Friday, July 31, 2015

Research Suggests That The Minimum Wage Leads To Capital Replacing Labor In The Long Run

See The minimum wage, the great reset, and the research of Isaac Sorkin from Marginal Revolution.
"From Free Exchange at The Economist:
In the first [paper] Isaac Sorkin of the University of Michigan argues that firms may well substitute machines for people in response to minimum wages, but slowly. Mr Sorkin offers the example of sock-makers in the 1930s, which took years to switch to less labour-intensive machines after the federal minimum wage was brought in. He also explains how this finding squares with other research. Most studies look at past minimum wage increases that were not inflation-proofed. Firms may decide not to go through the hassle of investing in labour-saving machines if the minimum wage will affect them less over time. But they could respond differently to a more permanent increase.
Mr Sorkin crunches the numbers, using a model of the American restaurant industry in which companies choose between employees and machines. He investigates the effect of a permanent (ie, inflation-linked) increase in the minimum wage and shows that the tiny short-run effects on employment normally seen are fully consistent with a long-run response over 100 times larger. The lack of evidence for a big impact on employment in the short term does not rule out a much larger long-term effect.
In a second paper, written with Daniel Aaronson of the Federal Reserve Bank of Chicago and Eric French of University College London, Mr Sorkin goes further, offering empirical evidence that higher minimum wages nudge firms away from people and towards machines. The authors look at the type of restaurants that close down and start up after a minimum-wage rise. An increase in the minimum wage seems to push some restaurants out of business. The eateries that replace them are more likely to be chains, which are more reliant on machines (and therefore offer fewer jobs) than the independent outlets they replace. This effect has not been picked up before because the restaurants which continue to operate do not change their employment levels, so the jobs total does not shift much in the short run."

Make Money On Your Identification of Monopsony Power (a minimum wage issue)

By Don Boudreaux of Cafe Hayek.
"As readers of this blog know, I often respond to pro-mimimim-wage arguments by advising those who make such arguments to put their money where their mouths are.  Specifically, whenever I encounter the assertion that minimum-wage legislation is justified because employers of low-skilled workers allegedly possess monopsony power, I point out to those who assert the existence in reality of monopsony power as a reason to impose a minimum wage that their assertion implies the existence of profit opportunities for anyone who enters the market to hire away these allegedly underpaid workers.  So I ask those who assert that monopsony power is real and relevant to start their own businesses to give solid evidence of the strength of their belief.

The typical response to my suggestion is hostile.  “Oh that’s silly!  I’m a college professor / graduate student / newspaper pundit,” the typical such minimum-wage proponent retorts.  “I have no special ability to launch a real-world business.”

Well I’ve solved the problem for those professors and pundits who believe that monopsony power exists but who also are too inept to undertake the challenging tasks of operating real-world businesses.  I know a very successful and savvy businessman in California, Mike Long – a man of enormous integrity and experience – who stands ready to share with you his time, expertise, and counsel in order to guide you in starting and operating your own businesses.  All you need do is to supply some of your own seed capital – say, a minimum of $25,000 – and Mike will help guide you to launch and run your business in order to take advantage of the profit opportunity that your identification of monopsony power implies is available for the taking.  Mike can even share with you his knowledge of how to get from the capital markets any additional financing you might need."

More Excerpts From "Why the Federal Government Fails" By Chris Edwards of Cato

Click here to read the full paper.

Click here to read the intro.
""Each added dollar of federal income taxes creates roughly 50 cents in deadweight losses. So a $10 billion federal project would cost the private sector $10 billion directly plus another $5 billion in deadweight losses."

"The cost to the economy of each additional tax dollar is about $1.40 to $1.50. Now that tax dollar . . . is put into a bucket. Some of it leaks out in overhead, waste, and so on. In a well-managed program, the government may spend 80 or 90 cents of that dollar on achieving its goals. Inefficient programs would be much lower, $.30 or $.40 on the dollar."
""So a new program might cost the private economy $1.50, but produce benefits of, say, $0.50, for a 3-to-1 ratio. Economist Edgar Browning came to similar conclusions. Browning is an expert on the effects of taxes and government spending, and he summarized his research in the 2008 book, Stealing from Each Other."

"Looking at the federal government overall, he roughly estimated that “it costs taxpayers $3 to provide a benefit worth $1 to recipients.”"

"the government’s excessive size reduces average U.S. incomes by roughly 25 percent."

"Economist Vito Tanzi examined that question for a sample of high-income countries using the United Nation’s human development index (HDI). He found “no identifiable relationship between levels of public spending and HDI."

Thursday, July 30, 2015

The Best Ways to Fight Extreme Poverty (free trade is one of them)

By Bjørn Lomborg.
"each dollar spent ending extreme poverty with cash transfers would achieve about $5 worth of social value. That is not a bad return at all, but there are many better ways to help.

One possibility is to triple mobile broadband penetration in developing countries. This would provide small-scale businesspeople such as farmers and fishermen with market information, enabling them to sell their goods at the highest price – and to boost productivity, increase efficiency, and generate more jobs. Our research shows that the benefits, added up, would be worth $17 for every dollar spent – making it a very good development target. 

An even better intervention addresses migration. More than 200 million people today work outside their home countries. As rich countries age, they need more workers. At the same time, people from developing countries are more productive in a developed country. Easing restrictions on migration would allow young people from developing countries to expand industrialized economies’ diminishing workforces – and generate the taxes needed to pay for care for the elderly. 

Such migration would also be good for the developing countries, because migrant workers send home remittances. In total, every dollar spent on increased migration would produce more than $45 of social good – possibly more than $300. While in today’s political climate, increasing migration might be difficult to achieve, it is worth pointing out how effectively it could help the world’s poorest. 

The single development target that would have the biggest impact on global prosperity would be the completion of the Doha trade round. Lowering trade barriers would mean that all countries could focus on doing what they do best, making everyone better off. Moreover, freer trade would accelerate economic growth, owing to increased innovation and knowledge exchange. Heavy reliance on trading in a global market was one of the main reasons that South Korea has developed so rapidly and essentially eradicated its poverty in the last 65 years. 

Economic models indicate that a successful Doha round would make the global economy $11 trillion richer each year by 2030, with most of the benefits going to developing countries. Each person in the developing world would earn $1,000 more per year, on average. The number of people living in extreme poverty would fall by 160 million. For every dollar spent, mostly to pay off Western farmers blocking the current negotiations, the world would achieve more than $2,000 of benefits, making free trade a phenomenal investment."

Health Spending Leaps Upward As ObamaCare Takes Effect

BY JOHN MERLINE of Excerpts:
"After trending downward since 2002, national health spending jumped 5.5% in 2014 — the steepest climb in seven years — as ObamaCare's Medicaid expansion and insurance subsidies took effect, according to the latest data from the Centers for Medicare and Medicaid Services.

Spending by the federal government jumped 10.1% last year, compared with 3.5% in the private sector, the report shows.

The finding runs counter to repeated boasts by President Obama that ObamaCare had ushered in the lowest rate of health spending growth in decades."

"CMS data show that between 2002 and 2009, the annual growth rate in spending dropped steadily from 9.6% to 3.8%, where it hovered until last year. Credit for the slowdown was attributed to previous Medicare reforms, the rapid growth in "health savings account" type plans, and in more recent years the recession and slow economic recovery.

The latest forecast projects that annual spending increases will average 5.8% over the next decade, which the report, published in the journal Health Affairs, attributes to "the Affordable Care Act's coverage expansions, faster economic growth, and population aging.""

Why the Federal Government Fails

By Chris Edwards of Cato. Below is just the introduction to a longer report.
"Most Americans think that the federal government is incompetent and wasteful. Their negative view is not surprising given the steady stream of scandals emanating from Washington. Scholarly studies support the idea that many federal activities are misguided and harmful. A recent book on federal performance by Yale University law professor Peter Schuck concluded that failure is “endemic.” What causes all the failures?

First, federal policies rely on top-down planning and coercion. That tends to create winners and losers, which is unlike the mutually beneficial relationships of markets. It also means that federal policies are based on guesswork because there is no price system to guide decision making. A further problem is that failed policies are not weeded out because they are funded by taxes, which are compulsory and not contingent on performance. Second, the government lacks knowledge about our complex society. That ignorance is behind many unintended and harmful side effects of federal policies. While markets gather knowledge from the bottom up and are rooted in individual preferences, the government’s actions destroy knowledge and squelch diversity.

Third, legislators often act counter to the general public interest. They use debt, an opaque tax system, and other techniques to hide the full costs of programs. Furthermore, they use logrolling to pass harmful policies that do not have broad public support.

Fourth, civil servants act within a bureaucratic system that rewards inertia, not the creation of value. Various reforms over the decades have tried to fix the bureaucracy, but the incentives that generate poor performance are deeply entrenched in the executive branch.

Fifth, the federal government has grown enormous in size and scope. Each increment of spending has produced less value but rising taxpayer costs. Failure has increased as legislators have become overloaded by the vast array of programs they have created. Today’s federal budget is 100 times larger than the average state budget, and it is far too large to adequately oversee. Management reforms and changes to budget rules might reduce some types of failure. But the only way to create a major improvement in performance is to cut the overall size of the federal government."

Wednesday, July 29, 2015

Minimum wage hurts most those the government tries to help

By VANCE GINN. Ginn is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation. Excerpts:
"Minimum-wage supporters forget or ignore the law of demand that states the quantity demanded of a good will decrease from an increase in its price. The labor market is no different.

By artificially raising the wage without expecting more value from workers, employers have an incentive to fire them.

Who will the employer fire first? The least skilled, of course.

In a 2014 paper, Jeffrey Clemens and Michael Wither found that the latest minimum-wage increase explained 14 percent of the 4.8 percentage point drop in the national share of the population employed from December 2006 to December 2012. This is after accounting for the effects of the Great Recession and other factors. But the largest adverse effect was to teenage employment.

According to the Bureau of Labor Statistics, a quarter of the 1.7 million Americans earning at or below the minimum wage were 16- to 19-years-old in 2006 — the year before the minimum wage increase. That year, teenagers had a 43.6 percent labor force participation rate, 15.3 percent unemployment rate and 37 percent employment-to-population ratio."

"In 2010, their share declined to 22.8 percent of the 4.4 million paid at or below the minimum wage. The participation rate fell to 35 percent, the unemployment rate increased to 25.9 percent and the share employed declined to 25.9 percent — all at or near the worst levels since record-keeping started in the late 1940s.

Even harder hit were black teenagers during the 2006-2010 period. Their participation rate dropped 8.4 percentage points to 25.6 percent; the unemployment rate increased from 29 percent in 2006 to 43.1 percent in 2010; and the employment-population ratio fell by 5.9 percentage points to 14.6 percent.

A one-size-fits-all federal wage is terrible policy because states have different costs of living. For example, private sector measures of these costs by C2ER show that California is 50 percent more expensive than Texas."

Mind-Blowing Temperature Fraud At NOAA

From Steven Goddard.
"The measured US temperature data from USHCN shows that the US is on a long-term cooling trend. But the reported temperatures from NOAA show a strong warming trend.
ScreenHunter_10009 Jul. 27 12.16
Measured : ushcn.tavg.latest.raw.tar.gz
Reported : ushcn.tavg.latest.FLs.52j.tar.gz
They accomplish this through a spectacular hockey stick of data tampering, which corrupts the US temperature trend by almost two degrees.
ScreenHunter_10008 Jul. 27 12.08
The biggest component of this fraud is making up data. Almost half of all reported US temperature data is now fake. They fill in missing rural data with urban data to create the appearance of non-existent US warming.
ScreenHunter_10010 Jul. 27 12.20
The depths of this fraud is breathtaking, but completely consistent with the fraudulent profession which has become known as “climate science”"

Africa, Capitalism, and the 'Elimination of Poverty': Leon Louw on Africa's Incredible Growth

From Reason. They have a video. Here is the descripton:
""Thank goodness people are 'exploiting' Africa by buying things from it, by investing in it, by employing people in it," says Leon Louw, author, policy analyst, and executive director the South Africa-based think tank The Free Market Foundation. "The worst thing that would happen is if people decide to stop exploiting Africa."

The statement might sound provocative, but Louw is responding to a pair of critiques he hears often: That economic development is akin to exploitation and that the gap between rich and poor is growing dangerously large. But Louw says that the focus on economic inequality is a distraction from a more important metric.

"The world is experiencing the most amazing accomplishment of humanity: The virtual elimination of poverty," says Louw. "It's strange that as that happens, we are talking about it as if there is more of it."
Reason TV's Zach Weissmueller interviewed Louw about how his anti-Apartheid activism turned him from a Marxist into a libertarian, the factors driving Africa's incredible growth, the lessons other countries can learn from Botswana, South Africa, and even Rwanda, and how mobile phones and digital currencies are changing life in the developing world."

The empirical failures of Krugman’s macroeconomic model

See Paul Krugman: Three Wrongs Don’t Make a Right by Robert P. Murphy of FEE. It was a long post so here is the conclusion:
"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."

Tuesday, July 28, 2015

Caroline Baum's rebuttal of Krugman on the minimum wage

See Letter to the NYT, etc. from Money Illusion. Excerpt: 
"Over at Econlog I have a post on Krugman’s recent minimum wage column. Caroline Baum (you’ve probably seen her columns at Bloomberg, and elsewhere) responded to the column with a letter to the NYT.  They didn’t print it, so I thought it would be a good idea to post it here.  The rest of the column is her letter.  I request that commenters be more polite than usual.  I don’t mind obnoxious comments, but let’s please treat her as a guest—if you disagree, do so respectfully:
To the Editor:
In his July 15 op-ed, “Liberals and Wages,” Paul Krugman states definitively: “There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” In support of his no-evidence conclusion, he cites a widely discredited 1994 study by economists David Card and Alan B. Krueger.
So flawed was the study – it relied on telephone surveys of fast food restaurants in neighboring counties in New Jersey and Pennsylvania after New Jersey raised its minimum wage – that Card and Krueger were forced to redo it. Using official employment data the second time around instead of a telephone survey, they re-published their findings in 2000, claiming similar results to the first study.
Economists who have reviewed the body of literature on the effect of an increase in the minimum wage have criticized both the methodology and the results of the second Card/Krueger study. David Neumark and William Wascher, both widely respected for their work in the field, cite the vastly different patterns of teenage employment in the two states that pre-dated the study, disqualifying Pennsylvania as a good “control” group. They also find that the depressing effect of a minimum wage hike on employment occurs with a lag, not within Card/Krueger’s short-term time frame. (Neumark and Wascher’s study can be found here:
What’s more, unlike a randomized controlled trial for a new drug, Card and Krueger have no way of measuring what would have happened to fast-food employment in New Jersey absent a minimum wage increase.
It is disingenuous for Mr. Krugman to ignore the wide body of evidence demonstrating that an increase in the minimum wage deprives entry-level workers of an opportunity to enter the workforce. Instead he relies on the findings of an outlier study that contradicts basic economic theory. An increase in the price of any good or service, including labor, results in a decrease in demand for it.
No one will argue with Mr. Krugman’s point that paying workers a higher wage and providing good benefits increases employee loyalty. Businesses choose to do it all the time. Henry Ford didn’t double his workers wages to $5 a day in 1914 because he wanted them to buy Model T’s. He paid his workers more because he wanted to reduce turnover on the assembly line, which proved to be a hard, unappealing line of work.
When the government mandates a floor on wages, many low-margin businesses can’t absorb the higher costs and raise their prices. Even high-margin businesses pass the cost along to their customers.
The New York Times does a disservice to its readers when it allows a Nobel prize winning economist to dissemble to make a political point. Progressive economists may argue in favor of a minimum wage on compassionate grounds, but they all understand the economics of supply and demand. The non-partisan Congressional Budget Office reported last year that raising the federal minimum wage to $10.10 an hour from the current $7.25 would eliminate 500,000 jobs nationwide. (Currently 29 states have minimum wages higher than $7.25.)
And yes, a higher minimum wage is great for those who keep their jobs. But it’s an impediment to those starting out in the workforce.
Mr. Krugman is entitled to his own opinion; after all he writes opinion pieces. But he is not entitled to his own facts. As an opinion writer myself for three decades, my work is always fact-checked for accuracy. Perhaps the Times should make accuracy in support of opinions a priority.
Caroline Baum
West Tisbury, Mass."

The Fed caused the Great Recession with a tight money policy

See Don’t waste time looking for Ratex alternatives by Scott Sumner. Excerpt:
"Noah Smith has a new post discussing the current fad of looking for alternatives to the rational expectations model.  The motivation seems to be that we need to explain the collapse of bubble expectations and the rise in the propensity to save (although not actual saving?) during the 2008 recession.  I understand why people want to do this, but it would be a very big mistake.

I’ve always thought that it was patently obvious that the Fed caused the Great Recession with a tight money policy that allowed NGDP expectations to collapse in late 2008. But other people apparently don’t see it as being at all obvious.  They look for alternative explanations.  And yet when you ask them why, they tend to give these really lame “concrete steppes” explanations, such as, “The Fed didn’t raise interest rates on the eve of the Great Recession, so how can you claim that tight money caused the recession?”  Or they show themselves to be completely ignorant of actual Fed policy, and claim that the fed funds target was at zero when NGDP expectations collapsed in 2008.  It wasn’t.

Fortunately, neither of those apply to the ECB, which had positive target interest rates throughout 2007-2012, and which took “concrete steppes” in both 2008 and 2011, tightening money and triggering not one but two plunges in NGDP growth, which led to two recessions.  If there has ever been a more perfect example of the monetary policy/AS/AD model that we teach in our textbooks, I’d like to see it. (OK, maybe 1929-32.) And yet last time I did one of these rants almost no economists were blaming the ECB’s tight money policy for the double dip recession."

Uber: The Best Option for Workers and Consumers

By John McDonald of CEI. Excerpts:
"The reason that Uber has grown 400 percent from 2013 to 2014 is not just because it provides consumers with cheaper and easier alternate to the traditional taxicab, but it also offers drivers a flexible and easy way to earn some extra income. Indeed, most Uber drivers use the ride share service as a part-time job for supplemental income; only 19 percent of Uber drivers spend more than 35 hours on the road.

One of Uber’s most attractive aspects of is the flexible hours and the freedom it provides. Uber drivers can work whenever they want using their own car. Some taxi drivers rent a car from the taxi company for a fee of $75 to $100 per day. On average, Uber drivers make $19.04 per hour, while taxi drivers make a measly median wage of $10.97 per hour.

Another key advantage is that Uber has the ability to maintain the quality of customers the drivers will serve. Each Uber customer has a personal profile on the Uber app and drivers rate their customers, just like riders rate their drivers. Uber drivers have a better workplace environment because of this feature."

"for most Uber drivers, the service provides a secondary income, meaning that many have health insurance through a full-time job (86 percent of full-time jobs in the private sector provide health insurance). Even for those for whom Uber is a primary source of income, it’s a freely chosen alternative;"

"a 2014 CEI study shows that unionization actually lowers workers’ wages by about 15 percent."

Monday, July 27, 2015

Why the gap between worker pay and productivity might be a myth

From James Pethokoukis of AEI.
"Versions of the above [I moved it below-CM] chart are pretty common in news stories about inequality and middle class stagnation. While US output continues to rise decade after decade, the benefits don’t go to workers despite their obviously rising productivity. (And capital grabs more and more of national income.) There’s a big gap between the blue line (wages) and the green line (output).


But Robert Lawrence of the Peterson Institute argues this chart better reflects the productivity-worker income relationship:


According to this chart, wage and productivity growth have pretty much risen together. (And the share of national income going to labor has been steady until recently. More on that later.) Why the difference between the two charts? Lawrence made several modifications: (a) adjusted for an overly narrow definition of workers; (b) added in benefits to wages, (c) used an inflation measure that better accounts for what workers purchase; and (d) used a more relevant productivity measure. Lawrence:
Between 1970 and 2003 the growth in hourly real product compensation matched the growth in hourly real net output per worker. In 2003, therefore, the share of net compensation paid to labor was the same as in 1970. If the rise in average net output per hour is a good measure of the marginal product of labor, for this 33-year period, the data are compatible with the assumption that workers have actually seen their wages rise as rapidly as their marginal product. Since labor’s share in income fluctuates over the business cycle, and was therefore unusually high in 2000 for cyclical reasons, we cannot be confident about dating when the decline in labor’s share in income began. But it is clear that labor’s share has been unusually low since 2008, and real wages and compensation for workers of all skill levels has been slow.
The explanation for the sluggish rise in real wages over the long run—1970 through 2000—may lie not with something that weakened labor’s bargaining power but instead in changes in the relative prices of the goods and services that workers consume and those that they produce. In particular, in thinking about policies to raise middle-class incomes, we should be concerned about (a) the rising relative prices of goods and services that workers consume such as housing and education; (b) the rising costs of benefits, especially health care, and (c) the slow productivity growth in services as compared with the rapid productivity growth in investment goods. In the period after 2000, the declining share of labor (and rising share of profits) does warrant further explanation (in a recent working paper, I argue this growing gap reflects a particular type of technical change), but prior to that, simplistic comparisons of “real” output per worker and “real” wages are likely to lead analysts to draw the wrong conclusions.
This an uncomfortable analysis for analysts who argue that workers have been getting shafted for decades — and that the big reason why is the decline of union power. Instead, as I mentioned in the previous post, we need to focus first and foremost more on faster productivity and output growth. Then look at how these gains are being distributed."

The problem of regulation in Greece

See Krugman on Greece by David Henderson of EconLog. Excerpt:
"Krugman does make a good point that those regulations were bad 10 years ago but the Greek economy was not doing as badly 10 years ago. But they had the Euro ten years ago too. I agree with Krugman that the Euro is a huge culprit, but Krugman minimizes the problem of regulation. Transparency International ranks Greece, by the Corruption Perceptions Index, at 69th out of 175 countries rated. Germany's? 12th. Canada? 10th. (Low numbers are good.) Economic Freedom of the World puts Greece at 84th. Germany? 28th. Canada? 7th. (Again, low numbers are good.) Narrowing it down to regulation, Economic Freedom of the World puts Greece at 144th, Germany at 31st, and Canada at 10th. Athens, we have a problem."

Sunday, July 26, 2015

Stockholm Warns Seattle About The Problems Rent Control Can Cause

From Marginal Revolution.
"Here’s an interesting letter from “Stockholm” to Seattle
Dear Seattle,
I am writing to you because I heard that you are looking at rent control.
Seattle, you need to ask your citizens this: How would citizens like it if they walked into a rental agency and the agent told them to register and come back in 10 years?

I’m not joking. The image above is a scan of a booklet sent to a rental applicant by Stockholm City Council’s rental housing service. See those numbers on the map? That’s the waiting time for an apartment in years. Yes, years. Look at the inner city – people are waiting for 10-20 years to get a rental apartment, and around 7-8 years in my suburbs. (Red keys = new apartments, green keys = existing apartments).

Stockholm City Council now has an official housing queue, where 1 day waiting = 1 point. To get an apartment you need both money for the rent and enough points to be the first in line. Recently an apartment in inner Stockholm became available. In just 5 days, 2000 people had applied for the apartment. The person who got the apartment had been waiting in the official housing queue since 1989!

In addition to Soviet-level shortages, the letter writer discusses a number of other effects of rent controls in Stockholm including rental units converted to condominiums and a division of renters into original recipients who are guaranteed low rates and who thus never move and the newly arrived who have to sublet at higher rates or share crowded space. All of these, of course, are classic consequences of rent controls.

Addendum: More details on Sweden’s rent-setting system can be found here, statistics (in Swedish) on rental availability in Stockhom are here and a useful analysis of the Swedish housing crisis with more details on various policies (e.g. new construction is exempt for 15 years but there isn’t nearly enough) is here. Jenkins wrote a comprehensive review of the literature on rent controls in 2009 that echoed what Navarro said in 1985 “the economics profession has reached a rare consensus: Rent control creates many more problems than it solves.”

Hat tip to Bjorn and Niclas who confirmed to me the situation in Stockholm and to Peter for the original link."

Maybe The Market Does Help Promote Racial Equality And Worker Safety

By David Henderson of EconLog. Excerpt:
"Now I don't trust the free market to preserve racial equality either. You can't preserve what has never existed. But what I do trust the free market to do is to undercut racial discrimination--by making those who discriminate pay for discrimination even if a government can't catch them. There's a large economics literature on this. And I do trust free markets more than I trust government. After all, governments in the South, in South Africa, and in Nazi Germany, to name three, had pro-discrimination laws. Here's what Linda Gorman writes in "Discrimination" in The Concise Encyclopedia of Economics:

Many people believe that only government intervention prevents rampant discrimination in the private sector. Economic theory predicts the opposite: market mechanisms impose inescapable penalties on profits whenever for-profit enterprises discriminate against individuals on any basis other than productivity. Though bigoted managers may hold sway for a time, in the long run the profit penalty makes profit-seeking enterprises tenacious champions of fair treatment.
And worker safety? Read W. Kip Viscusi's piece "Job Safety" in the Concise Encyclopedia. Here's the opening paragraph:

Many people believe that employers do not care about workplace safety. If the government were not regulating job safety, they contend, workplaces would be unsafe. In fact, employers have many incentives to make workplaces safe. Since the time of Adam Smith, economists have observed that workers demand "compensating differentials" (i.e., wage premiums) for the risks they face. The extra pay for job hazards, in effect, establishes the price employers must pay for an unsafe workplace. Wage premiums paid to U.S. workers for risking injury are huge; they amount to about $245 billion annually (in 2004 dollars), more than 2 percent of the gross domestic product and 5 percent of total wages paid. These wage premiums give firms an incentive to invest in job safety because an employer who makes the workplace safer can reduce the wages he pays."

Shocker: Seattle Feels the Pinch of Self-Inflicted Minimum Wage Law

By Daniel Davis of Excerpt:
"But the minimum wage has always backfired on workers, and in Seattle it's been no different. Seattle workers are seeing higher wages, yes -- but many of them are now asking to work fewer hours. Why? Because higher income means that workers will become ineligible for welfare assistance. Jason Rantz, a Seattle resident, explained it over the radio:
“If they cut down their hours to stay on those subsidies because the $15 per hour minimum wage didn’t actually help get them out of poverty, all you’ve done is put a burden on the business and given false hope to a lot of people,” said Jason Rantz, host of the Jason Rantz show on 97.3 KIRO-FM.
So the policy that was intended to raise people's incomes is now incentivizing them to seek lower incomes. How's that for smart policy?

Government data show that the law has not succeeded in moving people off of government assistance. In March, Seattle's Basic Food program supported 130,851 people. In April, the number was 130,376.

Sadly, Seattle has also seen a number of well-known restaurants close in recent months. Some restaurants are having to slap a 15 percent surcharge on their customers in order to cover the higher wages. If Seattlites prove unwilling to pay it, you can expect more restaurants to eventually shut down."

Coercion Is Bad Economics

Free markets generate value, deliver diversity, and spur better ways of doing things

By Chris Edwards of Reason. Excerpt:
"First, because the government uses coercion, its actions are based on guesswork. Regulations are top-down commands, not efforts at finding common agreement. Spending relies on compulsory taxation, not voluntary customer revenue. So government actions generate no feedback regarding whether or not they generate any net value.

Compare that to markets. We know markets generate value because they are based on voluntary and mutually beneficial exchanges. Decisionmaking in markets is a reality-based system guided by individual preferences.

Consider the purchase of aircraft. In the private sector, an airline chooses the number to buy based on the demand for air travel, which is aggregated through the price system from choices made in the marketplace. By contrast, when the Pentagon buys aircraft, it has no price system or measured demand to guide it, so its decisions are made flying blind.

Second, government actions often destroy value because they create winners and losers. Regulations squelch personal choices and impose one-size-fits-all rules. The amount of federal spending on each program is chosen for the whole nation, and thus differs from the amount that would be favored by each individual.

In markets, people choose the amount of each item they purchase, and they can pursue a vast array of different interests, lifestyles, and careers. "The great advantage of the market," Milton Friedman said, "is that it permits wide diversity," while "the characteristic feature of action through political channels is that it tends to require or enforce substantial conformity."

Liberals like using the word "diversity," but it is free markets that actually deliver it. With their support of big government, liberals seem to believe that people can be made better off by quashing their individual choices. But with America's increasingly pluralistic society, it makes more sense to allow for diverse market solutions, rather than top-down rules from Washington.

Third, government activities fail to create value because the funding comes from a compulsory source: taxes. Unlike in markets, bad government decisions are not punished and failed policies are not weeded out because the funding is not contingent on performance. Low-value programs can live on forever, and they block the reallocation of resources to better uses.

In markets, the quest for profits spurs businesses to search for better ways of doing things. Businesses aim to maximize value for themselves, and they end up boosting the broader economy, which is the "invisible hand" of Adam Smith. In government, there is no invisible hand, no guide to steer policymakers in a constructive direction.

Fourth, government programs often fail to generate value because the taxes to support them create "deadweight losses" or economic damage. Taxes are compulsory, and so they induce people to avoid them by changing their working, investing, and consumption activities. That reduces overall output and incomes.

Let's say that the government imposes a tax on wine. That would transfer money from wine drinkers to the recipients of government programs. But an additional cost—the deadweight loss—would be created as people cut back their wine consumption. People would enjoy less wine and suffer a reduction in welfare or happiness.

The wine tax has blocked mutually beneficial exchanges from taking place, and thus has damaged the economy. The size of the damage depends on the type of tax, but for the income tax, empirical studies show that the deadweight loss of raising taxes by a dollar is roughly 50 cents.

Suppose that a philanthropist spends $10 million on a charitable program that generates $12 million in benefits. That private program would be a success. But a similar program run by the government would be a failure because the tax funding would create deadweight losses. The government program would cost $10 million directly, plus another $5 million in deadweight losses, for a total cost that is higher than the benefits.

In sum, coercion imposes deadweight losses and creates winners and losers, which is the polar opposite of the win-win exchanges in markets. Politicians may hope that their interventions create more winners than losers, but that is wishful thinking because their decisions are based on no more than guesswork.

Liberals might assume that the government has an advantage in tackling society's problems because it is such a powerful institution. But because it uses coercion to raise funds and impose its will, the government tends to make bad decisions, entrench them, and drag the whole economy down."

Saturday, July 25, 2015

Jared Bernstein Tilts His Tax Facts (The plain fact of the matter is that the federal tax system is highly graduated, or what liberals call “progressive.”)

By Chris Edwards of Cato.
"Former Obama administration economist, Jared Bernstein, argues for higher taxes in a New York Times op-ed yesterday. His piece begins:
Like it or not, the campaign season is upon us, and that almost certainly means somebody is going to try to buy your vote with a tax cut — even though average federal tax rates are already low in historical terms, our tax code remains tilted in favor of the wealthy, and our children, neighborhoods and infrastructure desperately need public investment.
I tried to use my imagination and think of how a thoughtful and intelligent liberal like Bernstein might conceive of tax policy. But I could not come up with any scenario under which this statement might be considered true: “our tax code remains tilted in favor of the wealthy.”  

The plain fact of the matter is that the federal tax system is highly graduated, or what liberals call “progressive.” Lower-income households pay much smaller shares of their income in taxes than do higher-income households.

In his article, Bernstein uses data from the respected Tax Policy Center (TPC), as I do here. The first table shows TPC estimates of average federal tax rates (total taxes divided by income) for U.S. households (specifically, “tax units”) in five income groups.

Average Federal Tax Rates, 2015
Income Group Income Tax Payroll Tax Other Taxes Total Taxes

The average household in the highest group will pay 25.7 percent of its income toward taxes in 2015, which compares to 3.6 percent in the lowest group. The average household in the middle group will pay a rate about half that of the highest group. I don’t see how this data can be reconciled with Bernstein’s claim.

Data from other sources shows the same tilt in tax burdens toward high earners. Actually, “piling on” on high earners is more accurate than “tilt.” The following screenshot is from Table A-6 in this Joint Committee on Taxation report. I’ve circled the key column. Average tax rates rise rapidly as income rises. The highest earners in 2015 will pay an average federal tax rate of 33.1 percent, which is about twice the rate of those with middling incomes, and many times the rate of people at the bottom.

Perhaps Bernstein meant “tilted in favor of the wealthy” compared to other countries. But we have pretty solid data showing that is not correct either. Tax Foundation summarizes OECD data here showing that the U.S. has the most graduated, or progressive, tax system among the high-income nations.

Bernstein is right that the “campaign season is upon us.” But that doesn’t give him license to tilt tax data upside down to fit his policy narrative."

There are conflicting empirical studies of the effect of minimum wages. When that occurs, it's probably safest to go back to the basic theory.

See Paul Krugman on the minimum wage.
"Paul Krugman recently had this to say on the minimum wage:
Until the Card-Krueger study, most economists, myself included, assumed that raising the minimum wage would have a clear negative effect on employment. But they found, if anything, a positive effect. Their result has since been confirmed using data from many episodes. There's just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.
This struck me as very odd. I've done work that suggests that minimum wages probably cost jobs (although admittedly my research was on the Great Depression, and hence may not be applicable to today.) But it's widely known that there is lots of other research suggesting that minimum wages cost jobs. In addition, economic theory suggests that when you make something more expensive, people will buy less of it. Perhaps strangest of all, Krugman's claim is contradicted on the very first page of the study he links to as having "confirmed" his claim:
On balance, case studies have tended to find small or no disemployment effects. Traditional national level studies, however, have produced a more mixed verdict, with a greater propensity to find negative results.
Paul Krugman has said that he doesn't read conservative blogs, so obviously he may not be familiar with the literature on how the minimum wage costs jobs. But that's no excuse for not even reading the first page of the study he links to in support of his claim.

Krugman doesn't come right out as say that the Card-Krueger study provides support for the Democratic Party's recent attempt to raise the minimum wage, but that's surely the implication that most readers will draw from his post. And yet even the Card-Krueger study doesn't necessarily support the Obama administration's proposal for a $10.10 minimum wage, or the Congressional Democrats attempt to raise the minimum wage to $12/hour. The studies he cites look at the effects of small increases in the minimum wage.

There are conflicting empirical studies of the effect of minimum wages. When that occurs, it's probably safest to go back to the basic theory. That doesn't necessarily mean that minimum wages are bad policies, perhaps the gains in income outweigh the cost in unemployment. But it's disingenuous to claim that we can raise minimum wages without any disemployment effects."

Robert J. Samuelson Explains The Problems With Hillary Clinton's New Tax Proposal To Encourage Profit Sharing

See The trouble with Hillary Clinton’s profit-sharing plan. Excerpts:
"Her proposal seems simple. She would provide a 15 percent tax credit — that’s a direct tax cut — for profits that companies distribute to workers. On a $5,000 profit-sharing payment to a worker, a company would save $750 in taxes (that’s 15 percent of $5,000). The credit would phase out after two years, presumably after demonstrating its value. The Clinton campaign estimates the cost at about $20 billion over a decade.

“It’s a win-win,” argues Clinton.

Well, maybe not. Creating the tax break would pose huge practical problems, and the economic advantages of profit-sharing may be overstated.

Writing regulations wouldn’t be easy. One issue is what to do with firms that already offer profit-sharing. In 2014, about 36 percent of employees worked at firms that have some form of profit-sharing, reports sociologist Joseph Blasi of Rutgers University. This poses a dilemma. Tax policy often tries to avoid rewarding taxpayers for doing things they already do. But denying these companies a tax break would put them at a disadvantage with firms that get it. 

Another problem: Some companies would convert normal pay increases into profit-sharing to qualify for the tax break. This would save taxes, but workers wouldn’t benefit. The Clinton campaign pledges “to develop protections against [such] abuses.” More complex regulations. Similarly, the campaign says the tax credit “would phase out for higher-income workers.” How high? More regulations. The credit would also be capped for any one firm “to prevent an excessive credit for very large corporations.” More regulations.

All this would be nonproductive work — interpreting and manipulating rules. It would benefit tax lawyers and accountants. Whether their parasitic work would outweigh productivity gains from more profit-sharing is unclear.

The assumption is that these gains occur automatically. That’s not true, according to research by Blasi and economists Douglas Kruse of Rutgers and Richard Freeman of Harvard. They find that, for firms to become more productive, profit-sharing must occur in combination with other work practices: high levels of training, job security and on-the-job problem-solving. What matters is the whole package of practices. (In fairness: Blasi, Kruse and Freeman support Clinton’s proposal and think it should be broadened.)

We have a microcosm of tax policy: The gains of Clinton’s proposal are overstated, the costs understated. We’d be better off with fewer preferences and lower rates. Let firms and individuals decide what’s best for them. But politicians would have to stop using the tax code as an advertising agency and benefits bargain store. That’s a long shot."

Automation and Technology Increase Living Standards (and unemployment does not necessarily result)

By James Sherk and Lindsey Burke of The Heritage Foundation.

Many Americans worry that automation will significantly reduce the need for human employees. This is highly unlikely to happen. Automation reduces the need for humans in particular tasks, but employees have historically moved to new or different sectors of the economy as a result. Little evidence suggests this time is different. Technological advances have reduced the demand for employees in routine jobs and increased the demand for employees in non-routine jobs. They have not reduced the need for human labor overall. Further, the rate of automation has slowed over the past decade."

"Lump of Labor Fallacy

Fears of mass technological unemployment are predicated on a “lump of labor” model of the economy—the belief the economy needs a roughly fixed amount of work performed.[4] In this economic model, machines automating work formerly done by people reduce the total amount of work remaining for humans, reducing total employment. Keynes forecast an impending crisis of unwanted leisure. He suggested future societies would establish three-hour workdays to give everyone enough work to avoid boredom.[5]
Almost all economists reject this model today. Economists have found that an almost unlimited amount of potential work exists in the economy because people’s material desires continue to expand. Virtually all Americans today enjoy material living standards vastly better than the wealthy of 1900. Nonetheless, most Americans today would purchase additional goods and services if they received a raise or bonus.

Automation does reduce the human labor needed to produce particular goods and services, but it also reduces production costs. Competition forces firms to pass these savings on to their customers through lower prices. These lower prices lead consumers to buy more of the now less-expensive product and leave them with more money to spend elsewhere, increasing the demand for labor in those sectors of the economy. The amount of work in the economy expands to use the available labor supply.

Economists strongly agree on this point. The University of Chicago recently asked a panel of prominent economists whether they agree that “advancing automation has not historically reduced employment in the United States.” Over three-fourths expressly agreed with that statement, and only one of the economists disagreed.[6]
America’s economic history illustrates how technology reallocates—but does not eliminate—human labor. In 1910, approximately one-third of all Americans worked on farms,[7] food was expensive, and the typical family spent almost half its budget on food. By 1960, technological advances such as the tractor had reduced the proportion of Americans working on farms to well under one-tenth.[8] This transition did not lead to mass unemployment. Instead, former farmhands began working in offices and factories. They enjoyed less expensive food and newly available manufactured goods.[9]"
"Productivity data show that the pace of automation has actually slowed in recent years. Over the past generation the earnings of less-skilled Americans have risen faster than the economy-wide average.

Slow Productivity Growth. Businesses do not appear to be automating human tasks at a faster rate than before. If they were, this would increase measured labor productivity growth."

"computers have great difficulty performing non-routine tasks. Although more fluid algorithms that take into account computer “learning” possibilities are being refined, computers still do what their program tells them to—and nothing else. Computer programmers must specify in detail every contingency that the machine might encounter. What often looks like computers adapting to their surroundings is in fact them following very detailed operating instructions.[18]

Consequently, computers cannot handle many non-routine activities that most people find straightforward. They are simply too complex for their programs to account for every possibility. For example, Autor points out that and other online retailers use human “pickers” to identify, retrieve, and pack the goods that they ship their customers."

Friday, July 24, 2015

Why can't Texas export oil when Iran can?

By Chris Tomlinson of Houston Chronicle. Excerpts:
"U.S. oil companies are forced to sell their product at a substantial discount"

"Congress needs to repeal this misguided federal ban so that U.S. crude can become another source in the international marketplace and diminish the power of OPEC"

"When a nation that many lawmakers consider an enemy can sell crude more easily than Texas, there is something wrong in Washington."

"First, many Democrats believe that allowing oil exports will increase the price of U.S. gasoline. While that may sound logical because exports will likely raise the price of American crude while lowering the price of foreign crude, the truth is that U.S. refineries have never given Americans a discount.

"The global oil price is what sets the price of gasoline,""

""U.S. refiners already produce above and beyond what U.S. consumers need or demand. ... We already export our crude, we just do it through the refined product market."

In fact, several studies show that adding U.S. supply to the market will bring down international prices, and therefore bring down U.S. gasoline prices.

The second myth is that we can keep U.S. oil within our borders and stop importing oil from elsewhere and achieve energy independence. This survivalist view is strong in the more paranoid corners of the Republican Party. It's also out of touch with reality.

Advocates of energy independence point to the OPEC oil embargo in 1973 as proof of America's vulnerability. But since then, the market has become much more fractured and sophisticated. Arab members of OPEC once controlled the majority of the world supply, but now they manage only about 25 percent. The U.S. also doesn't buy that much from them anymore.

If Arab countries decided not to export to the U.S., it would drive the price up a little bit, but there are plenty of other sources that would keep us supplied. That is called energy security,"

"There are also thousands of grades of oil and petroleum products. We need some types of foreign heavy oil, and we have too much light, sweet crude."

"U.S. refineries can take only so much U.S. oil because they are configured for heavier foreign oil. That means U.S. oil is going into storage while refiners import heavier grades to keep operating."

"low prices are killing U.S. drilling."

"shale drillers cannot generate profits at current prices and U.S. production will soon drop.

If we want to keep the industry alive, we need to let it sell to the international market and generate higher revenues.

Markets are complex, and trying to manipulate them is foolish."

In North Korea, "Private trade keeps the population afloat"

See ‘North Korea Confidential’ and ‘North Korea Undercover’ by JANE PERLEZ, in the book review section. Excerpt:
"Their first lesson is that “Communist” and “collectivized” are no longer relevant labels for North Korea’s economy. Farmers are now permitted to hold on to about one-third of their crops. Private trade keeps the population afloat, a way of life that emerged as a survival technique during the devastating famine of the 1990s and has blossomed since. Women are the dominant traders in society: They run kiosks, make and sell food, and operate small import-export businesses. Some rent their apartments by the hour to couples looking for some privacy. The preferred time is the afternoon, when the apartment owner’s kids are at school and her husband is at work, and she can go for a walk for an hour or so. The authors write: “The process is very simple, but it acts as a reasonable summary of the people’s adaptation to post-famine North Korea: It is illegal; it is informal; it corresponds to basic human needs; and it is 100 percent capitalist.”"

A Not-So-Transparent Attempt to Cap Drug Prices

Forcing the disclosure of profits on high-cost drugs reflects a misunderstanding of how research works

By Robert A. Ingram, in the WSJ. He is the former CEO and chairman of GlaxoWellcome, is a general partner in Hatteras Venture Partners, which invests in early-stage life-science companies. He serves as lead director at Valeant Pharmaceuticals, and on the boards of Edwards Lifesciences and Regeneron Pharmaceuticals. Excerpts: 
"The reason new medications are so expensive is that research is expensive. It takes, on average, $2.6 billion and 10 or more years to research and develop a successful new treatment, according to researchers at Tufts University. This decade of development is a time of intense trial and error, and often failure. The U.S. Food and Drug Administration approves only 12% of potential medicines that enter clinical trials.

Price controls and other restrictions on an industry that is already among the most highly regulated in the world will make a complex R&D challenge all but impossible. If research companies are unable to recoup their investments, they will effectively be deterred from devoting the necessary money and time to developing new medicines."

"Far from being a driver of costs, prescription drugs reduce overall health-care spending. Medications can eliminate the need for more expensive care, especially hospital visits. For example, a study in Health Affairs a few years go showed that every dollar spent on medicines for heart failure, high blood pressure, diabetes and high cholesterol generates $3 to $10 in savings from emergency room visits and inpatient hospitalizations."

NY City legislation imposing caps on Uber is tabled—for now

See Uber 1, Progressives 0: A public outcry forces de Blasio and the taxi cartel to back down. A WSJ editorial. Excerpts:
"The real motivation was taxi interests. The price of New York taxi licenses, known locally as medallions, has dropped nearly a quarter in recent years from a high of $1.3 million in 2013, as more consumers switch to summoning a car on a smartphone instead of hailing a cab. This is called competition, and taxis want to recoup market share by stifling alternatives.

Mayor de Blasio and the far-left City Council Speaker Melissa Mark-Viverito went along for the ride despite their supposedly progressive politics. It must be a coincidence, comrade, that the yellow taxi industry has lavished campaign contributions on both of them.

As for congestion, Uber makes up less than 1% of cars on the road. Politicians blamed ride-sharing services by showing that speeds in Manhattan have slowed 0.84 mph since 2010, to 8.5 miles an hour. What they didn’t mention is that average speeds hovered around 8.5 miles an hour in 2008, before the recession took cars off the road for a few years."

Government regulations may have played a role in the pilot shortage

See A Looming Pilot Shortage Means a Bumpy Ride for Airlines: Airline pilots’ average age is 50, and newcomers are scarce. No wonder: The starting salary is $23,000 by Dan Elwell in the WSJ. He is president of Elwell & Associates, an aviation consulting firm. Excerpts:
"Here’s how the pilot ecosystem is supposed to work. At the top of the food chain sit the major carriers. Typically, they hire experienced pilots from the military and regional carriers. The regionals and the Pentagon, in turn, train inexperienced pilots looking to move up the ranks.

But that base of the pyramid has been shrinking for decades. In 1980 there were 610,490 people in the U.S. with private, commercial or airline transport pilot certificates. By 2014 the number had withered to 432,138. In 1980, there were 557,312 student and private pilots; in 2014 there were about 240,000.

Complicating matters, Congress passed a law that went into effect in 2013 changing the certification required to become an airline co-pilot, which raised the required hours to 1,500 from 250. That requirement, known as the 1,500-hour rule, was intended to address concerns over pilot inexperience raised after the 2009 crash of Colgan Air Flight 3407, which killed 50 people.

But the law dramatically decreased the number of qualified applicants to regional carriers. The new rule adds roughly $100,000 and several years to the process of becoming an airline pilot, which has a chilling effect on young aviators. Particularly since the average starting salary for new regional pilots is an abysmally low $23,000, according to the Air Line Pilots Association.

Over the next 20 years, growth in commercial aviation and an unprecedented wave of pilot retirements—the average age of airline pilots is roughly 50, up from 44 in 1993—will exert huge pressure on the industry. The problem can only be addressed by introducing more young people to aviation and solving the cost-benefit dilemma of high training costs and low salaries."

Government Report Cites Shortfalls in Medicare’s Screening Process for Doctors

Thousands of doctors who bill Medicare used questionable addresses, GAO report finds

By Christopher Weaver of the WSJ. Excerpts:
"Thousands of medical providers signed up to bill Medicare using questionable addresses, and dozens of doctors enrolled despite disciplinary actions by state medical boards, according to a congressional probe of the $600 billion-a-year taxpayer-funded program.

Medicare records listed doctors and other providers as practicing at invalid addresses, such as commercial mailbox stores, construction sites and, in one case, a fast-food restaurant, according to a report by the Government Accountability Office that examined data through March 2013.

Over the past five years, the federal Centers for Medicare and Medicaid Services, which runs Medicare, has been revamping its enrollment system and verifying provider information, such as addresses and licensure. The overhaul is partly due to requirements of the 2010 Affordable Care Act. The CMS said Tuesday that as a result of its enhanced screening efforts, it has kicked more than 34,000 providers out of the program since February 2011.

The GAO says that some screening problems persist, however, among the 1.8 million providers enrolled to bill Medicare from nearly a million addresses. The report estimated that about 23,400 addresses might be invalid."

"It isn’t clear how much Medicare has paid out to providers whose addresses have been shown to be invalid. The agency estimates that overall, it made $44.2 billion in improper overpayments to medical providers in the fiscal year ended Sept. 30, 2014—a figure that includes payments to ineligible providers, for services that aren’t covered and duplicate payments, among other things."

Sea Ice Might Be More Resilient Than Thought

Single cool summer briefly reversed decline in ice cap around the North Pole, study reports

By Robert Lee Hotz of the WSJ.
"Arctic sea ice is so sensitive to changing temperatures that a single cool summer briefly reversed the decline in the ice cap around the North Pole, says a new study released Monday."

"the total volume of sea ice in the Northern Hemisphere was well above average in the autumn of 2013, traditionally the end of the annual melt season"

"“We now know it can recover by a significant amount if the melting season is cut short,” said the study’s lead author Rachel Tilling, a researcher who studies satellite observations of the Arctic. “The sea ice might be a little more resilient than we thought.”"

"In 2013, summer temperatures were about 5% cooler than the previous year and the volume of autumn ice jumped 41%"

Sky-High California Gas Prices Have a Green Additive

The national average is $2.76 a gallon, while Golden State drivers pay $3.88. Eco-virtue is expensive.

By Allysia Finley of the WSJ. Excerpts:
"The real culprit is anti-carbon regulation promoted by a cartel of green activists and liberal politicians that is aimed at raising energy costs to discourage consumption."

"For most of the 1980s and ’90s, Californians paid roughly the national average, according to U.S. Energy Information Administration data. Since 1999—the year Democrat Gray Davis assumed the governorship following 16 years of Republican leadership—California gas prices have sizably surpassed the national average and most of the lower 48 states, principally due to more stringent fuel regulations. California gas taxes are also about 12 cents higher than the national average.

In 1999, Mr. Davis’s Air Resources Board banned the fuel additive MTBE—a smog-reducing oxygenate that in low quantities has been detected in groundwater. It also adopted cleaner “reformulated” fuel standards that raised production costs. A tiramisu of other environmental mandates have been layered into the state’s fuel standards.

The results? By 2006 Californians were paying 23 cents more than the national average for regular gas. The disparity increased to 40 cents in 2014 and now sits at $1.11. 

Next to crude, electricity ranks as refiners’ largest production cost. Electric rates like gas prices have soared in California thanks to the state’s mandate that requires that renewables make up 33% of the state’s electricity by 2020."

"Over the past three years, electric rates in California rose by 2.18 cents per kilowatt-hour—about four times the rate nationally"

"nuclear plants, which generate cheaper electricity, have been decommissioned"

"The state’s 2006 global-warming law, AB32, also established a cap-and-trade program that requires large industrial companies operating in the state to cut their carbon emissions or buy permits."

"cap and trade would add 16 cents to 76 cents a gallon to the retail price of gas. Other economists projected a 10-cent bump. Sure enough, gas prices skyrocketed this year, though it’s tough to disentangle the impact of cap and trade from other ill-conceived environmental policies.

State and federal environmental mandates have forced several smaller, inefficient refineries in California to shut down over the past two decades. Only 14 refineries in California produce the state’s pristine-burning fuel"

"Few refiners outside the state blend California’s reformulated fuel."

Thursday, July 23, 2015

My response to "Francis excoriates global capitalism"

I submitted this to the San Antonio Express-News but it will probably not be printed.
"I was surprised and disappointed to read the pope's unrealistic and inflammatory rhetoric about capitalism ("Francis excoriates global capitalism," July 12).

For example, he compares the excesses of global capitalism to the “dung of the devil.” The excesses of anything are never good. The pope does not seem to be interested in the excesses of socialism, either.

My first concern is that the article, being a shorter version of one in The New York Times, left out a quote from Rev. Robert A. Sirico, president of the Acton Institute for the Study of Religion and Liberty.  

Sirico strongly disagrees with the pope's message. San Antonio readers need to know that not all religious leaders share Pope Francis's views.

We can't examine capitalism without looking at the alternatives. We can become more market oriented or less, having the government make more decisions about resource allocation and who gets what through taxation, regulation and spending programs.

In many ways the pope either ignores or is unaware of what capitalism does well.

According to the book “The Economics of Macro Issues,” The poorest 10% of the population in the most capitalist countries have incomes about nine times higher than in the least capitalist countries.

Hundreds of millions of people have been lifted out of extreme poverty in the last few decades in China and India as they came to rely more on markets and less on government planning.

George Mason University economics professor Tyler Cowen observed in The New York Times last year that global inequality fell in the last 20 years, partly due to improvements in China and India. International trade played a big role, too.

Perhaps the pope's views are colored by his home country of Argentina. Things could be better there. But is it the fault of too much capitalism?

Maybe not. Argentina ranks 169th out of 178 countries in the Heritage Foundation's Index of Economic Freedom, which takes into account the rule of law, limited government, regulatory efficiency and open markets.

Argentina's rank has also been slipping in recent years. They have high unemployment (7.3%) and high inflation (10.6%). Its per capita GDP is only about $18,000, not even half of the U.S. level.

The pope might benefit from reading the work of Peruvian economist Hernando de Soto. His studies have shown that many third world governments make it very difficult for the poor to start businesses or register property ownership. This prevents them from fully participating in markets.

The pope is also concerned with what capitalism does to the environment. But capitalism pushes businesses in ways that sometimes help the environment.

Cars may have brought us smog. But city streets are no longer covered in horse manure like in the nineteenth century.

Using petroleum means we no longer hunt whales for oil. Fracking has increased natural gas production while we use less coal. This reduces global warming.

This all comes from the “logic of markets,” which the pope distrusts. Businesses constantly develop better technologies that use resources more efficiently. That leads to less pollution.

That won't be a cure all for the environment. But it is an aspect the pope ignores.

The pope should acknowledge that, in the U.S., for example, we have many environmental regulations and an Environmental Protection Agency. We have recycling programs. There is also the Corporate Average Fuel Economy (CAFE) standards that mandate each car maker achieve so many miles per gallon.

So things are not as one sided as the pope indicates. Let's work for better outcomes without demonizing capitalism."

How to Fix Roads and Bridges without Increasing the Fuel Tax: Reform Federal Highway Policy and Use the Savings for Roads

By Tracy C. Miller & Megan E. Hansen of Mercatus.Excerpts:
"Before resorting to an increase in the federal gas tax, policymakers should first review the regulations for federal transportation projects. They should pare back requirements that raise the cost of building and maintaining roads while offering questionable benefits. Regulations like the Davis-Bacon Act of 1931 (Davis-Bacon) increase the cost of labor for federal infrastructure projects. Environmental regulations such as the National Environmental Policy Act of 1969 (NEPA) create complicated requirements that result in delays that drive up the costs of federal infrastructure projects. Besides causing delays, regulations force the government to hire additional federal employees to make sure that requirements are met."

"The FHWA has developed a set of procedures that must be used on every highway project it funds. According to one estimate, complying with federal rules raises overhead costs to approximately 25 percent of project costs, while overhead costs represent only about 5 percent of project costs for locally funded roads that do not have to comply with federal rules. These costs could be reduced considerably if the federal government gave each state a grant and allowed that state to decide how to spend the money, subject to an audit process to ensure that certain minimum standards are met, such as making sure the money is spent on highways.

Another regulation that raises highway costs is the Buy America program. This program requires that iron, steel, and manufactured products used for highways must be made in the United States unless using domestically produced materials would raise costs by more than 25 percent. Although many highway materials, such as concrete and asphalt, are not internationally traded, eliminating this requirement can still reduce some costs, particularly for bridges, which use a considerable amount of steel."

"Federal transportation projects must comply with 65 different environmental regulations."

"Because they have to meet so many different requirements...major highway construction projects take as long as 10 to 15 years to complete."

"Since NEPA [National Environmental Policy Act of 1969] became law, the average time required to complete an environmental impact statement for a federal infrastructure project has increased from two years to more than eight years."

"The Obama administration recognized the burdensome nature of the NEPA process when it exempted 179,000 stimulus projects from environmental review... these recent exemptions have not led to an environmental catastrophe..."

"The Davis-Bacon Act of 1931 set a price floor for the wages of workers on most federally funded construction projects based on the “prevailing wages” of workers in that area. In practice, this means paying higher union wages, since the level of prevailing wages is often determined based on union wage data. James Sherk found that Davis-Bacon regulations increase the cost of federally funded construction projects by 9.9 percent. Although some would argue that this represents a benefit for local workers who are employed by federal projects, in reality Davis-Bacon leads to higher costs that must be borne by US taxpayers."

"repealing Davis-Bacon would save $13 billion in discretionary spending from 2015 through 2023."

" federal regulations increase project costs by 20 percent. Reducing these regulatory costs could save more than $8 billion per year."

"reducing or eliminating programs that spend trust fund money for purposes other than highway construction and maintenance could save additional costs."

"If the FHWA reformed highway policy by giving grants directly to the states, eliminating Davis-Bacon, and reducing programs that require trust fund money to be allocated for purposes other than highway construction or maintenance, total savings could be as much as $10 billion or more."


Recent trends in both capital wealth and income are driven almost entirely by housing (a critique of Piketty)

See Piketty Vs. Rognlie: Land Use Restrictions Inflate Housing Values, Drive Wealth Concentration by Chuck DeVore in Fortune. Excerpts:
"Matthew Rognlie, on the other hand, isn’t buying Piketty’s proposition. An M.I.T. doctoral student in economics, Rognlie contends in his “A note on Piketty and diminishing returns to capital,” published a year ago, that the French economist and academic failed to see that “Recent trends in both capital wealth and income are driven almost entirely by housing…” wryly suggesting Piketty’s famous book should have instead been entitled, “Housing in the Twenty-First Century.”

It’s one thing to claim, as Piketty does in front of a large amen chorus to the left, that the game of economics is rigged for the rich. It’s another thing entirely if Piketty’s thesis is founded, not on the high rate of return for capital, but merely the high rate of return for housing in the developed world.
Piketty’s contention generates a vastly different narrative, with satisfying calls for higher taxes on wealth. Piketty gives “Soak the rich!” a new lease as a rallying cry.

Rognlie’s retort is more problematic. If the accumulation of capital is really about equity in homes, then the “problem” of wealth concentration is not an issue of the “1 percent,” rather, it’s an issue of homeowners vs. renters—a far more problematic proposition for elected officials.

And, why are housing values soaring? Rognlie’s notes two studies, one examining New York City and the other, California. These studies found that in “markets with high housing costs” those “costs are driven in large part by artificial scarcity through land use regulation.”"

"All three of these factors [the significance of a state’s cost of living, the degree of urbanization and land use freedom] reliably predict the number of single family homes and mobile homes in a state, with higher costs and more urbanization predicting fewer houses and mobile homes and more land use freedom equating to more single family homes and mobile homes. It’s all fairly much common sense, but it is nice to see statistical reinforcement that notion."

"...what drives the cost of living, of which the greatest share of differences between the states is due to wide variances in the cost of housing?" "... land use freedom, not the degree of urbanization, can explain most of the variance in the cost of living from state-to-state."

"poverty is far worse than advertised in states with high costs of living, most of which is due to onerous property rights restrictions that make it very difficult to build affordable housing."

"Randal O’Toole, a senior fellow with the Cato Institute, notes that houses in California, a state with the nation’s third-most-restrictive land use policies, after New Jersey and Maryland, has gotten “so expensive that no one can buy anything.”

O’Toole says that the median home value to median family income ratio reached 10 to 1 at the height of the housing boom in 2006 in the greater San Francisco Bay area vs. only 2 to 1 in Houston."

"Returning to Rognlie one last time, an additional major critique he has of Piketty is Piketty’s contention that labor will be easier to replace with capital than has historically been the case. This theory is important to Piketty’s case that people with capital will experience greater benefits than that seen by labor.

Rognlie’s retort to Piketty may operate in truly free markets where labor has mobility to meet demands. But, as is often the case with government meddling in the economy, unintended consequences arise, distorting markets.

For instance, persistently high unemployment and poverty levels in Los Angeles might, in a free market for labor, cause some people to either reduce their wage demands to get a job or move to a location where their labor can command a higher premium. But, in the this age of welfare, housing subsidies and the minimum wage, the unemployed are less likely to move for work. This is compounded by proposal to increase the minimum wage in Los Angeles to $15 an hour, pricing large numbers of marginally-skilled people out of the workforce and simultaneously inviting investment in capital to replace the labor that’s been artificially overpriced by government decree."