are losing money because their expectations turn out to be wrong. Given that the fundamentals imply large price movements from rather small shocks to supply and demand, and that successful speculation tends to moderate price movements, it is hard to believe that speculation has played a major role in causing the large swings in oil prices.

When the IEA countries on June 23 agreed to sell 60 million barrels (half by the US) from their oil reserves over the subsequent 30 days, it basically acted as a speculator on oil prices. Since oil was in plentiful supply then at about $110 a barrel, the only economic, as opposed to political, justification for the move was the belief that the IEA countries thought oil prices were too high and would be falling in the future. Perhaps these countries are privy to special information not available to private participants in the oil market about the recovery of Libyan oil production over the next few months, and about whether the unrest in the Middle East and North Africa would spread to other major oil producers in that region. Special knowledge is required to justify the IEA’s intervention because otherwise that information would already have lowered the price of oil. Such special knowledge does not seem likely, given that the unrest itself caught all the major governments (and private participants) by surprise.

Moreover, government oil stocks should not be used with the intent to profit from special information. Instead the information should be made public (if not based on politically sensitive information). Strategic reserves should be a hedge against supply disruptions during wartime or other crises when oil is not readily available even at so-called market prices. The only two previous interventions by the IEA were due to large supply shocks: the Persian Gulf War in 1991, and the effects of Hurricane Katrina, although the world oil market continued to function without major supply disruptions during these crises. The oil market is presently functioning very well, despite the high price of oil, so there is no good economic case for selling oil from strategic reserves at this time."

Costs and Benefits of Regulation

Great post by Ryan Young of the Competitive Enterprise Institute Blog.
"One of the major developments in regulation over the last 30 years has been the rise of cost-benefit analysis. At first, agencies squirmed and resisted. But then they realized something: they’re in charge of their own accounting. It’s not an independent audit. There’s no third-party involved. An agency is free to use its own standards and its own measures when calculating its own regulatory costs and benefits.

When it’s that easy to game the system, of course agencies are going to lowball their costs and highball their benefits. This is on full display in the Office of Management and Budget’s pithily titled “Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities.” [PDF]

On page 13 of the report, Table 1-1 lists cost-benefit numbers for selected agencies for their major rules (costing $100 million or more) over the last ten years. It can be hard to quantify costs with precision, so agencies typically report a range estimate. EPA, for example, estimates that its major rules cost from $23.3 billion to $28.5 billion over the last decade.

Benefits are much trickier to calculate. EPA estimates that its major rules have had benefits of $81.8 billion to $550.7 billion — a range of nearly a factor of 7. They might as well say they have idea. Why such a large range? Because EPA is trying to put dollar figures on items such as its air quality rules lowering the number of premature deaths. To do that, they have to pull numbers out of thin air.

Remember, these estimates don’t come from an independent third party. They come from EPA itself. There is a conflict of interest here. EPA wants to maximize its budget and its activities. The more beneficial its regulations appear, the more of them they can issue without too much pushback. So when it comes to putting dollar values on things that aren’t quantifiable, EPA has an incentive to pick the highest numbers it can.

That’s why agencies shouldn’t try to calculate their own regulations’ benefits. After all, nobody claims the tax burden is negative because the benefits those tax dollars confer outweigh their cost. It’s easy to calculate how much people pay in taxes. It’s also fairly easy to calculate how much regulations cost. But the fudge factor in benefit calculations is so high — and so prone to abuse — that it’s literally impossible to come up with an honest number. If it were possible, maybe EPA’s benefit range would be tighter than a factor of 7."

Wednesday, June 29, 2011

Setting the Record Straight: Trade Creates Wealth

Great post by Nick DeLong of the Competitive Enterprise Institute Blog.
"In his article “Suffering of Many Continues to Serve the Greed of Others,” Thomas Gibson argues we should convince our politicians to change the “destructive trade laws” that have caused business to locate overseas and as a result have “ravaged communities and families all over our country.” In support of his claim, Thomas list several specific examples where small communities lost a significant number of jobs relative to their total population and notes that more than 42,000 factories have been closed since the U.S. entered into the North American Free Trade Agreement (NAFTA). Furthermore, he cites the authors of Outsourcing America, Ron Hira and Anil Hara, stating that “Outsourcing signals that even hardworking, well-educated and highly skilled American workers may no longer be able to achieve success.”

I beg to differ. While small groups of individuals in specific, labor-intensive sectors across the nation may lose their jobs, the evidence suggests that United States’ trade policies have been had a net positive effect on the nation as a whole. In 2005 dollars, real GDP grew from $8,523.4 billion in 1993 to $13,248.2 billion in 2010. According to the Office of the United States Trade Representative (USTR), total U.S. employment actually increased from 110.8 million to 137.6 million people during the period (1993-2007) following the enactment of NAFTA. Finally, and perhaps most importantly, the new jobs that were created during the early years of the NAFTA agreement weren’t low-paying. In fact, most of the new job creation came in the form of high-wages in high-paying professions. Contrary to Thomas’ claim, it doesn’t look like the “well-educated” and “highly skilled” American citizen is in trouble.

Since the time of Adam Smith, the evidence of the benefits of free trade has been irrefutable. When countries trade, the wealthier nation is exposed to more competition and thus its citizens get the added benefit of a larger variety of products at a lower price. The poorer nation, on the other hand, benefits from the creation of a new industry that once didn’t exist within its borders and its citizens can begin buying essential goods with their new found increase of wealth. Trade is not a zero sum game. Let’s not ask our politicians to end our free trade policies. If we do, a few small groups of people will benefit at the expense of the many."

Legalizing Marijuana Could Save Thousands of Lives

See Great post by Adam Ozimek at The Atlantic.
"A recent op-ed in the New York Times by Sylvia Longmire tries to lower expectations for what legalization of marijuana could accomplish. It's all fine and good and be realistic, but I think the author oversells her pessimism. Here is her summary of the argument she is attempting to counter:
"FOR a growing number of American policy makers, politicians and activists, the best answer to the spiraling violence in Mexico is to legalize the marijuana that, they argue, fuels the country's vicious cartels and smugglers. After all, according to official estimates, marijuana constitutes 60 percent of cartels' drug profits. Legalization would move that trade into the open market, driving down the price and undermining the cartels' power and influence."

There are several debatable issues here, but she is mostly disagreeing with the notion that the "power and influence" of cartels would be "undermined" by legalization of marijuana.

Her main counterpoints can be summarized as:

1) They will still have 40% of their profits from other activities.

2) They could enter the legal marijuana market.

3) A growing share of profits come from other activities.

4) Given these other activities, "it's unlikely that Mexican cartels would close up shop in the event of legalization."

The first thing to note is that all of the above can be true, and we are still very short of showing that the power and influence of drug cartels would not be weakened, and that killings would decline by a significant amount.

Longmire doesn't debate whether the cartels get 60% of their revenue from Marijuana, but there is a lot of uncertainty regarding this number. A recent Rand study highlights the difficulty here. They find estimates of U.S. annual marijuana consumption ranging from 1,000 to 5,000 metric tons (MT), with one estimate as high as 9,830 MT. Then, they put the range for the Mexican share of the U.S. market somewhere between 40% to 67%. Using these and a couple of other estimates, they peg the final Mexican exports to the U.S. as somewhere between $1.1 billion to $2 billion. The Rand report also cites a range from the NDIC of $3.9 billion to $14.3 billion, so clearly the is much uncertainty here.

In the end Rand concludes the revenues from marijuana in the U.S. are around 15% to 26% of cartel revenues. Of course one could image the U.S. legalization leading to Mexican cartels losing both their domestic market as well as the Canadian market, which would have a larger impact. The Rand report helps Longmire's case, and I don't point it out as an argument against her. But since Longmire doesn't stop to question this number, I'm sort of--but not completely--going to sidestep the issue and grant that she is correct and the revenues are 60%. In any case marijuana revenues mean a lot of money to cartels, but we don't have a very good idea how much.

Moving on to her argument, Longmire's second point strikes me as her weakest. Sure, cartels could enter the legal U.S. marijuana market, just as they could enter the U.S. market for alcoholic beverages and tobacco. Likewise they could enter the market for diapers, ballet shoes, or any product or services. Yet the major profit center for the cartels she lists are all illegal: kidnaping, oil theft, pirated goods, extortion. If cartels are capable of competing in legal markets against legitimate firms, she hasn't provided any examples. It's hard to see why this would be the case for marijuana.

So if I'm right and they won't be getting into the legal market, how would a revenue reduction of as much as 60% impact cartels operations? Longmire is skeptical it would do much, arguing:
"Cartels are economic entities, and like any legitimate company the best are able to adapt in the face of a changing market."

But it's hard to imagine being sanguine about the long-term viability of any "legitimate company" in the face of losses approaching 60% of revenues. Apple, for instance, get's around 50% of it's revenues from the iPhone. If this market were to evaporate, would it be fair to say that it would probably "hinder" their "long-term economics"?

Like cartels, it's probably true that Apple has a lot of other activities that represent profit centers, and they would be unlikely to "close up shop" in the event of losing the iPhone market. But it is a far walk from here to concluding that their "power and influence" (or whatever the comparable measures are for a legal company, maybe market cap?) would not be severely weakened. I guess my question for Longmire is this: if a 60% decline in revenues wouldn't represent a significant blow to the power and influence of cartels, what percentage would? 70%? 90%?

Another important way cartels are similar to Apple is that there likely economies of scope and scale for cartels. A decrease in marijuana revenues will take away resources they were using to build their distribution networks and buy political and legal influence, both of which probably exhibit economies of scale and are inputs for cartels in the production of their other elicit goods. This means a decrease in marijuana revenue should decrease raise costs and thus decrease profits in their other markets. This is in the same way that if the iPhone went away it would hurt Apple's sales of it's computers and software, and generally diminish its brand.

Longmire ends her piece by listing reasons why marijuana should be legalized:
"We need to stop viewing casual users as criminals, and we need to treat addicts as people with health and emotional problems. Doing so would free up a significant amount of jail space, court time and law enforcement resources. What it won't do, though, is stop the violence in Mexico."

Say the higher end estimate of marijuana revenues from the Rand corporation is correct, and legalizing would reduce cartel revenue by 26%, or that the 60% number is correct and they will make back an implausibly high 50% of their lost revenue in other activities. This means something like a 30% decrease in lost revenues. If this leads to a proportional decrease in long-run drug related murders in Mexico, then based on the 15,273 drug related deaths in 2010, there would be 4,580 fewer deaths each year. That's a huge gain in welfare even if it falls short of the quixotic goal of "killing the cartels". The end of alcohol prohibition in the U.S. did not mean an end to the mafia, but it did lead to a significant decline in murders and in their power. Longmire has not presented a convincing case that the same would not be true in Mexico."

More Problems With Massachusetts Health Care

See Massachusetts AG: Global Payments Aren't Controlling Costs Either by Megan McArdle.
"One of the main attractions of the Massachusetts health care plan (other than the obvious primary goal of expanding coverage) was that it would control many areas of cost growth. Insurance was supposed to become more affordable, as adverse selection ceased to be a problem. Cheap preventative care was supposed to avoid costly crises. Giving people access to regular health care was supposed to cut down on costly emergency room visits.

Most of these savings didn't materialize. The already high cost of insurance continued to rise faster than the US average. ER visits actually rose, as wait times for primary care appointments stretched out, and people who'd used the ER to schedule around inflexible work demands continued to do so. Preventative care turns out to be largely not cheaper than letting people get sick (though of course, that doesn't mean it's not a good idea for other reasons). When last heard from, the Massachusetts government was blaming the fee-for-service model and contemplating some sort of move to capitation (paying per patient, rather than per procedure).

But last week, while I was rusticating in the wilds of Kentucky, Massachusetts Attorney General issued a report saying that this isn't going to work either:

The yearlong review of what six large Massachusetts insurers paid providers in 2009 found that doctors working under the new "global payment'' system -- which puts them on a per-patient monthly budget -- generally did not cost less than doctors paid the standard way. And in some cases, large doctors groups such as Atrius Health and Mount Auburn Cambridge were far more expensive than physicians paid under the fee-for-service system, despite being put on a budget.

. . . Coakley recommended that the state adopt "temporary statutory restrictions on how much prices may vary for similar services.'' She said this would "reduce health care price distortions'' until insurance plans that direct consumers toward less expensive providers, and other measures have time to work.
Of course, this is only a limited study. But it's not entirely surprising. Capitation was tried and failed in the United States in the past, as both patients and providers rebelled, and marshalled considerable political and financial muscle to fight its imposition.

There's a great deal of path dependence in health care systems, as with most systems. It's a lot easier to keep a system cheap than it is to make an expensive system less costly. If Massachusetts went to price controls, we might find that even the single payer type systems that have kept costs somewhat lower in Europe, don't do the same thing here."

Monday, June 27, 2011

Resources May Not Be Finite In The Economic Sense

See On the Finiteness of Resources by Don Boudreaux at "Cafe Hayek."
"Commenting on Mark Perry’s post that makes the same Simonesque point that I make here – namely, that humanity’s stock of ‘natural resources’ is not finite economically over time – one morganovich writes:
this seems like sort of a tricky exercise in semantics.

there is only a certain amount of coal in the ground, no matter how good we get at extracting it. if you took the whole earth and broke it up into piles of it’s constituent components, there would be X amount of coal. the amount we can use will always be kX where k<1.
The point is not that the number of atoms (or molecules, or whatever other physical form or substance you wish to name) available on earth to human beings is not finite or unable to be enlarged. Of course these things are finite. Instead, the point is that “resources” is not, ultimately, a physical concept; it’s an economic concept. And to be limited physically is not necessarily to be limited economically.

What is and isn’t a resource is determined by human ingenuity. Likewise, human ingenuity determines how much “utility” – satisfaction; gratification; pleasure; relief-of-felt-uneasiness (call it what you will) – can be gotten at any moment in time from any given unit of physical stuff. As long as human ingenuiity is free to create, there is no necessary practical limit to the amount of any ‘natural’ resource that is available for humans to use productively.

Consider petroleum. Is its stock strictly limited? For a physicist the answer is yes. But not so for an economist, who asks different questions than does the physicist. The economist asks: “How available is this particular substance – petroleum – for the continuing satisfaction of human desires?”

Suppose a brilliant physical scientist invents a very low-cost means of powering cars, airplanes, boats, and electricity-generating plants with seawater, and also a means to turn seawater into plastics and lubricants – indeed, a means to replace all uses of petroleum. The available economic supplies of petroleum would fall quickly to zero. Petroleum would become worthless; it would no longer be a resource. It’s physical presence in the earth – as measured by weight or volume – wouldn’t change. But its status as a resource would change.

Now consider a different scenario. The brilliant scientist invents not a means of turning seawater into a near-perfect and dirt-cheap substitute for petroleum, but, instead, a low-cost means of quadrupling the amount of energy that can be extracted from each ounce of petroleum. Economically the stock of the ‘natural resource’ we call petroleum is thus multiplied by four. Both history and some not-terribly far-fetched economic theorizing tell us that there is no reason to believe that petroleum (or any other resource) is finite in an economic sense."

Some Evidence We Have Income Mobility And The Poor Are Better Off Than They Used To Be

See Markets and the Economic Condition of the Poor By Steve Horwitz. Excerpts:

" a Treasury study of income mobility between 1996 and 2005, 58.6% of the lowest quintile moved up at least one quintile in that 10 year period and 29.1% moved up two or more quintiles. A Federal Reserve Bank of Minneapolis study looked at 2001-2007 and found that 44% moved up at least one quintile, with 13% moving up two or more. As David points out, what to conclude from this depends on where you stand. I would say that it shows that income mobility in the US is still alive and well, with at least half of poor families moving up a quintile in around ten years or so, and decent number moving two or more over that same time span."

consumption data

"Two things to notice about these data. First, the absolute consumption possibilities of the poor have improved dramatically over time, as the first four columns show. US households below the poverty line have more in their homes than they did in the 1980s or the 1990s, and they have some items that didn’t even exist back then! (And to head off one objection, there is no evidence that this has all been bought on credit.)

Second, compare the poor in 2005 with the “all 1971” column. Americans below the poverty line in 2005 were living better, at least in terms of their ability to buy what we now think of as standard consumption items, than did the average US household in 1971. (Note too that the average household is better off today than in 1971, so much for “the Great Stagnation.”) One might say these are trivial consumption items, but air conditioning and cell phones save lives, and refrigerators and washing machines keep people healthy.

How is this possible? Two answers. First, contrary to what the media say, working and middle class stagnation is a myth. According to the Census Bureau over 30% of US households in 2006 earned above $75,000 compared to under 20% in 1980 (adjusted for inflation). Over the same period, the percentage of US households earning under $35,000 fell from 42.8% to 36.7%. Fewer households are poor, fewer are middle class, and a hunk more are above $75,000. And in case you were wondering, those general trends hold for black and Hispanic households too – with the percentage of black households under $35,000 falling by 10.9 percentage points and the number above $75,000 increasing by 8.9 percentage points, for example. If the middle class is shrinking, it’s because they’re getting richer, as are the poor.

Second, the real cost of goods is falling. Thanks to innovation and competition, it costs far less to buy these household items than in years past, especially if we measure by the number of labor hours it takes to earn the money to buy them. Given the increase in wages over the last few decades and the falling prices of many goods, Americans can buy much more than they could in the past for the same hours of work.

So for example take a $400 TV from 1973 which took 97.1 hours of labor at the average private sector wage of $4.12. At the 2009 wage of $18.72, the 97.1 hours of labor it took to earn that $400 in 1973 would net you $1817.71. So with the same work that would have purchased what, by our standards, was a pretty crappy color TV in 1973, we could today buy a darn-near top of the line very large flat-screen with 3D. Or alternatively, we could go to Walmart and get a relatively cheap LCD TV that would still be a way better product than the 1973 TV and tack onto it a surround sound system, a blu-ray player, and then for giggles maybe a cheap laptop and a small iPod and maybe even a digital camera and still have change left for some DVDs and software. And all of this ignores the increased variety and higher quality of the artistic creations one can enjoy on all of those toys.

So if the question is whether markets work to the benefit of the least advantaged, the answer is “it sure looks that way.” One drive around the rural area in which I live where you can see the working poor with their cell phones, flat screen TVs, and satellite dishes is perhaps all the evidence one needs. If not, you can just quote everything from above."

Cavemen Had More Resources Than We Do, Yet They Weren't Rich

Cavemen had more resources per person than we do today (this has to be true right, since we have used up so many resources since then and we have alot more people). Yet they don't seem to have been rich. So it means that know how and imagination are keys to getting rich, not just resources.

See Quote of the Day: Thomas Sowell on the Cavemen at "Carpe Diem."
"At Cafe Hayek, Don Boudreaux quotes economist Julian Simon:
“Natural resources are not finite in any meaningful economic sense, mind-boggling though this assertion may be. The stocks of them are not fixed but rather are expanding through human ingenuity.”

Here's a related quote about natural resources from economist Thomas Sowell in his book "Knowledge and Decisions":

"The cavemen had the same natural resources at their disposal as we have today, and the difference between their standard of living and ours is a difference between the knowledge they could bring to bear on those resources and the knowledge used today." "

Friday, June 24, 2011

Can Wal-Mart Be Sexist And Profit Hungry At The Same Time?

See The Circle Isn’t a Square by Don Boudreaux at "Cafe Hayek."
"Opining in today’s New York Times, history professor Nelson Lichtenstein asserts that Wal-Mart uses an “authoritarian style, by which executives pressure store-level management to squeeze more and more from millions of clerks, stockers and lower-tier managers.” Then he scolds Wal-Mart for being so bigoted that it erects “obstacles to women’s advancement.”

This tale is highly improbable.

A company that squeezes maximum possible profits from its workers does not refuse to promote women simply because of their sex. Such refusals would leave money on the table by keeping many employees in lower-rank positions even though those employees would add more to the company’s bottom line by being promoted to higher-rank positions. Conversely, a company that indulges its taste for bigotry is not a company intent on squeezing as much profit as possible from its employees.

If Ms. Jones can add thousands of dollars to Wal-Mart’s annual profits by working as a manager, rather than hundreds of dollars by working as a cashier, squeezing “more and more” from her requires that Wal-Mart promote her to manager.

It’s simply unbelievable that a company with Wal-Mart’s record of consistently wringing profits from razor-thin retail margins intentionally – or even negligently – wastes the talents of large numbers of its employees by using them in ways that do not add maximum value to Wal-Mart’s bottom line."

Boeing's Move To South Carolina Could Lessen Inequality

See ‘Progressives’ Should Cheer by Don Boudreaux at "Cafe Hayek."
"Here’s a letter to the Washington Post:

Re Kate Bronfenbrenner’s claim that Boeing’s plan to build some jetliners in South Carolina violates federal regulations (“A good case against Boeing,” June 23): whatever is Boeing’s motivation for expanding its operations in lower-wage South Carolina rather than in higher-wage Washington state, its expansion in South Carolina would modify a trend that you frequently insist is unraveling America’s social fabric – namely, growing income ‘inequality.’

By increasing the demand for lower-wage non-unionized workers while decreasing the demand for higher-wage unionized workers, the difference between the annual incomes of each of these groups of workers shrinks. Incomes in America thereby become less ‘unequal.’

As if led by an invisible hand, Boeing is helping to reduce income ‘inequality.’

Donald J. Boudreaux"

Don Boudreaux On Why It Is Okay For Boeing To Move To South Carolina

See Smitten with Monopoly Privileges at "Cafe Hayek."
"Here’s another letter to the Washington Post:

Applauding the NLRB’s attempt to stop Boeing from buying lower-priced labor in South Carolina, Kate Bronfenbrenner writes that “If the NLRB did not take on such cases, it would cede to employers unilateral control over a large swath of the U.S. workplace” (“A good case against Boeing,” June 23).


Does the absence of a government agency empowered to stop grocery shoppers from buying lower-priced groceries at competing supermarkets cede to grocery shoppers unilateral control over a large swath of U.S. supermarkets? Of course not.

In a dynamic market with tens of thousands of employers competing for labor, the notion that even a large employer such as Boeing has “unilateral control” over the labor market unless reined in by government bureaucrats is ridiculous.

Donald J. Boudreaux"

Did The Economy Grow Despite Clinton's Non-Keynesian Policies?

See The Clinton Years by Russ Roberts at "Cafe Hayek."
"Steve Henke on the implications of the Clinton years for Keynesianism (HT: Tim Townsend):
Nothing contradicts the fiscalists’ dogma more conclusively than former President Clinton’s massive fiscal squeeze. When President Clinton took office in 1993, government expenditures were 22.1% of GDP, and when he departed in 2000, the federal government’s share of the economy had been squeezed to a low of 18.2%. . . . And that’s not all. During the final three years of the former President’s second term, the federal government was generating fiscal surpluses. President Clinton was even confident enough to boldly claim in his January 1996 State of the Union address that “the era of big government is over.”

President Clinton’s squeeze didn’t throw the economy into a slump, as Keynesianism would imply. No. President Clinton’s Victorian fiscal virtues generated a significant confidence shock, and the economy boomed.
My only disagreement is with the first line. I think the success of the post-WWII economy when government spending collapsed and the Keynesians predicted disaster is more conclusive. But that’s a nit-pick."

The Government Of Japan Creates Too Many Ph. D.'s

See Japanese Central Planners at Work by Arnold Kling of EconLog.
"From Nature:
Of all the countries in which to graduate with a science PhD, Japan is arguably one of the worst. In the 1990s, the government set a policy to triple the number of postdocs to 10,000, and stepped up PhD recruitment to meet that goal. The policy was meant to bring Japan's science capacity up to match that of the West -- but is now much criticized because, although it quickly succeeded, it gave little thought to where all those postdocs were going to end up.

Academia doesn't want them: the number of 18-year-olds entering higher education has been dropping, so universities don't need the staff. Neither does Japanese industry, which has traditionally preferred young, fresh bachelor's graduates who can be trained on the job."

Releasing Oil From The Strategic Petroleum Reserve May Not Be Necessary

See Some Non-Strategic Thinking About a Non-Problem by Mark Perry of "Carpe Diem."
"Gasoline prices have been dropping steadily for the last six weeks, and the current price of $3.62 per gallon (national average) is the lowest in three months and almost 8% below the recent peak of close to $4 per gallon in early May (see chart above). America's stock of crude oil for the week ending June 17 was at the highest level (1.065 billion barrels) in more than four month since early February. So what's the administration's "solution" to the "non-problems" of rising oil supplies and falling oil and gas prices?

Tap into America's "Strategic Petroleum Reserve" for 30 million barrels of oil, enough for about 36 hours of domestic consumption, while at the same time opposing any legislation that would allow greater access to domestic oil supplies, see Mark Green's post at the Energy Tomorrow blog titled "Non-Strategic Thinking." Mark quotes American Petroleum Institute president Jack Gerard on CNBC:

"It's confusing as to why we would wait to this point to release part of the (SPR), but we've still failed to step forward and say let's bring long-term supply to the marketplace, create American jobs at a time when we have 9.1 percent unemployment and produce millions of dollars of federal revenue at time when we're struggling with a debt and deficit crisis. ... Just yesterday the administration sent a letter to Capitol Hill opposing a permitting bill that was designed to expedite permits in Alaska to produce oil and natural gas. We are getting a confused message."

Larry Kudlow is rightly skeptical and suspicious of the "government solution" to the "non-problem" and wonders if the IEA delivered a "QE3 quick fix to save Obama’s skin?" and concludes "Lord save us from short-run government fixes. Haven’t we had enough of them?""

Thursday, June 23, 2011

The EPA's War on Jobs

Editorial from the 6-13 WSJ. Excerpts:
"The proposal (to regulate mercury in coal plants) was obviously rushed, with numerous errors like overstating U.S. mercury emissions by a factor of 1,000. The word in Washington is that the openly politicized process unsettled even the EPA's career staff."

"But most of those alleged benefits are indirect—i.e., not from the mercury reductions that the rule is supposed to be for. Rather, they come from pollutants ("airborne particles") that the EPA already regulates under other parts of the Clean Air Act. A good analogy is a corporation double-counting revenue."

"According to the EPA's own numbers, every dollar in direct benefits costs $1,847. The reason is that electric generation—yes, even demon coal—results in negligible quantities of air pollutants like mercury. And mercury is on the decline: In 2005, the entire U.S. coal fleet emitted 26% less than the EPA predicted."

"The consensus estimate in the private sector is that the utility rule and eight others on the EPA docket will force the retirement of 60 out of the country's current 340 gigawatts of coal-fired capacity."

"The International Brotherhood of Electrical Workers, normally a White House union ally, says the rule will destroy 50,000 jobs and another 200,000 down the supply chain."

Economist Alain Enthoven On How Costly High Speed Rail Can Be

See Bullet-Rail Program Is Costly Blank, a letter in th 6-13 WSJ.
"Thomas J. Umberg, the new chairman of California's High-Speed Rail Authority (CHSRA) board, says such rail systems are profitable (Letters, June 6). That flies in the face of multiple sources of evidence. In May of 2009 Iñaki Barrón de Angoiti, director of high-speed rail at the International Union of Railways, said, "Only two routes in the world—between Tokyo and Osaka, and between Paris and Lyon—have broken even." In December 2009 the U.S. Congressional Research Service said: "Typically, governments have paid the construction costs, and in many cases have subsidized the operating costs as well." In July 2010 a World Bank report cautioned that governments planning high-speed rail systems "should also contemplate the near-certainty of copious and continuing budget support for the debt." In May 2011 the AFL-CIO's Transportation Trades Department, said: "There is no high-speed passenger rail system in the world that operates without significant government assistance."

It's not clear where Mr. Umberg gets his information, as the CHSRA Business Plan doesn't say that, and proponents' statements don't refer to data sources independent of the industry. Mr. Umberg might ask the authority's staff why the latest (2009) Business Plan asked for a "revenue guarantee" (aka subsidy) five times.

Alain Enthoven

William Grindley

William Warren

Atherton, Calif."

Robert Bryce On Why Allowing More Hydraulic Fracturing To Get Natual Gas Is A Good Idea

See America Needs the Shale Revolution from the WSJ, 6-13. He is a senior fellow at the Manhattan Institute and just published a book on the energy industry. Excerpts:
"Although hydraulic fracturing has been used more than one million times in the U.S. over the past 60 years, environmental activists are hoping to ban the process or have it regulated by the Environmental Protection Agency (EPA). Opponents claim the process can harm groundwater even though drinking-water aquifers are separated by as much as two miles of impermeable rock from the shales that are being targeted by the fracturing process."

"While the Pennsylvania economy is getting a much-needed lift from drilling, opposition in New York may mean that the state loses out on jobs and investment. A new study by Tim Considine, an energy economist at the University of Wyoming, estimates that drilling in the Marcellus Shale could add as many as 15,000 new jobs to the New York economy by 2015. The study, conducted for the Manhattan Institute (a think tank where I am a senior fellow), estimated that shale drilling in New York could add some $1.7 billion to the state's economy by 2015 and increase the state's tax revenue by more than $200 million."

Evidence On Unemployment Insurance Proloning Unemployment

See The Jobless Insurance Mess from the WSJ, 6-15. Excerpt:
"Meanwhile, more evidence has arrived that jobless subsidies are a disincentive work. A recent report by Chicago Federal Reserve economists Luojia Hu and Shani Schechter indicates that benefit extensions account for a roughly 1% increase in the unemployment rate. They calculate that between 10% and 25% of the recent decline in unemployment is due to people exhausting their benefits. Allowing the extended emergency benefits to expire, they conclude, could help reverse their adverse effects on employment."

NLRB threatens Boeing's job growth in Texas, other states

Article by Greg Abbott, attorney general of Texas. From the San Antonio Express-News, 6-17. Excerpts:
"The NLRB filed a complaint against Boeing at the request of labor unions in Washington State, which is home to Boeing's original 787 Dreamliner factory. Like Texas, South Carolina is a “right-to-work” state, which means state law protects employees from being forced to join a labor union or pay union dues. While Boeing determined that expanding into South Carolina was in its best business interest, labor unions and the NLRB are incorrectly claiming that Boeing's decision constituted “retaliation” against its union workforce — despite the fact that Boeing eliminated no union jobs and actually added 2,000 union workers in Washington."

"But as our brief explains, the NLRB's proposal is not just harmful to Texas and other right-to-work states. It also poses a significant threat to heavily unionized states like Washington and Michigan. As the Detroit News recently put it in an editorial lambasting the NLRB's proposal, “What new firm would invest in Michigan knowing that its union could then block its expansion to a less unionized state?”"

How Government Distorted The Railroad Industry In The 19th Century

See Tracks Across America. JOHN STEELE GORDON reviews the books Railroaded by Richard White and Union Pacific: The Reconfiguration by Maury Klein. From the WSJ, 6-17. Excerpts:
"As Mr. White notes, with no laws to govern their behavior, railroad managers often acted in their own self-interest rather than in the interests of stockholders. It would be Wall Street, not government, that would, near the end of the 19th century, impose what are now called Generally Accepted Accounting Principles and demand quarterly and annual reports certified by independent accountants. Such demands brought the era of buccaneer capitalism to a swift end.

The transcontinental railroads, though, did not have their origins in entrepreneurship. They were the child of politics. When California was admitted as a state in 1850, it was 1,500 miles from the nearest American settlements. From the Eastern states, it took months to travel there by either land or by sea. The federal government was eager to tie the state firmly to the Union. But no railroad company was going to build tracks across vast stretches of land empty of settlers, and no settlers were going to take up land claims until there was a railroad to move their products to eastern markets.

To get the railroads built, government offered lavish subsidies. Much of the money ended up in the hands of the companies' top managers and their political friends. After Congress in 1862 mandated the construction of railroads from the Missouri River to the Pacific, for instance, the men who ran the Union Pacific set up a construction company, gave it a fancy French name, Crédit Mobilier, and then hired it—wildly overpaying—to build the railroad. To make sure that no one in Congress objected, many members were offered stock in Crédit Mobilier. Not that they had to pay for it: The lawmakers were allowed to delay payment until the stock paid out its prodigious dividends.

The result of all this self-dealing in the industry, naturally, was shoddily built railroads that were saddled with huge debts. Many of them collapsed into bankruptcy and had to be reorganized by people like J.P. Morgan and E.H. Harriman, who are barely mentioned in "Railroaded.""

Wednesday, June 22, 2011

Alan Reynolds vs. Robert Reich On Taxes, Revenue And Economic Growth

See Memo to Robert Reich: Rewrite Your Brief. Excerpt:
"Only after top tax rates came down, I noted, were we able to afford very substantial reductions in taxes for people with incomes under $100,000. Since President Reagan took office the average income tax rates have become negative for the bottom 40% and were cut in half for the “middle class.” In 1980, when top tax rates were 70% and nearly 40% on capital gains, such rates brought in so little revenue that the Feds were compelled to tax low and middle-income families quite heavily to bring revenues up to the normal 8% of GDP.

At his blog, Reich argues that, “Reynolds bends the facts to make his case. The most important variable explaining the rise and fall of tax revenues as a percent of GDP has been the business cycle, not the effective tax rate. In periods when the economy is growing briskly, tax revenues have risen as a percent of GDP, regardless of effective rates; in downturns, revenues have fallen.”

For that to work as an explanation of why individual tax revenues were higher when the top tax rate was 28% than when it was 70-91%, Reich is logically obligated to argue that the economy was growing more briskly when the top tax rate was 28% than when the top tax rate was 70-91%. Contradicting his own logic, however, Reich instead claims that “Giving the middle class more purchasing power by lowering its rates while raising the rates at the top will help spur growth.”

Reich is not proposing to add new tax rates to 50-70% on salaries, dividends and capital gains because he believes it will raise more revenue (my data show otherwise), but because he believes it will raise the growth of real GDP. This is breathtaking. Reich should be glad that I ignored his “central argument” about super-high tax rates boosting economic growth by taking income from those who earned and giving it to those more likely to squander it. I was just being too polite.

Within his hyper-Keynesian lawyer’s brief, Reich is logically required to argue that top tax rates of 70-91% (1) raised revenue, and that (2) this imaginary added revenue allowed imaginary tax reductions on poorer people with a lower propensity to save. He must then arrive at the logical conclusion, which is that (3) the average savings rate must have been much lower when top tax rates were 70-91% than since 1988 when to tax rates have frequently been 28-35% and as low as 15% on capital gains and dividends. A low savings rate, in Reichian theory, is what makes the economy grow.

My article proved the first two premises are false. High statutory tax rates on the rich generated less revenue, and the poor and middle classes paid much higher taxes as a result.

The third premise of Reich’s brief is key to the Keynesian fable about growth depending to incentives to consume rather than incentives to produce. Once again, the facts are the exact opposite of what Reich imagines. The personal savings rate was 9% from 1959 to 1981 when top tax rates were 70-91%, and 4.5% from 1988 to 2007 when top tax rates were 28-39.6%.

Reich’s comment that “the richest 1% of Americans got 10% of total [pretax, pretransfer] income in 1980, and get more than 20% now” refers to income reported on individual tax returns, assembled by Thomas Piketty and Emmanuel Saez. When top tax rates went way down, particularly in 1988, 1997 and 2003, the amount of reported income and capital gains went way up. As Saez explained in the 2004 issue of Tax Policy and The Economy (MIT Press, p.120): “Top income shares . . . show striking evidence of large and immediate responses to the tax cuts of 1980s, and the size of those responses is largest for the topmost income groups.” That is why revenues from high-income households went way up rather than down, and why it then became feasible to hand out refundable credits to the bottom 40% and cut tax bills in half for those earning less than $100,000.

Reich would apply his 50-70 % tax rates to reported capital gains and dividends, which is a surefire way to make taxable capital gains and dividends vanish from tax returns. No high-income taxpayer can be compelled to sell property or financial assets for the sheer joy of paying 50-70 % of the gain to the IRS. No investor can be compelled to hold dividend-paying stock rather than tax-free bonds."

Mark A. Calabria Critiques Alan Blinder And Keynesian Policies

See Ricardo Paging Alan Blinder.
"I almost hesitate to suggest that anyone actually read Alan Blinder’s defense of Keynesian economics in today’s Wall Street Journal, except that the piece lays out clearly in my mind why Blinder is so wrong. The only part you really need to read is:
In sum, you may view any particular public-spending program as wasteful, inefficient, leading to “big government” or objectionable on some other grounds. But if it’s not financed with higher taxes, and if it doesn’t drive up interest rates, it’s hard to see how it can destroy jobs.

So in Blinder’s world, deficits are explicitly not future taxes, despite what I believe is a fairly strong consensus among economists that some form of Ricardian equivalence holds (see John Seater’s literature review and conclusion, “despite its nearly certain invalidity as a literal description of the role of public debt in the economy, Ricardian equivalence holds as a close approximation.”). Perhaps Blinder is blind to the fact that deficits are so much a part of the public debate today because households absolutely see those deficits as future taxes.

I also think Blinder misses that fact that crowding out can occur without raising interest rates. As Cato scholar Steve Hanke points out, the Fed’s current policies have basically killed the interbank lending market, which has encouraged banks to load up on Treasuries and Agencies, rather than lend to the productive elements of the economy. While I sadly don’t expect most mainstream macroeconomists to focus on the link between the banking sector and the macroeconomy, Blinder has no excuse; he served on the Fed board.

As I have argued elsewhere, banks are indeed lending, but to the government, not the private sector. The simplistic notion that crowding out can only occur via higher interest rates, as if price is ever the only margin along which a decision is made, has done serious harm to macroeconomics. But then if macroeconomists actually understood the mechanics of financial markets, then we might not be in this mess in the first place."

ObamaCare’s Latest ‘Glitch’: Medicaid for Millions of Middle-Class Retirees

Great post by Michael F. Cannon of Cato.
"Remember how ObamaCare inadvertently kicked members of Congress out of their health insurance plans? (Just kidding! The Obama administration ignored that part of the law!)

Well, today we learned that ObamaCare also inadvertently gives free health care to millions of middle-class Social Security recipients:
President Barack Obama’s health care law would let several million middle-class people get nearly free insurance meant for the poor, a twist government number crunchers say they discovered only after the complex bill was signed.

The change would affect early retirees: A married couple could have an annual income of about $64,000 and still get Medicaid, said officials who make long-range cost estimates for the Health and Human Services department.

Up to 3 million people could qualify for Medicaid in 2014 as a result of the anomaly. That’s because, in a major change from today, most of their Social Security benefits would no longer be counted as income for determining eligibility.

Medicare chief actuary Richard Foster says the situation keeps him up at night.

“I don’t generally comment on the pros or cons of policy, but that just doesn’t make sense,” Foster said during a question-and-answer session at a recent professional society meeting. It’s almost like allowing middle-class people to qualify for food stamps, he suggested."

Tuesday, June 21, 2011

More Evidence That Federal Employees Are Overpaid

Great post by Andrew Biggs of AEI.
"In my AEI working paper on federal employee compensation with Jason Richwine of the Heritage Foundation, we compare the salaries, benefits, and job security of federal employees to that received by private-sector workers with similar earnings-related attributes—that is, similar education, experience, region, race, gender, and so on. These calculations, which are performed using regression analysis, show that federal workers receive salaries around 14 percent higher than similar private-sector workers. The federal pay premium is largest for employees with less education, and increases as workers gain experience. (So, for instance, a less-educated federal employee with long job tenure would get a larger pay premium than a newly hired PhD).

Almost no economist really disagrees with this approach, so much so that studies on federal salaries—after a spurt during the 1970s and 1980s—are pretty infrequent today. In other words, most labor economists seem to consider the pay premium issue more or less settled.

But some people find this kind of statistical analysis unconvincing, probably because they don’t think it’s really possible to control for all the relevant differences between different kinds of workers. While regression analysis can control for whether a person has, say, a bachelor’s or master’s degree, it doesn’t control for the quality of the school attended or the grades the person received. Likewise, maybe federal employees are unusually hard-working or creative, such that they create more value than private employees who look the same on paper. I doubt it, but you can’t prove that it’s impossible.

What these folks want to know is how much the exact same person would be paid in the federal government versus the private sector. And Jason Richwine’s new paper released by Heritage answers that question. Instead of comparing pay for different people at the same point in time, it follows the same people over time as they shift into and out of different jobs. If a given person earns more in a federal job than a private-sector job then we can be pretty sure it’s the job that’s making the difference, since the person himself barely changes over time. (And Jason controls for the limited instances where the person’s characteristics do change, say by getting an additional educational degree or by gaining an extra year of experience.)

What does this analysis show? As Jason states, “Private-sector workers who switch to federal jobs receive an average real wage increase of 9 percent, while private workers who find another private job earn just an additional 1 percent, implying an 8 percent federal premium.” These are the same workers, with the employer and job being the only difference. Similarly, most people who leave federal employment take a pay cut, undercutting the common claim by federal employees that they could earn much more on the outside.

But does this study, which finds an 8 percent average pay premium for people switching to federal jobs, undercut our previous estimate of a 14 percent pay premium? Not at all. Remember that our analysis found that the federal pay premium is smallest in the initial years after a worker has been hired, and Jason’s new paper calculates the pay premium only in the first year of employment. So it’s actually fully supportive of the cross-sectional results we generated.

If there’s a convincing rebuttal to all this from the Office of Personnel Management and the public employee unions, who in the past have pooh-poohed federal-private pay comparisons, I’d like to hear it."

Increased public spending on transit may not have boosted ridership

See The Facts about Transportation Spending by Veronique de Rugy of Reason. Excerpt:
"Despite huge increases in transit funding over the past two decades, ridership has remained constant. Using American Public Transportation Administration (APTA) data, the chart above reveals that ridership has barely changed as funding has drastically increased—especially if you control for the increasing number of transit systems, and the level of population growth over time.

Although transit funding in 1995 was eight times more than it was in 1978 (17.4 billion and 2.2 billion respectively), the total increase in ridership was only about 2 percent. Total ridership in 1978 (7.8 billion trips) was actually more than ridership in 1995 (7.7 billion trips)—the only difference was in the amount of funding. Between 1989 and 1996 ridership fell by 11 percent; again, this was while funding increased by 42 percent.

These funding increases have included federal, state, and local taxpayer assistance to transit. Moreover, about a quarter of these subsidies come directly from highway user fees. Cato Institute Senior Fellow Randal O’Toole claims that “because transit produces less than 5 percent of urban transport, while autos produce more than 90 percent, it is safe to say that most of the taxes supporting transit are subsidies from auto users to transit riders.”

The reasons for the shortcomings in transit ridership have less to do with the amount of available funds than with the fact that rail lines are expensive to build, maintain, and operate, and the fact that most transit systems have at some point been forced to significantly raise fares and/or curtail services, often leading to the loss of transit riders.

According to O’Toole, “Thanks in part to the high cost of rails, transit systems in Atlanta, Baltimore, Buffalo, Chicago, Cleveland, Philadelphia, Pittsburgh, St. Louis, and the San Francisco Bay Area carried fewer riders in 2005 than two decades before. Los Angeles lost 17 percent of its bus riders when it began building rail transit.” The fact that transit workers are generally members of public sector unions hasn’t helped either.

None of this means that transit agencies will never be able to attract new riders. But it does mean that simply throwing more money at transit isn’t the answer."

Gary Becker On Why The Recovery Might Be Lagging

See The Slow Economic Recovery-Becker. Excerpt:
"I am persuaded that an important third part is due to concerns that the US will be unable to control its fiscal situation. The ratio of federal government spending to GDP grew from about 21% in 2007 to 25% in 2011, a very rapid change compared to the relative stability of this ratio during the prior 25 years. Unfortunately, there is not yet a strong enough will in Congress and by the president to lower this ratio during the coming decade. Indeed, with the looming enormous growth in entitlement spending, especially Medicare, the spending to GDP ratio could well increase sharply in the coming decade, along with the fiscal deficit and the federal debt.

Liberal Democrats continue to be reluctant to agree to big cuts in government spending. Many Republicans have come out against increasing any taxes, even though sensible tax reform toward a flatter and broader based income tax would raise the taxes paid by some taxpayers. The most attractive reform of Medicare put forward by any member of Congress is Paul Ryan’s proposal to provide grants to the elderly to buy health insurance, with the size of the grant falling with the income of the recipient. But Ryan’s Medicare proposal has been rejected not only by Democrats, but also by leading members of his own party.

To many investors, the future of the American economy looks dim and also uncertain. I am a perennial optimist about America, but even I have moments of serious doubts: not about the ability to solve these problems, but about the will to do so. The best way to get American fiscal and other economic problems under control, and thereby “stimulate” the economy, is to institute growth oriented policies that would increase the long-term growth rate beyond the 3% average annual GDP growth rate of the past 130 years. These policies include tax reform, cuts in entitlement spending, and more sensible regulations that are less dependent on discretion by regulators."

Monday, June 20, 2011

Maybe Liberals Aren't Trying To Understand Conservatives Like Krugman Says

See Open Letter to Paul Krugman at "Cafe Hayek" by Don Boudreaux.
"Dear Mr. Krugman:

Interviewed recently in “The Browser,” you said that
if you ask a liberal or a saltwater economist, “What would somebody on the other side of this divide say here? What would their version of it be?” A liberal can do that. A liberal can talk coherently about what the conservative view is because people like me actually do listen. We don’t think it’s right, but we pay enough attention to see what the other person is trying to get at. The reverse is not true. You try to get someone who is fiercely anti-Keynesian to even explain what a Keynesian economic argument is, they can’t do it. They can’t get it remotely right. Or if you ask a conservative,”What do liberals want?” You get this bizarre stuff – for example, that liberals want everybody to ride trains, because it makes people more susceptible to collectivism. You just have to look at the realities of the way each side talks and what they know. One side of the picture is open-minded and sceptical. We have views that are different, but they’re arrived at through paying attention. The other side has dogmatic views.

Let’s overlook your failure to distinguish conservatives from libertarians – a failure that, for the point I’m about to make, is unimportant.

You’re able to conclude that “liberals” are open-minded thinkers while “conservatives” are dumb-as-dung dogmatists only because you compare the works of “liberal” scholars to the pronouncements of conservative popular pundits. However valid or invalid is the artistic license used by conservative celebrities such as Glenn Beck and Rush Limbaugh (and, for that matter, by “liberal” celebrities such as Rachel Maddow and Keith Olbermann) to entertain large popular audiences, you’re wrong to equate the pronouncements of conservative media stars with the knowledge and works of conservative (and libertarian) scholars.

Because, as you claim, you study carefully the works of non-”liberal” scholars, you surely know that the late Frank Knight, Ludwig von Mises, F.A. Hayek, and Milton Friedman – influential economists whom you would classify as “conservative” – were all steeped in and treated seriously the writings of Keynes, Marx, Veblen, Galbraith, and other “liberal” thinkers.

The same is true for still-living influential non-”liberal” scholars.

I’d be obliged to conclude that you in fact, contrary your claim, do not carefully engage the works of non-”liberal” scholars if you insist that “liberal” scholarship is ignored by conservative and libertarian thinkers such as James Buchanan, Gordon Tullock, Ronald Coase, Armen Alchian, Harold Demsetz, Anna Schwartz, Gary Becker, Vernon Smith, Leland Yeager, Henry Manne, Deirdre McCloskey, Allan Meltzer, Richard Epstein, Tyler Cowen, Arnold Kling, George Selgin, Lawrence H. White, and James Q. Wilson, to name only a few.

You do a disservice to scholars such as these, as well as to scholarship generally, to assert that serious thinking is done only by you and your ideological cohorts.

Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

UPDATE: Thanks to commenter Yosef for reminding me of this recent boast of Mr. Krugman:
Some have asked if there aren’t conservative sites I read regularly. Well, no. I will read anything I’ve been informed about that’s either interesting or revealing; but I don’t know of any economics or politics sites on that side that regularly provide analysis or information I need to take seriously."

Companies Leaving California in Record Numbers

Great post by Mark Perry of "Carpe Diem."
"California currently ranks #49 among U.S. states for "business tax climate" (Tax Foundation) and #48 for for "economic freedom" (Mercatus). It shouldn't be any surprise then that companies are leaving the "Golden State" in record numbers this year (see chart above) for "golder pastures" and more business-friendly climates in other states.

From Joe Vranich:

"Today, California is experiencing the fastest rate of disinvestment events based on public domain information, closure notices to the state, and information from affected employees in the three years since a specialized tracking system was put into place. Out-of-state economic development officials are traveling through the state to alert frustrated business owners and corporate executives to their friendlier business climate versus California's hostility toward commercial enterprises.

•From Jan. 1 of this year through this morning, June 16, we have had 129 disinvestment events occur, an average of 5.4 per week (see chart above).
•For all of last year, we saw an average of 3.9 events per week.
•Comparing this year thus far with 2009, when the total was 51 events, essentially averaging 1 per week, our rate today is more than 5 times what it was then.
Our losses are occurring at an accelerated rate. Also, no one knows the real level of activity because smaller companies are not required to file layoff notices with the state. A conservative estimate is that only 1 out of 5 company departures becomes public knowledge, which means California may suffer more than 1,000 disinvestment events this year.

The capital directed to out-of-state or out-of-country, while difficult to calculate, is nonetheless in the billions of dollars. The top five destinations are (1) Texas, (2) Arizona, (3) Colorado, (4) Nevada and Utah tied; and (5) Virginia and North Carolina tied.

Based on the legislature’s recent rejection of business-friendly legislation and Sacramento’s implementation of additional regulations, signs are that California’s hostility towards business will only worsen. California is such fertile ground that representatives for economic development agencies are visiting companies to dissect our high taxes, extreme regulatory environment and other expenses to show annual savings of between 20 and 40 percent after an out-of-state move.""

How About Europe Learning from Mississippi?

Great post by Mark Perry of "Carpe Diem."
"In a New York Times editorial last year titled "Learning from Europe" Paul Krugman wrote:

"The story you hear all the time about Europe — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. The European economy works; it grows; it’s as dynamic, all in all, as our own."

The BEA recently released data for the amount of GDP produced by U.S. states in 2010 , which allows for a updated comparison of output per capita in U.S. states (Note: Per-capita GDP is provided by the BEA in 2005 dollars, and those amounts have been adjusted to 2010 dollars for comparison to other countries in 2010) to European countries (and Japan and Canada), see table below (international countries are adjusted for PPP). Key findings:

1.The European Union as a group ($32,700 GDP (PPP) per capita in 2010) ranks below America's poorest state, Mississippi ($32,764).

2. Even relatively wealthy (by European standards) Switzerland would rank #32 as a U.S. state, behind Georgia. The countries of Belgium and Germany would rank even lower at #46 and #47, and the U.K., Finland, and France would be close to the bottom of American states, below #48 South Carolina.

3. Spain, Italy, Greece and Portugal all rank below America's poorest state (Mississippi) for GDP per capita.

MP: Paul Krugman's assessment of Europe's economic success bears little resemblance to the surprisingly negative facts, which are actually the opposite of what Krugman claims. With a few exceptions, the amount of economic output produced per person would rank most European countries among America's poorest states. And even America's poorest states like Mississippi and West Virginia would rank above average among the countries of Europe. When it comes to economic success, the data suggest that Europe has a lot more to learn from the U.S. than vice-versa."

Friday, June 17, 2011

Most Illinois Specialists Won't Take Medicaid Patients

Great post by Megan McArdle. Excerpt:
"Proponents of health care reform are gnashing their teeth, while opponents grimly say "I told you so", at the news of a study from Illinois showing that children in Medicaid/SCHIP have difficulty getting specialists to treat them:
The study used a "secret shopper" technique in which researchers posed as the parent of a sick or injured child and called 273 specialty practices in Cook County, Ill., to schedule appointments. The callers, working from January to May 2010, described problems that were urgent but not emergencies, like diabetes, seizures, uncontrolled asthma, a broken bone or severe depression. If they were asked, they said that primary care doctors or emergency departments had referred them.

Sixty-six percent of those who mentioned Medicaid-CHIP (Children's Health Insurance Program) were denied appointments, compared with 11 percent who said they had private insurance, according to an article being published Thursday in The New England Journal of Medicine.

In 89 clinics that accepted both kinds of patients, the waiting time for callers who said they had Medicaid was an average of 22 days longer.

Obviously, this has implications for the plans to cut Medicare reimbursements. And for the success of ObamaCare, since most of the coverage expansion will come, not from the exchanges, but from extending Medicaid."

Don Boudreaux Corrects President Obama On Jobs And Innovation

See Open Letter to Barack Obama.
"Dear Mr. Obama:

In your recent interview with NBC News you explained that your policies would promote more private-sector job creation were it not for (as you put it) “some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.”

With respect, sir, you’re complaining about the source of our prosperity: innovation and the increases it causes in worker productivity.

With no less justification – but with no more validity – any of your predecessors might have issued complaints similar to yours. Pres. Grant, for example, might have grumbled in 1873 about “some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank that uses a modern safe and so employs fewer armed guards than before, or when you travel on trains which, compared to stage coaches, transport many more passengers using fewer workers.”

Or Pres. Nixon might have groused in 1973 about such labor-saving innovation: “You see it when you step into an automatic elevator that doesn’t require an elevator operator, or when you observe that polio vaccination keeps people alive and active without the aid of nurses and all those workers who were once usefully employed making iron-lung machines, crutches, and wheelchairs.”

Do you, Pres. Obama, really wish to suggest that the innovations you blame for thwarting your fiscal policies are “structural issues” that ought to be corrected?"

Cochrane, Krugman And Market Efficiency

See Quotation of the Day… at Cafe Hayek.
"from pages 36-37 of John H. Cochrane, “How Did Paul Krugman Get It So Wrong?” Economic Affairs, June 2011 (Vol. 31):
Krugman writes as if the volatility of stock prices alone disproves market efficiency, and believers in efficient marketers [sic] have just ignored it all these years. This is a canard that Krugman should know better than to pass on, no matter how rhetorically convenient. There is nothing about ‘efficiency’ that promises ‘stability’. Stable price growth would in fact be a major violation of efficiency as it would imply easy profits."

Did Bush Tax Cuts Cause Big Deficits?

See The Budget Debate in Pictures: A Look at CBO Projections and the Role that Bush-Era Tax and Spending Policies Play in the Deficit by William McBride of the Tax Foundation. Excerpts:
"...revenues have largely tracked the economy and did not significantly drop below the historical average until the 2008 financial crisis, i.e. seven years after the first Bush tax cut and five years after the second Bush tax cut. Further, in the immediate response to the financial crisis, it is outlays, more than revenues, which have changed dramatically and diverged from the historical averages. Between 2008 and 2009, revenues dropped 2.6 percentage points, from 17.5 percent of GDP to 14.9 percent--3.1 percentage points below the historical average of 18 percent. Meanwhile, outlays grew 4.3 percentage points, from 20.7 percent of GDP to 25.0 percent--4.2 percentage points above the historical average of 20.8 percent.

Additionally, in 2000, before the Bush tax cuts, the CBO predicted 2010 outlays to be $2.457 trillion,[5] whereas actual outlays were $3.456 trillion - a $1 trillion under-prediction of spending. CBO predicted 2010 revenues to be $2.946 trillion, whereas actual revenues were $2.162 trillion - a $0.784 trillion over-prediction of revenues. Based on this, it seems logical to conclude that "Bush spending" more than "Bush tax cuts" are to blame for the deficit. Doing a similar analysis, Glenn Kessler at the Washington Post concludes the same.[6] This is also supported by another report recently issued by the CBO[7], in which they compare their projections from 10 years ago to the current reality and score the budgetary effects of various legislative items. In 2009, for instance, discretionary spending exceeded projections by $417 billion, and mandatory spending exceeded projections by $409 billion. This is far greater than the effect of the Bush tax cuts, which reduced revenues in 2009 by $181 billion.

Furthermore, a growing share of spending actually occurs within the tax code, via so called tax expenditures. For instance, the earned income tax credit and the child credit refunds to those who pay no income tax nearly doubled between 2000 and 2008, from $40 billion to $72.5 billion.[8] So, again, it would be closer to the truth to say that Bush-era spending rather than Bush-era tax cuts caused the deficit."

"Although there is a conspicuous "W" pattern in the Bush years, this is more a reflection of the 2001 and 2008 recessions than the Bush tax cuts. Note that the Bush tax cuts altered only the individual income tax code. However, in 2003-2004 revenues dropped most dramatically in the category of corporate taxes, which peaked in 1998 at 2.2 percent of GDP and dropped to 1.2 percent in 2003--a 41 percent decline. Compare this to individual income tax revenues, which peaked in 2000 at 10.2 percent of GDP and dropped to 6.9 percent in 2004--a 32 percent decline. Payroll and other taxes remained relatively stable, such that total revenues declined by 22 percent over this period.

It is much the same story in the aftermath of the 2008 recession, except the numbers are larger and more discouraging. Corporate tax revenues peaked in 2007 at 2.7 percent of GDP and bottomed out at 1 percent in 2009 -- a staggering 63 percent drop. Compare this to individual income tax revenues, which peaked in 2007 at 8.4 percent of GDP and dropped to 6.2 percent in 2010--a 26 percent decline. Again, payroll and other taxes remained relatively stable, such that total revenues declined by 19 percent over this period.

In fairness, it is not quite this simple, since a large share of businesses file under the individual income tax code and would have had a greater incentive to do so following the Bush tax cuts. Nevertheless, it remains true that the recent collapse in revenues is largely due to the economy. For instance, at the 2007 peak, individual and corporate tax revenues combined were 11 percent of GDP, which is above the 40-year historical average of 10.2 percent."

"Now let's turn to spending. It should be apparent from the graph of outlays above that we are currently in record territory in terms of spending as a percentage of GDP, and the CBO projects no return to normalcy. Mandatory spending, i.e. entitlement spending, has roughly doubled as a share of GDP, from 6.7 percent in 1971 to 13.2 percent in 2010. The CBO projects it to hit 14 percent next year and remain close to that level through 2021. Again, however, the CBO assumes a sharp reduction in Medicare payment rates at the end of this year, which has been pushed off repeatedly since 2003. They estimate that if payment rates remained at 2011 levels this would add about 3 percent to Medicare outlays over the next 10 years. Discretionary spending has actually declined as a share of GDP, from 11.3 percent in 1971 to 9.3 percent in 2010. It is projected to decline further to 6.7 percent in 2021. However, net interest payments are projected to increase, such that total outlays will remain well above the historical average of 20.8 percent of GDP. Based on CBO projections out to 2021, as well as their longer term projections out to 2035.[12] in every year spending as a share of GDP is expected to exceed any year prior to the financial crisis."

Thursday, June 16, 2011

Perverse Incentives from Mortgage Modification

Posted by David Henderson at "EconLog."
"Christopher J. Mayer, Edward Morrison, Tomasz Pikorski, and Arpit Gupta of Columbia University (variously Business School and Law School) find that a mortgage modification program that Countrywide Financial agreed to implement as part of a settlement with U.S. state attorneys general caused more people to become delinquent. Give people an incentive not to pay their mortgage and some of them will decide--not to pay their mortgage.

In a difference-in-difference framework, we estimate the percentage increase in defaults among Countrywide borrowers during the months immediately following the Settlement announcement relative to the percentage increase during the same period among comparable borrowers who were unaffected by the Settlement because their loans were not serviced by Countrywide (the "Control Group"). In regressions controlling for many borrower attributes, including current credit scores and indebtedness, we find a thirteen percent increase in the overall probability that Countrywide 2/28 ARMs loans roll straight from current to sixty days delinquent during the three months immediately after the Settlement announcement (relative to a control group of loans with non-Countrywide servicers). The effect of the Settlement rises to over twenty percent when we subset on borrowers with (i) greater access to liquidity through credit cards and (ii) lower current combined loan-to-value (CLTV) ratios. These borrowers were arguably less likely to default in the near term because they had significant untapped liquidity through their credit cards or some positive equity in their homes.

We also find no effect of the Settlement on default rates among subprime Countrywide borrowers with respect to debts (credit cards, second mortgages) that were not targeted by the Settlement. In fact, Countrywide borrowers exhibit a very large increase in the likelihood of being delinquent on their first mortgage while remaining current on other debts relative to the control group.

The full study is at Christopher J. Mayer, Edward Morrison, Tomasz Piskorski, and Arpit Gupta, "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide," NBER Working Paper No. 17065, May 2011.

Manufacturing Productivity Has Improved Our Lives

See Manufacturing Productivity Has Improved Our Lives from Mark Perry of "Carpe Diem."
"In a comment on this CD post about the dramatic gains in U.S. manufacturing productivity, JoeMac asks an important question: "How have these gains in productivity improved the lives of Americans?"

The chart above displays the share of Personal Consumption Expenditures represented by three categories of manufactured consumer goods that are most important to U.S. households: a) food and beverages consumed at home, b) clothing and footwear, and c) furnishings and durable household equipment (BEA data here). In the late 1940s, it required almost half (41%) of consumer expenditures to provide for the household basics: food, clothing and home furnishings, which are all manufactured goods.

As a direct result of the significant improvements in manufacturing productivity, manufactured goods have become cheaper and more affordable over time, resulting in a declining share of total consumer expenditures required to furnish our homes, and cloth and feed our families. By 1985, the share of consumer spending on household basics was only 20%, or less than half of the 41% share in 1948. For each of the last five years since 2006, the share of consumption expenditures on food, clothing and household furnishings has been below 14%, and was only 13.5% in 2010.

For every $100 of consumer spending today, only $13.50 is spent on food, clothing and household furnishings and $87.50 is spent on everything else. Contrast that to 1948, when it took $40 of every $100 of spending for the basics, leaving only $60 to spend on all other goods and services.

Bottom Line: Without the major productivity gains in the manufacturing sector over the last fifty years, it would still require almost half of consumer spending just to furnish our houses, and feed and clothe our families. The standard of living for the average American household has improved significantly over the last 50 years, and keeps getting better all the time, thanks in large part to greater manufacturing productivity.

Here's the proof that productivity gains have improved our lives: Would you be willing to exchange your computer and laser printer for an old manual typewriter? Would you be willing to exchange your cell phone or iPhone for an old rotary phone? Would you be willing to exchange your big-screen color TV for an old black and white TV? Would you be willing to trade your iPod and iTunes for an old phonograph and 45 RPM records? Would you be willing to trade your modern refrigerator, washing machine or dishwasher for appliances from the 1950s? I think most rational people would much prefer today's manufactured goods to those from past eras, and we can thank manufacturing productivity for lower costs and greater variety, and for better quality and more energy-efficient products."

Truth about Trade Deficits and Jobs

See U.S. Trade With Rest of World is Always Balanced from Mark Perry of "Carpe Diem."
"In a Tuesday Washington Times editorial "Truth about Trade Deficits and Jobs," Cato Institute trade specialist Dan Griswold makes the following important point about U.S. trade deficits:

"A trade deficit doesn't mean that the dollars flowing abroad just disappear. They quickly return to the United States. If they are not used to buy our goods and services to export, they are used to buy American assets — Treasury bills, corporate stock and bonds, real estate and bank deposits.

In this way, America's trade deficit is always and almost exactly offset by a foreign investment surplus. The net surplus of foreign investment into the U.S. each year keeps long-term interest rates down, prevents the crowding out of private investment by government borrowing and promotes job creation through direct investment in U.S. factories and businesses.

In the broadest sense, our trade with the rest of the world is always balanced. In 2010, Americans bought $4 trillion worth of goods, services and assets from abroad, while foreigners bought $4 trillion worth of goods, services and assets from the U.S."

MP: The Bureau of Economic Analysis released detailed data today on U.S. international transactions for the first quarter 2011. The U.S. had a $182.45 billion "trade deficit" for goods in the first quarter, which was offset by multiple surpluses for other international accounts including services, income receipts and asset purchases, so that our overall trade with the rest of the world remained balanced. (What a relief!)

While most of the media attention focuses on the "trade deficit," a more complete analysis always reveals offsetting surpluses for other international transactions that result in a "balance" of our total payments (cash outflows) and receipts (cash inflows) with the rest of the world. Because international transactions are calculated using double-entry bookkeeping accounting, international payments HAVE TO BALANCE, and the balance of payments has to equal ZERO, just like a corporate "balance sheet" has to balance such that Total Assets - (Debt + Equity) = ZERO.

The chart above illustrates graphically the "balance" of international transactions for the first quarter showing that the $1.1 trillion of cash inflows to Americans between January and March from: a) the export of U.S. goods and services, b) income receipts (e.g. dividends and interest income) to Americans owning foreign assets, and c) the sales of U.S. assets (e.g. stocks and bonds) to foreigners, is exactly equal to the $1.1 trillion of cash outflows paid to foreigners for: a) imports of goods and services, b) income payments to foreigners owning U.S. assets, and c) the purchase of foreign assets by Americans.

In other words, even though it's not very "newsworthy," America's international transactions were once again balanced in the first quarter, just like every quarter and every year, and the "balance of payments" was once again ZERO.

Bottom Line: As Dan Griswold concludes, politicians, and everybody else, should just stop worrying about the "trade deficit.""