Wednesday, August 31, 2011

Obama's Chief Econ. Adviser Once Made An Amazing Discovery: Demand Curves Slope Upward

Great post by Mark Perry of "Carpe Diem."
"In a 1994 paper published in the American Economic Review, economists David Card and Alan Krueger (appointed today to chair Obama's Council of Economic Advisers) made an amazing economic discovery: Demand curves for unskilled workers actually slope upward! Here's a summary of their findings (emphasis added):
"On April 1, 1992 New Jersey's minimum wage increased from $4.25 to $5.05 per hour. To evaluate the impact of the law we surveyed 410 fast food restaurants in New Jersey and Pennsylvania before and after the rise in the minimum. Comparisons of the changes in wages, employment, and prices at stores in New Jersey relative to stores in Pennsylvania (where the minimum wage remained fixed at $4.25 per hour) yield simple estimates of the effect of the higher minimum wage. Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent."

Note: In that case, New Jersey should have increased the minimum wage even higher than $5.05 per hour, and employment would have increased even more than 13%!

It was only a short time before the fantastic Card-Krueger findings were challenged and debunked by several subsequent studies:

1. In 1995 (and updated in 1996) The Employment Policies Institute released "The Crippling Flaws in the New Jersey Fast Food Study"and concluded that "The database used in the New Jersey fast food study is so bad that no credible conclusions can be drawn from the report."

2. Also in 1995, economists David Neumark and David Wascher used actual payroll records (instead of survey data used by Card and Krueger) and published their results in an NBER paper with an amazing finding: Demand curves for unskilled labor really do slope downward, confirming 200 years of economic theory and mountains of empirical evidence (emphasis below added):
"We re-evaluate the evidence from Card and Krueger's (1994) New Jersey-Pennsylvania minimum wage experiment, using new data based on actual payroll records from 230 Burger King, KFC, Wendy's, and Roy Rogers restaurants in New Jersey and Pennsylvania. We compare results using these payroll data to those using CK's data, which were collected by telephone surveys. We have two findings to report.

First, the data collected by CK appear to indicate greater employment variation over the eight-month period between their surveys than do the payroll data. For example, in the full sample the standard deviation of employment change in CK's data is three times as large as that in the payroll data.

Second, estimates of the employment effect of the New Jersey minimum wage increase from the payroll data lead to the opposite conclusion from that reached by CK. For comparable sets of restaurants, differences-in-differences estimates using CK's data imply that the New Jersey minimum wage increase (of 18.8 percent) resulted in an employment increase of 17.6 percent relative to the Pennsylvania control group, an elasticity of 0.93. In contrast, estimates based on the payroll data suggest that the New Jersey minimum wage increase led to a 4.6 percent decrease in employment in New Jersey relative to the Pennsylvania control group. This decrease is statistically significant at the five-percent level and implies an elasticity of employment with respect to the minimum wage of -0.24."

MP: It should be noted that even if empirical evidence suggests that raising the minimum wage has no effect on the level of employment, that finding does not necessarily mean that the minimum wage has no adverse effects. There could be many other negative effects making unskilled workers worse off, even if they manage to keep their job following a minimum wage increase. Here are some examples:

1. Reduction in the number of hours worked;
2. Reduction in fringe benefits like reduced cost uniforms, reduction or elimination of reduced cost or free meals at restaurants, elimination or reduction in company-sponsored holiday parties, picnics, events;
3. Reduction or elimination in any health care benefits;
4. Reduction in on-the-job training, etc.

The most likely outcome of a minimum wage increase, confirmed by Neumark and Wascher and consistent with the Law of Demand, would be that everything beneficial for unskilled workers decreases: employment levels, hours worked, fringe benefits, subsidized uniform and food, training, etc. Let's hope that labor economist Alan Krueger, as he assumes his new position as Chief Economist to the President, remembers that demand curves really do slope downward, despite his original flawed findings based on faulty survey data."

How ineffective was the stimulus really?

Great post by Tyler Cowen of "Marginal Revolution."
"1. Labor market polarization. This is a very popular idea among the Progressive Left and rightly so; it seems to be true and increasing in importance. Yet it gets dropped like a hot potato when discussions of stimulus come up. A simple interpretation of the data, consistent with labor market polarization, is that we have a larger sum of money chasing the same set of well-qualified, easily-employable workers. Polarization also means not so much substitutability and there is plenty of evidence in the Jones-Rothschild paper of employers finding labor markets — for what they want — somewhat tight.

2. The Jones-Rothschild paper has an estimate that only 42 percent of the job offers went to the unemployed. A lot of the money also was spent on capital, land, raw materials, and other factors of production. I’ve never seen good estimates here, but labor’s share is about seventy percent of gdp, actually a bit shy of that. Let’s say seventy percent of the stimulus gets spent on labor at all, and only forty-two percent of that gets spent on unemployed labor. (It’s actually worse than that because it is 42 percent of the job offers and may well be less than 42 percent of the revenue, most likely so if you think of the unemployed as bringing lower wage offers.) That’s less than thirty percent of the initial expenditure being spent on unemployed labor and that is before any other problems with the expenditures kick in. It’s hard for me to see that as a triumph of the program (NB: we are only talking about one part of ARRA here); would direct government employment have overhead costs that high? How about monetary stimulus? What’s the new calculation for cost per job saved per year?

3. Cutting nominal wages of workers hurts their morale and firing people hurts the morale of everyone left behind. Employers weigh these morale costs carefully when making personnel decisions. To get to the matter in question, when times are tight employers are often quite relieved when workers leave the firm voluntarily. It eases their cash flow, prevents a firing, and everyone is happy, sort of. Bad times are precisely when replacements of these workers do not happen. (Another version of that argument: If Keynesians are right about labor hoarding, job shifters don’t get replaced very often.) So the claim that an ARRA hire of an already-employed worker led to a replacement for that worker at the original firm is not so strong. This happened during down times and very often replacement is postponed, perhaps indefinitely. The Keynesian view, after all, stresses how AD problems hit virtually the entire economy.

4. Very often when the replacement does happen, the replacement is drawn from the pool of workers who are doing well. Some of those workers will be unemployed. But they are the unemployed who least need the help. Their average search time goes down, and that is somewhat of a social gain, but it is hardly the goal of a fiscal stimulus program. We’ve failed very badly at reemploying the hard-core unemployed and that is borne out by other numbers. So of the forty-two percent of offers going to the unemployed, how many were going to the “don’t so much need the help but were searching” unemployed? That will make the calculation look uglier yet.

Labor market polarization, labor market polarization, labor polarization. Market-oriented economists don’t like to stress this theme, but it’s true and it’s a big reason why the stimulus didn’t work better. It’s not an idea we should suddenly leave behind."

Why didn’t the stimulus create more jobs?

Great post by Tyler Cowen of "Marginal Revolution."
"There are many studies of the stimulus, but finally there is one which goes behind the numbers to see what really happened. And it’s not an entirely pretty story. My colleagues Garett Jones and Daniel Rothschild conducted extensive field research (interviewing 85 organizations receiving stimulus funds, in five regions), asking simple questions such as whether the hired project workers already had had jobs. There are lots of relevant details in the paper but here is one punchline:
…hiring people from unemployment was more the exception than the rule in our interviews.

In a related paper by the same authors (read them both), here is more:
Hiring isn’t the same as net job creation. In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations after January 31, 2009, were unemployed at the time they were hired (Appendix C). More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%)(Figure 2).

One major problem with ARRA was not the crowding out of financial capital but rather the crowding out of labor. In the first paper there is also a discussion of how the stimulus job numbers were generated, how unreliable they are, and how stimulus recipients sometimes had an incentive to claim job creation where none was present. Many of the created jobs involved hiring people back from retirement. You can tell a story about how hiring the already employed opened up other jobs for the unemployed, but it’s just that — a story. I don’t think it is what happened in most cases, rather firms ended up getting by with fewer workers.

There’s also evidence of government funds chasing after the same set of skilled and already busy firms. For at least a third of the surveyed firms receiving stimulus funds, their experience failed to fit important aspects of the Keynesian model.

This paper goes a long way toward explaining why fiscal stimulus usually doesn’t have such a great “bang for the buck.” It raises the question of whether as “twice as big” stimulus really would have been enough. Must it now be four times as big? The paper also sets a new standard for disaggregated data on this macro question, the data are in a zip file here."

Tuesday, August 30, 2011

Ten Job-Destroying Regulations

National Review article by Andrew Stiles. Here a few of them:
"MACT and CSAPR Utility Standards
The Obama administration has proposed new maximum-achievable-control-technology (MACT) standards and a cross-state air-pollution rule (CSAPR) for utility plants that will have a direct impact on utilities prices across the country. The new rules will affect more that 1,000 fossil-fuel-fired power plants, a number of which will likely be forced to shut down. As a result, Americans in many parts of the country could find themselves paying anywhere from 12 to 24 percent more for electricity. The House will vote next month on the Transparency in Regulatory Analysis of Impacts on the Nation (TRAIN) Act, sponsored by Rep. John Sullivan (R., Okla.), which would mandate a cumulative economic analysis for regulations proposed by the Environmental Protection Agency (EPA) and delay implementation of the new utility standards until the full impact of the administration’s regulatory agenda can be sufficiently analyzed.

Boiler MACT Rules
The EPA’s new “boiler MACT” rules would impose stricter emissions standards for some 200,000 commercial, institutional, and industrial boilers nationwide, and stand to dramatically impact the thousands of American businesses — from hospitals to factories to universities — that use them. EPA officials estimated the cost of the new rules at about $10 billion, though others predict the true cost will be almost double that figure. The U.S. Small Business Administration warned that the rules would cause “significant new regulatory costs” for businesses, institutions, and municipalities across the country, with the American forest and paper industry alone expected to see an additional burden of at least $5–7 billion in new capital and compliance costs. A U.S. Commerce Department analysis predicted job losses of up to 60,000 as a result of the stricter requirements — much greater than the EPA had initially claimed — while some estimates put the job loss figure at closer to 200,000. The EPA Regulatory Relief Act, sponsored by Rep. Morgan Griffith (R., Va.), would impose a stay on four related EPA regulations issued earlier this year and give the agency more time to issue new, less onerous rules. The House will vote on the bill in early October.

Coal Ash Regulations
The EPA has, for the first time ever, proposed national restrictions on coal ash, a byproduct of coal-burning power plants. Utility and power producers predict the cost of these rules will exceed $100 billion and force them to retire about one-fifth of the nation’s coal capacity, which could mean the loss of well over 100,000 jobs. The nonpartisan Congressional Research Service, which conducts policy research for lawmakers, says that the new restrictions are likely to force many coal plants to shut down between now and 2017. Rep. David McKinley (R., W.Va.) has sponsored legislation that would create a minimum standard for coal ash and would allow states to impose further regulations of their own as they see fit. The House plans to take up McKinley’s bill in late October.

EPA Ozone Rule
His cap-and-trade legislation having failed to win the support of Congress, President Obama has sought to push ahead with his environmental agenda through the EPA and the creation of strict new ozone-pollution standards. Many Republicans view this as the single most harmful regulation proposed by the administration and estimate that the total cost of implementation will be at least $1 trillion over a decade and millions of jobs. The EPA is expected to propose a readjustment of the regulatory standard for ozone from its current level of 0.075 parts per million (ppm) down to somewhere in the range of 0.060 to 0.070 ppm. Despite the fact that the normal EPA procedure doesn’t call for a review of ozone standards until 2013, the agency is expected to introduce the new rule early this fall, at which point the House Energy and Commerce Committee will take swift action to forestall its implementation.

EPA Greenhouse-Gas Requirements
As part of the Obama administration’s wildly ambitious goal to reduce America’s greenhouse-gas emissions by 28 percent by 2020, the EPA is expected to revise its greenhouse-gas new source performance standards (NSPS), which impact all new and existing oil, natural-gas, and coal-fired power plants, as well as oil refineries, across the nation. Furthermore, the EPA and the Department of Transportation have jointly conceived new regulations that would — for the first time ever — require stricter emissions and mileage standards for medium- and heavy-duty trucks. These new standards would affect everything from delivery vans to full-size pickups and buses. According to an analysis by Sen. John Barrasso (R., Wy.), the new rules would cost consumers an additional $1,000 per vehicle, at a total cost of more than $8 billion. As with the aforementioned ozone restrictions, chairman Fred Upton (R., Mich.) and the Energy and Commerce Committee are expected to take preventative action as soon as the new regulations are introduced."

Many New Job-Killing Regulations from the Obama Administration

Great post by Hans Bader of the Competitive Enterprise Institute.
"Andrew Stiles describes “Ten Job-Destroying Regulations” from the Obama administration that will wipe out hundreds of thousands of jobs. Another job-killing regulation is the Obama administration’s recent demand that trucking companies employ alcoholics as truckers rather than assigning them to less safety-sensitive positions — a demand that will lead to costly lawsuits against trucking companies by accident victims, and thus discourage anyone from setting up new trucking companies.

Still another is the Obama EEOC’s current practice of suing some employers who consider applicants’ arrest records and criminal convictions in hiring — a practice it is now considering broadening, through agency guidance further restricting consideration of applicants’ criminal histories in hiring decisions. If you were thinking of starting a new business, wouldn’t you be less likely to do so if you thought you would have no freedom as to whom you could hire, and no freedom to consider someone’s dangerousness or the content of their character before hiring them? If you don’t hire a criminal, the EEOC may sue you for “disparate impact”; but if you do hire the criminal, you may later be sued under a state law for “negligent hiring” if the criminal harms someone on the job or while doing errands for your company.

The Obama Justice Department used the Americans with Disabilities Act (ADA) to attack new technologies that were helpful to disabled people (under the theory that they weren’t helpful enough, even though they were more helpful than pre-existing technologies), and is trying to use the ADA to regulate the Internet. It also has signed an international disabled-rights treaty that could undermine U.S. sovereignty.

Deferring to the Obama administration’s interpretation of the ADA, the most-liberal federal appeals court recently ruled against Chipotle in a lawsuit that will lead to hundreds of thousands of dollars in damages and attorney fees and a no-win, catch-22 situation for the company. To satisfy the Justice Department’s interpretation of the ADA, Chipotle which must lower its employee counter tops to make them easier for disabled patrons to view. But to comply with worker-safety rules, it must keep counter tops high. (Ironically, the appeals court’s ruling in Antoninetti v. Chipotle conflicted with one of its own past rulings, violating the rule that one panel of an appeals court cannot contradict an earlier panel.)

We wrote earlier about how unemployment has risen due to Obama administration policies, and how perverse economic disincentives contained in the health care law will shrink the economy by at least 400,000 jobs, and more likely around 800,000 jobs.

Tagged as: ADA, alcoholics, alcoholism, Americans With Disabilities Act, Chipotle, civil rights division, criminal convictions, disparate impact, EEOC, Equal Employment Opportunity Commission, felons, Justice Department, Obama Justice Department."

Maybe we don't have to address our $500 billion trade deficit in manufactured goods

See Finding ways to raise costs and make us poorer by Russ Roberts of "Cafe Hayek."
"Susan Hockfield has a piece in the New York Times on manufacturing. She is probably a very smart person. She is described as a neuroscientist, president of MIT, and a member of the GE board. Here is how her piece opens:
The United States became the world’s largest economy because we invented products and then made them with new processes. With design and fabrication side by side, insights from the factory floor flowed back to the drawing board. Today, our most important task is to restart this virtuous cycle of invention and manufacturing.

Rebuilding our manufacturing capacity requires the demolition of the idea that the United States can thrive on its service sector alone. We need to create at least 20 million jobs in the next decade to offset the effects of the recession and to address our $500 billion trade deficit in manufactured goods. These problems are related, given that the service sector accounts for only 20 percent of world trade.
The piece goes on to talk about why we need government to get involved. But let’s just look at the opening. I disagree with almost every sentence. But the most important error is the idea implicit in this piece that there was a decision made somewhere by someone to gamble on a service economy instead of a manufacturing economy. If the idea of returning to what allegedly made America great is such a good idea, why does she need to write a piece in the New York Times? If making the stuff we invent is so virtuous, why isn’t it happening? There are four possibilities.

1. No one has thought of it.
2. People have thought of it but something stops them from implementing the idea.
3. People have thought of it but the gains go to others so no one does it.
4. It’s not a good idea.

So why does Apple, for example, outsource so much of its production? Because it’s cheaper and it allows more people to be able to afford more Apple products.

Making stuff the cheapest way is the road to prosperity.

Trying to find expensive ways to make stuff (because it once was a good idea but no longer is) is the road to poverty."

Monday, August 29, 2011

Obama Refinance Plan Sows Seeds for Another Bailout

Great post by Mark A. Calabria of Cato.
"I’ve already mentioned how the rumored Obama plan to re-finance existing underwater Fannie/Freddie loans with new mortgages at as low as 4 percent would not actually do much, if anything, positive for the economy. Even worse is that such a plan would likely require a massive infusion of taxpayer dollars into Fannie Mae and Freddie Mac.

First let us start with some basics about the Fannie Mae business. According to Fannie’s most recent 10-Q (see page 28), Fannie’s current interest-earning assets, mostly mortgages, yield the company 4.59%. However, Fannie has to fund those assets. The cost of Fannie’s total current interest-bearing funding is 3.99%, leaving the company a spread of 60 basis points to cover its non-interest expenses. What should be immediately obvious is that lowering the value of much of Fannie’s book to 4% will leave the companies with almost zero earnings. I’m not sure how that is supposed to get Fannie back on the path to repaying the taxpayer.

Worse is that newly re-financed 4% mortgages, or mortgage-backed securities, would remain on Fannie’s balance sheet for years (assuming Fannie is still around). I cannot be the only one who believes rates are going up in the future — either due to inflation or the Fed raising rates to fight inflation. It is not hard to imagine, in say two years, Fannie stuck with a balance sheet of 4% assets, while having to pay 5% to fund those assets. It is also not hard to believe that the taxpayer would get stuck making up the difference. On a $3 trillion balance sheet, that’s $30 billion. Add in Freddie and you’ll get another $20 billion or so. And that’s at future funding costs of 5%. If Fannie’s funding costs hit 6% in the next few years, we could be looking at an annual shortfall of $100 billion.

Instead of helping dig Fannie and Freddie into a deeper hole, Obama should start offering a real plan to help repay the taxpayer for what they’ve already had to shell out for Fannie and Freddie."

Higher capital-asset ratios are deflationary

See Lagarde Confused, Again by Steve H. Hanke of Cato.
"Christine Lagarde, the new managing director of the International Monetary Fund and former French finance minister, is confused, again. In her speech before the central bankers assembled in Jackson Hole, Wyoming this weekend, Ms. Lagarde asserted that the way forward for Europe was to recapitalize Europe’s “weak” banks. This, she claimed, would cut the “chains of contagion” and promote growth.

Nothing could be further from the truth. Even the IMF, in its July 2011 Article IV consultations with Mexico, realized that mandating higher capital-asset ratios (recapitalization) for banks, would take some steam out of Mexico’s money supply growth and jeopardize Mexico’s economic recovery.

It is rather easy to see why higher capital-asset ratios are “deflationary.” If we hold the level of a bank’s capital constant, an increase in its capital-asset ratio requires that the level of its assets must fall. This, in turn, implies that the banking system’s liabilities – demand deposits – must contract. Since the money supply consists of demand deposits, among other things, the money supply must, therefore, contract.

Alternatively, if we hold assets constant, an increase in the capital-asset ratio requires an increase in capital. This destroys money. When an investor purchases newly-issued bank shares, for example, the investor exchanges funds from a bank deposit for the new shares. This reduces deposit liabilities in the banking system and wipes out money.

Given Euroland’s anemic broad money growth rate (M3), the struggling state of Europe’s economies, and the IMF’s recent counsel to Mexico, Ms. Lagarde’s Jackson Hole assertions signal confusion, at best."

For U.S. Multinationals, More Jobs Abroad Mean More Jobs at Home

Great post by Daniel Griswold of Cato.
"We haven’t heard politicians complain much lately about “tax breaks for U.S. companies that ship jobs overseas,” perhaps because the next federal election is still more than a year away.

An article in the Financial Times today shows why that charge rings pretty hollow anytime in the election cycle. In an interview with CEO Doug Oberhelman of Caterpillar Inc., the FT notes that the Peoria, Ill.-based maker of earth-moving equipment has been thriving even though the domestic U.S. economy has been stuck in low gear.

Like many U.S. multinational companies, Caterpillar has been expanding its sales and profits by selling its products in rapidly growing emerging markets while spreading its production facilities around the world. Here’s the key passage for those politicians who complain about U.S. companies investing and hiring abroad:

In recent months, [Caterpillar] has announced plans for new factories in Singapore, Thailand, China and Brazil.

In the US, it is building a new distribution centre in Washington state while expanding its factories in North Dakota and Kansas.

Caterpillar has hired about 29,000 people worldwide in the past 20 months, some 13,000 of them in the US, with most of the rest in China, Brazil, Mexico and the UK.

The Caterpillar experience shows that job creation is not a zero-sum game, where jobs created abroad by U.S. companies must come at the expense of production and employment in the United States. In fact, as I show in my 2009 book Mad about Trade (pp. 100-104), the Caterpillar experience is not unusual. U.S. employment by parent companies will typically rise and fall in synch with employment at their affiliates abroad. For U.S. multinationals:

Foreign and domestic operations tend to complement each other and expand together. A successful company operating in a favorable business climate will tend to expand employment at both its domestic and overseas operations. More activity and sales abroad usually require more managers, accountants, lawyers, engineers, and production workers at the parent company.

As for those “tax breaks for shipping jobs overseas,” I explained why they are not a problem in an op-ed in the New York Post during the last election cycle. Keep it handy for when the demagoguery starts flying again next fall."

Click here to see that New York Post article. Here it is:
"With campaign season come predictable charges that Candidate X favors "tax breaks for corporations that ship US jobs overseas." It's a bogus claim.

With unemployment still stubbornly high, Americans are rightly worried about the economy. And politicians of both parties — from President Obama on down — have seized on US multinational companies as a convenient scapegoat.

The charge sounds logical: Under the US corporate tax code, US-based companies aren't taxed on profits that their affiliates abroad earn until those profits are returned here. Supposedly, this "tax break" gives firms an incentive to create jobs overseas rather than at home, so any candidate who doesn't want to impose higher taxes on those foreign operations is guilty of "shipping jobs overseas."

In fact, American companies have quite valid reasons beyond any tax advantage to establish overseas affiliates: That's how they reach foreign customers with US-branded goods and services.

Those affiliates allow US companies to sell services that can only be delivered where the customer lives (such as fast food and retail) or to customize their products, such as automobiles, to better reflect the taste of customers in foreign markets.

In 2008, US companies sold more than $6 trillion worth of goods and services through overseas affiliates — three times what US companies exported from America. And, no, those affiliates aren't mainly "export platforms," set up to ship goods back to the United States: Almost 90 percent of what they produce abroad is sold abroad.

It's not about access to "cheap labor," either: More than three-quarters of outward US manufacturing investment goes to other rich, developed economies like Canada and the European Union. That's where they find the wealthy customers, skilled workers, open markets, efficient infrastructure and political stability to operate profitably.

Indeed, US manufacturing companies invest a modest $2 billion a year in China, compared to $30 billion a year in Europe.

Nor do jobs created by those investments come at the expense of American workers. In fact, the more workers US multinationals hire abroad, the more they tend to hire at their parent operations in America. Ramped up production at affiliates stimulates demand at home for managers, accountants, engineers and sales reps. It also stokes demand for the export of higher-end components and services from the US-based parent.

But the charge is worse yet — because if Congress were to repeal the tax exemption for income earned abroad, it would kill American jobs. Affiliates would have to pay the relatively high US corporate income-tax rate, rather than the usually lower rate imposed by the host country — putting US affiliates at a competitive disadvantage with their foreign counterparts, which would still be paying the lower domestic rate.

Without the ability to defer taxes on income earned and kept abroad, US multinationals would be forced to cut back their foreign operations, ceding important markets to their competitors from Japan, Korea or the European Union. That would mean fewer foreign sales and fewer jobs created by their US operations.

But it's the big picture that really shows how absurd these claims are. Year after year, the rest of the world invests more in their affiliates here in the United States than American companies invest in operations outside our country.

From 2005 to 2009, foreign manufacturers invested an average of $87 billion a year in US factories, such as the Russian-owned Severstal steel plant in Mississippi and the German-owned BMW plant in South Carolina, while US manufacturing companies were investing an average of $45 billion a year abroad.

In other words, by the populists' flawed logic, the world has been shipping more jobs to America than US companies have been shipping abroad.

The real fear behind those desperate political ads isn't that American workers are having their jobs "shipped overseas." It's the fear of incumbent politicians that they'll soon be losing their jobs because of the economic downturn they've created here in America."

Sunday, August 28, 2011

Consumer Sovereignty Rules in the Long Run and Competition Breeds Competence

Great post by Mark Perry of "Carpe Diem."
The data in the chart above come from a fascinating 2007 Bloomberg article "The Fall of Detroit: An Insider's Tale," by John Lippert, chief of Detroit' Bloomberg New bureau, and formerly a GM employee from 1973 to 1981. Customer complaints were so high for Ford and GM in 1980 because they were both selling everything they could produce, and so it was quantity of production that mattered, not quality. According to John Lippert, "For labor and management alike, moving iron out the door trumped everything," and "We didn't emulate Toyota sooner because we didn't think we needed to."

What are the economic lessons here?

1) Although "labor sovereignty" and "management sovereignty" may have prevailed in the auto industry in the short-run as they ignored quality and consumer complaints, that outcome was not sustainable over time in a competitive market. Ultimately it was "consumer sovereignty" that prevailed in the auto industry over the long run, as the dramatic improvements in quality and customer satisfaction demonstrate.

2) The intense competition from Japanese automakers was the best thing that ever happened for American car consumers, because it was that competition that restored American consumers to their rightful throne as the kings and queens of the market economy. Adjusted for quality and price, American car consumers today have never had it so good. Ever. They can thank international competition from Toyota, Honda and VW for that.

HT: Chris Douglas

Do Mandatory Calorie Information Laws Help?

Maybe not. See Mandating Calorie Counts: Has Libertarian Paternalism Gone Too Far? by Steve Sexton of Freakonomics. Excerpt:
"Existing research suggests that the benefits of such a revenue-less tax are minimal. Stanford economists, for instance, show that New York’s law reduced calorie consumption per transaction at Starbucks by a mere 6% and didn’t change drink consumption at all. Tracking the purchases of anonymous Starbucks cardholders, they found no change in individuals’ common drink orders that could be attributed to the law. Mandatory calorie labeling in NYC, they estimate, reduces long-term body weight by less than 1%."

See Calorie Posting in Chain Restaurants by Bryan Bollinger, Phillip Leslie and Alan Sorensen of Stanford.

Not everyone has disregarded the heroic entrepreneur

Below is a letter I sent to The Wall Street Journal which, unfortunately, did not get printed. It was in reference to an article by Stephen Moore called Why Americans Hate Economics.
"Stephen Moore raises a good point when he says "there is a fatal disregard for the heroes of the economy: the entrepreneur" ("Why Americans Hate Economics,” Aug. 18). But not everyone has disregarded the heroic entrepreneur. Candace Allen Smith, wife of Nobel prize winning economist Vernon Smith, and Dwight Lee of Southern Methodist University, published an article in 1996 in The Journal of Private Enterprise article called “The Entrepreneur as Hero.” Inventor and Physicist Elliot McGucken has held an annual "Heroes Journey Entrepreneurship" festival at Pepperdine University. He is currently working on a related book. Economist Walter Williams gave a talk at Hillsdale College in 2005 called “The Entrepreneur As American Hero.” Johan Norberg published an article called “Entrepreneurs Are the Heroes of the World,” in Cato’s Letter: A Quarterly Message on Liberty in 2007. I published an article in the business newsletter The New Leaders in 1992 on entrepreneurs as heroes using the work of mythologist Joseph Campbell. Campbell once said in a radio interview that entrepreneurs were the real heroes in our capitalist society. He even referred to the work of the hero in myths as one of "creation and destruction." This parallels Joseph Schumpeter's theory of "creative destruction.""
See also my Who Says Entrepreneurs Are Heroes? (Remarks prepared for the first HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL, March 31st, 2007 at Pepperdine University)

Saturday, August 27, 2011

Co-operation within groups leads to antagonism within them -- if you leave out trade

See Why are we nice to strangers? by Matt Ridley. Excerpts:
"The more evolution encourages niceness within groups, the more it produces nastiness between them. Dr. Wilson thinks "the future is bleak if we don't turn our groups into organisms," by which he means entities that emulate the team behavior of cells in a body. But surely the future is bleak if we do turn groups into such organisms. Consider gangs, armies, sports fans and companies, which have taken this advice—and, as a result, fight each other.

As Adam Smith pointed out, kindness works among friends and relatives, but for cooperation among strangers, human beings use a wholly different mechanism: a division of labor that encourages people to engage in mutual service. Plenty of other animals (from chimpanzees to ants) show cooperation within groups and proportionate antagonism between them, whereas none has exchange and specialization between strangers. History shows that it is trade that dissolves hostility between groups.

A few years ago, Joe Henrich of the University of British Columbia and his colleagues did a series of experiments in small-scale societies in the Amazon, New Guinea and Africa. They asked people to play the "ultimatum game," in which a player must decide how much of a windfall he needs to share with another player to prevent the other player from exercising his right to veto the whole deal. The more the small-scale society is enmeshed in modern commerce, the more generous the offers people make. This may shock those who believe in Rousseau's idea of the "noble savage," but not those who believe in the virtues of what Montesquieu called "sweet commerce."

Could The Species Extinction Rate Be Falling?

See Counting species out by Matt Ridely. Excerpts:
"Nobody quite knows what human beings are doing to the speciation rate, but in his paper Dr Worm makes the now routine claim that extinction rates are running at 100 or 1,000 times their normal rates, because of human interference. We are often told we are causing a “sixth mass extinction” similar to that wrought by the asteroid that wiped out the dinosaurs. So what is the evidence for this claim?

One estimate of the species extinction rate — 27,000 a year — came from the biologist E. O. Wilson, of Harvard University, based on an assumption that habitat loss leads to predictable species loss through a mathematical relationship called the species-area curve. The trouble is, the theory is flawed.

A recent study by Stephen Hubbell and Fangliang He, of the University of California at Los Angeles, found that these “estimated” extinction rates are “almost always much higher than those actually observed” because destruction of forest habitat simply does not lead to proportionate species loss as predicted by the theory. In eastern America, in Puerto Rico and in the Atlantic rainforests of Brazil, more than 90 per cent of forest was extirpated, but the number of birds that died out locally were one, seven and zero respectively.

Another widely used estimate for the extinction rate — 40,000 species a year — came from Norman Myers, a British conservationist. Though often cited as if it were a scientific estimate, this number was more of an assumption. This is what Myers wrote in 1979: “Let us suppose that, as a consequence of this man-handling of natural environments, the final one quarter of this century witnesses the elimination of one million species — a far from unlikely prospect. This would work out, during the course of 25 years, at an average extinction rate of 40,000 species per year.” For more on Myers, see here.

There is no doubt that humans have caused a pulse of extinction, especially by introducing rats, bugs and weeds to oceanic islands at the expense of endemic species. Island species are often vulnerable to parasites, predators and competitors that continental species have evolved to cope with. Mauritius’s dodos, New Zealand’s moas, Madagascar’s elephant birds and many of Hawaii’s honeycreepers all succumbed to the introduction of rats, pigs, monkeys — and humans.

But now that most of these accidental introductions to islands have happened, the rate of extinctions is dropping, not rising, at least among birds and mammals. Bird and mammal extinctions peaked at 1.6 a year around 1900 and have since dropped to about 0.2 a year. Wilson’s 27,000 a year should be producing (pro rata) 26 bird and 13 mammal extinctions a year. Myers would predict even more.

Moreover, according to an analysis by the scholar Willis Eschenbach, of the 190 bird and mammal species that have gone extinct globally in the past 500 years, as recorded on the comprehensive list kept by the American Museum of Natural History, just nine were continental species (if you count Australia as an island, which in ecological terms it is)."

"Eschenbach says: “This lack of even one continental forest bird or mammal extinction, in a record encompassing 500 years of massive cutting, burning, harvesting, inundating, clearing and general widespread destruction and fragmentation of forests on all the continents of the world, provides a final and clear proof that the species-area relationship simply does not work to predict extinctions.”"

Friday, August 26, 2011

Occupational Licensing Gone Wild: In Chicago, You Need a License To Help Others Get a License

Great post by Mark Perry of "Carpe Diem."
"NCPA -- "Restrictions on who can and cannot practice a certain profession have increased significantly in recent years (see chart above). Occupational licensing — the most onerous restriction — requires people to pass tests and meet other criteria before they can practice a trade. It is a barrier to employment, disproportionately affecting low-income and immigrant workers, and frequently benefiting established practitioners by limiting competition from new entrants.

Many jobs could be performed by unlicensed individuals at a lower cost, without sacrificing safety or quality. Licensing decreases the rate of job growth by an average of 20 percent and costs the economy an estimated $34.8 billion to $41.7 billion per year, in 2000 dollars,
reports the Reason Foundation."

MP: Here's how we know that occupational licensing has gone too far in America:

In Chicago (since 2009), you need an official "expediters license" to help other people fill out paperwork to get a different city license (or a city permit or certificate). In other words, the occupational licensing process has gotten so complicated and time-consuming, that you need to hire a expediter to help you get a license to operate a business, and that expediter needs a license to help you get a license..... Kinda makes your head spin...."

America's Unique, Unsuccessful and Dangerous Housing and Mortgage Policies

Great post by Mark Perry of "Carpe Diem."
"The Richmond Fed has an interesting cover story in its second quarter publication titled "Foreign Housing Finance," with some interesting comparisons of U.S. housing finance, mortgage markets, and housing policy to other countries. Here's an excerpt:

"It is common for developed-country governments to intervene in the provision of housing services. Many have state-owned rental properties for example, and most have housing programs targeted to lower-income families. Nearly every industrialized country also encourages the direct ownership of homes through tax breaks and other policies — but none does so to the extent of the United States.

“Compared to other developed countries, only a couple come even close,” says economist John Kiff, who in April 2011 published a comparative analysis with colleagues at the International Monetary Fund (IMF). “You’ve got interest payment deductibility, nonrecourse [mortgages] in some states, special protections in bankruptcy courts,” among other things, he says. Then there’s the support of mortgage finance by Fannie Mae and Freddie Mac, the creatures of statute known as government-sponsored enterprises (GSEs). “Everything you could possibly name for supporting homeownership for everybody regardless of whether they can afford it, it’s all in place in the U.S.”

Given that the United States pours relatively more public resources into promoting homeownership, one might expect an obvious reflection in homeownership rates. This is not quite the case. At about 67 percent, the U.S. homeownership rate — defined as the ratio of occupied housing units that are owned by the resident — falls squarely in the middle of the pack among developed nations, although it should be noted that many factors affect homeownership, from rental policies to zoning regulations to intangibles such as culture (see chart above).

By some measures, we actually perform worse. The United States experienced a greater percentage of mortgage defaults during the recent global housing market decline than any other developed nation, despite some occurrences of larger housing booms and busts elsewhere. About 8 percent of U.S. mortgages were in default at the end of 2010, down from almost 10 percent a year earlier. Countries differ in what legally count as mortgage defaults, or “arrears,” but according to local definitions, almost 6 percent of Irish mortgages were 90 or more days in arrears in late 2010. Spain and the United Kingdom trailed at about 3 percent and 2 percent of mortgages, respectively, and defaults in most other developed countries hovered below 1 percent.

Whatever benefits the government’s support of homeownership has bought for the United States, its costs are evident. The government has injected more than $150 billion so far toward rescuing housing agencies Fannie Mae and Freddie Mac, whose support of the mortgage market resulted in record losses. U.S. housing policies heavily encourage consumers to build housing debt (as opposed to equity), which some data suggest may have helped to turn the unprecedented housing decline of the late 2000s into the major recession that followed."

MP: There are two excellent sidebar articles that accompany the main article, one on how U.S. housing policies encourage excessive debt (over equity), and another one on the 30-year fixed rate mortgage, both are worth reading.

One conclusion from the article might be that even with our political obsession and public policies directed towards increasing homeownerhsip, we still never achieved the levels of homeownership in countries like Canada, Australia, Ireland and Italy that don't promote homeownership as aggressively as in the U.S. And it was the political obsession with homeownership that was largely responsible for the housing bubble, deterioration of credit standards, mortgage meltdown, and financial crisis. So the political obsession with homeownership failed by every measure."

Cheap Private Busses May Be Doing A Better Job Than Subsidized High Speed Rail

See Traveling Back to the Future on Intercity Buses by Mark Perry of "Carpe Diem."
"From Michael Barone:

"While the Obama administration has been desperately seeking to spend $53 billion on so-called high-speed rail lines, private businessmen have developed Chinatown and Megabus lines that provide inter-city service that has attracted legions of price-conscious travelers.

Private bus operators have effectively taken a 100-year-old technology, the bus, and adapted it seamlessly to the 21st century. Compare high-speed rail. It is tethered to enormous stations that must be built or refurbished and limited to particular routes that, once the rails are laid down, cannot be changed except at prohibitive expense.

And it is enormously costly. In just two years, the estimated cost of the Obama administration's pet project, California high-speed rail, in the Central Valley has risen from $7.1 billion to $13.9 billion. Oxford economist Bent Flyvbjerg has found that high-speed rail projects always end up costing more, usually far more, than estimates. In addition, operating costs almost always end up higher than fares. And fares always turn out to be expensive, comparable to airfare if you book a popular flight the day before your trip.

So high-speed rail is a form of transportation on which government subsidizes business travelers. You don't see backpackers anymore on the Acela or Amtrak trains from Washington to New York. They're taking the Chinatown bus or one of its competitors.
Finally, most of the high-speed rail lines the Obama administration is touting are a whole lot slower than France's TGV or Japan's bullet train. You can beat the proposed Minneapolis-Duluth line by going just slightly over the speed limit on I-35. The proposed line from the college town of Iowa City to Chicago would take longer than the currently operating bus service.

So the private sector provides cheap intercity transportation while government struggles to waste $53 billion. Please remind me which is the wave of the future.""

A New Civil Right: The Right Right to Raise Hell in Section 8 Rental Housing in Nice Neighborhoods: Another Failed Government Housing Policy

Mark Perry of "Carpe Diem" quotes James Bovard writing in the WSJ.
""Section 8 rental subsidies have long been one of the most controversial federal social programs. The Department of Housing and Urban Development (HUD) under the Obama administration is making a troubled program worse.

In the 1990s, the feds were embarrassed by skyrocketing crime rates in public housing—up to 10 times the national average, according to HUD studies and many newspaper reports. The government's response was to hand out vouchers to residents of the projects, dispersing them to safer and more upscale locales.

Section 8's budget soared to $19 billion this year from $7 billion in 1994. HUD now picks up the rent for more than two million households nationwide; tenants pay 30% of their income toward rent and utilities while the feds pay the rest.

But the dispersal of public housing residents to quieter neighborhoods has failed to weed out the criminal element that made life miserable for most residents of the projects. "Homicide was simply moved to a new location, not eliminated," concluded University of Louisville criminologist Geetha Suresh in a 2009 article in Homicide Studies. In Louisville, Memphis, and other cities, violent crime skyrocketed in neighborhoods where Section 8 recipients resettled.

Dubuque, Iowa, is struggling with an influx of Section 8 recipients from Chicago housing projects. Section 8 concentrations account for 11 of 13 local violent crime hot spots. Though Section 8 residents account for only 5% of the local population, more than 20% of arrestees resided at Section 8 addresses. Dubuque's city government responded by trimming the size of the local Section 8 program. HUD retaliated by launching a "civil rights compliance review" of the program.

HUD seems far more enthusiastic about cracking down on localities than on troublesome Section 8 recipients who make life miserable for the rest of the community. And because Section 8 recipients in some areas are mostly black or Latino, almost any enforcement effort can be denounced as discriminatory.

Remarkably, HUD seems bent on creating a new civil right—the right to raise hell in subsidized housing in nice neighborhoods. Earlier this year, the agency decreed that Section 8 tenants who are evicted because of domestic violence incidents may sue for discrimination under the Fair Housing Act because women are "the overwhelming majority of domestic violence victims." In essence, this gives troublesome tenants a federal trump card to play against landlords who seek to preserve the peace and protect other renters."

~James Bovard writing in the WSJ

MP: In hindsight, we now know that the political obsession with homeownerhip created a housing bubble, mortgage meltdown, and financial crisis, which destroyed many formerly good, stable neighborhoods. We now have another example of failed government policy intended to create affordable housing, this time for renters, with government-subsidized Section 8 rental housing.

With one set of public policies, the political obsession with homeownership turned good renters into bad homeowners and created a housing, mortgage and financial crisis, and with another set of policies to create affordable rental housing, the political elite turned bad renters in bad neighborhoods into bad renters in formerly good neighborhoods, and helped destroy even more neighborhoods in America.

In hindsight, isn't it obvious that we would be better off today if the federal government had never intervened in the residential housing market, the mortgage market, or the rental market? Then add in the distortions and inefficiencies of local rent control laws in NYC and elsewhere, and you have a strong case that government intervention in housing over the last 50 years has done significant damage to the housing market and economy. I think it would be almost impossible to argue that government housing policies have created net benefits for America over the last half-century, and very easy to make the case that government policy has made our housing markets and neighborhoods much worse off."

Thursday, August 25, 2011

Time to Stop Increasing Education Spending?

Great post by Hans Bader Of the Competitive Enterprise Institute Blog.

"Even The New York Times is now questioning the massive spending increases on education that have occurred over the last generation in a discussion entitled “Spending Too Much Time and Money on Education?”:
Americans are spending more and more on education, but the resulting credentials — a high-school diploma and college degrees — seem to be losing value in the labor market.

Americans who go to college are triply hurt by this. First, as taxpayers: state and federal education budgets have ballooned since the 1950s. Second, as consumers: the average college student spends $17,000 a year on school, and those with loans graduate more than $23,000 in debt. And third, as a worker: in 1970, an applicant with a college degree was among an elite 11 percent, but now almost 3 in 10 adults have a degree.

Given that a high school diploma, a bachelor’s degree and even graduate school are no longer a ticket to middle-class life, and all these years of education delay the start of a career, does our society devote too much time and money to education?

In the discussion, PayPal co-founder and technology investor Peter Thiel notes that “College Doesn’t Create Success,” noting that college graduates make more money than non-college graduates partly because people who are more creative by nature are “more likely to complete college” than less creative people, even if going to college doesn’t make them any more creative or teach them much of value. The fact that many successful people happened to go to college doesn’t mean that college made them successful, anymore than the fact that “Brooklynites who work in Manhattan” make more money than “Brooklynites who work in Brooklyn” proves “that crossing the Brooklyn Bridge makes people more productive.”

Education expert Richard Vedder sums up education’s decline over the last generation as “Spending Triples; Results Slide.” As he notes,
Spending on K-12 schools, adjusting for inflation and enrollment growth, has roughly tripled over the last 50 years, yet there is little solid evidence that today’s students are better prepared for work and citizenship than their grandparents were — and even some evidence that they are less so.

The university situation is similar, with two-fifths of those entering college failing to graduate within six years, the average college enrollee spending less than 30 hours a week on academics, and a major recent study by Richard Arum and Josipa Roksa showing that there is little advancement of critical thinking or writing skills while in school. Moreover, college costs are soaring, and almost certainly the education system is becoming less efficient, at a time when labor productivity is rising elsewhere.

The icing on the cake is the total disconnect between student job expectations, college curricula, and the realities of today’s labor market. More college grads are taking low-skilled jobs previously occupied by those with high school diplomas — more than 80,000 bartenders, for example, have at least a bachelor’s degree. If students are successful in graduating (a big “if”), they often are saddled with debt and only able to get a relatively low-paying job.

As students learn less and less, nowhere is the problem greater than in America’s education schools, which people are required to attend if they wish to become teachers. Students in education schools have some of the lowest test scores of any major, and lower high-school grades. But education schools are so easy for students to pass that, as Professor KC Johnson notes,
the average grade in Education classes far exceeds the average in virtually any other major, to such an extent that “Education departments award exceptionally favorable grades to virtually all their students in all their classes.” The University of Missouri provided the most embarrassing results; at the state university’s flagship campus, one of every five Education classes ended with each student receiving an A. The logical inference of such figures . . . is that Education professors have failed to perform the gate-keeping role of ensuring that badly under-qualified students aren’t simply passed along so they can then become public school teachers. . . they reflect the leveling approach that is at the heart of contemporary schools of Education. Competition is bad; cooperation is good. Individual achievement must be discouraged; collegial collaboration is the ideal. “High-stakes” tests and exams requiring critical thinking have less relevance than group work or classroom chats. Such an environment all but ensures that professors will not attempt, much less succeed, in distinguishing much between students’ abilities.

Many education schools are ideologically oppressive places that seem designed to inculcate left-wing ideology rather than produce effective teachers. K-12 education is better in Japan because teachers there learn through apprenticeships and on-the-job training, rather than taking useless classes filled with psychobabble at education school, as George Leef points out in “Nurturing the Dumbest Generation.” “In Japan, there are no education schools at all. Those who wish to become teachers first earn degrees in some academic discipline and some of them are then accepted as apprentices who learn teaching by assisting veterans in the classroom.”

Increasing education spending has often benefited bureaucrats rather than teachers. There are now more college administrators than faculty at California State University. The University of California, which claims to have cut administrative spending “to the bone,” is creating new positions for liberal bureaucrats even as it raises student tuition to record levels:
The University of California at San Diego, for example, is creating a new full-time “vice chancellor for equity, diversity, and inclusion.” This position would augment UC San Diego’s already massive diversity apparatus, which includes the Chancellor’s Diversity Office, the associate vice chancellor for faculty equity, the assistant vice chancellor for diversity, the faculty equity advisors, the graduate diversity coordinators, the staff diversity liaison, the undergraduate student diversity liaison, the graduate student diversity liaison, the chief diversity officer, the director of development for diversity initiatives, the Office of Academic Diversity and Equal Opportunity, the Committee on Gender Identity and Sexual Orientation Issues, the Committee on the Status of Women, the Campus Council on Climate, Culture and Inclusion, the Diversity Council, and the directors of the Cross-Cultural Center, the Lesbian Gay Bisexual Transgender Resource Center, and the Women’s Center.

Other colleges raised spending on administrators as much as 600 percent in recent years.

States spend hundreds of millions of dollars operating colleges that are worthless diploma mills, yet manage to graduate almost no one — like Chicago State, “which has just a 12.8 percent six-year graduation rate.” People endure useless college courses to get paper credentials, but they get their actual education through internships and work.

College tuition is often a rip-off, since most people who went to college because of rising college-attendance rates in recent years wound up in unskilled jobs (including 5,057 janitors who have Ph.Ds or other advanced degrees), and tuition is skyrocketing faster than housing costs did during the real estate bubble, resulting in a 511 percent increase in student-loan debt. (100 colleges charge at least $50,000 a year, compared to five in 2008-09. Bush increased federal education spending 58 percent faster than inflation, while Obama seeks to double it. Spending has exploded at the K-12 level: per-pupil spending in the U.S. is among the highest in the world.”"

Did Hoover Contribute To Wage Stickiness In The Great Depression?

See What - or Who - Started the Great Depression? by Lee E. Ohanian of UCLA. Here is the abstract and conclusion:

Herbert Hoover. I develop a theory of labor market failure for the Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fi xed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation/low nominal spending apparently had such large real eff ects during the 1930s, but not during other periods of signifi cant deflation."


The defining characteristic of the Great Depression is a substantial and chronic excess supply of labor, with employment well below normal, and real wages in key industrial sectors well above normal. A successful theory of the Depression must explain not only why the labor market failed to clear, but why monetary forces apparently had such large and protracted effects. This paper proposes such a theory, based on President Hoover's program that offered industrial firms protection from unions in return for paying high wages. Firms deeply feared unions at this time, reflecting a growing union wage premium and a sea change in economic policy, including policies advanced and supported by Hoover, that significantly fostered unionization and enhanced their bargaining power. Consequently, there was an incentive for firms to follow Hoover's program of paying moderately higher real wages to avoid even higher wages and lower profits that would come from unionization.

I conclude that the Depression is the consequence of government programs and policies, including those of Hoover, that increased labor's ability to raise wages above their competitive levels. The Depression would have been much less severe in the absence of Hoover's program. Similarly, given Hoover's program, the Depression would have been much less severe if monetary policy had responded to keep the price level from falling, which raised real wages. This analysis also provides a theory for why low nominal spending - what some economists refer to as deficient aggregate demand - generated such a large depression in the 1930s, but not in the early 1920s, which was a period of comparable deflation and monetary contraction, but when firms cut nominal wages considerably.

Presidents Hoover and Roosevelt shared similar goals of fostering industrial collusion and increasing real wages and raising labor's bargaining power. Hoover accomplished these goals during a period of deflation by inducing industry to maintain nominal wages, and by promoting and signing legislation that facilitated union organization and that increased wages above competitive levels, including the Davis-Bacon Act and the Norris-Lagaurdia Act. Roosevelt accomplished these goals with the NIRA and the Wagner Act, both of which raised wages well above competitive levels while increasing industrial collusion.

The 1930s would have been a better economic decade had government policy promoted competition in product and labor markets, rather than adopting policies that extended monopoly in product markets and that set wages above competitive levels."

Tuesday, August 23, 2011

The Unintended Congo “Catastrophe” of Dodd-Frank Conflict Mineral Provision-it mostly harms local miners

Great post by Daniel Hamermesh of "Freakonomics."
"A number of months ago I wrote a blog entry on the requirement in the Dodd-Frank bill, put in by then-Senator (and now Kansas governor) Sam Brownback, prohibiting the purchase of “conflict minerals”—those that might be used to finance warfare in Africa, particularly the Congo. I noted the very simple economic point that this would create a surplus that would drive prices down, mostly harm local miners, but benefit buyers/countries without U.S.-level scruples about these purchases.

I shouldn’t brag—any Econ I student could have seen this point; but it is nice, albeit depressing, to see this prediction come true. From David Aronson in the New York Times:
Unfortunately, the Dodd-Frank law has had unintended and devastating consequences, as I saw firsthand on a trip to eastern Congo this summer. The law has brought about a de facto embargo on the minerals mined in the region, including tin, tungsten and the tantalum that is essential for making cellphones.

The smelting companies that used to buy from eastern Congo have stopped. No one wants to be tarred with financing African warlords — especially the glamorous high-tech firms like Apple and Intel that are often the ultimate buyers of these minerals. It’s easier to sidestep Congo than to sort out the complexities of Congolese politics — especially when minerals are readily available from other, safer countries.

For locals, however, the law has been a catastrophe. In South Kivu Province, I heard from scores of artisanal miners and small-scale purchasers, who used to make a few dollars a day digging ore out of mountainsides with hand tools. Paltry as it may seem, this income was a lifeline for people in a region that was devastated by 32 years of misrule under the kleptocracy of Mobutu Sese Seko (when the country was known as Zaire) and that is now just beginning to emerge from over a decade of brutal war and internal strife.
Brownback’s provision has harmed precisely those it was designed to protect, the small-scale miners in the Congo, but it has certainly lowered the price faced by Chinese processors for these inputs. Law of unintended, but what should have been perfectly expected, consequences."

Monday, August 22, 2011

Linda Chavez-Thompson's Claims About NAFTA And Jobs May Not Be True

Here is a letter to the editor I wrote to the San Antonio Express-News. So far it has not been published.
"Linda Chavez-Thompson claims that "the United States has lost more than 682,000 jobs to NAFTA" ("Flawed free-trade deals will cost American jobs," August 13). This is hard to prove and may be wrong.

In 2005, she said it was 900,000 jobs while UNITE HERE chief economist Mark Levinson said it was almost a million. Why does this figure change?

In 1993, Chavez-Thompson said "NAFTA poses a great threat to the public sector of the economy as it does to the private sector." The actual employment and wage record before and after NAFTA, which began in 1994, calls her prediction into question.

In the previous 17 years, the average annual unemployment rate was 6.97%, while the hourly wage increase of 96% was less than the CPI increase of 154%. So real wages fell. The average percent of the population employed was 60.34.

From 1994-2010, the average annual unemployment rate was 5.62%, while the hourly wage increase of 65% was more than the CPI increase of 51%. So real wages rose. The average percent of the population employed was 62.65.

Workers have done better since NAFTA than before. That, however, does not mean that it was the cause.

Dartmouth economist Douglas Irwin said in his book Free Trade Under Fire "it is virtually impossible to disentangle all of the reasons for jobs displacement."

But the annual U.S. unemployment rate was 6.1% in 1994, a mark not surpassed until 2009. It is possible that without NAFTA, the rate could have been even lower all those years.

In fact, in 2000, the rate was 4%. If NAFTA really cost us 680,000 jobs, then without it, unemployment would have been just 3.5% that year.

I know of no economist who has claimed that was possible. Full-employment is usually defined as an unemployment rate of 4-6%.

There are only 11 million manufacturing jobs now compared to the 17 million in 1994. But it was actually 17.26 million in 2000.

We have had two recessions since then which might have caused the decline. If NAFTA was the cause of manufacturing jobs losses, why did it take more than 6 years?

Douglas Irwin says that workers could get trade assistance under NAFTA simply by showing that imports contributed to their job loss even if it wasn't specifically due to NAFTA. This may be the source of the unrealistically high job loss estimates.

Irwin also mentions that it costs consumers $140,000 a year to preserve each domestic textile job since tariffs raise prices. So blocking free trade can be expensive.

A report signed in 2003 by the U.S. , Canada and Mexico concluded that NAFTA expanded employment.

What is good about trade? Again, let's summarize some of what Irwin says in his book.

It increases specialization in each nation which leads to greater efficiency and productivity which in turn leads to greater incomes. Consumers can buy a greater variety of goods, not just more goods. Nations that opened up to trade have generally taken advantage of these forces.

When nations close themselves to trade, as the U. S. did in 1807, the economy suffers (the embargo was lifted after about a year since everyone knew it was causing serious economic damage in terms of higher prices and lower incomes).

Job losses are by and large a macro issue. With unemployment still high, this is where we should all focus our attention. Blocking free trade will probably only hurt."

Sunday, August 21, 2011

Government Fails To Create Green Jobs

See Nimble government, job creating machine by Russ Roberts of "Cafe Hayek."
"The New York Times reports that green technology might not be the job creation engine some have claimed it to be:
In the Bay Area as in much of the country, the green economy is not proving to be the job-creation engine that many politicians envisioned. President Obama once pledged to create five million green jobs over 10 years. Gov. Jerry Brown promised 500,000 clean-technology jobs statewide by the end of the decade. But the results so far suggest such numbers are a pipe dream.

“I won’t say I’m not frustrated,” said Van Jones, an Oakland activist who served briefly as Mr. Obama’s green-jobs czar before resigning under fire after conservative critics said he had signed a petition accusing the Bush administration of deliberately allowing the Sept. 11 terrorist attacks, a claim Mr. Jones denies.

A study released in July by the non-partisan Brookings Institution found clean-technology jobs accounted for just 2 percent of employment nationwide and only slightly more — 2.2 percent — in Silicon Valley. Rather than adding jobs, the study found, the sector actually lost 492 positions from 2003 to 2010 in the South Bay, where the unemployment rate in June was 10.5 percent.

Federal and state efforts to stimulate creation of green jobs have largely failed, government records show. Two years after it was awarded $186 million in federal stimulus money to weatherize drafty homes, California has spent only a little over half that sum and has so far created the equivalent of just 538 full-time jobs in the last quarter, according to the State Department of Community Services and Development.

The weatherization program was initially delayed for seven months while the federal Department of Labor determined prevailing wage standards for the industry. Even after that issue was resolved, the program never really caught on as homeowners balked at the upfront costs.

“Companies and public policy officials really overestimated how much consumers care about energy efficiency,” said Sheeraz Haji, chief executive of the Cleantech Group, a market research firm. “People care about their wallet and the comfort of their home, but it’s not a sexy thing.”

Ah, seven (!) months to determine “prevailing wage standards” in the industry. No hurry. And even then they couldn’t spend the money because consumers, even at subsidized prices, didn’t like the program."

If it was 538 jobs for $93,000,000, that is about $172,000 per job. The government could have just given everyone $100,000 and let them use it for job training.

Saturday, August 20, 2011

FDR's policies prolonged Depression by 7 years, UCLA economists calculate

From From the UCLA Newsroom.
"Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.

"Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding," Ohanian said. "We show that they really did artificially inflate wages and prices."

Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.

The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened.""

The persistence of the Depression due to the New Deal's cartelization policies

See New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis by Harold L. Cole and Lee E. Ohanian, Journal of Political Economy, 2004. Abstract:
"There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak, and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution to the persistence of the Depression of New Deal cartelization policies designed to limit competition and increase labor bargaining power. We develop a model of the bargaining process between labor and firms that occurred with these policies and embed that model within a multisector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the failure of the economy to recover back to trend."

Maybe Austerity Can Lead To Recovery

See An Austere Recovery by George Selgin of "Free Banking."
"As I pointed out in a previous post, in the course the BBC/LSE "Hayek versus Keynes" debate the Keynesian side made some claims to which I had no opportunity to respond. My earlier post addressed some of them, but left another alone. This was Lord Skidelsky's claim, aimed at Great Britain's current riot-provoking austerity campaign, that no government has ever achieved a speedy recovery from a recession by clamping down on its spending or reducing its indebtedness.

But there is at least one instance of economic recovery--and hardly a trivial one--that contradicts, or at least very much appears to contradict, Lord Skidelsky's claim. This is the United States' rapid recovery from the deep recession into which it sank in the last half of 1920.

In many respects the boom-bust cycle that started in April 1919 was typically "Hayekian": during the boom year ending in April 1920 the Fed held its rediscount rate at 4 percent despite rising money market rates. Commercial banks took advantage of the low rate--as they'd actually been encouraged to do by the Fed--by borrowing from the Fed in order to re-lend at a profit, causing bank loans and investments to increase by just over 25 percent. General prices, and prices of commodities and land and other factors of production especially, in turn rose more rapidly than they had since the Civil War, exacerbating a gold drain that had begun with the armistice. Under the circumstances a reversal was only a matter of time.

When it came, the reversal was both sudden and sharp. Commodity prices tumbled from an index value of 248 in May 1920 to one of just 141 the following August, while consumer prices witnessed their greatest rate of deflation ever. Businesses were unable to pay their bills, industrial production fell by an unheard of 30 percent, and almost 5 millions workers lost their jobs, bringing the unemployment rate, which had been less than 2 percent, to just below 12 percent. Yet by August 1921 recovery was well underway. What's more, it was so swift that by the spring of 1923 unemployment had given way to a pronounced labor shortage, while industrial production reached a new peak.

Did the U.S. government hasten the recovery by means of deficit spending and other "stimulus" programs? Not in the least. instead, it stuck to conducting business as usual which, in those naive days before Keynes revealed that prudence and thrift were shopworn Victorian shibboleths, meant reverting to its prewar budget and retiring its wartime debt. In other words, it followed what would today be called an "austerity" policy, and did so to a degree that makes recent austerity measures in Great Britain and the U.S. seem downright profligate. Instead of spending more than it had been, the Harding administration steadily cut expenditures, exclusive of debt retirement, from just over $6.4 billion in fiscal 1920 to just under $3.3 billion in fiscal 1923--a whopping 45 percent! As a percentage of GNP, Randy Holcombe shows, Federal outlays fell from just over 7 percent to well under 4 percent.* And although its revenues also declined over the same period, from about $6.7 billion to about $4 billion, the government nevertheless devoted a large share--almost $1 billion--to reducing its indebtedness. As Benjamin Anderson, who was at the time an economist employed by Chase National Bank, observes in Economics and the Public Welfare (1949),
The idea that an unbalanced budget with vast pump-priming government expenditure is a necessary means of getting out of a depression received no consideration at all. It was not regarded as the function of the government to provide money to make business activity. It was rather the business of the United States Treasury to look after the solvency of the government, and the most important relief that the government felt that it could afford to business was to reduce as much as possible the amount of government expenditure, which had risen to great heights during the war; to reduce taxes--but not much; and to reduce public debt.*

Turning to monetary policy, although easy money did contribute somewhat to the recovery, the contribution was minor and largely unintended. Thus while the Fed banks gradually lowered their discount rate from 7 to 4 percent between 1921 and 1922, 4 percent was not especially low in light of the rapid deflation then in progress. And despite the rate lowering commercial bank rediscounts declined, as banks preferred reducing their indebtedness to the Fed to taking advantage (as they regretted having done earlier) of opportunities to re-lend borrowed funds at a profit. The Fed also made what was at the time an unusually large open-market purchase of government securities. But this only served to further reduce commercial bank rediscounts, and was moreover done, not with any intent of stimulating recovery, but solely so that the Fed could earn enough revenue to cover its expenses and pay promised dividends to its commercial-bank shareholders.

Proponents of Keynesian pump-priming often berate the Hoover administration for its "liquidationist" strategy for dealing with the outbreak of the Great Depression--forgetting that it was Hoover himself who caricatured Andrew Mellon, his Secretary of the Treasury, as someone who wished to "liquidate" the stock market, farmers, real estate, and so forth, and who took pride in not having followed his advice. But Mellon was also Harding's Secretary of the Treasury; and Harding, unlike Hoover, trusted him. It is one of the greater ironies of economic history that "liquidationist" policies, including government austerity, are blamed for prolonging a depression for which those policies were set aside, while being denied credit for perhaps helping to end one in which they really were put into practice."

More Evidence On The Damage That Minimum Wage Laws Cause

See Minimum Wages and Teen Employment: A Spatial Panel Approach by Charlene M. Kalenkoski, Associate Professor, Ohio University and Donald J. Lacombe, Research Associate Professor, West Virginia University. (Hat Tip: Division of Labor) Excerpts:
"Abstract: The authors employ spatial econometric techniques and Annual Averages data from the U.S. Bureau of Labor Statistics for 1990-2004 to examine how changes in the minimum wage affect teen employment. Spatial econometric techniques account for the fact that employment is correlated across states. Such correlation may exist if a change in the minimum wage in a state affects employment not only in its own state but also in other, neighboring states. The authors show that state minimum wages negatively affect teen employment to a larger degree than is found in studies that do not account for this correlation. Their results show a combined direct and indirect effect of minimum wages on teen employment to be -2.1% for a 10% increase in the real effective minimum wage. Ignoring spatial correlation underestimates the magnitude of the effect of minimum wages on teen employment."

"In our particular application, it may be that teens may cross state lines to obtain employment in a higher-wage state or that there are "employment centers" that draw employees from surrounding states, perhaps due to geographic features, such as valuable natural resources, that cross state boundaries, drawing employment into a particular region.

"as a state increases its real effective minimum wage, teen employment in adjacent states (as defined by our W matrix) decreases as well. One possible explanation for the effect is that as a state increases its real effective minimum wage, it becomes more attractive to workers in neighboring states who decide to queue for jobs in the state that raised its minimum wage. Consequently, teen employment in the neighbor state will decrease."


Previous studies of the minimum wage have neglected the issue of spatial dependence. This has potentially led to biased, inconsistent, and inefficient parameter estimates. The advantages of using spatial econometric techniques in a panel data setting are, firstly, that spatial dependence can be modeled and controlled for and, secondly, that spatial spillovers can be accounted for to produce more accurate estimates of the quantities of interest. Using a panel data set covering the period 1990-2004, we examine how changes in the real effective minimum wage affect teen employment. Estimation of the standard panel data model with state- and year- fixed effects but no controls for spatial dependence suggests that, as the real effective minimum wage increases by 10%, teen employment decreases by 1.78%, a finding that is consistent with estimates from other studies. Controlling for spatial dependence through estimation of a SAR model indicates that a 10% increase in the real effective minimum wage results in a 2.11% decrease in teen employment, a larger estimate because it includes both direct and indirect effects. Thus, studies that ignore spatial dependence may underestimate the negative effect of minimum wages on teen employment.""