Sunday, July 31, 2016

Forced Labor in Venezuela

By David Henderson of EconLog.
"Well, Venezuela's government has now taken the next step--to forced labor.

Here's Richard Washington, "Venezuela calls for mandatory labor in farm sector," on CNBC:

A Venezuelan ministry last week announced Resolution No. 9855, which calls for the establishment of a "transitory labor regime" in order to relaunch the agricultural and food sector. The decree says that the government must do what is "necessary to achieve strategic levels of self-sufficiency," and states that workers can be forcefully moved from their jobs to work in farm fields or elsewhere in the agricultural sector for periods of 60 days.
Erika Guevara Rosas, Americas director at Amnesty International, stated:
Trying to tackle Venezuela's severe food shortages by forcing people to work the fields is like trying to fix a broken leg with a band aid.
Good for her for pointing out the futility of the measure but her analogy is inexact because it understates the damage done by the forced-labor measure. A band aid is low-cost. Shifting labor out of its current uses is potentially high-cost.

Here's a better analogy although it's inexact in the opposite direction:

Trying to tackle Venezuela's severe food shortages by forcing people to work the fields is like trying to fix a broken leg by breaking one's arm.

This gets right the damage done to the non-food sector because labor used in agriculture cannot be used elsewhere. It may slightly understate the benefit to the ag sector because, while breaking an arm does nothing for the broken leg, shifting non-ag labor to the ag sector may increase agricultural output somewhat. But not by much because the non-ag labor is not particularly good at ag labor, which is one reason it's not in ag labor.

But the whole thing--both her analogy and mine--ignores the horror of the situation. One of the biggest accomplishments of the last two centuries has been the elimination of slavery, much of which was used in agriculture--in most of the Western world. Venezuela's government has taken a further step back to that horrible institution.

At long last, Nicolas Maduro, have you no sense of decency? Have you no shame?"

Friedman's contributions are not passé and economists and the general public should invest further in learning or caring about these insights

Noah Smith on Milton Friedman by Emily Skarbek of EconLog. 
"In commenting on Milton Friedman's contributions to economics, it was once remarked that "attempting to portray the work of Milton Friedman . . . is like trying to catch the Niagara Falls in a pint pot." In yesterday's Bloomberg View, however, Noah Smith argues that it is time economists give up on Milton Friedman's biggest idea - the Permanent Income Hypothesis (PIH). 
It seems to me that Smith has chosen to take one of the many contributions of Milton Friedman - far from his biggest or most important idea, I would argue - and give some examples of why it may not hold in particular cases. Smith then uses this to suggest that Friedman's contributions are passé and economists and the general public should not invest further in learning or caring about these insights.
If this were true, what would the public be missing? Here are just a few:

1. Friedman's theory concerning the positive relationship between economic freedom and political freedom. Friedman long argued that political freedoms are inextricably related to economic freedom. In today's political climate, I would argue the public discussion desperately requires a renewed understanding of this relationship and what it means for questions of immigration, civil liberty, healthcare, security, war on terror, etc. Political campaigns in the UK and the US capitalise on the ability to decouple questions of political freedoms from their related economic freedoms.

2. Friedman ended the military draft in the United States. A topic David Henderson has written on extensively - for example, see here, here, and here.

3. Friedman and Schwartz showed that the Federal Reserve's monetary policies were largely to blame for the severity of the Great Depression. An important contribution with which even Ben Bernanke agrees. More generally, Friedman brought renewed understanding to the dangers of inflation and central banks as a source of macro -instability.

4. Friedman argued for ending the war on drugs. A policy long overdue.

5. Friedman argued for how markets work to weed out discrimination and provide opportunities for discriminated groups to overcome bias. These ideas are under-explored when it comes to understanding processes of social change. When minority groups face political discrimination, markets and civil society can provide in-routes to positive change. For an illustration, consider the case of the Green Book. [a book that told travelers where hotels and restaurants that would serve blacks were located]

4. Occupational licencing - for contemporary relevance see the recent CEA report; the costs of government-supplied public schooling; negative-income tax (or its political manifestation, the Earned Income Tax Credit).

Finally, to go back to Noah Smith's examples of how the PIH doesn't hold, it is curious that each of his examples involves relatively small windfall gains, not investment decisions. Smith looks at evidence relating to things like a bonus at work, or a tax refund, or a government stimulus check. It seems to me that the PIH is a useful way to understand personal investments decisions over one's lifetime. For example, why young people who expect (even if inaccurately in many cases) to have high earnings after college incur student loans instead of directly entering the workforce. Or why people take out 30 year mortgages to buy homes. It doesn't seem surprising that in some instances people's behavior does't conform to the exact predictions of consumption smoothing at any given point in time (for possibly many reasons - individual time preference, cognitive biases, etc). But that also doesn't mean it isn't a useful way to understand a general life cycle pattern of lower consumption/higher borrowing when young ; high consumption/higher savings or debt repayment when older; and lower consumption/dis-savings during retirement.

You don't have to believe that markets are always efficient to see that many people think Friedman's arguments are worth taking seriously. Just look at his citations."

Saturday, July 30, 2016

If the IKEA units were as safe as an average vehicle they would have caused 67,000 deaths, not six

See Wasting Resources in the Name of Protection. Letter to the editor of the WSJ by
"The July 22 letter from Nancy A. Cowles and Rachel Weintraub regarding an IKEA furniture recall shows the authors disturbingly unable to grasp the meaning of numbers. Numeracy is crucial to evaluating risk and danger—and that level of ignorance from two apparent professionals in consumer product safety is frightening.

Twenty-nine million IKEA units caused six child deaths over 27 years. If a single-unit recall costs a modest $25, that means $725 million is required upfront to prevent six deaths over the next 27 years (at 5% a year, a final cost of $450 million per death). That is surreal waste (if not to class-action lawyers). The authors assert, inanely: “the ‘millions were sold and only six children died’ argument is specious.” No, to the educated it is called “rational.” If the IKEA units were as safe as an average vehicle they would have caused 67,000 deaths, not six. As it is, a unit’s owner would wait on average 130 million years before a child death. Yet the Consumer Product Safety Commission director urged owners to respond quickly.

For decades the Journal has exposed frivolous tort litigation and warned about its consequences. Innumeracy, like junk science, is often crucial to such claims."

Andrew K. Gabriel, Ph.D.
South Pasadena, Calif."

Make America Grow Again:The economy is stuck on 1% growth as business investment stalls

From a WSJ editorial. Excerpts:
"since last September the economy has pumped the brakes from the 2.2% average from 2012-2015 into a near-stall speed of about 1%. Seven years after the recession ended, President Obama on Wednesday took credit for an economy that he called “stronger and more prosperous than it was when we started.”"

"The President didn’t mention that the current recovery, the one on his watch that began in June 2009, is easily the weakest since World War II."

"business investment fell at a 2.2% pace[in the 2nd quarter], and companies ran down inventories for the fifth consecutive quarter." 

"The investment plunge is a signal that business is on strike, or at least depressed by uncertainty. Most CEOs will be risk-averse and conservative with their balance sheets until they see signs of a growth rebound, even though they’re sitting atop piles of cash and the cost of capital is at all-time lows. They will also hold off investing until they have a better sense of the future tax and regulatory burdens they are likely to face next year.

They can’t be re-assured by what they heard in Philadelphia, where the Obama-Clinton Democrats promised more of the policies that have stifled growth the last eight years. “Wall Street, corporations and the super-rich are going to start paying their fair share of taxes,” Hillary Clinton declared.

Start? The richest 1% already pay about 38% of federal income tax revenue. And perhaps Mrs. Clinton will disclose which sage economic advisers have told her that raising taxes on business will yield more business investment. We were taught that if you tax something you get less of it. Mr. Obama’s unprecedented wave of regulatory costs is another main reason business isn’t investing. Yet Mrs. Clinton promised more costly rules on finance, health care, drug prices, mandated wages and benefits, and more."

Free tuition for most families could exacerbate existing inequalities and further stratify higher education

See Notable & Quotable: The ‘Free College’ Cascade from the WSJ.
"From “How Clinton’s ‘Free College’ Could Cause a Cascade of Problems,” July 27 in the Chronicle of Higher Education:
The first in line for harm, most experts agree, would be the private colleges. . . .

“You’re going to see a combination of dropping enrollments and skyrocketing tuition discounting,” [ Kent John Chabotar, a former president of Guilford College] says, “killing off the weaker, private, unendowed colleges.” The migration to public institutions wouldn’t have to be universal to be devastating, he says. Some institutions would have difficulty absorbing even a 5- to 10-percent drop in enrollment. . . .

So let’s say that migration happens, and a new crop of students chooses public institutions over the privates. Good news for the publics, right? Maybe not. It’s unclear that regional publics and community colleges have enough capacity. . . .

“Do we really think in this fiscal environment, if a state makes higher education free, they’ll increase funding that much?” [ Donald Hossler, a scholar at the USC Rossier School of Education] asks. Colleges, he says, would soon be expected to educate more people with fewer resources per student. The quality of public education could erode. . . .

In fact, some experts worry that free tuition for most families could exacerbate existing inequalities and further stratify higher education. While poor students would attend crowded, lower-tier public colleges at no cost, affluent students could buy their way into elite colleges—public or private—where they might get a different kind of education from everyone else."

Friday, July 29, 2016

As Corn Devours U.S. Prairies, Greens Reconsider Biofuel Mandate

By Jennifer A Dlouhy of Bloomberg. Excerpt:
"Environmentalists who once championed biofuels as a way to cut pollution are now turning against a U.S. program that puts renewable fuels in cars, citing higher-than-expected carbon dioxide emissions and reduced wildlife habitat.

More than a decade after conservationists helped persuade Congress to require adding corn-based ethanol and other biofuels to gasoline, some groups regret the resulting agricultural runoff in waterways and conversion of prairies to cropland -- improving the odds that lawmakers might seek changes to the program next year.

"The big green groups that got invested in biofuels are tacitly realizing the blunder," said John DeCicco, a research professor at the University of Michigan Energy Institute who previously focused on automotive strategies at the Environmental Defense Fund. "It’s really hard for the people who really -- shall we say -- hate oil viscerally, to think that this alternative that we’ve been promoting is today worse than oil."

The green backlash could give a boost to long-stalled congressional efforts to overhaul the Renewable Fuel Standard, including proposals to limit the amount of traditional, corn-based ethanol that counts toward the mandate, as environmentalists side with anti-hunger groups and even the oil industry in calling for change. The RFS forces refiners to blend steadily escalating amounts of biofuel into the gas supply. Most of the mandate is currently fulfilled by corn-based ethanol, which makes up nearly 10 percent of U.S. gasoline and provides oxygen that helps the fuel burn cleaner.

Broken Promise

The Natural Resources Defense Council used a 96-page report in 2004 to proclaim boundless biofuel benefits: slashed global warming emissions, improved air quality and more wildlife habitat.

Instead, farmers plowed millions of acres of prairie grasses to grow corn for making ethanol, with fertilizer runoff contributing to a dead zone in the Gulf of Mexico. Scientists warned that carbon dioxide emissions associated with corn-based ethanol were higher than expected. And alternatives using switchgrass, algae and other non-edible plant materials have been slow to penetrate the market.

"The ethanol policy was sold to environmentalists as something that was going to clean up the environment, and it’s done anything but," said Democratic Representative Peter Welch of Vermont, who is co-sponsoring legislation to revamp the RFS. "It’s truly been a flop. The environmental promise has been transformed into an environmental detriment."

‘Unintended Consequences’

The Environmental Working Group, Clean Air Task Force and Friends of the Earth argue that the program has propelled corn-based ethanol without delivering a similar boost to advanced biofuels with potentially bigger climate benefits.

Collin O’Mara, president of the National Wildlife Federation, told a House committee last month that the RFS program, created with "good intentions," has instead wreaked "severe, unintended consequences," including the loss of prairie land and water-supply damage that threatens wildlife.
Even the NRDC that once lobbied for the RFS bemoans that "the bulk of today’s conventional corn ethanol carries grave risks to the climate, wildlife, waterways and food security." In NRDC’s "OnEarth" magazine, an essay headlined "Played for a Fuel" argues that corn-based ethanol isn’t sustainable because it requires "huge amounts" of water, fertilizer and land.

NRDC spokesman Ed Chen said the group continues to monitor the RFS "because low-carbon cellulosic biofuels can play an important role in reducing transportation pollution,” but added that the organization is “far more focused” on other carbon-cutting strategies with more immediate climate payoffs."

Are Libertarians Anti-Government?

By David Boaz in 1998.
"For the past several years, especially since the Oklahoma City bombing, the national media have focused a lot of attention on “anti-government” extremists. Libertarians, who are critical of a great deal that government does, have unfortunately but perhaps understandably been tossed into the “anti-government” camp by many journalists.

There are two problems with this identification. The first and most obvious is that many of the so-called anti-government groups are racist or violent or both, and being identified with them verges on libel.

The second and ultimately more important problem is that libertarians are not, in any serious sense, “anti-government.” It’s understandable that journalists might refer to people who often criticize both incumbent officeholders and government programs as “anti-government,” but the term is misleading.

A government is a set of institutions through which we adjudicate our disputes, defend our rights, and provide for certain common needs. It derives its authority, at some level and in some way, from the consent of the governed.

Libertarians want people to be able to live peacefully together in civil society. Cooperation is better than coercion. Peaceful coexistence and voluntary cooperation require an institution to protect us from outside threats, deter or punish criminals, and settle the disputes that will inevitably arise among neighbors— a government, in short. Thus, to criticize a wide range of the activities undertaken by federal and state governments—from Social Security to drug prohibition to out-of-control taxation—is not to be “anti-government.” It is simply to insist that what we want is a limited government that attends to its necessary and proper functions.

But if libertarians are not “anti-government,” then how do we describe the kind of government that libertarians support? One formulation found in the media is that “libertarians support weak government.” That has a certain appeal. But consider a prominent case of “weak government.”

Numerous reports have told us recently about the weakness of the Russian government. Not only does it have trouble raising taxes and paying its still numerous employees, it has trouble deterring or punishing criminals. It is in fact too weak to carry out its legitimate functions. The Russian government is a failure on two counts: it is massive, clumsy, overextended, and virtually unconstrained in scope, yet too weak to perform its essential job. (Residents of many American cities may find that description a bit too close for comfort.)

Not “weak government,” then. How about “small government”? Lots of people, including many libertarians, like that phrase to describe libertarian views. And it has a certain plausibility. We rail against “big government,” so we must prefer small government, or “less government.” Of course, we wouldn’t want a government too small to deter military threats or apprehend criminals. And Washington Post columnist E. J. Dionne, Jr., offers us this comparison: “a dictatorship in which the government provides no social security, health, welfare or pension programs of any kind” and “levies relatively low taxes that go almost entirely toward the support of large military and secret police forces that regularly kill or jail people for their political or religious views” or “a democracy with open elections and full freedom of speech and religion [which] levies higher taxes than the dictatorship to support an extensive welfare state.”

“The first country might technically have a ‘smaller government,’” Dionne writes, “but it undoubtedly is not a free society. The second country would have a ‘bigger government,’ but it is indeed a free society.”

Now there are several problems with this comparison, not least Dionne’s apparent view that high taxes don’t limit the freedom of those forced to pay them. But our concern here is the term “smaller government.” Measured as a percentage of GDP or by the number of employees, the second government may well be larger than the first. Measured by its power and control over individuals and society, however, the first government is doubtless larger. Thus, as long as the term is properly understood, it’s reasonable for libertarians to endorse “smaller government.” But Dionne’s criticism should remind us that the term may not be well understood.

So if we’re not anti-government, and not really for weak or small government, how should we describe the libertarian position? To answer that question, we need to go back to the Declaration of Independence and the Constitution. Libertarians generally support a government formed by the consent of the governed and designed to achieve certain limited purposes. Both the form of government and the limits on its powers should be specified in a constitution, and the challenge in any society is to keep government constrained and limited so that individuals can prosper and solve problems in a free and civil society.

Thus libertarians are not “anti-government.” Libertarians support limited, constitutional government—limited not just in size but, of far greater importance, in the scope of its powers."

Thursday, July 28, 2016

Nordic Socialism Isn't the Answer for America

By Nima Sanandaji writing for FEE. Nima Sanandaji is a research fellow at CPS,  and the author of Scandinavian Unexceptionalism available from the Institute of Economic Affairs. Excerpts:
"Will Americans benefit from longer life spans and lower poverty if they adapt Nordic-style welfare models? According to Bernie Sanders, Democrat activists, left-of center intellectuals, and journalists, the answer seems to be yes. However, as I show in my new book Debunking Utopia – Exposing they myth of Nordic socialism, much of this is built upon misconceptions about Nordic societies:
  • Yes, it is true that Nordic societies combine high living standards with large welfare states. However, numerous studies show that the high tax systems significantly impede the living standard in these countries. Nordic countries compensate for large public sectors by having strong working ethics and adapting market-friendly reforms in other fields. The lesson for America certainly isn’t that higher taxes will create more prosperity, but rather the opposite.
  • Nordic societies did not become successful after introducing large welfare states. They were economically and socially uniquely successful already in the mid-20th century, when they combined low taxes and small welfare states with free-market systems.
  • The root of the high levels of equality, the economic prosperity, the high levels of trust and other advantageous social features of the Nordics seem to be a unique culture rather than unique policies. After all, Spain, Italy, and France also have large welfare states, built upon the ideals of democratic socialism. Why doesn’t the American left believe that US society would evolve to resemble Southern Europe after introducing a large welfare state?
  • Over time, the generous welfare states of Nordic nations have created massive welfare dependency, gradually eroding the strong norms of responsibility that undermine the region's success. This, combined with the growth-reducing effects of a large state, explains why Nordic countries have gradually, over the past decades, moved towards less-generous welfare, market reforms, and tax cuts.
  • The combination of open borders, high taxes, and generous welfare systems has been anything but a success in Sweden. The open-border policies that Sweden experimented with in 2015 lead to a massive influx of new arrivals, who are finding it very difficult to integrate in the country. The result is massive social tension and increasing poverty. Countries such as the US, Canada, Australia, New Zealand, and even the UK are much better at integrating the foreign-born in their labor markets.
Lastly, while the idea of Nordic-style democratic socialism is all the rage among the left in the US and other countries, in the Nordic countries themselves social democracy has never been weaker than today. In Denmark, the social democrats themselves have introduced massive market reforms and called for a much slimmer welfare state. In Sweden, the only one of the Nordic countries to currently be led by a center-left government, the Social Democrats are polling their lowest support in modern times."

Lack of exercise costs world $67.5B and 5M lives a year

From Fox News.
"A study of one million people has found that physical inactivity costs the global economy $67.5 billion a year in healthcare and productivity losses, but an hour a day of exercise could eliminate most of that.

Sedentary lifestyles are linked to increased risks of heart disease, diabetes and cancer, researchers found, but activity - such as brisk walking - could counter the higher likelihood of early death linked with sitting for eight or more hours a day.

Such inactivity is estimated to cause more than 5 million deaths a year - almost as many as smoking, which the World Health Organization (WHO) says kills 6 million a year.

Giving details of their findings at a briefing in London, the international team of researchers warned there has been too little progress in tackling a "pandemic of physical inactivity".

Ulf Ekelund, a professor at the Norwegian School of Sports Sciences and Cambridge University, said that WHO recommendations for at least 150 minutes of moderate exercise a week was probably not enough. A quarter of adults worldwide do not meet even the WHO's recommendations.

"You don't need to do sport or go to the gym ... but you do need to do at least one hour a day," he said, giving walking at 5.6 km an hour (km/h) or cycling at 16 km/h as examples of what was needed.
People who sat for eight hours a day but were otherwise active had a lower risk of premature death than people who spent fewer hours sitting but were also less active, suggesting that exercise is particularly important, no matter how many hours a day are spent sitting.

The greatest risk of premature death was for people who sat for long periods of time and did not exercise, according to the findings, published in The Lancet on Wednesday.

In another of the series of four studies, researchers estimated healthcare costs and productivity losses for five major diseases linked to lack of exercise - heart disease, stroke, diabetes, breast cancer and colon cancer - cost $67.5 billion globally in 2013.

Melody Ding of the University of Sydney, who led this part of the research, said the costs occur largely in wealthier countries, but as poorer countries develop, so too will the economic burden of chronic diseases linked to inactivity."

Wednesday, July 27, 2016

Pot legalization has not had the negative effects that drug warriors predicted

See Remorse by Scott Sumner. Excerpt:
"Tyler Cowen linked to a Wonkblog post that suggested pot legalization has not had the negative effects that drug warriors predicted:

National surveys have shown that teen marijuana use rates are falling across the country. But there haven't been many numbers available specifically for states such as Colorado and Washington where it is legal. Federal data released late last year showed that teen use rates in Colorado and Washington were essentially flat, but they covered only 2014, the first year commercial marijuana was available in those states. 
The latest data from Colorado includes 2015, reflecting two full years of the legal marijuana market's effect. These numbers give the strongest indication yet that fears of skyrocketing adolescent use have not materialized.
Here are some of the groups opposed to pot legalization:
Among the groups opposing marijuana legalization in the state are the California Hospital Association and the California Correctional Supervisor's Association. The state's report on the measure's fiscal impact on state and local government shows it could save "tens of millions of dollars to potentially exceeding $100 million annually" due to savings in the courts, police and corrections.
Of course, saving money on corrections means a loss of income to corrections officers."

Raising the minimum wage is not the best way to fight income inequality because it will increase the rate of job automation

What Not to Do As Robots Take More Jobs: To compete with artificial intelligence, low-wage workers need more opportunities to qualify for high-wage jobs by Joy Buchanan of Mercatus. Excerpt:
"Leading computer scientists at the Future of Life Institute last year wrote an open letter warning policymakers of the risks posed by artificial intelligence. A primary concern is that many jobs will become automated, filled machines. It's a problem if people do not adapt, but one piece of good news is that high-paying jobs in the tech sector are motivating millions of people to learn how to use computers.

Until more people leave low-wage jobs for high-wage jobs, we will have income inequality. Because of income inequality, jobs exist for people who are not ahead of the technological revolution, and higher wages in the tech sector are directing people toward the jobs that will be more profitable and secure in the future. A young person who is about to go to college can see that a computer programmer can make a lot of money. This motivates students to work through difficult technical courses. And you don't have to go to college if you do college-level courses online for free.

Meanwhile, the minimum wage is rising in certain states. Fighting income inequality by making it illegal to work for less than $15 per hour, when technological change already threatens many jobs, is harmful to people who have not re-skilled their trade yet. Teenagers have not had time to build skills. Young people will have to spend even more time in school or in illegal jobs just to reach the first rung of the career ladder. If adults do not want to learn a new trade or might not want to move to a new city, they should still have the right to participate in the economy right where they are.

In order to help low-income workers and reduce income inequality, the focus could be on creating a system that gives more people the opportunity to qualify for high-wage jobs. Not everyone needs to apply to high-wage jobs for wages to equalize. There just have to be enough people trying to fill those positions that competition drives the wage of those high-wage jobs down while the shortage of people applying for other jobs raise wages elsewhere.

Let companies experiment and compete to successfully navigate the new employment frontier blazed by artificial intelligence.

The moral anchor of the high minimum wage movement is that parents who work full time can live below the poverty line. A law to raise the minimum wage will help some low-income families, but it will also hurt some of them. Less harm would be done if tax-payers gave direct assistance to low-income families.

There is no doubt that raising the minimum wage will reduce job growth and that everyone will pay higher prices at the store since labor costs will rise. If the economy shrinks and prices rise, it's not just rich people who will get hurt. A shrinking tax base will mean fewer social services like Medicaid. Making it harder for humans to compete with robots will ultimately hurt low-income families.

If prices are allowed to move freely, then the problem of who goes where as more robots join the economy will be solved faster because prices communicate information. No one knows exactly where the greatest demand for human workers will be next year, but market wages will immediately indicate where the need is. The way for a community to become rich is to use this information from market prices and to help more people who want high-wage jobs to get them."

Worry about Lack of New Banks, Not 'Record Profits'

By Stephen Matteo Miller of Mercatus.
"The House Committee on Oversight and Government Reform just had a hearing about the Federal Deposit Insurance Corporation's (FDIC) application process for de novo (new) banks. The purpose of the hearing was to uncover why we have so few new banks of late: Is it the slow economy and low interest rates, the regulations or something else driving away new applicants? Maybe the answer is: all of the above.

As a recent Federal Reserve Bank of Richmond study showed, the number of new banks has declined significantly since 2009. The decline coincided with the end of the crisis and the FDIC's prolonging of the de novo period, during which new banks must adhere to their capital plans, from three to seven years. (Interestingly, an earlier Richmond Fed study observed how the FDIC similarly tried to restrict entry after the much larger number of Depression-era failures.) That the FDIC reversed this rule earlier this year could mean staff there acknowledge the rule's adverse effects.

On the other hand, another study by Federal Reserve Board economists found that non-regulatory economic factors, such as low interest rates and other measures of economic activity that drive down profitability, explained at least 75 percent of the decline in new banks. The authors do not measure the effects of specific regulations, merely the increase or decrease in the number of de novo banks after the passage of a law. Still, the study does find that the Dodd-Frank Act, together with the FDIC's rule change, had the largest (and most negative) effect of any previous law on new bank applications. That means laws and regulations probably have some effect, even if we cannot precisely measure it.

Moreover, as my colleague Patrick McLaughlin shows in a recent co-authored study, the regulatory restrictions embodied in the Code of Federal Regulations may have reduced gross domestic product (GDP) in recent years by as much as $4 trillion. With a relatively smaller economy, it's easy to believe fewer opportunities would exist for bankers.

A related and unresolved issue that came up during the recent congressional hearing was the "record profits" in the banking industry and whether those profits could be consistent with reports of declining profitability. Yes, industry profits in dollars may be at record high levels, but so are total U.S. banking assets and GDP (which might be higher with fewer regulatory restrictions). "Record profits" in dollar terms could just reflect the fact that the economy as a whole (as measured in dollar values), not just the banking industry, is larger than ever before. Just as people may experience a decline in income while GDP rises to record highs, banks may experience declining profitability even with "record profits" for the industry.

Finally, some at the hearing voiced concerns about the decline in the total number of banks. Barriers to entry exist, which could present problems for the longer-term performance of the industry, but the total number of banks is also affected by industry consolidation.

Written before the 1994 Riegle-Neal Act, which paved the way for interstate banking and consolidation at the federal level, a Richmond Fed study conjectured that interstate banking would mean the number of banks would decline. The study suggested, as a simple thought experiment, comparing the number of banks to the size of the population to get a rough estimate of how many banks might exist without the geographic barriers to banking.

According to the study, inferring from California's banking industry and population, the number of banks under interstate banking might be as high as 3,700. On the other hand, inferring from Canada's banking industry and population, the number of banks under interstate banking might be as low 75 banks (with most operating branches nationwide). All this is to say, we're likely still way above the range we might expect to see with competitive interstate banking.

Going forward, proposed laws and regulations that favor banks of a certain size or scope, such as the GOP's new plan to bring back the Glass-Steagall Act, reflect a return to our error-prone past. Neither the Great Depression nor the recent crisis were about the divide between commercial and investment banking. And as Professors Charles Calomiris and Stephen Haber wrote about in their book "Fragile by Design," we've had many banking crises throughout U.S. history, largely because of such policies. Let's let customers decide the number, size and scope of their banks, not lawmakers and regulators, no matter how well-intentioned."

Need a striking example of why a 107% increase in the federal minimum wage to $15 an hour is a bad idea?

See The Fight for $15 Will Hit North Philly Hard: Not far from Democrats’ soiree, teen unemployment is at 42%. What if the minimum wage doubles? by Mark J. Perry and Michael Saltsman in the WSJ. Excerpts:
"If delegates to the Democratic convention in Philadelphia this week need a striking example of why a 107% increase in the federal minimum wage to $15 an hour is a bad idea, they need only travel a few miles north of the city’s convention center on Broad Street.

In the heart of North Philadelphia—represented by ZIP Codes 19121, 19122, 19132 and 19133—the unemployment rate for teenagers averages 42%, according to 2014 data (the most recent available) from the Census Bureau’s American Community Survey. The employment rate for teens residing in these ZIP Codes is an astonishingly low 14%—only one in seven has a job. (Nationwide, roughly one in three teens is employed.) Young adults in North Philadelphia ages 20 to 24 don’t fare much better: Their jobless rate averages 28%.

The city’s north side faces these crisis-level rates of youth joblessness with a starting wage—$7.25 an hour—that’s consistent with the historical inflation-adjusted average minimum wage in the U.S. of $7.40. If anything, the current minimum wage is too high, given the large numbers of unemployed youths who can’t find a job. The consequences of more than doubling it to $15 an hour would be disastrous.

By significantly reducing the available stock of job opportunities at the bottom end of the career ladder, a higher minimum wage increases the likelihood that unemployed teens will seek income elsewhere. A 2013 study by economists at Boston College analyzed increases in state and federal minimum-wage levels between 1997 and 2010. It found that low-skill workers affected by minimum-wage hikes were more likely to lose their jobs, become idle and commit crime. The authors warn that their results “point to the dangers both to the individual and to society from policies that restrict the already limited employment options of this group.”"

Tuesday, July 26, 2016

Why Unemployment Is Lower When Immigration Is Higher

By David Bier of Cato.
"“We are going to have an immigration system that works, but one that works for the American people,” Donald Trump told the Republican National Convention last week. “Decades of record immigration have produced lower wages and higher unemployment for our citizens.” But the candidate is wrong in two respects. First, the United States has not seen “record” immigration in recent years, and second, higher immigration is not associated with higher unemployment. Immigrants are heralds of growth, not portents of economic disaster. 

Recent immigration is no record

The amount of immigration to the United States can be measured in two ways. The most obvious is the absolute number of people receiving permanent residency in the United States. By this measure, the peak year was 1991 with 1.8 million. Even by this measure, Trump is wrong. Rather than “decades of record immigration,” out of the top ten highest levels of all time, five occurred since 1990 and five before 1915.

But measuring immigration in terms of the absolute number of permanent residents is narrow and misleading. The biggest problem is that it implies that a million immigrants entering China, with a population of 1.4 billion, would have the same effect on employment as a million entering Estonia with a population of 1.2 million. Clearly, to understand the impact of immigration, you need to control for the size of the destination country.

Table 1: Top Ten Immigration Rates and Immigration Levels 1820 to 2014
  Year Rate   Year Number
1 1854 1.61% 1 1991 1,826,595
2 1850 1.59% 2 1990 1,535,872
3 1851 1.58% 3 1907 1,285,349
4 1882 1.50% 4 2006 1,266,129
5 1852 1.49% 5 1914 1,218,480
6 1907 1.48% 6 1913 1,197,892
7 1853 1.43% 7 2009 1,130,818
8 1849 1.31% 8 2005 1,122,257
9 1881 1.30% 9 2008 1,107,126
10 1906 1.29% 10 1906 1,100,735
Present 2014 0.32% Present 2014 1,016,518 
Source: Department of Homeland Security. “2014 Yearbook of Immigration Statistics.”  

By this measure, that “record year” of 1990 comes in 52nd overall. Rather than decades of record immigration, we see decades of below average immigration. Indeed, per capita immigration during the current decade is almost 30 percent lower than the historical average, and five times less than the record rates in the 19th and 20th centuries.

Figure 1: Immigration Rates (1820 to 2014) and Unemployment Rates (1890 to 2014)

Sources: Immigration: Department of Homeland Security. “2014 Yearbook of Immigration Statistics.” Unemployment: Census Bureau. “Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970.” p. 135 and Bureau of Labor Statistics via Federal Reserve Bank of St. Louis. “Fred Economic Data: Civil Unemployment Rate.” 

Higher immigration is not associated with higher unemployment

The other obvious aspect of the above visual is that the years with higher immigration do not coincide with the years with highest unemployment.* In fact, the reverse is true. Unemployment is highest when immigration is lowest. During years when immigration was above the historical average, unemployment was 5.7 percent. During all other years, it was 7.2 percent, a difference of 1.5 percent. If you exclude years where unemployment dropped solely because of the draft, during the World Wars, the difference rises to 1.8 percent.

Figure 2: Unemployment During Years with Immigration Rates Above and Below the Average (1890-2014)

Sources: See figure 1.

This relationship is statistically significant, but its magnitude is obscured by non-market phenomena, such as the draft as well as immigration quotas that interfere with market forces. If we confine our focus to the pre-World War I period, we can see a much higher degree of coincidence between low unemployment and high immigration.

Figure 3: Immigration and Unemployment Rates (1890 to 1915)

Sources: See figure 1.

The years in which the immigration rate exceeded the average for the period had an unemployment rate 5.5 percent lower than those below the average. The magnitude of the relationship is also quite large: roughly 20 percent of the variability in the immigration rate can be explained by the unemployment rate alone over this period.

The relationship becomes much stronger when you focus on economic migrants only. I’ve previously noted this phenomenon in H-1B temporary work visa applications. When unemployment is high in the top H-1B fields, employers submit dramatically fewer applications. Companies hire foreign workers when they are making general increases in employment, not when they are laying off workers.
To be clear, immigrants are not causing the unemployment rate to move up or down. The economic literature on this point is quite unambiguous: immigrants cause essentially no effect on the unemployment rate one way or another. Rather, the causation is the other direction. Immigrants come during periods of economic growth when companies are hiring new workers, both immigrants and natives.

Trump is mistaken to associate unemployment with immigrants. They are a sign of good times, not bad.

*Unemployment did not begin in 1890, but that is the first year in which comparable numbers are available. Note that pre-1948 numbers refer to individuals over the age of 14, all others over 16"

Land Everywhere and Not a Place to Live

By Alex Tabarrok of Marginal Revolution.
"Land use regulations raise prices, reduce mobility and increase income inequality in the United States. In many parts of the developing world, however, the situation is worse, much worse.
In an excellent piece Shanu Athiparambath writes:
Land is not scarce in Delhi, as I learned in one of those days, when a friend drove me around the city. There is enough land for everybody to live in a mansion. Delhi has nearly 20,000 parks and gardens. Large tracts of land remain idle or underutilized, either because the government owns it, or because property titles are weak. Politicians and senior bureaucrats live in mansions with vast, manicured lawns in the core of the city. Some of these political eminentoes farm on valuable urban land while firms and households move to the periphery or satellite cities where real estate prices are lower. So the average commute is long, roads are too congested, and Delhi is one of the most polluted cities in the world.
Zoning regulations inflict great harm. But it is difficult for Americans to imagine the cost of zoning in Indian cities. Delhi is one of the most crowded cities in the world, and there is great demand for floor space. But real estate developers are not allowed to build tall buildings. In Delhi, for apartment buildings, the regulated Floor Area Ratio (FAR) is usually 2. FAR, an urban planning concept, is the ratio of built-out floor space to the area of the plot.
This means, in Delhi, developers are not allowed to build more than 2,000 square feet of floor space on a 1,000 square feet plot. If a building stands on the whole plot, this would be a two-storey building.
To understand the harm this inflicts on the world’s second-most populous city, remember that in Midtown Manhattan, FAR can go up to 15. In Los Angeles, it can get as high as 13, and in Chicago, up to 12. In Hong Kong’s downtown, the highest FAR is 12, in Bahrain it is 17, and in Singapore it can get as high as 25. Not surprisingly, office space in Delhi’s downtown is among the most expensive in the world. It is impossible to profitably redevelop these crumbling buildings in Delhi’s downtown because they are under rent control.
You might expect the capital city to be especially restrictive, just as is Washington, DC, but in Mumbai, the densest major city in the world, the downtown FAR is an absurdly low 1.33.
Think about it like this: A FAR is like a tax on manufacturing land. Why would you impose prohibitive taxes in places where land is most desperately needed?"

Where there are property rights there is sustainability

See “Sustainability” is Fishy by Don Boudreaux of Cafe Hayek.
"Today on the radio I heard an ad for a DC-area supermarket chain that boasts that it now has on sale – as in, selling for a reduced price – “sustainably farmed fish.”

I really dislike the word “sustainable” (and all of its variations) as used today to signal holier-than-thou environmental ‘awareness.’  As Robert Solow said about this concept,
It is very hard to be against sustainability.  In fact, the less you know about it, the better it sounds.
But advertising “sustainably farmed fish” – implying, as it does (rather bizarrely), that unsustainably farmed fish are common – is especially annoying.  While the absence of property rights in oceans and other large bodies of water, and in uncaught fish, might well lead to overfishing (that is, to a genuinely unsustainable manner of acquiring fish for human consumption), the very essence of a fish farm implies property rights in the fish stocks.  And where there are property rights there is sustainability.  A fish farmer is no more likely to allow his stock of fish to be depleted than is the owner of Triple Crown winner American Pharaoh to allow his horse to be slaughtered for sport, or than are you to allow the cost of motor oil to prevent you from ever changing the oil in your car.

Private property rights give to each owner incentives to consider not only the current values of alternative uses of the things that he or she owns, but to consider also the future values of alternative uses.  In other words, private property rights internalize on each owner not only the immediate, current costs and benefits of the chosen use of the property, but also the more-distant, future costs and benefits of that use.  Your cost today of changing the oil in your car might well be greater than the benefit such an oil change would yield to you if you knew that, say, your car would be stolen and destroyed tomorrow.  But because you own the car and expect either to keep it for several more years or to sell it, you care about the car’s future.  Your ownership of the car makes you care about that asset’s future.  Ownership is very much like a pair of eyeglasses: it cures economic myopia.

It’s depressing that those people who today are most likely to worry about resources being “unsustainable” – people who are most likely to prattle publicly about “sustainability” – are those people who also are most likely to disparage private property rights and to argue for government policies that weaken and attenuate such rights.  Such people are those who are most likely to wish to further collectivize the provision not only of environmental amenities such as park space and animal conservation, but also of health care, of education, of housing, and of a host of other private goods and services.  Such people also are those who are most likely to protest prices made higher by market forces, and to applaud rent-control and other government-imposed price ceilings on a variety of consumer goods and services.

In short, the people who today howl most frequently and loudly for “sustainability” are those who most frequently and loudly oppose the legal and economic institutions – private property and market-determined prices – that alone reliably promote genuine sustainability."

Monday, July 25, 2016

Jacob Levy Review's Sven Beckert's Empire of Cotton

See Cotton, Coercion, and Capitalism: A sweeping history aims to change the way we think about the origins of capitalism. Excerpt:
"Even the book's valuable central chapters are hardly flawless. All too often, Beckert's focus on cotton leads him to ignore other industrial sectors that might compete with it for land, labor, capital, and political power. The last, at least, is given some attention in the context of the run-up to the Civil War. And he is clear enough that subsistence agriculture and traditional cotton farming and weaving competed, often successfully, with the cotton monoculture and with industrial spinning and weaving. But once industrialism takes hold, other sectors become invisible.

This might not be a serious problem in telling the history of the first, cotton- and textile-led, industrial revolution. But it gets progressively worse as time goes on, and is a source of serious confusion by the time Beckert discusses rich countries' 20th-century shift out of textile manufacturing. The idea that land, labor, and capital could increasingly find higher returns elsewhere in growing economies simply plays no part in his explanation for this transformation, even though by now it is a familiar thought that developing countries tend to grow out of an early emphasis on textiles as they move up the value chain.

This neglect of other sectors also means that protectionist tariffs and other trade barriers occupy a very strange place in the book, which presents them as apparently costless boons to each country's cotton manufacturing. This was, of course, how the cotton industrialists themselves described the protections they sought, and Beckert has immersed himself in their documentary history. But that is no excuse for treating their word as the last word, for not looking at where the costs fell. In his eagerness to explode myths and show that capitalism emerged out of state planning, Beckert almost certainly overemphasizes the importance of protectionist industrial policy. His own account of the jaw-dropping advances in productivity brought on by early technological improvements—a 370-fold increase in spinning productivity in 30 years in Britain, for example—is easily enough to explain revolutionary economic transformation.

While he exhaustively documents interventions by European states to subsidize and protect their domestic cotton industries in order to show that capitalism was centrally dependent on the emerging modern state, Beckert does very little to establish the actual importance of such interventions compared with the scale of the underlying economic and technological changes. Indeed, he writes that of all the "market making" activities that states engaged in, the "most important of all" were "the road building, canal digging, and railway construction that characterized assertive states in the first half of the nineteenth century." But these "most important" interventions occupy two sentences, a tiny fraction of the space given to protectionism and various forms of industrial policy. And the costs of protectionist policies to other sectors of each country's economy—including its industrial economy—go unmentioned, as if cotton were not only the most important part of capitalism but the whole thing.

But at its best this is an extraordinary book that sets a new standard for history across long periods of time and worldwide space. If Hayek is right about the influence of the historians, Beckert's text may well re-set the terms for how the history of capitalism is understood for a generation to come. Defenders of modern market economies have been issued a powerful challenge, and one worth meeting."

Industrial strategy can be regressive

From Matt Ridley.
"The history of industrial strategies is littered with attempts to pick winners that ended up picking losers. Worse, it is government intervention, not laissez faire, that has done most to increase inequality and to entrench wealth and privilege. For example, the planning system restricts the supply of land for housebuilding, raising property prices to the enormous benefit of the haves (yes, that includes me) at the expense of the have-nots. The government favours private pensions, creates tax loopholes and subsidises farming and the opera.

Why are salaries so high in financial services? Because there are huge barriers to entry erected by government, which hands incumbent firms enormous quasi-monopoly advantages and thereby shelters them from upstart competition. Why are cancer treatments so expensive? Because governments give monopolies called patents to the big firms that invent them. Why are lawyers so rich? Because there is a government-licensed cartel restricting the supply of them. Why do civil servants get so many knighthoods — symbols of inequality? Because they control the supply of them.

I am not saying that all these interventions are wrong. Clearly, we want government to ensure that beauty spots are protected from development, that financial firms are not shysters, lawyers are not crooks and that drugs are safe and effective. But is it possible that both companies and regulators have a common interest in restricting competition, and subsidising each other, at the expense of consumers? Of course it is.

Our current “industrial strategy” for energy — to subsidise offshore wind, solar, biomass and nuclear — is responsible for the fact that domestic electricity prices are the seventh highest of the 29 countries that are members of the International Energy Agency, 21 per cent above the median, while our industrial energy prices are fourth highest and 43 per cent above the median.

Domestic electricity bills are a higher proportion of household budgets for the poor than for the rich, so this policy is regressive; doubly so, because the wind and solar subsidies mostly go to the rich. High industrial electricity bills are a big part of the cost of aluminium, steel and other blue-collar industries, and bear a heavy responsibility for the painful closures at Lynemouth and Redcar. The policy has been tough for blue-collar workers and poorer people.

So the biggest source of inequality is government intervention on behalf of crony capitalism, not the free market. Indeed, in the way it drastically cuts the costs of goods, the free market is a great equaliser. “The capitalist achievement does not typically consist in providing more silk stockings for queens, but in bringing them within reach of factory girls,” as Joseph Schumpeter put it. Or cars, computers and foreign holidays.

Besides, no industry is run on laissez-faire lines these days. There is hardly any sector of the economy, apart from illegal drug dealing, where lobbying government is not as large a part of being in business as marketing your products. The further you are from London, and the less likely you are to bump into Sir Humphrey at Glyndebourne, the worse your chances of favourable government support.
Take Sunderland, a city that came to represent all that the southern chatterati think is wrong with the Brexit-voting north. Sunderland’s problem is not an excess of free market commerce; it’s a dearth of it. The one huge success story near by, the Nissan plant, may have arrived with government support, but it now thrives because it repeatedly wins competitions to be the most reliable and cost-effective maker of new cars for Nissan. It has good co-operation between unions and management not because of government intervention, but because of an enlightened approach on both sides.

There are signs that Mr Timothy at least recognises that government intervention is often the problem not the solution. He has called Britain’s energy policy a “unilateral and monstrous act of self-harm” in the context of the closure of the Port Talbot steelworks. In effect, he also argues that we currently intervene when it suits the rich — wind farms — and not when it suits the poor: immigration and its effects on wages and public services.

Of course, the government must sometimes take an active role. It must choose between infrastructure projects. It should cancel Hinkley Point, which has become a fiasco both financially and technologically, and HS2, which is a white elephant likely to come to life just when driverless cars arrive on our overcrowded motorways. It should get on with a runway in the southeast — anywhere! — as fast as possible, and build plenty of new roads. Likewise, it should break up BT so that the market can deliver fibre broadband, in which we are falling rapidly behind.

But the rest of what it should do is negative: it needs to clear the drains of invasive roots, push the legal roadblocks aside and remove the parasites from the system. Thanks to some excellent work by George Osborne, with things such as the seed enterprise investment scheme and entrepreneur’s relief, Britain is experiencing a wave of innovation and business formation, especially in digital, financial and biotechnology, so the economy will respond.

That’s the best industrial strategy: to plough the ground and let a thousand flowers bloom. The appointment of George Freeman, MP, as chairman of the prime minister’s policy board is a good sign: as life sciences minister he has been a fervent champion of innovation within the National Health Service and elsewhere. As far as possible, government’s best industrial strategy is to trust 65 million people who alone can judge what it is that they want done and how."

Sunday, July 24, 2016

Wharton Model Shows Benefits Of Immigration

See All Donald’s Immigrants: See for yourself: an economic model for immigration policy from the WSJ . Excerpt:
"The model shows that increasing the share of immigrants with, say, college degrees had only a minimal effect on GDP and employment. Deportation reduces both GDP and employment. The optimum policy choice for the economy and employment is one that increases net immigration. Increasing net annual immigration by 50% each year, for example, would increase GDP growth on average from 1.7% to 2% a year over next 35 years. It would also mean more workers per retiree—reducing the stress on retiree Medicare and Social Security."

Telemedicine Runs Into Crony Doctoring

State medical-licensing barriers protect local MDs and deny patients access to remote-care physicians.

By Shirley Svorny, writing for the WSJ. Ms. Svorny is a professor of economics at California State University, Northridge, and an adjunct scholar at the Cato Institute. Excerpts:
"Instead of welcoming the benefits of telemedicine, state governments and entrenched interests use licensing laws to make it difficult for out-of-state experts to offer remote care."

"Existing state medical-licensing laws are supported by entrenched interests primarily concerned with protecting providers, not with fostering the competitive health-care market that consumers so desperately need. If they want to operate in multiple states, telemedicine providers must hold multiple licenses, pay licensing fees to each state medical board, and comply with changing rules and regulations in every state. In effect, these stifling regulations force many patients to settle for whatever doctors are licensed to practice in their state—which is why in-state physician groups often support them."

"the misnamed Interstate Medical Licensure Compact, does not include provisions for license portability"

"the compact protects the power of the state boards to shield physicians in their states from competition. It preserves the multiple fees physicians must pay to each state board."

"Using its power under the Commerce Clause of the Constitution, Congress could pass legislation to define where a physician practices medicine to be the location of the physician, rather than the location of the patient, as states currently do. Physicians would need only one license"

Regulatory Costs Inflate New-Home Prices, Builders Say

Fees for park space, stormwater devices, endangered-species surveys; ‘I don’t build affordable houses anymore’

By Chris Kirkham of the WSJ. Excerpts:
"$8,000 for a new type of storm-water capture device required for each house, $3,500 for customized architectural plans required on every lot and about $15,000 to remove a tree from the property."

"they face a bevy of new regulations and higher fees governing everything from environmental quality and park access to regulations on the amount of brick on a home exterior."

"For the past five years, the median new home price has been 32% to 38% higher than the median price of a resale home...the largest such gap since the figures started being tracked in the 1960s. Compliance costs are one of many factors affecting prices of new homes, economists said"

"new homes have become “permanently more expensive to build” because of increased regulations"

"New regulations included a survey required in some areas of the Midwest to determine whether endangered bats are on a property, which builders said can cost $10,000 or more for each new development."

"the average cost for builders to comply with regulations has risen nearly 30% over the past five years."

"local “impact fees” charged to builders and developers to pay for services such as roads, sewers and parks have climbed 45% since 2005 to an average of $21,000 per home across 37 major markets."

"In the town of Prosper, north of Dallas, the city requires a dedication of one acre of park space for every 35 units (single- or multifamily) and a park fee of $1,500 to $2,000 for each unit."

Saturday, July 23, 2016

A new working paper by James Bessen from Boston University finds that much of the rise in corporate profits since 2000 was caused by political rent seeking.

See Political Rents and Profits in Regulated Industries by Guy Rolnik at Pro Market blog.
"Looking at both intangible investments and political activities to explain the 20 percent rise in Tobin’s q in the U.S. since 1970, a new working paper by James Bessen from Boston University concludes that activity associated with increased federal regulation is the most important explanatory factor, especially after 2000. In fact, spending on R&D and other intangibles has fallen, relative to conventional assets, since 2000.

Noting that operating margins for these firms have also risen since 1990 by over 2 percent in aggregate, Bessen’s study also found that variables associated with regulation and corporate campaign contributions account for about half of this increase.

When expressing the political rent seeking effect in dollar terms, the paper states that it corresponds to an increase in the value of non-financial public corporations of about $2 trillion, and that this amounts to an annual transfer from consumers to firms of about $200 billion. Several tests performed by Bessen also suggest that the link between industry regulation and corporate profits is indeed causal, flowing from regulation to profits.

Central to the study is Bessen’s use of RegData.1) Based on a November 2014 paper by Omar Al-Ubaydli and Patrick McLaughlin, “RegData: A numerical database on industry-specific regulations for all United States industries and federal regulations, 1997-2012”, RegData is currently the most advanced way of improving the measurement of regulations and the regulatory process. In contrast with previous methods that counted words or pages in regulatory documents, RegData quantifies regulations based on the actual content of regulatory text and is focused on “restrictive” words that indicate an obligation to comply, such as “shall” or “must.”

The RegData technique provides deep insight into the complexity of regulation. For example, last January, the Mercatus Center at George Mason University, which hosts the RegData project, published “The McLaughlin-Sherouse List: The 10 Most-Regulated Industries of 2014,2)which was led by petroleum and coal products manufacturing (25,482 restrictive words), electrical power generation, transmission and distribution (20,959 restrictive words), and motor vehicle manufacturing (16,757 restrictive words). Bessen used RegData to gain a deeper understanding of the relationship between regulation, rent seeking and the balance of power between corporations and consumers.

Bessen’s paper corresponds with a 2015 presentation by Jason Furman and Peter Orszag, in which they explored the potential role of rents in the rise in inequality, and in allowing firms to achieve super-normal returns. After comparing the distribution of returns on equity across S&P 500 firms between 1996 and 2014, they found a distinct possibility of “an increased prevalence of super-normal returns over time” (which the distribution skewed to the high-end over time, since the firm at the high-end of the distribution earn more super-normal returns). After reviewing Census Bureau data on market consolidation showing that in three quarters of the industry covered by the census, the 50 largest firms have experienced a rise in revenue share, the two concluded that “consolidation may be contributing to the changing distribution of capital returns and the increased share of firms with apparently super-normal returns.”

Bessen’s path to his current academic post, a lecturer at the Boston University School of Law, was unusual.

Bessen studied economics at Harvard. Later he became a software engineer and developed the first commercially successful “what-you-see-is-what-you-get” (WYSIWYG) PC publishing program. In 1993 he sold the company he founded, Bestinfo. He returned to academia, working with Nobel Laureate Eric Maskin on a paper about software patents. In 2002 he became a visiting scholar at MIT’s Sloan School of Management, and in 2004 he joined Boston University.

Last May he published a Working Paper, “Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents?,3) which has received good feedback.

Guy Rolnik: In the January/February 2015 issue of Foreign Affairs you wrote4) on how special interests undermine entrepreneurshipand in May 2016 you wrote an HBR piece titled “Lobbyists Are Behind the Rise in Corporate Profits.”5)Why are you so interested in regulatory capture and special interests?

James Bessen: My main research focus is technology. I have a technology background. I ran a software company and it’s what I have been studying for about 15 to 20 years. This is my second piece on political economy. The first was that Foreign Affairs piece.

As I was looking at what was happening in technology policy across many different areas, I saw the same thing happening, whether you are talking about trade secret law, patents, non-compete agreements for employees, or government procurement policy. It just seems that policy is working against startups in way not seen in the past. It seemed to be in favor of the incumbent firms. That observation led me to the Foreign Affairs piece.

GR: Did it come from your academic work, or was it something that you picked up when you were still in industry?

JB: It came more from the academic work. A lot of my work was in the area of patents. When I was in industry, I was in the software business. Just after I sold my company, they started issuing software patents in large numbers. Immediately, people in the software industry were upset by this.

They felt that, “Here’s a very innovative industry. Why do you want to introduce patents and lawyers into something that’s working very well without them?” To this day, most software developers are opposed to patents on software, or at least most patents on software.

I started a line of research that looked at that controversy. What happened was, it turned out that it was the well-established hardware companies, and then later on, the large software companies, were in favor of these patents, but most software developers were not.

Even as recently as four or five years ago, start-up firms generally didn’t get patents in software.

These patents benefit large hardware and software companies, sometimes at the expense of startups. But because this change created large numbers of software patents with poorly defined property boundaries, patent litigation started to increase sharply. Many of these lawsuits were filed by patent trolls who used lawsuits to extract settlement payments from startups.

As we did more empirical research on what was going on with patents and patent trolls, and it became a legislative issue, it was very striking.

We did a lot of work on patent trolls that was entered into the debate as firms were pushing for legislative reform on patents. The lobbying that went on was so striking. It was huge. It was an education for me.

Where I’d been thinking in very academic terms, there is this brutal policy landscape and conflict that goes on. That has a whole lot to do with how this policy has evolved in the beginning and how it is evolving today.

GR: When you say it was an educating experience for you, do you mean that you realized that regulation and patents work for the big incumbents?

JB: Right. Not only do they work for them, but that the political process was centered around them.

I’ll give you a little backstory. There was a lot of discontent that started bubbling up in the late 2000s, a huge increase in lawsuits.

Lots of small companies were sued both in tech fields and even outside of tech. A lot of retailers, a lot of travel or hotel industry people, who all of a sudden are upset about patents because they’re getting sued over this whole range of patents that should never have been issued, but it becomes a legal strategy to extract money out of them.

In 2011 a new patent law passed, the Leahy-Smith America Invents Act. This patent law was essentially negotiated between a small number of large pharma companies and a small number of large tech companies.

This law has some good things about it, but there was a huge amount of lobbying, a huge amount of money that poured into this, and they came up with something that was very tame.

Because it didn’t address the problems, all of a sudden you have a whole lot of small businesses in every state in the country who are now upset about getting sued for patent infringement over these very ridiculous claims.

What you saw from 2013 is this much broader grassroots activity pushing for patent reform by a lot of start-ups, by a lot of small companies, throughout the country.

It’s been pretty much blocked by pharmaceutical companies, patent trial lawyers and some well-established interests. This was my original education on how things are playing out. It’s happening in other policy areas.

GR: What brought you to this recent paper?

JB: I’ve been reading some of the papers of Jason Furman and Peter Orszag.

GR: Do you mean the paper about the “super firms”?

JB: Yeah, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality.” As a technology guy, my first guess was that a lot of this rise in profits may not be about political rent seeking. It may be just returns on technology investments as firms are making more and more technology investments.

These investments don’t show up in normal accounting, in the normal balance sheet, as assets, and this has been a well-known problem for some time. When I started out I had the expectation that I was going to find that there were some political rent seeking aspects to the rise in profits and the rise in corporate valuations, but that it was probably more an issue of unmeasured technology investments.

What I found was that I was wrong in my prior opinion, especially for the last decade, it’s been more a story about political rent, especially concentrated in regulated industries.

GR: How long was the period you’ve been looking at?

JB: The total period I looked at was from 1970 to 2014, but when I say, “The last decade,” I really mean from 2000 on. 2000—that was when the tech bubble burst, the Internet bubble, and firms had been spending a lot on technology. They cut back some of that spending. Since then, you’ve seen a relative decrease in technology spending, but regulation and campaign spending have gone up.

GR: Why do you think that lobbying expenditure is a good measure of rent seeking?

JB: I don’t think lobbying expenditure itself is a very good measure. One of the things that comes out of this paper is the suggestion that lobbying expenditure and campaign spending are tip-of-the-iceberg measures.

What it finds is that the regulation index is the strongest factor.

GR: The RegData index.

JB: The RegData, yeah. That is picking up. My interpretation is that when you see an industry with a very high RegData index, a very high level of complexity or restrictive words in the regulation, that reflects a lot of industry rent seeking activity. But the nature of that activity is very varied and involves a lot of different things.

It includes lobbying and campaign expenditure, but those two things are probably a small part of it.

GR: Is this a more of a Stiglerian phenomenon, or more of a tollbooth phenomenon?

JB: It’s very much a Stiglerian type phenomenon. The tollbooth idea implies that regulators want to extract rents from companies, and so you would expect highly regulated industries to have decreased rents.

The Stiglerian idea is that regulation comes about because of cooperation between regulators and industry, and so you would see greater rents. That’s what we see. It may not be a simple story of industry activity capturing individual regulators.

There may be a much more complex story. It may be, for instance, that regulatory complexity helps established firms extract rents and complexity serves as a barrier to entry to new startups; these barriers can increase rents and corporate valuations.

GR: So the important empirical evidence is derived from RegData correlating with the rents that are manifested by the Tobin outcomes?

JB: Right. I’m seeing a large correlation, and that seems to be accounting for a very substantial part of the increase in rents.

It could be that we’re seeing a spurious correlation and that perhaps it’s high-profit industries that are attracting regulation.

At the turn of the 20th century, trusts were these high rent, high monopoly industries that were getting attacked by regulators because they were making high profits.

I did this causal analysis and found that the causality really does flow the other way: when you see an increase in regulation, profits follow.

GR: Another surprising finding of yours is that you feel that most of the rents are derived from complex regulations, and not from market power driven by concentration.

JB: I don’t think these things are necessarily in opposition. The problem is that my data doesn’t speak to it. I do use the share of the top four firms in an industry and find that it does not have much explanatory power. But that’s only one measurement of market power.

There may be many other sorts and it may be that the relevant sorts of market power aren’t picked up by a simple index like that. It may be that, for instance, when you think about the electric utility industry, the relative market power is not the national market but the local market, so you’re not going to pick it up there.

When you think about the pharmaceutical industry, you may be talking about a highly differentiated product market, so it’s not the number of pharmaceutical firms in general. It may be the ones that are particularly involved in producing Statins, or cancer drugs or other treatments.

There are these niche markets that they compete in and they may very well work as monopolies.

GR: Some of the industries that you do mention that have rising regulatory complexity are also quite concentrated or have high HHI values, like telecom, mobile, cable, big pharma, and of course airlines, railways, and so on.

JB: That’s right. The study raises more questions than it answers. These are some of the interesting questions. What it speaks to is that we really don’t have our arms around what’s going on in all these industries. We can speculate.

It’s this notion that we can look at these concentration ratios, and they’re indicative for some industries, but in other industries it’s not picking it up. It’s just not the best measure.

GR: How is it that the financial sector does not appear among the five industries that you mentioned?

JB: Good question. It’s because the way that balance sheets are constructed and…

GR: Because of the Tobin’s measure, you can’t use Tobin for financial companies. Since RegData is the base of your empirics, can you say something about the way it works?

JB: It’s a very clever approach they’ve got. They’re continuing to refine it. Previous measures have just looked at the gross number of words in regulations. The developers of RegData do two things. One is they look at restrictive words, words like “shall,” or “must,” to rank the restrictiveness of each section of the Federal Code. They also look at key words that relate to a particular industry, using a sophisticated textual analysis, and that’s where we get the real action in this case. They’re able to go and do an annual measure, for most industries, that tells us the regulatory complexity. It’s fascinating to look at some of these.

You see something like major legislation gets passed—and then the regulatory complexity goes up. You see some cases where there’s deregulation occasionally and the complexity goes down for a period of time, but the overall trends are up.

GR: Would it be correct to say that, in a way, what you’re saying is that this paper adds to the literature that proves that George Stigler was right, and it’s happening in a big way in the last 15 years?

JB: Yes. The surprise here is the magnitude of things. That’s what caught me and surprised me. I’m seeing a very strong effect and an economically large effect. That makes me stop, think and say “This is important stuff.” It’s Stigler being right in a big way.

GR: In your HBR paper you say that basically lobbyists and lobbyism are only the tip of the iceberg. Can you describe what you think goes beneath the surface level in this?

JB: First of all, it’s not only U.S. activity. It’s global. Second, lobbying is largely directed at getting legislation and regulatory decisions, but there’s a lot of what we would call rent seeking activity.

If you look at the electrical industry or cable television, there are rates that get set. There are these complex rules, and firms have to meet with regulators on an on-going basis. That’s not lobbying, per se.

They may challenge those rates and those rules in court. They need to be monitoring them. They may change their offerings, their products, to take advantage of changes in regulation. That was part of the story with the Cable Act of 1992 where they made these changes.

This is the point that Richard Posner made back in 1975. Using the example of airline regulations, he saw that rent seeking involves actually changing the nature of their products and services. You’ve also got activities like clinical drug trials which are huge investments that pharmaceutical firms make with the aim of getting regulatory approval.

All of these sorts of things are termed as rent seeking activitis—activities where the firm invests in getting a political outcome that increases their rent."