Friday, September 30, 2011

Most of the increase in per-capita output that occurred after 1933 was due to higher productivity

See Cole and Ohanian ask a good question about the Great Depression by Tyler Cowen of "Marginal Revolution."
"The main point of our op-ed, as well as our earlier work, is that most of the increase in per-capita output that occurred after 1933 was due to higher productivity – not higher labor input. The figure [at the link] shows total hours worked per adult for the 1930s. There is little recovery in labor, as hours are about 27 percent down in 1933 relative to 1929, and remain about 21 percent down in 1939. But increasing aggregate demand is supposed to increase output by increasing labor, not by increasing productivity, which is typically considered to be outside the scope of short-run spending/monetary policies."

Why the Solyndra Loan Wasn't Like a VC Investment

Great post by Megan McArdle
"Despite all my Solyndra-blogging earlier in the week, I missed making one point that I really wanted to about the various facile comparisons between the DOE loan guarantee programs, and venture capital firms.

A number of people have claimed that the government had to make these loans because they're "too risky" or "too big" for the private sector, forcing the government to act as a VC firm. That riskiness means that yes, a non-insubstantial number of the loans will fail.

But this doesn't really make any sense. The private sector doesn't have any trouble dealing with risky ventures; it simply prices the capital accordingly, demanding high interest rates, or a larger equity chunk, in exchange for money.

Nor is the private sector unable to provide large sums of money--indeed, you may have noticed that it is doing so this very year, to the government. It may not be able to provide the capital through one bank, or one firm, but it can certainly syndicate a loan or do a large securities offering in order to aggregate many providers into one giant pile of cash.

Now, maybe you think that there is some unpriced social return of these investments. But then this has nothing to do with VCs, portfolios, or risk; it's a subsidy. And loan guarantees are not a very good way to structure that subsidy.

Here's why: at the company level, there's no difference between an optimal market outcome, and an optimal social outcome (from the DOE's point of view); both investors and society benefit if more solar cells are sold. If the solar cells are unlikely to be sold to many people, than the loan guarantee is not a good idea--it will not foster much environmental benefit. If the solar cells are likely to be sold to many people, than the loan guarantee should not be needed; private investors should be easily found to back the manufacturing.

The loan guarantees may help make the product slightly cheaper, of course. But again, if the product is sufficiently likely to be popular, capital should be available in the marketplace at a fairly decent price; the difference in interest rates should not be the difference between success and failure unless the loan itself represents an unsustainably large portion of the company's assets and income.

At any rate, it does not make sense to issue a massive loan guarantee in order to make a company's solar panels slightly cheaper; that's maybe a case for subsidizing solar panel installations, but it's not a case for guaranteeing the loans of a particular solar panel manufacturer.

So no, this isn't much like a VC. Or anything else that makes financial sense in the private sector. It's like . . . the government giving money to companies that sound whizzy."

The absence of any necessary negative connection between trade deficits and employment

See Ptolemaic Economics by Donald J. Boudreaux of "Cafe Hayek."
"Here’s a letter to the New York Times:

C. Fred Bergsten claims that eliminating America’s trade deficit is a costless way to boost employment in America (“An Overlooked Way to Create Jobs,” Sept. 29). He’s mistaken. Among his several errors is his illegitimate assumption that all dollars that foreigners don’t spend on American exports remain idle, effectively withdrawn from circulation.

Consider two cases. First, Americans buy $1 million worth of textile imports from the Chinese who then buy $1 million worth of pharmaceutical exports from Americans. The result: balanced trade.

Second case: Americans buy $1 million worth of textile imports from the Chinese who then buy $1 million worth of land in Texas. The American seller of the land immediately spends this $1 million on American-made pharmaceuticals. (Perhaps the Texan is opening a pharmacy.) The result: a $1 million U.S. trade deficit.

In both cases, Americans producers sell an additional $1 million worth of output as a consequence of Americans importing $1 million worth of goods. So – although America runs a trade deficit only in the second case – the employment effects in both cases are identical.

Such an example, being entirely plausible, is sufficient to prove the absence of any necessary negative connection between trade deficits and employment.

Donald J. Boudreaux"

Thursday, September 29, 2011

Herbert Hoover: Father of the New Deal.

See My New Cato Briefing Paper on Hoover by Steven Horwitz.
"The Cato Institute has released my Briefing Paper titled "Herbert Hoover: Father of the New Deal." I try to cover all the major evidence for Hoover's role as precursor to FDR and why connecting him with laissez-faire is simply wrong. Here's the Executive Summary:

Politicians and pundits portray Herbert Hoover as a defender of laissez faire governance whose dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the stock market crash in 1929. In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt's advisers knew that Hoover had started the New Deal. One of them wrote, "When we all burst into Washington ... we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself."

Hoover's big-spending, interventionist policies prolonged the Great Depression, and similar policies today could do similar damage. Dismantling the mythical presentation of Hoover as a "do-nothing" president is crucial if we wish to have a proper understanding of what did and did not work in the Great Depression so that we do not repeat Hoover's mistakes today."

Tuesday, September 27, 2011

Maybe Trade, Not Brain Size, Is What Led To Human Success

See The ancient cloud by Matt Ridely.
"There was no sudden change in brain size 200,000 years ago. We Africans—all human beings are descended chiefly from people who lived exclusively in Africa until about 65,000 years ago—had slightly smaller brains than Neanderthals, yet once outside Africa we rapidly displaced them (bar acquiring 2.5% of our genes from them along the way).

And the reason we won the war against the Neanderthals, if war it was, is staring us in the face, though it remains almost completely unrecognized among anthropologists: We exchanged. At one site in the Caucasus there are Neanderthal and modern remains within a few miles of each other, both from around 30,000 years ago. The Neanderthal tools are all made from local materials. The moderns' tools are made from chert and jasper, some of which originated many miles away. That means trade.

Evidence from recent Australian artifacts shows that long-distance movement of objects is a telltale sign of trade, not migration. We Africans have been doing this since at least 120,000 years ago. That's the date of beads made from marine shells found a hundred miles inland in Algeria. Trade is 10 times as old as agriculture.

At first it was a peculiarity of us Africans. It gave us the edge over Neanderthals in their own continent and their own climate, because good ideas can spread through trade. New weapons, new foods, new crafts, new ornaments, new tools. Suddenly you are no longer relying on the inventiveness of your own tribe or the capacity of your own territory. You are drawing upon ideas that occurred to anybody anywhere anytime within your trading network.

In the same way, today, American consumers do not have to rely only on their own citizens to discover new consumer goods or new medicines or new music: The Chinese, the Indians, the Brazilians are also able to supply them.

That is what trade does. It creates a collective innovating brain as big as the trade network itself. When you cut people off from exchange networks, their innovation rate collapses. Tasmanians, isolated by rising sea levels about 10,000 years ago, not only failed to share in the advances that came after that time—the boomerang, for example—but actually went backwards in terms of technical virtuosity. The anthropologist Joe Henrich of the University of British Columbia argues that in a small island population, good ideas died faster than they could be replaced. Tierra del Fuego's natives, on a similarly inhospitable and small land, but connected by trading canoes across the much narrower Magellan strait, suffered no such technological regress. They had access to a collective brain the size of South America."

Amazing Drop in Deaths from Extreme Weather

Great post by Mark Perry of "Carpe Diem"

The Reason Foundation has released a new study titled, "Wealth and Safety: The Amazing Decline in Deaths from Extreme Weather in an Era of Global Warming, 1900–2010," here's the executive summary (emphasis mine):

"Proponents of drastic curbs on greenhouse gas emissions claim that such emissions cause global warming and that this exacerbates the frequency and intensity of extreme weather events, including extreme heat, droughts, floods and storms such as hurricanes and cyclones. But what matters is not the incidence of extreme weather events per se but the impact of such events—especially the human impact. To that end, it is instructive to examine trends in global mortality (i.e. the number of people killed) and mortality rates (i.e. the proportion of people killed) associated with extreme weather events for the 111-year period from 1900 to 2010.

Aggregate mortality attributed to all extreme weather events globally has declined by more than 90% since the 1920s, in spite of a four-fold rise in population and much more complete reporting of such events. The aggregate mortality rate (per million population) declined by 98% (see chart above), largely due to decreased mortality in three main areas:
  • ·Deaths and death rates from droughts, which were responsible for approximately 60% of cumulative deaths due to extreme weather events from 1900–2010, are more than 99.9% lower than in the 1920s.

  • Deaths and death rates for floods, responsible for over 30% of cumulative extreme weather deaths, have declined by over 98% since the 1930s.

  • ·Deaths and death rates for storms (i.e. hurricanes, cyclones, tornados, typhoons), responsible for around 7% of extreme weather deaths from 1900–2008, declined by more than 55% since the 1970s.

To put the public health impact of extreme weather events into context, cumulatively they now contribute only 0.07% to global mortality. Mortality from extreme weather events has declined even as all-cause mortality has increased, indicating that humanity is coping better with extreme weather events than it is with far more important health and safety problems.

The decreases in the numbers of deaths and death rates reflect a remarkable improvement in society’s adaptive capacity, likely due to greater wealth and better technology, enabled in part by use of hydrocarbon fuels. Imposing additional restrictions on the use of hydrocarbon fuels may slow the rate of improvement of this adaptive capacity and thereby worsen any negative impact of climate change. At the very least, the potential for such an adverse outcome should be weighed against any putative benefit arising from such restrictions."

Update: Julian Morris writes on about the study.

Transporting the final product accounts for only a small part of the energy consumed in the production and delivery of food

See Interesting Fact of the Day by Mark Perry of "Carpe Diem."
"From the article "Got Cheap Milk?: Why Ditching Your Fancy, Organic, Locavore Lifestyle is Good for the World's Poor," in Foreign Policy (emphasis mine):

"What about [eating] "local"? Perhaps locally grown produce tastes better to some people. And perhaps it is psychologically better to have close contact with the people who grow your food. But that doesn't make it good for the environment.

For example, it is twice as energy efficient for people in Britain to eat dairy products from New Zealand than from domestic producers. It is four times more energy efficient for them to eat lamb shipped from the other side of the world than it is to eat British lamb.

That's because transporting the final product accounts for only a small part of the energy consumed in the production and delivery of food. It's far better to eat foods from places where production itself is more efficient. For example, New Zealand cattle eat clover from the fields while British livestock tend to rely on feed -- which itself is often imported.""

Thursday, September 22, 2011

Trade Deficits Don't Cause Unemployment

See Fiction Still Drives the U.S.-China Trade Debate by Daniel Ikenson of Cato.
"The Economic Policy Institute is at it again, asserting itself as an unrivaled purveyor of economic nonsense. Every year, the labor-sponsored lobbying shop produces a sensational report, which presumes to measure the deleterious impact of trade with China on U.S. employment. And every year those figures become scripture to the likes of Sen. Sherrod Brown and Rep. Mike Michaud, in their efforts to make Americans less free to choose how and with whom to transact.

This year’s takeaway is: “Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010.” In the report summary on EPI’s homepage, author Robert Scott makes the following claim: “Increases in U.S. exports tend to create jobs in the United States, and increases in imports tend to lead to job loss. Thus, a growing trade deficit signifies growing job loss.”

Well, that might be true…but for the fact that it’s demonstrably false.

As the chart below (which is based on easily verifiable figures published in the Economic Report of the President) reveals, the trade deficit and job creation appear to be positively correlated. When the deficit rises, employment increases; when the deficit shrinks, employment declines. So, right off the bat, a central premise of Scott’s analysis is in doubt.

Beyond that problem, EPI’s methodology is not taken seriously by most economists because, for one, it approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the figures. There’s not. And it pretends that imports do not create or support U.S. jobs, which is clearly wrong. After all, U.S. producers — purchasing raw materials, components and capital equipment — accounted for more than half of the value of all U.S. imports last year ($1.05 trillion). In other words, the majority of U.S. imports support U.S. economic activity, which is the basis of U.S. employment. Yet EPI’s methodology counts those imports as jobs-reducing.

Last month, the U.S. International Trade Commission published its seventh update to the “The Economic Effects of Significant U.S. Import Restraints” study, which contains a special section on global supply chains. On page xv of the executive summary is a table that not only raises more serious doubts about EPI’s methodology, but should put to rest once and for all the hyperbole employed and anxiety caused by alarmist public relations campaigns and the politicians they serve.

Table ES.4 of that study indicates that there is more U.S. valued added (U.S. labor, material, and overhead) in U.S. imports than there is Chinese valued added in U.S. imports. Specifically, 8.3 percent of the value of U.S. imports (about $160 billion last year) is U.S. value, while 7.7 percent of the value of U.S. imports is Chinese value added. EPI’s methodology does not account for the U.S. jobs associated with the U.S. value added in U.S. imports.

Furthermore, that same table reveals that U.S. value added accounts for 89 percent of total U.S. consumption (a figure that confirms the findings in a recent San Francisco Federal Reserve study), which means that foreign value-added accounts for just 11 percent of U.S. consumption, making the United States a fairly closed economy—or at least, a relatively non-integrated economy. And China? Well, China only accounts for a measly 0.9 percent of the goods and services consumed in the United States. So, if 2.8 million U.S. jobs were lost to a country that produces less than one percent of what Americans consume, I say its about time we shed those highly inefficient jobs that have been a drag on the U.S. economy. The fact is, however, that 2.8 million is a fiction.

EPI’s jobs loss figures also fail to reflect the fact that the U.S. capital account surplus – the flip side of the current account deficit – is a considerable source of U.S. employment. Foreign investment in U.S. plants, property, hotels, equities, debt, and other assets provide employment for millions of Americans in much the same way that U.S. exports do.

Yes, the 2.8 million job loss figure is a fiction, concocted to support political talking points and a narrow agenda that distract the public from the real problems that ail our economy. Some Chinese government policies are genuine causes for concern, worthy of efforts to resolve, but we limit our capacity to address the real problems effectively when every last gripe becomes a call to arms."

Open Immigration, Falling Effective Tariffs Fell While The US Grew In The 19th Century

See Immigrants and Imports by Don Boudreaux of "Cafe Hayek."
"A couple of years ago, I debated Pat Buchanan on the question of free trade. I endorsed free trade; Pat Buchanan, of course, defended protectionism. (Buchanan won the debate, I’m chagrined to admit.)

One point Buchanan made in that debate – and that he’s made in print – is that the impressive American economic growth of the latter half of the 19th century was promoted by protectionism. The last three decades of the 19th century and the first few years of the 20th century were indeed overall years of impressive economic growth. And these were also years of high tariffs. Is Pat Buchanan correct? Did these tariffs contribute to the growth?

In an interesting new article published in The Independent Review, economists Cecil Bohanon and T. Norman Van Cott argue against the proposition that America’s economic growth in the several decades following the U.S. Civil War was promoted by tariffs.

First, they show that the tariff rate on all imports — that is, imports taken as a whole — fell, if only gradually, from 1870 through 1910. This fact contrasts with the steady rate of tariffs on dutiable imports. This happened because, during these years, the volume of nondutiable imports grew relative to that of dutiable imports.

Second, the U.S. in those years (as today) received huge amounts of foreign capital.

Third, and most interestingly, Bohanon and Van Cott argue convincingly that the open-immigration policy America followed during these years effectively undercut tariff protection. After all, if people can come freely to the U.S. – as they did, in droves, during this time – the notion that growth depends upon protecting American workers from foreign workers is undercut.

Bohanon and Van Cott put an intriguing Julian-Simonesque spin on the point by noting that the immigrant labor that came freely to the U.S. circa 1870-1910 contained inchoate goods and services – goods and services that these immigrants would eventually actually produce once they began working in the U.S. economy. So, to admit an immigrant is to admit in — duty free! — a stream of goods and services. It is, in short, a means around high tariffs. Because immigration during these decades was so significant, Americans effectively imported, duty-free, many more goods and services (inchoate though they were) than is revealed by conventional trade statistics."

The U.S. Grew When We Had Open Immigration

See Whose MONEY Is It, Anyway? by Don Boudreaux of "Cafe Hayek."
"Here’s a letter to The American Conservative (HT Craig Kohtz):
Pat Buchanan repeats his familiar litany against free trade and immigration (“Whose Country Is It, Anyway?” Sept. 19). That litany boils down to a simple formula: the U.S. economy declines as American consumers gain better access to lower-priced goods and services, and as American producers gain better access to lower-cost means of production.

In short, competition creates poverty, while monopoly creates wealth.

Economists have repeatedly and utterly debunked such claims for the alleged marvels of monopoly power. I’ll not here repeat any such debunking. Instead, I merely highlight one internal inconsistency in Mr. Buchanan’s own arguments.

He frequently asserts that 19th-century America’s policy of relatively high tariffs, along with its impressive economic growth, proves that protectionism promotes prosperity. End of story; full stop; no further analysis is necessary. Fact A’s simultaneous existence with fact B proves that A caused B.

Well, 19th-century America also had open immigration. So Mr. Buchanan ought to join the ranks of those of us who support a return to that policy. After all, according to the tenets of his own epistemology, the mere fact that booming 19th-century America had open immigration proves that open immigration promotes – or at least doesn’t hamper – vibrant economic growth.

Donald J. Boudreaux"

Wednesday, September 21, 2011

Free Market Solutions to Today’s Toughest Problems

That is the name of a conference that will take place at SMU in Dallas on October 14. Click here to read all about it. Here is some of the info.

The speakers will discuss "Jobs, global warming, education, health care, poverty, Social Security and energy — how to fix things without Big Government."

It will be from 8:30AM – 1:30PM, luncheon included, at the James Collins Center at SMU Cox School of Business.

Featured Speakers:

Robert Stavins, Professor, Harvard Business School
Brian Habacivch, Fellon McCord
Michael Cox, Director, Center for Global Markets, SMU
Michael Tanner, Senior Fellow, CATO
John Goodman, President, NCPA
Lisa Snell, Director of Education and Child Welfare, Reason Foundation
Luncheon Keynote: Warren A. Stephens, CEO, Stephens Inc.

Click here for speaker biographies.

Shared bikes don't work out even under good circumstances

See Smart People Can Be Slow Learners by E. Frank Stephenson of "Division of Labor."
"Yet another example of a failed open access bike program comes from Davidson College. Some key graphs:
Why was such a useful and popular program discontinued? Unfortunately, it appears that the strong Davidson sense of honor and responsibility wavered when it came to these bikes.

"They were stolen, damaged and some were even thrown off of buildings," Jeannie Kinnett '12 said. "Since there were no repercussions for damaging them, and no way to ensure their maintenance, the Activities Tax Council decided that funding them this year would not be worth it since they would be trashed anyway."

There were efforts by Davidson Outdoors and other organizations to improve student treatment of the bikes, but this was largely ineffective. They were being damaged and stolen faster than they could be repaired or replaced.

"I once found one on the side of the road on Main Street," Samanvitha Sridhar '14 said. "I tried to ride it, but the tires were completely deflated, so I fell. It was pretty awful, and after that, I avoided the bikes because they all seemed to be in bad condition or broken." One bike was even found in a drug bust."
Click here to read the article from the Davidson school paper

Economic freedom means lower unemployment rates

See Surely It's Just a Coincidence That ... by E. Frank Stephenson of "Division of Labor."
"... Hong Kong has a 3.2% unemployment rate and it ranks first, yet again, in the EFW index.

UPDATE: Here's the abstract of Horst Feldmann's 2007 Southern Economic Journal article examining the relationship between unemployment and economic freedom:
Using data from 87 countries and the years 1980–2003, this paper empirically analyzes whether and to what extent economic freedom affects unemployment. According to the regression results, economic freedom is likely to substantially reduce unemployment, especially among women and young people. A small government sector and a legal system characterized by an independent judiciary, impartial courts, and an effective protection of property rights most clearly seem to have beneficial effects. In addition, there are indications that freedom to trade across national boundaries and a light regulatory burden may also lower unemployment, though apparently in the long term only.

Maybe the Earth can handle 9 billion people

See Room for all by Matt Ridley. Excerpts:
"... it is actually likely that the ecological impact of nine billion in 2050 will be lighter, not heavier: there will be less pollution and more space left over for nature than there is today.

Consider three startling facts. The world population quadrupled in the 20th century, but the calories available per person went up, not down. The world population doubled in the second half of the century, but the total forest area on the planet went up slightly, not down. The world population increased by a billion in the last 13 years, but the number living in absolute poverty (less than a dollar a day, adjusted for inflation) fell by around a third.

Clearly it is possible at least for a while to escape the fate forecast by Robert Malthus, the pessimistic mathematical cleric, in 1798. We've been proving Malthus wrong for more than 200 years. And now the population explosion is fading. Fertility rates are falling all over the world: in Bangladesh down from 6.8 children per woman in 1955 to 2.7 today; China - 5.6 to 1.7; Iran - 7 to 1.7; Nigeria - 6.5 to 5.2; Brazil 6.1 to 1.8; Yemen - 8.3 to 5.1.

The rate of growth of world population has halved since the 1960s; the absolute number added to the population each year has been falling for more than 20 years. According to the United Nations, population will probably cease growing altogether by 2070. This miraculous collapse of fertility has not been caused by Malthusian misery, or coercion (except in China), but by the very opposite: enrichment, urbanization, female emancipation, education and above all the defeat of child mortality - which means that women start to plan families rather than continue breeding.

Increasing prosperity means eating more food, though. Can we really feed today's let alone tomorrow's billions? In 60 years we have trebled the total harvest of the three biggest crops, wheat, rice and corn. Yet the acreage devoted to growing these crops has barely changed. This is because fertilizer, irrigation, pesticides and new varieties have greatly increased yields.

They continue to do so. Growth regulators boost the yield of wheat. Genetic modification boosts the yield of cotton (while increasing the biodiversity in fields). New enzymes promise to cut the phosphate output and increase weight gain of pigs. These technologies save rain forest, by sparing land from the plow. If we went back to organic farming, the world would have to cultivate more than twice as much land as we do."

"What could possibly prevent this golden vision? Running out of fossil fuels? Not a chance: the discovery of how to extract shale gas has just given the world a quarter of a millennium's worth of cheap fossil fuel. Running out of water? No: far more frugal uses of water are already in play where price and technology combine. Climate change? Hardly. Rising carbon dioxide is already measurably boosting yields of crops and the slow and small warming we have had so far - roughly half a degree in 50 years - has probably boosted rainfall slightly. Even the UN's own models predict that a big warming by 2050 from here is unlikely."

Tuesday, September 20, 2011

New FBI Numbers Reveal Failure of "War on Drugs": One Drug Arrest Every 19 Seconds in the U.S.

Great post by Mark Perry of "Carpe Diem." It originally comes from Law Enforcement Against Prohibition (LEAP).

"WASHINGTON, D.C. -- "A new FBI report released today shows that there is a drug arrest every 19 seconds in the U.S. A group of police and judges who have been campaigning to legalize and regulate drugs pointed to the figures showing more than 1.6 million drug arrests in 2010 as evidence that the "war on drugs" is a failure that can never be won.

"Since the declaration of the "War on Drugs" 40 years ago we've arrested tens of millions of people in an effort to reduce drug use. The fact that cops had to spend time arresting another 1.6 million of our fellow citizens last year shows that it simply hasn't worked. In the current economy we simply cannot afford to keep arresting three people every minute in the failed 'war on drugs,'" said Neill Franklin, a retired Baltimore narcotics cop who now heads the group Law Enforcement Against Prohibition (LEAP). "If we legalized and taxed drugs, we could not only create new revenue in addition to the money we'd save from ending the cruel policy of arresting users, but we'd make society safer by bankrupting the cartels and gangs who control the currently illegal marketplace."

Today's FBI report shows that 81.9 percent of all drug arrests in 2010 were for possession only, and 45.8 percent of all drug arrests were for possession of marijuana.""

Omaha Hokum: The Entire Buffett Rule is False

Great post by Mark Perry of "Carpe Diem."

"So here we are back at the same old political stand, though even Mr. Obama concedes that today those he routinely calls "millionaires and billionaires" pay at least some tax. The President's complaint, echoing billionaire Warren Buffett, is that too many billionaires pay a lower rate than regular salary earners. So even as he endorsed tax reform in general yesterday, Mr. Obama insisted that one of his reform "principles" is that people who make more than $1 million must pay a higher tax rate than middle-class earners.

There's one small problem: The entire Buffett Rule premise is false, as the table above shows. In 2008, the last year for which such data are available, the IRS reports that those who made more than $1 million in adjusted gross income paid an average income tax rate of 23.3%.

That's slightly lower than the 24.1% rate paid by those making between $500,000 and $1 million, probably because the richest are like Mr. Buffett and earn more from capital gains and dividends. The rate for a relative handful of the rich—400 people—fell to 18%. But nearly all millionaires still paid a rate that is more than twice the 8.9% average rate paid by those earning between $50,000 and $100,000, and more than three times the 7.2% average rate paid by those earning less than $50,000. The larger point is that the claim that CEOs are routinely paying lower tax rates than their secretaries is Omaha hokum."

The Buffett Alternative Tax: The rich don't pay lower average tax rates. (fromt the Wall Street Journal)

Sunday, September 18, 2011

Market Failure Compared to Government Failure

Great post by Gary Becker.
"When an industry in the private sector is not performing efficiently or effectively, there is said to be “market failure”. The recommendation by economists and others typically is then for government actions to combat such failure, such as taxes to help reduce pollution. The diagnosis of market failure may be accurate, but the call for government involvement may be naïve and inappropriate.

The reason is that actual governments do not necessarily do what economists and others want them to do because there is “government failure” as well as market failure. Before recommending government actions to correct market failures, one should consider whether actual government policies would worsen rather than improve private sector outcomes. Since many factors often make for considerable government failure, considering such failure is crucial and not just a theoretical fine point.

Consider, for example, that consumers are sometimes ignorant of the qualities and other aspects of the products they buy. However, before advocating various forms of government protection of consumers, we should recognize that voters are far more ignorant of political candidates than consumers are of what they buy. The reason is that consumers directly suffer if they make bad choices out of ignorance, while individual voters have negligible influence over political outcomes. Hence voters have little incentive to be informed about different candidates and their positions, and the consequences of the mistakes they make are largely borne by others.

Monopolies do arise in the private sector, as when Microsoft had monopoly power over personal computer operating systems, when IBM still earlier had monopoly power over computers, or when manufacturers form cartels to raise their prices by restricting production. Yet, monopoly also occurs in the political sector, and it is far more pervasive there. An industry that contains only two firms is considered a duopoly that is presumed to raise prices above competitive levels, but the political process is dominated in democratic countries by duopolies, such as the Democratic and Republican parties. In addition, when government companies receive monopoly positions, such as the US Postal Service or national oil companies in many countries, they generally succeed in either keeping out or greatly delaying the entrance of private competitors. By contrast, private monopolistic positions are usually temporary, as seen in the eroding over time of IBM’s and Microsoft’s dominant positions in the computer industry.

Government actions sometimes not only fail to overcome market failure but rather worsen the failure. Fannie Mae and Freddie Mac were formed as quasi-governmental institutions to help encourage mortgages in the residential housing market because of a belief that the private sector was not providing enough mortgages, especially to lower income families. Yet, as documented in detail in Reckless Endangerment by Gretchen Morgenson and Joshua Rosner, these two companies used their privileged positions to take excessive risks, and to insure large numbers of mortgage loans that should never have been made.

European regulators have attacked Microsoft, Google, General Electric, Intel, and other (mainly American) companies because of various alleged anti-competitive policies. In these cases, and in many antitrust cases brought by American regulators, such as the recent objection to the merger of AT&T and T-Mobile, the motivation seems to be to protect the competitors of these companies or to protect jobs rather than to improve outcomes to consumers.

Many countries subsidize various alternative forms of energy, such as wind, solar, biofuels, and electric batteries, because of the substantial pollution from using coal, oil, and other fossil fuels. Often, however, the choices of what to heavily subsidize are made on political rather than economic criteria. For example, for years hydrogen cars were politically the most promising substitute for gasoline driven cars; then hydrogen fell out of favor and electric cars became the political darlings. Since governments have seldom succeeded in picking technological winners, I suspect they will be wrong again in these attempts to steer the development of cost-effective alternatives to the internal combustion gasoline engine. Another example is the scandal about the heavy American government financial support to the solar panel company Solyndra that recently failed.

How does one approach policy once it is recognized that government failure is substantial, and often much worse than market failure? As a general rule I believe the presumption should be in favor of government actions only when market failures are quite large and persistent. So clearly governments should have the dominant role in the military and police areas, in the judiciary, in protecting against massive pollution, and in providing a safety net for its least fortunate members (private charities are important but do not do enough). On the other hand, when market failures are relatively small and likely to be temporary, as in monopoly situations or in exploiting consumer ignorance, government involvement should be minimal, as in minimalist anti-trust policies, and in allowing consumers generally to make their own decisions.

The intermediate cases are the most difficult: when market failures may be significant, and yet government alternatives are not attractive. This may be decided on a case-by-case basis, but I believe the usual rule should then be to let the market operate. This belief is based on the conclusion that, on the whole, government failure is far more pervasive, damaging, and less self-correcting, than is market failure. Others may reach different conclusions, but these are the problems that a relevant welfare analysis should focus on. Simply concluding that in particular instances markets are not working perfectly is a misleading and incorrect basis for supporting active and sizable government involvement."

Low cost clinics and online health care growing

See Popularity of Telemedicine Grows in Michigan, U.S at "Carpe Diem."
"Detroit News -- "Michiganians who have an urgent medical question, lack insurance or just want access to a doctor and prescription after hours can increasingly reach for their phones or computers for an instant chat or webcam conversation with a physician or nurse. Telemedicine and telehealth — the practice of medicine using electronic communication between a physician in one location and a patient in another — is growing in popularity in the state and across the country.

At health fairs today, nine Southeast Michigan Rite Aid stores will debut OptumHealth's NowClinic, which allows consumers to talk to a nurse for free or use a credit card and pay $45 for a private appointment with a doctor licensed to practice in Michigan — anytime the store is open and online 24 hours a day. Doctors can diagnose patients and, when appropriate, write them a prescription, which can be filled at Rite Aid stores.

Several online health companies such as MDLiveCare and Consult A Doctor are growing by forming partnerships with health insurers and employers as a way to lower health care costs. Through its wellness program, Taylor-based Masco Corp. (NYSE:MAS) provides its about 500 headquarters' employees and dependents free access to MDLiveCare, which has board-certified, Michigan-licensed physicians available 24/7.

"We really wanted to see how it works and to have an alternative to seeing your primary care doctor, running to the urgent care for things that were minor in nature," said Julie Forrester, director of benefits for Masco, which makes several brand-name home products.

During the past six months, Masco has recorded about 40 different doctor visits for non-emergencies, Forrester said. The service can save employees time and money, as co-pays for an office visit run $20 to $25 and up to $100 for a trip to urgent care, Forrester said. If successful, Masco is considering putting a kiosk — which includes MDLiveCare and other wellness tools for employees — into some of its manufacturing locations, where access to health care may be more difficult.""

Saturday, September 17, 2011

TSA Is Larger, More Expensive Than First Planned And Not As Effective

See TSA Creator: The Whole Thing is a Fiasco. Screeners Should Be Privatized, Agency Dismantled at "Carpe Diem."
"HUMAN EVENTS -- "A decade after the TSA was created following the September 11 attacks, the author of the legislation that established the massive agency grades its performance at “D-.”

“The whole program has been hijacked by bureaucrats,” said Rep. John Mica (R. -Fla.), chairman of the House Transportation Committee. “It mushroomed into an army,” Mica said. “It’s gone from a couple-billion-dollar enterprise to close to $9 billion." As for keeping the American public safe, Mica says, “They’ve failed to actually detect any threat in 10 years.”

“Everything they have done has been reactive. They take shoes off because of shoe-bomber Richard Reid, passengers are patted down because of the diaper bomber, and you can’t pack liquids because the British uncovered a plot using liquids,” Mica said. “It’s an agency that is always one step out of step,” Mica said.

It cost $1 billion just to train workers, which now number more than 62,000, and “they actually trained more workers than they have on the job,” Mica said.

“The whole thing is a complete fiasco," Mica said. "Screeners should be privatized and the agency dismantled."

HT: Tim Dodson"

Friday, September 16, 2011

One Reason Obama Wants Another State Bailout

Great post by Tad DeHaven of Cato.
"I recently discussed why the additional federal subsidies for state and local government that President Obama is proposing as part of his “job plan” are a bad idea. A new study from two Harvard economists suggests that the president’s affinity for these subsidies might have something to do with the fact that the aid would be particularly helpful to states with more left-leaning legislators and strong public sector unions.

The study from Daniel J. Nadler and Sounman Hong (see here) found that states with stronger public sector unions and a higher proportion of left-leaning state legislators face higher borrowing costs:
We find that, all things being equal, states with weaker unions, weaker collective bargaining rights, and fewer left-leaning state legislators pay less in borrowing costs at similar levels of debt and similar levels of unexpected budget deficits than do states with stronger unions and more left-leaning legislators. More practically, these findings suggest that the strength of public sector unions has become among the most important factors in bond market perceptions of a state’s risk of financial collapse.

Why do these states face higher borrowing costs? Nadler and Hong explain:
These “political” factors might signify to the bond market whether a state government has the willingness and capacity to initiate needed fiscal adjustments and austerity measures during the state fiscal crises that followed the financial crisis, and thus might provide some information to market participants about the likeliness that a given state government will choose to default on its debt instead of making politically difficult or undesirable budget cuts. Similarly, public sector labor environment variables, such as union strength, might signify to market participants the degree of organized political opposition state lawmakers would have to overcome to implement such austerity measures.

In a corresponding Wall Street Journal op-ed, Nadler and Paul E. Peterson, director of Harvard’s Program on Education Policy and Governance, do a nice job of explaining why the separation of responsibility between the federal government and the states has been crucial to the country’s economic rise:
Federal rescue of states is a dramatic departure from past practice. State bankruptcies date back to the 1840s when, amid a financial crisis, Pennsylvania, Michigan, Illinois and five other states discovered they had invested too heavily in infrastructure. The last state bankruptcy was in Arkansas during the 1930s. But overall the instances were few; in each case the federal government refused to come up with a fix.

Bankrupt states paid the price, but for the country as a whole, a system of fiscally sovereign states has proven incredibly beneficial to the nation’s economic well-being. Every state is responsible for its own police, fire, schools, transport and much more, and most of the time they do reasonably well. If they manage their affairs so as to attract business, commerce and talented workers, states prosper. If states make a mess of things, citizens and businesses vote with their feet, marching off to a part of the country that works better.

It is this exceptional federalist system that helped drive the rapid growth of the American economy throughout the first two centuries of the country’s history. Because state and local governments competed with one another for venture capital, entrepreneurial talent and skilled workers, governments generally had to be attentive to the needs of both citizens and commerce.

Unfortunately, the 20th century’s trend for the federal government to subsidize and manage more and more state and local affairs has worsened in the last 10 years as the chart in my blog post shows. If our bloated federal government is ever to be reined in, a return to fiscal federalism is a must. And if the states are to get their financial houses in order, state policymakers can’t be allowed to believe that a federal policy of “too big to fail” applies to them

It rose from $372 billion 10 years ago to $625 billion today.

Administration Ignored Warnings on Long-Term Care Plan

Great post by Megan McArdle.
"Speaking of ill-considered financial decisions made by politicians intent on their policy priorities, new emails revealed by the AP show that the administration was warned that parts of ObamaCare were a financial disaster--but plowed ahead anyway.

For those who don't marinate daily in the minutiae of health care policy, a recap: when ObamaCare was working its way through the Congressional sausage factory, they wanted absolutely every penny of revenue that they could get, in order to maximize the amount of deficit reduction they could claim. The call thus went out to the committees to dust off all of their old revenue raisers and present them for possible inclusion in the bill.

As I understand it, that's how we got the idiotic 1099 requirement, which raised a trivial amount of revenue by requiring every business in America to do massive new loads of paperwork. It also seems to be how we got the CLASS Act, a long-term care insurance program that I believe was the brain-child of Ted Kennedy. While the idea was beloved of nursing homes, it was hated by everyone else due to its rich potential for turning into yet another unkillable and unaffordable entitlement.

However, from the point of view of someone who is primarily concerned with the Congressional Budget Office's 10-year scoring window, it was great. In the first decade of its existence, the program collects a lot of premiums, but doesn't pay a lot of benefits, so it looks like a fiscal gold mine. It's only in later years, when the beneficiaries start demanding their long-term care, that the problems begin.

It seems like it might have been wiser to skip it. But if they had, ObamaCare wouldn't have had much deficit reduction; the last score of CLASS that I'm aware of put the net deficit reduction at $72 billion. CBO's final score of ObamaCare said it would reduce the deficit by $118 billion over the same period. Without CLASS, the deficit reduction would have been less than half the figure they eventually touted. Somehow, $46 billion of deficit reduction on a nearly $1 trillion bill doesn't sound too impressive, does it? More like a rounding error than a serious commitment to fiscal probity.

No wonder they were so deaf to the warnings from their own experts. Apparently, the administration was warned about this from the very beginning, but ignored it:
Obama's own bipartisan debt commission last year recommended major reforms or repeal of CLASS, as did another independent advisory group. Nursing homes and long-term care providers support the program, while private long-term care insurance companies oppose it. CLASS poses a dilemma for the new congressional supercommittee, since it initially reduces the federal deficit until payouts overwhelm premiums collected.

The emails show that the first warning about CLASS came in May 2009, from Richard Foster, head of long range economic forecasts for Medicare. "At first glance this proposal doesn't look workable," Foster wrote in an email to other HHS officials, some of whom were working with Congress to get CLASS into the health care law.

Foster said a rough outline of the program would have to enroll more than 230 million people - more than the U.S. workforce - to be financially feasible.

But work on CLASS continued, bolstered by a report for AARP that laid out scenarios for implementing the plan. The AARP study also raised financial concerns, although the seniors' lobby supports CLASS.

In July, Foster tried again. After reviewing the latest information from Kennedy's office, he wrote HHS officials: "Thirty-six years of (professional) experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue."

Too late. The Obama administration had decided to support CLASS. Documents and emails indicate that Foster was edged out of deliberations. Officials relied on a more favorable analysis from the Congressional Budget Office. In November, Foster went public with his concerns. Congress was well aware, the administration says.

By that time, Marton, the HHS aging policy official, was also raising questions internally. Emails he sent other administration officials relayed studies that raised concerns about such issues as premiums and the role of employers, while also recommending fixes.

Publicly, the administration maintained it would all work out. A December 2009 presentation for senior officials stressed the end result would be a financially robust program.

In private, administration insiders were still spelling out concerns. In January 2010, amid the final drive to pass the health care law through a divided Congress, officials circulated a 10-page list of "technical corrections." One item questioned whether the law gave HHS sufficient authority to redesign the program to keep it afloat, and recommended a "failsafe" clause spelling that out.
The administration seems to think that it can fix the program--but the only workable fix appears to be making the thing mandatory rather than optional, which is hardly what they said when they were passing it. And it's not even clear that making it mandatory would work, as my husband noted last spring.

The administration has taken something of a beating this week. Not because they're somehow uniquely evil--but because they presented themselves as something different, a technocratic elite above the grubby political posturing and ideological mistakes of earlier administrations. First Solyndra, now this, seem to show that they're very much like everyone else when they're caught up in the throes of ideological excitement--too much in a hurry to dig into promises that are, as journalists like to say, "Too Good to Check".

Thursday, September 15, 2011

A $38.6 billion loan guarantee program creates fraction of jobs promised

See Green dog bites man by
"Here’s a shocker from the Washington Post:
A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show.

The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

President Obama has made “green jobs” a showcase of his recovery plan, vowing to foster new jobs, new technologies and more competitive American industries. But the loan guarantee program came under scrutiny Wednesday from Republicans and Democrats at a House oversight committee hearing about the collapse of Solyndra, a solar-panel maker whose closure could leave taxpayers on the hook for as much as $527 million.

The GOP lawmakers accused the administration of rushing approval of a guarantee of the firm’s project and failing to adequately vet it. “My goodness. We should be reviewing every one of these loan guarantee” projects, said Rep. Marsha Blackburn (R-Tenn.).

Obama’s efforts to create green jobs are lagging behind expectations at a time of persistently high unemployment. Many economists say that because alternative-­energy projects are so expensive and slow to ramp up, they are not the most efficient way to stimulate the economy.

Sometimes, “many economists” are right. Here’s some wisdom from one economist:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

F.A. Hayek

The plan was to create (or save) 65,000 jobs. It apparently didn’t turn out that way."

We Still Spend A Small % Of Our Income On Gas

See Energy Fact of the Week: Real Energy Costs on the Rise for American Households? by Steven F. Hayward.
"The Los Angeles Times yesterday reported that American motorists may spend a record $491 billion for gasoline this year, reflecting the high price of gasoline. Meanwhile, the Department of Energy reported the dog-bites-man story that sales of refrigerators are down on account of the poor economy—something they might have grasped if they’d read last week’s Energy Fact of the Week. Since new refrigerators are generally more energy efficient than the fridges they replace, this implies a slowdown in the long-term trend of improving household energy efficiency.

The gasoline sales projection is an estimate from proprietary sources by an analyst with the Oil Price Information Service. And one relevant question is: what does that $491 billion figure mean in terms of its share of household income, and what has the long-term trend been over time? The Department of Energy’s data series on gasoline expenditures is surprisingly out of date; the most recent data release is from 2001. However, it is possible to see the long-term trends from data reported in the Census Bureau’s Consumer Expenditure Survey, which reports annual data from 1984 through 2009.

Figure 1 below shows that consumer expenditures for gasoline and motor oil as a percentage of average after-tax income fell steadily from about 5 percent at the beginning of the survey in 1984 to a low of 2.6 percent in 1999 (when gasoline prices dipped below $1 a gallon in many places in the United States). However, the slow rise in oil prices has pushed the figure back up to 4.4 percent in 2008—its highest level since 1985. After dipping in 2009, the 2010 and 2011 figure is likely to spike back up again when the full year’s data is reported."


The cause of the financial crisis in the United States was from an unprecedented number of weak and risky loans

See Not So Prime After All: Countrywide Claimed to be Predominantly a Prime Lender by Edward Pinto of AEI.
"This 2007 testimony by a senior executive at Countrywide Financial Corporation before the U.S. Senate Banking Committee just came to my attention (H/T Tom LaMalfa):

Countrywide is predominantly a prime lender that offers the widest array of products available in the market place. While the subprime market represents over 20 percent of the overall U.S. mortgage market, it constitutes only 7 percent of Countrywide’s loan volume.

The toxic trio—Countrywide, Fannie Mae (which claimed that just 0.2% of its single-family mortgage credit book of business consisted of subprime mortgage loans under its definition), and Freddie Mac (which also claimed just 0.2% of its single-family mortgage credit book of business consisted of subprime mortgage loans under its definition)—demonstrates a level of grade inflation that would make an Ivy League professor blush. The “A” or prime loan was redefined so that it was no longer what it historically had been—a high quality, low risk loan.

This was no accident. HUD observed in a 2000 rule making:
Because the GSEs have a funding advantage over other market participants, they have the ability to underprice their competitors and increase their market share. This advantage, as has been the case in the prime market, could allow the GSEs to eventually play a significant role in the subprime market. As the GSEs become more comfortable with subprime lending, the line between what today is considered a subprime loan versus a prime loan will likely deteriorate, making expansion by the GSEs look more like an increase in the prime market. Since … one could define a prime loan as one that the GSEs will purchase, the difference between the prime and subprime markets will become less clear. This melding of markets could occur even if many of the underlying characteristics of subprime borrowers and the market’s (i.e., non-GSE participants) evaluation of the risks posed by these borrowers remain unchanged.

"The cause of the financial crisis in the United States was the collapse of housing and mortgage markets resulting from an accumulation of an unprecedented number of weak and risky loans, most of which were called prime. When the financial crisis hit in full force in 2008, approximately 26.7 million or 49 percent of the nation’s 55 million outstanding single-family first mortgage loans had high risk characteristics, making them far more likely to default."

POVERTY HALVED-when the government didn’t try to help the poor

See The Headline That Never Was by Charles Murray of AEI.
"Yesterday, the revelation that poverty had reached 15.1 percent in 2010 (poverty figures refer to the year prior to their release) got a lot of attention, but, seen in context, it wasn’t really a big deal. The official poverty percentage hit its low in 1972 at 11.1 percent and since then has moved within a narrow range, hitting a high of 15.2 percent in 1982.

Compared those wiggles in the graph of poverty with this headline: “POVERTY HALVED. Drops 20 Percentage Points in Just Twelve Years.” That’s what happened from 1949 to 1961. We didn’t know it at the time, but the numbers have been calculated retrospectively, using the 1950 census to determine the poverty rate in 1949—it was 41 percent. In President Kennedy’s first year in office, 1961, it was 21 percent. And what was going on in between? Oh, yes. Those boring, complacent Eisenhower years, when the government didn’t try to help the poor. Unlike now."

Tuesday, September 13, 2011

The Cost Of Medicare Fraud

See Medicare Thieves: Stealing from the government-run health care system is much easier—and potentially more lucrative—than dealing drugs by Peter Suderman of Reason.
"Between 2007 and early 2011, the federal government reports having won convictions against 990 individuals in fraud cases totaling $2.3 billion. In 2010, it recovered an additional $4 billion through collection of non-criminal penalties on health providers who improperly billed the government. But that’s just a fraction of the total problem.

According to a 2011 report from the Government Accountability Office, Medicare makes an estimated $48 billion in “improper payments” each year, an estimate that’s almost certainly lower than the actual amount since it doesn’t include bad payments within the prescription drug program. Some of that money, perhaps a lot of it, is fraud, but experts differ on exactly how much. On the very low end, the National Health Care Anti-Fraud Association has estimated that about 3 percent of all U.S. health care spending is fraud. Assuming fraud is distributed equally across payment systems, that would mean Medicare’s share is roughly $15 billion a year. But almost all analysts believe fraud is much more common in Medicare than in it is in payments by private insurers. Toward the high end, Sen. Tom Coburn (R-Okla.) once suggested the number could be as much as $80 billion a year. In March, the executive director of the National Health Care Fraud Association told members of Congress that total health care fraud losses likely range from $75 billion to $250 billion each year."

"For years, Florida’s league of health care fraudsters operated with minimal federal interference. They forged medical records, bought and sold patient ID numbers, billed for treatments not provided, and ran criminal enterprises out of fake storefronts. In 2006 investigators from the HHS inspector general’s office made unannounced visits to 1,581 Medicare suppliers in South Florida and found that more than one-third didn’t even maintain a business office at the address listed on Medicare’s payment files."

"Just how easy is Medicare fraud? According to Aghaegbuna Odelugo, who swindled Medicare out of nearly $10 million between 2005 and 2008, it’s “very easy”—arguably no more difficult than doing summer temp work at a call center. Earlier this year, Odelugo told Congress in written testimony that the “primary skill required to do it successfully is knowledge of basic data entry on a computer.” The only other important element “is the presence of so-called ‘marketers’ who recruit patients and often falsify patient data and prescription data. With these two essential ingredients, one possesses a recipe for fraud and abuse. The oven in which this recipe is prepared is the Medicare system."

"Medicare’s billing system is based on a hodgepodge of bureaucratic codes, one for each medical device or procedure. But the coding system is imprecise and contains significant overlap: Two nearly identical devices—say, a wheelchair and a variation on the same product with a slightly different safety strap—might be assigned two different codes. If one code is kicked back as ineligible for reimbursement, the scammer can easily submit the same claim under a different code for an essentially identical device. The same technique can be used to submit multiple claims for the same item, double-billing the government for the same service or product. Medicare’s billing system has long allowed providers to submit and resubmit claims with virtually no serious checks on their validity or patterns of misuse.

According to Odelugo, the process of billing for forged prescriptions is similarly easy. “A person engaging in this fraud will typically purchase a forged prescription from a marketer for a price determined by the amount the person anticipates earning,” he explained. “Usually this would be an amount of 15% to 20% of the anticipated profit.” The forger then submits the claim electronically, and Medicare responds as it is designed to: with a prompt payment.

Security surrounding the system is astonishingly lax. The “unique physician identification numbers” (UPINs) that doctors use to submit their claims are openly available to anyone on the Internet."

"Perhaps the biggest problem with Medicare’s billing system, however, is its pattern of excessive reimbursement rates, particularly for the category known as “durable medical equipment,” which encompasses medical devices, such as wheelchairs and oxygen tents, that assist patients living at home. These devices tend to be fairly inexpensive on the open market, but Medicare pays highly inflated rates for them. According to Odelugo, the reimbursements are “beyond exorbitant”—as much as 10 times the normal cost for knee braces, for example. “For anyone engaging in fraud,” he testified, “these numbers are too good to be true. It defies logic to believe that a system like Medicare can reimburse at these rates and not attract a great deal of fraud.”"

Obama Wants More Spending on Failed Federal “Job Training” Programs that Teach Welfare Recipients and Young People Bad Habits

Great post by Hans Bader of the Competitive Enterprise Institute.
"In The Wall Street Journal, James Bovard, a former CEI Warren T. Brookes Journalism Fellow, takes aim at some of the billions in waste contained in President Obama’s recent “jobs” proposal, the “American Jobs Act,” which would fund proven government failures in the form of federal job “training.” Federal “job-training” programs, which Obama likes, are so dismally ineffective that they cause “significant earnings losses” for young people who participate in them, and result in participants ending up on food stamps at higher rates:
Last Thursday, President Obama proposed new federal jobs and job-training programs for youth and the long-term unemployed. The federal government has experimented with these programs for almost a half century. The record is one of failure and scandal.

In 1962, Congress passed the Manpower Development and Training Act (MDTA) . . . A decade after MDTA’s inception, GAO reported that it was failing to teach valuable job skills or place trainees in private jobs and was marred by an “overriding concern with filling available slots for a particular program,” regardless of what trainees actually needed.

Congress responded in 1973 by enacting the Comprehensive Employment and Training Act (CETA). . . CETA spent vastly more money. . .[such as] providing nude sculpture classes (where, as the Pharos-Tribune of Logansport, Ind., explained, “aspiring artists pawed each others bodies to recognize that they had ‘both male and female characteristics’”), and conducting door-to-door food-stamp recruiting campaigns.

Between 1961 and 1980, the feds spent tens of billions on federal job-training and employment programs. To what effect? A 1979 Washington Post investigation concluded, “Incredibly, the government has kept no meaningful statistics on the effectiveness of these programs—making the past 15 years’ effort almost worthless in terms of learning what works.” CETA hirees were often assigned to do whatever benefited the government agency or nonprofit that put them on the payroll, with no concern for the trainees’ development. An Urban Institute study of the mid-1980s concluded that participation in CETA programs resulted in “significant earnings losses for young men of all races and no significant effects for young women.”

After CETA became a laughingstock, Congress replaced it in 1982 with the Job Training Partnership Act. JTPA spent lavishly—to expand an Indiana circus museum, teach Washington taxi drivers to smile, provide foreign junkets for state and local politicians, and bankroll business relocations. . . young trainees were twice as likely to rely on food stamps after JTPA involvement than before since the “training” often included instructions on applying for an array of government benefits.

For years the Labor Department scorned the mandate in the 1982 legislation to speedily and thoroughly evaluate whether the programs actually benefitted trainees. Finally, in 1993, it released a study that showed participation in JTPA “actually reduced the earnings of male out-of-school youths.” Young males enrolled in JTPA programs had 10% lower earnings than a control group that never participated. . .

In his speech to Congress, Mr. Obama called for funding hundreds of thousands of summer jobs for teens, which he labeled “investing in low-income youth and adults.” Yet such programs have been blighting work ethics for decades.

The GAO warned in 1969 that many teens in federal summer jobs programs “regressed in their conception of what should reasonably be required in return for wages paid.” A decade later, it reported that most urban teens “were exposed to a worksite where good work habits were not learned or reinforced.” And in 1985, a National Academy of Science study found that government jobs and training programs isolated disadvantaged youth, thus making it harder for them to fit into the real job market.

The president also wants to increase federal anti-poverty spending, which already rewards lazy people who are not poor, while doing little or nothing to help struggling taxpayers who work hard.

Experts say that the $450 billion spending package President Obama submitted Monday, which he calls the “American Jobs Act,” will be ineffective at creating jobs, and even harmful in certain respects. The Associated Press said that Obama’s claim that his plan would not increase the national debt was false. Obama’s proposals are simply a recycled collection of bad ideas that twist language and logic and rely on deception. Even the seemingly rational parts of Obama’s proposal, such as infrastructure spending, are in fact harmful, since they contain boondoggles and pork designed to favor special interests. (Obama himself blocked useful infrastructure spending in the past for ideological reasons.) He is also pushing more fantasy “green jobs” schemes that will consume billions in tax money without actually creating jobs.

The fact that wasteful federal “job-training” programs may actually increase the number of people on welfare and food stamps may not be a big concern to Obama. Thanks to Obama’s policies, a record 45.8 million people are now on food stamps, including some millionaires who are treated by the government as “poor” because their cash income is tax-exempt or modest. His $800 billion stimulus package largely repealed welfare reform."

Infrastructure projects often cost more than first forecast

See “Strategic Misrepresentation” by Rand Simberg of the Competitive Enterprise Institute.
"Over at National Review‘s The Corner, Mercatus’s Veronique de Rugy has a post on cost underestimates in infrastructure projects:
…here are some striking facts about government run public work projects. The most comprehensive study of cost overruns examines 20 nations spanning five continents. The authors find that:

■In 9 out of 10 transportation infrastructure projects, costs are underestimated.
■For rail projects, actual costs are on average 45%higher than estimated costs.
■For fixed-link projects (tunnels and bridges), actual costs are on average 34% higher than estimated costs
■For road projects, actual costs are on average 20%higher than estimated costs.
■For all project types, actual costs are on average 28% higher than estimated costs
■These same cost overruns exist in all public work projects

Remember the Capitol Hill Visitor Center? This ambitious three-floor underground facility, originally scheduled to open at the end of 2005, was delayed until 2008. The price tag leaped from an estimate of $265 million in 2000 to a final cost of $621 million.

How can we explain these cost overruns? The authors explain:

These cost underestimation cannot be explained by error and seems to be best explained by strategic misrepresentation, i.e., lying.

It happens in space transportation projects as well. On a cost-plus contract, the incentives are to low-ball the bid, and then get financially well with change orders. Before Constellation was canceled last year, the estimated costs for the Ares I rocket and Orion capsule had ballooned dramatically, and the schedule slipped far to the right (it was slipping more than a year per year). In fact, it tends to be even worse for NASA projects, because they’re not even projects that the public will ever use, so it doesn’t matter whether they ever actually succeed — the program, with the jobs it creates in the states and districts of the only representatives who care about it (and for only that reason) is its own justification. Reagan announced the space station program in 1984, with the intent to have it flying by 1992, for a cost of eight billion dollars. The first hardware flew in 1998, and it has now cost about a hundred billion (though to be fair, the original cost estimate didn’t include transportation costs of the Shuttle, which the latter number does). No one loses elections because launch systems don’t fly, but sometimes they are won by the jobs from the local contracts that the representative brings home.

Veronique also points out that it’s not just that costs are underestimated — demand is overestimated. This happens in space projects as well. The Shuttle’s per-flight cost estimates assumed that it was going to get all of the US launch business, and much overseas as well, giving it the high flight rate necessary to bring the average cost closer to the marginal cost, but many of the payloads never materialized, and many of them fled to other launch providers. What’s truly amazing about the Senate Launch System is that NASA is admitting that it will fly rarely, and cost billions per flight. But until the rest of the Congress starts to care, and stops deferring to the porkers on the space committees, the waste will continue."

Monday, September 12, 2011

Perhaps Robert Barro Did Make Sense On Growth In His NY Times Article

See What might be Robert Barro’s argument? by Tyler Cowen at Marginal Revolution.
"Paul Krugman, Brad DeLong, Justin Wolfers and others are not sure what is Robert Barro’s argument or model in his recent Op-Ed. I am puzzled by these responses, because, while I do not pretend to speak for Barro, I see at least one simple answer to these puzzlements.

Consider the following model. Sometimes growth slows down and afterwards it speeds up again. Temporary losses tend to be undone in future periods. For one thing the Solow model implies catch-up growth, furthermore cyclical losses may exhibit mean-reversion. There is in the meantime some depreciation of labor skills, from unemployment, but long-run output and welfare really does for the most part depend on the forces which govern economic growth. (Increases in the variance of consumption are not enough to overturn that emphasis.) That implies lower government spending in most areas of the economy, and it also implies lower taxation of capital, as supported by many empirical papers on growth including some by Barro himself.

That view may not be true (in my TGS book you will find some dissent from it but from another direction), but it’s hardly bizarre or economically illiterate. If some writers aren’t totally explicit, it could be they don’t have enough words and feel that a large enough part of their audience takes the emphasis on growth and its preconditions for granted.

We are once again witnessing the renaissance of old Keynesian economics as a theory of the long run not just the short run. The “New Old Keynesians” are of course entitled to their opinions, but given their minority status, it is strange when they find others difficult to comprehend."

Raising taxes on the wealthy and businesses may not be a good way to pay for the proposed stimulus

See Obama's Job Plan: A Never-Never Bill by Megan McArdle.
"I was tenatively in favor of the jobs plan that Obama proposed last week. But that's before I realized that he has no intention of trying to get it passed:
The White House said Monday that President Obama wants to pay for his $447 billion jobs bill by raising taxes on the wealthy and businesses. Jack Lew, director of the Office of Management and Budget (OMB), said the tax hikes would pay for Obama's entire bill, which the administration is sending to Congress Monday evening.

The chief provision announced by Lew would be to limit itemized deductions for individuals who make more than $200,000 a year and families that make more than $250,000, something the Obama administration has previously pushed to do through its budget proposals. Lew told reporters at the White House press briefing that this would raise about $400 billion.

The administration would tax the income investment fund managers make, known as "carried interest," as regular income instead of as capital gains, which has a low 15 percent tax rate. This is another longstanding administration goal that has been resisted by Wall Street as well as some Democrats.

The administration estimates the capital gains change would provide $18 billion in revenue.

The administration also wants to eliminate tax breaks for the oil-and-gas sector, which would raise $40 billion, the administration said.

Another $3 billion would come from changing the way corporate jets depreciate. With a few other revenue increases, Lew indicated the total measures proposed by the administration would bring in $467 billion, $20 billion more than the cost of the bill.

It's worth noting that a deduction phase-out is actually worse than a marginal tax hike. Deduction phase-outs amplify other rate increases--depending on how they're structured, a deduction phase-out can actually mean that you make less money at $251,000 than $249,000.

But more importantly, paying for the bill with tax hikes--any tax hikes--is going to substantially reduce the stimulus this bill provides. Just as government spending boosts aggregate demand, tax hikes (yes, even on rich people), reduce aggregate demand. Providing stimulus through payroll tax cuts that are financed with tax hikes on other people is like trying to boost your household income by making your wife pay you to mow the lawn.

Yes, yes, I know--why should you believe me, when we all know that libertarians sell their souls to Satan Corporations in a secret ceremony involving Charles Koch, The Wealth of Nations, and a silver chalice full of Olde English malt liquor? Well, don't listen to me then--listen to that torrid old conservative shill, Christina Romer, former chair of Obama's Council of Economic Advisors:
This paper investigates the impact of changes in the level of taxation on economic activity. The paper uses the narrative record ñ presidential speeches, executive-branch documents, and Congressional reports ñ to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.

Of course, you can still argue that the bill will provide some stimulus, because maybe the stimulative multiplier on payroll tax cuts for the middle class is higher than the contractionary multiplier of tax hikes on the affluent. I might even agree with you. But why would you want a stimulus that relies on the delta between two fairly similar multipliers, when you could get much more stimulus by borrowing the money this year, and paying it back later, when we're richer? No matter how you look at it, unless these tax cuts happen well into the future, structuring the bill this way means that it will be much less stimulative than it could be.

If the president were serious about providing stimulus, he would pay attention to the work of his old CEA chair, and pay for the jobs bill by decreasing the growth rate of something-or-other in the future by 0.2%. This is also what he would do if he were serious about getting any part of it through Congress. Instead he is apparently sending them a less-stimulative bill designed to be maximally embarrassing to the GOP--which by definition means minimally politically viable.

You can say that Obama has no choice, because the GOP is just so damn obstructive that they won't pass anything anyway. As it happens, I disagree--I don't think that he could have gotten the whole thing through, but the GOP would probably have given him a few pieces to avoid looking like total jerks, and while that might not have done too much for Obama's re-election chances, it probably would have meant a lot to the schmoes trying to make their mortgage payments in a tough economy.

But say it's true. If it is, I really wish that Obama hadn't wasted my Thursday evening, and that of 31 million other Americans, listening to a jobs plan that was only designed to produce one job--a second term for Barack Obama. I mean, I don't blame him, exactly. But I get a little pang when I realize that I could just as well have spent that time bleaching the grout in the master bath.

Update: I see from the comments that this was taken as primarily a complaint that Obama is raising taxes. Depending on how it's structured, it's a little bit of a complaint that he's raising taxes--you don't, I think, get all that much stimulus by pairing a temporary tax cut on the middle class with an even bigger permanent tax hike on corporations and high earners, though others may disagree."

But it's mostly half annoyance and half genuine disappointment, because if this is true, I think it means that Obama has given up on even trying to pass it; this is just political theater. Maybe you think he had no choice--I disagree, but I can see where others may differ. But either way, you have to be way more invested in Obama's re-election than I am to take much interest in pure political theater."

Davis-Bacon Rules Damage D.C.

Great post by Chris Edwards of Cato.
"The Washington Post reports on a Labor Department decision that applies pro-union Davis-Bacon rules to the CityCenter development in Washington D.C. The ruling could push up costs on the project by $20 million by forcing firms to pay artificially high wages.

The paper says that “area real estate developers and construction executives who have partnered with the District say the ruling, if upheld, is likely to inflate costs on a wide range of projects by as much as 15 percent.” In turn, that could have “unprecedented, significant [and] adverse citywide cost impact upon every economic development project in the District’s portfolio,” said a deputy mayor of the city. So while Democrats in Congress are demanding government action to fix the nation’s supposedly crumbling infrastructure, here the Obama administration has thrown up a new hurdle to investment.

Davis-Bacon rules usually apply to federally funded construction, thus pushing up the costs of public projects. Nationwide, economists at the Beacon Hill Institute found that Davis-Bacon rules cost federal taxpayers about $9 billion annually. For example, repairs to National Park facilities cost more than they should, thus reducing the amount of maintenance the agency can do within its budget. However, the D.C. ruling stretches the Davis-Bacon rules even further because CityCenter is a privately funded project.

In an essay at, economist Charles Baird notes that passage of Davis-Bacon in 1931 was motivated by the faulty economic idea that the government should try to keep wages high during an economic downturn. But Baird describes another reason why Davis-Bacon was misguided from the start—the racist intentions of the bill’s supporters:
Congress wanted to keep black workers from competing for jobs that had hitherto been done by white unionized labor. The racist motivation behind the legislation is plain when reading the Congressional Record of the debate in 1931."

Sunday, September 11, 2011

Hoover Had Big Deficits

See Who’s Benighted?, a great letter by Don Boudreaux of "Cafe Hayek."
"Here’s a letter to the Washington Post:
Steven Pearlstein alleges that a laughable mysticism drives those of us who “reject as thoroughly discredited all of Keynesian economics, including the efficacy of fiscal stimulus, preferring the budget-balancing economic policies that turned the 1929 stock market crash into the Great Depression” (“The magical world of voodoo ‘economists’,” Sept. 11).

Before guffawing at us oafs, Mr. Pearlstein should check his facts.

After running a budget surplus in 1930, Uncle Sam ran a budget deficit in 1931 of $462 million and a budget deficit in 1932 of $2.74 billion. Moreover, 1932′s budget deficit was four percent of GDP – a deficit-to-GDP ratio the size of which was not matched after 1946 until 1976, and which was exceeded by only three of FDR’s non-war-year budgets. For 1930-1932 as a whole, the U.S. government ran a net budget deficit of $2.46 billion.* Herbert Hoover’s deficit spending was so alarming that, during the 1932 presidential campaign, FDR emphasized his own commitment to reverse what then seemed to be unprecedented fiscal recklessness.

Of course, FDR broke that campaign pledge. He ran a budget deficit during every year of the greatly depressed 1930s – a fact that should cause Mr. Pearlstein to shed some of the arrogance with which he dismisses skeptics of Keynesian economics.

Donald J. Boudreaux"