Monday, February 29, 2016

Net Neutrality vs. Net Reality

By Holman W. Jenkins, Jr., WSJ. Excerpts:
"For starters, notice all the developments in the marketplace that neut activists feel obliged to be outraged about, which they imagined the government could stop. Netflix continues to be dunned for interconnection fees by big cable operators. This is a terrible offense against net neutrality, we’re told, except that it undoubtedly helped to incentivize Netflix’s recent project to reduce the burden of its video on the Internet by 20% without hurting video quality.

Ditto the zero-rating plans put forward by wireless operators like T-Mobile, Verizon and AT&T, allowing some data to pass through to users without being subject to data caps. Net neuts are enraged even as these plans help to make video affordable on wireless.

We come to the most bizarre case of net neuties making lemons out of lemonade. A Pew survey finds a small but absolute drop in the number of American households subscribing to fixed broadband. Now, no WSJ reader would be so incautious as to conclude the value of the Internet must therefore be falling for many Americans—it costs too much, who needs it!

Yet this is exactly the interpretation the neut brigade are peddling, even while Pew quietly acknowledges the truth: Fixed broadband subscriptions slipped slightly because fast wireless is increasingly seen by many customers as an adequate substitute.

Let’s see. Mobile devices overtook PCs to account for 55% of Internet traffic in 2014. They accounted for a majority of Google searches by early 2015. Half of Americans use LTE wireless networks, with an average speed of 11 megabits. Is it really a tragedy that some of these Americans now find it unnecessary to pay two broadband bills?"

Sunday, February 28, 2016

Although the money incomes of middle-class households have been rising very slowly for three decades, the focus on cash income is misleading

See The U.S. Economy Is in Good Shape: As we shake off the effects of past Fed policy, many signs are good. But the 2016 race has seen some alarming proposals floated. by Martin Feldstein in the WSJ. Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor at Harvard and a member of the Journal’s board of contributors. Excerpts:
"The CBO explains that once corporate and government transfers are added to market incomes, and federal taxes are subtracted, the real income after transfers and federal taxes is up 49% between 1979 and 2010 for households in the lowest income quintile (with average total incomes of $31,000 in 2010). Real income is up 40% between 1979 and 2010 for households in the middle three quintiles (with average total incomes of $60,000 in 2010).

Even that understates the true growth rates of real incomes, because government statistics don’t fully capture improvements in the quality of goods and services."

"The 70% decline in the price of oil since early 2015 will eventually turn out to have a positive impact on U.S. economic growth."

"But the fall in gasoline prices alone has increased annual household spending power by about $129 billion or more than $1,000 per household. Although households have temporarily plowed much of this found money into savings, we are likely to see it lead to increased consumer spending in 2016 and 2017."

Tax-reforms that eliminate the double corporate tax would boost economic growth significantly

See Ending the One-Two Corporate Tax Punch: Jason Furman is right about the ‘stupid’ policy on overseas income. Domestic policy also isn’t so bright. by Brian Reardon and Tom Nicholsin the WSJ. Mr. Reardon is president of the S Corporation Association. Mr. Nichols is a former chairman of the American Bar Association Tax Section Committee on S Corporations. Excerpts:
"On paper, the U.S. has a world-wide tax system that imposes two layers of tax on overseas business income—an initial foreign tax when the money is earned and a second U.S. tax when the money is repatriated. In practice, however, companies actively avoid the U.S. tax by various means, including inversions (moving their headquarters abroad by merging with foreign corporations), shifting profits to foreign subsidiaries, and hoarding the cash overseas."

"On paper, the U.S. also imposes two layers of tax on domestic corporate income—one layer when the corporation earns the income and another on shareholders when they receive the income as a dividend or a capital gain."

"business owners have voted for a single-layer tax here as well. Those that are able become pass-through entities—sole proprietorships, partnerships and S corporations—where their business income is taxed only once, on their personal returns. Those that remain C corporations avoid the double corporate tax by retaining their earnings rather than distributing them, paying their executives excess salaries and bonuses, engaging in share buybacks rather than paying dividends, and borrowing rather than raising capital through the equity markets. The result is less investment, fewer jobs and more debt. It also means that very little corporate income is subject to a second layer of tax."

"Analysis by the Tax Foundation consistently finds that tax-reforms that eliminate the double corporate tax would boost economic growth significantly."

"The current code imposes a very high tax on equity investment, but a much lower tax on debt-financed investments. The dangers of too much debt were exposed during the 2008 financial crisis."

Saturday, February 27, 2016

Scott Sumner On The Autor, Dorn, and Hanson Paper On The "China Shock"

See Autor, Dorn, and Hanson on the China Shock. Excerpts:
"I have a lot of problems with this claim. First, even if China trade was bad for the US, it was almost certainly extremely good for China, which was a vastly poorer country in 1990. So I'm quite confident that economists are justified in supporting free trade. Whether they are justified in suggesting that Chinese trade is beneficial to the US is another question.

Second, this is just one study, and as we'll see it's far from convincing. We don't abandon views held for 200 years, and supported by hundreds of studies, just because of a single study. I can't speak for other economists, but I very much doubt whether economists are holding back some sort of "secret" information that free trade is actually bad.

The ADH paper does show a nice job of showing that Chinese exports have depressed some local labor markets. But unless I'm mistaken the paper doesn't tell us anything about the macro effects of Chinese exports, which would require a macro model. Here are three possible ways that Chinese exports might hurt the aggregate economy:

1. It might depress aggregate demand
2. It might depress aggregate supply by reducing the long-term productivity of the US economy.
3. It might reduce aggregate supply by causing medium-term structural "reallocation" problems, as labor had trouble migrating to new jobs.

I'll call these the AD shock, the AS/efficiency shock and the AS/reallocation shock channels. Even after reading the ADH paper, I am having trouble understanding which channel is relevant.

The easiest shock to address is the AD shock. EC101 students are sometimes confused by the GDP equation:

GDP = C + I + G + (Ex - Im)

This equation makes it look like a current account deficit would reduce GDP. However the CA deficit is exactly equal to the capital account surplus, which is I - S. So if we import more than we export, we also invest more than we save. Thus a CA deficit might boost investment, or if it reduces saving it might boost consumption. There is no "accounting argument" for the claim that trade deficits reduce aggregate demand.

There is a more sophisticated argument that CA deficits reduce AD, but only at the zero bound. Paul Krugman has suggested that when interest rates are zero, a CA deficit may depress the equilibrium interest rate, making monetary policy effectively tighter. Because we are at the zero bound, the Fed may not offset this shock and total AD may decline.

There is one big problem with this theory; it doesn't apply to the 1990-2007 period considered in the ADH study. Interest rates were never at zero, and thus monetary offset clearly applied. Try to imagine a policy counterfactual involving a ban on Chinese imports. Unemployment was only 5.2% in June 1990, near the peak of the Reagan boom. By June 2000 it had fallen to 4.0%, near the peak of the Clinton boom. In the subsequent recession it never got higher than 6.3%, and then fell back to 4.6% in June 2007. Whatever you think about this data, the Fed clearly thought AD was adequate, or they would have eased policy further. Thus if a ban on Chinese imports did somehow boost AD, its effects obviously would have been offset by the Fed. I'm pretty sure that even Keynesians like Paul Krugman would agree with that claim. So I think it's safe to assume that whatever the channel was by which China trade hurt the US economy, it was certainly not the AD shock channel.

The long run AS/efficiency channel also seems unlikely. Basic economic theory suggests that productivity and efficiency are highest when a country concentrates on producing those goods for which it has a comparative advantage. Thus the most likely channel would be the reallocation channel; something prevents workers who lost their jobs in one sector from quickly finding jobs in other booming sectors. And indeed ADH do frequently discuss the problem in exactly those terms, workers don't seem to be able to easily reallocate out of areas hit by the China trade shock."

"Overall, I had a lot of trouble making sense of this paper. To draw macro implications, you'd need a macro model, including assumptions about monetary offset to evaluate a counterfactual with no China trade. But I couldn't find this model.

And who is the intended audience? The sort of economist who is most likely to be receptive to this message is not a free market supporter like me, but rather a left of center pragmatist. But people like Krugman and Summers were extremely skeptical of the claim that structural/reallocation theories explained high unemployment after 2008, and insisted that an AD shortfall was the real problem. I agree that AD was the real problem after 2008, which is one reason I am skeptical of this paper. But if you did dismiss the claims of people like Arnold Kling, that much of the unemployment was due to the difficulty workers had reallocating out of residential real estate construction, then why would you be receptive to the ADH paper?

I don't want to sound too negative here. While I don't buy the argument that trade is harmful in a macro sense, I do think ADH have done a good job of showing that labor reallocation may be harder than we assumed. This has lots of policy implications. We should be more skeptical of policies that slow reallocation, such as zoning restrictions on development and rent controls (both of which Steve Waldman recently defended), and extended unemployment compensation programs.

One of the things I liked most about the ADH paper was that they recognized the massive gains from trade to China. Thus even if the effects of trade on the US were slightly negative in net terms (which I doubt) the case for free trade would remain overwhelmingly powerful, at least unless you were a nationalist who opposed any sort of foreign aid, even aid that hugely boosted world efficiency.

The thing I liked least is the ambiguity about the model they were using. If they are right about the costs of reallocation, does it suggest that all "creative destruction" is bad, including technological progress? That would seem to be the implication, but I doubt they'd want to go that far. So why focus on jobs lost by the China shock, but not German exports or robots replacing workers? Early in the paper they suggest that China is special, as it was a once in a lifetime massive shock from a huge country, which hit us rapidly, but also that wages in China are now rising fast, so much of the adjustment is over. So even if they are right about China during 1990-2007, it probably has no policy implications going forward, as other types of creative destruction like rising German exports and robots tend to occur more gradually over time. And if I am too complacent about robots, then the policy implication of the paper is not anti-China (it's too late to prevent that shock), but rather anti-robot, as robots might be the next massively disruptive shock.

Sorry to be so long winded, but I'm not seeing anyone seriously grapple with the implications of their research, if it is correct. I would appreciate any comments you might have."

How Berkshire Hathaway thinks about climate change

From Marginal Revolution.
"From their new report (pdf, pp.25-26):
…insurance policies are customarily written for one year and repriced annually to reflect changing exposures. Increased possibilities of loss translate promptly into increased premiums.
Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather-related events covered by insurance. As a consequence, U.S. super-cat rates have fallen steadily in recent years, which is why we have backed away from that business. If super-cats become costlier and more frequent, the likely – though far from certain – effect on Berkshire’s insurance business would be to make it larger and more profitable.
As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries."

Friday, February 26, 2016

No Matter Who Wins at the Oscars, Taxpayers Lose on Film Subsidies

By Jared Meyer of Reason. Excerpts:
"States are starting to realize that the economic benefits of film tax credits are pure fantasy, like some movie plots. In 2012, 40 states offered tax incentives, at a total cost of $1.4 billion, but since then some states have decided that maintaining roads, funding schools, staffing police departments, and letting residents keep more income are better uses of funds. Since last year’s Oscars, Alaska, Michigan, and Illinois all ended their film tax credit programs."

"Jobs in the film industry are highly skilled and mobile, which means they do not create lasting economic benefits. If another state rolls out an even more generous tax credit, film production can simply pack up and leave for another soundstage. States that decide to shower the film industry with taxpayer funds are in a race to the bottom, as no credit is high enough to satisfy Hollywood executives.
Maryland’s experience of losing film productions and wasting taxpayer dollars on its program is not unique. Every independent study of film tax credits have found that the programs come nowhere close to paying for themselves. But this reality has not stopped proponents from making fanciful predictions. The Maryland Film Industry Coalition—a group dedicated to promoting the film industry—claims that each dollar in tax credits leads to $1.03 in tax revenue.

The Tax Foundation’s Joseph Henchman points out that if these fanciful projections were taken seriously, the United States could pay off its national debt by simply giving the film industry $1 trillion. One study that was funded by the Motion Picture Association of American assumes that every dollar in tax credits creates $17.75 in economic activity, which leads to $1.88 in new tax revenue for the state. These claims are less realistic than the science-fiction films the credits support.

Film tax credit programs do not pay for themselves. They do not create long-term jobs, nor do they have tourism benefits. All film tax incentives do is provide opportunities for politicians to rub elbows with movie stars."

Minimum Wage: The End of Teenage Work Experience?

By Jack Salmon of CEI.
"A new report from JP Morgan Chase & Co. finds that the summer employment rate for teenagers is nearing a record low at 34 percent. The report surveyed 15 U.S. cities and found that despite an increase in summer positions available over a two year period, only 38 percent of teens and young adults found summer jobs.

This would be worrying by itself given the importance of work experience in entry-level career development, but it is also part of a long-term trend. Since 1995 the rate of seasonal teenage employment has declined by over a third from around 55 percent to 34 percent in 2015. The report does not attempt to examine why summer youth employment has fallen over the past two decades. If it had, it would probably find one answer in the minimum wage.

Most of the 15 cities studied in this report have minimum wage rates above the federal level, with cities such as Seattle having a rate more than double that. Recent data from the Bureau of Labor Statistics seen in the chart show exactly how a drastic rise in the minimum wage rate affects the rate of employment.

Seattle has experienced the largest 3 month job loss in its history last year, following the introduction of a $15 minimum wage. We can only imagine the impact such a change has had on the prospects of employment for the young and unskilled.

Raising the minimum wage reduces the number of jobs in the long-run. It is difficult to measure this long-run effect in terms of the numbers of never materializing jobs. However, the key mechanism behind the model—that more labor-intensive establishments are replaced by more capital-intensive ones—is supported by evidence. That is why recent research suggesting that minimum wages barely reduce the number of jobs in the short-run, should be taken with caution. Several years down the line, a higher real minimum wage can lead to much larger employment losses.

Nevertheless, politicians continue to push the idea that minimum wage laws are somehow helping the young “earn a decent wage.” It is important to remember the underlying motives behind pushes for higher minimum wage rates. Milton Friedman characterized it as an “unholy coalition of do-gooders on the one hand and special interests on the other; special interests being the trade unions.”

Several empirical studies have been conducted over the course of more than two decades, with all evidence pointing toward negative effects of minimum wage rises on employment levels among the young and unskilled. A study conducted by David Neumark and William Wascher in 1995 noted that “such increases raise the probability that more-skilled teenagers leave school and displace lower-skilled workers from their jobs. These findings are consistent with the predictions of a competitive labor market model that recognizes skill differences among workers. In addition, we find that the displaced lower-skilled workers are more likely to end up non-enrolled and non-employed.”

Policy makers who continuously raise the minimum wage simply assure that those young people, whose skills are not sufficient to justify that kind of wage, will instead remain unemployed. In an interview Milton Freidman famously asked “What do you call a person whose labor is worth less than the minimum wage? Permanently unemployed.”

The upshot: Raising the minimum wage at both federal and local levels denies youth the skills and experience they need to get their career going."

Thursday, February 25, 2016

Utah's Disastrous War on Electronic Cigarettes

By Michelle Minton of CEI.
"Despite the fact that tobacco products kill nearly half a million Americans each year, it is vaping products—which help people quit smoking—that have become a top target for health advocates. In addition to the Food and Drug Administration’s proposed rules that would create a de facto ban on the products, health advocates are trying to pass laws in the states that would increase restrictions and taxes on electronic cigarettes. Their intentions may be good, but the consequences of their proposals in states like Utah could be a disaster for public health.
Currently, Utah lawmakers are considering several proposals that would raise taxes on electronic cigarettes by more than 85 percent and ban anyone under 21 from purchasing them. Health advocates argue such changes are needed to prevent Utah’s children from becoming addicted to the nicotine in electronic cigarettes, which have become more popular than traditional cigarettes among teens.
Certainly, it’s alarming to read that “nearly 11 percent of Utah students in eighth, 10th and 12th grades reported using e-cigarettes…almost double the rate two years ago,” but there is a positive flipside to this story; the rate of traditional cigarette usage has significantly declined among this age group. According to a 2013 report by the Utah Department of Health, 3.8 percent of students in grades 8, 10, and 12 reported smoking traditional cigarettes in the last month. Compare that with the 9 percent of students in these grades that reported smoking cigarettes in 2005.

Electronic cigarettes might not be “healthy,” but they’re certainly less harmful than traditional tobacco cigarettes. For example, an independent review commissioned by Public Health England, published in August 2015, found that electronic cigarettes are at least 95 percent less harmful than traditional cigarettes and early research indicates switching to vaping from cigarettes may reverse lung damage. Even former U.S. Surgeon General Dr. Richard Carmona, wrote, “Based on what we know today, there is broad agreement that e-cigarette use is significantly safer than cigarette smoking.” This sentiment was echoed by the FDA’s tobacco “czar,” Mitch Zeller, who said, “If we could get all those people [who smoke] to completely switch all of their cigarettes to noncombustible cigarettes, it would be good for public health.”

So, as my friend Jeff Stier put it, “If the point of a sin tax is to discourage behavior, why would you put a sin tax on e-cigarettes, which are the alternative to smoking?"

Good question. The enormous tax increase proposed in Utah would only make it more expensive for adult cigarette users to switch to a much safer alternative. And it will do nothing to stop kids from smoking. Rep. Paul Ray, sponsor of one of the tax bills under consideration, declared that “the whole point of my bill is to raise the price point [on electronic cigarettes] high enough that the youth don't have access.”

Teens are already smoking cigarettes and a small portion of them likely always will; raising the price on electronic cigarettes simply means that more teens will buy regular cigarettes instead of vaping—which contains less nicotine.

Luckily, there doesn’t seem to be much support for the bills in the wake of several other tax hikes in the state. This is, perhaps, why supporters felt the need to pull a stunt like busing kids to the capitol for a rally in support of the tax hike. Because if there’s one thing kids love, it’s taxes. Even if the children are sincere in their public policy demands, restricting and putting a massive tax on products that effectively help adult smokers quit a deadly addiction would be inexcusably reckless behavior for adult lawmakers."

Four ways occupational licensing damages social mobility

By Edward Rodrigue and Richard V. Reeves of Brookings.
"It is often rather important that somebody knows what they’re doing. Few of us would board a commercial airplane, for instance, without feeling confident that the pilot was well trained and accredited. Occupational licenses are a way to set a clear competence bar in such activities.
But licensing also acts to mute competition by creating barriers to market entry. There are plenty of activities where licensing is unnecessary, or unnecessarily strict, which limits market dynamism and possibly social mobility, too.

The long boom in licensing

State governments are regulating more everyday professions through licensing, according to a recent report by the White House. In the 1950s, roughly 5 percent of jobs required a license; now that number is roughly 25 percent. Most of that rise comes from an increase in the number of professions that demand licenses, rather than from increased employment in already licensed professions. As a recent paper from the Brookings Hamilton Project shows, occupations now requiring a state license include hair-dressing, auctioneering, makeup artistry, and scrap metal recycling.

Licensing laws increase prices between 3 and 16 percent, depending on the particular profession. In many cases, there are better ways to ensure quality and professionalism, especially in the era of Yelp and TripAdvisor. In many cases, the regulations simply protect incumbent businesses, and benefit the schools that train those aspiring to become licensed. In some cases, the licensing schools have a direct hand in creating the state requirements. So there are some vested interests here.

Four ways licensing can damage social mobility

Overly tight licensing could also damage social mobility, for at least four reasons:

1. Since state licensing laws vary widely, a license earned in one state may not be honored in another. In South Carolina, only 12 percent of the workforce is licensed, versus 33 percent in Iowa. In Iowa, it takes 16 months of education to become a cosmetologist, but just half that long in New York. This licensing patchwork might explain why those working in licensed professions are much less likely to move, especially across state lines:

2. In many cases, people who’ve been imprisoned face a lifetime ban on obtaining an occupational license. This adds to the employment barriers faced by those leaving prison.

3. Licensing requirements impose up-front costs. The actual licensing fees are often just the tip of the iceberg; many aspiring professionals must spend time and money attending the required trade school courses. These burdens fall disproportionately on people from lower-income backgrounds.

4. Licensing can act as a form of “opportunity hoarding,” allowing those with resources and connections to benefit from the higher incomes flowing from these occupations, in part by preventing others from competing with them.  As Reihan Salam points out, questionable licensing extends well up the income distribution. Dentists in North Carolina prevent other professionals from providing teeth-whitening—even though the procedure is relatively straightforward. Insurance brokers in Utah play a similar game by attempting to make free equivalents of their service illegal. If nurses were allowed to perform more routine medical procedures, doctors would make slightly less, but nurses could earn more and overall health care costs would likely fall.

Licensing is a necessary tool for protecting consumers. But it can also become a tool for protecting producers, hoarding status, and blocking an important path to upward mobility."

Wednesday, February 24, 2016

Higher Marginal Tax Rates Reduce Income Mobility, Especially at the Bottom

By Charles Hughes of Cato.
"Calls for higher tax rates often suffer from a myopic focus on the one percent, but these proposals largely fail to acknowledge that tax rates, and the incentives they create, influence work decisions for everyone.  Nowhere is narrow focus more evident than the tax proposals from the two rivals for the Democratic nomination. Bernie Sanders has proposed more than $19 trillion in new taxes over the next decade, and Hillary Clinton’s own plans only look modest by comparison. My colleague Alan Reynolds briefly alluded to a recent paper from Mario Alloza of University College London that examines the relationship between tax rates and income mobility. He finds that higher marginal tax rates reduced mobility over the period analyzed, particularly for people with low incomes or less education. These findings imply that proposals to significantly increase taxes could make it harder for people at the bottom of the income distribution to work their way up.
Alloza looks at panel data between 1967 and 1996 to examine whether tax rates affect the probability of staying in the same decile in the following two years. He examines different scenarios including pre-tax, post-tax and post-tax and transfer. Most of the paper focuses on federal taxes, but he also examines a case where state and payroll taxes are included as well. Increases in the marginal tax rate are associated with a reduction in short-run relative income mobility. Households are roughly 6 percent more likely to stay in the same income quintile when the marginal tax rate is increased by one percentage point. This mechanism holds for all of the different tax and transfer scenarios. Even accounting for the impact of transfers and benefits, higher rates curbed the upward mobility of people at the lower end of the income distribution. This suggests that the impact of tax rates on income mobility is not confined to redistribution effects, but the changes in labor market incentives.

These effects are even more pronounced for people with low-income or less than a college degree. Tax changes focused on compressing the income distribution by taking more from those at the top could also make it harder for these people at the bottom to climb the economic ladder. When Alloza restricts his sample to non-college households, he finds that a one percentage point increase in the marginal tax rate increases the probability of moving down to lower deciles by roughly one percent, increases the likelihood of remaining in the same decile by roughly the same amount, and reduces the probability of moving up to a higher income decile by almost one and a half percent. For households in the lowest income decile, an increase in the marginal tax rate reduces their probability of moving up to a higher decile by almost one and half percent in the post-tax and transfer scenario.  Higher marginal tax rates reduce the mobility for these groups in particular.

These results provide more evidence that taxes matter for all people when they make decisions about work. Higher tax rates limit income mobility by changing work incentives, particularly for people near the bottom of the income distribution. Public policy should not further reduce the scope of opportunity for these people, and increasing tax rates would likely do just that." 

Regulations Contribute to Poverty

By Patrick A. McLaughlin of Mercatus.
"Some people maintain the notion that the costs of regulation are limited to compliance costs, and that these costs are paid primarily by businesses. This belief is incorrect. I will highlight two specific ways that the costs of regulation can actually be regressive, meaning that the costs are disproportionately borne by low-income households:
  1. Regulations have regressive effects by increasing the prices of basic necessities, such as electricity, housing, and telephone services, which typically consume a larger share of the budget of lower-income households than of wealthier households.
  2. Some types of regulations are associated with higher levels of income inequality, most likely because entrepreneurs at the lowest segments of the income distribution have relatively greater difficulty surmounting costly barriers to entry created by regulations.
With those points in mind, I hope to present this problem as an opportunity for policymakers to take positive steps toward regulatory reform—steps that will reduce the harm of federal regulations that are acting to impoverish, rather than help, low-income households.

The Regressive Effects of Regulation

In contrast to the belief that businesses pay the costs of regulation, regulatory growth is in fact associated with increases in the prices of all goods to all consumers. While economists have long known that regulations increase prices, researchers have only recently been able to actually estimate the effect in a comprehensive manner. In a recent study, which I’ve attached, economists Dustin Chambers and Courtney Collins found that a 10 percent increase in the quantity of federal regulations is associated with an approximately 0.7 percent increase in prices. While 0.7 percent may sound small, consider that this same study found that regulations affecting households grew by 33.6 percent between the years 2000 and 2012. That implies that price inflation of 2.31 percent has been associated with federal regulatory growth over that time period.

That percentage is the average across all households. But the price inflation associated with regulation is worse for low-income households because those households spend more of their income on heavily regulated goods than high-income households. For the most part, these are basic necessities. For example, electricity costs make up more than twice as much of the budgets of low-income households compared to high-income households, with the former spending just over 4 percent of their budgets on electricity, whereas high-income households spend less than 2 percent on it. Similarly, telephone services take up about three times as much space in the budgets of poorer households (about 3.25 percent) relative to that of high-income households (1.1 percent). All of these goods, many of them essentials, are heavily regulated, so the price inflation associated with regulation is also relatively high.

Price volatility is a problem as well. The same study found that regulations are positively correlated with price volatility. Budget-constrained households need to plan future spending, and price volatility hurts them in that regard as well. Low-income households are not only more budget constrained, but they also spend about 15 percent more than high-income households on goods with the highest price volatility. If regulations are contributing to that price volatility, then this is another way that they are contributing to poverty.

Regulation and Income Inequality

Regulations can also contribute to income inequality. In a study that I have attached, a coauthor and I recently examined a sample of 175 countries to learn more about the relationship between regulation and income inequality. We found that those countries with more stringent entry regulations tend to experience significantly higher levels of income inequality. The explanation for this is pretty straightforward: regulations can act as barriers to entry, and the higher those barriers to entry, the costlier it is for an entrepreneur to start a business. When entrepreneurs cannot legally open a business because of the cost of dealing with regulations, they may abandon the idea altogether.

Consider the long-standing reputation of America as the land of opportunity—where you can lift yourself up by your bootstraps with enough hard work. Indeed, entrepreneurship has historically been one of the best paths from rags to riches. If regulations are inhibiting this process, that means people with low incomes have fewer opportunities to rise from the low end of the income distribution to middle and high levels. In fact, the possibility that regulations are hindering this process is consistent with the growing evidence that regulatory accumulation creates substantial drag on economic growth by impeding innovation and entrepreneurship, as I have previously testified before this subcommittee.

Concluding Remarks

In conclusion, I have just discussed how regulations are contributing to poverty. First, they have regressive effects caused by increasing prices, particularly for those items that low-income households purchase most. Second, regulations can contribute to income inequality by increasing the costs of starting a business. This makes it more difficult for entrepreneurs to start their own businesses and begin the climb up the income ladder.

Although these facts are surely disheartening, there is good news. Because regulations disproportionately harm low-income households, regulatory reform offers a feasible opportunity to enact a policy that would effectively act like a tax refund by virtue of reducing the price inflation associated with regulations. Additionally, regulatory reform could lead to gains in job growth, increased entrepreneurship, and greater innovation. However, unlike a one-time tax refund, the benefits from regulatory reform would repeat year after year, they would not increase the deficit, and they would be progressive in their nature—accruing foremost to low-income households.

The regulatory process in the United States leads to regulatory accumulation. Federal regulatory code currently contains over 1 million individual regulatory restrictions. If you were insane enough to read regulations as a full time job, it would take you over three years to read through the entire code. The accumulation of regulation is both undesirable—because of a bevy of unintended consequences associated with it—and avoidable. If this accumulation of regulation is harming not only the economy overall but especially low-income households, it is certainly time to consider ways that we can eliminate regulations that are obsolete, duplicative, ineffective, or otherwise undesirable."

Sunday, February 21, 2016

'Common Sense' Means Repealing the FDA’s Menu-Labeling Mandate

Congress considers amending the rules. What it should do is get rid of them.

By Baylen Linnekin in Rreason. Baylen J. Linnekin is a food lawyer, author of a forthcoming book on food, regulation, and sustainability, and an adjunct professor at George Mason University Law School, where he teaches Food Law & Policy. Excerpts:
"Critics of mandatory calorie labeling, including me, have argued for years that menu-labeling provisions, including those adopted by the FDA, are rigid, overly inclusive, overly burdensome, pointless, and counterproductive.

For example, research indicates mandatory menu labeling may not just be ineffective, but also counterproductive. Studies have found that customers who view calorie counts on restaurant menus have been shown to eat more calories, rather than fewer. Contradictory studies that have touted menu labeling tend to be filled with qualifiers, along the lines of a small percentage of the small percentage of consumers who self-reported that they noticed calorie information on restaurant menus reduced their calorie intake by a small amount.

Perhaps most importantly, enforcing the rules will be tricky. The FDA currently does not inspect restaurants. It would be absurd for an agency that claims both its budget and its inspectors are strapped to suddenly take on the visual inspection of tens of thousands of restaurant menus around the country. The FDA might seek to hire local inspectors to do the job—by paying state and local health departments to do the work for them, including in states and cities that adopt legislation that mirrors federal law, as this writer suggests.

But in states where legislatures are hostile to the Affordable Care Act generally or to its menu-labeling provisions specifically, I suspect lawmakers are more likely to pass legislation to block such enforcement than they are to pass legislation that would support the federal law.

All this makes the menu-labeling provisions of the ACA sticky at best, and likely ripe for a court challenge.

It's perhaps for this latter reason that the FDA announced this past summer it would not begin enforcing the ACA menu-labeling rules until December 2016. That gives supporters of the Common Sense Nutrition Disclosure Act of 2015 a window in which to tweak the law.

Better still, based on all of the problems inherent with mandatory menu labeling, would be action in Congress to repeal the law. But that's unlikely.

"We are not debating the merits of calorie counts in restaurants," said Rep. Cathy McMorris Rodgers (R-Wash.), who introduced the Common Sense Nutrition Disclosure Act, in a recent op-ed in The Hill. "We are debating if this specific, 400-page rule is workable."

It's unworkable. But it's too bad that discussing the merits of mandatory menu labeling appear to be off the table.  As law, regulation, and policy, menu labeling is wildly unsettled. It's one that's very much in need of thoughtful debate."

Most Ordinary Americans in 2016 Are Richer Than Was John D. Rockefeller in 1916

By Don Boudreaux of Cafe Hayek.
"This Atlantic story reveals how Americans lived 100 years ago.  (HT Warren Smith)  By the standards of a middle-class American today, that lifestyle was poor, inconvenient, dreary, and dangerous.  (Only a few years later – in 1924 – the 16-year-old son of a sitting U.S. president would die of an infected blister that the boy got on his toe while playing tennis on the White House grounds.)

So here’s a question that I’ve asked in one form or another on earlier occasions, but that is so probing that I ask it again: What is the minimum amount of money that you would demand in exchange for your going back to live even as John D. Rockefeller lived in 1916?  21.7 million 2016 dollars (which are about one million 1916 dollars)?  Would that do it?  What about a billion 2016 – or 1916 – dollars?  Would this sizable sum of dollars be enough to enable you to purchase a quantity of high-quality 1916 goods and services that would at least make you indifferent between living in 1916 America and living (on your current income) in 2016 America?

Think about it.  Hard.  Carefully.

If you were a 1916 American billionaire you could, of course, afford prime real-estate.  You could afford a home on 5th Avenue or one overlooking the Pacific Ocean or one on your own tropical island somewhere (or all three).  But when you travelled from your Manhattan digs to your west-coast palace, it would take a few days, and if you made that trip during the summer months, you’d likely not have air-conditioning in your private railroad car.

And while you might have air-conditioning in your New York home, many of the friends’ homes that you visit – as well as restaurants and business offices that you frequent – were not air-conditioned.  In the winter, many were also poorly heated by today’s standards.

To travel to Europe took you several days.  To get to foreign lands beyond Europe took you even longer.

Might you want to deliver a package or letter overnight from New York City to someone in Los Angeles?  Sorry.  Impossible.

You could neither listen to radio (the first commercial radio broadcast occurred in 1920) nor watch television.  You could, however, afford the state-of-the-art phonograph of the era.  (It wasn’t stereo, though.  And – I feel certain – even today’s vinylphiles would prefer listening to music played off of a modern compact disc than listening to music played off of a 1916 phonograph record.)  Obviously, you could not download music.

There really wasn’t very much in the way of movies for you to watch, even though you could afford to build your own home movie theater.

Your telephone was attached to a wall.  You could not use it to Skype.

Your luxury limo was far more likely to break down while you were being chauffeured about town than is your car today to break down while you are driving yourself to your yoga class.  While broken down and waiting patiently in the back seat for your chauffeur to finish fixing your limo, you could not telephone anyone to inform that person that you’ll be late for your meeting.

Even when in residence at your Manhattan home, if you had a hankering for some Thai red curry or Vindaloo chicken or Vietnamese Pho or a falafel, you were out of luck: even in the unlikely event that you even knew of such exquisite dishes, your chef likely had no idea how to prepare them, and New York’s restaurant scene had yet to feature such exotic fare.  And while you might have had the money in 1916 to afford to supply yourself with a daily bowlful of blueberries at your New York home in January, even for mighty-rich you the expense was likely not worthwhile.

Your wi-fi connection was painfully slow – oh, wait, right: it didn’t exist.  No matter, because you had neither computer nor access to the Internet.  (My gosh, there weren’t even any blogs for you to read!)
Even the best medical care back then was horrid by today’s standards: it was much more painful and much less effective.  (Remember young Coolidge.)  Antibiotics weren’t available.  Erectile dysfunction?  Bipolar disorder?  Live with ailments such as these.  That was your only option.
You (if you are a woman) or (if you are a man) your wife and, in either case, your daughter and your sister had a much higher chance of dying as a result of giving birth than is the case today.  The child herself or himself was much less likely to survive infancy than is the typical American newborn today.

Dental care wasn’t any better.  Your money didn’t buy you a toothbrush with vibrating bristles.  (You could, however, afford the very finest dentures.)

Despite your vanity, you couldn’t have purchased contact lenses, reliable hair restoration, or modern, safe breast augmentation.  And forget about liposuction to vacuum away the results of your having dined on far too many cream-sauce-covered terrapin.

Birth control was primitive: it was less reliable and far more disruptive of pleasure than are any of the many inexpensive and widely available birth-control methods of today.

Of course, you adore precious-weacious little Rover, but your riches probably could not buy for Rover veterinary care of the sort that is routine in every burgh throughout the land today.

You were completely cut off from the cultural richness that globalization has spawned over the past century.  There was no American-inspired, British-generated rock’n’roll played on electric guitars.  And no reggae.  Jazz was still a toddler, with only few recordings of it.

You could afford to buy the finest Swiss watches and clocks, but even they couldn’t keep time as accurately as does a cheap Timex today (not to mention the accuracy of the time kept by your smartphone).
Honestly, I wouldn’t be remotely tempted to quit the 2016 me so that I could be a one-billion-dollar-richer me in 1916.  This fact means that, by 1916 standards, I am today more than a billionaire.  It means, at least given my preferences, I am today materially richer than was John D. Rockefeller in 1916.  And if, as I think is true, my preferences here are not unusual, then nearly every middle-class American today is richer than was America’s richest man a mere 100 years ago.
* This is page 99 in C├ęsar Hidalgo’s 2015 book, Why Information Grows."

Saturday, February 20, 2016

How Economists Would Wage the War on Drugs

The monstrous cartels that run the narcotics business face the same dilemmas as ordinary firms—and have the same weaknesses

By Tom Wainwright, in the WSJ. Mr. Wainwright is the Britain editor of the Economist and the author of “Narconomics: How to Run a Drug Cartel,” to be published Tuesday by PublicAffairs. Excerpts:
"The number of people using cannabis and cocaine has risen by half since 1998, while the number taking heroin and other opiates has tripled." (despite large governmental efforts to stop it)

"Take cocaine, which presents one of the great economic puzzles of narcotics. The war against cocaine rests on a simple idea: If you restrict its supply, you force up its price, and fewer people will buy it. Andean governments have thus deployed their armies to uproot the coca bushes that provide cocaine’s raw ingredient. Each year, they eradicate coca plants covering an area 14 times the size of Manhattan, depriving the cartels of about half their harvest. But despite the slashing and burning, the price of cocaine in the U.S. has hardly budged, bobbing between $150 and $200 per pure gram for most of the past 20 years. How have the cartels done it?"
 The drug lords have both monopsony and monopoly power.
"In the Andes, where coca farmers tend to sell to a single dominant militia, the same thing seems to be happening. Cross-referencing data on coca-bush eradication with local price information shows that, in regions where eradication has created a coca shortage, farmers don’t increase their prices as one might expect. It isn’t that crop eradication is having no effect; the problem is that its cost is forced onto Andean peasants, not drug cartels or their customers."

Even if the price of coca could be raised, it wouldn’t have much effect on cocaine’s street price. The raw leaf needed to make one kilogram of cocaine powder costs about $400 in Colombia; in the U.S., that kilogram retails for around $150,000, once divided into one-gram portions. So even if governments doubled the price of coca leaf, from $400 to $800, cocaine’s retail price would at most rise from $150,000 to $150,400 per kilogram."

"Demand for drugs is inelastic—that is, when prices rise, people cut their consumption relatively little. (Given that most banned drugs are addictive, this isn’t surprising.) So even when governments can drive up prices, dealers continue to sell almost as much as they did before—only at higher prices, meaning that the value of the criminal market increases. Reducing demand, by contrast, triggers a fall in both the amount consumed and the price paid, cutting into the criminal market on two fronts.

Demand-side interventions are not only more effective, they’re also considerably cheaper than playing about with helicopters in the Andes. A dollar spent on drug education in U.S. schools cuts cocaine consumption by twice as much as spending that dollar on reducing supply in South America; spending it on treatment for addicts reduces it by 10 times as much. Rehab programs for prescription-painkiller users might seem costly, but they prevent those people from slipping into the colossally more expensive problem of heroin addiction. Where demand cannot be dampened, it can be redirected toward a legal source, as a few U.S. states have done with marijuana—a development that has inflicted bigger losses on the cartels than any supply-disruption policy."

What if the compensation for all S&P 500 CEOs were confiscated and redistributed to rank-and-file workers?

From Mark Perry.
"I wrote a few days ago on CD about how both Hillary Clinton and Bernie Sanders have been criticizing “excessive CEO pay.” A campaign ad for Hillary tells us that “On average, it takes 300 Americans working for a solid year to make as much money as one top CEO. It’s called the wage gap.” In a Tweet last month, Bernie Sanders lamented that “CEOs make 300 times what their workers make. That is simply immoral and must be dealt with.” A few years ago, the AFL-CIO made this statement:
America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while wages have stagnated and unemployment remains high. Today’s CEO-to-worker pay ratios are simply unconscionable.
OK, let’s assume that Hillary and Bernie are correct that CEO pay in America is excessive and immoral, and is a problem that “must be dealt with,” according to Sanders. Let’s also accept the AFL-CIO’s statements above that today’s CEO-to-worker pay ratio is unconscionable, and that America’s corporate CEOs have been gobbling up a greater and greater share of the payroll pie at the expense of the average worker in recent decades.

In that case, let’s analyze what would happen if we could either: a) confiscate 100% of the compensation paid in 2014 to the S&P 500 CEOs and redistribute all of that income to the 97,734,00 production and non-supervisory workers cited by the AFL-CIO as America’s rank-and-file workers, or b) cap the CEO-to-worker pay ratio at either the “less unconscionable” 1980 level of 42:1 or the “less immoral” 1960 ratio of 20:1 and confiscate and redistribute the excess CEO pay above those caps to the 97.734 million rank-and-file hourly workers. The table above summarizes how that confiscation and redistribution of CEO pay would affect the average worker’s annual income and hourly pay rates.


Here’s a summary:

  1. The AFL-CIO reports that CEOs of companies in the S&P 500 received $13.5 million in average total compensation in 2014, and those 500 CEOs as a group would have therefore generated $6.75 billion in compensation. If that total amount of almost $7 billion was confiscated and redistributed equally to the 97.734 million workers that the AFL-CIO uses for its “average worker pay” calculation, each of those rank-and-file hourly workers would have received $69.07 in extra annual pre-tax income in 2014, or about 3.5 cents per hour for a 40-hour workweek and about 4.2 cents per hour for a 33.7-hour workweek (which is the average workweek for the AFL-CIO’s rank-and-file workers, many of whom work part-time), see first row of data in the table above.
  2. If we could impose the 1980 CEO-to-worker pay ratio of 42:1, the average S&P 500 CEO compensation in 2014 would have been only about $1.5 million (42 x $36,134 in average worker pay according to the AFL-CIO), and the 500 CEOs would have earned only $759 million in 2014, instead of $6.75 billion. Distributing the nearly $6 billion in excess earnings in 2014 to the 97.734 million rank-and-file workers would have increased their annual pre-tax income by $61.30, and their hourly pay by 3.1 cents or 3.7 cents before tax, depending on the number of weekly work hours (see middle row of data in the table above).
  3. Going all the way back to the 1960s, and capping the CEO-to-worker pay ratio at 20:1 would mean that the average annual CEO compensation in 2014 would have been only about $723,000 (20 x $36,134 average worker pay), generating nearly $6.4 billion in excess CEO pay to redistribute to average workers. Each of the 97.734 million rank-and-file workers would have gotten an increase in their annual pay of about $65 in 2014, and their hourly pay would have gone up by less than 4 cents, before tax (see last data row in the table above).
MP: Even if Bernie Sanders, Hillary Clinton, and the AFL-CIO had their way and could “deal with” the unconscionable, immoral “CEO wage gap” by confiscating 100% of the compensation of all 500 CEOs in the S&P 500, and then redistribute that $6 billion of “excessive” executive compensation to America’s 97,734,000 rank-and-file workers, the average full-time worker’s income would only increase by 3.5 cents per hour – and that’s before taxes. And if either Hillary or Bernie get elected as president and issues an executive order capping CEO compensation at the 20:1 CEO-to-worker pay ratio that prevailed in 1960, and redistributed the excess CEO pay to the rank-and-file, the average worker would see his or her weekly pay increase by $1.32 – before taxes. Big deal.

Bottom Line: There might be a lot of reasons that average worker pay has stagnated over the last decade – intense international competition, an increase in fringe benefits as a share of total worker compensation that has slowed monetary wage increases, the adverse economic effects of the Great Recession, the slowest and weakest economic recovery in more than 50 years — but the increased compensation for America’s top S&P 500 executives certainly isn’t one of them. To stimulate job growth, and increase the wages and income of the average worker, Clinton and Sanders should be looking at ways to increase and expand economic opportunity in America. Unfortunately, most of their progressive policy prescriptions involve greater government involvement in the economy, more regulations, and higher taxes, which will likely retard economic opportunities and slow economic and wage growth. In that case, don’t expect the “CEO wage gap” to change much under a Clinton or Sanders administration."

Friday, February 19, 2016

New evidence suggests that Seattle’s ‘radical experiment’ might be a model for the rest of the nation not to follow

From Mark Perry. Excerpts:

"Early evidence from the Bureau of Labor Statistics (BLS) on Seattle’s monthly employment, the number of unemployed workers, and the city’s unemployment rate through December 2015 suggest that since last April when the first minimum wage hike took effect: a) the city’s employment has fallen by more than 11,000, b) the number of unemployed workers has risen by nearly 5,000, and c) the city’s jobless rate has increased by more than 1 percentage point (all based on BLS’s “not seasonally adjusted basis”). Those figures are based on employment data for the city of Seattle only (not the Seattle MSA or MD), and are available from the BLS website here (data are “not seasonally adjusted”)."

"Following the first minimum wage hike in 2015, there was a decline in the city of Seattle’s employment of 11,037 jobs between April and December as reported by the BLS (from 407,073 to 396,036) and by 8,114 jobs on a seasonally adjusted basis (from 404,202 to 386,089). By both measures of employment, that April to December 2015 drop in Seattle employment was the biggest decline over any 9 month period since between April and December 2009 period during the Great Recession when there were similar, but slightly larger job declines (see top chart above). And the loss of more than 10,000 Seattle jobs (on an unadjusted basis vs. a 9,950 job loss on a seasonally adjusted basis) in just the three months of September, October and November 2015 establishes a new record for the greatest number of Seattle jobs ever lost over a three month period going back to 1990 when the BLS first started reporting the city’s monthly employment levels. Notably, the three-month job losses last year in Seattle from September to November were greater that job losses in any three month period during the last three recessions (1990-1991, 2001 and 2007-2009)."

"the number of the city’s unemployed workers increased between April and December last year by nearly 4,700 on an unadjusted basis (dark blue line), and by nearly 4,300 on a seasonally adjusted basis (light blue line). Like for the decline in the city’s employment level last year between April and December, the rise in the number of unemployed Seattle workers between April and December 2015 was the largest increase over any 9 month period since the May 2009 to January 2010 period at the end of the Great Recession."

"Following the city’s minimum wage increase in April, the seasonally adjusted jobless rate increased by more than one percentage point (from 3.45% to 4.53%) to the highest level in more than two years going back to October 2010. The unadjusted unemployment rate increased by 1.2 percentage points from 3.0% to 4.2% between April and December last year. There hasn’t been as large an increase in Seattle’s jobless rate over a 9-month period since the end of the Great Recession between May 2009 and January 2010."

" until the first minimum wage hike last April, all three of Seattle’s labor market indicators had been showing ongoing and strong signs of improvement for the previous five years: the city’s employment had been steadily increasing since early 2010, the number of unemployed workers in Seattle had significantly declined from a peak of more than 33,000 in 2009 to fewer than 13,000 by last April, and the city’s jobless rate had fallen steadily from a post-recession peak of nearly 9% to only 3% by last April (unadjusted). But then each of those key labor market variables for the city of Seattle reversed sharply starting last April"

"while the city of Seattle experienced a sharp drop in employment of more 11,000 jobs between April and December last year (light blue line, BLS data available here), employment in Seattle’s neighboring suburbs outside the city limits (the Seattle MSA jobs less Seattle city jobs) increased over that period by nearly 57,000 jobs and reached a new record high in November 2015 before falling slightly in December."

"Here is the employment for the entire Seattle MSA:
As you can see, employment for the MSA doesn’t show any decline, and in fact has continued to increase steadily. So the only part of the MSA showing decline last year is apparently the city of Seattle, and that’s the only part of the MSA affected by the pending 61% in labor costs for minimum wage workers."

Obamacare may be growing the number of unpaid medical bills

From Scott Gottlieb of CEI.
"A big hospital chain’s surprise decision to write off a slug of bad debt may be a signal of much deeper consumer healthcare strains being caused by ObamaCare.

Community Health Systems surprised analysts this week, announcing that among other things, the company would take a $169 million provision for bad debt. The write off was a big part of Community’s dismal fourth quarter earnings report, leading to a 22% drop in the company’s stock on Tuesday.

In the lexicon of hospital finance, bad debt is another word for unpaid bills. In this case, Community Health said that the charge was largely a result of lower-than-expected collections on deductibles and co-pays that consumers owed. The hospital chain was recording a higher amount of cash from these co-pays than it now expects to collect, so it needed to take a write off to account for its lowered expectations.

The rising amount of uncollected co-pays and deductibles may be an early sign of consumer stress as the economy weakens. But more likely, it also reflects changes in the healthcare market that are saddling consumers with a much bigger share of their medical costs. For this, ObamaCare is playing a big role.

The structure of the insurance products offered under ObamaCare was deliberately skewed toward hollowed-out health plans. These plans sport large out-of-pocket limits and often skimpy or no co-insurance on drugs and doctors purchased outside a health plan’s increasingly narrow drug formularies andprovider networks.

As consumers face a higher proportion of their medical bills, more are finding it hard to pay the tab. Some analysts are starting to bake in expectations for rising bad debt across the hospital sector. The issue isn’t just the ObamaCare plans. By adopting these structures in ObamaCare, the feds effectively popularized these constructs, or at least made them politically suitable. So health plans are starting to incorporate the same insurance designs across their products, even among the employer-sponsored plans that they offer in their commercial segments.

ObamaCare didn’t invent the idea of a high-deductible health plans. There was a growing prevalence of these arrangements long before the Affordable Care Act. Conservatives made a big push in the 2000s for “consumer directed health plans” that coupled health savings accounts with plans that insured against catastrophic medical costs. The idea was to empower consumers to pay for routine care out of their own tax-free savings. But ObamaCare created something entirely different.

In the case of ObamaCare plans, a lot of routine medical expenses are covered in full as part of the scheme’s “essential health benefits” — a politically crafted list of favored medical services that Washington mandates. To accommodate full coverage of these routine costs, the plans skimp on access to doctors and drugs, and saddle consumers with high out of pocket costs on mostly catastrophic medical bills.

This isn’t what’s usually meant by the concept of a high deductible health plan. The idea of a high deductible plan was to make consumers more cost conscious by exposing them to more of their routine medical costs, but covering them more fully when they confront a serious illness, and don’t have as much medical discretion.

In this way, ObamaCare inverts the traditional notion of a high deductible health plan. The ObamaCare plans have closed drug formularies that leave important specialty medicines completely uncovered. They adopt doctor networks that exclude a lot of medical specialists. When patients try to go outside ObamaCare’s narrow doctor networks or shop outside their skimpy drug formularies, consumers typically have little or no co-insurance. In many ways, ObamaCare reinvented what was traditionally meant by the term “high deductible health plan.”

Moreover, in the case of the ACA, what consumers spend outside narrow doctor networks and closed drug formularies often don’t count against their deductible or their out-of-pocket maximum. I conducted an analysis of ObamaCare silver plans to see how they covered drugs for multiple sclerosis. I surveyed more than 30 plans across five states. All of the plans sported closed drug formularies, meaning that they didn’t provide any coverage for drugs that didn’t make their formulary lists. But more worrisome, all of the plans also excluded many important medicines.

Now that these cost-saving constructs have been rendered politically appropriate by the ACA, they’re becoming the new standard across the market. This year, 86% of employers will offer plans with very high deductibles as an option, up from 54% five years ago, according to Towers Watson. Around 25% of companies offer these high deductible plans as the only option.

What’s happening is that the “average” insurance product in the marketplace is beingn degraded. Over a short period of time, there has been a dramatic and secular shift in the structure of health coverage, toward these more hollowed-out constructs. Spread across millions of consumers, in aggregate, Americans are now less insured for medical costs.

The earnings report from Community Health was an early financial harbinger of this trend. Collecting on these rising out of pocket costs will get more difficult for healthcare providers as the ObamaCare insurance designs become the new market standard. This will be ObamaCare’s legacy – a new standard for hollow health coverage."

Thursday, February 18, 2016

New York Times Editorial Board Urges Hillary to Back $15 Minimum Wage, Leaves Economic Reality Behind

By Charles Hughes of Cato.
"Yesterday, the New York Times editorial board called on Hillary Clinton to leave the realm of economic reality behind and join the ranks of those seeking to drastically increase the minimum wage to $15. The timing of this latest exhortation would almost be amusing, if it weren’t so disconcerting. It came the same day that four former Democratic chairs of the Council of Economic Advisers sent an open letter to her rival for the Democratic nomination Bernie Sanders citing concerns that some of the claims of his campaign “cannot be supported by the economic evidence.” The editorial board engages in its own bout of economic fantasy with the claim that “economic obstacles are not standing in the way” of more than doubling the minimum wage. Even Alan Krueger, author of one of the major studies finding negligible disemployment effects from a past minimum wage increase, took to the pages of the New York Times to oppose a $15 minimum because it is “beyond international experience, and could well be counterproductive.” 
In order to make their support for a $15 minimum seem more reasonable, the board alludes to a understanding among proponents of a higher minimum wage that a robust one equals half the average wage. These proposals generally use the median hourly wage, not the higher mean the board references, and getting to that ratio with a $15 minimum wage in 2022 would require wage growth higher than 5 percent, levels not seen in well over a decade. So it’s not only the Sanders campaign engaging in fanciful economic assumptions, and the NYT editorial board is right there with them. More reasonable wage growth assumptions would place a fully phased-in $15 minimum wage around the highest levels seen in the developed world. beyond the frontier of the existing economic literature. Such a move would make major negative unintended consequences near certain.

Even this could understate the problems with a federal $15 minimum wage, as some states and jurisdictions would be even less able to absorb the effects of such a radical increase. The editorial board asserts that the minimum wage needs to be increased at the federal level because some states have not raised it on their own. The piece fails to give any consideration to how less affluent parts of the country will fare under the proposed increase. In Puerto Rico, for instance, the current federal minimum wage is already 77 percent of the median hourly wage (France, for comparison is around 61 percent). While there are certainly other factors contributing to the crisis on Puerto Rico, the high minimum wag is a contributing factor, and doubling it would have disastrous consequences for the roughly 3.6 million people living there. The same dynamic to a lesser extent would hold for less affluent states like Alabama or Arkansas, especially in non-metro areas, where this increase would lead to a higher ratio relative to the median hourly wage than almost anywhere else in the developed world. This could have a devastating impact on state and local economies in these places, and exacerbate the serious problems with poverty and limited opportunity those places already grapple with.

These concerns aside, the minimum wage is an incredibly ineffective way to try to alleviate poverty, and would probably further limit the opportunities for affected workers. Few of the benefits of a higher minimum wage would accrue to families in poverty: with a $15 minimum wage, only 12 percent of the benefits would go to poor families, while 38 percent would go to families at least three times above the poverty line. Even worse, while some studies have indeed found past minimum wage increases had a limited impact on employment, others focusing on targeted workers (younger workers with lower skills) have found significant disemployment effects and reduced economic mobility for this group. Minimum wage increases are poorly targeted to reduce poverty, and could actually be counterproductive for the very people they are supposed to help.

The NYT editorial board’s call for Hillary to embrace the $15 minimum wage elevates intentions above outcomes, leaving behind valid questions about trade-offs for the realm of economic fantasy. Their piece ignores the concerns that an increase of that magnitude could have severe unintended consequences that could exacerbate many of the problems they would want it to address. Perhaps they should have perused their own archives, as the same editorial board said years ago, “[t]he idea of using a minimum wage to overcome poverty is old, honorable - and fundamentally flawed.”"

Inexperienced youths were among “the biggest losers from state intervention” in labor markets

See Bonus Quotation of the Day at Cafe Hayek.
"the concluding paragraph of the excellent new Cato Journal article by economists J. Wilson Mixon and E. Frank Stephenson entitled “Young and Out of Work: An Analysis of Teenage Summer Employment, 1972-2012” (link added):
Vedder and Gallaway (1993: 294) concluded that inexperienced youths were among “the biggest losers from state intervention” in labor markets. Our results suggest that same conclusion may be reached about teen summer jobs over the past four decades. Even after controlling for the adverse effects on teen summer employment of increased labor force participation by senior workers, cyclical macroeconomic factors, and, for male teens, the decline in manufacturing employment, increases in the real value of the minimum wage are found to have detrimental effects on teen employment, particularly for black teens.
Note that increased labor-force participation by senior workers is not independent of hikes in the minimum wage: the higher the wage, the more likely are retirees and housewives to enter the labor force in search of paid employment (and, hence, to displace less experienced and less skilled young people)."

Sunday, February 14, 2016

Misperceptions on Adam Smith (and F. A. Hayek)

By Peter Boettke at Coordination Problem.
"Many folks inside and outside of academic life believe that Adam Smith "invisible hand" theorem required a strong-version of the rationality and/or self-interest postulate.  Strong rationality assumption is necessary condition for the derivation of a strong version of the invisible hand.  Thus, any demonstration of the deviation from strong rationality indicates that at best only a weak version of the invisible hand could be derived.  Instead, as Joe Stiglitz likes to say we have a "palsied hand" that requires the helping or guiding hand of state.  Such examples of deviations from the strong rationality assumption would be asymmetric information, but also various weaknesses of will that produce myopia in decision making.

But, of course, Adam Smith did not hold any such position no matter how elegant the mid-20th century efforts to rationally reconstruct his system of thought to be consistent with the research program of general competitive equilibrium theory.  Yes, formal equilibrium theory was an elegant way to demonstrate the interconnectedness of economic activity, but NO, it was not an accurate portrayal of Smith's depiction of the coordination of economic activities without any central command. Smith wants to attract his readers with a mystery -- the mystery of cooperation and coordination in anonymity -- as he sets up the puzzle in the beginning pages of An Inquiry into the Nature and Causes of the Wealth of Nations* by capturing our imaginations with two thought experiments -- scarce he argues in our lifetime do we have the opportunity to make but a few close personal friends, yet our daily survival requires the cooperation and coordination of hundreds perhaps thousands of individuals we will never know, let alone meet even in passing; and he asks us to think deeper about this puzzle by demonstrating the numerous number of exchange relationships often at great geographic and social distance that must be realized in order for the day laborer to be able to wear his common-woolen coat.  It is in this context that he make his famous "not from the benevolence of the butcher, baker, brewer" point.  In this context, he is also making a fundamental point about the division of labor, the benefits of specialization, and the mutual advantages brought about through exchange.  The greatest increases in the well-being of mankind are due to increases in real-income, those increases in real-income only result from increases in real-productivity, and the greatest increases in the improvement in real-productivity are due to the division of labor -- its expansion and its refinement.  The division of labor, however, is limited by the extent of the market.  So the questions that any inquiry on development must raise is how does one move from an order defined by subsistence to an order defined by exchange.  And Smith's inquiry, like Hayek's, had little to do with the cognitive capacities of the economic actors being studies, but everything to do with the institutional infrastructure within which these very imperfect beings were attempting to live their lives and perhaps improve their situation, or the situation of their children.  Here is the important point to always stress -- absent that institutional infrastructure even strong rationality can go astray in generating the common-good.  The Smithian inquiry IS an inquiry into institutions and how those institutions impact human well-being.

Hayek understood this and sought to stress at various points.  In his essays "Notes on the Evolution of Systems of Rules of Conduct" footnote 10 (p 72 in his book Studies in Philosophy, Politics and Economics) Hayek points to what he calls "the unprofitable discussions about the degree of 'rationlity' which economic theory is alleged to assume."  And he explains further in his essay "The Results of Human Action but not of Human Design" (p. 100, ibid):
There was perhaps some excuse for the revulsion against Smith's formula because he may have seemed to treat it as too obvious that the order which formed itself spontaneously was also the best order possible.  His implied assumption, however, that the extensive division of labor of a complex society from which we all profited could only have been brought about by spontaneous ordering forces and not by design was largely justified.  At any rate, neither Smith nor any other reputable author I know has ever maintained that there existed some original harmony of interests irrespective of those grown institutions.  What they did maintain, and what one of Smith's contemporaries, indeed, expressed much more clearly than Smith himself ever did, was that institutions had developed by a process of the elimination of the less effective which did bring about a reconciliation of the divergent interests. (emphasis added)
The devil is always in the institutional details.  It is those institutions that determine whether our Hobbesian nature (rape, pillage, plunder) or our Smithian nature (truck, barter, exchange) come to characterize human interaction.  Weak rationality, in fact, very weak rationality, within the right institutional infrastructure will be filtered in a way that leads human beings from subsistence and a life that is nasty, brutish and short, to the extended exchange order that delivers human beings from the bondage of nature and frees them from the oppression of others.  This is why the theory of social cooperation under the division of labor is foundational for understanding economic development, and why the focus on the appropriate institutional infrastructure that enables that social cooperation to be realized is the critical step in the analysis.

Exchange and the institutions within which we engage in exchange, and not the individual decision calculus provides the microfoundations of our inquiry.  Buchanan brilliantly argued this position in "What Should Economists Do?"; Hayek stressed this in various ways throughout his long career; and Adam Smith and David Hume laid the foundation for our understanding of this core insight into the human condition.  We are dealing as social theorists with very imperfect human beings interacting in very imperfect institutional environments, we need to get our methodological and analytical perspective right in order to engage our studies.

*I use the full title because I want to emphasize the word inquiry, Smith's work, like that of Hayek, is an invitation to inquiry, not a catechism on settled doctrine. Awe and wonder, not fear and punishment are the driving attractors."

The shale revolution has changed the world

See Low oil prices are a good thing by Matt Ridley.
"The continuing plunge in the price of oil from $115 a barrel in mid-2014 to $30 today is really, really good news. I know just about every economic commentator says otherwise, predicting bankruptcies, stock market crashes, deflation, political turmoil and a return to gas guzzling. But that is because they are mostly paid to see the world from the point of view of producers, not consumers. Yes, some plutocrats and autocrats won’t like it, but for the rest of us this is a big cut in the cost of living. Worldwide, the fall in the oil price since 2014 has transferred $2 trillion from oil producers to oil consumers.

Oil is the largest and most indispensable commodity on which society depends, the vital energy-amplifier of our everyday actions. The value of the oil produced every year exceeds the value of natural gas, coal, iron ore, wheat, copper and cotton combined. Without oil, every industry would collapse — agriculture first of all. Cutting the price of oil enables you to travel, eat and clothe yourself more cheaply, which leaves you more money to spend on something else, which gives somebody else a job supplying that need, and so on.

Sure, the low oil price is partly a symptom of a weak global economy (and a mild winter), and yes, it has probably overshot so that many producers and explorers will go out of business, making some rebound in the oil price inevitable. Plus, it has utterly discredited the public-finance plans of the Scottish Nationalists who would be presiding over a cold version of Venezuela now if they had persuaded Scotland to vote for independence. But lower energy prices will boost living standards.
The shale revolution is the dominant reason for the fall. I know columnists are not supposed to say I told you so, but I did: “Oil prices look set to fall as America exploits a shale cornucopia,” I wrote here in 2013, when the price was persistently high: “Shale gas is old hat; the shale oil revolution is proving a world changer.” This was at a time when pessimistic predictions that we had reached “peak oil” were still widespread, and many thought oil prices would rise even further.

A combination of horizontal drilling and much improved hydraulic fracturing, first developed for shale gas, then adapted for oil, has unleashed a gusher from North Dakota and Texas in particular. It has taken the United States right back to the top of the oil-producing league, reversing a 30-year decline (of almost 50 per cent) in just three years. This is one of the most momentous innovations of the modern world.

The Price of Oil, a book by Roberto Aguilera and Marian Radetzki (fellow and professor of economics at universities in Australia and Sweden respectively), predicts that this shale revolution has a long way to go. Although the current low oil price is bankrupting many producers and explorers in North Dakota and elsewhere, and many rigs are now standing idle with jobs being lost, there has only been a very modest fall in production.

That is because the technology for getting oil out is improving rapidly and the cost is falling fast, so some producers can break even at $30 or even $20 a barrel and it takes fewer rigs to generate more oil. It is one of the cruel features of innovation that it usually benefits the consumers more than the inventors.

This means the shale industry can now put a lid on oil prices in future. Aguilera and Radetzki argue that not only is the US shale industry still in its infancy, but that there is another revolution on the way: when the price is right, conventional oil fields can now be redrilled with the new techniques developed for shale, producing another surge of supply from fields once thought depleted. They also expect that other countries — beginning with Australia, Argentina, China and Mexico — are ripe to join the technology revolution begun in American shale.

As a result, they calculate that, barring political crises, the oil price could well stay low till 2035 — about $40 to $60 a barrel in today’s prices. This is in sharp contrast to both the International Energy Agency and the US Energy Information Administration, which forecast an oil price in 2035 of $128 and $130 respectively. As Aguilera and Radetzki point out, the shale revolution has repeatedly made fools of forecasters, who persisted until very recently in seeing the shale-oil revolution as a flash in the barrel.

Why is the price of oil so volatile? I thought I knew the answer — scarcity and Opec — till I read Aguilera and Radetzki. They make the case that depletion has never been much of a factor in driving oil prices, despite the obvious drying up of certain fields (such as the North Sea today). Nor did Opec’s interventions to fix prices make much difference over the long run. What caused the price of oil to rise much faster than other commodities, though erratically and with crashes, they argue, was the result of one factor in particular.

There was a wave of nationalisation in the oil industry beginning in the 1960s. Today some 90 per cent of oil reserves are held by nationalised companies. ExxonMobil and BP are minnows compared with the whales owned by the governments of Saudi Arabia, Venezuela, Iran, Iraq, Kuwait, the United Arab Emirates, Nigeria and Russia. Post-colonial nationalisation affected many resource-based industries, but whereas many mineral and metal companies were privatised in the 1990s as their grotesque inefficiencies became visible, the same has not happened to state oil companies.

The consequence is that most oil is produced by companies that are milked by politicians, and consequently starved of cash (or incentives) for innovation and productivity. Lamenting “politicians’ extraordinary ability to mess things up”, the two authors note “the severely destructive role that can be played by political fights over the oil rent and its use”.

If politicians don’t get in the way, and we have two decades of relatively cheap oil it will be bad news for petro-dictators, oil-igarchs, Isis thugs, and the promoters of wind power, solar power, nuclear energy and electric cars. But it is good news for everybody else, especially those on modest incomes."