Tuesday, February 28, 2017

The risk of layoff and unemployment to workers in trade-exposed sectors is comparable — or even lower — than the risk to workers in non-traded sectors and that these risks have not increased during the period of more intense competition with Chinese imports

By Jonathan T. Rothwell of the George Washington University Institute of Public Policy.


In any dynamic economy, there is a risk of job loss. Job loss resulting from foreign rather than domestic competition has come under intense scrutiny recently with Britain’s exit from the European Union and the election of Donald Trump as president of the United States. While economists generally conclude that trade is broadly enriching, recent works have brought attention to the costs of trade to workers and communities. At the individual level, I find that the risk of layoff and unemployment to workers in trade-exposed sectors is comparable — or even lower — than the risk to workers in non-traded sectors and that these risks have not increased during the period of more intense competition with Chinese imports. At the community level, Autor, Dorn and Hanson (2013) find that local areas have experienced slower job and wage growth and higher unemployment because of import competition with China. Upon analyzing their data, I conclude that their results are biased by the weaker macroeconomic performance of 2000-2007 relative to the 1990s. When I analyze inter-local area economic changes — rather analyzing changes within and across areas — I fail to reject the null hypotheses that import competition has no effect on wage or employment growth, except within the manufacturing sector during the most recent period, or that it has no effect on many other outcomes, including labor force participation, intergenerational mobility, and mortality. During each period, import competition actually predicts an increase in average wages for manufacturing workers, as well as non-manufacturing during the 1990s period, and import competition predicts a shift toward college educated non-manufacturing jobs in the second period. I conclude that foreign competition does not appear to elevate the risk of job loss to a greater extent than domestic competition, and people living in the communities most exposed to foreign competition are no worse off on average."

The EU’s renewable energy policy is making global warming worse

By Michael Le Page of New Scientist.
"Countries in the EU, including the UK, are throwing away money by subsidising the burning of wood for energy, according to an independent report.

While burning some forms of wood waste can indeed reduce greenhouse gas emissions, in practice the growing use of wood energy in the EU is increasing rather than reducing emissions, the new report concludes.

Overall, burning wood for energy is much worse in climate terms than burning gas or even coal, but loopholes in the way emissions are counted are concealing the damage being done.

“It is not a great use of public money,” says Duncan Brack of the policy research institute Chatham House in London, who drew up the report. “It is providing unjustifiable incentives that have a negative impact on the climate.”

The money would be better spent on wind and solar power instead, he says.

It is widely assumed that burning wood does not cause global warming, that it is “carbon neutral”. But the report, which is freely available, details why this is not true.

More emissions

Firstly, burning wood produces more carbon dioxide, methane and nitrogen dioxide per unit of energy produced than coal. When forests are logged, their soils also release carbon over the next decade or two. There are also emissions from the transport and processing of wood, which can be considerable.

By contrast, forests that are left to grow continue soak up carbon. This is true even for mature forests, the report says. Older trees absorb much more carbon than younger trees, so despite the death of some trees, mature forests are still a carbon sink overall.

As for the idea that all the CO2 emitted when wood is burned is eventually soaked up when trees regrow, this can take up to 450 years if forests do indeed regrow, the report says. To avoid dangerous climate change, however, emissions need to be reduced right away.

Dirty reality

Supporters of bioenergy claim the industry is only using waste from sawmills and such, rather than whole trees. Producing energy from genuine wood waste that would otherwise be left to rot can indeed be better than burning fossil fuels.

But in reality, there simply is not enough waste wood to meet demand. What waste there is often contains too much dirt, bark and ash to burn in power plants, or is already used for other purposes. Instead, there is substantial felling of whole trees for energy, the report says.

“I think the evidence is pretty strong,” says Brack. Official definitions are so poor that companies can cut down whole trees and count them as waste, he says.

There is also no evidence that new forests are being planted to meet demand for bioenergy, as some bioenergy enthusiasts claim. For instance, forest area in the southern US, which provides much of the wood pellets burned in the EU, is not increasing.

Policy changes needed

Substantial changes in policies are needed to ensure biomass burning reduces rather than increases emissions. In particular, the report recommends the introduction of much stricter criteria to ensure only genuine waste wood is used.

It also recommends a number of changes to close the various carbon accounting loopholes that allow the EU to claim its bioenergy policy is reducing its greenhouse gas emissions, when it is fact it is having the opposite effect.

“Many countries are increasing use of biomass as renewable energy,” Mary Booth of the US-based Partnership for Policy Integrity and a reviewer on the report, said in a statement. “Alarmingly, the Chatham House report concludes that uncounted emissions from the ‘biomass loophole’ are likely large, and likely to significantly undermine efforts to address climate change.”"

Monday, February 27, 2017

Sports Drinks Are Now More Expensive than Beer Thanks to the Philadelphia Soda Tax

By Scott Drenkard of The Tax Foundation.
"On January 1st, the controversial Philadelphia soda tax took effect. It is levied at a rate of 1.5 cents per ounce, which is 24 times the tax levied on beer in the state of Pennsylvania. This stark new tax has prompted a few interesting reactions on Twitter as customers are starting to see just how large the effects on prices of sweetened beverages in the city are. One person on Craigslist (the post has now been flagged for removal) posted a joke page offering to smuggle in untaxed soda, noting that they “deal in weight only” and “cash or Bitcoin accepted.”

My colleague Bill Rickards—former Tax Foundation intern, Philadelphia native, and all-around great guy—just sent me some pictures of what this looks like on the ground in the city. Some observations (all photo credits to Bill):

A 12-pack of sports drinks is now more expensive than beer. Here’s a 12-pack of Propel energy water versus a 12-pack of Icehouse beer. Before sales taxes, 12 Propels is $5.99 plus $3.04 in soda taxes for a total of $9.03 (and that’s when it’s on sale for $1 less than the $6.99 standard). The 12 Icehouses are $7.99, beer tax included.

The tax on sweetened beverages is approaching the base price of the beverage in some instances. Here’s a picture of store-brand root beer, where the price of a 12-pack is $2.99, plus a beverage tax of $2.16. That’s a 73 percent excise tax. Taxes on 2-liter sodas are even higher percentages.

The “soda” tax is capturing a lot more drinks than just soda. Because of the overly broad statute language, the tax captures zero-calorie diet beverages, juice, and even milk substitutes for lactose-intolerant people."

Fatalities at wind turbines may threaten population viability of a migratory bat

Abstract from Biological Conservation. Volume 209, May 2017, Pages 172–177.

"Large numbers of migratory bats are killed every year at wind energy facilities. However, population-level impacts are unknown as we lack basic demographic information about these species. We investigated whether fatalities at wind turbines could impact population viability of migratory bats, focusing on the hoary bat (Lasiurus cinereus), the species most frequently killed by turbines in North America. Using expert elicitation and population projection models, we show that mortality from wind turbines may drastically reduce population size and increase the risk of extinction. For example, the hoary bat population could decline by as much as 90% in the next 50 years if the initial population size is near 2.5 million bats and annual population growth rate is similar to rates estimated for other bat species (λ = 1.01). Our results suggest that wind energy development may pose a substantial threat to migratory bats in North America. If viable populations are to be sustained, conservation measures to reduce mortality from turbine collisions likely need to be initiated soon. Our findings inform policy decisions regarding preventing or mitigating impacts of energy infrastructure development on wildlife."

Sunday, February 26, 2017

The antitrust authorities, no less than regulatory authorities, are vulnerable to capture by the collective interests of groups having the most salient stakes in antitrust law enforcement outcomes

By William F. Shughart II.
"As Fred McChesney and I wrote 26 years ago in the introduction to our edited volume titled The Causes and Consequences of Antitrust: The Public-Choice Perspective (University of Chicago Press, 1995), the Chicago School’s approach to the enforcement of antitrust (competition) laws is schizophrenic.

Largely happy to accept the implications of George Stigler’s economic theory of regulation (1971) and its formalization by Sam Peltzman (1976), few scholars nowadays accept the naïve proposition that price and entry controls on private firms are designed (or even intended) to protect consumers against abuses of market power. Too much evidence has accumulated before and sinceshowing that regulatory intervention into private markets is ineffective or that its consequences often are perverse—to conclude that regulatory agencies operate in the “public’s interest.”

Nor should it be possible for the defenders of the public-interest theory of regulation to escape criticism by resorting to the shopworn phrase “unintended consequences.” As Prof. Stigler wrote in “A Supplementary Note on Theories of Regulation (1975)”, an essay published in his The Citizen and the State, “mistakes” can explain both everything and nothing. If a regulatory regime were found to result in higher prices for consumers and larger profits for producers (a very common empirical finding), surely that “error” would be corrected by amending or repealing the relevant regulatory statute. If not, as Stigler concluded, the actual effects of regulation must be the intended effects.

Stigler advanced what has since been known as the “capture” theory of regulation. His theory was based on ideas in Mancur Olson’s Logic of Collective Action (Harvard University Press, 1965), a manuscript cited by Stigler in his Spring 1971 article in the Bell Journal of Economics and Management Science (now the Rand Journal of Economics). Olson’s insight was to explain why small, homogeneous and well-organized groups of individuals (or firms) tend to dominate political processes at the expense of larger, heterogeneous and less-well organized groups: the “law of 1/N”, where N is the number of group members. Stigler adapted those ideas to illuminate the outcomes of regulatory processes in which the interests of producers dominate those of the mass of unwashed consumers.

While many economists continue to plow the theoretical fields in search of “optimal” regulation without acknowledging the political contexts in which regulatory agencies function in the so-called real world, the Chicago School’s interest-group theory of regulation dominates the modern literature. Curiously, however, the antitrust laws and their enforcement have escaped by and large being brought within the ambit of Chicagoan analyses of public policy.

Antitrust is seen in Chicago (and nearly everywhere else) as somehow “different” from ordinary economic regulation of prices and entry conditions into narrowly defined “markets” for electric power and other “public utilities.”1) That mindset becomes even curiouser insofar as Judge William Landes warned long ago of the increasingly regulatory nature of antitrust decrees.2) Richard Posner once called for the abolition of the Federal Trade Commission, courts having ruled that the FTC can bring charges under Section 5 of the Federal Trade Commission Act (1914) against virtually any law violation the Justice Department can prosecute under the Sherman Act (1890), the first competition law enacted on the planet; Judge Posner later recanted.

Standing on the shoulders of at least one giant, my former colleague and frequent co-author the late Robert Tollison, I laid out the special interest group basis of antitrust in Antitrust Policy and Interest-Group Politics (Quorum, 1990). That book documented the political pressures brought to bear on antitrust law enforcers, including those of congressional oversight committees and the competitors of antitrust defendants, that shape enforcement outcomes at every stage of the process. The rent-seeking and rent-defending efforts of the parties involved in both public and private antitrust lawsuits are consistent with Olson’s Logic. The antitrust authorities, no less than regulatory authorities, are vulnerable to capture by the collective interests of groups having the most salient stakes in antitrust law enforcement outcomes.

It is tempting to think that antitrust law enforcersand the judges who rule on such matters—are immune from the self-interested motivations of ordinary mortals, that the parties involved look only to the “public’s interest” by protecting consumers from the depredations of profit-seeking business enterprises. A review of more than a century of the actual practices of applying the relevant laws points in the opposite direction.

Antitrust is economic regulation and, as such, is amenable to scholarly evaluations of it within the same analytical framework. If not, scholars will continue to bemoan antitrust’s failures rather than seeing them as the predicable outcomes of an understandable political process, helping to explain the secular rise and fall of activist intervention against mergers and the behaviors of so-called dominant firms both at home and abroad.3)

Antitrust bureaucrats, judges and the parties who can bring the laws to bear to their own benefit are rational actors, not Madison’s fictional angels able to shed their parochial interests in the courtroom. The evidence is clear. Chicago School scholars, if anyone, should take off their rose-colored glasses.

(Note: William F. Shughart II is the Research Director and Senior Fellow at the Independent Institute, the J. Fish Smith Professor in Public Choice at the Jon M. Huntsman School of Business at Utah State University. He is also the Editor-in-Chief of Public Choice, and a former economist at the Federal Trade Commission.)"

New Study on Low-Income Housing Subsidies

By Chris Edwards of Cato.
"A new study at Downsizing Government looks at low-income housing aid. Howard Husock of the Manhattan Institute examines the history of federal aid and discusses problems with current policies, particularly rental subsidies and public housing.

One problem is that housing aid is costly to taxpayers. The federal government spent $30 billion on rental subsidies (Section 8 vouchers) and almost $6 billion on public housing in 2016.

Another problem is that housing aid and related rules are costly to urban communities. Howard argues that federal interventions undermine neighborhoods, encourage dependency, and create disincentives for long-term maintenance and improvements in housing.

In urban politics, there are frequent calls for “affordable housing.” But Howard says that it is a myth that markets cannot provide decent housing for people at all income levels. He discusses the vast private housing investment in the decades prior to the 1930s, which was a time of rapid growth in America’s big cities.

The problem today is that government rules and regulations inflate housing costs, which is the topic of an upcoming study by Cato’s housing expert, Vanessa Calder.

What should Ben Carson do? The new Secretary of Housing and Urban Development should heed Howard’s advice and work to cut federal subsidies. Carson should also follow through on his conviction that HUD imposes too many “social engineering” rules on local governments.

Vanessa provides further policy guidance for Carson here, and she discusses an example of the sort of top-down HUD mandate that should be on the chopping block here.

Howard’s vast scholarship on housing policy is here.

More information on HUD is here. I would particularly recommend HUD Scandals. My god, Ronald Reagan’s HUD was appalling."

Saturday, February 25, 2017

Those of us who demonize government and think it's incompetent still have a solid basis for those views (the role medicaid might have played in the opiate epidemic)

See Quinones versus Eberstadt by David Henderson.

"We have demonized government and laughed at government and called it incompetent, not paid taxes to support it. And we have a situation now, in my opinion, where--having done all that, having exalted the private sector, demonized government, what we now have is a story that the private sector has visited upon the United States of America and its people the most devastating threat to personal liberty that we know today, which is opiate addiction. And for a long time the only ones who were fighting that were government officials--coroners, jailers, cops, public health nurses, etc.
This is a statement by Sam Quinones, author of Dreamland: The True Tale of America's Opiate Epidemic. It's at the tail end of the January 23 EconTalk interview of Quinones by Russ Roberts. Yet elsewhere in the interview, Russ, drawing on Quinones's own book, said:

But you don't have $1000. You do have a Medicaid card. And the co-pay for Medicaid is $3. Which seems like a very nice, thoughtful thing. But what it means is that the taxpayer is going to cover $997 of this. The addict is going to cover $3. And then the punchline--that's interesting by itself and as an economist who has often talked about the value of cash, I can't help but note the irony that we give people Medicaid because we don't want them to have cash as a way to use it on drugs and alcohol. So there's an incredible tragedy here. So, they take the $3 co-pay; they $1000 worth of drugs; and it's worth $10,000 on the street.

I found it interesting--as Russ appeared to also--that after pointing out the huge role of government in creating or exacerbating this opioid problem, Quinones said that we demonize the government and call it incompetent. But surely this absurd policy--having taxpayers pay for people to get addicted--deserves demonization and possibly the "incompetent" label.
 I haven't had time to read Quinones's book but elsewhere I did find confirmation of the point he's making. It comes from a chilling article by Nicholas Eberstadt of the American Enterprise Institute (HT2 John Cochrane). The article is titled "Our Miserable 21st Century" Eberstadt quotes the section of Quinones's book that Russ drew on and then adds:

You may now wish to ask: What share of prime-working-age men these days are enrolled in Medicaid? According to the Census Bureau's SIPP survey (Survey of Income and Program Participation), as of 2013, over one-fifth (21 percent) of all civilian men between 25 and 55 years of age were Medicaid beneficiaries. For prime-age people not in the labor force, the share was over half (53 percent). And for un-working Anglos (non-Hispanic white men not in the labor force) of prime working age, the share enrolled in Medicaid was 48 percent. (italics in original)

Eberstadt adds:
By the way: Of the entire un-working prime-age male Anglo population in 2013, nearly three-fifths (57 percent) were reportedly collecting disability benefits from one or more government disability program in 2013. Disability checks and means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age. We cannot say that these programs caused the death of work for millions upon millions of younger men: What is incontrovertible, however, is that they have financed it--just as Medicaid inadvertently helped finance America's immense and increasing appetite for opioids in our new century. (italics in original)

So those of us who demonize government and think it's incompetent still have a solid basis for those views. I agree with Quinones on one thing, though: this is not a laughing matter.
 Also, unlike Quinones, I don't see how opiate addiction threatens people's liberty or how jailers and cops in the drug war apparently don't."

Large inflows of foreign aid change local politics for the worse and undercut the institutions needed to foster long-run growth

See Gates Foundation Should Credit Market Reforms for Poverty Reduction by Daniel Press of CEI.
"Last week, the Bill and Melinda Gates Foundation released its annual letter, celebrating its investments in the developing world. Following their typical upbeat style, this year’s letter served as a thank-you note to their friend and fellow philanthropist, Warren Buffett. Buffett, who has donated a substantial portion of his fortune to the Foundation over the years, recently wrote a letter asking what humanitarian return there has been on his investment. The Gates Foundation provided this summary of its report back:

It’s a story about the stunning gains the poorest people in the world have made over the last 25 years. This incredible progress has been made possible not only by the generosity of Warren and other philanthropists, the charitable giving of individuals across the world, and the efforts of the poor on their own behalf—but also by the huge contributions made by donor nations, which account for the vast majority of global health and development funding.
Our letter is being released amid dramatic political transitions in these countries, including new leadership in the United States and the United Kingdom. We hope this story will remind everyone why foreign aid should remain a priority—because by lifting up the poorest, we express the highest values of our nations.

In part, the Foundation is spot on. The world’s poorest have indeed made “stunning gains” over the past few decades. Extreme poverty has fallen by some 80 percent since 1970, while child mortality has also seen dramatic improvements. What they get wrong, however, is the cause of all of this. The letter’s emphasis on government development aid as the source of this progress is misplaced, and masks a controversial legacy.

Between 1962 and 2012, world governments contributed almost $4 trillion of their taxpayers’ money to aid programs. For some recipient nations, this accounts for as much as 44 percent of their GDP. While international development experts have been predicting that such incredible charity would end poverty as we know it, it has been shown to have had little effect on the recipient countries’ economic growth. In some African nations, among the largest recipients of aid, there is even a negative relationship. Zambia is one such sad example. Former World Bank economist William Easterly found that if Zambia had received its aid funding between 1960 and the early 1990s as investment dollars instead, it could have had a per capita GDP of around $20,000. Instead, an average Zambian in the early 1990s lived off of just $500 per year – less than in 1960.

The reason behind the aid-development model’s monumental failures are clear – aid corrupts the incentives required for nations to develop. With the promise of large aid checks, African governments have transferred their attention from domestic economic development towards courting foreign donors. This has created generous budgets for unaccountable governments, who would rather reap in aid money than begin the tedious task of reform. Without such free-market reforms, long-term prosperity is unlikely. As economist and Nobel laureate Angus Deaton has written, “large inflows of foreign aid change local politics for the worse and undercut the institutions needed to foster long-run growth.”

It is well established by now that countries that embrace free-market reforms, including liberalized trade, reduced regulation, and secure property rights, tend to grow faster than others. Indeed, the unprecedented decline in world poverty in the last few decades has coincided with a significant increase in global economic freedom. The collapse of the Soviet Union, the opening up of India and China, and the spread of globalization have all helped spur the recent explosion in economic freedom.
The comparison of capitalist South Korea with socialist Ghana is especially compelling. Since the 1960s, South Korea’s embrace of foreign investment, liberalized trade, and strong property rights led to an over 2,000 percent increase in income, reaching $38,571 per capita. Ghana’s socialist experiment, on the other hand, led to a meager 83 percent rise in per capita incomes, reaching $4,495. This was while Ghana was receiving massive amounts of aid and South Korea received relatively little.  The “efforts of the poor” that have followed free-market reforms have created wealth and fostered robust economic growth. That the people of the developing world are creating their own development through embracing markets is the real cause for celebration.

The Gates Foundation should give greater credit to the proven economic reforms that have spurred development throughout the world. They crafted their annual letter to reassure Mr. Buffett of the effectiveness of his charity. But if he was looking for better return, I’d bet on free markets for the developing world."

Thursday, February 23, 2017

Manufacturing GDP and the Trade Deficit Rise and Fall Together

By Alan Reynolds.
"As The Wall Street Journal notes, “Mr. Trump and his advisers see the U.S. goods trade deficit as an indicator of U.S. economic weakness.”

Manufacturing Output and Goods Trade Deficit

Yes, they do. But why?  As the graph clearly shows, the real gross output of U.S. manufacturing rises when the goods trade deficit (both measured in 2009 dollars) is also rising.  When trade deficits fall, so does U.S. manufacturing.  Sinking industries need fewer imported parts and materials, and their unemployed workers can’t afford imports.

Measured in 2009 dollars, the goods trade deficit fell from $863.4 billion in 2006 to $525.2 billion in 2009.  Peter Navarro, the President’s liberal protectionist trade adviser, would apparently call that good news.  The rest of us called it The Great Recession."

Taxes and Deadweight Loss

By David Henderson.
"In his excellent post on taxes and the incidence of taxes, co-blogger Scott Sumner does not mention another important issue in taxation: deadweight loss. The deadweight loss from a tax is the part of the loss to those who bear the tax that does not go to the government. Thus the term "deadweight." (Scott's graph shows a small deadweight loss, but he does not elaborate on this.)

I noticed when checking the Concise Encyclopedia of Economics that the article on taxation, although it mentions incentive effects of taxation, does not introduce the term "deadweight loss." That's my bad as the editor.

There are three important bottom lines on deadweight loss.

1. The easier it is to avoid a tax (that's usually expressed as a higher elasticity of supply or demand), the greater is the DWL per dollar of revenue raised. That's because the tax has distorted a lot. If, for example, the number of cigarettes people buy drops a lot in response to a given increase in the per-pack tax, the tax has distorted the smoking decision a lot. Of course, some people, those who don't want people to smoke, like this distortion.

This is why the capital gains tax is so inefficient, that is, causes a large DWL. It is very easy to avoid the tax by not realizing your capital gain, that is, by not selling your asset whose value has increased.

2. A tax can cause a DWL and raise zero revenue. Here is my favorite example I've used when I've taught this. When I fly into Winnipeg every summer, I don't rent a car at the airport. Instead, I can save almost 20 days of airport taxes on the car rental by paying about $20, including tip, to take a cab to the Avis in downtown Winnipeg. I save close to $200 in taxes by spending an extra 15 minutes plus $20. The latter is the DWL. Notice that the tax raised zero revenue from me. Of course, I'm not claiming that it raised no revenue. But it led to a DWL on my part with zero revenue from me.

3. Last, and possibly most important, the DWL from a tax is proportional, not to the tax rate, but to the square of the tax rate. So doubling a tax rate will quadruple DWL. Cutting a tax rate by half will reduce DWL by 75%. So, imagine that Republicans somewhat succeed in cutting the corporate income tax rate from 35% to 20% and assume, for simplicity, no state tax on corporate income. That's a 43% drop in the tax rate and the new tax rate is 57% of the old tax rate. The new DWL will be (0.57)^2 of the old DWL. That's 0.32. So the DWL falls by 68%!

See these earlier posts by me for more on DWL from taxes."

Sunday, February 19, 2017

A maze of local land-use laws make housing scarcer and more expensive

See Why Falling Home Prices Could Be a Good Thing by Conor Dougherty of The New York Times. Excerpts:

What if the regulations were not so burdensome?
"They would be somewhat cheaper in most places, where population is growing slowly. But they would be profoundly cheaper in places like super-expensive San Francisco.

That was the conclusion of a recent paper by the economists Ed Glaeser of Harvard and Joe Gyourko at the Wharton School of the University of Pennsylvania. The paper uses construction industry data to determine how much a house should cost to build if land-use regulation were drastically cut back. Since the cost of erecting a home varies little from state to state — land is the main variable in housing costs — their measure is the closest thing we have to a national home price.

According to them, a standard American home should cost around $200,000, a figure that includes the cost of construction, what land would cost in a lightly regulated market, and a modest profit for developers. In many places, that’s what the prices roughly are."

"By the paper’s calculations, a home in the San Francisco area should cost around $281,000.

The actual price for a standard home in the area is more like $800,000 (using 2013 data). The paper argues that most of that difference is caused by regulatory hurdles like design and environmental reviews that can add years to a project’s timeline and suppress the overall housing supply."

"their general conclusion — that an abundance of new homes would result in lower prices — is not remotely controversial. Many studies, from the McKinsey Global Institute, California’s Legislative Analyst’s Office and others, have shown that California’s high home prices are largely a supply problem: The state doesn’t build enough homes."

"Tokyo has not had rapid home price appreciation because increases in demand are met with increases in new building."

"Say we opened the floodgate of development. What kind of effects could we expect? The economy would grow, and by a lot. According to a recent paper by the economists Chang-Tai Hsieh, from the University of Chicago’s Booth School of Business, and Enrico Moretti, from the University of California, Berkeley, local land-use regulations reduce the United States’ economic output by as much as $1.5 trillion a year, or about 10 percent lower than it could be.

That is a theoretical figure that includes easy-to-see things like increased sales of building materials and more jobs for construction workers. Most of the increase, however, would come from more abstract gains like increased wages for people who are willing to move from an economically distressed city to a faster-growing economy elsewhere, but are currently unable to because housing is too expensive."

"lower home prices would encourage workers to move farther and more often in search of job opportunities. The impact on mobility could be huge, as the $1.5 trillion figure shows.

There was a time, a few decades ago, when the cost of living did not vary all that much from city to city. Since then, as places like New York, San Francisco and Seattle have been hit with skyrocketing rents and home prices"

"when home prices were more even from place to place, people with different levels of education and income tended to flock to the same types of high-wage places"

"Today, people with less education tend to go where housing is cheap, like Las Vegas, while college-educated workers with skills that are in demand still go to places where wages are high, like the Bay Area.

That’s because lower-income people have little to gain by going to California’s coastal cities. Wages might be higher, but as the state’s poverty figures show, a better paycheck doesn’t help if it’s swallowed by rent. The loss of mobility makes income inequality worse"

"Finally, if housing were plentiful and cheap, we would probably stop having big housing bubbles."

"housing is already relatively affordable in the vast majority of American cities. So there is little reason to believe that people would desert overpriced neighborhoods if they suddenly became cheaper."

"Take Boston. The median Boston suburb has a minimum lot size of one acre, and many suburbs have minimum lot sizes of one home per two or four acres. That is a huge drag on the region’s overall housing supply, according to Mr. Glaeser."

Pushing Diesel To Help The Environment Actually Hurt It

See Dieselgate Is a Political Disaster by Holman W. Jenkins, Jr. Excerpts:
"less than 4/1,000ths of a degree Celsius. That’s how much warming might be spared half a century from now thanks to Europe’s decision, starting after the Kyoto treaty in the late 1990s, to switch more than 50% of its passenger cars to diesel.

For this negligible result, Europe got significantly dirtier air. Paris, on some days, suffers worse smog than Beijing. Though his methodology may be questionable, a U.K. government scientist estimates that thousands of citizens die each year because of increased nitrogen oxide and soot emissions."

"More than 70% of BMW and Daimler cars made for the European market last year were diesel. When honestly tested, one study shows the latest “Euro 6 Standard” vehicles miss their pollution targets by a whopping 400%."

"In the U.S., the totality of Obama climate policies—his fuel mileage targets, his coal regulations, his wind and solar subsidies—would not make a detectable difference in the earth’s climate even if given a century to work their nonmagic. Yet the cost will be hundreds of billions."

Saturday, February 18, 2017

21.7 percent of bridges were “structurally deficient” while it was just 9.1 percent in 2016

See Condition of Highway Bridges by Chris Edwards of Cato.
"Mainstream media reporting on infrastructure seems to be driven by the lobby groups that are pushing for more federal spending. A Washington Post article today reflects two popular lobbyist themes: “the bridges are falling down” and “the federal government needs to solve the problem.” For today’s story, the Post could have saved the reporter’s salary and simply asked the press office at the American Road and Transportation Builders Association (ARTBA) to write it.

The headline, “More than 55,000 bridges need repair or replacement,” captures the bridges-falling-down theme. That figure is the number of “structurally deficient” bridges, which the Post sources from the ARTBA. But the story does not mention that these bridges (56,007 according to federal data) are 9.1 percent of the nation’s 614,387 bridges, which is the lowest such percentage in 24 years. The chart below shows that the share of bridges in this category fell from 21.7 percent in 1992 to just 9.1 percent in 2016.

That positive trend undermines the scary scenario that most articles want to convene, so it is not mentioned. By the way, “structurally deficient” does not mean unsafe.

The other lobbyist theme is captured by the Post in a quote from Rep. Bill Shuster, “We at the national level have to figure out how we’re going to make these investments.”

No we don’t. Of the 600,000 bridges, 99 percent are owned by state and local governments. Responsibility lies with the owner. The states have a powerful ability to tax, and about half of them have raised their gas taxes in just the past five years to fund highways and bridges. The states can also borrow or privatize to steer additional funds to infrastructure.

The Post story notes the large differences in bridge maintenance across the states. Apparently, 23 percent of bridges in Rhode Island are structurally deficient, but just 2 percent are in Texas. That does not suggest a need for federal intervention, but rather that Rhode Island’s leaders have been negligent.
It also suggests that a new federal spending effort to reduce the number of structurally deficit bridges would be unfair. It would reward irresponsible states such as Rhode Island, and penalize states such as Texas that have already prioritized bridge maintenance.


The ‘simple life’ wasn’t so simple – and, compared to modern life with all of its ‘complexities,’ the ‘simple’ life was also sure as hell difficult, dirty, dreary, and dangerous

By Don Boudreaux.
"from page 105 of Stanley Lebergott’s brilliant 1993 book, Pursuing Happiness: American Consumers in the Twentieth Century (footnote excluded):

The development of central heating in the 1920s has often been instanced as one more example of how American materialism overwhelmed the simple life.  Indeed it did.  It ended the simple family chore of cutting and hauling fifteen to twenty tons of wood for stove and fireplace, with the housewife then having to carry much or all of it into the house.  (As late as 1919 half of all farm women carried in their firewood.  Many also had to chop logs or branches into kindling.)

DBx: The ‘simple life’ wasn’t so simple – and, compared to modern life with all of its ‘complexities,’ the ‘simple’ life was also sure as hell difficult, dirty, dreary, and dangerous.

But note the job destruction that is rampant in modernity!  Central heating of homes destroyed countless millennia-old jobs of chopping and hauling wood.  What’s a poor family to do in light of this calamity?

Well, central heating – along with running water, electricity-powered household appliances such vacuum cleaners, ranges, refrigerators, and freezers (with the latter later becoming self-defrosting), commercial dairies, inexpensive prepared foods, and other modern conveniences – released women from the dullness of housewifery so that they could contribute their skills to strangers in commercial markets (and, of course, earn extra monetary income from these contributions).

Did women entering the workforce displace some men from particular jobs?  Of course.  But did women entering the workforce also cause the pattern of specialization to change?  Of course.  So did women entering the workforce – that is, did labor-saving innovations such as central heating and disposable diapers – cause a permanent increase in unemployment or “shortage” of gainful employment?  Of course not.  Nor did the increased entry of women into the commercial workforce cause wage stagnation (although it might have contributed to the statistical illusion of such stagnation).  And yet people continue to worry that today’s new labor-saving devices and techniques (such as driverless cars, 3D printers, and better inventory-control methods) are somehow different from the countless such devices and methods that have been put into use throughout history and, thus, will indeed cause a permanent increase in unemployment or absence or “shortage” of gainful employment.

While I agree that there are unfortunate ‘frictions’ in labor markets – some natural, some man-made – I doubt that the natural frictions are worse today than in the past, and I insist that the best way to deal with the man-made frictions is to eliminate them rather than pointing accusing fingers at labor-saving innovations and screaming “Stop!” or “Slow down!”"

Friday, February 17, 2017

The Industrial Revolution Is No Reason To Be Pessimistic Now

See Why Tyler Cowen's Pessimism Fails to Persuade Me by David Henderson.
""Why should it be different this time?"

So asks Tyler Cowen in opening his recent Bloomberg article "Industrial Revolution Comparisons Aren't Comforting." The idea of people who ask that question--I'm one of them--is that the Industrial Revolution worked out pretty well, permanently raising living standards and then leading to a growth trajectory.

Tyler gives a surprising answer, writing, "This time probably won't be different, and that's exactly why we should be concerned." He goes on to show some adjustment problems with the Industrial Revolution. I'll list the main points and respond to each. His statements are in a box; mine are not.

Consider, for instance, the history of wages during the Industrial Revolution. Estimates vary, but it is common to treat the Industrial Revolution as starting around 1760, at least in Britain. If we consider estimates for private per capita consumption, from 1760 to 1831, that variable rose only by about 22 percent. That's not much for a 71-year period.

It's true that that's not much. But it's something. And remember what preceded it, as Brad DeLong pointed out so well in his NBER study "Cornucopia." What preceded it was centuries in which private per capita consumption grew even less.
A lot of new wealth was being created, but economic turmoil and adjustment costs and war kept down the returns to labor. (If you're wondering, "Don't fight a major war" is the big policy lesson from this period, but also note that the setting for labor market adjustments is never ideal.)

Keeping down the returns to labor is different from decreasing the returns to labor. Also, I agree with Tyler about war. I hope he keeps up that part of his writing. No matter which president and party have been in power lately, they seem to be in love with war. Tyler could be a very effective critic of that tendency.
By the estimates of Gregory Clark, economic historian at the University of California at Davis, English real wages may have fallen about 10 percent from 1770 to 1810, a 40-year period. Clark also estimates that it took 60 to 70 years of transition, after the onset of industrialization, for English workers to see sustained real wage gains at all.

Notice the "may" in front of "have." Also notice, that that amounts to a 0.26% decrease annually. Not great, but not close to horrible. Also, remember the "may."
If we imagine the contemporary U.S. experiencing similar wage patterns, most of us would expect political trouble, and hardly anyone would call that a successful transition. Yet that may be the track we are on. Median household income is down since 1999, and by some accounts median male wages were higher in 1969 than today. The more pessimistic of those estimates are the subject of contentious debate (are we really adjusting for inflation properly?), but the very fact that the numbers are capable of yielding such gloomy results suggests transition costs are higher than many economists like to think.

The question "are we really adjusting for inflation properly" is one of the two main ones to ask. And the answer is no. See Michael J. Boskin, "Consumer Price Indexes," in David R. Henderson, ed., The Concise Encyclopedia of Economics. There are three other questions. By what % has median household income fallen, even using the problematic price index that Tyler presumably is using? He doesn't say. A second question is "Has the size of households changed in the last 16 or 17 years?" It has, not by a lot, admittedly, but by 3.0 percent. A third question is "Has immigration brought down the average income of U.S. households by adding a segment at the bottom, pulling the average down even though the preexisting households have not seen a fall?" If that's so, as I suspect it is, then over 90% of households could be better off, as I suspect is true.
Industrialization, and the decline of the older jobs in agriculture and the crafts economy, also had some pernicious effects on social ideas. The early to mid-19th century saw the rise of socialist ideologies, largely as a response to economic disruptions. Whatever mistakes Karl Marx made, he was a keen observer of the Industrial Revolution, and there is a reason he became so influential. He failed to see the long-run ability of capitalism to raise living standards significantly, but he understood and vividly described the transition costs and the economic volatility.

Tyler could be right here. He doesn't make the case, and, admittedly, he can't do so in a short space. But there is a competing hypothesis: the Industrial Revolution and the real income it created, gave rise to an intellectual class whose inclination was to attack free markets. Schumpeter, in Capitalism, Socialism, and Democracy, had a good bit to say about this.
Western economies later turned to variants of the social welfare state, but along the way the intellectual currents of the 19th century produced a lot of overreaction in other, more destructive directions. The ideas of Marx fed into the movements behind the Soviet Union, Communist China and the Khmer Rouge. Arguably, fascist doctrine also was in part a response to the disruptions of industrialization in the 19th and early 20th centuries.

The shift of jobs away from agriculture also poisoned economic policy. Typically the U.S. government spends more than $20 billion a year subsidizing farmers, even though virtually all economists think those expenditures are wasteful.

True, although I think that calling an annual expenditure of 0.1 percent of GDP on farm subsidies, bad as that is, "poison," is an exaggeration.
The European Union is worse yet. Although Europe has pressing problems with bank solvency, Italian and Greek debt, and refugees, an estimated 38 percent of the EU budget will be going to farm subsidies.

That is worse. A check of his link shows that it's about $90 billion per year, which is about 0.5 percent of EU GDP.
It is possible a similar logic may play out with the jobs that will be rendered obsolete by automation. That is, we may decide to subsidize and protect those jobs for centuries to come, to the detriment of long-run economic growth.

Correct. Tyler and I agree that subsidizing or protecting those jobs is a bad idea.
When it comes to automation, my all-things-considered view is still "full steam ahead," and I might have felt the same way and bit the same bullet, had I been alive in the late 18th century.

Drop the "might" and, even behind a Rawlsian veil of uncertainly, I would say the same.
But invoking the Industrial Revolution today is not going to ease my worries.

It did ease mine, not that they were large to begin with. But if this is what a well-informed pessimist thinks, then I'm still optimistic."

The Pathology of Domestic Aid

By Alex Tabarrok.
"Arvind Subramanian, Chief Economic Adviser to the Government of India, and co-authors have a nice summary of the effect of internal domestic aid on governance (the longer version is a chapter in the excellent Indian Economic Survey.) The bottom line is this:
The evidence suggests that all the pathologies associated with foreign aid appear to manifest in the context of intra-country transfers too
In particular, using one measure of aid to states, Redistributive Resource Transfers or RRT the authors find:
Higher RRT seem to be associated with:
  1. Lower per capita consumption
  2. Lower gross state domestic product (GSDP) growth
  3. Lower fiscal effort (defined as the share of own tax revenue in GSDP)
  4. Smaller share of manufacturing in GSDP, and
  5. Weaker governance.
Causality likely goes both ways of course but using an instrumental variable of distance to New Delhi (which correlates with transfers) the authors find suggestive evidence, as shown in the figure, that transfers are a cause of weaker governance.

It’s interesting to read an official government report which discusses instrumental variables!"

Thursday, February 16, 2017

How American Capitalism Serves Poorer Nations

By Tom Rogan.
"Right-wing philosophy assumes that market forces best allocate economic capital. Conversely, left-wing philosophy assumes that government management of economic capital best empowers society. And this debate doesn’t just matter here at home. In today’s globalized economy, left-wing theorists also claim that American capitalism is hurting poorer nations.

That accusation demands an answer. Because nothing could be further from the truth. It’s time the record was set straight: American capitalism is a great servant of poorer nations.

Consider how U.S.-led research efforts benefit poorer nations. In India, for example, a world-leading joint U.S.-Indian team is developing affordable, high-quality heart valves. Combining U.S. investment and medical experience with skilled Indian researchers, the team will provide affordable options for poor individuals in desperate need. And even when that project is completed, Indian researchers will take what they have learned and apply that knowledge to the long-term benefit of their people. Here we see American wealth and knowledge shared in the durable service of our own and foreign interests.

Yet business-related investment is where American capitalism’s greatest benefits are felt. By opening the markets to U.S. consumers, poorer nations have been able to build huge industries for the export of basic goods. While those employed in these industries do not make much money, they do make something. In turn, U.S. families benefit from thousands of dollars of annual savings by purchasing these cheaper goods in our stores.

Foreign investment by U.S. corporations is equally crucial. Vietnam offers a great testament here. After all, according to Vietnam, “As of April 20, 2016, Vietnam had 806 U.S. valid investment projects, registered at over $11.7 billion.” And while that investment number is not world-leading, it does speak to a broader trend.

An increasing number of major U.S. corporations from a wide array of sectors—including Intel, Microsoft and Coca Cola—are now investing in Vietnam. And in doing so, they bring capital, jobs and wealth. In part, that’s why the vast majority of Vietnamese citizens are avowedly pro-capitalist. They have seen communism and they have seen capitalism, and they prefer the latter.

As an extension, there are two unique advantages that U.S. corporate investment brings to foreign nations. First and most important, American companies are bound to U.S. legal obligations. This protects foreign nations from the kind of corruption that defines Chinese corporate investment.
Second, because of their focus on consumer services at the higher value end (think Apple and iPhones) and professional services such as finance and software development, U.S. corporations offer foreign nations new opportunities in goods and services, but also in diversification.

Earning potential in these sectors is far greater than sectors like that of agriculture. In that regard, U.S. investment brings the foundation for long term increases in living standards and quality of life. With time, these developments benefit Americans in offering new, higher-wealth export markets.
That said, it would not be fair to say that American beneficence is the primary motivation of foreign investments. Ultimately, the motivation rests in the realistic prospect of profit. And in that sense, before they invest large sums, U.S. companies need confidence about a foreign nation’s contract law protections, political stability, long-term tax policy, and general economic stability. Alongside its sustainable economic growth rates, declining inflation rates, and its young population, Vietnamese efforts to simplify foreign investment have thus met a warm reception. The country’s leaders understand that to help their people, they must choose a different course to the anti-private sector rhetoric like that of Venezuela.

Sadly, the same understanding is not shared by every nation. In Brazil, Russia, and South Africa, political corruption, economic mismanagement and bureaucratic minefields have deterred hundreds of billions in potential foreign investment. And while India, under Prime Minister Modi, is reducing its red-tape obstacles, vested interests are making that effort more difficult than India’s interests suggest it should be. The simple point here is that private interests need confidence that they will find a return on those investments. Absent that confidence they will simply refuse to invest.

Of course, it isn’t just capitalism with which America serves less-wealthy nations. On the continent of Africa, for example, American taxpayers are empowering impoverished peoples with improved health and better infrastructure. In those efforts, we’ve saved tens of millions of lives and improved hundreds of millions more.

And that’s just the tip of the iceberg. More generally, across the world, cutting edge U.S.
development efforts are investing in better lives and stronger societies. Nevertheless, we should not neglect the importance of capitalism in improving lives. Far more than any other economic theory, it remains the world’s most crucial mechanism for greater human opportunity.

Tom Rogan is a foreign policy columnist for National Review, a domestic policy columnist for Opportunity Lives, a panelist on The McLaughlin Group and a senior fellow at the Steamboat Institute. Follow him on Twitter @TomRtweets."

An Ivy League professor who spent 4 months working in a South Bronx check-cashing store says we're getting it all wrong

By Alex Morrell of Business Insider
"Lisa Servon couldn't kick the nagging feeling that the financial elite had it all wrong.
The prevailing wisdom from bankers and policy makers went like this: People who used alternative financial services — like check cashers and payday lenders — were making expensive and unwise decisions. If we could just educate the "unbanked" and "underbanked" and usher them into the modern financial system with a bank account, their fortunes would surely improve.

But Servon, a professor of city and regional planning at the University of Pennsylvania and a former dean at the New School, spent 20 years studying low-income communities, and to her, that picture didn't add up. Most of the unbanked (the roughly 7% of US households without checking or savings accounts) and the underbanked (the nearly 20% that had such accounts but still used alternative financial services) that she encountered were neither naive nor irresponsible about money.

"The implication of that" — the biennial surveys of the "unbanked and underbanked" by the Federal Deposit Insurance Corporation — "was these people were making poor decisions," Servon recently told Business Insider. "I knew that the people I had worked with closely who don't have very much money know where every penny goes. They budget things. They know where to get the best deals on things. And so it struck me that if they were using check cashers, there must be a good reason for that."

Already steeped in academia and research, Servon didn't think she'd gain any new insight from behind the desk. So in late 2012, she decided to embed in these communities to get a firsthand look, landing a job as a teller for four months at a check-cashing store in the South Bronx. (She would later also work as a teller and loan collector at a payday loan store in Oakland.)

She didn't go undercover, but rather was hired on the up-and-up thanks to some help from Joe Coleman, the president of a small chain of New York City check cashers called RiteCheck Cashing, who had guest lectured for one of her classes years before.

"It felt like the only way I could answer this question: If alternative financial service providers are so bad — if they're so predatory and so sleazy and so much in the business of taking advantage of people — why are people using them in growing numbers?" Servon said.

Servon recounts her journey in her new book, "The Unbanking of America: How the New Middle Class Survives," which came out in January. The book seeks to untangle the reasons millions of Americans are fleeing the "broken banking system" and opting instead for alternative financial services in ever increasing numbers, providing many first-person accounts from people Servon encountered while working in the field.

Early in the book, she focuses on her experiences at RiteCheck, which is part of an industry that reached $58 billion in 2010, up from $45 billion two decades earlier. If check cashing was shady, why were more people flocking to it?

Servon was surprised by what people told her. Over and over, Servon heard and observed that check cashers often met customers' needs better than banks did.

She discovered there were three main reasons people used these services instead of banks: cost, transparency, and service.


"People told me they were saving money by going to the check casher instead of the bank," Servon told Business Insider.

The RiteCheck she worked at charged $1.50 to pay a bill, $0.89 to buy a money order, and roughly 1.95% — as regulated by state law — of the face value of a check to cash it. These small fees add up, but they often paled in comparison to the unexpected charges, maintenance fees, and overdraft fees customers had experienced at banks. The rate for money orders is cheaper than at most banks, which commonly charge $5 to $10.

"RiteCheck customers told me clearly that bank fees were an important factor in their decision to patronize check cashers," Servon wrote in her book.

In the book, she provides the example of Carlos, a local contractor who came in on a Thursday to cash $5,000 for his small business, paying a $97.50 fee (and a $10 tip to Servon) in the process. That's $100 he'll never see again — how could he be coming out ahead compared with using a bank? Servon explains:

"If Carlos is like many small contractors operating in New York City, he relies at least in part on undocumented workers, who are unlikely to have bank accounts. If Carlos deposited his check in a bank, it would take a few days to clear — too late to deliver cash on payday. Or maybe the check was a deposit for a job he had just been contracted to do, and he needed supplies to get started. If he couldn't start right away, he risked losing the job to another contractor." 

Paying $100 isn't much compared with the cost of losing good laborers that need to be replaced or forfeiting new business.

"It feels expensive — it is expensive — but it made good sense," Servon said. "And there are many, many stories like that."


Outsiders may think the signage at a check casher — resembling that of a fast-food menu — is gauche compared with simple, polished interiors of their local bank branch. But that's a feature, not a bug.

Customers "felt like they knew exactly what they were paying when they went to the check casher. And if you go into a check casher, you will see there are signs that span the teller window that list every product that's for sale and how much it costs," Servon said. "The transparency is really critical."

On the contrary, customers couldn't predict when banks would charge them a fee or what that amount would be — a deal-breaker when you're operating on a tight budget.

"Walk into your bank branch and you'll see there's no literature like that that makes it obvious what's on offer," Servon said.

Moreover, Servon writes, checking accounts were the antithesis of transparent. The terms and conditions were long, technical, and laden with jargon. Many people can't afford to wonder when their deposit will clear, and they prefer paying a small fee for the clarity and speed offered by check cashers.


The third thing Servon heard repeatedly was that "people felt like they were being better served" at a check casher than at a bank.

"The customer-teller relationship at RiteCheck creates remarkable loyalty," she wrote in her book. She said the dynamic resembled the banking she grew up with in the late 1960s and early '70s that was based on relationships and that has largely faded from traditional banking.

Check-cashing companies charge small fees and thus rely on a high volume of business to turn a profit. That means inspiring loyalty is crucial to the business model, so tellers go out of their way to be friendly and flexible, and customers reward them by returning week after week, year after year.
"Banks want one customer with a million dollars. Check cashers like us want a million customers with one dollar," Coleman, the RiteCheck president, said in Servon's book.

In practice, this means providing customers with payment plans when times get tight or helping non-native speakers read letters they've received in the mail and providing advice — not to mention offering rapid access to their money that banks frequently can't match.

"One of the things that cost people a lot of money is actually waiting for their money," Servon said, alluding to the example of Carlos, the contractor.

Not all check cashers are the same, but the perception of the industry as seedy doesn't jibe with Servon's experience. And contrary to the views of the financial elite, customers' use of check cashers typically didn't seem naive or poorly thought out, but rather the smartest decision they could make given their circumstances, according to Servon.

"It showed me that those decisions are often rational, logical decisions, even if they're expensive," Servon said."

Tuesday, February 14, 2017

Lack of Competition Is Leading to a Costly Electricity Glut in California Government monopolies drive prices up

Government monopolies drive prices up

By Steven Greenhut writing for Reason.
"A top California utility official once quipped that he was one of the few executives in the country who earned a profit merely by remodeling his office. He was referring to the way the state's regulated utility system is designed. Companies are granted an electricity monopoly for a particular region, then are guaranteed a hefty rate of return for the infrastructure investments they make.

This price system, critics say, results in unforeseen consequences. A recent investigative report found that California's utility companies have been involved in a power-plant building spree, even though Californians have significantly cut their electricity usage over the same time period. In three years, the state is projected to be producing 21 percent more electricity than it needs, without counting the growth in rooftop-solar applications, reported the Los Angeles Times.

Last year, the California Independent System Operator had 24 percent in actual reserves—far above the targeted 15 percent goal. Even that 15 percent goal is 50 percent higher than what's necessary to protect the system from disaster and blackouts, according to some experts.

As the Times' report put it, "California has a big—and growing—glut of power." It's a matter of incentives. Because utilities are guaranteed a 10.5 percent rate of return on each new plant they build, regardless of whether customers actually need it, they can make more money building new plants than they could buying power from existing competing plants.

In an open marketplace, gluts of products or services lead firms to slash their prices dramatically. If, say, car manufacturers produce too many vehicles, they will provide rebates or be stuck with lots full of unsold inventory. With California's regulated utility system, by contrast, gluts in electricity actually raise prices for consumers because of the way utilities are paid for their investments. They need only get the approval from the Public Utilities Commission to build new plants and pass on costs to ratepayers.

The regulated utility model, which dates back to the 19th century, puts government regulators in charge of looking after consumers' best interests. But a fairly recent California utility scandal has illustrated the dangers of what Nobel Prize laureate George Stigler refers to as "regulatory capture," when the oversight agencies are dominated by the industries they regulate.

As the Mercury News reported in 2015 regarding the investigation of a deadly 2010 explosion of a PG&E natural-gas pipeline in San Bruno:
Additional evidence of the close relationship between PG&E officials and leaders of the agency that regulates the utility emerged late Friday in a new batch of emails long sought by the city of San Bruno...
Some say the current system also crushes the emergence of a functioning electricity market. The Times article tells the story of an energy company that built a $300 million privately funded facility in Sutter County:
Independents like Calpine don't have a captive audience of residential customers like regulated utilities do. Instead, they sell their electricity under contract or into the electricity market, and make money only if they can find customers for their power.
But soon after the construction of that plant, the California Public Utilities Commission approved PG&E's application to build its own power plant. PG&E gets paid no matter the consumer demand, so it was hard for a true private enterprise to compete with that subsidized model. Calpine shuttered its facility halfway into its useful life.

"A monopoly franchise removes the incentive to innovate to increase market share," explains my R Street Institute colleague Devin Hartman, in an August study of the nation's electricity markets. "Guaranteed cost recovery for 'prudently incurred' expenses diminishes the incentive to control costs. The regulated model also insulates utilities from market risks and most policy risks, such as changes in fuel prices or government subsidies." This provides a safe place for investors, he added, but gives them little incentive to manage risks or control costs.

These analyses also highlight a point that might seem counterintuitive to many environmentalists: competitive markets often lead to better air-quality outcomes. Here, we see utilities overbuilding natural-gas-fired power plants even as consumer demand suggests the plants aren't necessary. Because of the utilities' rate-of-return-based payment, they can stick with older technologies and avoid looking at alternative-energy models that might trim their costs.

The current distorted market is, to some degree, a reaction to the botched energy deregulation plan former Gov. Pete Wilson (R) signed into law in 1996, which provoked a statewide crisis in 2000. The state deregulated the price of wholesale energy, but capped its retail price. The population had been growing and regulators had not approved the construction of new power plants for years. After a hot summer and market manipulations by energy companies gaming the new system, the state's wholesale prices soared above those retail caps.

The end result: Rolling electricity blackouts, a statewide crisis that led to the bankruptcy of PG&E, and the recall of Gov. Gray Davis (D). Though Wilson signed the legislation, Davis was blamed for indecision as parts of the state went dark. Since then, state officials have avoided anything smacking of deregulation or market competition and have been cranking up supply even if it's not necessary. Other states, such as Texas, deregulated their electricity markets and have watched electricity prices go down as California's have increased.

The Times only touches on another issue of long-term importance: solar energy and the utility companies' fear of a "death spiral." California law allows for net energy metering. "Customers who install small solar, wind, biogas and fuel cell generation facilities… to serve all or a portion of onsite electricity needs are eligible for the state's net metering program," explains the Public Utilities Commission. "NEM allows a customer-generator to receive a financial credit for power generated by their onsite system and fed back to the utility."

Utilities must buy back the electricity at market rates, but they still have this vast—and growing—infrastructure of power plants and utility lines to finance and maintain. The more the utilities raise their rates to pay for these "stranded costs," the more consumers opt out and install solar panels. That raises the per-capita costs of maintaining that infrastructure, which raises electricity prices—and leads to more people opting out of the system. Advances in battery storage could further diminish the need for power plants that are financed 30 or 40 years into the future.

Steven Greenhut was the Union-Tribune's California columnist. He is western region director for the R Street Institute. He is based in Sacramento."

Study finds no evidence that educational vouchers promote religious behavior

See The political economy of vouchers and churches from Marginal Revolution.
"A while ago I had some email with Noah Smith on this topic, now we are getting somewhere, this is from a new NBER working paper by Daniel M Hungerman, Kevin J. Rinz, and Jay Frymark:
We use a dataset of Catholic-parish finances from Milwaukee that includes information on both Catholic schools and the parishes that run them. We show that vouchers [funded by the government] are now a dominant source of funding for many churches; parishes in our sample running voucher-accepting schools get more revenue from vouchers than from worshipers. We also find that voucher expansion prevents church closures and mergers. Despite these results, we fail to find evidence that vouchers promote religious behavior: voucher expansion causes significant declines in church donations and church spending on non-educational religious purposes. The meteoric growth of vouchers appears to offer financial stability for congregations while at the same time diminishing their religious activities.
I’ve long maintained that the fiscal effects of vouchers, if they were implemented on a much larger scale, are the elephant in the room.  For better or worse."

Sunday, February 12, 2017

Are Payday Loans Harmful?

By Jeffrey Miron of Cato.
"Payday loans are small, short-term, unsecured loans. The typical borrower can not easily borrow elsewhere, and the interest rates on payday loans are quite high. These factors generate enormous criticism of payday lenders for “exploiting” borrowers.
Economists Susan Payne Carter and William Skimmyhorn of the United States Military Academy provide evidence on this criticism:
We evaluate the effect that payday loan access has on credit and labor market outcomes of individuals in the U.S. Army. … We find few adverse effects of payday loan access on service members when using any of [our empirical] methods, even when we examine dozens of subsamples that explore potential differential treatment effects.
This should not be a surprise: for people with poor credit, payday loans can be better than the alternatives. These include going to a loan shark, which is even more expensive; or not borrowing, even to fund crucial medical care, or a rental payment that avoids eviction, or travel to secure a job."

Obamacare Exchanges Were in Big Trouble Before Trump

From Megan McArdle.
"Healthcare.gov enrollment came in well below what was anticipated last month. After running very slightly ahead of last year’s numbers in December, January brought the news that about 400,000 fewer people had enrolled on the federal exchanges than did so in 2016. Those are scary numbers, not so much for the absolute size of the decline -- it’s roughly 4 percent -- but because any backwards movement is very bad news for the exchanges.

As many readers will recall, 2016 brought hefty premium hikes to make up for years of losses on the exchanges. Going into this year’s open enrollment period, there seemed to be a significant risk that we’d see what economists call “adverse selection”: People who were getting good value out of their insurance (because they used a lot of services) would keep paying the premiums, even if they grumbled a bit, but people who didn’t use a lot of health care would decide that at those prices, they might as well go uninsured. When those people exited the market, the average cost to cover each person remaining in the pool would be higher … and insurers still wouldn’t make money, forcing them to raise premiums again next year. This process is known as the “adverse selection death spiral.”

December’s numbers seemed to indicate that people were still willing to buy insurance at the new, higher prices. January’s numbers suggest that maybe they aren’t. Most worryingly, young people, who don’t worry that much about the health insurance they rarely use, tend to sign up fairly late in the game, so a rise in December and a decline in January means that the pool could end up substantially older and sicker than last year’s.

Okay, but why are liberals blaming all of this on President Donald Trump? The man was only president for a few days worth of open enrollment. Could he really have somehow caused 400,000 people to forgo health insurance?

That’s exactly what people like Charles Gaba are suggesting. The culprit: outreach advertising designed to encourage people to sign up, which Donald Trump cut. Gaba points out that many states who run their own exchanges didn’t see the same kinds of declines that the federal exchanges did. That seems almost like a natural experiment, which makes it persuasive.

Except: We’re talking about $5 million worth of advertising over a brief period, and it’s not clear how much of it actually failed to run. If HHS advertising is that effective, then they need to open a branch office on Madison Avenue. In other words, the eyeballing of the data looks okay, but the mechanism is frankly unbelievable. Moreover, if advertising, or some other federal exchange policy, explains it, then how come Connecticut, California and Maryland also saw declines?

You can argue that the problem was not the advertising, but the fact that the Trump administration was obviously against Obamacare. And I suppose that’s possible -- except that Trump won in November, so how come people only reacted in late January? It’s not as if it was exactly a secret that Republicans wanted to repeal the thing. Nor do I find it plausible that potential customers were following the play-by-play of fiddling changes to health care policy during the last 10 days of the month -- in part because the news was completely dominated by other things, but mostly because I’ve never seen evidence that these consumers were following this sort of deep-in-the-weeds wonkplay at any time in the history of the program.

Besides, there’s another mechanism that’s just as plausible: Young and healthy people tend to sign up late, and young and healthy people are the ones who are most likely to have balked at higher premiums. Say Hillary Clinton had won, and her administration ran the ads just as planned. However, suppose as well that (unbeknownst to her), Obamacare was poised for a decline. What pattern would we expect to see? Pretty much the one we did: December would still look about like last year, but January would come in lower, because the people most likely to fail to buy insurance are the young, healthy folks who buy late. We’d see some states where enrollment increased, and some where it fell, because small populations do not mirror larger ones exactly. But the overall impact would be a late-January decline.

We’ll never really know the answer. I spent a morning slicing and dicing the data looking for some relationship to premiums -- size of premium increase, ratio to local incomes, absolute size of premium. You can kind of tease a relationship out, if you look hard enough, but you have to squint pretty hard. The same is true of the state/federal distinction, however: Gaba ends up separating out various states for various reasons, which can be reasonable, but can also be a good way to fool yourself into thinking that you’ve identified an effect that isn’t there.

After long squinting, the best I’m willing to say is that smaller states tended to show larger effects one way or another: Hawaii’s enrollment increased 30 percent, Mississippi’s declined 20 percent. 
Unfortunately, that’s the kind of “information” that anyone could have predicted using nothing more than a basic familiarity with statistics. It’s another instance of the Obamacare Rorschach blot, offering policy experts as much insight into their own psychology as to what’s on the page.

What we can say, however, is that any of these theories of the decline suggests that Obamacare was already incredibly fragile. The program was either:

a) primed to decline anyway,
b) primed to decline as soon as a Republican took the White House and voters began worrying about the future of the program, or
c) so vulnerable that a small amount of advertising could make the difference between enrollment growth and a significant decline.

All three of these theories suggest that this program badly needs to be replaced with something that doesn’t begin to topple as soon as anyone looks at it funny."