Wednesday, November 30, 2016

The U.S. trade deficit is not a significant drag on growth and manufacturing jobs

See Open Letter to Jared Bernstein by Donald J. Boudreaux.
"Mr. Jared Bernstein
Center on Budget and Policy Priorities

Mr. Bernstein:

In your Washington Post essay “A proposal to the incoming administration to lower the trade deficit” (Nov. 28) you simply assert that the U.S. trade deficit is “a significant drag on growth and manufacturing jobs.”  Because you devote not a single word to explain why you believe this assertion to be correct, you clearly suppose that it is too obvious for words that the U.S. trade deficit harms the American economy.  Yet as you must know, for America to run a trade deficit with non-Americans is for America to receive a net inflow of capital from non-Americans.  In light of this reality, I’ve a few questions for you about a number of transactions, each of which causes the U.S. trade deficit to swell:
– Does the building of stores throughout America by Ikea, Sony, and other non-American companies impose “a significant drag on growth” in the U.S.?  If so, how?

– Did the $7.1 billion spent by Shuanghui International to buy Smithfield Foods impose “a significant drag on growth” in the U.S.?  If so, how?

– Was the $15.6 billion that the British-Swedish firm AstraZeneca paid a decade ago for Maryland-based MedImmune “a significant drag on growth” in the U.S.?  If so, how?

– When Japan-based Softbank bought the ailing Kansas-based Sprint for $21.6 billion, was there a resulting “significant drag on growth” in the U.S.?  If so, why?

– According to a June 2014 report from Brookings, “Jobs in FOE’s [foreign-owned enterprises in America] are relatively concentrated in manufacturing and advanced industries.”  How do you square this fact with your implication that such investments are “a significant drag on growth and manufacturing jobs” in the U.S.?

Some final questions: If non-Americans come to be led, as you wish, by U.S. Government policy to invest less in America, do you believe that the resulting decline in the value of U.S. corporate shares, the decline in the value of American real estate, and the decreased sharing by non-Americans of the burden of financing Uncle Sam’s budget deficits will enrich Americans and cause American economic growth to accelerate?  If so, why?

Unless and until you can plausibly answer questions such as these – questions the significance of which, frankly, you seem to be unaware – you should stop offering advice about trade policy.


Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030"

Climate model projections of wheat yields are just stupid

See Record Temperatures and Record Grain Yields by Ronald Bailey, a science correspondent at Reason magazine.
"Those of us who try to monitor the torrent of climate change studies frequently come across various projections that just seem like a total waste of their researchers' time. The impacts of future climate change on crop productivity nearly a century hence is one such area. This particular blog post is provoked by a new study in Nature Climate Change purporting to predict that wheat yields will fall by 4.1 to 6.4 percent for every 1℃ increase in global average temperature. Some of the same researchers estimated in a 2014 study in the same journal that global wheat production will fall by 6 percent for each degree Celsius of further temperature increase. Other researchers projected that higher temperatures will also significantly lower corn yields in France, the U.S., Brazil, and Tanzania by "4.5, 6.0, 7.8 and 7.1% per °C at the four sites, respectively." While these projections claim to take into account efforts to adapt, the researchers all seem to be technological pessimists who more or less assume that farmers and crop breeders will be stuck using techniques and crop varieties not much different from the ones they have now.

Actually, crop breeders in the United Kingdom are already working to create a "super wheat" genetically modified with enhanced photosynthesis. In greenhouses, this boosts yields by 15 to 20 percent and the researchers are planning on field trials next year. In addition, the GMO wheat is even more productive when carbon dioxide levels are higher. In South Australia, researchers are figuring out how to add beneficial microbes (endophytes) that boost wheat yields by 10 percent. American researchers detail in a November 16 article in Science how they are working on another technique to boost photosynthesis that could increase yields by 15 to 20 percent.

According to the Intergovernmental Panel on Climate Change the world has warmed at a rate of 0.12 degrees Celsius per decade since 1951 which implies that global average temperature has increased by nearly 0.8 degrees Celsius. Even as the world warmed, the World Bank reports that per hectare yields of coarse grains (including wheat and corn) have increased from an average of 1,400 kilograms per hectare in 1961 to 3,900 kilograms per hectare in 2014, an increase of 280 percent.

It bears noting that world grain production (including wheat) reached a record high this year, which has been declared by the World Meteorological Organization to be the warmest year ever in the instrumental temperature record."

Tuesday, November 29, 2016

OECD Economic Research Finds That Government Spending Harms Growth

By Daniel J. Mitchell of Cato. Excerpts:
"A new working paper by two economists at the OECD contains some remarkable findings about the negative impact of government spending on economic performance. If you’re pressed for time, here’s the key takeaway from their research:
Governments in the OECD spend on average about 40% of GDP on the provision of public goods, services and transfers. The sheer size of the public sector has prompted a large amount of research on the link between the size of government and economic growth. …This paper investigates empirically the effect of the size and the composition of public spending on long-term growth… The main findings that emerge from the analysis are… Larger governments are associated with lower long-term growth. Larger governments also slowdown the catch-up to the productivity frontier.
For those who want more information, the working paper is filled with useful information and analysis.

Here’s one of the charts from the study, showing how government spending is allocated in OECD nations.

The report also acknowledges that there’s a lot of preexisting research showing that government spending hinders economic growth.
There is a vast empirical literature investigating the relationship between the size of the government and economic growth (see Slemrod, 1995; Myles 2009; Bergh and Henrekson, 2011 for overviews). A review by Bergh and Henrekson (2011), based on papers published in peer reviewed journals after 2000, suggested a negative relationship in OECD countries. Likewise, a recent OECD study confirmed a negative relationship between the size of government and GDP growth (Fall and Fournier, 2015). …the link between the size of government and growth may vary with the income level and could be hump-shaped (Armey, 1995). A few studies have found support for the existence of a non-linear relationship between the size of government and growth (e.g. Vedder and Gallaway, 1998; Pevcin, 2004; Chen and Lee, 2005).
By the way, the reference to “hump-shaped” means that the OECD is even aware of the Rahn Curve.
The methodology in the paper is not ideal from my perspective. For all intents and purposes, the economists compare economic performance of the OECD’s big-government nations with the growth numbers from the OECD’s not-quite-as-big-government nations. But even with that limitation, the study generates some powerful results.
…the simulation assumes that in countries where the size of government is above the average level of countries in the bottom half of the sample, the government size will gradually converge to this level (36% of GDP). Similar to the spending mix reforms, this reform is phased in over 10 years. Such a reduction in the size of the government could increase long-term GDP by about 10%, with much larger effects in some countries with currently large or ineffective governments. …a reduction of the size of government has a positive, but moderate, effect on the income of the poor. The average disposable income also rises. However, the rich gain relatively more. Finally, in countries where the government is less effective (such as Italy) the growth effect dominates and a moderate reduction of the size of government would have a large growth effect, so that it would lift all boats.
And here’s a chart showing how much more growth would be possible if the countries with really-big government downsized their public sectors to the somewhat-big level.

Even with the methodology limitations I described, these results are astounding. Potential GDP gains of more than 30 percent for Greece and Italy. Gains of more than 20 percent for Slovenia, France, and Hungary. And more than 10 percent for Belgium, Czech Republic, Portugal, and Poland.

The working paper also looks at the composition of government spending. In other words, just as not all taxes are equally damaging, the same is true for spending programs.
The results from the estimation of the size of the government and the public spending mix illustrate that public spending matters for long-term growth…pension and subsidy spending [are] the two items with a significantly negative effect on growth. As each regression includes the size of government and one spending share, the estimates provide the effect of increasing this type of spending while decreasing spending on other items to keep the spending to GDP ratio unchanged… larger governments are in several specifications significantly and negatively associated with long-term growth. This is consistent with the literature… Larger governments can impede convergence (Table 8, columns 1 and 3), because they are associated with higher taxation that can discourage business investment including foreign investment and households to supply labour.
Pensions and subsidies seem to cause the most economic harm.
Reducing the share of pension spending in primary spending yields sizeable growth gains with no significant adverse effect on disposable income inequality. This reduction could be achieved by an increase in the effective retirement age or by cutting the replacement rate. …Cutting public subsidies boosts growth, as public subsidies…can distort the allocation of resources and undermine competition. …Education outcomes depend not only on education spending but also on the effectiveness of education policies, and the literature suggest the latter can be more important. Since the seminal work of Coleman (1966), a broad literature suggests that there is no clear link between education spending and education outcomes. …policies aimed at increasing education spending effectiveness can be more appropriate than an across-the-board rise of education spending. …It may be that, beyond a certain point, additional spending on investment has adverse effects, if poorly managed.
For those of you with statistical/econometric knowledge, here’s some relevant data from the study.

And you can match the numbers in Table 6 with these excerpts.
…pension spending reduces growth (Table 6, columns 2, 5, 7 and 10). Increasing the share of pension spending in primary spending by one percentage point (offset by a reduction in other spending) would decrease potential GDP by about 2%. …Public spending on subsidies also reduces growth (Table 6, columns 3, 5, 8 and 10).
…increasing the share of public subsidies in primary spending by one percentage point would decrease potential GDP by about 7%.
If you’re not a stats wonk, these two charts may be more helpful and easy to understand.

What jumped out at me is how the normally sensible nation of Switzerland is very bad about subsidies. That’s a policy they obviously need to fix (along with the fact that they also have a wealth tax, which is very uncharacteristic for that country).
But I’m digressing.

Let’s return to the study. One of the interesting things about the working paper is that it notes that bad fiscal policy can be somewhat mitigated by having market-oriented policies in other areas, which is a point I always make when writing about Scandinavian nations.
…countries with a high level of public spending may also be characterised by features that partly offset the adverse growth effect of government size. …in Sweden the mix of growth-friendly structural policies…may have offset the adverse growth effect of a large government sector.
In other words, the moral of the story is that smaller government is good and free markets are good. Mix the two together and you have best of all worlds.

P.S. Even if the OECD published dozens of quality studies like this one, I would still argue that American taxpayers should no longer be forced to subsidize the Paris-based bureaucracy. And even if the OECD’s political types stopped pushing statist policies, I would still have the same view about ending handouts from American taxpayers. This has nothing to do with the fact that the bureaucrats once threatened to have me arrested and thrown in a Mexican jail. I simply don’t think taxpayers should fund international bureaucracies.

P.P.S. Other international bureaucracies, including the World Bank and European Central Bank, also have published good research about the negative effect of excessive government spending."

Monday, November 28, 2016

How Latin America Pays the Price of Protectionism

By Taos Turner & Paul Kiernan of the WSJ.
"For decades, South America’s two largest economies have tried to shield their workers from global trade, largely through high tariffs and regulations that promote domestic production over imports. The World Bank ranks Argentina and Brazil among the world’s most closed big economies.
In Brazil, locally made products are enshrined in the constitution. Gadget-loving Argentines often use the black market or go to Miami to buy iPhones, which were barred for years because Apple wouldn’t produce them in Argentina.

In Tierra del Fuego at Argentina’s southern tip, where cruise ships sell sightseeing tours of icebergs and penguins, one can see the results of an experiment to create a “Made in Argentina” electronics manufacturing hub. To help it thrive, the Argentine government slapped a tariff of up to 35% on imported electronics.

Now, 14,000 workers in 55 factories in this grimy industrial town and the nearby tourist paradise of Ushuaia churn out products including phones, TVs and air conditioners. Most of the components are Asian-made, imported duty free and assembled by Argentine workers, with a few local components like Argentine-made screws thrown in. Chinese, Japanese and Korean executives have moved to Tierra del Fuego to oversee the production of everything from Samsung phones to Sony TVs, officials at several factories said.

The cost to Argentina’s taxpayers of these jobs is steep: up to $72,000 per factory worker a year, including tax breaks and other incentives, officials say. The largess was needed, said former President Cristina Kirchner, because “without manufacturing, we’d have no country and no future.”
But for ordinary Argentines, the products’ price tag can be hefty. An unlocked Samsung J7 smartphone sells for $240 in the U.S. but costs nearly $500 in Buenos Aires.

“The irony is that people who live here don’t buy the products made here,” said Cintia Davalos, 27, who works in a Tierra del Fuego five-and-dime. She explained that residents will drive seven hours to free-market Chile to buy everything from auto parts to clothing to TVs.

“Taking a protectionist turn would be extraordinarily disruptive, not just for our trading partners but for the United States,” said Eric Farnsworth, a former U.S. diplomat who is now vice president of the Council of the Americas.

He and other advocates of free trade often highlight the self-inflicted wounds that protectionism has caused economies in Latin America. Here, import substitution gave Mexicans the notoriously unreliable Zonda TV back in the 1970s and left Brazil producing the 1950s-era Volkswagen Type 2, or hippie bus, until 2013.

Most countries have long abandoned that model. Mexico, for instance, has become a global leader in free trade, signing deals with 44 countries. Since 2010, Latin America’s open economies—tied together in the Pacific Alliance, which groups Mexico, Colombia, Peru and Chile—have grown by an accumulated 29.7%.

Meanwhile, members of Mercosur, the protectionist trade bloc led by Argentina and Brazil, grew 19.4% and had less investment and much higher inflation, according to a study by Santander Rio. In Brazil, Latin America’s largest economy, exports accounted for just 13% of GDP last year—a fraction of the ratio in trade-focused economies such as Mexico (33%) or Germany (50%). In Argentina, exports are 11% of GDP.

Critics warn that Brazil’s long history of protectionism bred complacency in its manufacturers, leaving them unprepared and vulnerable.

Consider Brazil’s auto industry, until recently one of the world’s 10 largest. Shielded for decades by high tariffs, it has devolved into a peddler of rinky-dink hatchbacks with one-liter engines that barely sell outside of the Mercosur bloc. After nearly three years of deep recession, with few export markets to support the industry, output has fallen some 45%. And for Brazilian consumers, cars are far pricier: A new Volkswagen Gol Comfortline lists in Brazil at $15,231—nearly twice as much as in Mexico, which has low tariffs and an efficient car industry.

The effects of protectionism go beyond cars. After big offshore oil finds a decade ago, Brazil’s government set “Made in Brazil” mandates for drilling vessels, refineries and shipyards. That drove up costs and fostered corruption.

But Nicolas Dujovne, a former Argentine central bank director, noted that Argentina—a big, resource-rich country with a relatively well-educated workforce—still hasn’t become an industrial country. “The losers from populism can be found everywhere,” he said. “They are the millions of jobs and hundreds of thousands of companies that were not created because of very disorderly macroeconomic policies.”

Castro Undeniably Impoverished Cuba

By Tim Worstall.
"Fidel Castro, the Communist Dictator of Cuba, has died at the age of 90. There have been those, over the decades, who have held him up as some paragon of a new world order, one in which people will not be subservient to either America nor capitalism. The truth is that he visited an economic disaster upon the island nation of Cuba. No, it was not the US, it was not any blockade or embargo, not anything external to Cuba that caused this, it was quite simply the idiocy of the economic policy followed, that socialism, which led to there being near no economic growth at all over the 55 years or so of his rule. What little that did occur happened when the strictest of his rules were relaxed.
It is polite, human, and common to withhold criticism of the dead in the immediate aftermath of their demise. But leaving 11 million people grossly poorer than they ought to be in the name of a bankrupt ideology is not the stuff of which hagiographic obituaries are made.
The news itself:
Former Cuban leader Fidel Castro has died at age 90, according to Cuban state media, confirms NPR.
Castro, who took power in the Cuban revolution in 1959, led his country for nearly 50 years.
True, infirmity made him relinquish some power in this past decade:
Fidel Castro ruled Cuba as a one-party state for almost 50 years before Raul took over in 2008.
His supporters said he had given Cuba back to the people. But he was also accused of suppressing opposition.
There will be much of this sort of stuff:
999 Transforming Cuba from a playground for rich Americans into a symbol of resistance to Washington, Castro outlasted nine U.S. presidents in power.
He fended off a CIA-backed invasion at the Bay of Pigs in 1961 as well as countless assassination attempts.
The problem being that the economic policy followed, that of socialism, didn’t achieve the first thing that an economic policy is supposed to achieve: make the people richer. We will be awash, for months, in stuff like this:
And this will be repeated again and again:
His greatest legacy is free healthcare and education, which have given Cuba some of the region’s best human development statistics.
Amazingly, large parts of the world have both of those and all without killing anyone nor trying to impose socialism. As the Guardian itself notes in its very next sentence:
But he is also responsible for the central planning blunders and stifling government controls that – along with the US embargo – have strangled the economy, leaving most Cubans scrabbling for decent food and desperate for better living standards.
It’s that strangling of the economy which is the great disaster.

To give an idea of how bad that was we should use the Angus Maddison numbers. You can download the spreadsheet here. These are in international dollars, so we have already adjusted for price differences across geography. And they are in chained dollars, so we have already adjusted for price differences, inflation, across time.

And in 1959, when Castro took power, GDP per capita for Cuba was some $2,067 a year. About two-thirds of Latin America in general and about the same as Ecuador (1,975), Jamaica (2,541), Panama (2,322) and two-thirds of Puerto Rico (3,239). Despite that playground of rich Americans think it was, by the standards of the time, doing reasonably well.

By 1999, 40 years later, Cuba had advanced hardly at all, to $2,307, while Ecuador had, relatively, jumped to 3,809, Jamaica to 3,670, Panama to 5,618 and Puerto Rico to 13,738. GDP isn’t everything of course but it’s still hugely important. For it’s the basic measure of what it is possible that people, on average, can consume. And we don’t tend to think that Ecuador, Jamaica, Panama and Puerto Rico were particularly well run in the latter decades of the 20 th century but at least they didn’t have a government actively conspiring to keep them impoverished like Cuba did.

And that was the great economic disaster, the grand mistake. That scientific socialism of the Soviet type makes one great claim–or at least it did when it could still be said without people bursting into great gales of laughter. That by planning the economy, by doing away with the exploitation of capitalism and the chaos of markets, socialism would make the people rich. We then ran the world’s largest economic controlled experiment, something we call the 20th century, and found that socialism does not achieve this.

It is possible, if you really want to stretch matters, to say that this was not known in 1959. But all knew it by 1989, and that’s where the Cuban system really deserves excoriation. And thus so does Fidel Castro, who imposed said system. In 1991 Albania was poorer than Cuba (1,836 as against 2,590) but that simple switch to a market economic system, however chaotic, near tripled the standard of living in only 20 years (5,375 in 2010).

For the result of that controlled economic experiment is that we have a fairly narrow spectrum of socio-political systems that actually work. Work here meaning doing what an economy is supposed to do, increase the living standards of the average person. This runs from the near laissez faire free market of Hong Kong to the tax and redistribution heavy free market of Sweden’s social democracy. Any non-market system does not work.

And do note that Puerto Rico result. That Caribbean island remained under that American domination, that cruel capitalism and the chaos of markets. It was never enriched by the scientific planning of socialism. And living standards soared by a factor of 4 while those in Cuba stagnated for 5 decades. And the Cuban system justified itself by freeing Cuba from such American hegemony.
For that Fidel Castro should not be forgiven.

We also need to heed this lesson. Non-market economic systems do not work. We do only have that spectrum available to us, laissez faire all the way to social democracy. Socialism, not even once people, not even once."
More links on Cuba

Sunday, November 27, 2016

How Dodd-Frank Led to More Mayhem in Africa

A measure to curb violence from conflict minerals has caused militias to simply expand their looting

By Tate Watkins in the WSJ. He is a research fellow at the Property and Environment Research Center (PERC), a nonprofit research institute. Excerpt:
"When Congress passed the Dodd-Frank financial bill in 2010, it included a provision aimed at curbing the violence caused by these minerals. Companies like Apple and Intel use the metals to make electronic components in devices such as cellphones and laptops. Legislators hoped that by requiring U.S. companies to disclose purchases of tantalum, tin, tungsten and gold, the militias’ funding would dry up.

Rep. Barney Frank (D., Mass.) famously said at the time that the bill was supposed to “cut off funding to people who kill people.” But new research shows the regulation has had the opposite effect and escalated violence in the eastern Congo.

In a forthcoming study in the Journal of the Association of Environmental and Resource Economists, my colleague Dominic Parker and co-author Bryan Vadheim document that while the law may have cut off one source of revenue to armed groups, it led them to intensify their plundering of civilians in the region—exacerbating the humanitarian crisis. By their estimates, violent incidents more than doubled after the law was implemented.

The economists assert that before Dodd-Frank, Congolese militias acted as “stationary bandits.” The idea is that a strongman who seeks to rule for years won’t use his iron fist to crush the people entirely—and he may even invest a bit in roads, security and other provisions to ensure he avoids an uprising that could loosen his control. Messrs. Parker and Vadheim stress that stationary bandits are no saints, but the arrangement “may be safer and more economically productive than anarchy.”

The authors compare the eastern Congo’s stationary bandits to the mafia. They write that some militias charged roughly the equivalent of $1 to enter a mining site and took a weekly cut of miners’ earnings. In return for this “tax,” militias provided a degree of protection—even if only from themselves—as the mob does.

Dodd-Frank upset the stationary-bandit equilibrium because, rather than spending resources to scrutinize a fragmented and opaque supply chain, many U.S. companies simply stopped purchasing minerals from the Congo. The Commerce Department admitted in a 2014 analysis that it did “not have the ability to distinguish” whether specific mineral purchases funded militias, and in August a Government Accountability Office report found that 97% of companies that filed disclosures “couldn’t determine whether the conflict minerals financed or benefited armed groups.”

Companies avoided the extra costs and red tape by boycotting tantalum, tin and tungsten mined in the Congo. They instead looked to suppliers in Australia and Brazil. Congolese mineral exports plunged by 90% in the wake of the legislation, according to DRC mining officials. Consequently, income to militias from such mines either plunged or vanished entirely.

None of this stopped the militias from killing. Some of them pivoted and became “roving bandits,” expanding their looting to make up for lost mining revenues. Mancur Olson, the late Nobel laureate in economics who outlined the theory of both types of bandits, wrote in a 1993 American Political Science Review article that the anarchy and theft wrought by the roving sort destroy “the incentive to invest and produce, leaving little for either the population or the bandits.” Messrs. Parker and Vadheim found that armed groups specifically targeted farmers during harvest time—especially after bumper crops."

A Snag in Donald Trump’s Pledge to Make America Make Again: Asia

China’s workers and region’s supply chain are integral to electronics manufacturing

By Kathy Chu and Juro Osawa of the WSJ.
"A stiff tariff on Chinese imports could accelerate the migration of electronics factories from China to lower-cost Asian countries like Vietnam, rather than boosting U.S. electronics production, some analysts warn.

Apple, in a statement, said it has created more than two million jobs in the U.S. for engineers, retail and call-center employees and delivery drivers. The company said it works with more than 8,000 suppliers in the U.S. and is “investing heavily in American jobs and innovation.”

HP declined to comment. A Dell spokesman said the company looks forward to working closely with the new administration on “priority IT issues like security, trade and cloud computing.”

While U.S. electronics companies already manufacture high-end, lower-volume products such as the Apple Mac Pro in the country, President Obama and Sen. Bernie Sanders have questioned whether mass-produced electronics—and specifically the ever-popular iPhone—can also be made profitably in the U.S.

The answer, experts say, is that while iPhone assembly in the U.S. is theoretically possible, it is highly improbable because of the difficulty of relocating assembly and other parts of Asia’s sprawling electronics chain to the West.

While iPhones are designed in California, Apple sources memory chips from Korean suppliers and displays—which are the most expensive component in the iPhone—from Japanese suppliers, then uses Taiwanese companies such as Hon Hai Precision Industry Co. and Pegatron Corp. to assemble iPhones in mainland China. Apple also uses U.S. suppliers to make components such as glass and radio-frequency parts in the country.

Mr. Trump “wouldn’t be able to finish (such a move) during his presidency,” said Sanford C. Bernstein’s Alberto Moel.

Another barrier to moving manufacturing back to the U.S. is that U.S. electronics companies often outsource production, so they don’t always have full control over where their goods are made.
With China now the world’s largest consumer market for smartphones and other gadgets, it makes sense for U.S. companies and their assemblers to keep manufacturing bases in Asia, says Steve Chuang, chairman of the Hong Kong Electronics Industry Council, which represents manufacturers in mainland China. Some manufacturing jobs done in China with human labor could be lost to machines if production moves back to the U.S., economists warn.

Last December, Apple Chief Executive Tim Cook said on the CBS program “60 Minutes” that the company manufactures its products in China in part because Chinese workers possess “vocational kind of skills” increasingly difficult to find in the U.S. “That is the reality,” Mr. Cook said.

Even if Apple finds enough workers to assemble in the U.S., the cost of making an Apple iPhone 7 could increase $30 to $40, estimates Jason Dedrick, a professor at the School of Information Studies at Syracuse University. Since labor accounts for only a small part of an electronic device’s overall costs, most of these higher expenses would come from shipping parts to the U.S.

If the iPhone components were also made in the U.S., the device’s costs could climb up to $90, according to Mr. Dedrick’s research with UC Berkeley’s Greg Linden and UC Irvine’s Ken Kraemer. That means that, if Apple chose to pass along all these costs to consumers, the device’s retail price could climb about 14%."

Saturday, November 26, 2016

Court Blocks Overtime Rule

By Trey Kovacs of CEI.
"Labor Secretary Thomas Perez learned a harsh lesson this month. Public servants at federal agencies cannot allow their political preferences to guide their regulatory agenda. Rather, they must fulfill the mission of the agency as Congress intended.
The folks over at the Department of Labor  (DOL) do not seem to comprehend that. Once again, a court has issued an injunction against a DOL regulation. This time it was President Obama's signature overtime rule, finalized on May 23, 2016, which would more than double the salary threshold for overtime eligible employees from $23,660 to $ $47,892.

On November 22, 2016, Judge Amos Mazzant, Obama appointee Eastern Texas U.S. District Court, agreed with the argument of 21 state Attorneys General and issued a nationwide preliminary injunction against the DOL’s overtime rule.

The Fair Labor Standards Act grants the Labor Secretary authority to issue regulations that interpret which employees are exempt from overtime, but with limitations. Section 213(a)(1) of the FLSA states that “any employee employed in a bona fide executive, administrative, or professional capacity” is exempt from overtime pay requirements. Congress only gave the Secretary the power to define which employees are considered “executive, administrative, or professional” employees, not raise the salary threshold so high as to “categorically exclude” employees who perform the duties of an executive or professional.

So the question at hand for the court, “What constitutes an employee employed in an executive, administrative, or professional capacity?”

As the ruling discusses, the terms “executive, administrative, or professional” (EAP) all relate to an employee’s duties and functions, not a minimum salary level. Judge Mazzant concluded that Congress intended for employees who perform professional duties to be exempt from overtime requirements.
As Judge Mazzant states in the ruling:

While this explicit delegation would give the Department significant leeway to establish the types of duties that might qualify an employee for the exemption, nothing in the EAP exemption indicates that Congress intended the Department to define and delimit with respect to a minimum salary level.

Further, the DOL’s final rule clearly violates Congress’ intent by stating that any executive, administrative, or professional employee earning less than $913 per week “will not qualify for the EAP exemption, and therefore will be eligible for overtime, irrespective of their job duties and responsibilities.”

Again, the Judge points out that by making the salary level the litmus test for whether an employee is exempt from overtime pay, the DOL “exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test. … If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change.”

This ruling throws a lifeline to small businesses, employees, state and local governments, non-profits and universities that would have suffered irreparable harm had the injunction not been granted."

These links explain the problem with the regulation

How much did tariffs drive 19th century U.S. economic growth?

From Marginal Revolution.
"Not so much:
The role of high tariffs in the emergence of the U.S. as a leading industrial nation in the late 19th century is still hotly debated. Despite its symbolic signifi- cance in the arguments of Free Trade, the quantitative implications of the tariffs on key features of the development are still unknown. In this paper I ask: Could the U.S. have grown as it did without the high tariffs imposed on its manufacturing imports in the late 19th century? To see this clearly, my analysis is quantitative and counterfactual in nature, effectively isolating the effects of the tariffs from other important forces. To do this, I construct a three-region general equilibrium model. The model is calibrated to match the key data during this period. Then, I disentangle the effects of the tariffs under two different assumptions. First, I assume that manufacturing productivity is exogenous to the tariffs. Then I assume that there exists learning-by-doing in U.S. manufacturing so that the tariffs positively affect productivity. Contrary to popular beliefs, I find that the effects of high manufacturing tariffs are quantitatively small. Even with learning-by-doing, tariffs only contributes about 4 percent to the growth of the manufacturing output, and a little more than 1 percentage point to its share in world manufacturing from 1870 to 1913. I then ask what the key driving forces for development are. I find that the large increase in labour force is the single most important factor behind the development of the U.S. economy.
That is from a 2013 job market paper by Yeo Jooon Yoon (pdf), emphasis added by me.  See also this earlier Doug Irwin paper, all hat tips go to PseudoErasmus."
Here is the abstract from the Irwin paper: 
"Were high import tariffs somehow related to the strong U.S. economic growth during the late nineteenth century? This paper examines this frequently mentioned but controversial question and investigates the channels by which tariffs could have promoted growth during this period. The paper shows that: (i) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth; (ii) tariffs may have discouraged capital accumulation by raising the price of imported capital goods; (iii) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff."

Friday, November 25, 2016

Standard methods of measuring welfare overstate cost of living increases by ignoring new products and demand shifts

See What big data tells us about real income growth by Stephen Redding and David Weinstein. Redding is Professor of Economics at Princeton. Weinstein is Professor of Economics at Columbia. Excerpt:

"Our index enables us to identify a novel form of bias that arises from the assumption of time-invariant demand for each good in existing price indexes. ‘Consumer valuation bias’ arises whenever expenditure shares respond to demand shifts. Since conventional indexes assume that expenditure shares are only affected by price changes, they will be biased whenever expenditure share changes are correlated with demand shifts. For example, if higher consumer demand causes prices to rise, a conventional index will overstate cost-of-living changes because it will not adjust for the fact that some of the price increase is offset by the higher utility per unit associated with the demand shift.

Our second main insight is to develop a novel way of estimating the elasticity of substitution between goods. Extant approaches focus on identification from supply and demand systems. However, we show that one can also identify this parameter by combining information from the demand system and unit expenditure function. One of the desirable properties of this ‘reverse-weighting’ estimator is that it minimises departures from money-metric utility given the observed data on prices and expenditure and the assumed constant elasticity of substitution utility function.

Finally, we use barcode data to examine the properties of our unified price index and reverse-weighting estimator. We find that we obtain reasonable elasticity estimates in the sense that they are similar to those identified using other methodologies on the same data. Moreover, the consumer valuation biases in existing indexes appear to be quite substantial, suggesting that allowing for demand shifts is an economically important force in understanding price and real income changes.  

Figure 2. Changes in cost of living for various indexes

We can see these differences at the aggregate level in Figure 2, which plots the expenditure-share-weighted average of the changes in the cost of living across product groups for each of the different index numbers over time, again using the initial period expenditure share weights. Not surprisingly, the Fisher, Törnqvist and Sato-Vartia result in almost identical changes in the cost of living that are bounded by the Paasche and Laspeyres indexes. This similarity is driven by the fact that they all assume no demand shifts for any good. The distance between the Sato-Vartia index and the Common-Goods Unified Price Index tells us the importance of the consumer valuation bias and the distance between the Sato-Vartia and the Feenstra-CPI indicates the value of the adjustment for changes in variety. In other words, big data suggests that standard methods of measuring welfare overstate cost of living increases by several percentage points per year because they ignore new goods and demand shifts."

Low-income households are disproportionately affected by price increases due to regulations

How Do Federal Regulations Affect Consumer Prices? An Analysis of the Regressive Effects of Regulation by Dustin Chambers & Courtney A. Collins of Mercatus.


Regulators and policymakers often claim that regulations are intended to protect the poorest and most vulnerable consumers. However, the effects of regulations are most harmful to the poor because regulations drive up the cost of doing business, resulting in higher prices. Unfortunately, the goods and services to which the poor devote much of their limited budgets, such as energy and food, are also the most heavily regulated.

When the federal government introduces new regulations for an industry, there are numerous potential consequences for both producers and consumers. Often, complying with regulations is costly for firms, and these higher costs may in turn drive up prices for consumers. Higher prices caused by regulatory growth are unlikely to affect all consumers equally. High-income and low-income households tend to have different spending patterns, and regulations may have a larger impact on one group than on another.

This study examines the relationship between regulatory expansion and higher prices and finds that price increases caused by regulation have a disproportionately negative effect on low-income households. The poorest households tend to spend a larger proportion of their income on goods that are heavily regulated and subject to both high and volatile prices. This cost should be recognized in policymakers’ efforts to consider the costs and benefits of new and existing regulations.


While several previous papers have documented potential costs associated with the burden of federal regulations, none have provided a comprehensive empirical analysis of the effect of regulations on consumer prices. This study uniquely combines data from the Consumer Expenditure Survey with industry-specific regulation information from the Mercatus Center’s RegData database as well as information on price changes over time from the Consumer Price Index.


Regulations in the Aggregate Lead to Price Increases
The stated purpose of regulations is often to help protect consumers from a variety of problems in the market. However, the benefit of any sort of protection must be weighed against the cost of higher prices. The data show evidence of a statistically significant relationship between regulation and increased prices.

There is a period of time between the publication of new regulatory restrictions and when they have a measurable impact on prices, so it is important to evaluate both variables over time. After the impacted production processes have been altered to comply with a new regulation, there is an associated jump in the price of the affected goods and services. Comparing the growth rate of prices over time against the growth rate of regulations over time, the data show that a 10 percent increase in total regulations leads to a 0.687 percent increase in consumer prices.

Poorer Households Spend More on More Heavily Regulated Goods

The data also show that households from the poorest income groups experience the highest overall levels of inflation and the highest levels of price volatility. In comparison to wealthier households, poorer households spend a substantially larger proportion of their income on more inflation-prone, volatile, and heavily regulated goods and services.

In the two most stable price quartiles of consumer expenditures, wealthier households allocated 15.3 percentage points more spending than the poorest households. By contrast, the poorest households allocated 15.3 percentage points more spending than the wealthiest households in the two most volatile quartiles.


Regulators and policymakers often claim that regulations are intended to protect the poorest and most vulnerable consumers. However, the effects of regulations are most harmful to the poor because regulations drive up the cost of doing business, resulting in higher prices. Unfortunately, the goods and services to which the poor devote much of their limited budgets, such as energy and food, are also the most heavily regulated.

Another unintended effect of regulation is that the poor face a higher overall rate of inflation in the goods they tend to purchase. In addition to undergoing larger price hikes, these heavily regulated products also display greater volatility, meaning that low-income households face more uncertainty in their household budgets than do wealthier households. Policymakers must understand the unintended effects of higher, more volatile prices on the poor when considering new regulations."

Wednesday, November 23, 2016

In defense of rational expectations models

By Scott Sumner.
"David Glasner has a post criticizing the rational expectations modeling assumption in economics:
What this means is that expectations can be rational only when everyone has identical expectations. If people have divergent expectations, then the expectations of at least some people will necessarily be disappointed -- the expectations of both people with differing expectations cannot be simultaneously realized -- and those individuals whose expectations have been disappointed will have to revise their plans. But that means that the expectations of those people who were correct were also not rational, because the prices that they expected were not equilibrium prices. So unless all agents have the same expectations about the future, the expectations of no one are rational. Rational expectations are a fixed point, and that fixed point cannot be attained unless everyone shares those expectations. Beyond that little problem, Mason raises the further problem that, in a rational-expectations equilibrium, it makes no sense to speak of a shock, because the only possible meaning of "shock" in the context of a full intertemporal (aka rational-expectations) equilibrium is a failure of expectations to be realized. But if expectations are not realized, expectations were not rational.

I see two mistakes here. Not everyone must have identical expectations in a world of rational expectations. Now it's true that there are ratex models where people are simply assumed to have identical expectations, such as representative agent models, but that modeling assumption has nothing to do with rational expectations, per se.

In fact, the rational expectations hypothesis suggests that people form optimal forecasts based on all publicly available information. One of the most famous rational expectations models was Robert Lucas's model of monetary misperceptions, where people observed local conditions before national data was available. In that model, each agent sees different local prices, and thus forms different expectations about aggregate demand at the national level.
It's also wrong to say:
But if expectations are not realized, expectations were not rational.
Suppose I am watching the game of roulette. I form the expectation that the ball will not land on one of the two green squares. Now suppose it does. Was my expectation rational? I'd say yes---there was only a 2/38 chance of the ball landing on a green square. It's true that I lacked perfect foresight, but my expectation was rational, given what I knew at the time.

In 2006, it might have been rational to forecast that housing prices would not crash. If you lived in many countries, your forecast would have been correct. If you happened to live in Ireland or the US, your forecast would have been incorrect. But it might well have been a rational forecast in all countries."

Take the 25% tariff on light trucks hurts "average Americans"

See Mercantilism Dies Hard by David Henderson of EconLog.
"One of the things that economists, whatever their other views, are most sure of is that free trade is a good idea.

The normal way we argue for trade, either between individuals and companies in a country or between individuals and companies across borders, is that both sides benefit. The seller benefits by selling something for a price greater than his supply price. (The supply price is the minimum price that he requires to be willing to supply the item in question.) The seller's gain is the difference between his supply price and the price he is paid, and is called producer's surplus. The buyer benefits by buying something for a price that is below his demand price. (The demand price is the maximum price the buyer is willing to pay for an item.) The buyer's benefit is his demand price minus the price he pays, and is called consumer surplus. The sum of producer's and consumer's surplus is the gain from the exchange.

Notice that consumer surplus is a big part of the story, whether the exchange is within a country or across borders.

But many people systematically leave out the gains to consumers. There are two recent instances.
Henry Olsen, a senior fellow at the Ethics and Public Policy Center and an adjunct professor at Villanova University, in an op/ed in the Washington Post, writes:

Many of Trump voters' priorities can be addressed in ways consistent with Republican inclinations. Immigration can be reduced but not eliminated; trade deals can proceed if they ensure that benefits flow to average Americans, not just those in finance or exporting industries.

Notice Olsen's narrow focus. The implication of his focus on exporters seems to be that trade deals don't generally generate benefits for average Americans except in their role as exporters or employees of exporters. But they do benefit. One of the main benefits of free trade is lower prices, and therefore consumer surplus, on the items they buy.
 Take the 25% tariff on light trucks, please. That tariff makes price of trucks, whether new or used, substantially higher. Yes, it has caused most truck production for the U.S. market to move to the United States. But the producers do that to get around the tariff wall and would likely not do that if there were no tariff. So, although 25% is almost certainly an overestimate of the higher price U.S. buyers pay for new trucks, without a tariff they would certainly pay much less. So a trade deal that cuts tariffs on trucks would definitely help "average Americans." And here's the thing: the U.S. government could to that unilaterally without a trade deal. I choose this example on purpose. When I mentioned to my students, while teaching about free trade and protectionism, that there is a 25% tariff on light trucks coming into the United States, that caught their attention. Many of them have bought new trucks and would have loved to have paid much less. They are not literally average Americans--their and their spouses' incomes probably put them in the top 20% of the income distribution--but next time you talk to an "average American" who owns a pickup truck, tell him about that 25% tariff and see if he is indifferent.

Or consider this recent piece in the Wall Street Journal by Harvard economist Martin Feldstein, my boss when I was at the Council of Economic Advisers. He's trying to defend NAFTA. Good for him. But how does he defend it? He writes:

During the campaign Mr. Trump promised to tear up the North American Free Trade Agreement if he could not negotiate a substantial improvement. Revoking the agreement would put more than $600 billion of U.S. exports to Canada and Mexico in jeopardy. According to the U.S. Census Bureau, U.S. companies export more to Canada than they import from Canada. Including Mexico, total Nafta imports exceed exports by less than $40 billion, an amount equal to just one-quarter of 1% of GDP.

So Marty's defense is that exports would be put at risk and he mentions imports only to compare their size to the size of exports. So all that seems to matter to him, when defending free trade, is gains to producers (exporters), not gains to consumers (importers).
 Mercantilism dies hard.

The misunderstanding is bipartisan. But also the understanding is bipartisan. Democratic economist Alan Blinder laid out the case for free trade beautifully in "Free Trade" in The Concise Encyclopedia of Economics."

Tuesday, November 22, 2016

Amtrak’s World-Class Losses

By Randal O'Toole of Cato.
"Amtrak issued its F.Y. 2016 unaudited financial results last week with a glowing press release claiming a “new ridership record and lowest operating loss ever.” Noting that “ticket sales and other revenues” covered 94 percent of Amtrak’s operating costs, Amtrak media relations called this “a world-class performance for a passenger carrying railroad.” The reality is quite a bit more dismal.
Many new high-tech firms attract investors despite losing money, but a 45-year-old company operating an 80-year-old technology shouldn’t really brag about having its “lowest loss ever.” The “world-class performance” claim is based on the assumption that passenger trains all over the world lose money, which is far from true: most passenger trains in Britain and Japan make money, partly because they are at least semi-privatized.

Moreover, a close look at the unaudited report reveals that Amtrak left a lot of things out of its press release: passenger miles carried by Amtrak declined; ticket revenues declined; and the average length of trip taken by an Amtrak passenger declined. The main reasons for Amtrak’s positive results were an increase in state subsidies (which Amtrak counts as passenger revenue) and a decrease in fuel and other costs.

Ridership grew by 1.3 percent, but passenger miles fell because the average length of trips fell by 3.1 percent. One of the biggest drops in trip lengths was on the New York-Savannah Palmetto. Starting at the beginning of F.Y. 2016, Amtrak added stops at Metropark, New Brunswick, Princeton Junction, and Baltimore-Washington Airport, effectively turning the supposedly long-distance train into a Northeast Corridor train. In 2015, the train’s average trip length was 396 miles, but in 2016 that dropped to 257 miles.

A decline in passenger miles means more empty seats. In 2015, Amtrak filled 51.4 percent of its seat-miles; in 2016, this fell to 50.0 percent. In other words, the average Amtrak train is half full; when was the last time you were on a half-full airliner? The biggest declines were on the Washington-Richmond state-supported train, the Seattle-Los Angeles Coast Starlight, and the Auto Train.

Some trains did show an increase in passenger miles. One of the biggest increases was the Chicago-Indianapolis Hoosier State, which saw an 11 percent increase in passenger miles and a 16 percent increase in revenues. This train is supported by Indiana, which got fed up with Amtrak service and contracted it out to another operator, Iowa Pacific. Amtrak is a “partner” because it allows people to make reservations on the train from its web site. But the lesson may be that privatization (or semi-privatization) can result in bigger ridership gains than Amtrak.

The biggest increase in Amtrak’s revenue was state subsidies for trains such as Washington-Norfolk, Chicago-St. Louis, Seattle-Eugene, and the California trains. In 2015, these trains earned $1.62 in total revenues for every $1 in actual ticket revenues; in 2016, this grew to $1.76 per dollar. Most of the difference between total revenues and ticket revenues is state subsidies, which grew from $222.9 million to $227.5 million.

Decreasing costs, not increasing revenues, accounted for most of the increase in the share of operating costs covered by revenues. Fuel costs declined by $53 million. Wages fell by $12 million (though executive salaries grew by $17 million). The biggest savings was a $79 million decline in employee benefits, due to late F.Y. 2015 cuts in both pensions and health benefits.

The focus on the share of operating costs that is covered by revenues conveniently ignores the fact that not all costs are operating costs. Amtrak reported ticket revenues of $2.1 billion and total expenses of $4.2 billion, so passenger fares actually covered just 50 percent of total costs. There’s a big difference between 94 percent and 50 percent.

That difference is largely due to an issue that I’ve noted before, which is that Amtrak has defined away a lot of operating costs by calling them capital costs. It’s also difficult to tell how much Amtrak is reducing costs by deferring maintenance on its infrastructure and rolling stock.

The truth is that not much is different from 2015. Amtrak still requires well over a billion dollars in federal subsidies per year. That makes Amtrak a world-class money loser, just like most European state-owned railroads. Despite the implicit promise of “declining operating losses,” that’s not going to change anytime soon unless Congress kills the program."

ObamaCare's Supposed Beneficiaries Turned Out For Trump

By Michael F. Cannon.
"Recent economic research calls into question the value of ObamaCare’s Medicaid expansion, and indeed the entire Medicaid program. In one study, MIT health economist Amy Finkelstein and her colleagues found that Medicaid produced no discernible improvement in enrollees’ measured physical health outcomes. In another, Finkelstein and colleagues estimated enrollees receive only 20-40 cents of benefit for every dollar the program spends.

Researchers at The Economist went looking for factors to explain why Donald Trump outperformed Mitt Romney’s showing in key states four years prior. They found ”the single best predictor identified so far of the change from 2012 to 2016 in the share of each county’s eligible voters that voted Republican” is how low the county scores on an index of public health measures. The worse a county performed on life expectancy, obesity, diabetes, heavy drinking, and physical activity, the greater the swing toward Trump. The Economist explains:
Polling data suggests that on the whole, Mr. Trump’s supporters are not particularly down on their luck: within any given level of educational attainment, higher-income respondents are more likely to vote Republican. But what the geographic numbers do show is that the specific subset of Mr. Trump’s voters that won him the election—those in counties where he outperformed Mr. Romney by large margins—live in communities that are literally dying.
The accompanying graph shows the negative relationship between these health measures and Trump’s gains, or (equivalently) the positive relationship between poor health and Trump’s gains.

United States, health metrics against swing to Donald Trump, by county.  Source: The Economist,
United States, health metrics against swing to Donald Trump, by county. (Source: The Economist)

The implications are remarkable. ObamaCare’s main selling point is that it guarantees access to health insurance for people with preexisting conditions — like diabetes and other illnesses associated with obesity, heavy drinking, and a lack of physical activity.

After nearly two years of experience with ObamaCare, areas of the country that supposedly stand to gain the most swung toward the candidate who promised to repeal it. The more they stood to benefit, the bigger the swing. Many of ObamaCare’s supposed beneficiaries don’t appear to value the law all that much."

Monday, November 21, 2016

The Trouble With Trump's Infrastructure Plan

By Tyler Cowen.
"During the Obama years, most conservatives were against fiscal stimulus and most liberals were for it. Now that President-elect Donald Trump has proposed a major boost in government spending, many commentators will feel urges to migrate to the opposite positions. In light of this ideological turmoil, we should keep a clear head on when government spending truly stimulates the economy.

The first principle is not to be fooled by increases in measured gross domestic product. A new Trump stimulus would probably boost GDP, but that doesn’t mean it would be working well.

Measured GDP just doesn’t capture the relevant trade-offs for evaluating government spending. For instance, a lot of U.S. workers are producing organizational capital. They work on business plans, building client lists, developing marketing strategies, cultivating customer relations and performing other future-oriented activities common to service-sector enterprises. On any given day, most of us are not churning out additional widgets.
Government stimulus, on the other hand, usually is oriented toward concrete outputs such as roads and bridges or military hardware. It’s more like old-style manufacturing.

Stimulus therefore pulls workers out of producing organizational capital. In the short run, measured GDP goes up, yet the economy may or may not be doing better overall, especially in the longer run. In desperate situations, it is indeed prudent to emphasize the short run, but that is not obviously the case in 2016, when we are nearing full employment and last quarter’s GDP growth was estimated at a respectable 2.9 percent.

There are valuable infrastructure projects governments could and should spend money on, like road maintenance. But a short-term rise in GDP is not itself an good indicator of quality or success. Even if the Trump administration makes bad infrastructure decisions and wastes a lot of money, measured GDP still is going to rise. Don’t be fooled.

There is another reason why short-run GDP is a misleading guide to stimulus: the money spent eventually has to be paid back. So today’s GDP boost will be offset by a contraction in five, 10 or 20 years.

In Keynesian theory, fiscal policy only works well if you use it in down times and pay off the bill during a boom. Trump seems ready to do the opposite by upping spending as the economy approaches full employment. After that? Recent history suggests that many countries switch back to austerity precisely when they shouldn’t. That is a reality proponents of “spend more now” have to reckon with, and it means stimulus can bring a bigger contraction in the future than the boost it gives today.

For years, I have been reading about evidence that the 2009 fiscal stimulus promoted by the administration of President Barack Obama was good for the American economy. Study after study shows that it boosted GDP across a two- to three-year time horizon, as indeed it did. Furthermore, some parts of the stimulus truly were beneficial, for instance the aid to state and local governments that limited the need for temporary layoffs. But a serious evaluation of the Obama stimulus, and its longer-term consequences, remains to be done.

Many Democratic economists are in a bind when it comes to criticizing the forthcoming Trump stimulus, as they’ve spent the last seven years neutering their best arguments. The awkwardness is evident in writers such as Paul Krugman, who has argued for a massive stimulus for many years, including for 2016, claiming it would come close to paying for itself, even if much of the money were to be wasted. Now Krugman sees his archenemy Trump recommending more government spending, and he can’t bring himself to simply endorse someone else’s version of that idea.

Republican legislators also face a dilemma. Many of them, including Paul Ryan, went along with the big government spending increases of the Bush administration, when Republicans controlled the executive and legislature. The conservative wing of the party made them swear to never do it again, but will they stick to that promise? I predict Trump will offer a big enough tax cut to get most of them on the spending bandwagon once again.

The real danger is that a year or two from now, Trump will be a popular president, pointing to real gains in GDP numbers, even if his policies aren’t better for the longer run.

The best scenarios for a Trump presidency involve a lot of checks and balances, backed by public skepticism, not more popularity and populism. It’s up to economists to help enforce such critical thinking, but the fiscal-policy rhetoric of pro-stimulus economists has been pushing discourse in the wrong direction. That’s one bill to come due sooner than many of us had been expecting."

Thanksgiving Was a Triumph of Capitalism over Collectivism

By Richard M. Ebeling of FEE.
"This time of the year, whether in good economic times or bad, is when we gather with our family and friends and enjoy a Thanksgiving meal together. It marks a remembrance of those early Pilgrim Fathers who crossed the uncharted ocean from Europe to make a new start in Plymouth, Massachusetts. What is less appreciated is that Thanksgiving also is a celebration of the birth of free enterprise in America.

The English Puritans, who left Great Britain and sailed across the Atlantic on the Mayflower in 1620, were not only escaping from religious persecution in their homeland. They also wanted to turn their back on what they viewed as the materialistic and greedy corruption of the Old World.

In the New World, they wanted to erect a New Jerusalem that would not only be religiously devout, but be built on a new foundation of communal sharing and social altruism. Their goal was the communism of Plato’s Republic, in which all would work and share in common, knowing neither private property nor self-interested acquisitiveness.

What resulted is recorded in the diary of Governor William Bradford, the head of the colony. The colonists collectively cleared and worked land, but they brought forth neither the bountiful harvest they hoped for, nor did it create a spirit of shared and cheerful brotherhood.

The less industrious members of the colony came late to their work in the fields, and were slow and easy in their labors. Knowing that they and their families were to receive an equal share of whatever the group produced, they saw little reason to be more diligent their efforts. The harder working among the colonists became resentful that their efforts would be redistributed to the more malingering members of the colony. Soon they, too, were coming late to work and were less energetic in the fields.

As Governor Bradford explained in his old English (though with the spelling modernized):
For the young men that were able and fit for labor and service did repine that they should spend their time and strength to work for other men’s wives and children, without recompense. The strong, or men of parts, had no more division of food, clothes, etc. then he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labor, and food, clothes, etc. with the meaner and younger sort, thought it some indignant and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc. they deemed it a kind of slavery, neither could man husbands brook it.
Because of the disincentives and resentments that spread among the population, crops were sparse and the rationed equal shares from the collective harvest were not enough to ward off starvation and death. Two years of communism in practice had left alive only a fraction of the original number of the Plymouth colonists.

Realizing that another season like those that had just passed would mean the extinction of the entire community, the elders of the colony decided to try something radically different: the introduction of private property rights and the right of the individual families to keep the fruits of their own labor.
As Governor Bradford put it:
And so assigned to every family a parcel of land, according to the proportion of their number for that end . . .This had a very good success; for it made all hands very industrious, so as much more corn was planted then otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little-ones with them to set corn, which before would a ledge weakness, and inability; whom to have compelled would have been thought great tyranny and oppression.
The Plymouth Colony experienced a great bounty of food. Private ownership meant that there was now a close link between work and reward. Industry became the order of the day as the men and women in each family went to the fields on their separate private farms. When the harvest time came, not only did many families produce enough for their own needs, but they had surpluses that they could freely exchange with their neighbors for mutual benefit and improvement.
In Governor Bradford’s words:
By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God. And the effect of their planting was well seen, for all had, one way or other, pretty well to bring the year about, and some of the abler sort and more industrious had to spare, and sell to others, so as any general want or famine hath not been amongst them since to this day.
Hard experience had taught the Plymouth colonists the fallacy and error in the ideas of that since the time of the ancient Greeks had promised paradise through collectivism rather than individualism. As Governor Bradford expressed it:
The experience that was had in this common course and condition, tried sundry years, and that amongst the Godly and sober men, may well convince of the vanity and conceit of Plato’s and other ancients; -- that the taking away of property, and bringing into a common wealth, would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed confusion and discontent, and retard much employment that would have been to their benefit and comfort.
Was this realization that communism was incompatible with human nature and the prosperity of humanity to be despaired or be a cause for guilt? Not in Governor Bradford’s eyes. It was simply a matter of accepting that altruism and collectivism were inconsistent with the nature of man, and that human institutions should reflect the reality of man’s nature if he is to prosper. Said Governor Bradford:
Let none object this is man’s corruption, and nothing to the curse itself. I answer, seeing all men have this corruption in them, God in his wisdom saw another course fitter for them.
The desire to “spreading the wealth” and for government to plan and regulate people’s lives is as old as the utopian fantasy in Plato’s Republic. The Pilgrim Fathers tried and soon realized its bankruptcy and failure as a way for men to live together in society.

They, instead, accepted man as he is: hardworking, productive, and innovative when allowed the liberty to follow his own interests in improving his own circumstances and that of his family. And even more, out of his industry result the quantities of useful goods that enable men to trade to their mutual benefit.

In the wilderness of the New World, the Plymouth Pilgrims had progressed from the false dream of communism to the sound realism of capitalism. At a time of economic uncertainty, it is worthwhile recalling this beginning of the American experiment and experience with freedom.

This is the lesson of the First Thanksgiving. This year, when we sit around our dining table with our family and friends, let us also remember that what we are really celebrating is the birth of free men and free enterprise in that New World of America.

The real meaning of Thanksgiving, in other words, is the triumph of Capitalism over the failure of Collectivism in all its forms."

Sunday, November 20, 2016

We had the debate between capitalism and socialism, and capitalism won.

From Cafe Hayek.
"from pages 3-4 of Georgetown University philosopher Jason Brennan’s brilliant 2014 book, Why Not Capitalism? (footnotes deleted):
Consider: The United States puts the poverty line for an American living alone at about $11,500.  A person living in the United States off this meager [annual] income, adjusting for the cost of living, is still among the richest 14% of people alive today, earning more than six times the income of the typical person worldwide.  In contrast, the countries that tried socialism – the Soviet Union, China, Cuba, Vietnam, Cambodia, and North Korea – were hellholes.  Socialist governments murdered about 100 million (and perhaps many more) of their own citizens….  In socialist countries no one got rich, except maybe a few Communist Party officials.  Socialism was especially bad for poor proletariat workers, the very people the system was supposed to help the most.  So, sure, capitalism has problems, as [filmmaker] Michael Moore and OWS [Occupy Wall Street] can show you, with perhaps some exaggeration here and there.  But socialism was a disaster.  In short, we had the debate between capitalism and socialism, and capitalism won.
In this book, Brennan defends capitalism not because capitalism is by far the best set of economic institutions and attitudes for enriching the masses, but because capitalism is also morally superior to socialism – even to ideal socialism."

It appears Milwaukee’s School Choice program produced somewhat better outcomes at much lower taxpayer expense than the public schools

See At Least as Good at a Fraction of the Cost? Some “Flop”! by Neal McCluskey of Cato.
"A lot of well-intentioned people think it is not enough for families to be able to choose schools. They have to choose “good” schools. Those people often do not think private school choice programs that give parents a lot of control over which schools they select are up to par. Fine. But just because you don’t like something doesn’t make it a “clear flop.”
Writing at The 74, Richard Whitmire warns that we should beware Trumps bearing school choice gifts. He argues that President-elect Trump’s proposal to spend $20 billion on school choice could be dangerous not because of, say, federal rules that might be attached to unconstitutional largesse, but because the money might not be restricted to “great” schools. “Great,” presumably, should be defined by legislators or bureaucrats. After all, you don’t want to replicate the Milwaukee voucher program:
Those in the school reform movement learned the hard way that choice alone does not produce more seats in great schools. If that were the case, we’d all be praising the early voucher program in Milwaukee and the widespread charters in Ohio and Michigan. But in all those cases, choice alone produced nothing.
In Milwaukee, for example, which I visited repeatedly while researching my book On the Rocketship, about the creation of one best-in-class charter network, the more-than-two-decade-old voucher experiment proved to be a clear flop. (Note that I didn’t say unpopular. Who objects to free tuition for their kid’s parochial schools?)
Set aside the first evidence that Milwaukee’s program isn’t a “clear flop”: It is popular, indicating that the people it is supposed to serve are at least getting something they want. What about other important measures, including test scores, graduation rates, competitive effects, and costs? According to researchers at the University of Arkansas’ School Choice Demonstration Project, who intensively studied Milwaukee:
Our main findings included that the program had a positive effect on a student’s likelihood of graduating from high school and enrolling and persisting in a 4-year college. We found little evidence that the Choice program increased the test scores of participating students, though our final analysis revealed a positive effect of the program on reading scores when combined with high stakes testing. There was no evidence of program effects on math scores. Competition from the Choice program appears to have boosted the test scores of students who remained in Milwaukee Public Schools (MPS), but those systemic effects of the program were modest in size. Because the maximum value of the voucher…is substantially less than what the government pays to educate students in MPS, the state saves over $50 million per year from the operation of the program. 
Is the choice program transformative? No. But a flop? It appears to have produced somewhat better outcomes at much lower taxpayer expense than the public schools. It is also nowhere near a free market, with regulations constraining admissions policies, hours of instruction, and testing. And freedom is the key to unleashing competitive pressures, specialization, and innovation.

The Milwaukee voucher program is not a flop, and making policy based on the idea it is would be a mistake."

Friday, November 18, 2016

Federal Reserve Board Chair Janet Yellen warns lawmakers that as they consider infrastructure spending, they should keep an eye on the national debt-also a big fiscal stimulus is not needed now

See Janet Yellen confirms much of what I've been saying about fiscal stimulus by Scott Sumner.

"I've been frequently arguing that fiscal stimulus makes no sense, especially at a time when the unemployment rate is 4.9% and the Fed is raising interest rates. Any impact on aggregate demand will be offset by tighter monetary policy.
In contrast, prior to 2007, no one (AFAIK) was suggesting that infrastructure spending is a sensible countercyclical tool when unemployment is 4.9%. And if someone did recommend it, they almost certainly recommended LOWER than usual spending at 4.9% unemployment.
Now Janet Yellen is saying much the same thing; now's not the time for fiscal stimulus:
President-elect Donald Trump has pledged a $1 trillion infrastructure spending program to help jump-start an economy that he said during the campaign was in terrible shape. Speaking on Capitol Hill Thursday, Federal Reserve Board Chair Janet Yellen warned lawmakers that as they consider such spending, they should keep an eye on the national debt. Yellen also said that while the economy needed a big boost with fiscal stimulus after the financial crisis, that's not the case now.
"The economy is operating relatively close to full employment at this point," she said, "so in contrast to where the economy was after the financial crisis when a large demand boost was needed to lower unemployment, we're no longer in that state."

In my recent Lake Wobegon post I pointed out that fiscal policy can't always be above average. Thus if you do fiscal stimulus when unemployment is relatively low, then in the next recession fiscal policy will have to be tighter than otherwise:

The key point to understand about fiscal stimulus is that more fiscal stimulus today implies less fiscal stimulus during the next recession. That's because the expansionary impact of fiscal stimulus (in the Keynesian model) occurs because the full employment budget deficit gets larger than before, not because it is large in absolute value. For the moment, let's assume that the full employment deficit during the next recession is $X. In that case, the larger the fiscal stimulus between now and the onset of the next recession, the smaller the increase in the deficit during the next recession, and thus the smaller the fiscal stimulus during the next recession.

And now Janet Yellen is saying the same thing:

Yellen cautioned lawmakers that if they spend a lot on infrastructure and run up the debt, and then down the road the economy gets into trouble, "there is not a lot of fiscal space should a shock to the economy occur, an adverse shock, that should require fiscal stimulus." In other words, lawmakers should consider keeping their powder dry so they have more options whenever the next economic downturn comes along.

For weeks and months we've been bombarded with nonstop commentary from media "pundits" about how monetary policy is out of ammo, and fiscal stimulus is the shiny new thing that everyone favors. I've been standing in the middle of the road yelling, "stop". 
 My opponents claimed that the Fed does not agree with me. So how does it feel to achieve a dramatic come from behind fourth quarter victory?

Pretty darn good!"