Monday, October 31, 2011

A tax reform that includes lower rates can change incentives in a way that grows the tax base and produces extra revenue.

See The Tax Reform Evidence From 1986: Experience implies that the combination of base broadening and rate reduction would raise revenue equal to about 4% of existing tax revenue by Martin Feldstein. From the WSJ, 10-24. Excerpt:
"The Tax Reform Act of 1986, enacted 25 years ago last Friday, showed how a tax reform that includes lower rates can change incentives in a way that grows the tax base and produces extra revenue. The 1986 agreement between President Ronald Reagan and House Speaker Tip O'Neill reduced the top marginal tax rate to 28% from 50%. A conservative Republican and a liberal Democrat could agree to a dramatic reduction in top rates because the legislation also eliminated a wide variety of tax loopholes.

A traditional "static" analysis that ignores the response of taxpayers to lower tax rates indicated that those combined tax changes would leave total revenue unchanged at each income level. But the actual experience after 1986 showed an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates.

To measure that response, I studied a sample of individual tax returns (stripped of all identifying information) for more than 4,000 taxpayers provided by the U.S. Treasury Department. Because the sample contained the tax return of each individual for the years 1985 through 1988, I could compare the taxable income of individuals in 1985 with their taxable incomes in 1988, two years after their rates were lowered.

Taxpayers who faced a marginal tax rate of 50% in 1985 had a marginal tax rate of just 28% after 1986, implying that their marginal net-of-tax share rose to 72% from 50%, an increase of 44%. For this group, the average taxable income rose between 1985 and 1988 by 45%, suggesting that each 1% rise in the marginal net-of-tax rate led to about a 1% rise in taxable income.

This dramatic increase in taxable income reflected three favorable effects of the lower marginal tax rates. The greater net reward for extra effort and extra risk-taking led to increases in earnings, in entrepreneurial activity, in the expansion of small businesses, etc. Lower marginal tax rates also caused individuals to shift some of their compensation from untaxed fringe benefits and other perquisites to taxable earnings. Taxpayers also reduced spending on tax-deductible forms of consumption."

CHARLES W. CALOMIRIS: no doubt that reductions in mortgage-underwriting standards were at the heart of the subprime crisis

See The Mortgage Crisis: Some Inside Views: Emails show that risk managers at Freddie Mac warned about lower underwriting standards—in vain, and with lessons for today. From the WSJ, 10-27. Excerpt:
"Occupy Wall Street is denouncing banks and Wall Street for "selling toxic mortgages" while "screwing investors and homeowners." And the federal government recently announced it will be suing mortgage originators whose low-quality underwriting standards produced ballooning losses for Fannie Mae and Freddie Mac.

Have they fingered the right culprits?

There is no doubt that reductions in mortgage-underwriting standards were at the heart of the subprime crisis, and Fannie and Freddie's losses reflect those declining standards. Yet the decline in underwriting standards was largely a response to mandates, beginning in the Clinton administration, that required Fannie Mae and Freddie Mac to steadily increase their mortgages or mortgage-backed securities that targeted low-income or minority borrowers and "underserved" locations.

The turning point was the spring and summer of 2004. Fannie and Freddie had kept their exposures low to loans made with little or no documentation (no-doc and low-doc loans), owing to their internal risk-management guidelines that limited such lending. In early 2004, however, senior management realized that the only way to meet the political mandates was to massively cut underwriting standards.

The risk managers complained, especially at Freddie Mac, as their emails to senior management show. They refused to endorse the move to no-docs and battled unsuccessfully against the reduced underwriting standards from April to September 2004."

"The decision by Fannie and Freddie to embrace no-doc lending in 2004 opened the floodgates of bad credit. In 2003, for example, total subprime and Alt-A mortgage originations were $395 billion. In 2004, they rose to $715 billion. By 2006, they were more than $1 trillion.

In a painstaking forensic analysis of the sources of increased mortgage risk during the 2000s, "The Failure of Models that Predict Failure," Uday Rajan of the University of Michigan, Amit Seru of the University of Chicago and Vikrant Vig of London Business School show that more than half of the mortgage losses that occurred in excess of the rosy forecasts of expected loss at the time of mortgage origination reflected the predictable consequences of low-doc and no-doc lending. In other words, if the mortgage-underwriting standards at Fannie and Freddie circa 2003 had remained in place, nothing like the magnitude of the subprime crisis would have occurred."

Mr. Calomiris is a professor of finance at the Columbia Business School and a research associate of the National Bureau of Economic Research.

Sunday, October 30, 2011

Income Mobility is Much More Important Than Rising Income Inequality or Stagnating Household Income, and We Have a Lot of It (Mobility)

Great post by Mark Perry of "Carpe Diem."

We hear a lot these days about "increasing income inequality" and "stagnating household income," but those discussions rarely include what is probably the most important factor when it comes to income over time: income mobility. In fact, even if: a) income inequality was increasing over time, and b) median household income was stagnant over time, those outcomes wouldn't necessarily be a problem if there was significant income mobility. Reason? If there is substantial movement of households over time from lower-income to higher-income quintiles, households may only be earning the median household income for a short period of time on their way up to a higher quintile.

In other words, it's more likely that most households are "typical" or at the "median" level" only temporarily on their way to a higher income group. The fact that median household income might be stagnant over time seems far less important than what happens as households exceed median income and move up to a higher-income category. In the case of significant income mobility over time, wouldn't households actually benefit from increasing income inequality over time if that allowed them to earn higher incomes relative to the median or low-income quintiles once they arrived at one of the top two quintiles?

Most of those complaining about income inequality and stagnating income seem to statically assume that households or individuals stay in the same income group (by quintile, or the "top 1%," "top 10%," bottom 50%, median income, etc.) forever, with no movement over time. If we assume that you're stuck in the bottom income quintile for life, or even earn the median household income for life (both highly unrealistic), then the concerns about rising income inequality or stagnating median household income have greater strength. But with dynamic movement over time in the income of households and individuals, the "problems" of income inequality and stagnating income seem much less important, and might even be "non-problems."

Thomas Sowell offers this key insight (emphasis added):

“Only by focusing on the income brackets, instead of the actual people moving between those brackets, have the intelligentsia been able to verbally create a "problem" for which a "solution" is necessary. They have created a powerful vision of "classes" with "disparities" and "inequities" in income, caused by "barriers" created by "society." But the routine rise of millions of people out of the lowest quintile over time makes a mockery of the "barriers" assumed by many, if not most, of the intelligentsia.”

Contrary to prevailing public opinion that households get stuck at a given income level for decades or generations, there is strong empirical evidence that households actually move up and down the economic ladder over even very short periods of time.

For example, recent research from the Federal Reserve Bank of Minneapolis is summarized in the table above, based on income data from the Panel Study of Income Dynamics that followed the same households from 2001 to 2007. The empirical results answer the question: For households that started in a given earnings quintile (20 percent group) in 2001, what percentage of those households moved to a different income quintile over the next six years? Short answer: a lot.

Read more here at The Enterprise Blog.


How Technological Breakthroughs and Not Energy Policy Have Created A New World Order of Oil

Great post by Mark Perry of "Carpe Diem."
"From Daniel Yergin's editorial in today's Washington Post (emphasis added):

"For more than five decades, the world’s oil map has centered on the Middle East. No matter what new energy resources were discovered and developed elsewhere, virtually all forecasts indicated that U.S. reliance on Mideast oil supplies was destined to grow. This seemingly irreversible reality has shaped not only U.S. energy policy and economic policy, but also geopolitics and the entire global economy.

But today, what appeared irreversible is being reversed. The outline of a new world oil map is emerging, and it is centered not on the Middle East but on the Western Hemisphere. The new energy axis runs from Alberta, Canada, down through North Dakota and South Texas, past a major new discovery off the coast of French Guyana to huge offshore oil deposits found near Brazil.

This shift carries great significance for the supply and the politics of world oil. And, for all the debates and speeches about energy independence throughout the years, the transformation is happening not as part of some grand design or major policy effort, but almost accidentally. This shift was not planned — it is a product of a series of unrelated initiatives and technological breakthroughs that, together, are taking on a decidedly hemispheric cast.

The new hemispheric outlook is based on resources that were not seriously in play until recent years — all of them made possible by technological breakthroughs and advances. They are “oil sands” in Canada, “pre-salt” deposits in Brazil and “tight oil” in the United States.

One major supply development has emerged right here in the United States: the application of shale-gas technology — horizontal drilling and hydraulic fracturing, a process popularly known as “fracking” — to the extraction of oil from dense rock. The rock is so hard that, without those technologies, the oil would not flow. That is why it is called “tight oil.”

Case study No. 1 is in North Dakota, where, just eight years ago, a rock formation known as the Bakken, a couple of miles underground, was producing a measly 10,000 barrels of oil per day. Today, it yields almost half a million barrels per day, turning North Dakota into the fourth-largest oil-producing state in the country, as well as the state with the lowest unemployment rate.

Similar development is taking place in other parts of the country, including South Texas and West Texas. Altogether, tight oil production is growing very fast. The total output in the United States was just 200,000 barrels per day in 2000. Around 2020, it could reach 3 million barrels per day — a third of the total U.S. oil production. (And that is a conservative estimate; others are much higher.)

For the United States, these new sources of supply add to energy security in ways that were not anticipated. There is only one world oil market, so the United States — like other countries — will still be vulnerable to disruptions, and the sheer size of the oil resources in the Persian Gulf will continue to make the region strategically important for the world economy. But the new sources closer to home will make our supply system more resilient. For the Western Hemisphere, the shift means that more oil will flow north to south and south to north, rather than east to west. All this demonstrates how innovation is redrawing the map of world oil — and remaking our energy future.""

U.S. Income Inequality Has Been Flat Since 1994

Great post by Mark Perry of "Carpe Diem."

We keep hearing from the media and OWS protestors that rising income inequality (or exploding income inequality according to Jonathan Chait) and stagnating household incomes have gotten worse in recent years, caused allegedly by the "rich getting richer at the expense of the poor and lower-income income groups" because disproportionate and rising shares of national income have been going to the top 1% or top 20%, etc. In other words, we're hearing the standard, typical "class warfare" narratives.

Another part of that narrative is that income inequality wasn't nearly as much of a problem in the decades of the 1950s, 1960s, and 1970s when there was an upwardly mobile middle-class, when real median household income was rising year after year, and when income was more equitably and fairly distributed among income groups, i.e. during the "Golden Age" of the middle class. But once we experienced the Reagan tax cuts of the 1980s and the first "decade of greed," the American Dream of middle class equality started to fade. Once the Bush tax cuts of 2001 and 2003 took effect, the middle class was doomed, and "the rich" dominated the economy, upward mobility was over, the share of income going to the rich skyrocketed and income inequality "exploded."

But there's a problem, because three different measures of income dispersion (the share of total U.S. income going to the top 20% of American households, and Gini coefficients for both U.S. households and families) from the Census Bureau (Tables E-1 and F-4) displayed in the two charts above show trends that are completely contrary to the common narrative.

As can be seen in the top chart, all three measures of income dispersion have gradually increased over time, but most of the increases occurred in the earlier period between 1967 and 1994. Starting in the mid-1990s, the three measures of income inequality stalled out and barely changed in the sixteen years from 1994 to 2010 (see bottom chart of just the 1994-2010 period).

Wednesday, October 26, 2011

We should be happy that the Chinese are subsidizing their solar industry

See The Best Things in Life are Free by Megan McArdle.
"Matthew Yglesias explains why we should be happy that the Chinese are subsidizing their solar industry:
I do think it's always helpful to try to take a "real resources" viewpoint on these things. What's at issue here, basically, is that China is trying to give us a bunch of free solar panels. It's quite true that insofar as we've been organizing economic activity around the (reasonable) assumption that China won't give us a bunch of free solar panels, that getting the free panels will cause some dislocations. But it seems implausible that the best possible way of dealing with the situation is to refuse to accept the panels. That (poor) China has chosen to boost domestic employment by subsidizing consumption in (rich) America is slightly bizarre, but we may as well try to enjoy it while it lasts.

But won't they gain a permanent strategic advantage over us, I hear you cry?

Well, this does sometimes happen. But it's actually really rare. Notice how all the electronics goods seem to be manufactured in China? Even though we invented many of them (and the Japanese are responsible for a lot of the rest?) Notice that all the jobs assembling sneakers and looming textiles seem to have moved along with them? Sure, we had know-how and strategic supplier networks. But these were no competition for enormously cheap labor.

Even if we succeeded in creating, via subsidy, a vibrant domestic solar panel manufacturing industry, there's no reason to think it would stay here . . . unless you're planning to continue the subsidies forever, which is like trying to get rich by paying yourself to mow the lawn.

This is why it's so stupid to focus on "green jobs". The reason to promote green energy is to mitigate global warming, lessen economic dependence on some very volatile and unstable parts of the world, and build enough scale and demand that you maybe someday usher in an era of power that's "too cheap to meter", as they used to promise about nuclear. I understand why it makes sense politically for Democrats, but it's also dangerous, because if you can't produce the jobs, a lot of your support for the "green" evaporates, a long with a lot of green money.

In other words, calm down and enjoy your complimentary solar panels."

Tuesday, October 25, 2011

hurricanes did not increase economic growth in the U.S.

See So Much for Hurricanes as Stimulus, Part Deux from "Division of Labor."
"In a recent paper in REStat, Eric Strobl found that hurricanes did not increase economic growth in the U.S. Now he has a paper in the Journal of Development Economics that has similar findings for Latin American and Carribbean countries; the abstract:
In this paper we investigate the macroeconomic impact of natural disasters in developing countries by examining hurricane strikes in the Central American and Caribbean regions. Our innovation in this regard is to employ a wind field model on hurricane track data to arrive at a more scientifically based index of potential local destruction. This index allows us to identify damages at a detailed geographical level, compare hurricanes' destructiveness, as well as identify the countries that are most affected, without having to rely on potentially questionable monetary loss estimates. Combining our destruction index with macroeconomic data we show that the average hurricane strike caused output to fall by at least 0.83 percentage points in the region, although this depends on controlling for local economic characteristics of the country affected and what time of the year the storm strikes.

Of course, Strobl and others could publish 50 papers with similar conclusions and it wouldn't stop some doofus from proclaiming that the aftermath of some hurricane or other disaster will be greater prosperity."

Berkeley temperature study does not prove global warming

See No change makes big news by Matt Ridley. Here it is:

"A comment on the piece by James Astill about the Berkeley temperature study. Most of the article is a sensible discussion of a deadly dull piece of statistics that changes nothing. But it's topped and tailed with claims that this leaves little room for doubters, and that the warming is "fast". Both these conclusions are badly wrong.

1. To think this will dampen doubt badly misreads what the doubt is about. What sceptics mainly doubt is not that there has been warming but the cause and the future projections. Here's what Richard Muller of the Berkeley study actually says in the Wall Street Journal:

"How much of the warming is due to humans and what will be the likely effects? We made no independent assessment of that."

So no change there.

2. Given that Muller used the SAME temperature station records as the other sets, his graph is no surprise at all. About the only thing Muller has added is a statistical attempt to find out if the urban heat island has exaggerated the effect. He says no, but his efforts in that regard have already been taken apart [update, I meant dissected, not demolished] by McIntyre, Watts, Eschenbach and Keenan (the latter in email correspondence with Astill). In any case, it turns out if you look at the data in Muller's article, rather than the press release, he very much does NOT get the same result. He gets a decline in the last decade then hides it by smoothing. [Update: Eschenbach has partly withdrawn this charge.] See Eschenbach's piece here:

3. Even if Muller is right, the last word of the Astill article is "fast". Yet Muller has merely confirmed that — in his analysis — the temperature is rising about as fast as the three surface temperature sets. Which is at a rate SLOWER than the zero emission prediction made by James Hansen in the 1980s — and ten times slower than the warming rate at the end of the ice age, by the way. Hansen told us to expect 2-4 degrees in 25 years if we continued emitting co2. Thatcher at the Royal Society spoke of a degree per decade. Muller confirms that we are experiencing about 0.16 degrees per decade and that's not including the sea, so the real number is lower. That's nearly an order of magnitude slower!!! How can that conceivably be called fast? We are exactly on course for the zero-feedback version of greenhouse warming — ie, a doubling of CO2 leading to a harmless 1.2C of warming. See the chart at this site.

4. The Muller study has not yet been peer-reviewed. It appears to have been rushed into print full of errors to suit Muller's self-publicity machine. Nothing wrong with you writing about scientific ideas before peer review, but when I asked Oliver earlier this year to cover the interesting work of Nic Lewis who has proved that the IPCC had statistically altered a chart of probability density function of climate sensitivity in a way that fattened the tail (from green to blue in the chart below) — implying far higher probability of high warming than the only empirical study of sensitivity warranted — Oliver said he would not cover it till peers and the IPCC had reacted. Double standard there.The IPCC reacted eventually, and quietly, by admitting that Lewis was right and publishing an erratum. Yet still not a word for your readers. The consequence of that is that the IPCC now admits that the probability of any warming over 2.3 degrees is highly unlikely. Now that is a big story, unlike the Muller thing"

5. Why does this matter? Here are two reasons. About 190,000 people probably died last year needlessly because of policies for making motor fuel out of food. Near where I live hundreds of jobs are about to be lost in hard-pressed south-east Northumberland because of Huhne's carbon rationing driving RTZ's aluminium smelter abroad. When people at Notting Hill dinner parties talk of the need for sacrifice, that's what they mean, not paying more for home-grown runner beans. Both these are a direct result of carbon emissions reduction policies. If you want to endorse the imposition of such hardships, you'd better have some darned good evidence that the cure is less painful than the disease. The Muller study merely confirms that the patient has the symptoms so far of a mild cold.

The coverage of this story in the press has been abysmal — as if somebody had written a paper saying that the euro has been increasing in value, therefore the eurosceptics were wrong and the media had taken them at face value. The Economist used to take apocaholic vested interests with a pinch of salt"

Saturday, October 22, 2011

Income inequality can be explained by household demographics

Great post by Mark Perry at AEI.

"The Occupy Wall Street (OWS) protest has returned national attention to the topic of income inequality; see recent commentary from bloggers Megan McArdle here and James Pethokoukis here and here. Both highlight empirical evidence that challenges the narrative that income inequality has gotten worse over time.

Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households, but it’s also instructive to analyze the demographic differences among income groups at a given point in time to answer the question: How are high-income households different from low-income households? Recently released data from the Census Bureau (available here, here, and here) for American households by income quintiles in 2010 allows for such a comparison: see the chart below.

Here is a summary of some of the key demographic differences between American households in the bottom and top income quintiles in 2010:

1. On average, there were significantly more income earners per household in the top income quintile households (1.97) than earners per household in the lowest-income households (0.43).

2. Married-couple households represented a much greater share of the top income quintile (78.4 percent) than for the bottom income quintile (17 percent), and single-parent or single households represented a much greater share of the bottom quintile (83 percent) than for the top quintile (21.6 percent).

3. Roughly 3 out of 4 households in the top income quintile included individuals in their prime earning years between the ages of 35-64, compared to only 43.6 percent of household members in the bottom fifth who were in that age group.

4. Compared to members of the top income quintile, household members in the bottom income quintile were 1.6 times more likely to be in the youngest age group (under 35 years), and three times more likely to be in the oldest age group (65 years and over).

5. More than four times as many top quintile households included at least one adult who was working full-time in 2010 (77.2 percent) compared to the bottom income quintile (only 17.4 percent), and more than seven times as many households in the bottom quintile included adults who did not work at all (65 percent) compared to top quintile households whose family members did not work (13.3 percent).

6. Family members of households in the top income quintile were about five times more likely to have a college degree (60.3 percent) than members of households in the bottom income quintile (only 12.1 percent). In contrast, family members of the lowest income quintile were 12 times more likely than those in the top income quintile to have less than a high school degree in 2010 (26.7 percent vs. 2.2 percent).

Bottom Line: American households in the top income quintile have almost five times more family members working on average than the lowest quintile, and individuals in higher-income households are far more likely than lower-income households to be well-educated, married, and working full-time in their prime earning years. In contrast, individuals in low-income households are far more likely to be less-educated, working part-time, either very young or very old, and living in single-parent households.

The American economy and labor market are extremely dynamic, and evidence shows that individuals are not stuck forever in a single income quintile but instead move up and down the income quintiles over their lifetimes. It’s very likely that many high-income individuals who were in their peak earning years in 2010 were in a lower income quintile in prior years, before they acquired education and job experience, and they’ll move again to a lower quintile in the future when they retire.

Last November, presaging today’s protests on Wall Street, columnist Nicholas Kristof wrote in the New York Times (“A Hedge Fund Republic?”) that if Americans want to observe “rapacious income inequality,” they don’t need to travel to a banana republic. Rather, he suggests that “you can just look around” the United States to see “stunning inequality.” Given the significant differences in household characteristics by income group, it shouldn’t be too stunning that there are huge differences in incomes among American households, and it has nothing to do with “rapaciousness.” Rather, it can be easily explained by household demographics."

Adult baby is a symptom of a broken Social Security system

Great post By Matthew McKillip of AEI

Perhaps Stanley Thornton will be the giant straw that causes a policy breakthrough in our failing disability system. Thornton, as The Atlantic reported, is a 350 pound “adult baby” who receives disability benefits. Earlier this week it was decided that he was not fraudulently on the Social Security rolls.

Senator Tom Coburn asked for an investigation into Thornton’s case on the seemingly sound logic that anyone who can “custom-make baby furniture to support a 350-pound adult” should not receive Social Security Disability Insurance (SSDI) disability benefits.

While Thornton’s unique case is sure to stir outrage, of greater consequence is the SSDI system that he is drawing benefits from. The SSDI is both a fiscal and functional disaster: it is on pace for insolvency in 2017 and it discourages workers from returning to work through an ill-conceived incentive system. Austerity measures that aim to trim “adult babies” and others who can work off the disability rolls is at best a short-term fix. President Reagan attempted it in the early eighties but, as AEI Adjunct Scholar Richard Burkhauser explains, his efforts “were extremely controversial and resulted in a backlash that ended up making both SSDI eligibility criteria less strict and removing someone already on the rolls nearly impossible.” Cuts alone will only delay the reality that policy, not fraud or health conditions, is the root cause of the disability system’s failure.

Burkhauser, author of The Declining Work and Welfare of People with Disabilities, told McClatchy:

This is not a disability crisis in the sense that suddenly our workers are becoming less healthy. This is a fundamental flaw in the system that leads us to increasingly use SSDI as a long-term unemployment program for people who could be in the workforce if they had the appropriate (workplace) accommodations and rehabilitation.

The way forward is a serious conversation about what should be happening at the onset of a worker’s disability. Currently, there is little to nothing in the system that signals the costs to both workers and employers—both are inclined to increase the SSDI rolls on the federal dollar. Drawing on the experience of the Dutch, who have managed to stabilize a disability system which at one point had ballooned to 12 percent of their workforce, we should consider reforms such as making firms responsible for employees’ first year of sick pay or experience rating SSDI taxes. Experience rating allows those employers who do an above average job of getting workers back to work pay fewer taxes, while those who are poor at it pay more. Both of these adjustments provide an incentive for a company to accommodate workers, get them back on their feet, and help them lead a happier and more productive life.

Thursday, October 20, 2011

How costly is the mortgage deduction?

See The Upper-Class Entitlement: It’s time to end the mortgage interest deduction by Anthony Randazzo & Dean Stansel of Reason.

Dean Stansel is an economics professor at Florida Gulf Coast University. Anthony Randazzo is director of economic research at the Reason Foundation.

"The federal income tax code is full of complicated deductions, credits, and loopholes, which together exempted $1.2 trillion from taxation in 2009. The single largest benefit, amounting to around 35 percent of the total, is the mortgage interest deduction. This longstanding incentive, which allows individual taxpayers to deduct up to $1.1 million in home loan–related interest payments from their taxable income, has warped the real estate market and overwhelmingly benefited higher-income Americans, all while failing to achieve its stated policy objection of promoting homeownership. As Congress continues to debate federal budgetary and tax policy in an atmosphere of debt ceilings and ratings downgrades, the time has come for the mortgage interest deduction to go.

All taxes on income create distortions in economic decision-making. The more something is taxed, increasing its relative cost, the more individuals will substitute a good that is comparatively cheaper. This is as true of taxes on income produced by labor and capital as it is of taxes on goods and services. Such market distortions reduce efficiency, creating what economists call excess burden or deadweight loss.

The least distortionary income tax system is one with the broadest possible base and the lowest possible marginal tax rates. If that $1.2 trillion in itemized deductions was instead spread throughout the tax base, the average tax rate could be reduced by roughly a fifth, from 17.8 percent of taxable income to 14.5 percent. Such a tax cut would directly increase the reward for productive, income-generating activity. Closing loopholes such as the mortgage interest deduction while lowering overall rates would lead to a more productive economy."

"In 2009, only 22.1 percent of federal income tax returns contained the mortgage interest deduction. (The figure has remained between 21 and 26 percent since 1991.) Data from the congressional Joint Committee on Taxation (JCT) shows that only a small portion of taxpayers with incomes below $50,000 claim the deduction. In contrast, two-thirds of those with incomes above $100,000 do so (see Figure 1)."

"How big is the benefit? According to the JCT, after you adjust for the difference between the standard deduction and the mortgage deduction, for a taxpayer with average income, the mortgage interest deduction is about $10,000 but only reduces taxable income by $7,600. At the 2009 average tax rate of 12 percent on adjusted gross income, that amounts to a tax savings of $912, or $76 a month.

But these numbers provide an incomplete picture, since the tax savings can vary substantially based on income level, age, and location. Using the most recent data from the JCT and the Internal Revenue Service, we found that taxpayers with incomes below $75,000 save less than $200 per year, while those with incomes above $200,000 save about $1,800 (see Figure 2). As a percentage of their overall tax bill, however, the lower-income groups save more."

Liberal Indifference to the Jobless in the Private Sector

Great post by Hans Bader of the Competitive Enterprise Institute Blog.
"Senate Majority Leader Harry Reid claims that joblessness is not a problem in the private sector, where huge numbers of people have lost their jobs, and that it’s the public sector — where unemployment is much lower — where it is a problem. This nonsense could only come from someone like Reid, who has been a government official for decades, and is supported by liberal government employee unions.

Reid claimed, “It’s very clear that private sector jobs have been doing just fine, it’s the public sector jobs where we’ve lost huge numbers, and that’s what this legislation is all about.” (“Reid Says Government Jobs Must Take Priority Over Private Sector Jobs,” The Hill, 10/19/11).

Reid was defending Obama’s costly American Jobs Act proposals, which would spend billions more on state government employees, who are already much better compensated than the average American worker, and who have generous pension benefits that have resulted in trillions in unfunded pension benefits at taxpayer expense.

Contrary to Reid’s claims, 1,503,000 jobs, almost all of them in the private sector, have been lost during the Obama Administration (see figures for February, 2009 – September, 2011 (U.S. Dept. Of Labor, “Employment, Hours, And Earnings,” Accessed 10/19/11)). The official unemployment rate is 9.1 percent, and some unofficial figures put it closer to 20 percent. (“The Unemployment Situation – September 2011,” Bureau Of Labor Statistics, 10/7/11). By contrast, the unemployment rate for government workers is a mere 4.7%. (See Table A-14).

(Fox News gives a slightly higher figure for lost private sector jobs, saying that “since the president’s January 2009 inauguration, total private sector employment has dropped by 1.6 million.” Government jobs have gone down from their peak in the Obama Administration primarily because the 2010 Census came to an end. The Census temporarily inflated the number of federal employees).

As the private sector and high-tech industries have suffered, the government has expanded. One result is that the top average income in the U.S. is now in the Washington, D.C. Area, not California’s Silicon Valley. “The U.S. capital has swapped top spots with Silicon Valley, according to recent Census Bureau figures, with the typical household in the Washington metro area earning $84,523 last year. The national median income for 2010 was $50,046. … . The unemployment rate in the Washington metro area in August was 6.1 percent, compared with 10 percent in San Jose, according to Labor Department figures.” (“Top Income In U.S. Is…Gasp!…Wash. D.C. Area,” Bloomberg, 10/19/11)"

Incomes of the top 1% have been falling

Nice graph from Megan McArdle's post The 1% Ain't What It Used To Be. It goes up through 2009.

Screen shot 2011-10-19 at 3.06.16 PM.png

Wednesday, October 19, 2011

Reshoring-jobs coming back to the USA for reasons that economic theory predicted

See "Back in the USA" - Seattle Manufacturer Provides A Lesson on Reshoring. Expect More of It. Lots More by Mark Perry of "Carpe Diem."
"The NY Times recently featured a Seattle-based company named "Taphandles" that has brought some of its manufacturing of custom beer taps and beer-marketing products (see photo above) back to the United States from China as many of the economic and cost advantages of manufacturing have started to shift back to the United States, including:

1. Manufacturing wages in China continue to increase at 15-20% per year on average, and have actually increased by a whopping 300% for Taphandles since it opened a Chinese factory in 2006. In contrast, manufacturing wages in the U.S. have remained relatively flat, or have even decreased in some industries that have adopted a two-tier wage structure.

2. The lead time for Taphandles' orders coming from China is three weeks, compared to a much shorter time for domestic production, which improves customer satisfaction for Taphandles' clients.

3. In addition to rising wages, the Chinese currency has appreciated by 23% over the last five years, making production there much more expensive for American firms like Taphandles.

4. Taphandles owner Paul Fitcher predicts that international shipping costs will continue to rise along with higher oil prices, which was another factor in his decision to "reshore" manufacturing back to the U.S.

Bottom Line: Look for more and more manufacturing production to come back to the U.S. from China in the future, as China's once-significant labor cost advantage continues to shrink. According to a recent Boston Consulting Group report, the example of Taphandles is part of an emerging trend that will accelerate in the next five years, and in the process could create 2 to 3 million American manufacturing jobs from the reshoring of production back to the U.S."

The "must hire a gasoline attendant" law leads to less gas available

See Markets NOT in Everything: No Gas from 11pm-7 am by Mark Perry of "Carpe Diem."
""In 48 states, customers are allowed to pump their own gasoline. In 48 states, filling station attendants no longer exist as a profession. Labor costs are lower. These savings are passed on to customers in the form of lower gasoline prices.

In Oregon, any convenience store that sells gasoline must hire a gasoline attendant. So, there are fewer convenience stores acting as sellers of gasoline. This law restricts entry into the field.

Because there are few customers from 11 p.m. to 7 a.m., it is unprofitable for stations to hire full-time attendants. The solution is to close the stations. When the stations are closed, the manager turns off the pumps. No one can buy gasoline at the station.""

Saturday, October 15, 2011

Matt Ridely On Why Gas Is Better Than Wind Power

See Gas against wind. Excerpts:
"Which would you rather have in the view from your house? A thing about the size of a domestic garage, or eight towers twice the height of Nelson’s column with blades noisily thrumming the air. The energy they can produce over ten years is similar: eight wind turbines of 2.5-megawatts (working at roughly 25% capacity) roughly equal the output of an average Pennsylvania shale gas well (converted to electricity at 50% efficiency) in its first ten years.

Difficult choice? Let’s make it easier. The gas well can be hidden in a hollow, behind a hedge. The eight wind turbines must be on top of hills, because that is where the wind blows, visible for up to 40 miles. And they require the construction of new pylons marching to the towns; the gas well is connected by an underground pipe.

Unpersuaded? Wind turbines slice thousands of birds of prey in half every year, including white-tailed eagles in Norway, golden eagles in California, wedge-tailed eagles in Tasmania. There’s a video on Youtube of one winging a griffon vulture in Crete. According to a study in Pennsylvania, a wind farm with eight turbines would kill about a 200 bats a year. The pressure wave from the passing blade just implodes the little creatures’ lungs. You and I can go to jail for harming bats or eagles; wind companies are immune.

Still can’t make up your mind? The wind farm requires eight tonnes of an element called neodymium, which is produced only in Inner Mongolia, by boiling ores in acid leaving lakes of radioactive tailings so toxic no creature goes near them.

Not convinced? The gas well requires no subsidy – in fact it pays a hefty tax to the government – whereas the wind turbines each cost you a substantial add-on to your electricity bill, part of which goes to the rich landowner whose land they stand on. Wind power costs three times as much as gas-fired power. Make that nine times if the wind farm is offshore. And that’s assuming the cost of decommissioning the wind farm is left to your children – few will last 25 years.

Decided yet? I forgot to mention something. If you choose the gas well, that’s it, you can have it. That’s because when thIf you choose the wind farm, you are going to need the gas well too. e wind does not blow you will need a back-up power station running on something more reliable. But the bloke who builds gas turbines is not happy to build one that only operates when the wind drops, so he’s now demanding a subsidy, too.

What’s that you say? Gas is running out? Have you not heard the news? It’s not. Till five years ago gas was the fuel everybody thought would run out first, before oil and coal. America was getting so worried even Alan Greenspan told it to start building gas import terminals, which it did. They are now being mothballed, or turned into export terminals."

"State regulators in Alaska, Colorado, Indiana, Louisiana, Michigan, Oklahoma, Pennsylvania, South Dakota, Texas and Wyoming have all asserted in writing that there have been no verified or documented cases of groundwater contamination as a result of hydraulic fracking. Those flaming taps in the film “Gasland” were literally nothing to do with shale gas drilling and the film maker knew it before he wrote the script. The claim that gas production generates more greenhouse gases than coal is based on mistaken assumptions about gas leakage rates and cherry-picked time horizons for computing greenhouse impact."

Thursday, October 13, 2011

Reckless Government Policies, Not Private Greed Caused the Housing Bubble and Financial Crisis

Great post by Mark Perry of "Carpe Diem."

"Peter Wallison of the American Enterprise Institute writing in today's WSJ, explains that the Wall Street protesters have been grossly misled because it was "Reckless government policies, and not private greed, that brought about the housing bubble and resulting financial crisis." Here's an excerpt:

"Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.

It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.

Research by Edward Pinto, a former chief credit officer of Fannie Mae (now at the American Enterprise Institute) has shown that 27 million loans—half of all mortgages in the U.S.—were subprime or otherwise weak by 2008. That is, the loans were made to borrowers with blemished credit, or were loans with no or low down payments, no documentation, or required only interest payments.

Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution. Thus it is clear where the demand for these deficient mortgages came from.

The huge government investment in subprime mortgages achieved its purpose. Home ownership in the U.S. increased to 69% from 65% (where it had been for 30 years). But it also led to the biggest housing bubble in American history (see chart above). This bubble, which lasted from 1997 to 2007, also created a huge private market for mortgage-backed securities (MBS) based on pools of subprime loans.

As housing bubbles grow, rising prices suppress delinquencies and defaults. People who could not meet their mortgage obligations could refinance or sell, because their houses were now worth more.

When the bubble deflated in 2007, an unprecedented number of weak mortgages went into default, driving down housing prices throughout the U.S. and throwing Fannie and Freddie into insolvency. Seeing these sudden losses, investors fled from the market for privately issued MBS, and mark-to-market accounting required banks and others to write down the value of their mortgage-backed assets to the distress levels in a market that now had few buyers. This raised questions about the solvency and liquidity of the largest financial institutions and began a period of great investor anxiety.

The narrative that came out of these events—largely propagated by government officials and accepted by a credulous media—was that the private sector's greed and risk-taking caused the financial crisis and the government's policies were not responsible. This narrative stimulated the punitive Dodd-Frank Act—fittingly named after Congress's two key supporters of the government's destructive housing policies. It also gave us the occupiers of Wall Street."

MP: The chart above shows how the weakening of underwriting standards did boost the homeownership to rate to an historically unprecedented level above 69% by the end of 2004, but in the process created an unsustainable housing bubble that started unraveling in early 2007. Now real home prices (measured by the FHFA index) are back to 2001 levels and homeownership rates are back to the levels of the late 1990s."

More on Warren Buffett's Questionable Tax Analysis

Great post by Mark Perry of "Carpe Diem."

"In response to claims by David Clayton on the Vox Rationalis blog that I'm "thoughtless, dishonest and/or lazy" in my analysis of Warren Buffett's tax claims, I provide the chart above displaying the average federal tax rates that various income groups paid for: a) individual federal income taxes and b) payroll taxes in 2007 (most recent year available from the Congressional Budget Office, retrieved from the Tax Policy Center). These data allow for the most accurate "apples-to-apples" analysis of Buffett's claim that his federal tax rate was 17.4% for income taxes and payroll taxes (see today's WSJ and Buffett's letter to Rep. Huelskamp), compared to the average federal tax rate of 36% for his employees.

It should also be noted that Buffett's original claims in the NY Times were as follows:

"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent."

Here are my thoughts:

1. Warren Buffett's tax situation is not typical for "wealthy" taxpayers, because the average tax rate for those in the top quintile is more than 20% compared to Buffett's 17.4% rate. As discussed previously, Buffett's lower-than-average tax rate is because he receives most of his taxable income as dividends (which have been taxed previously at the corporate level) and capital gains - taxed at only 15% - and not as ordinary income, which would be taxed as high as 35%. He also may receive income from tax-exempt municipal bonds.

2. More importantly, it seems highly unlikely that Buffett's secretary and other co-workers are paying effective federal tax rates of 33-41%. It's important to note that Buffett has only mentioned federal income taxes and payroll taxes, and not state income taxes, and has specifically reported his 17.4% rate on only federal taxes. Given the tax data in the chart above, it's either the case that: a) Buffett's assessment of his co-workers' tax data is inaccurate, or b) all of his office workers faced extremely unusual tax situations last year, which are not at all representative of the taxes paid by typical Americans.

3. Our federal tax system is highly progressive on average - higher income groups pay higher rates of federal taxes even when including payroll taxes - in general and on average. Buffett's suggestion and anecdotal "evidence" that the federal tax system is regressive in at least some cases (his secretary and lower-paid employees pay a higher federal tax rate than he does) is not typical, but can only be considered as special cases of extreme outliers, both for him and his employees.

Now that Buffett has released some of his tax information, perhaps he should have his employees release their tax information, so that we could see how it's possible that they are paying an average rate of 36%. If he claims that he's adding state taxes to his "analysis" for his employees, then that should be clarified, and he should explain why he didn't include state taxes in the tax information he released."

Wednesday, October 12, 2011

ECB study questions Romer's Multiplier Estimate

See Krugman’s weak defense of Keynesian fiscal policy by James Pethokoukis of AEI. Excerpt:
Oh, and the conclusion of that ECB study:
The estimates reported here of the impact of such packages are much different from those reported in the paper by Christina Romer and Jared Bernstein. They report impacts on GDP for a broad fiscal package that are six times larger than those implied by government spending multipliers in a typical new Keynesian model and our calculations based on generous assumptions of the impacts of tax rebates and transfers on GDP. They also report job estimates that are six times larger than these alternative models. At the least, our findings raise serious doubts about the robustness of the models and the approach currently used

Russ Roberts Critique's Krugman's View Of Keynesianism

See The evidence for Keynesian economics at "Cafe Hayek."
"Paul Krugman explains why he believes (his verb) in Keynesian economics.
A correspondent asks a good question: what evidence makes me believe that Keynesian economics is broadly right, given the relative absence of experience with large fiscal stimulus programs?

I’d answer that question with several points.

First, we’re talking about a model, not just a prediction about the impact of spending increases. So you can ask about the ancillary predictions of that model as opposed to rival models. Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?

Krugman is a superb polemicist. He takes a single argument of anti-Keynesians and uses it to show us that Keynesian claims beyond the effects of stimulus spending are probably right. Does Krugman really believe that you can’t have high interest rates when there is high unemployment. The stagflation of the 1970s when there was high unemployment with high interest rates is one reason Keynesian went into disrepute.
Also, there are some features of the approach that can be tested separately. Keynesianism isn’t just about sticky prices, but it does generally assume sticky prices — and there is overwhelming evidence, from a variety of sources, that prices are indeed sticky.

This is an even better piece of polemicism than the first one. Keynesian models assume sticky prices, prices are sticky, therefore? Therefore what? Therefore Keynesian models have somewhat realistic assumptions. That isn’t the most convincing selling point.

Also also: there’s plenty of evidence that monetary policy can move output and employment — and it’s very hard to devise a model in which that is true that doesn’t also say that fiscal policy can be effective, especially when you’re up against the zero lower bound.

Yes, there is plenty of evidence that monetary policy can have real effects. So why isn’t there plenty of evidence of fiscal policy having real effects? He has to say that in the models (whose? which ones? All of them?) that presume monetary policy works, so does fiscal policy.

So his first point is that the model works well–it has correct implications in general, its assumptions (well one of them anyway) are realistic and if monetary policy works, fiscal policy should too.
Second, while we don’t have a lot of postwar experience with fiscal stimulus, we do have a lot of experience with anti-stimulus, that is, austerity — and that turns out to be reliably contractionary. Again, it’s hard to think of a model in which austerity is contractionary but stimulus isn’t expansionary.

Finally, there is evidence from fiscal expansions in the 1930s, which actually did lead to economic expansion too.

Mainly I’d stress the first point. We have a model of the way the world works, and the world does indeed seem to work that way. And an implication of that model is that fiscal stimulus will work under conditions like those we face now. If interest rates had soared, if the rise in base money had led to rising GDP and/or soaring prices despite the zero lower bound, I would have sat down to reconsider what I thought I knew about macroeconomics. In fact, however, my preferred model has passed the test of events with flying colors, while the other guys’ models have been totally wrong.

If I were defending Keynesian economics I guess I’d go with the first point, too. Because the empirical evidence he cites in his second point is very mixed. Krugman cites the studies that supports his view (as we all tend to do.) He leaves out the post-WW II expansion that followed huge cuts in government spending where the Keynesian predictions were totally wrong. He leaves out the stagflation of the 1970s. He leaves out all the studies that find a small multiplier (Barro and Redick, Ramey (who will be a guest on EconTalk in the next two weeks) and work by Alesina that shows that contractions in government spending (the austerity Krugman refers to) actually encourage economic growth.

The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government. Both of us can find evidence for our worldviews. Whose evidence is better? I’m not sure it’s a meaningful question. My empirical points about Keynesianism won’t convince Krugman. His point don’t convince me. I am not saying that we will never get any kind of decisive evidence on the question. I’m saying it sure isn’t here now."

Tuesday, October 11, 2011

A Nobel for Non-Keynesians

See Henderson on Sargent and Sims Nobel by David Henderson of EconLog.
""A Nobel for Non-Keynesians," my piece on the Nobel prize winners, Thomas J. Sargent and Christopher A. Sims, ran in the Wall Street Journal today. I wrote it yesterday a.m., which is why I didn't take time to post on it yesterday. Suffice it to say that I strongly disagree with Arnold's dismissal. Here is a long excerpt, followed by a paragraph the editors cut. The excerpt is on Sargent, the person whose work I know best. By the way, he wrote the entry on Rational Expectations for the first edition of The Concise Encyclopedia of Economics.

This conclusion was at odds with the Keynesian model, which dominated economic thinking from the late 1930s to the early 1970s. The Keynesian model posited a stable trade-off between inflation and unemployment. In 1970, major U.S. econometric models, built on Keynesian assumptions, predicted that the government could get the unemployment rate down to 4% if it accepted an increase in inflation to 4%. In a 1977 article titled "Is Keynesian Economics a Dead End?" Mr. Sargent wrote, "[I]nstead of 4-4, in the mid-1970s we got 9-9, a very improbable occurrence if econometric models of 1969 had been correct."

In his later work, Mr. Sargent explored expectations in other contexts. An important one is the issue of how a government can end high inflation. Mr. Sargent studied four countries that had hyperinflation in the early 1920s--Germany, Austria, Hungary and Poland. All used inflation to finance high government deficits. They all succeeded in eliminating hyperinflation, but to do so they had to be credible. Of course, they got rid of their old currencies and started new ones. But they also had to affect people's expectations by committing to substantially lower budget deficits. All four governments did.

Although the Nobel committee did not cite his work on unemployment insurance, Mr. Sargent, with Swedish economist Lars Ljungqvist, found that high, long-lasting unemployment benefits in Europe have caused many European workers who lose their jobs to stay unemployed for years and, thereby, erode their "human capital." This makes them less employable in the long run. The fact that the U.S. government has extended unemployment benefits in many U.S. states to 99 weeks, said Mr. Sargent in a 2010 interview with the Federal Reserve Bank of Minneapolis, "fills me with dread."

The interview linked to above is the single best popular piece for getting to know the sharpness of Sargent's thinking. I had already been impressed by Sargent. Reading some of his work yesterday deepened that impression.

In fact, it was based on that interview that I wrote this paragraph, which got deleted:

Sargent is actually quite ecumenical. In the same interview, Sargent praises articles by left-wing economists Joseph Stiglitz and Jeffrey Sachs. Stiglitz and Sachs, he points out, "executed a rational expectations calculation to compute the rewards to prospective buyers" of "toxic assets" under President Obama's Public-Private Investment Program of 2009. "Those calculations," says Sargent, "showed that the administration's proposal represented a large transfer of taxpayer funds to owners of toxic assets.""

Many Swedes Choose Private Health Care Over Government Health Care

See Private Health Insurance Increases 400% in Sweden To Avoid Long Waiting Lines and Inconsistent Care by Mark Perry of "Carpe Diem."
"From The Local: Sweden's News in English:
"While Sweden has long taken pride in its public healthcare system, lengthening queues and at times inconsistent care have prompted many Swedes to opt for private healthcare with many gaining the benefit through insurance policies offered by employers, currently responsible for 80% of healthcare insurance market.

The idea behind private health insurance is simple enough: those put off by the idea of heading to publicly funded clinics and hospitals can purchase a policy through an insurance company and instead enjoy speedy medical attention with private doctors.

As many as 500,000 Swedes are now estimated to be using private healthcare insurance, up from 100,000 only ten years ago. And a flawed public system is often cited as the cause of the rapid expansion.

Long queues are one of the main complaints for consumers of Sweden's public healthcare services, with patients sometimes forced to wait as much as fifteen times longer for treatment compared to private options."

MP: Government-run health care always sounds so good in theory, but often fails to deliver in reality."

Monday, October 10, 2011

Government Officials Often Protect Fraud Perpetrators

See ‘Health-Care Executive’s Medicare Fraud Scheme Included Lobbying Washington’ by Michael F. Cannon of Cato.
In a recent article, I explained:
Politicians routinely subvert anti-fraud measures to protect their constituents. When the federal government began poking around a Buffalo school district that billed Medicaid for speech therapy for 4,434 kids, the New York Times reported, “the Justice Department suspended its civil inquiry after complaints from Senator Charles E. Schumer, Democrat of New York, and other politicians”…

It’s not just the politicians. The Legal Aid Society is pushing back against a federal lawsuit charging that New York City overbilled Medicaid. Even conservatives fight anti-fraud measures, albeit in the name of preventing frivolous litigation, when they oppose expanding whistle-blower lawsuits, where private citizens who help the government win a case get to keep some of the penalty.

Sunday, October 9, 2011

The Problem With The Class Act Of Obama Care

See Not a CLASS Act by Alex Tabarrok of "Marginal Revolution."
"When President Obama’s health care proposal was being debated we were repeatedly told that the “The president’s plan represents an important step toward long-term fiscal sustainability.” Indeed, a key turning point in the bill’s progress was when the CBO scored it as reducing the deficit by $130 billion over 10 years making the bill’s proponents positively giddy, as Peter Suderman put it at the time. Of course, many critics claimed that the cost savings were gimmicks but their objections were overruled.

One of the budget savings that the critics claimed was a gimmick was that a new long-term care insurance program, The Community Living Assistance Services and Supports program or CLASS for short, was counted as reducing the deficit. How can a spending program reduce the deficit? Well the enrollees had to pay in for at least five years before collecting benefits so over the first 10 years the program was estimated to reduce the deficit by some $70-80 billion. Indeed, these “savings” from the CLASS act were a big chunk of the 10-yr $130 billion in deficit reduction for the health care bill.

The critics of the plan, however, were quite wrong for it wasn’t a gimmick, it was a gimmick-squared, a phantom gimmick, a zombie gimmick:
They’re calling it the zombie in the budget.

It’s a long-term care plan the Obama administration has put on hold, fearing it could go bust if actually implemented. Yet while the program exists on paper, monthly premiums the government may never collect count as reducing federal deficits.

Real or not, that’s $80 billion over the next 10 years….

“It’s a gimmick that produces phantom savings,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates deficit control..

“That money should have never been counted as deficit reduction because it was supposed to be set aside to pay for benefits,” Bixby added. “The fact that they’re not actually doing anything with the program sort of compounds the gimmick.”

Moreover, there were many people inside the administration who thought that the program could not possibly work and who said so at the time. Here is Rick Foster, Chief Actuary of HHS’ Centers for Medicare and Medicaid Services on an earlier (2009) draft of the proposal:

The program is intended to be “actuarially sound,” but at first glance this goal may be impossible. Due to the limited scope of the insurance coverage, the voluntary CLASS plan would probably not attract many participants other than individuals who already meet the criteria to qualify as beneficiaries. While the 5-year “vesting period” would allow the fund to accumulate a modest level of assets, all such assets could be used just to meet benefit payments due in the first few months of the 6th year. (italics added)

So we have phantom savings from a zombie program and many people knew at the time that the program was a recipe for disaster.

Now some people may argue that I am biased, that I am just another free market economist who doesn’t want to see a new government program implemented no matter what, but let me be clear, this isn’t CLASS warfare, this is math."

Americans are not harmed by foreign subsidies that lower the prices of our imports

Great post by Don Boudreaux of "Cafe Hayek."
"Mr. Robert Samuelson, Columnist
Washington Post
Washington, DC

Dear Mr. Samuelson:

You argue that we Americans are harmed by foreign subsidies that lower the prices of our imports (“Our one-sided trade war with China,” Oct. 7). But why? Why are we harmed by these lower-priced imports if (as I know you agree) we benefit from imports whose prices are lowered by natural market forces?

In both cases, some U.S. workers lose jobs. And in both cases, not only does Americans’ cost of living fall, but, also, opportunities are thereby opened in America for the creation of new industries and new opportunities that would otherwise be economically out of reach. In America, absolutely nothing about jobs lost to imports whose prices are made lower by foreign subsidies distinguishes them from jobs lost to imports whose prices are made lower by natural market forces.

If you’re skeptical of my claim, ask first: Would you oppose the successful private efforts of a Chinese physician to invent an inexpensive pill that safely and completely cures people of cancer? I’m sure not, despite the fact that such a pill would destroy many American jobs – from those of physicians to hospital orderlies. Now ask, would you oppose the successful efforts of the Chinese government to subsidize the invention and production of such a pill for export to America?

The logic of your position is that such subsidies would hurt Americans and, therefore, Uncle Sam should retaliate with measures to protect us from the scourge of such a low-priced cancer-curing pill.

But honestly, would Americans really be made better off by retaliatory tariffs that prevent us from buying this pill – or that force up the price of this pill to levels sufficient to protect the jobs of oncology physicians, nurses, and other health-care workers? If you (rightly) suspect that the answer is no, then you should realize that your case for retaliatory trade restrictions against whatever goods Beijing might now subsidize for export is without merit.

I attach, fyi, a just-published paper of mine that answers in the negative the question “do foreign subsidies justify retaliatory protectionist measures?”

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

Important New Evidence on Regime Uncertainty

From Robert Higgs of the Independent Institute
When I introduced the concept of regime uncertainty in 1997, attempting to improve our understanding of the Great Depression’s extraordinary duration, I anticipated that many people—especially my fellow economists—would not welcome this contribution. Their primary objection, I ventured, would be that the concept remained too vague and, most of all, that it had not been reduced to a quantitative index of the sort that modern mainstream economists customarily work with, especially in their empirical macroeconomic analyses.

My argument did not lack evidence, however, and I regarded the agreement of several different forms of evidence as an important element of the argument’s force. The evidence I adduced with regard to changes in the yield spreads for high-grade corporate bonds of differing maturities seemed to me both systematic and especially compelling, though not decisive because alternative explanations of those changes might be offered. (I considered several such explanations and rejected them as unpersuasive in one way or another.) Recently, in my application of the concept of regime uncertainty to help us understand better the persistent economic troubles since 2007, I again advanced several different kinds of evidence, including as before an analysis of changes in the yield curves for high-grade corporate bonds. This time, too, the evidence is consistent with the underlying argument.

Nevertheless, the argument scarcely gained widespread assent, and most analysts either ignored it completely or, like Paul Krugman, dismissed it as a fairy tale—in his view, the sort of wholly fictitious notion that would be peddled only by think-tank whores in the pay of Republican plutocrats. (I trust that everyone who knows me will see how closely I fit this template.)

Now, however, more respectable analysts than I have accepted the challenge of showing that regime uncertainty can be measured systematically and that the resulting index “shows U.S. policy uncertainty [is currently] at historically high levels.” This research has been been carried out by three analysts at two of the world’s preeminent research universities: Scott R. Baker and Nicholas Bloom at Stanford University and Steven J. Davis at the University of Chicago. I highly recommend that anyone interested in this matter read the October 5 summary of these analysts’ research published online by Bloomberg News.

Some highlights:
• A major factor behind the weak recovery and gloomy outlook is a climate of policy-induced economic uncertainty. An index we devised . . . shows U.S. policy uncertainty at historically high levels.

• We constructed our index by combining three types of information: the frequency of newspaper articles that refer to economic uncertainty and the role of policy, the number of federal tax code provisions set to expire in coming years, and the extent of disagreement among forecasters about future inflation and government spending.

• Our index shows prominent surges in policy uncertainty around the time of major elections, the outbreak of wars and after the Sept. 11 attacks. It shows another surge after the bankruptcy of Lehman Brothers Holding Inc. in September 2008. Policy uncertainty has remained at high levels ever since.

• [T]he data refute the view that economic uncertainty necessarily breeds policy uncertainty. In the last decade, however, policy became a larger source of movements in overall economic uncertainty and an increasingly important concern for businesses and households. . . . [T]he persistence of policy uncertainty . . . reflects deliberate policy decisions, harmful rhetorical attacks on business and “millionaires,” failure to tackle entitlement reforms and fiscal imbalances, and political brinkmanship.

• To identify the drivers of policy uncertainty, we drilled into the Google News listings and quantified the factors at work. Several factors account for the high levels of policy uncertainty in 2010 and 2011, but monetary and tax issues predominate. Uncertainties related to health-care policy, labor regulations, national security and sovereign-debt concerns play contributing roles.

• Negative economic effects of uncertainty operate through multiple, reinforcing channels. When households are fearful about job loss, wages, taxes and retirement funds, they cut back on expenditures. The drop in consumer spending means weak sales for businesses and lower sales-tax collections for governments.

• When businesses are uncertain about taxes, health-care costs and regulatory initiatives, they adopt a cautious stance. Because it is costly to make a hiring or investment mistake, many companies will wait for calmer times to expand. If too many businesses wait, the recovery never takes off. Weak investments in capital goods, product development and worker training also undermine longer-run growth.

• So how much near-term improvement could we gain from a stable, certainty-enhancing policy regime? We estimate that restoring 2006 levels of policy uncertainty would yield an additional 2.5 million jobs over 18 months. Not a full solution to the jobs shortfall, but a big step in the right direction.

See the authors’ report for more detail.

The index constructed and analyzed by Baker, Bloom, and Davis, like any such index, may be faulted in various ways. Working with such data and the indexes constructed from them is a never-ending task of correction and refinement for empirical researchers. Nevertheless, these analysts have met the challenge of producing a systematically measured quantitative index of regime uncertainty (they call it policy uncertainty) over a long period, and they have presented reasonable arguments that tie the index’s movements to specific policy measures and future possibilities. Their evidence certainly deserves as much respect as the standard National Income and Product Accounts (NIPA) estimates prepared by the Commerce Department’s Bureau of Economic Analysis, much of which derives from highly questionable definitions and assumptions and from underlying data subject to a variety of errors—yet economists swallow the NIPA estimates all the time without choking.

The idea of regime uncertainty had sound economic theory and substantial empirical evidence to support it from the beginning, and a great deal of additional evidence has accumulated over the past three years. Yet critics have continued to dismiss it either as Republican bunk bought and paid for by Obama-hating billionaires or as a sort of “just so” story concocted by flaky think-tank nobodies, such as yours truly. Now, however, the research reported by Baker, Bloom, and Davis knocks the ball firmly back into the critics’ court. Don’t be surprised if they take a whack at it. Whether their attempt will succed intellectually is another matter.

Saturday, October 8, 2011

George Will on Elizabeth Warren's Collectivism

From Mark Perry of "Carpe Diem."
"George Will below responds to Elizabeth Warren's recent claims that (modified slightly):

"There is nobody in this country who got rich on his own. Nobody. If Steve Jobs or Bill Gates created a new company like Apple or Microsoft out there — good for you guys.

But I want to be clear. You moved your iPods, iPhones, and Windows software products to market on the roads the rest of us paid for. You hired workers for Apple and Microsoft that the rest of us paid to educate. You were safe in your offices because of police forces and fire forces that the rest of us paid for. ... You built a computer business and it turned into something terrific or a great idea — God bless, keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."

Here's George Will:

"Elizabeth Warren is a pyromaniac in a field of straw men: She refutes propositions no one asserts. Everyone knows that all striving occurs in a social context, so all attainments are conditioned by their context. This does not, however, entail a collectivist political agenda.

Such an agenda's premise is that individualism is a chimera, that any individual's achievements (like Steve Jobs) should be considered entirely derivative from society, so the achievements need not be treated as belonging to the individual. Society is entitled to socialize — i.e., conscript — whatever portion it considers its share. It may, as an optional act of political grace, allow the individual (like Steve Jobs) the remainder of what is misleadingly called the individual's possession.

The collectivist agenda is antithetical to America's premise, which is: Government — including such public goods as roads, schools and police — is instituted to facilitate individual striving, aka the pursuit of happiness.

Society — hundreds of millions of people making billions of decisions daily — is a marvel of spontaneous order among individuals in voluntary cooperation. Government facilitates this cooperation with roads, schools, police, etc. — and by getting out of its way. This is a sensible, dynamic, prosperous society's "underlying social contract.""

Even with Fees, The Miracle of Flight Still a Bargain

Great post by Mark Perry of "Carpe Diem"

WALL STREET JOURNAL -- "Structurally, the airline business is capital-intensive, labor-intensive, highly leveraged and fiercely competitive. It is also vulnerable to external shocks, including terrorism, oil-price spikes, waning consumer confidence and high taxes. Even though the industry generates billions of dollars in annual revenue, it rarely is able to cover its huge expenses, much less show a decent return on invested capital.

Passengers love to accuse the airlines of gouging, and a dizzying array of fares adds to the outrage. A new raft of fees for better seats, expedited security lines and meals on board only makes passengers angrier. But airlines, caught between a steady decline in fares and rising costs, have no choice but to look for every nickel they can find. Passenger tickets now account for just 71% of U.S. airlines' total passenger revenue, down from 88% in 1990, according to the DOT. The rest comes from fees it charges for, among other things, reservation changes, standby service, checked luggage, in-flight food service and transporting pets."

MP: The chart above shows average annual U.S. airfares for domestic travel back to 1979 (data here), both with fees (blue line) and without fees (red line). Even with fees that averaged $21.66 last year for baggage ($13.78) and reservation charges ($7.88), the average total fare of $337.97 in 2010 was 43% below the 1980 peak of $592.55, and 16% below the $401.27 average fare in 2000. Without fees, the average fare of $292.25 in 2009 was the lowest average annual airfare in history. In 2010, the average airfare without fees of $316.31 was below the 2008 average of $323.32 and about the same as the average in the years from 2004-2007, so inflation-adjusted airfares have been basically flat for the last 7 years or so.

As much as consumers complain about rising fees for baggage and other services, the "miracle of flight" is still close to the lowest cost in history, and travelers today are getting a great bargain, especially when compared to the fares of the 1980s and 1990s. Considering that the average flier today is saving about $200 per flight compared to the average cost during the 1980s, those average baggage fees of $14 don't seem so bad.

Update: As Jet Beagle pointed out in the comments, the average miles flown per round-trip journey has increased by more than 20% over the last 30 years (data here), from 1,947 miles in 1980 to an all-time high of 2,345 miles in 2010. Therefore, the cost-per-mile traveled has gone down even more than the 43% reduction in the average air fare since 1980. The chart below shows the downward trend in real cost per mile traveled, and compared to 1980 ($0.2878 per mile), the cost in 2010 was 50% cheaper ($0.1441 per mile).

Arts Complexes, Like Sports Stadiums, May Not Make Economic Sense

See Surprise! Arts Center Predictions Flawed by David Boaz of Cato.
"The Washington Post reports that the financial projections for a government-funded arts center, Artisphere, in Arlington, Virginia, don’t seem to have panned out. Do they ever? The Post story sounds like all the previous stories about what happened after influential interest groups persuaded the taxpayers’ representatives to give them money on the basis of reams of economic projections:
The Arlington County-funded arts center, which opened Oct. 10 last year in the Newseum’s former space, projected it would have 300,000 visitors in its first year. As of the end of last month, it had hosted about 90,000. And the venue for art, theater, film, music and more, whose build-out cost $6.7 million, had to request an additional $800,000 to supplement the $3 million appropriated for its first annual operating budget.

“Our original business plan had very aggressive projections,” says Executive Director Jose Ortiz….“In terms of those expectations, no, we didn’t make those.”

“One of the projections was that every performance was going to be at capacity,” he says. “For a brand-new facility, that’s impossible.”

Deja vu for sure. These economic projections for subsidized stadiums are always vastly overstated. And the Cato Institute has published a number of studies over the years looking at the issue, mostly with respect to athletic stadiums. Dennis Coates and Brad Humphreys wrote in a 2004 Cato study criticizing the proposed subsidy for Nationals Park in the District of Columbia, “The wonder is that anyone finds such figures credible.”

In “Sports Pork: The Costly Relationship between Major League Sports and Government,” Raymond Keating finds:
The lone beneficiaries of sports subsidies are team owners and players. The existence of what economists call the “substitution effect” (in terms of the stadium game, leisure dollars will be spent one way or another whether a stadium exists or not), the dubiousness of the Keynesian multiplier, the offsetting impact of a negative multiplier, the inefficiency of government, and the negatives of higher taxes all argue against government sports subsidies. Indeed, the results of studies on changes in the economy resulting from the presence of stadiums, arenas, and sports teams show no positive economic impact from professional sports — or a possible negative effect.

In Regulation magazine, (.pdf) Dennis Coates and Brad Humphreys found that the economic literature on stadium subsidies comes to consistent conclusions:
The evidence suggests that attracting a professional sports franchise to a city and building that franchise a new stadium or arena will have no effect on the growth rate of real per capita income and may reduce the level of real per capita income in that city.

And in that 2004 study, “Caught Stealing: Debunking the Economic Case for D.C. Baseball,” Coates and Humphreys looked specifically at the economics of the new baseball stadium in Washington, D.C., and found similar results:
Our conclusion, and that of nearly all academic economists studying this issue, is that professional sports generally have little, if any, positive effect on a city’s economy. The net economic impact of professional sports in Washington, D.C., and the 36 other cities that hosted professional sports teams over nearly 30 years, was a reduction in real per capita income over the entire metropolitan area.

And yet millionaire owners and mayors with Edifice Complexes keep commissioning these studies, and council members and editorial boards keep falling for them. The Artisphere project was approved by the Arlington County Board in July of 2009. Was the county flush with money at the time? Well, not surprisingly, county officials were wringing their hands about the need to make cuts in late 2008, including “A detailed review of every service to determine what is mandated, what is essential to the community and what is discretionary.” In February 2009 the Post reported budget cuts, including police positions. Maybe the next time Arlington County — or any other state or municipality — needs to cut its budget, it might think about cutting subsidies for money-losing venues before going after police officers, firefighters, and math teachers."