Friday, December 30, 2016

From music therapists to funeral directors, licensing schemes keep out competition

See Breaking Down ‘Bottleneckers’ by Dick Carpenter and Chip Mellor. Excerpts:
"Most states require that much of the alcohol produced for consumers pass through a distributor before being made available for retail purchase. There is little evidence that such a middleman scheme reduces overconsumption—the original purported benefit. Yet there is confirmation that consumers pay as much as 30% more for their hooch, all of it going into the pockets of distributors. It’s no wonder that efforts to break open the market are fiercely opposed by distributor bottleneckers.

Representatives of other industries...coordinate letter-writing campaigns, crowd legislative-hearing rooms, lobby legislators, hold industry days at capitols, and deliver frightening testimony to legislative committees.

These strategies aren’t new. In 2000 an Oklahoma legislator proposed a bill to allow casket sales without a funeral director’s license. Funeral-home executives warned legislators that the bill would mean that grandma’s dead body would be propped in a corner while awaiting a casket purchased online. (Never mind that such caskets can be delivered within 24 hours.) Oklahoma still requires a funeral-director license to sell a casket"

"The American Music Therapy Association has been canvassing state legislatures since at least 2011, begging to be licensed."

"In 2014, Georgia began requiring aspiring music therapists to earn a bachelor’s degree or higher in music therapy from an association-approved program, complete 1,200 hours of clinical training, and pass the examination for board certification, which costs $325 to take. They also have to pay $100 in fees to the state."

"Also consider aspiring cosmetologists, who spend between 1,000 and 2,300 hours in training, depending on the state. But even leaders in the cosmetology industry admit the requirements can’t be justified for hair and makeup experts."

"“there do not appear to be documented explanations for how each state determines the required curriculum hours,” even though there is not much evidence to show more hours “lead to more positive industry outcomes.”"

"In a 2014 letter, the executive director of the Professional Beauty Association warned that “the vast disparity among state licensing requirements will leave [the beauty] industry vulnerable to legislative attacks and the risk of deregulation.”"

New IRS data show that 71% of US taxpayers who make it into the ‘Top 400’ are there for only a single year

From Mark Perry.
"The IRS recently released its annual report on the 400 US taxpayers with the highest adjusted gross incomes (AGI) from 1992 to 2014, and the table above shows the frequency of individual taxpayers appearing in the Top 400 (Table 4 in the IRS report). Of the 9,200 total tax returns filed in the 23 years from 1992 to 2014 for the 400 highest earners in each year, there were 4,584 unique, individual taxpayers in the Top 400 over those 23 years, since some taxpayers were in the Top 400 group in more than one year.


The new IRS data show that:

1. Of the group of 4,584 unique top earners from 1992-2014, there were 3,262 individual taxpayers who made it into the “Fortunate 400” only one time during the 23-year period. Those 3,262 one-timers represent 71.2% of the total 4,584 taxpayers, and therefore only 1,322 taxpayers that make up the rest of that elite group (28.8% of the total, or about one in four) were able to make it into the Top 400 in more than one year between 1992 and 2014.

2. Moreover, since 3,262 earners made it into the Top 400 only once (71.2%) and another 558 taxpayers (12.2%) made it into the top group twice between 1992 and 2014, that means that 83.3% of the top earners made it into the “Fortunate 400” only once or twice (3,820 out of 4,584), and only 16.7% (764 taxpayers out of 4,584) were able to make it into the top group in more than 2 years out of 23.

3. There were only 138 taxpayers out of the 4,584 total taxpayers in the top earner group (3%) who were in the Top 400 in 10 or more years out of 23.

4. Why is there such a high turnover among the Top 400 and why are most taxpayers in that group for only a single year? Data in Table 1 of the IRS report provide an answer. The combined salaries and wages of the Top 400 in 2014 were about $5.6 billion, which represented only 4.4% of those taxpayers’ combined Adjusted Gross Income (AGI) of about $127 billion. But those top taxpayers as a group had about $76.8 billion in income from sales of capital assets in 2014, which was more than 60% of their combined AGI of $127 billion. So while the Top 400 are certainly high earners (average salary of about $14 million in 2014), what puts them into the Top 400 in a given year isn’t their high salaries, but rather their large gains from the sale of capital assets (average capital gain for the Top 400 taxpayers in 2014 was $192 million) – which are often one-time sales of appreciated stock, or one-time gains from selling a business, partnership, farm, or real estate.

5. Data from Table 1 also reveal that the Top 400 are a pretty generous group based on their reported charitable contributions. In 2014, the Top 400 combined gave nearly $14.5 billion to charity, at an average of more than $37 million per taxpayer. Even though that Top 400 group represented only about three one-thousandths of 1% of all 148.6 million taxpayers in 2014 (0.000269%), those 400 taxpayers accounted for nearly 7% of the $210 billion in total charitable contribution deductions in 2014.

According to the IRS from a previous report on the dynamics of the Top 400 earners (updated here with 2014 data), “The data reveal a mostly changing group of taxpayers over time. In fact, there were 4,584 different taxpayers represented in total for the 23-year period between 1992 and 2015. Of these, fewer than 17 percent appear more than once and only about 3 percent were represented in 10 or more years. Nearly three out of four taxpayers (71.2%) were in the Top 400 in only a single year.”

MP: Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover. That is, once you find yourself in a top or bottom quintile, or a certain income percentile, or the Top 400, you’ll likely stay there for decades or even for life. But economic reality is very different – people move up and down the income quintiles and percentile groups throughout their careers and lives. The top or bottom 1/5/10% by income, just like the top or bottom income quintiles, are never the same people from year to year, because there is constant, dynamic turnover as we move up and down the income categories.

It’s very likely that most of the members of the IRS’s Top 400 started in one of the lower-income quintiles early in their lives and careers, and advanced into the higher income quintile and eventually into the Top 400 as they become successful, and they may drop into a lower-income quintile later in life. As the new IRS data show, almost three out of every four members of the ever-changing “Fortunate 400” over the last 23 years were only “members” of that group for a single year, which reflects the dynamic nature of the US economy and the significant income mobility that exists for Americans — at all levels of income."

Thursday, December 29, 2016

Trump’s Threats on Trade Endanger US Jobs

By Daniel Griswold.
"Heading toward his inauguration in less than a month, President-elect Donald Trump has already waved a big stick at every American multinational company that’s even thinking about moving productive operations to another country. After making Carrier Co. an offer it couldn’t refuse, to keep 800 Indiana factory jobs from moving to Mexico, he warned that “companies are not going to leave the United States anymore without consequences.” In a barrage of subsequent tweets, he threatened “retribution,” including a 35 percent tariff on products those companies try to sell back to the United States.

Trump’s ultimatum scored well in national polls, but it should trouble all Americans who value free enterprise and the rule of law. It weakens our economy and our political system when the incoming chief executive of the federal government tries to dictate to U.S. companies how they should deploy their productive assets.

According to a new report issued by the U.S. Commerce Department, more than 4,000 U.S. companies operate more than 32,000 affiliates around the world. Those companies don’t invest abroad primarily to take advantage of low wages or to send products back to the homeland, but to instead reach new customers and expand their market share globally. Locating production in foreign markets allows U.S. companies to better tailor products for local consumer tastes, to reduce transportation costs and to protect trademarks and intellectual property. Various services can’t be exported; they must be delivered in the local market.

In today’s global economy, U.S. companies sell more of their brand-name goods and services through their majority-owned foreign affiliates than they do by exporting from the United States. According to the most recent numbers from the Commerce Department’s Bureau of Economic Analysis, U.S. majority-owned affiliates supplied $4.49 trillion in goods to foreign customers in 2014, compared to the $1.63 trillion exported from the United States. U.S. affiliates supplied $1.66 trillion in services to foreigners, compared to $743 billion in exported services. That means U.S. companies sell more than twice as much in global markets through their foreign affiliates as they do by exporting from the United States.

What U.S. majority-owned affiliates produce abroad is overwhelmingly sold abroad. Of the more than $4 trillion in goods they supplied in 2014, 8 percent were sold as imports to the United States; 92 percent were sold in the host country or in third countries. A full 96 percent of the goods supplied by U.S.-owned affiliates in China were sold in that country or others outside the United States. In Mexico, 68 percent of the goods they supplied were sold in Mexico or other foreign countries.

Ford Motor Co. has also come under Trump’s Twitter fire for its plans to shift production of lower-margin vehicles to Mexico. Its competitor General Motors now sells almost twice as many cars in China than it does in the United States, not by exporting to China but by producing them in China through joint ventures. Few of the cars are exported back to the United States. In 2015, GM’s China operations returned more than $2 billion in profits, improving the company’s long-term viability after its 2009 bankruptcy.

United Technologies Corp., the parent company of Carrier as well as Otis Elevators, operates 25 factories in China that generate $6 billion in annual sales and employ 24,000 workers. As Politico recently reported, United Technologies’ vice president for international government relations, David Manke, said of the company’s operations in China, “We’re not going anywhere. We like doing business there.” Manke said United’s joint ventures make products for the Chinese domestic market, not the U.S. market. “We don’t go there to make elevators and ship them back to the U.S. We go there to make elevators and sell them in China.”

While investment in Mexico and China draws the president-elect’s ire, most of the foreign affiliates are located in other high-income, high-standard countries, accounting for three quarters of the affiliate value added. What attracts U.S. investment is not primarily low wages but wealthy customers, skilled workers, free movement of goods and money across borders, the rule of law and political stability. U.S. majority-owned affiliates employ twice as many workers in Canada, Europe, Japan and Australia as they do in Mexico and China.

Expanding operations abroad not only generates profits but also supports U.S. employment at the parent company. More production abroad can increase demand for higher-end components and services exported from the United States. It creates demand for more U.S. engineers, designers, accountants and managers to support global operations. From 2009 through 2014, while U.S. multinationals were expanding their affiliate employment overseas by 3.0 million, they were adding 3.6 million jobs at their parent-company operations in the United States.

The irony of Trump’s fixation on outward manufacturing investment is that the United States remains the world’s largest recipient of manufacturing investment. Foreign multinationals, year after year, invest more than twice as much in the U.S. manufacturing sector as American manufacturing companies invest abroad. About one in six American manufacturing workers, more than 2.4 million, are employed by foreign-owned companies.

While candidate Trump was calling out Carrier for its plans to send 1,300 jobs to Mexico, the Japanese automaker Subaru was shifting production of its new Impreza model from Japan to its operations in Indiana, adding 1,400 new jobs in the past year. We should be grateful that Japan’s government is not threatening “retribution” against its companies that “ship jobs” to the United States.

If a Trump administration succeeds in erecting a financial Berlin Wall that prevents U.S. companies from investing abroad, the result will be a retreat from global markets, with European, Japanese and Chinese multinationals ready to grab market share. U.S. companies will sell fewer American-branded goods and services abroad, reducing the returns to their shareholders and employment opportunities for American workers.

Daniel Griswold is a senior research fellow and co-director of the Program on the American Economy and Globalization with the Mercatus Center at George Mason University."

With Lower Taxes And Fewer Regulations, The U. S. Does Better Than Other G-7 Nations

See Holiday Cheer From the Dismal Science by Edward P. Lazear.
"Around the time when Tocqueville was writing, England’s per-capita gross domestic product was 50% higher than that of America, according to a 2014 study by the Organization for Economic Cooperation and Development (OECD). But by the early 20th century the U.S. had caught up. Since World War II, the U.S. has maintained about a 30% advantage over the U.K. There is no other G-7 country that comes close to the U.S. Most are about 70% as rich on a per-capita basis.

A sign of economic progress is that most Americans generally do better than the previous generation, despite some earnings declines over the recent past. A 2012 Pew report based on data from the Panel Study of Income Dynamics reveals that 84% of the respondents earn more than their parents.

Admittedly, there is room for improvement, especially by addressing those in poverty whose children do not escape that condition. But most Americans have managed to earn higher incomes than their parents earned.

The same report also documents high income mobility, meaning that those who are born poor do not necessarily remain poor and those who are rich come predominantly from less wealthy families. Three-fifths of Americans who are now among the top 20% of earners grew up in families that weren’t in the top 20%. The same is true for the bottom 20% of earners, where almost three-fifths come from families that were not in the bottom 20%.

Another indicator of opportunity is the number of people who would like to move to the U.S. From 2009 through 2014, about one million people a year were successful in obtaining immigration status (green cards), but entry quotas typically left more than four million people waiting to get in each year, according to State Department data. In 2010 a survey conducted by the European Commission asked residents of the European Union in which other countries they would like to work. Despite the distance from Europe, the winner was the U.S., with 21% saying they would like to work here.

What makes the U.S. economy perform well over time and so attractive to others? First, Americans are industrious. OECD data compiled between 1991 and 2014 reveal that hours worked per working-age person is highest in America among the G-7 countries. Hours are about 45% higher in the U.S. than those in France, the lowest of the G-7 countries, but Americans exceed all other G-7 countries in work effort.

The U.S. is a mobile country, which benefits the economy because residents move to opportunity. A 2008 European Commission survey showed that at the beginning of the 21st century Americans were more mobile than residents of all major EU countries. Americans were more than twice as likely to move as those in the European Union and five times as likely as Italians, who were the least mobile population.

The American economy also reaps the benefits of a fluid labor market. The most recent Bureau of Labor Statistics report on job openings and labor turnover (Jolts) reveals that in the 12 months ending in October there were 62.6 million hires and 60.1 million separations, resulting in net job gain of just over 2.5 million. The workforce consists of about 150 million workers so these statistics imply that on average about two-fifths of the employment positions experience turnover each year. This remarkable amount of labor mobility moves workers to the jobs in which they are most productive.
Even with increased taxes under the Obama administration, the U.S. remains a low-tax country compared with other G-7 countries. The OECD reports that the ratio of total taxes to GDP is just over 25% in the U.S. Next lowest is Japan with 30%. Italy and France each have tax receipts that equal about 45% of GDP.

The U.S. is a welcoming society, which also contributes to its success. One measure of integration is the proportion of immigrants employed relative to the native-born population. Immigrants have higher unemployment rates than native-born people in all G-7 countries except the U.S., according to the OECD. For example, Germany has the most extreme unemployment ratio, with an immigrant unemployment rate of almost 8%, 75% higher than that of native Germans. In the U.S., the immigrant unemployment rate is about 10% lower than the rate of those born here."

Wednesday, December 28, 2016

Henry Hazlitt Responds to 10 Common Objections to Capitalism

From The Mises Institute.
"A correspondent who describes himself as "a 26-year old college graduate who strongly supports a system of free enterprise," recently wrote me to say that he is "continuously confronted with questions that are most difficult to answer." He appended a list of 10 of them, and asked for my comments.

I offer my answer here. To save space, I have not repeated his questions, assuming they can be clearly guessed from my replies.

Dear Mr._____________________ :

The number of faults that have been alleged against capitalism are without limit. Few of the allegations have any merit, and when they do the reason will usually be found to lie deep in the weaknesses of human nature itself. Practically all the criticisms tacitly assume that the imputed faults could be easily cured by some form of socialism or communism, or some ad hoc government intervention that would, in fact, usually make the complained-about condition much worse.

With these preliminary remarks, let me try to give brief answers to your ten questions.

1. Capitalism does depend upon the consumption of natural resources, and some of these could eventually be depleted. But this must happen under any conceivable system of production when the population becomes large enough in comparison with the resources. But capitalism has proved resourceful in finding substitutes or for providing for renewal of resources (as in scientific forestry, for example).

2. There will probably always be some efforts toward collusion and private price-fixing. Encouraging private competition is probably the best cure for this, plus appropriate laws against clearly harmful collusion.

3. Not only do utilities often give lower rates to those who use more power; nearly all sellers give lower rates to bigger consumers because they can be supplied with the commodity at a lower cost. If big automobile companies consume more steel than a small hardware manufacturer, this does not necessarily mean that big companies are using steel more wastefully.

4. Private capitalism means free competition. Capitalism has far less tendency toward concentration than does socialism, and well drafted laws can prevent coercive methods of concentration. True, big companies can sometimes lower prices excessively to try to drive out small competitors, but they can do this only at a serious cost to themselves. It is more often alleged than proved that such practices happen with any real frequency.

5. True, adequate capital is sometimes difficult for small producers to obtain. But it can be obtained by savings, by previous profits from small-scale operations, or by borrowing. The borrowing can be done if a would-be enterpriser can convince a friend or a bank that he is likely to be successful. For a government agency to supply capital to individuals to become producers would only breed favoritism, corruption, and scandalous waste.

6. True, officers or directors of big corporations can sometimes try to use the capital and management of their company primarily to enrich themselves. Such practices can be minimized by watchful stockholders and appropriate corporate laws and law enforcement. But companies in which the practices occur extensively will soon go broke and be eliminated in favor of honestly-run companies.

7. There is no scientific way of measuring "productivity" in a service-oriented economy. Most of the current attempts to measure it rest on fallacious assumptions. The total value of output is essentially subjective, and not objectively measurable. The official GNP calculations are largely fraudulent. A short crop of wheat or corn, for example, usually sells for a greater money total than an above-normal crop. If we could produce everything anybody wanted, the national income would be zero. As nothing would be scarce, nothing could command a price.

8. It is sometimes difficult to know what injuries on the job are the fault of the individual worker and what of bad working conditions supplied by the employer. In any case, almost everywhere today the employer is legally obliged to pay "workmen's compensation" for most such injuries.

9. True, capitalism does not supply "equal" housing or "equal" pay. If we tried to do the latter, regardless of the difference between the skills and industry of different workers or even whether a man did not work at all, we would soon destroy all incentives to production and have little creation of housing or anything else.

10. There is nothing "inhuman" about capitalism itself. It does not legally compel compassion or charity on the part of private individuals, but neither does it stand in the way. Socialism assumes that nobody will help the poor unless the politicians compel him to. Capitalism is, in fact, the most "human" of all systems. It provides the greatest amount of material goods and services, both necessities and luxuries, for humanity. It supports the greatest number of human beings, and provides the more successful with a surplus above their needs capable of being turned over to the less successful, voluntarily or through taxation. Without capitalism, in short, most of its present detractors wouldn't be around today to denounce it.

A Flawed System 

One final word. Your questions tacitly assume that capitalism is the system we are now in fact living under. We are not. We are living under what the late Ludwig von Mises called "sabotaged" capitalism.
We are living under a network of government interventions that discourage or prevent capitalism from doing its work. With the "progressive" income tax, the government expropriates a crucial part of precisely the funds that would otherwise be invested in increased production and employment. By imposing minimum wage laws, encouraging coercive unionism, and subsidizing unemployment, government has brought about excessive American wage rates in many lines—making our automobile and steel industries at the moment unable to compete against foreign imports, and bringing about chronic unemployment. Having done this, the politicians denounce our domestic manufacturers for no longer being "competitive," "aggressive," or "innovative," and propose still more interventions to force them to be so. Thus anticapitalism begets still more anticapitalism."

Former Fed Governor Debunks Myths Of Credit

See Baggage of Consumer Installment Cash Lending by Thomas A. Durkin.
"Although credit use has been widespread for thousands of years, certain arguments against its use have persisted through the centuries. Today, these arguments carry a lot of baggage. A recent paper from the National Consumer Law Center displays a lot of this baggage, but this is just one example of the reasoning behind common anticredit arguments.

In this paper, Thomas A. Durkin examines a wide range of anticredit arguments that have persisted throughout history. He discusses reasons for using credit in the first place, interest rate ceilings on loans, lending profitability, loan renewals, the Rule of 78s, and credit insurance. By focusing on individual products’ success rather than on mythology perpetuated over time, policymakers will better serve the consumer lending market.

Suitcase Number One: Mythology of the Reasons for Credit Use

  • Myth. The use of credit is an attempt to live beyond one’s economic means. This has been considered either a moral evil or a cause of future economic strife.
  • Reality. The lending and borrowing process does not increase the amount of consumers’ resources or let them live beyond their means, unless they do not repay their loans. People typically borrow to change the timing of their spending, not to increase the amount. By borrowing, they are able to make large expenditures today on such things as education and durable goods that provide returns over time, even if they have to reduce future spending to make the payments.

Suitcase Number Two: Mythology That Installment Cash Loans with High Annual Percentage Rates Are Necessarily Predatory

  • Myth. The government has always protected consumers from predatory loans by placing caps on interest rates.
  • Reality. As loans get larger, the costs and risks usually rise. But it is important to see that they can fall relative to the size of the loan, meaning that a larger loan can carry a lower interest rate, and a higher rate on a smaller loan is not necessarily predatory. Although a multimillion-dollar loan can generate a lot more costs than a thousand-dollar loan, it can have a lower cost per loaned dollar and therefore a lower rate. Furthermore, a large annual interest rate may translate into a very low dollar cost if applied to a low balance that is repaid quickly.

Suitcase Number Three: Conceptual Mythology about Rates and Prices

  • Myth. The annual percentage rates (APRs) for installment loans are much higher than those for other loans, so the full costs of installment loans to the consumer are much higher than the costs of other loans.
  • Reality. APRs are a good tool for comparing similar loans, but they can be deceiving when it comes to loans that have different payment schedules. For loans that have installment payments, the charge for interest declines for each payment made on the loan, leading to a smaller finance charge than simplistic application of a rate to a balance would predict. Further, because dollars are the actual loan costs, there are situations where the number of dollars expended can be especially useful in making decisions.

Suitcase Number Four: Mythology about Operations and Profitability

  • Myth. High loan prices bring about enormous profits for lenders.
  • Reality. This myth was tested extensively in the 1960s and 1970s, with the result that the market for installment lending was profitable, but no more so than other markets. When price ceilings were lifted from the installment lending market, the short-term response was a slight increase in profitability, but over time, these profits were replaced by competition and more extensive lending service.

Suitcase Number Five: Mythology about Calculating Rates, Rebates, and Rule of 78s

  • Myth. Lenders use interest rates to take more than they should, cheating consumers by taking more than they have earned.
  • Reality. For loans that are set up to produce payments of equal size, rebates of unearned charges can involve complicated mathematical adjustments if these loans prepay. Historically, many algebraic methods were available for these calculations, but a method called the Rule of 78s often found its way into state regulations as a method that was both easy to use and fair to both borrowers and lenders. Today, interest in the Rule of 78s is mostly historical, although it still seems to generate controversy greater than its use or impact.

Suitcase Number Six: Mythology about Delinquency and Renewal

  • Myth. A high proportion of loan renewals in a portfolio indicates abusive “loan flipping.”
  • Reality. Most loan renewals involve adding new money, not making defaulted accounts current. Mathematical simulations of portfolios easily show that lenders can have a high steady state of renewals while simultaneously having rules in place that make “loan flipping” impossible.

Suitcase Number Seven: Mythology about Ancillary Products, Especially Credit Insurance

  • Myth. Products such as credit insurance are simply ways for lenders to add more costs to the original loan.
  • Reality. The concerns with credit insurance seem to stem not from the uselessness of the product, but rather from the methods of distribution through the lending process. Although critics argue that lenders sometimes try to mislead customers into buying the product, evidence shows that many customers are not even offered the product, and the small proportion who do buy it appear mostly very satisfied.


Policymakers should proceed with caution when acting on installment lending myths. Individual lending products should be allowed to stand or fall on their own merits and, if useful, should be permitted to thrive in a policy environment that favors their success. If existing regulations on traditional consumer installment lending are not serving borrowers and lenders, it does not follow that more regulations would necessarily be more useful or better. Maybe fewer regulations—or, in some cases, repeal of existing regulations—would be a better policy choice for the consumer lending market."

Tuesday, December 27, 2016

Texas is like a magnet, drawing talent from many other states in the center of the country due its superior economic model

See The Texas magnet by Scott Sumner.
"Two years ago, the New Orleans Pelicans NBA team seemed to have a bright future:
The Pelicans, the team that had just hired Gentry as head coach, played the Warriors closer than their four-game, first-round sweep that season would suggest. New Orleans also had the franchise building block in Davis that nearly every organization lusted over and an odd, yet intriguing, mix of complementary pieces. . . . That team is long gone. Jrue Holiday, Tyreke Evans and Quincy Pondexter have had their careers marred by injuries and other hardships since that playoff series. Ryan Anderson and Eric Gordon fled for Houston the moment they hit free agency last summer. And, the shell of what remains has been cracked by the Pelicans' inability to ever be whole, placing a greater weight on Davis' shoulders that can't be masked by those T-shirts he wears underneath his uniform.

For New Orleans residents, the loss of key players to Houston must lead to a bitter sense of deja vu. Back in 1950, New Orleans (pop. 570,445) and Houston (pop. 596,163) were roughly equal size cities, vying for the title of oil capital of America. Today Houston has 2.3 million people, nearly 6 times New Orleans' population.

Some people attribute Texas's success to oil, but Louisiana also has extraordinarily rich oilfields, onshore and off:
It's not news that oil and gas companies are moving from New Orleans to Houston. It's a trend that started in the 1980s with the downturn of the oil and gas business At the time, "New Orleans was really an oil center, certainly way more so than it was today," Bennett said.
In the late 1970s and 1980s, oil executives in New Orleans met for business lunches at Galatoire's, Brennan's or Kolb's and sealed deals over drinks at the Petroleum Club, Briggs said.
Even then, though, Houston had an edge on New Orleans because it had a more business-friendly environment and a better public school system. "Houston was just a better market to operate and live," Bennett said. . . .
Even though many of the energy companies still have a majority of wells, shipyards and employees in Louisiana or off the state's coast, companies increasingly have concentrated their business activity in Houston.
Over the years the New Orleans energy sector has suffered blow after blow. The most recent prior to Katrina was Exxon Mobil's 2003 move to Houston. At that time, there was still optimistic talk about luring oil companies back to the city and the state. Later that year, the City Energy Club, the successor to the Petroleum Club, ceased to exist. "It's a sign of the times (when) you don't even have a Petroleum Club," Parker said.

Louisiana is increasingly like a third world country, whose rich resources are exploited by the sophisticated technology of Houston companies.

It didn't have to happen that way. The key seems to have been Houston's superior economic model. No zoning laws, no state income tax, and much less corruption than in Louisiana. New Orleans residents pay a 6% state income tax on incomes above $50,000. 

You might think it's just a coincidence that the Pelicans lost two key players to the Houston Rockets. But for years the dirty little secret in the NBA is that teams in zero income tax states like Texas and Florida have an advantage in attracting NBA stars. Before-tax salaries are fairly similar because of the NBA salary limits, but after tax incomes are higher in Houston than New Orleans.

This was also an issue for oil companies:
Before deciding whether to return to New Orleans, Energy Partners Ltd. took a look at the economic advantages and disadvantages of staying in New Orleans. It boiled down to one thing, said Phil Zanco, director of tax at Energy Partners. "In a nutshell, if you want to get to the gist of the matter, Texas does not have a personal income tax," he said.
And the entrepreneurs and executives who are making decisions about where to build businesses pay a hefty portion of state income taxes, he said.
I don't want to overplay the tax angle in the oil industry. Once Houston gained its advantage, there are big benefits of agglomeration. Oil companies want to be where the talent is, just and financial companies wish to be in Manhattan and tech companies in Silicon Valley (both high tax areas.) So there's more involved than taxes. New York and California offer other important amenities. But seemingly slight differences in business environment can have a dramatic effect over time. Once a city takes over leadership in an industry, other top players want to be there:
Many executives talk about the "deal flow" in Houston, where prospects are traded at lunch and customers are picked up during casual conversations. Briggs, of the oil and gas association, likens it to the financial activity and camaraderie of Wall Street. David Heikkinen, who opened an office of the financial firm Pickering Energy Partners in New Orleans after Hurricane Katrina, agrees.
"The gravity pulls you in. Most of the business and most of the people in the energy industry are here, and if you're trying to build a business it's where you want to be," he said.

There's a lot recent talk about how talent from the center of America flows to wealthy cities on the two coasts, where the opportunities for highly talented people are greatest. Another version of that brain drain is occurring in south central America, where Texas is like a magnet, drawing talent from many other states in the center of the country. It's a different model from Wall Street and Silicon Valley, but equally effective.

When I first moved to Boston in 1982 the quality of life in Boston was not much different from in Nashua, New Hampshire. At the time, New Hampshire drew lots of residents north from "Taxachusetts". Today Boston is a far more exciting place to live than New Hampshire, and the Granite State is now growing more slowly than Massachusetts. My theory is that in information oriented industries, state income tax rates are not a big factor. But in the more competitive goods industries in much of middle America, a lack of state income tax allows states like Texas, Tennessee, Washington and even South Dakota to do noticeably better than their neighbors."

Earnings Inequality: The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance

By Mark J. Warshawsky of Mercatus. Excerpt:
"In a recent research for the Mercatus Center at George Mason University, I analyzed the link between earnings inequality and rising healthcare costs using unpublished data from the Bureau of Labor Statistics. I found that the increasing cost of employer-provided healthcare benefits accounts for a significant portion of rising earnings inequality.

This can be explained by looking at the share of healthcare costs relative to total compensation, which are much higher for low earners than for high earners. Rapidly growing healthcare costs, therefore, increasingly eat away at wage growth and non-health benefits—particularly for low-wage earners. To get some idea of the scale of escalation in healthcare costs, data from the 2015 Kaiser Family Foundation Survey highlights how employer costs for family healthcare coverage have exploded in recent years from around $4,200 in 1999 to nearly $12,600 in 2015. When we account for this increase in healthcare costs as a share of earnings for low-income workers, it becomes clear why the wages of low-income workers have stagnated in recent years.

Looking at data from 1996 to 2008, I found that unlike earnings, overall compensation (which includes healthcare benefits) did not become more unequal. In fact, overall benefits grew more quickly during this period for low-paid workers than for the top 1 percent. Thus, without rising healthcare costs, there would have been virtually zero change in earnings inequality.

Both economic theory and empirical findings indicate a clear tradeoff between wages and benefits: as benefits become more expensive, employers tend to hold back on salary increases, and so wage growth ultimately suffers. In fact, according to simple regression analysis, for every one percentage point increase in the healthcare cost share of compensation, the annual rate of growth in earnings declines by 0.23 percentage points. Over the period of 1990 through 2014, surging healthcare costs depressed annual earnings growth for low-paid workers more than twice as much as for the top 1 percent of workers."

Monday, December 26, 2016

Your sneakers are a case study in why Trump’s America-first trade policy is nonsense

By Marc Bain of Quartz. Excerpts:
"Americans love their sneakers, and are willing to pay a high price for a pair they love. But what many shoppers don’t know is that a large portion of the markup they’re paying is the result of steep import tariffs imposed by the US government. On a pair of $120 rubber-soled athletic shoes, for example, about $20 of the retail price could be the result of duties the manufacturer had to pay when they landed in the US from an overseas factory.

A combination of protectionist policies and lobbying by US trade groups has kept these tariffs high since the Great Depression, despite import duties for other products being reduced. But those policies, designed to protect US manufacturing, have done little to keep shoe manufacturing stateside. Americans are almost entirely shod in shoes made overseas, mostly in China.

The shoe industry offers an object lesson on the kind of protectionist policies that president-elect Donald Trump has proposed. Though a self-described “free trader,” Trump has pushed a 45% tariff on imported Chinese goods, (though he’s also said it “could be less“), and a 35% tax on US businesses that send jobs outside the country and then try to sell products domestically. The aim is to resuscitate US manufacturing by convincing American companies it will be more cost-effective for them to manufacture their goods at home.

But the sneaker industry, including brands such as Nike, is a perfect example of what happens when these policies fail. Despite the high tariffs on just about every sneaker, high heel, or kid’s shoe worn in the US, domestic production has dwindled so much that today the US imports 98.4% of its footwear, according to the American Apparel and Footwear Association.

“If duties are the way you think you keep jobs in places and keep people competitive, then we are the prime example as to why that’s nonsense,” says Matt Priest, president and CEO of Footwear Retailers and Distributors of America, a trade organization that has pushed to reduce trade barriers. “If duties were the elixir, we would have a million footwear-manufacturing jobs here in the United States because we collect such high duties.”

The results of the policies Trump has advocated for probably wouldn’t endear the president-elect to sneaker-loving Americans, regardless of their political leanings: Instead of bringing jobs back to the US, raising tariffs would likely make shoes even more expensive than they are today.

How tariffs affect the cost of shoes in the US

Today, the trade-weighted average US tariff for footwear is 10.8%, according to the Department of Commerce, making it much higher than average for all industrial products, which is just 1.5%.

Duties on footwear can range quite a bit, from duty free up to 67.5%. But a spokesperson for the US Department of Commerce says the kinds of footwear the US imports most by value have duties of 6% to 20%, and Priest explains that around 20% is the typical rate for an athletic shoe.

These kinds of mass-produced shoes actually face much higher tariffs than luxury dress shoes. Priest says an Italian leather loafer might carry a duty of 8.5%, while many plastic kids shoes are taxed at 48%. The reason stems from historical efforts to protect US industry.

The Smoot-Hawley Tariff Act of 1930 increased import duties on nearly 900 products in an effort to protect US industry at the outset of the Great Depression. Over the decades, many of those tariffs have been reduced or removed altogether—but not on footwear (paywall), particularly shoes made of plastic or with rubber soles."

The effect of those tariffs is multiplied in the markups that happen between manufacturing and the price that consumers pay at retail. Here’s how it works: Let’s say a manufacturer of athletic shoes wants to make its sneakers in China and then import them to the US to sell. At the 20% duty rate typical for athletic shoes, a $25 sneaker will incur a cost of $5. For the manufacturer, the shoe has now cost $30. In order to make money, the manufacturer sells this shoe to a retailer for twice that, or $60. The retailer, which also needs to make money, sells the shoe to a consumer for $120 (and that amount may also incur a sales tax).

“What you’ll notice is that $5 tax, that duty rate at the normal 20%, has been marked up two times,” Priest says. Consumers generally don’t recognize it, but these tariffs are baked into the final price they pay for a sneaker.

Despite tariffs, jobs have still gone overseas

These duties have done little to keep footwear manufacturing from hopping a ship to Asia, however. “The protective tariffs have not served to overcome the enormous differences in labor and other manufacturing costs which give an advantage to production in low cost countries,” explains Fleischaker.

Despite a nearly 50% increase in domestic manufacturing since 2009, the vast majority of Americans’ shoes are made overseas."

But even with higher tariffs in place, the footwear industry, with its labor-intensive, low-skilled manufacturing, isn’t likely to return jobs to the US. In footwear, as in many other industries, any re-shoring would probably mean that companies would invest more in automation to keep manufacturing costs down and stay competitive globally, as Carrier just proved after agreeing to Trump’s push not to move more operations to Mexico.

“If we’re going to see a lot of shoes made here, there’s going to be a lot of robotics in it and very little human labor,” says Matt Powell, the sports industry analyst for research firm NPD Group."

"“Historically, Brazil has tried to protect its domestic footwear business by having high tariffs on all footwear that’s not made in Brazil,” he explains. “What’s ended up happening is that the Brazilian consumer is paying about double what a US consumer would pay for the same shoe.” (His hashtag #nomorejordans presumably refers to a dystopian future in which Nike Jordans become too expensive for most Americans to purchase.)

Argentina, which in 2009 imposed a Trump-like 35% tariff on computers and electronics to protect its local manufacturers, is putting an end to it because it made products such as TVs and cell phones extraordinarily expensive.

If US companies did re-shore manufacturing, prices would also go up due to the much higher costs, particularly for labor, of making goods in the US. New Balance, which is the only sneaker manufacturer to still produce a significant amount of its shoes—about 25%—in the US, charges from $165 up to $399 for its American-made shoes."

Growth, Not Forced Equality, Saves the Poor

By Deirdre McCloskey. Excerpts:
"the Illinois state constitution, adopted in 1970. It sought to “eliminate poverty and inequality.”"

"The World Bank reports that the basics of a dignified life are more available to the poorest among us than at any time in history, by a big margin."

"The real income of India is doubling every 10 years."

"Even in the rich countries, the poor are better off than they were in 1970, with better food and health care and, often, amenities like air-conditioning."

"A good person, he [Anthony Trollope] declares, should rather “assist in lifting up those below him.”

Eliminate poverty, and let the distribution of wealth work. Economic growth has been accomplishing exactly that since 1800. Equality in the most important matters has increased steadily, through lifting up the wretched of the earth."

"What matters ethically is that the poor have a roof over their heads and enough to eat, and the opportunity to read and vote and get equal treatment by the police and courts."

"Equalizing possession of Rolexes does not."

"we should lift up the poor...enough for people to function in a democratic society and to have full human lives."

"John Rawls of Harvard, articulated what he called the Difference Principle: If the entrepreneurship of a rich person made the poorest better off, then the higher income of the entrepreneur was justified."

"Poverty is never good. Difference, including economic difference, often is. It is why New Yorkers exchange goods with Californians and with people in Shanghai, and why the political railing against foreign trade is childish."

"equality beyond the basics in consumption and in political rights isn’t possible in a specialized and dynamic economy."

"Trusting a government of self-interested people to know how to redistribute ethically is naïve."

"We need to allow for rewards that tell the economy to increase the activity earning them. If a brain surgeon and a taxi driver earn the same amount, we won’t have enough brain surgeons."

"An all-wise central plan could force the right people into the right jobs.'

"The magic has been tried, in Stalin’s Russia and Mao’s China. So has the violence."

 "Free adults get what they need by working to make goods and services for other people, and then exchanging them voluntarily. They don’t get them by slicing up manna from Mother Nature in a zero-sum world."

"Short of expropriation, we can and should join in supporting a safety net, keeping the violence to a minimum. K-12 public education, for example, should be paid for by compelled taxes on all of us. But we should not be doing a lot more.

As a matter of arithmetic, expropriating the rich to give to the poor does not uplift the poor very much. If we took every dime from the top 20 percent of the income distribution and gave it to the bottom 80 percent, the bottom folk would be only 25 percent better off. If we took only from the superrich, the bottom would get less than that. And redistribution works only once. You can’t expect the expropriated rich to show up for a second cutting."

"It is growth from exchange-tested betterment, not compelled or voluntary charity, that solves the problem of poverty. In South Korea, economic growth has increased the income of the poorest by a factor of 30 times real 1953 income."

"Liberal equality, as against the socialist equality of enforced redistribution, eliminates the worst of poverty. It has done so spectacularly in Britain and Singapore and Botswana."

"To borrow from the heroes of my youth, Marx and Engels: Working people of all countries unite! You have nothing to lose but stagnation! Demand exchange-tested betterment in a liberal society.

Some dare call it capitalism."

Friday, December 23, 2016

Obsolete Climate Science On CO2

By Richard A. Epstein.
"The incoming Trump administration has promised dramatic transformations on many vital domestic issues. The best gauge of this development is the fierce level of opposition his policies have generated from Democratic stalwarts. One representative screed is a New York Times Op-Ed by Professors Michael Greenstone and Cass Sunstein, who lecture the incoming president on climate change: “Donald Trump Should Know: This is What Climate Change Costs Us.”

Greenstone and Sunstein have a large stake in the game: During their years in the first Obama administration, they convened an interagency working group (IWG) drawn from various federal agencies that determined that the social cost of carbon (SCC)—or the marginal cost of the release of a ton of carbon into the atmosphere—should be estimated at about $36 per ton (as of 2015). Choose that number and there is much justification for taking major policy steps to curb the emission of carbon dioxide. Greenstone and Sunstein hoped that the working group process would draw on the “latest research in science and economics,” and establish the claimed costs by “accounting for the destruction of property from storms and floods, declining agricultural and labor productivity, elevated mortality rates and more.”

Their effort should be dismissed as a rousing failure, and as an affront to the scientific method that they purport to adopt in their studies. The first error is one of approach. The worst way to get a full exchange of views on the complex matter of global warming is to pack the IWG entirely with members from the Obama administration, all surely preselected in part because they share the president’s exaggerated concerns with the problem of global warming. The only way to get a full and accurate picture of the situation is to listen to dissenters on global warming as well as advocates, which was never done. After all, who should listen to a “denier”?

This dismissive attitude is fatal to independent inquiry. No matter how many times the president claims the science is rock-solid, the wealth of recent evidence gives rise to a very different picture that undercuts the inordinate pessimism about climate change that was in vogue about 10 years ago. The group convened in the Obama administration never examined, let alone refuted, the accumulation of evidence on the other side. Indeed, virtually all of its reports are remarkable for the refusal to address any of the data at all. Instead, the common theme is to refer to models developed by others as the solid foundation for the group’s own work, without questioning a word of what those models say.

The second major mistake in the government studies is the way in which they frame the social costs of carbon. As all champions of cost/benefit analysis understand, it is a mistake to look at costs in isolation from benefits, or benefits apart from costs. Yet that appears to be the approach taken in these reports. In dealing with various objections to its reports, the IWG noted in its July 2015 response that “some commenters felt that the SCC estimates should include the value to society of the goods and services whose production is associated with CO2 emissions.” Their evasive response has to be quoted in full to be believed: "Rigorous evaluation of benefits and costs is a core tenet of the rulemaking process. The IWG agrees that these are important issues that may be relevant to assessing the impacts of policies that reduce CO2 emissions. However, these issues are not relevant to the SCC itself. The SCC is an estimate of the net economic damages resulting from CO2 emissions, and therefore is used to estimate the benefit of reducing those emissions."

In essence, the benefits from present or future CO2 emissions are not part of the story. Yet a truly neutral account of the problem must be prepared to come to the conclusion that increased levels of CO2 emissions could be, as the Carbon Dioxide Coalition has argued, a net benefit to society when a more comprehensive investigation is made. The entire process of expanding EPA regulations and other Obama administration actions feeds off this incorrect base assumption. The most striking admission of the folly of the entire EPA project comes from EPA Chief Gina McCarthy, who has stated that she would regard a decrease of one one-hundredth of a degree as enormously beneficial, notwithstanding its major cost, because its symbolism would “trigger global action.” No cost/benefit analysis would justify wasted expenditures solely on symbolic grounds. After all, human progress on global warming will only suffer if other nations follow our false siren on CO2 emissions, while ignoring the huge pollution that envelops major population centers like Delhi and Beijing.

Unfortunately, support for regulating CO2 emissions relies unduly on a Regulatory Impact Analysis that is worth no more than the faulty assumptions built into the model. These include the EPA’s hugely complicated Clean Power Plan, temporarily enjoined by the United States Supreme Court, that relies once again on the flawed social costs of carbon estimates.

The weakness of the EPA approach is shown by the data that Greenstone and Sunstein cite to support the contention that global warming has reached dangerous levels. They refer, for example, to a Geophysical Research Letter of 2014 that notes the retreat of ice in the West Antarctic between 1992 and 2011. But that one finding has to be set in context, as is done in the 2016 State of the Climate Report  prepared by the Committee for a Constructive Tomorrow (CFACT) and sent to the U.N. Climate Conference in Morocco. This more complete account notes that the mass gain in East Antarctica has been at 200 billion tons per year on average, compared to the 65 billion tons, which was offset by substantial gains in ice in West Antarctica, generating a net gain of roughly 82 billion tons per year in Antarctic ice between 2003 and 2008. The upshot: “The good news is that Antarctica is not currently contributing to sea level rise, but is taking 0.23 millimeters per year away.” Overall, the temperature over the Antarctic has been constant for the past 35 years.

No analysis that looks at the minuses can afford to ignore the larger pluses and maintain its credibility. Indeed, for what it is worth, the CFACT report notes that the ice mass in the Arctic is now about 22 percent greater than it was at its low point in 2012. This fact helps explain why there has been no recent change in the rise of sea levels, and certainly none that can be attributed to the relatively modest level of temperature increases in the past 100 years. Recent trends suggest the rate of increase in ocean levels has been decelerating over the last 18 years, during which time there has been a substantial increase in carbon dioxide levels. Yet the 102 different models used by the Intergovernmental Panel on Climate Change (IPCC) are all high in their estimates, by roughly four-fold. As documented in the 2016 CFACT report, there has been substantially no change in overall global temperature over the past 18 years, and the record highs reported are by tiny fractions of degrees that are smaller than the margin of measurement error. Yet the government’s methodology is to look at the models and ignore the data.

Just that was done by the now anachronistic 2009 EPA Endangerment Findings for Greenhouse Gases, which reported on the overall shrinkage of Arctic ice and claimed that the “elevated CO2 levels” were expected to result “in small beneficial effect[s] on crop yields.” The good news on this point seems to be that the increase in CO2 has led to about a 14 percent increase in green vegetation on earth over the past 30 years, as Matt Ridley reported in a 2016 lecture. It is the best of all possible CO2 worlds if the level of arable land increases with minor temperature changes and there are no appreciable changes in ocean levels. Put these numbers together and a revision of the SCC must be made, as it now appears that the net costs of carbon are negative. Further, the revised projections have only strengthened the lower estimates of global warming from elevated CO2 levels.

This basic conclusion is reinforced by other data, easily accessible, that addresses other concerns raised in the Greenstone and Sunstein article. For starters, there has been no recent increase in the level of storms and floods, or the damage that is said to result from them. To the contrary, the trend line has been unambiguously favorable, as the number of extreme events like floods and storms has declined steadily over the past 100 years. Indeed, the last major event in the United States was Hurricane Katrina in 2005, followed by eleven years of relative tranquility in the United States and around the world. This point is critical because one of the constant claims on global climate change is that the system-wide instability has increased these extreme events, even if overall temperature levels have remained constant.

The overall picture with respect to the SCC, then, is the exact opposite of that described by Greenstone and Sunstein, and that change in direction has a serious effect on the success of various legal challenges. Greenstone and Sunstein note that a legal decision in 2008 held that ignoring the SCC makes an administrative rule “arbitrary and capricious” and thus requires its reformulation by the applicable agency. They also reference another 2016 decision that upheld an administrative decision of the Department of Energy that explicitly took into account the SCC. But these judicial decisions have a surreal aura about them. The key statute for these cases was the Energy Policy and Conservation Act of 1975 (EPCA), which was passed in the aftermath of the 1973 Mideast Oil Embargo that followed in the wake of the 1973 Yom Kippur War. The EPCA’s chief finding was that “the fundamental reality is that this nation has entered a new era in which energy resources previously abundant will remain in short supply, retarding our economic growth and necessitating an alteration in our life’s habits and expectations.”

It was on the strength of this 41-year-old statute that the Court in 2008 required the National Highway Traffic Safety Administration to reissue its rules for the average fuel economy standards for light trucks because they failed to take into account the SCC. The ruling is wholly anachronistic today because the revolution in energy technology has obviated the entire factual premise on which the so-called CAFE (corporate average fuel economy) rules rest. Given fracking, energy is abundant. Thus, the SCC has to be reevaluated in light of evidence collected outside the EPA, and summarized above, none of which was taken into account when working within the closed universe of the current set of environmental and energy laws. At this time, it appears that virtually all the EPA rules rest on outdated science.

Greenstone and Sunstein are not alone in their refusal to deal with evidence that undermines their claims. But if the SCC looks to be negative, the Trump administration should act to eliminate the current endangerment finding for carbon dioxide, and dismantle the regulatory apparatus that rests upon its highly questionable estimation of the positive value of SCC. The sorry truth is that the EPA and the regulatory process in the Obama administration show no respect for the scientific method they claim to rely on."

No, Protectionism Does Not Lead To Economic Development

See Kicking Away the Ladder: Development Strategy in Historical Perspective by Douglas Irwin. He reviewed Ha-Joon Chang's book Kicking Away the Ladder: Development Strategy in Historical Perspective. Excerpt:
"Chang’s book is provocative and interesting, but falls short of persuading. Perhaps the biggest disappointment is Chang’s extremely superficial treatment of the historical experience of the now developed countries. He has simply chosen not to engage the work of economic historians on the questions he is raising. For example, chapter one — “How Did the Rich Countries Really Become Rich?” — does not contend with the work that economics historians have done on the topic. Given the broad question posed in this chapter, one might have expected Chang to confront such landmark works as Douglass North and Robert Thomas’s The Rise of the Western World (1973) or Nathan Rosenberg’s and L.E. Birdzell’s How the West Grew Rich: The Economic Transformation of the Industrial World (1986). These works stress the importance of political systems that provide security to economic transactions and economic systems that allow for competition, broadly construed. But Chang does not explain why the lessons from these works are not relevant to developing countries today.

Rather, in chapter 2, Chang elaborates on his contention that “infant industry promotion (but not just tariff protection, I hasten to add) has been the key to the development of most nations … Preventing the developing countries from adopting these policies constitutes a serious constraint on their capacity to generate economic development.” In my view, this statement is erroneous on two counts — that infant industries were the key to economic development, and that developing countries are prevented from adopting such policies today.

Just because certain trade and industrial policies were pursued and the economic outcome turned out to be good does not mean that the outcome can be attributed to those specific policies. Yet Chang does not advance our understanding beyond this “correlation therefore attribution” approach. Perhaps the success of developed countries came despite the distortions and inefficiencies created by their earlier policies because the broader institutional context was conducive to growth.

For example, the United States started out as a very wealth country with a high literacy rate, widely distributed land ownership, stable government and competitive political institutions that largely guaranteed the security of private property, a large internal market with free trade in goods and free labor mobility across regions, etc. Given these overwhelmingly favorable conditions, even very inefficient trade policies could not have prevented economic advances from taking place. (As Adam Smith once commented, the effort of individuals to improve their condition “is frequently powerful enough to maintain the natural progress of things towards improvement, in spite … of the greatest errors of administration.”)

And yet, in Chang’s story, these other things get no credit for America’s economic success; rather, it all comes down to infant industry promotion. Chang writes: “Although some commentators doubt whether the overall national welfare effect of protectionism was positive, the U.S. growth record during the protectionist period makes this scepticism look overly cautious, if not downright biased.”

But, once again, correlation is not causation. Chang produces no evidence that protectionism was responsible for the growth. He does not investigate the various channels and mechanisms by which trade policy affects growth and compare them to other factors leading to economic expansion. He does not undertake a counterfactual analysis to determine the magnitude of benefits and costs of infant industry policies. In the reasoning style of Paul Bairoch, if tariffs were high and growth was strong, then there must be a causal relationship between the two. There is no need to examine alternative explanations, such as whether any effects of tariff policy were swamped by the advantages of other aspects of the American economy. Instead, Chang makes sweeping statements like “It is also clear that the U.S. economy would not have got where it is today without strong tariff protection at least in some key infant industries.”

The implication is that protecting manufacturing industries accounts for the success of rich countries. But Stephen Broadberry (1998) has shown that the United States overtook the United Kingdom in terms of per capita income in the late nineteenth century largely by increasing labor productivity in the service sector, not by raising productivity in the manufacturing sector. Broadberry’s research is not obscure, yet Chang makes no note of it.

Attributing the economic success of various other countries to their trade and industrial policies alone grossly inflates their role. In Europe, Broadberry and others have showed that growth was related to the shifting of resources out of agriculture and into industry and services. Yet trade policies may have slowed this transition for some countries. Britain industrialized with the textile industry in the late eighteenth and early nineteenth century, but the Corn Laws during this period kept more labor and capital resources in agriculture, not industry. Similarly, to the extent that Germany’s tariff code protected agricultural goods (where it was a net importer), it actually slowed that transition and may have retarded growth in the late nineteenth century.

A broader problem afflicts Chang’s approach — sample selection bias. Chang only looks at countries that developed during the nineteenth century and a small number of the policies they pursued. He did not examine countries that failed to develop in the nineteenth century and see if they pursued the same heterodox policies only more intensively. This is a poor scientific and historical method. Suppose a doctor studied people with long lives and found that some smoked tobacco, but did not study people with shorter lives to see if smoking was even more prevalent. Any conclusions drawn only from the observed relationship would be quite misleading. Chang also overstates the degree to which developing countries today are prevented from pursuing interventionist trade and industrial policies. Trade agreements such as the General Agreement on Tariffs and Trade (GATT) pose few barriers to countries that wish to pursue activist trade policies, and indeed many countries did so during the years when import substitution was the rage among developing countries in the 1950s and 1960s. Article XVIII of the GATT allows governments to undertake trade measure to promote development, including the promotion of selected industries. Many countries are choosing not to do so because their past experience with such policies has not been successful.

No economic historian will deny the importance of lessons from history in guiding policy today. The question is “which” economic history is relevant. (This point was raised in some insightful comments on Chang’s work by Ken Sokoloff at last year’s EHA meeting.) Which historical experience is most relevant for developing countries in Asia, Latin America, and Africa today — the perceived failure of state-led development and import substitution in those countries in recent decades, or the experience of Britain and the United States in the nineteenth century? Certainly China and India have answered by saying that their past policies of inward-looking socialism have failed them. Both countries have done better over the past decade or two by shedding heavy-handed government involvement in regulating the economy and allowing a greater role for market forces, even though they have not embraced every aspect of the “Washington Consensus.” In particular, China and India have decided to become much more open to world trade and investment and have reaped benefits by exposing long protected “infant industries” to global competition."

Thursday, December 22, 2016

The Case for a Rules-Based Fed

Neel Kashkari is wrong. My proposed rules-based reform of the Fed would not be run by a computer.

By John Taylor. Excerpts:
"in a recent Journal op-ed, Neel Kashkari, president of the Minneapolis Fed...joined the debate by arguing against rules-based reform."

"This is a false characterization of the reforms that I and many others support. In those reforms the Fed would choose and report on its strategy, which would neither be mechanical nor run by a computer."

"the Fed moved away from a rules-based policy in 2003-05 when it held the federal-funds rate well below what was indicated by the favorable experience of the previous two decades. The results were not good. The excessively low rates brought on a risk-taking search for yield and excesses in the housing market."

"During the panic in the fall of 2008, the Fed did a good job"

"But then the Fed moved sharply in an unconventional direction by purchasing large amounts of Treasury and mortgage backed securities, and by holding the fed-funds rates near zero for years after the recession was over.

These policies were ineffective. Economic growth came in consistently below what the Fed forecast and much weaker than in earlier recoveries from deep recessions. Such policies discourage lending by squeezing margins, widen disparities in income distribution, adversely affect savers and increase the volatility of the dollar."

"Because this 12-year period represents a deviation from the more rule-like and predictable monetary policy that worked well in the 1980s and ’90s, many are calling for the Fed to normalize and reform."

"Mr. Kashkari, by contrast, argues that a rules-based approach would shackle Fed policy makers, forcing them to “stick to” a rigid rule “regardless of economic conditions.” That too is false. The Fed could change or deviate from its strategy if circumstances changed, but the Fed would have to explain why. And he wrongly claims that rules cannot take account of changes in productivity growth."

"The rule calls for central banks to increase interest rates by a certain amount when price inflation rises and to decrease interest rates by a certain amount when the economy goes into a recession.

Mr. Kashkari ignores the hundreds of research papers that have been written on the effectiveness and robustness of such a rule"
"Yet in a recent empirical study, Alex Nikolsko-Rzhevskyy of Lehigh University and David Papell and Ruxandra Prodan of the University of Houston divided U.S. history into periods, like the 1980s and ’90s, where Fed policy basically adhered to the Taylor rule and periods, like the past dozen years, where it did not. Unemployment was 1.4 percentage points lower on average in the Taylor rule periods, and it reached devastating highs of 10% or more in the non-Taylor rule periods."

"they evaluate policy as a continuing contingency strategy—the essential characteristic of monetary rules—rather than as a one-time policy change,"

"Had the Fed not deviated from rules-based policy before the crisis, unemployment would not have increased so much."

"below-rule interest rates in other countries that were connected to crises."

N.F.L. Stadium in Las Vegas May Be an Ego Boost, but Not an Economic One

By By JOE NOCERA of the NY Times. Excerpts:
"To justify using tax dollars to subsidize N.F.L. owners, officials invariably point to the jobs that will be added, the infrastructure that will be improved and the economic activity that will ensue.

And in almost every case, those benefits are overstated or bogus. The academic literature on this point is nearly unanimous. Brad Humphreys, who has done a number of such studies as an economics professor at West Virginia University, told me bluntly that a new stadium brings “no economic benefit.” All it does is move spending to a football game that was otherwise being spent somewhere else."

"The group then went to the tourism committee, which, of course, included one of the presidents in Adelson’s company. Not surprisingly, the committee wholeheartedly embraced the stadium idea and commissioned an economic study. The study concluded — shocker! — that the combination of a small increase in the hotel tax and the upsurge in economic activity thanks to the new stadium would cover the county’s $750 million commitment. Indeed, because it was a hotel tax, the tourists would be paying, not the Las Vegas taxpayers. It was the equivalent of a free lunch.

Or was it? Getting to that number required some rather unusual assumptions. One was that a third of the 65,000 fans at any Raiders game — including preseason games — would not be Las Vegans but out-of-towners. They would stay in a hotel for 3.2 days and spend collectively, on an annual basis, $375 million. In other words, 217,000 people each year would fly to Las Vegas for the primary purpose of watching the Raiders play football. Even if there were that many seats set aside for tourists (highly unlikely), that seems implausible.

The tourism committee also accepted assumptions that the new stadium would attract a second bowl game in addition to the one it has now — and that the attendance would double. It would attract two neutral-site college football games each year. (There are usually fewer than a dozen each year.) Oh, and it would land signature events like the N.C.A.A. Final Four, the Republican National Convention and the Academy Awards ceremony (seriously).

And then there were the job assumptions, which swayed many Democrats. “They said it would take 25,000 people to build it, when it is usually more like 3,000,” said Roger Noll, a Stanford University sports economist who advised some stadium opponents. “They claim it will add 40,000 permanent jobs,” he added. “No sane person would believe a number like that.”

Noll concluded: “The fix was in.”"

"the governor called the Legislature into a special session to ram through the bill authorizing the $750 million expenditure. Only after the session began were legislators informed that the stadium would require nearly $900 million in road improvements. That meant that other, overdue improvements would continue to be delayed."

Wednesday, December 21, 2016

The Rust Belt Is Right to Blame Obama

The risk that regulators pose to business is up 79% from 2010—a burden that falls heavy on industry.

By Clark S. Judge, in the WSJ. Mr. Judge is managing director of the White House Writers Group Inc. and chairman of the Pacific Research Institute. Excerpt:
"Then, firing up a suite of algorithms and formulas, they generated a regulatory-risk score for every company in the Fortune 500. Hedge funds are using the findings to gauge how potential investments could be affected by new regulations, court filings and other breaking events.

But the news here is in the next steps. The Vogel and Hood team analyzed corporate lobbying and turned out company-by-company ratings of its effectiveness. They put into the calculations the amounts that firms spend on government relations, the size of government-relations staffs, the expertise of the outside lobbyists hired, and the number of lobbying registration reports filed. Each company can then be ranked in the hierarchy of Washington influence.

Messrs. Vogel and Hood say their method is like a capital asset pricing model with one exception: In place of the standard measure for market risk, they substituted their metrics for regulatory risk and corporate response. What were the results?

First, and no surprise here: From 2010-15 regulatory risk jumped—an average increase across all industries of 79%.

Second, and more surprising: As regulatory risk climbed, annual capital expenditures fell, a total drop of nearly $32 billion when comparing 2010 to 2015. This negative relationship was strong across the board, but it was statistically tightest for “industrials” (heavy manufacturing plus railroads and airlines).

Third, as regulatory risks grew and capital expenditures shrank, major corporations also cut jobs by more than 1.1 million. Among the biggest losers were heavy manufacturing, airlines, railroads, information technology and consumer products—America’s industrial core.

Fourth, while the business of making things and moving them to market was eroding, the value of gaming the government increased. The Vogel and Hood team constructed two trial portfolios composed solely of companies that ranked high in lobbying strength. From 2010-16 these portfolios outperformed the S&P 500 by 22% and 27%."

U.S. rank in World Bank "ease of doing business" falls under Obama

See Doomed to Stagnate? by Bret Stephens of the WSJ. Excerpts:
"Want to better understand the mess Greece is in? In 2006 it took an average of 151 days to enforce a contract in the Hellenic Republic. Today it takes 1,580. Want to measure Israel’s progress? A decade ago, starting a business in the startup nation took about 34 days. Now it takes 12.

What about the United States? When President Obama took office in 2009, the U.S. ranked third in the overall index, just behind Singapore and New Zealand. It has since fallen to eighth place. Eight years ago, 40 days were needed to get a construction permit. Now it’s 81. When President Bush left office, it took 300 days to enforce a contract. Today: 420. As for registering property, the cost has nearly quintupled since 2009, to 2.4% of property value from 0.5%."

"There’s nothing “secular” about our low rate of growth, goes the argument: It’s just the result of the never-ending accretion of ever more costly and time-consuming regulations, all of which could, in theory, be overturned at a stroke. These regulations go largely unnoticed by coastal elites because we’re mostly in the business of producing and manipulating words—as politicians, lawyers, bureaucrats, academics, consultants, pundits and so on."

"In recent months I’ve tried to get a better sense of the things-making world by asking executives in different industries to share their sense of what it’s like to do business in America today. They talk about Sarbanes-Oxley—its punishing auditing requirements. Or Dodd-Frank—the Compliance Blob it has created within banks. Or the Affordable Care Act—the employer mandate, the increased age of dependent “children,” the obscure little taxes for things like the “Patient Centered Outcomes Research Institute.”"

"Did you know that a company that is a contractor or subcontractor with the government must, according to recent Labor Department regulations, establish a goal of having 7% of its workforce be disabled?"

"Did you know that the Occupational Safety and Health Administration recently banned blanket policies on post-accident drug testing because they may be discriminatory?"

"Did you know that a driver who makes a delivery within Seattle’s city limits must earn a minimum of $15 an hour, irrespective of whether his company has a branch in the city?"

Tuesday, December 20, 2016

Energy Efficiency Standards Are More Regressive Than Energy Taxes: Theory and Evidence

NBER Working Paper by Arik Levinson. Here is the abstract.
"Economists promote energy taxes as cost-effective. But policymakers raise concerns about their regressivity, or disproportional burden on poorer families, preferring to set energy efficiency standards instead. I first show that in theory, regulations targeting energy efficiency are more regressive than energy taxes, not less. I then provide an example in the context of automotive fuel consumption in the United States: taxing gas would be less regressive than regulating the fuel economy of cars if the two policies are compared on a revenue-equivalent basis." 

Donald Trump is going to learn what his predecessors did: strong-arming a job revival is easier said than done

See When Presidents Defy Economic Gravity, Gravity Usually Wins by Greg Ip of the WSJ.
"In his efforts to preserve manufacturing jobs, President-elect Donald Trump will at some point learn the same thing LBJ did. When gravity is pulling the economy in one direction, no number of presidential phone calls, threats or tweets can push it in another.

Last week, Mr. Trump publicly shamed Carrier, a unit of United Technologies Corp., out of plans to outsource 800 jobs at an Indianapolis plant to Mexico. But he can’t make every business produce things in the U.S. that are cheaper to make elsewhere, any more than President Barack Obama could persuade insurers to keep selling money-losing health policies or consumers to buy overpriced electric cars.

Mr. Trump’s pressure tactics won’t take away Mexico’s comparative advantage in labor-intensive manufacturing. In fact, it’s become 10% cheaperto manufacture in Mexico thanks to the plunge in the peso that followed his election. His tactics will, however, encourage other companies to seek special arrangements, even at the expense of consumers and taxpayers.

Past protectionism was usually aimed at foreign companies, not domestic ones. Still, it’s a useful guide to what awaits Mr. Trump. In 1977, President Jimmy Carter slapped restrictions on imported Japanese televisions to protect American producers. The result? As Japanese sales went down, South Korea’s and Taiwan’s went up. When those imports were restricted, imports from Mexico and Singapore went up. Japanese and Taiwanese companies began assembling televisions in the U.S. using imported subassemblies, which weren’t restricted.

When Mr. Carter imposed limits on imports of shoes from Taiwan and South Korea, those countries raised the quality and thus value of the shoes they did sell. In industry after industry, the hoped-for job revival never happened; in some sectors, jobs went down.

“Market responses to protection sometimes significantly undermine its intended purposes,” concluded Robert Baldwin and Richard Green in a 1988 study published by the National Bureau of Economic Research.

Something similar happened when Mr. Obama imposed tariffs on Chinese tires in 2009: Chinese imports plummeted while other countries’ jumped. The action saved at most 1,200 jobs, a study by the Peterson Institute for International Economics found, at a cost to consumers of $900,000 per job because of higher prices.

Mr. Trump’s tactics are different, but the results will likely be the same. Any company pressured into keeping a high-cost plant open will have to choose between subpar profits to match the price of cheaper imports, or losing market share. Other companies will shed unwanted assets some other way, such as closing or selling them to a leveraged buyout firm with less compunction about slashing jobs and wages.

The gas furnaces Carrier builds in Indianapolis are a low-tech product in which the U.S. has no comparative advantage, in contrast to the sophisticated aircraft engines that Carrier’s affiliate, Pratt & Whitney, builds in Connecticut for which it plans to add 8,000 jobs in coming years."

"Opaque, ad hoc deals between business and government breed crony capitalism. Brazil’s state-owned oil giant Petrobras has long been required to favor local content in its procurement. It has undermined its finances and hamstrung its production ability. The culture of favoritism played a part in the kickback scandal now engulfing the company and Brazilian politicians.

Virtually every business that locates in Puerto Rico gets its own tax break, with the result that the effective corporate tax rate is a pitiful 5%, according to economist Anne Krueger, who studied that territory’s economy at its government’s request. Yet such favors can’t overcome the headwinds of high taxes and regulation and inadequate education and infrastructure, which have left the economies of both Brazil and Puerto Rico stagnant."