Sunday, May 31, 2015

Why Buy Local?

From Warren C. Gibson of The Freeman. Warren Gibson teaches engineering at Santa Clara University and economics at San Jose State University.
"Why did Safeway have to ruin a perfectly pleasant shopping trip?

I like my local Safeway grocery store a lot. (I can even get sardines at midnight.) But while I was enjoying my regular routine, appreciating the quality and variety of groceries, an annoying announcement came on over the sound system touting their “locally grown” produce section. We should buy stuff from that section, they said, because doing so “helps our local community.”

I understand that Safeway and its competitors do such promotions because they think it will be good for business, as it may well be. There’s nothing wrong with that. But let’s see if we can make sense of their claim about helping the local community.

To begin with, only individuals can be helped or hurt. Unless the store’s claim is that every individual within a certain radius of its location is helped, it makes no sense to talk of “the community.” We need to sort out which individuals are helped or hurt when we “buy local.”

Why ask for help?

The reason must be that they can’t compete with bigger firms on price, quality, or both. That’s likely, because they lack economies of scale. The burden of fixed costs weighs heavier on small farms, per unit of production.

Another possibility is the cost of water, a big deal in California these days. But whatever the underlying reasons, local farmers must come up short on price, quality, or both, or they wouldn’t need help.

Why offer help?

The next question is why they deserve help. If I patronize my neighbor’s children’s lemonade stand, a desire to help is foremost in my mind, not the lemonade per se. The same is likely true of people who want to buy locally grown produce. They want to help local growers because they see them as neighbors, although in my area the nearest farms are 30 miles away.

People are entitled to hold romantic notions about local growers. But they should ask themselves the next question: What are the costs? They should heed Frédéric Bastiat’s injunction to pay attention to what is unseen, not just what is seen. Business shifted toward local growers is taken away from larger, more efficient firms. The result is an overall decline in economic efficiency as resources are shifted from more efficient suppliers to less efficient local growers.

Many people view these large firms as faceless and vaguely sinister corporations. But the managers and stockholders and employees of these firms are people, too. They have faces and they are somebody’s neighbors. And this is just as true for growers in the developing world as it is for domestic suppliers. The same goes for the vast network of vendors who deal with the large produce firms.

Hampered food markets

A further question to ask is whether there are government interventions that play a role here. Large firms often wield a lot of lobbying power, which they use to gain special favors. The solution to this problem is not to buy locally but to remove the regulatory strictures that are the root of corporate rent seeking.

Zoning restrictions sometimes play a role. I live in a heavily built-up area, but vast areas of the coastal side of my county are devoted to agriculture because zoning laws forbid landowners from using their land for anything else. Its most productive use would likely be housing. The best way to help the local growers in this case would be to remove the zoning restrictions so they can get out of agriculture.

Hard sell

Government interventions aside, my story is a metaphor for the parochial thinking that makes international free trade, a notion supported by the vast majority of economists, such a hard sell. We tend to be suspicious of foreigners and biased in favor of our neighbors. We see losses when foreign competitors underbid local suppliers but fail to see the more-than-offsetting benefits of better, cheaper imports because those benefits are widely dispersed. And curtailing of free trade intensifies jingoism and even military conflict.

Supper at our house tonight will feature fresh packaged lettuce from a subsidiary of Chiquita Brands, Inc., a large multinational firm. The lettuce might have come from 75 miles away but it could also be from one of their farms in Mexico or Ohio or Arizona. Next time I’m in Safeway, I’ll look at what their local competitors offer, but unless I see better value for my money, I’ll stick with Chiquita."

New estimate of Obamacare’s fiscal impact on private doctor practices

By Scott Gottlieb of AEI.
"Under Obamacare, doctors have been strained by costly new regulations, intricate payment “reforms” that tie their Medicare reimbursement to complex federal reporting requirements, and mandates that they install and make “meaningful” use of electronic health records.

Add a new burden to the mix: The proportion of patients they see are rapidly shifting away from commercial health plans and toward Medicaid, which sometimes pays doctors pennies on the dollar that they were previously reimbursed under private insurance.

The data comes from ACAview, a product of athenahealth that aims to measure the impact of Obamacare on medical practices. The project, jointly funded with the Robert Wood Johnson Foundation, is the first large-scale examination of data derived directly from outpatient medical practices belonging to more than 60,000 providers. It gives a unique insight into how the Affordable Care Act is impacting patients at the point of care.

The analysis was first released in February 2015, and this new data is an update on those initial results. It is being released today for the first time. It shows that in states taking Obamacare’s Medicaid expansion, Medicaid visits as a proportion of all visits to doctors increased from 15.6% in 2013 to 17.7% in 2014, and continues to climb, to 21.5% in 2015.

Meanwhile, in states that didn’t expand their Medicaid programs, the proportion of visits covered by Medicaid remained largely flat at 9.4% for 2013, 9.2% for 2014, and 8.9% for 2015. The results were based on a subset of 16,000 providers who have been on the athenahealth network prior to 2011 and tracked the longest.

But here’s the rub. The proportion of commercially insured patients, either through Obamacare’s exchanges or through workplace coverage, actually fell in states that expanded their Medicaid programs. In those states, commercially insured patients comprised 65.2% of all patients in 2013, 64.4% in 2014, and then fell to 62.8% in 2015. In states that didn’t expand their Medicaid programs, the percentage of commercially insured patients rose slightly, from 66.1% in 2013 and 2014, to 68.1% in 2015. It’s important to note that the number of uninsured patients fell across all states, as previously reported, from 4.6% to 2.4% in states that expanded Medicaid, and by slightly less in states that did not.

Nonetheless, this three-year trend is going to add fiscal strains to physician practices.
Obamacare is already paying close to Medicaid rates for many ambulatory procedures. Moreover, there is evidence that many of the people who are now “privately” insured under Obamacare were previously insured in the individual or group market, and got bumped off their prior commercial coverage and forced into the ACA’s exchanges. That alone is going to lower provider revenue right at the very moment when their practice costs are escalating.

Now, add to the mix the new trend unearthed by the athenahealth data. In states that expanded their Medicaid programs, the proportion of Medicaid patients visiting doctor offices as a percentage of physicians’ total patient volume is rising sharply, by almost 40% since 2013. Accepting that Medicaid pays much less than private coverage, this sharp change in payer mix will wreak havoc on doctors’ bottom lines. Even if Obamacare is reducing the number of uninsured, doctors’ total revenue is falling as a result of this mix shift.

Just how much revenue is this taking out of doctor practices? It’s hard to estimate, but here’s one admittedly crude calculation. Data shows that the average medical provider, across all specialties, generates about $1.45 million a year in total billing revenue. This is gross revenue, before any practice costs are netted against the doctor. Next, assume that Medicaid pays doctors, on average, 50% of what private insurance pays (which is consistent with prior estimates). Then assume that there are about 900,000 professionally active doctors in the United States. Finally, figure that Medicaid and commercial insurance together accounted for 80 percent of the patients that a doctor sees (roughly in line with the athenahealth estimates).

If you accept that Medicare pays close to commercial insurance rates (about 90% on average), then looking only across the insured patients who support a practice’s revenue, a shift in total average payor mix between Medicaid and commercial coverage — of the magnitude reported by the athenahealth survey between 2013 and 2015 — would already cost the “typical” doctor practice close to about $50,000 in top line revenue, even after factoring in that more of the previously uninsured are now covered (mostly by Medicaid). Figuring that 40% of practicing docs work in privately run medical offices, and the aggregate hit would come out to $18 billion in less total revenue going into private medical practices.

Now there’s no evidence that private doc practices have, on average, seen reductions in their average top-line revenue. Most data shows that revenue growth has remained flat. Moreover, that rough estimate is based on what would happen if every state experienced the kinds of mix shift that the expansion states saw. Many states didn’t take the Medicaid expansion money.

But there’s no question that in states that did expand Medicaid, as the payer mix has changed, medical practices have on average, seen a sharp reduction in their average paying-patient reimbursement. That change was too steep to be offset by the reduction in the number of uninsured patients. This suggests that doctors are (so far) making up the shortfall caused by a worsening mix of insurance types.

Probably by expanding their volumes. Either they are increasing the total number of patients they see in an average day, or increasing the number of reimbursed tests and procedures that they perform. They may also be making up some of the deficit through higher out-of-pocket charges to privately insured patients. Keep in mind that none of these estimates factor in the additional revenue reductions seen as commercial patients shift out of group coverage and into the lower paying Obamacare plans.
All of these are admittedly rough estimates with lots of assumptions baked in. But they give a very basic measure of just one fiscal strain that doctor practices are feeling. With medical practice costs rising under the ACA, and revenue falling, it’s no wonder so many doctors are choosing to sell their private practices and become salaried employees of hospitals."

Saturday, May 30, 2015

Don't Ban Trans FatsIt's a bad idea

By Baylen Linnekin of Reason
"Any day now, the FDA is expected to issue a rule that will effectively ban the use of manmade, trans-fat-containing partially hydrogenated oils in all foods.

Most experts agree trans fats aren’t good for you. The American Heart Association, for example, recommends eating no more than 2 grams per day.

There’s some question about the difference between the manmade variety—those trans fats in partially hydrogenated oils—and those trans fats that occur naturally in beef and dairy.

As I wrote in a 2013 column in response to the proposed FDA trans fat ban, a recent meta-analysis found “the impact of artificial and natural trans fats on HDL and LDL levels to be roughly equivalent.” A recent Harvard Medical School publication notes another study found “no difference in how the two different types of trans fat affected men.” Men make up a significant portion of our population.

In any case, the FDA claims the ban could save around 7,000 lives per year. The agency has required food manufacturers to list the trans fat content of packaged foods since 2006. That’s helped reduce the amount of trans fats in the average American’s diet from far above to well below the American Heart Association recommendations.

So if Americans are already eating less trans fats than health experts recommend, why the push to ban them?

The ban comes thanks to a 2013 lawsuit filed by centenarian Dr. Fred Kummerow, a professor emeritus at the University of Illinois who’s been researching trans fats for more than 50 years. His lawsuit forced the FDA to act. The agency will do so by revoking the so-called GRAS status of partially hydrogenated oils. Without that status, anyone wishing to sell foods containing partially hydrogenated oils would have to petition the FDA to demonstrate their safety.

Interestingly, the lawsuit and court order follow virtually the same arc that saw the FDA ban raw milk—an action the agency rejected until a federal court forced its hand in the late 1980s.
The FDA’s longstanding raw milk ban isn’t the only good analogy to the trans fat ban. The trans fat ban is informative in light of another recent dramatic change government dietary advice, namely the U.S. government’s complete reversal of course on dietary cholesterol.

And then there’s salt, which the federal government has increasingly pushed Americans to cut from their diets. Those recommendations are now on the ropes. And according to a story this week by the Washington Post’s Peter Whoriskey, scientists recently argued at a New York City scientific conference that “the persistent global appetite for salt might be a sign that humans are geared for more salt than health authorities would allow.”

In addition to trans fats, salt, and cholestorol, I’ve warned before that ingredients like caffeine are also needlessly in the FDA’s crosshairs.

If the federal government’s dietary advice and actions are often wrong, there’s also a lesson in the trans fat ban for farmers and food producers who use GMO crops—and not just because many partially hydrogenated oils are made from GMO crops. The lesson is that those who claim consumers need more information about food X—evident in arguments advocating mandatory trans fat labeling and in the familiar cry around GMOs that consumers have a right to know what’s in their food—can easily morph into cries to ban food X.

It’s unclear how—or even if—the trans fat ban will proceed. For example, the Grocery Manufacturers Association, which represents food makers, says it’s planning to file a petition to delay implementation of the rule.

A delay here seems eminently reasonable. Putting the brakes on an increasingly activist and adventurous FDA serves the interests of consumers and food producers alike.

Baylen J. Linnekin is the executive director of Keep Food Legal Foundation and an adjunct professor at George Mason University Law School, where he teaches Food Law & Policy."

New research finds strong evidence that Thomas Piketty’s theory of why income inequality in the United States has increased in recent decades is wrong

From Cafe Hayek.
"New research by Jae Song, David Price, Fatih Guvenen, and Nicholas Bloom finds strong evidence that Thomas Piketty’s theory of why income inequality in the United States has increased in recent decades is wrong.  (In summary: Piketty argues that the recent increase in income inequality in the U.S. is explained largely by the rise in the pay of corporate executives.  And this rise in pay, according to Piketty, has nothing to do with managers’ productivity and everything to do with the cozy relationship between managers and corporate boards.  Allegedly, managers and board members are clubby friends scratching each other’s well-massaged backs and setting each other’s astronomical salaries.  Content to blame rising executive compensation on American “social norms” that encourage toleration of such payments, Piketty strangely never asks why shareholders continue to invest in corporations that spend their funds so wastefully.  Nor does Piketty even attempt to square his assertion that important managerial decisions are made chiefly for reasons that have nothing to do with productivity with his foundational assertion that the real returns to capital keep rising, and rising fast.  Song, et al., have an answer.)  Here’s the abstract from Song, et al.:
Earnings inequality in the United States has increased rapidly over the last three decades, but little is known about the role of firms in this trend. For example, how much of the rise in earnings inequality can be attributed to rising dispersion between firms in the average wages they pay, and how much is due to rising wage dispersion among workers within firms? Similarly, how did rising inequality affect the wage earnings of different types of workers working for the same employer—men vs. women, young vs. old, new hires vs. senior employees, and so on? To address questions like these, we begin by constructing a matched employer-employee data set for the United States using administrative records. Covering all U.S. firms between 1978 to 2012, we show that virtually all of the rise in earnings dispersion between workers is accounted for by increasing dispersion in average wages paid by the employers of these individuals. In contrast, pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups. Furthermore, the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population."

Friday, May 29, 2015

The Futility of Stimulus

By Gerald P. O'Driscoll Jr. of Cato
"George Selgin has recently focused on the failure of Federal Reserve policy to finance a normal recovery. The Fed has greatly expanded its balance sheet and created a large quantity of excess reserves, which, for a variety of reasons, commercial banks have not mobilized into credit creation. Instead, banks seem content to earn the 25 basis points of interest the Fed now pays on reserves. 
This anomalous behavior shows up in the M1 money multiplier, which is at record lows – less than half its value before the financial crisis. The Fed is creating reserves, but commercial banks are not creating as much bank money as has been historically true. Compounding this is the fact that the velocity of M1 – the rapidity with which each dollar is spent annually – has hit a 40-year low. Consequently, the Fed’s efforts to produce monetary stimulus have failed.

(A similar story can be told for other money supply measures. Data and charts can be found at FRED, the online data center at the Federal Reserve Bank of St. Louis.)

I do not think economists fully understand all of the factors contributing to this policy failure. But Selgin has surely identified one relevant factor, the payment of interest on reserves. On the margin, it creates a disincentive for commercial banks to create money and credit in a normal fashion. There are also fiscal reasons for ending the payments, as they reduce the payments the Fed makes to the Treasury. As it is, the payment of interest on reserves constitutes a fiscal transfer from taxpayers to commercial banks. In a normal world, I would endorse his call to end the interest paid on reserves.
We do not live in a normal world. The Fed has replaced liquid, short-term assets on its balance sheet with illiquid, long-term assets. Normally, to raise the Fed Funds rate, the Fed would sell Treasury bills. It has none to sell. Analysts and pundits speculate on when the Fed will raise interest rates. They should be asking how the Fed will raise interest rates.

Stanford’s John Taylor thinks the Fed will need to increase the interest rate paid on reserves to accomplish that goal. Markets through arbitrage would then increase the interest rates banks pay each other to borrow reserves. I suspect he is correct, with two caveats. First, there is no longer much of a market for federal funds. Banks aren’t lending each other reserves. Second, there are other possible mechanisms for raising short-term interest rates like the tri-party, reverse repo facility at the New York Fed. This, and other facilities, are untested as a means to implement a policy change. Their use would put monetary policy in unchartered waters.

To sum up, monetary policy has failed to simulate economic activity. It has failed even to finance a normal economic recovery. In pursuing a failed stimulus policy, the Fed has tied its policy hands going forward. At some point, interest rates will need to rise. The Fed will need to rely on novel means to accomplish a turn in policy. Paying higher interest rates on bank reserves may be one method. It is an unpleasant reality. It is only one consequence of the Fed’s experiment with extraordinary monetary policy."

Lowering it (the minimum wage) only for favored political groups is a terrible idea

See Now Union Opposes the Minimum Wage by Megan McArdle. 
"As readers of this column know, Los Angeles recently decided to raise its minimum wage to $15 an hour across the board, including even tipped workers like waitstaff. A lot of businesses opposed the new rule on the grounds that it would make their operations unaffordable. Now a new group is joining them in saying the law's not right for their operation: union leaders.

You read that right. Union leaders are saying that the $15 minimum wage is a bad idea. Not for everyone, of course; for most businesses and workers, they think it's splendid. But for union operations, they need an exemption. Rusty Hicks, the head of the Los Angeles County Federation of Labor, said businesses that have collective bargaining agreements with employees should be able to negotiate a wage below the "minimum."

This has been greeted with jeers from both left and right, though Matt Yglesias does mount a defense: in many countries, collective bargaining is a pretty good substitute for a minimum wage. Point taken, but it's hard to see how that saves the unions from the charge of rank hypocrisy. That same Rusty Hicks has a pretty clear record:

"Raising the minimum wage in LA County would help lift county workers, contractors and workers in unincorporated areas out of poverty and stimulate the economy." -- LA County Raise the Wage

"Among his highest priorities, Hicks said, will be to push forward a citywide minimum wage in Los Angeles, preferably of $15 an hour. ... The statewide minimum wage stands at $9, but L.A. workers need $15 because of the high costs of housing and other necessities, Hicks said." -- Los Angeles Times

"You can’t continue to have a strong, vibrant economy if in fact folks don’t have money in their pockets." -- Southern California Public Radio

"Hicks argued that increasing the minimum wage for those barely getting by would decrease government subsidies in such things as child care and food stamps, saving the taxpayer dollars ... Hicks argued that business has claimed job loss as a result of minimum wage increase since the minimum wage came into being in the 1930s, and that has not happened." -- Calwatchdog

Do union workers not deserve to be lifted out of poverty like other workers? Do they enjoy special discounts on housing and other necessities that leave them unaffected by the high cost of living plaguing the city's other workers? Are their paychecks not part of the stronger, more vibrant economy that Hicks hoped to achieve through a $15 minimum wage? Do they have a special claim on taxpayer subsidies? Or are their jobs somehow uniquely vulnerable to loss?

Here's a more plausible explanation: Having achieved their goal, the unions are now worried that excessively high minimum wages will cost their workers jobs. Here's another one: Perhaps unions fancy the idea of a labor market in which union workers are, through government fiat, the cheapest game in town. I'm sure that would be very good for the LA County Federation of Labor. But no explanation has been offered as to why it would be good for LA County.

Even if you believed the $15 minimum wage to be a bad idea, it's hard to see the exemption as a good idea. The first problem is economic. An exemption would introduce a fair amount of distortion into the labor market, and it's far from clear to me that this distortion is preferable to a blanket wage. The second problem is political. An exemption would create substantial perverse incentives for unions to drive up the minimum wage really high, effectively recruiting workers to become part of unions for the chance to work at negotiated (sub-"minimum") wages.

If workers have to have $15 an hour to live in LA, and that's a level the economy can support with minimum job loss, then the $15-an-hour wage should apply to everyone. If in fact this wage level is too costly, then LA should lower it for everyone. Lowering it only for favored political groups is a terrible idea, and the unions have earned every bit of the catcalling they got for suggesting it."

Thursday, May 28, 2015

Tariffs drive up the cost of goods to poor people

See Free Trade Is Good for Poor People by Simon Lester of Cato. Excerpt: 
"Should a movie star’s maid pay higher sales taxes than her famous boss?

The truth is, she often does. She just doesn’t know it.

Low-income moms buying polyester shirts, plastic purses, and cheap canvas sneakers are unwittingly taxed five, ten, and sometimes even 30 times higher than movie stars shopping for silks, cashmeres, and snakeskin on Rodeo Drive. This is the hidden scandal of the American tariff system—a small and almost forgotten tax, which likely costs low-income families nearly $2 billion a year.

Because the tariff system raises most of its money from cheaper shoes and clothes, its tilt against the poor is especially steep—much steeper than that of any other federal tax. Each year, single-parent families spend about $13 billion buying clothes, shoes, and other home goods. Tariffs drive up the cost of these goods by about 15 percent, adding about $1.6 billion to the total bill."

Entrepreneurial Solutions to Adverse Selection Problems

From Peter Boettke
"A new working paper is out by my colleagues at Mercatus -- "How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the 'Lemons Problem.'"  The lead author Adam Thierer has been doing some great work at Mercatus on entrepreneurship and public policy, and his Mercatus book is must reading for all who are interested in the vitality of economic life -- Permissionless Innovation.

In the early 2000s, I actually work with one of our PhD students -- Mark Steckbeck -- on the topic of how reputational feedback mechanisms were emerging in e-commerce to address adverse selection problems.  Our paper "Turning Lemons into Lemonade" was published in 2004 and focused on the reputational feedbacks on E-Bay by way of a case study of the sale prices of high end photography equipment.

But what is most striking about all of this when you study it closely is two things -- even Akerloff's original paper, he actually implies the solution to the "lemons problem" at the end of the paper, but the popular understanding of the literature is that this was a market failure that required a government solution, and in 1940s Hayek had already pointed out the critical importance of reputation in dynamic market competition in his essay "The Meaning of Competition".  As Hayek wrote:
In actual life the fact that our inadequate knowledge of the available commodities or services is made up for by our experience with the persons or firms supplying them — that competition is in a large measure competition for reputation or good will — is one of the most important facts which enables us to solve our daily problems."

The "sharing economy" is substantially lowering transaction costs, creating more opportunities for wanna-be entrepreneurs as well as customers.

See Uber banned in Milan too by Alberto Mingardi of EconLog. Excerpt:
"The Milan judge obviously didn't listen to this excellent EconTalk with Mike Munger, or read a recent article by Tim Sablik, published by the Richmond Fed, on the so-called "Sharing Economy". It is a very helpful review of the available literature on the subject.
Writes Sablik:

Evidence suggests that sharing economy firms have greatly increased supply in sectors like transportation and lodging. The Bureau of Labor Statistics reports that there were 233,000 taxi drivers and chauffeurs in the United States as of 2012, but new services are substantially adding to that number. According to a recent study by Uber's head of policy research Jonathan Hall and Princeton University economist Alan Krueger, the company had more than 160,000 active U.S. drivers in 2014. That alone nearly doubles the supply of short-term transportation, not counting Uber's competitors like Lyft and Sidecar. Similarly for the hotel industry, Airbnb boasts over a million properties in nearly 200 countries, surpassing the capacity of major hoteliers like Hilton Worldwide, which had 215,000 rooms in 74 countries in 2014.
Sablik emphasizes how the "sharing economy" is substantially lowering transaction costs, creating more opportunities for wanna-be entrepreneurs as well as customers. Uber is a very good example of this trend. People may have been theoretically happy to give rides for a fee even before the California start up begun its operation. But that couldn't happen for a variety of reasons, most notably people couldn't signal this availability in any other way than painting their car yellow and put a "Taxi" sign on it.

Sablik acknowledges that there are problems related with the establishment of "trust" in some of the areas the "sharing economy" companies operate in. We trust hotels to make sure the maids they employ will not steal the laptop we leave in our hotel room, but what about people renting a room on Airbnb? Taxi drivers have claimed a number of times they are more "trustworthy" than Uber drivers because they have to pass some test or more generally comply with local regulations--though it is not clear, to me, that municipalities (at least in Italy) are performing extensive background checks on taxi drivers. Sablik points out that "it is not clear that top-down regulations perform better than markets at establishing trust and policing bad behavior" and suggests that

Firms have their own incentives to establish trustworthiness and quality in order to maintain and expand their market share. This can lead to novel market solutions designed to solve Akerlof's 'lemons problem.' For example, in the 1990s, it was not obvious that online retailers like eBay and Amazon would succeed. After all, they faced the challenge of courting customers who couldn't inspect their products before they bought them and had no guarantee of receiving a good in the mail after they ordered it. Those initial online firms developed rating and review systems to allow market participants to provide measures of quality. 
Today, sharing economy businesses rely on the same underlying framework, and technological developments in the last decade have improved the reach and effectiveness of these systems. Widespread adoption of Internet-enabled smartphones gives consumers instant access to prices and reviews.
I find particularly perceptive his remark that the development of social networks may have helped greatly in building trust by "making the Internet less anonymous". Sablik's review finishes with a word of caution: platforms may "become monopolies because they gain more value the more users they have". Of course, their value increases with the number of users they have: but that's good for users too. Think again about Uber: the more drivers they have, the more likely it is for customers to find one when they need one. Certainly anything can happen, under this sky, but as far as the incidence of "monopolization" is concerned, these platforms have so far decreased it, widening the range of available options, as Sablik himself recognized a few lines before. At this stage, overemphasizing possible future dangers related with "market power" that the Ubers of this world may or may not at some point exercise creates a useful fig leaf for bans of European-style, whose rationale is really to protect taxi drivers from competition, not competition from Uber."

Wednesday, May 27, 2015

The acceleration of the sea level rise was in fact statistically insignificant

See The Spin Cycle: Accelerating Sea Level Rise by Paul C. "Chip" Knappenberger and Patrick J. Michaels of Cato
"The Spin Cycle is a reoccurring feature based upon just how much the latest weather or climate story, policy pronouncement, or simply poo-bah blather spins the truth. Statements are given a rating between 1-5 spin cycles, with less cycles meaning less spin. For a more in-depth description, visit the inaugural edition.

A popular media story of the week was that sea level rise was accelerating and that this was worse than we thought. The stories were based on a new paper published in the journal Nature Climate Change by an author team led by the University of Tasmania’s Christopher Watson.

Watson and colleagues re-examined the satellite-based observations of sea level rise (available since the early 1990s) using a new methodology that supposedly better accounts for changes in the orbital altitude of the satellites—obviously a key factor when assessing sea levels by determining the height difference between the ocean’s surface and the satellites, the basic idea behind altimetry-based sea level measurements.

So far so good.

Their research produced two major findings, 1) their new adjusted measurements produced a lower rate of sea level rise than the old measurements (for the period 1993 to mid-2014), but 2) the rate of sea level rise was accelerating.

It was the latter that got all of the press.

But, it turns out, that in neither case, were the findings statistically significant at even the most basic levels used in scientific studies. Generally speaking, scientists report a findings as being “significant” if there is a less than 1-in-20 chance that the same result could have been produced by random (i.e., unexplained) processes. In some fields, the bar is set even higher (like 1 in 3.5 million). We can’t think of any scientific field that accepts a lower than a 1-in-20 threshold (although occasional individual papers do try to get away with applying a slightly lower standard).

But in the sea level rise paper that is getting all the attention, the author’s team push a result—an acceleration in sea level rise—that has about a 1-in-4 chance of being zero or below—i.e., that no acceleration in actuality is taking place. That’s like betting the farm that you won’t get two heads in a row when flipping a coin. No one outside of someone who is extremely desperate would make such a bet.

Given such a result—a finding that grossly failed the standard test of statistical significance—the  authors of the paper should have concluded that over the past 22+ years, there has been no reliably detectable change in the rate of sea level rise in the satellite-observed dataset.

Instead, the lead authors wrote in their paper’s abstract that:
“[I]n contrast to the previously reported slowing in the rate during the past two decades, our corrected [global mean sea level] data set indicates an acceleration in sea-level rise…which is of opposite sign to previous estimates.”
Further down in the details of the paper (where no reporter dares to go), the authors do admit that the acceleration was in fact statistically insignificant. But that’s not the impression left to the press.

And the press, always eager for a paper predicting doom and gloom from human-caused climate change was more than happy to run with headlines like:
“Sea Level Rise Accelerating Faster Than Thought” (from Science magazine)
“Sea levels are rising at faster clip as polar melt accelerates, new study shows” (from the Washington Post)
“Sea level rise accelerated over the past two decades, research finds” (from The Guardian)
“Study: Sea level rise accelerating worldwide” (from USA Today)
For the misleading claims, and the cascade of misinformation that flowed from them, we determine that the Spin Cycle setting of this story is Permanent Press."

Let the Data Speak: The Truth Behind Minimum Wage Laws

By Steve H. Hanke of Cato.
"President Obama set the chattering classes abuzz after his recent unilateral announcement to raise the minimum wage for newly hired Federal contract workers. During his State of the Union address in January, he sang the praises for his decision, saying that “It’s good for the economy; it’s good for America.” As the worldwide economic slump drags on, the political drumbeat to either introduce minimum wage laws (read: Germany) or increase the minimums in countries where these laws exist — such as Indonesia — is becoming deafening. Yet the glowing claims about minimum wage laws don’t pass the most basic economic tests. Just look at the data from Europe (see the accompanying chart).

There are seven European Union (E.U.) countries in which no minimum wage is mandated (Austria, Cyprus, Denmark, Finland, Germany, Italy, and Sweden). If we compare the levels of unemployment in these countries with E.U. countries that impose a minimum wage, the results are clear. A minimum wage leads to higher levels of unemployment. In the 21 countries with a minimum wage, the average country has an unemployment rate of 11.8%. Whereas, the average unemployment rate in the seven countries without mandated minimum wages is about one third lower — at 7.9%.

This point is even more pronounced when we look at rates of unemployment among the E.U.’s youth — defined as those younger than 25 years of age (see the accompanying chart).


In the twenty-one E.U. countries where there are minimum wage laws, 27.7% of the youth demographic — more than one in four young adults — was unemployed in 2012. This is considerably higher than the youth unemployment rate in the seven E.U. countries without minimum wage laws — 19.5% in 2012 — a gap that has only widened since the Lehman Brothers collapse in 2008.

So, minimum wage laws — while advertised under the banner of social justice — do not live up to the claims made by those who tout them. They do not lift low wage earners to a so-called “social minimum”. Indeed, minimum wage laws — imposed at the levels employed in Europe — push a considerable number of people into unemployment. And, unless those newly unemployed qualify for government assistance (read: welfare), they will sink below, or further below, the social minimum.
As Nobelist Milton Friedman correctly quipped, “A minimum wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills.”

Dr. Jens Weidmann, President of Germany’s Bundesbank, must have heard Prof. Friedman and looked at these European data before he took on Chancellor Angela Merkel for proposing the introduction of a minimum wage law in Germany. In short, Dr. Weidmann said that this would damage Germany’s labor market and be a German job killer. He is right.


And, executives surveyed in the recently released Duke University/CFO Magazine Global Business Outlook Survey agree, too. Indeed, Chief Financial Officers from around the world were interviewed and a significant number of them concurred: a minimum wage increase in the United States –from the current $7.25/hour to President Obama’s proposed $10.10/hour — would kill U.S. jobs. The accompanying table shows what the CFOs had to say.

Perhaps, Prof. Friedman said it best when he concluded that “The real tragedy of minimum wage laws is that they are supported by well-meaning groups who want to reduce poverty. But the people who are hurt most by high minimums are the most poverty stricken.”

High mandated minimum wages will throw people out of work and onto the welfare rolls in cases where unemployment benefits exist. When it comes to welfare payments, they obey the laws of economics, too. Indeed, if something — like unemployment — is subsidized, more of it will be produced. When the data on unemployment benefits speak, they tell us that if the unemployed receive unemployment benefits, the chances that they will become employed are reduced. Those data also show that the probability of an unemployed worker finding employment increases dramatically the closer an unemployed worker comes to the termination date for receipt of his unemployment benefits. In short, when the prospect of losing welfare benefits raises its head, unemployed workers magically tend to find work.

The most important lesson to take away from allowing the minimum wage and unemployment benefit data to talk is that abstract notions of what is right, good and just should be examined from a concrete, operational point of view. A dose of reality is most edifying."

Who-d a-thunk it? A $12,480 per year ‘tax’ per full-time employee ($15 minimum wage) hurts businesses?

From Mark Perry.
"The pending 67% minimum wage hike in LA (from $9 to $15 per hour by 2020), which is the same as a $6 per hour tax (or $12,480 annual tax per full-time employee and more like $13,500 per year with increased employer payroll taxes, thanks to Richard Rider in the comments below), already has business owners planning to leave, see this letter in today’s New York Times:
Effects of Minimum Wage
I will be moving my two companies out of Los Angeles when the lease is due to renew. I’ve been here since 1966, grew up in L.A., but I cannot make it anymore. When the city compels me to pay employees $15 per hour, it comes out of my pocket. Last year, my employees made more than I, the owner, did. I am still trying to pay off the line of credit that got me through the recession.
I am not a charity. I can’t raise my product prices because of pricing pressure. I can’t reduce my expenses; in fact, salaries are my greatest expense, and $15 per hour increases my expenses and reduces my profit.
Just when small-business owners were clawing out of the recession’s devastation, the L.A. City Council hits us with this. We are the ones who hire people, expand the economy, market our products or services, risk capital for research and development, and buy inventory.
As a result of this decision, L.A. will have a mass exodus of employers from the city, leaving increased unemployment, less tax revenue and increased city debt in its wake.
Woodland Hills, Calif."

Tuesday, May 26, 2015

The New York Times says paid parental leave policies can hurt working woman

From AEI.
"It seems likely that a key element of the Democratic economic agenda going forward — and a key part of agenda of the party’s presidential nominee — will be advocacy of “family friendly” polices such as paid parental leave. Here is an example from the Hillary Clinton-friendly Center for American Progress’s “Report of the Commission on Inclusive Prosperity”:
In particular, paid parental leave, paid caregiving leave, paid sick days, paid vacation, protections for part-time workers, and workplace flexibility are important to increase the inclusiveness of advanced-market economies. … The United States is the only advanced economy that does not guarantee paid maternity leave and one of only a handful that does not guarantee paid paternity leave. Only 12 percent of U.S. workers have access to paid parental leave through their employer, and rates are significantly higher for those with the highest earnings. Approximately 60 percent of workers have access to unpaid, job-protected leave through the Family and Medical Leave Act, or FMLA.
But not so fast, says a new analysis by the New York Times. From “When Family-Friendly Policies Backfire” by Claire Cain Miller:
In Chile, a law requires employers to provide working mothers with child care. One result? Women are paid less. In Spain, a policy to give parents of young children the right to work part-time has led to a decline in full­-time, stable jobs available to all women — even those who are not mothers. Elsewhere in Europe, generous maternity leaves have meant that women are much less likely than men to become managers or achieve other high-powered positions at work. Family-­friendly policies can help parents balance jobs and responsibilities at home, and go a long way toward making it possible for women with children to remain in the work force. But these policies often have unintended consequences. They can end up discouraging employers from hiring women in the first place, because they fear women will leave for long periods or use expensive benefits. … These findings are consistent with previous research by Francine Blau and Lawrence Kahn, economists at Cornell. In a study of 22 countries, they found that generous family-friendly policies like long maternity leaves and part-time work protections in Europe made it possible for more women to work — but that they were more likely to be in dead-end jobs and less likely to be managers.
Economists call these “unintended consequences.” And what’s more, according to the piece, “There is no simple way to prevent family-friendly policies from backfiring, researchers say.” One option, though, would be to make these policies gender neutral and somehow nudge men to take as much advantage of them as women do. Looking forward to seeing what policies are meant to make that happen."

It appears that local workers benefit from the arrival of more immigrants

Via Cafe Hayek.
"Here’s the abstract of a new NBER working paper on immigration by Gihoon Hong and John McLaren:
Most research on the effects of immigration focuses on the effects of immigrants as adding to the supply of labor. By contrast, this paper studies the effects of immigrants on local labor demand, due to then increase in consumer demand for local services created by immigrants. This effect can attenuate downward pressure from immigrants on non-immigrants’ wages, and also benefit non-immigrants by increasing the variety of local services available. For this reason, immigrants can raise native workers’ real wages, and each immigrant could create more than one job. Using US Census data from 1980 to 2000, we find considerable evidence for these effects: Each immigrant creates 1.2 local jobs for local workers, most of them going to native workers, and 62% of these jobs are in non-traded services. Immigrants appear to raise local non-tradables sector wages and to attract native-born workers from elsewhere in the country. Overall, it appears that local workers benefit from the arrival of more immigrants."

Monday, May 25, 2015

Sticker Shock for Some Obamacare Customers

By Megan McArdle.
"So the proposed 2016 Obamacare rates have been filed in many states, and in many states, the numbers are eye-popping. Market leaders are requesting double-digit increases in a lot of places. Some of the biggest are really double-digit: 51 percent in New Mexico, 36 percent in Tennessee, 30 percent in Maryland, 25 percent in Oregon. The reason? They say that with a full year of claims data under their belt for the first time since Obamacare went into effect, they're finding the insurance pool was considerably older and sicker than expected.

Don't panic, says Kevin Drum. This is just the opening bid in a regulatory dance that will end up somewhere very different: "A few months from now, the real rate increases — the ones approved by state and federal authorities — will begin to trickle out. They'll mostly be in single digits, with a few in the low teens. The average for the entire country will end up being something like 4-8 percent."

He's right, of course, that the proposed rates will not end up being the final rate. Regulators are going to push back on these rates as hard as they can, with some success.

But in the case of the companies cited by the Wall Street Journal, I'd bet they're not going to go down to 4-8 percent. As it turns out, the insurer filings are public information, available on state websites. And in the three cases where I could see supporting data about premium revenue and losses, those losses appear to be large. Moda of Oregon says that its claims were 139 percent of revenue, making for a margin of -61 percent. If I am reading their somewhat confusing table right, Health Service Corporation of New Mexico says it lost $23 million on revenue of $121 million. CareFirst of Maryland says that claims were 120 percent of revenue, which if we add in some money to pay for overhead, amounts to ... less than or equal to what they're asking from regulators. I can't find claims experience data for Tennessee, but that state told the Wall Street Journal that it lost $141 million on exchange plans last year.

Now, this is not the whole story. These are only the biggest insurers in some states. Smaller insurers may price lower in an attempt to grow their business (though if their claims experience matches the biggest insurers, that's going to be a recipe for a quick bankruptcy). And the median request on a list of the biggest insurers in 12 states was more on the order of 10-15 percent, and three states -- Maine, Connecticut and Indiana -- had insurers ask for increases in the low single digits.

That's only 12 states, of course, and none of the biggest-population ones. But even if we assume that the regulators cut the increases in half, that's a median increase of 5-6 percent, with a mean considerably higher than that. Even if you weight by population -- well, actually population-weighting makes that worse, not better, because the states with the lowest rate requests are disproportionately sparse.

Moreover, significant rate increases are what I would broadly expect, because these rates are the first ones set with a full year of claims data, and what we know about the pool is that it is poorer and older -- which would also mean sicker -- than was projected. Initially, HHS was saying that it needed about 40 percent of the exchange policies to be purchased by people age 18-35 to keep the exchanges financially stable. It was 28 percent in both 2014 and 2015, according to HHS data. The CBO had projected about 85 percent of exchange enrollees to be subsidized, falling toward 80 percent as enrollment grew; instead, that number is 87 percent and actually rose slightly from 2014. It would be pretty surprising if rates weren't increasing faster than inflation, or even than general health care cost inflation.

Eyeing the Journal's list, the most obvious pattern is that states are converging on a price somewhere well north of $300 a month for a 40-year-old nonsmoker seeking a Silver plan; the states with the biggest rate hikes all had premiums under $250, and are asking to be allowed to go near or over $300, while the states that asked for low increases were already over $300, and in some cases well over. (Vermont is at $430 -- and asking to go to $476! "Only" an 8.4 percent increase, but wow.) It seems as if states where insurers initially underpriced are now trying to move toward a natural price somewhere between $3,600 and $5,000 a year for a single nonsmoker. If that's the price of providing basic benefits, regulators cannot command it away by fiat; the best they can do is to force insurers out of the market.

I assume that these large insurers are willing to incur some losses in the market for exchange policies in order to stay on the good side of their state regulators and HHS, because overall, those policies are not a large part of their business. But getting those rates down to something more on the order of 10 percent would require some pretty big losses. How long, exactly, will they be willing to carry a product that loses that kind of money? 

The good news is that even if we do see big rate hikes for the next few years, that doesn't mean we need expect them indefinitely. Eventually, insurers will figure out the price of providing these products, and then -- barring a self-selecting "death spiral" -- cost increases will move with the rate of health care cost inflation, rather than wildly gyrating as insurers realize they're losing money. The bad news, of course, is that we don't know how many big increases we might need to get to that price."

Tariffs did not help the U.S. economy in the late 19th century

From Cafe Hayek.
"from page 110 of Daniel Griswold’s superb 2009 book, Mad About Trade (footnote excluded):
What allowed the United States to pull ahead of Great Britain in total output was the huge increase in the stock of both capital and labor.  The capital came from domestic savings but also from abroad in the form of foreign investment, much of it from Britain itself.  The steady inflow of capital from abroad was the main reason why the United States ran almost continuous trade deficits through the second half of the 19th century.  Much of the expansion of labor came from the rest of Europe in the form of millions of immigrants, the “huddled masses” who arrived at Ellis Island from Scandinavia, Germany, Italy, Poland, Austria-Hungary, and Russia.  In the half-century from 1865 through 1914, the United States more or less welcomed 26.4 million legal immigrants.  As a share of the U.S. population, the immigration rate during that period was more than double the rate today.
Consider the irony.  The same era that Pat Buchanan and other trade skeptics praise for its high tariffs was also an era of persistent trade deficits and mass immigration!  And all the evidence shows that it was those trade deficits and the inflow of foreign capital they accommodated combined with large-scale immigration that did the most to transform America into an industrial giant, not self-damaging tariffs.
Elsewhere in his book, Dan rightly points us to research by Dartmouth’s great trade economist Doug Irwin, whose conclusions on this subject are summarized nicely by the abstract of one of Doug’s papers:
Were high import tariffs somehow related to the strong U.S. economic growth during the late nineteenth century? This paper examines this frequently mentioned but controversial question and investigates the channels by which tariffs could have promoted growth during this period. The paper shows that: (i) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth; (ii) tariffs may have discouraged capital accumulation by raising the price of imported capital goods; (iii) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff.
I add to Dan’s important review of the 19th-century U.S. experience with tariffs, trade, and immigration only that Americans’ openness to market-tested innovation and the creative destruction that such innovation unleashes was, as Deirdre McCloskey emphasizes, another indispensable ingredient for the rapid economic growth of that era."

Sunday, May 24, 2015

Technology Isn’t a Job Killer

A WSJ book review by Tamar Jacoby. Ms. Jacoby is president of Opportunity America, a nonprofit group working to promote economic mobility. The book reviewed is Learning by Doing by James Bessen.Excerpts:
"Although robots at the distribution center have eliminated some jobs, he says, they have created others—for production workers, technicians and managers. The problem at automated workplaces isn’t the robots. It’s the lack of qualified workers. New jobs “require specialized skills,” Mr. Bessen writes, but workers with these skills “are in short supply.”"

"Consider the ATM, a classic example, supposedly, of technological progress that has all but eliminated a white-collar job. In fact, Mr. Bessen shows, the number of bank tellers working in the U.S. has risen since the 1970s, when ATMs were introduced. How could that be? The average bank branch used to employ 20 workers. The spread of ATMs reduced the number to about 13, making it cheaper for banks to open branches. Meanwhile, thanks in part to the convenience of the new machines, the number of banking transactions soared, and banks began to compete by promising better customer service: more bank employees, at more branches, handling more complex tasks than tellers in the past. 

Another job category that has grown rather than shrunk as a result of technology: licensed practical nurses, or LPNs. Many in the medical profession expected computerized medicine to eliminate LPNs, who were thought to lack the skills needed to run new, sophisticated machines. Instead, developments like lasers and advanced endoscopy made it possible to perform minimally invasive surgery at short-stay clinics, which have multiplied in the past three decades, creating jobs and raising wages for licensed practical nurses. “The effect of technology on jobs is simply more dynamic and more complicated than many people recognize,” Mr. Bessen writes."

"In Mr. Bessen’s view, the Industrial Revolution also vindicates his optimism. He revisits the story of the power loom that Karl Marx made so much of in “Das Kapital.” “History discloses no tragedy more horrible than the gradual extinction of the English handloom weavers,” Marx wrote. In fact, Mr. Bessen shows, the power loom was the best thing that ever happened to the textile industry and its workers.

True, it took decades for workers and managers to learn specialized skills and reorganize production. Weavers had to adapt their technique to the faster machines—new knots, new hand movements, new ways of preventing broken threads—and develop monitoring and planning skills so they could coordinate work on several looms at once. Meanwhile, management made changes to training and hiring to take advantage of more experienced workers. None of this happened overnight—but when it did, productivity soared, jobs proliferated and eventually wages caught up."

"One of the book’s most suggestive ideas is captured in its title: learning by doing. Weavers in the 19th century learned on the job, finding their own methods of using technology more productively. So did employees at the companies that bought Mr. Bessen’s software and adapted it for their specialized needs. This can be a long, painful learning curve—developing skills through trial and error and reorganizing production. But it usually pays off in the long term."

Honey bees are increasing, and there's no evidence of a general decline in wild bees

See There is no bee apocalypse by Matt Ridley.
"So those beastly farmers want the ban on neonicotinoid pesticides lifted to help them to poison more bees, eh? Britain’s honeybees are supposedly declining and so are our 25 species of bumblebee and 230 species of solitary bee. “Almost all are in decline,” laments one of the green blob’s tame journalists, echoing thousands of other articles.

But it’s bunk. There is no continuing decline in honeybee or wild bee numbers. There was in the 1980s when the varroa mite hit bee hives. But not today. Honeybee numbers are higher today than they were in the 1990s when neo-nics began to be widely used. This is true in Europe, North America and the world. There are about ten million more beehives in the world today than there were in 2000.

The EU’s “Epilobee” survey found that winter losses for 2013-14, the last winter before the neo-nic ban went into effect, were low. Sure, bees will die if fed neo-nics in the lab (they are insecticides after all). But last month’s European Academies Science Advisory Council report to justify the neo-nic ban turned out to be a shameless rehash of a discredited report whose authors had been caught red-handed discussing how to select the laboratory evidence to help the “campaign” to get neo-nics banned.

So greens have stopped talking about honeybees and started talking about the threat to wild bees instead. There is little data on wild bee populations, but what we do have suggest some declines, some expansions and some species showing no change in recent years.

A 2013 study found that the species richness of British bumblebees declined from the 1950s to the 1990s, but the decline then reversed. Other studies agree that wild bees are doing better since neo-nics came on the market. Solitary mining bees have been thriving. Conservation and wildlife-friendly farming have brought five rare bumblebees back from the brink of extinction.

So there is no recent pollinator crisis that can be laid at the door of neo-nics. The reverse in fact: farmers who cannot now use neo-nics are using pyrethroids instead. These cause more collateral damage to insects other than pests because they are sprayed on rather than locked inside the plant as seed dressing.

If you would prefer farming with fewer pesticides, there’s a simple way to achieve it. No, not organic but genetically modified crops. Bees thrive in them."

Saturday, May 23, 2015

Bob Murphy on things Krugman was wrong about (like that the US budget “austerity” from 2011 onward coincided with a strengthening recovery)

Via Money Illusion.
"For a guy who has been right about everything, Paul Krugman sure is wrong about an awful lot of things.  Bob Murphy has an excellent new post which digs up lots of Krugman claims that turned out to be somewhat less then correct.
Krugman, armed with his Keynesian model, came into the Great Recession thinking that (a) nominal interest rates can’t go below 0 percent, (b) total government spending reductions in the United States amid a weak recovery would lead to a double dip, and (c) persistently high unemployment would go hand in hand with accelerating price deflation. Because of these macroeconomic views, Krugman recommended aggressive federal deficit spending.
As things turned out, Krugman was wrong on each of the above points: we learned (and this surprised me, too) that nominal rates could go persistently negative, that the US budget “austerity” from 2011 onward coincided with a strengthening recovery, and that consumer prices rose modestly even as unemployment remained high. Krugman was wrong on all of these points, and yet his policy recommendations didn’t budge an iota over the years.
Far from changing his policy conclusions in light of his model’s botched predictions, Krugman kept running victory laps, claiming his model had been “right about everything.” He further speculated that the only explanation for his opponents’ unwillingness to concede defeat was that they were evil or stupid."

$15 Minimum Wage Will Hurt Workers

From Megan McArdle.
"So Los Angeles is raising its minimum wage to $15 an hour by 2020, and then indexes the wage to inflation, so that it will never fall below this level in real terms. The politicians who have passed this law are understandably very excited that many low-wage workers -- perhaps almost half of the city's labor force -- will be getting raises, some from the current minimum of $9. I'm sure the workers themselves are pretty excited about having more money in their pockets. What's less clear is what happens next.

As I've written before, the existence of studies that seem to show minimal economic impact from minimum wage increases has caused many policy advocates to act as if we can assume that very high increases, like this one, can transfer money from the pockets of the affluent into the pockets of the poor without causing big disruptions. This is wildly beyond what that evidence shows, or could show.

The studies in question covered small increases in the minimum wage, over short time frames. They cannot tell us what will happen with big increases over longer time frames (and neither can flat international comparisons, which get influenced by local economic conditions--for example Australia, frequently cited by proponents of the minimum wage, has been having a decades-long commodity boom that is now ending). This matters. It is over longer periods that a minimum wage hike is likely to be most disruptive.

When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can't justify the risk of some operations. Some folks who have been in the business for a while will conclude that with reduced profits, it's no longer worth putting their hours into the business, so they'll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business. Many owners who stay in business will look to invest in labor saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks.

These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss -- that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses. The workers who are dropped have effectively gone from $9 an hour to $0 an hour. This hardly benefits those employees. Or the employee's landlord, grocer, etc.
There are secondary effects beyond the employment market too. Proponents of a higher wage are claiming that this will boost the local economy by putting more money into the pockets of workers.

This is the same sort of argument you frequently hear for the construction of massive new sports complexes. But of course, the money has to come from someone else's pocket -- the customer and the employer. What were those people doing with it? If the answer is "buying stuff from Amazon," then maybe diverting more money to wages is a net gain for the Los Angeles economy. But if the answer is mostly "buying stuff produced in LA" -- for example, paying rent, or buying services performed by low-wage workers -- then this is like trying to get rich by picking your own pocket.

There's no question that the wage increase will transfer money around within the economy -- out of the pockets of commercial landlords, for example, and into the pockets of folks who own real estate in low-rent districts. But little evidence has so far been offered that any boost in local spending will cancel out the deadweight loss, much less exceed it.

This is not a prediction that the new minimum wage will turn Los Angeles into a howling commercial wasteland where survivors pick over the corpses of the fallen because there's nowhere to buy gas or groceries. Economists tell us we have to think on the margin -- not ask whether everyone who currently makes minimum wage will become unemployed, but to ask whether some jobs will be forced out of existence, and if so, how many.

There's no way to say until the new wage is fully phased in and we have years of data. But it seems unlikely that you can increase the minimum wage by 65 percent, mandating higher wages for almost half of your workforce, and be confident that the other effects will be small. If I had to lay money, I'd put it the other way: The effects will be significant. The long-term result will be higher wages for many low-wage workers, but the desperation of unemployment, or a forced relocation, for many others."

Friday, May 22, 2015

Texas Pastors Are Wrong about School Choice

By Jason Bedrick.
"Today, the Fort Worth Star-Telegram published my op-ed addressing the claims of a group called Pastors for Texas Children. For the last month, the pastors have been flooding the pages of Texas newspapers with op-eds opposing school choice. Although they raise some legitimate concerns about school vouchers, their charges against scholarship tax credits—and school choice laws generally—range from lacking substance to being demonstrably false.  
There wasn’t enough space to address all of their claims in a single op-ed, but fortunately, here at Cato@Liberty we buy megapixels by the barrel (or whatever they come in).

The claims made by six Fort Worth pastors in this op-ed were typical. I’ll address their major claims point by point:
The Texas Senate recently passed Senate Bill 4, providing tuition tax credits to donors giving scholarships to private schools. These are plainly private school vouchers.
Actually, the scholarships plainly are not vouchers. Voucher programs are government-funded and administered. Tax-credit scholarships are privately funded and administered by nonprofit scholarship organizations. As I wrote in the Star-Telegram, it’s like the difference between government-issued food stamps and nonprofit food banks. Donors to both scholarship organizations and food banks have their tax burden lowered as a result, but in neither case do the donated funds transmogrify into government property.
Our state Legislature has repeatedly rejected private school vouchers because they divert public money to religious schools in violation of the First Amendment of the U.S. Constitution, which prohibits any establishment of religion.
First, the U.S. Supreme Court ruled in Zelman v. Simmons-Harris that school vouchers are constitutional because they serve a secular purpose, are neutral with respect to religion, and the funds are given to parents who can choose among religious or secular options. This is no more offensive to the First Amendment than holding a Bible study in a Section-8 subsidized apartment or using Medicaid at a Catholic hospital with a crucifix in every room and chaplains on the payroll.

Second, as noted previously, tax-credit scholarships are private funds. In ACSTO v. Winn, SCOTUS held that private funds do not become government property until they “come into the tax collector’s hands.”

Nevertheless, whoever runs the Pastors for Children Twitter account argued that “Tuition tax credits reduce the public treasury in diverting money for [a] religious cause.” But if that’s all it takes to turn private donations into government money, then the churches to which the pastors belong are entirely government-funded. After all, donors to those churches receive tax deductions and the churches themselves receive 100 percent property-tax exemptions. Fortunately for the pastors, no one really believes that.
Moreover, unlike the tax benefits that churches receive, well-designed education tax credits reduce the overall tax burden by reducing state expenditures more than they reduce state tax revenue. Whenever a child leaves her assigned district school to accept a tax-credit scholarship, the state no longer has to fund that child. In 2010, Florida’s Office of Program Policy Analysis and Government Accountability calculated that the Sunshine State’s scholarship tax credit produced $1.44 in savings for every $1 of reduced tax revenue, saving Florida taxpayers more than $36 million in a single year.
Religious liberty is at stake. The separation of church and state is intended not to protect the state from the church, but to protect the church from the state.
With Thomas Jefferson, we believe it is sinful and tyrannical for government to compel people to pay taxes for the propagation of religious opinions with which they disagree, or even with which they agree. Authentic religion must be wholly uncoerced. [emphasis in the original]
Indeed! Of course, the pastors don’t extend that logic to its conclusion: public schools regularly propagate opinions with which many citizens disagree. If the pastors truly held that principle sacred, if they truly believed that such compulsion is “sinful and tyrannical,” then they would seek to end government-run schooling altogether.

Moreover, even school vouchers have an advantage over the government’s near-monopoly in K-12 education because they allow parents to enroll their children in schools that reflect their views and values, rather than forcing parents into social conflict. And, of course, tax-credit scholarships achieve that end through voluntary contributions. In any case, given the pastors’ rhetoric, they should support school choice.
As a practical matter, vouchers channel public monies to private schools with no public accountability.
Actually, vouchers and tax-credit scholarships enhance accountability by making schools directly responsible to parents. This is especially true in low-income communities where parents have no financially viable options besides their assigned district school.
Private schools could use public money to discriminate on race, gender, religion and special needs.
There are four claims here. The first is patently false; as Patrick Gibbons noted at RedefinED, all schools—public and private—are forbidden by law to discriminate based on race. The U.S. Supreme Court settled the issue in its 1976 decision in Runyon v. McCrary. The pastors should issue a retraction.

The second and third claims are red herrings. Of course, in a free and pluralistic society that treasures freedom of association, a private school can be single-sex or have a particular religious affiliation. Do the pastors object to Wellesley College or Notre Dame accepting students on Pell Grants?
The fourth claim is more complicated. Not all private schools are equipped to handle particular special needs, but any school that accepts federal funding must comply with the Americans with Disabilities Act (ADA). Moreover, there are numerous private schools that cater to students with special needs. Indeed, more than a dozen states have school choice programs that specifically benefit students with special needs, such as the child in this video:

Returning to the pastors’ op-ed:
Texas benefits from a robust economy, yet hovers near the nation’s bottom in per-pupil spending. We feast at bounty’s table while some children subsist on crumbs.
The underlying but unstated assumption here is that more money means higher performance. However, there is no good evidence to suggest that’s the case. Texas public schools already spend north of $10,500 per pupil on average–how much do the pastors think should they should spend?
Education is a core component of democracy.
Indeed it is! Yet as Neal McCluskey noted recently, the best evidence shows that private schools do a better job instilling civic knowledge and values.

In a second op-ed, a Pastors for Texas Children member takes a different approach:
As tempting as it may be for private, religious schools to pluck the low-hanging fruit of “free” public money, the cost is too great. … Vouchers come with government strings attached.
Here the pastor raises a good point. Vouchers do tend to come with strings attached—but tax-credit scholarships do not. For that matter, the government could impose regulations on private schools even in the absence of vouchers. School choice or not, the price of liberty is eternal vigilance.
These government payouts seek to fill in for faith. They whisper from the shadows that they are the answer to the problems of funding a Christian school. God does not need vouchers.
Frankly, I’m not even sure what to make of that. Does that mean that there are no religious schools with a waiting list? And does God also not need public schools?

Whether or not God needs vouchers (whatever that means), there are low-income families who need financial assistance to send their kids to a decent school. Ideally, those funds would come through private charity, but we don’t live in an ideal world. Instead, we live in a world in which the government provides “free” education that crowds out most alternatives. Tax-credit scholarships would reduce that crowd-out by encouraging private giving to empower low-income families to choose private schools.

At one point, the pastor strays into darker territory:
There however, are some faith-based schools ready to receive the funds. I don’t want tax dollars diverted to them anymore than I want them diverted to my school. In North Carolina’s voucher program, 8 percent of the public money is diverted to a single school, the Greensboro Islamic Academy. Louisiana’s voucher system only passed the state legislature when an Islamic school’s request for funds was withdrawn. Where public funds are diverted to faith-based schools, all faiths will have access to the funds.
Why raise the specter of Islamic education if not to appeal to the assumed bigotry of the reader? We should expect better from a man of the cloth.

In short, none of the pastors’ central claims withstand scrutiny. Let us hope that after prayerful reflection on the evidence, they will—like the Texas Catholic diocese—come to support education for all students."

Legalizing drugs could well reduce the demand for all age groups.

From David Henderson of EconLog.
"In 2009, Glenn Greenwald wrote, for the Cato Institute, a study of the effects of drug decriminalization in Portugal. Among his findings were that drug usage actually decreased among various populations.
Greenwald writes:

In fact, for those two critical groups of youth (13-15 years and 16-18 years), prevalence rates have declined for virtually every substance since decriminalization (see Figures 4 and 5). 
For some older age groups (beginning with 19- to 24-year-olds), there has been a slight to mild increase in drug usage, generally from 2001 to 2006, including a small rise in the use of psychoactive substances for the 15-24 age group, and a more substantial increase in the same age group for illicit substances generally.
I was quite surprised.

The decrease among the very young did not completely surprise me. When I give talks on the drug war, I point out that there are two contrary effects on drug usage of reducing the penalties for using illegal drugs. The reduced penalties cause the price to be lower, thus moving people down a given demand curve and increasing the amount consumed. But the simply fact of decriminalization makes illegal drugs less of a "forbidden fruit," causing a downward shift in the demand curve. I point out that we don't know a priori which effect dominates, but that my gut feel is that the price effect dominates, leading to more consumption. I do point out, though, that the forbidden fruit effect is likely to be stronger for younger people and I illustrate by singing a few bars from a song my mother taught me about not putting "beans in my ears." That is why Greenwald's data showing that usage by the young declined is not totally surprising.

But the fact that usage increased only a little among 19 to 24 year olds did surprise me. I would have expected a much bigger effect of price.

I should note that I'm using the word "price" in a more-inclusive way than the usual. The price includes not just the cash outlay per unit but also the legal risk that comes with buying and using. Decriminalization would cause this legal risk to fall substantially, thus reducing the price.

But what if much of illegal drug use is a response to isolation? Then imposing harsh penalties can actually shift the demand curve higher because criminalization results in isolation. In that case, decriminalization would shift the demand curve lower not just for the youngest but for everyone.
That's the point of a recent article at the Huffington Post. Of course the author does not put it in terms of demand curves and movements along demand curves. But that's what's going on.

An excerpt from Johann Hari, "The Likely Cause of Addiction Has Been Discovered, and It Is Not What You Think:"

One of the ways this theory [that drugs cause addiction] was first established is through rat experiments--ones that were injected into the American psyche in the 1980s, in a famous advert by the Partnership for a Drug-Free America. You may remember it. The experiment is simple. Put a rat in a cage, alone, with two water bottles. One is just water. The other is water laced with heroin or cocaine. Almost every time you run this experiment, the rat will become obsessed with the drugged water, and keep coming back for more and more, until it kills itself. 
The advert explains: "Only one drug is so addictive, nine out of ten laboratory rats will use it. And use it. And use it. Until dead. It's called cocaine. And it can do the same thing to you."
But in the 1970s, a professor of Psychology in Vancouver called Bruce Alexander noticed something odd about this experiment. The rat is put in the cage all alone. It has nothing to do but take the drugs. What would happen, he wondered, if we tried this differently? So Professor Alexander built Rat Park. It is a lush cage where the rats would have colored balls and the best rat-food and tunnels to scamper down and plenty of friends: everything a rat about town could want. What, Alexander wanted to know, will happen then?
In Rat Park, all the rats obviously tried both water bottles, because they didn't know what was in them. But what happened next was startling.
The rats with good lives didn't like the drugged water. They mostly shunned it, consuming less than a quarter of the drugs the isolated rats used. None of them died. While all the rats who were alone and unhappy became heavy users, none of the rats who had a happy environment did.
OK, so that was about rats. What about humans? Hari continues:
At first, I thought this was merely a quirk of rats, until I discovered that there was--at the same time as the Rat Park experiment--a helpful human equivalent taking place. It was called the Vietnam War. Time magazine reported using heroin was "as common as chewing gum" among U.S. soldiers, and there is solid evidence to back this up: some 20 percent of U.S. soldiers had become addicted to heroin there, according to a study published in the Archives of General Psychiatry. Many people were understandably terrified; they believed a huge number of addicts were about to head home when the war ended. 
But in fact some 95 percent of the addicted soldiers--according to the same study--simply stopped. Very few had rehab. They shifted from a terrifying cage back to a pleasant one, so didn't want the drug any more.
The bottom line: Legalizing drugs could well reduce the demand for all age groups. The Portuguese puzzle is not so puzzling."