There was a huge collapse in wealth inequality in the UK between 1900 and 1980

Tweet from Sylvain Catherine. He is a professor at Wharton, the business school of the University of Pennsylvania. Excerpts:

"If . . .we look at the top 1% . . . there was a huge collapse in wealth inequality in the UK between 1900 and 1980, and basically no change since then. And that is before taking state pensions into account. The same thing is true when you look at the top 10%."

The graph shows the share or percent of total wealth going to the top 1% and the top 10% over time. Those shares fell dramatically.  

 

 

California's Minimum Wage Hike

From Jeffrey Miron. 

"Firms respond to minimum wage hikes in multiple ways.

One study considers a 2023 California bill that raised the minimum wage for fast food workers from $16 to $20 per hour.

The researchers estimated

a 4.9–5.1 percent increase in fast-food prices and a 2.1–2.2 percent increase in full-service prices. … Additionally, [the] findings suggest that price increases reduced consumers’ demand for fast food by 3.9–4.1 percent and for full-service meals by 1.7–1.8 percent.

Further, the wage hike had

distributional implications, as lower-income households spend a larger share of their budgets at fast-food restaurants.

All in all,

this large, sector-specific minimum wage increase raised labor costs, [which] firms passed … through to consumers by raising prices, and the resulting decline in demand reduced employment.

Exactly what standard economics would predict."

Obama’s CEA on Reforming Health Care

The CEA’s Contradictions on Obamacare

By David R Henderson. Excerpt:

"What was strange about Duggan’s discussion of adverse selection and moral hazard is that he ignored his own discussion later in the chapter. On adverse selection, for example, he laid out how asymmetric information leads to adverse selection, writing:

Insurers cannot perfectly determine whether a potential purchaser is a large or small health risk. (p. 186.)

But then later, in discussing the House and Senate bills, he writes:

These regulations would correct insurance market failures by preventing health insurers from responding to adverse selection by raising rates and denying coverages . . . . (p. 202)

Huh? Just 16 pages after laying out that the adverse selection problem occurs because insurers can’t adjust rates to risk, he says that these regulations, which he seems to think are good, will prevent insurers from adjusting rates to risk.

On moral hazard, Duggan writes:

A second problem with health insurance is moral hazard: the tendency for some people to use more health care because they are insulated from its price. When individuals purchase insurance, they no longer pay the full cost of their medical care. As a result, insurance may induce some people to consume health care on which they place much less value than the actual cost of this care or discourage patients and their doctors from choosing the most efficient treatment. (p. 187)

But in a section titled, “Declining Coverage among Non-Elderly Adults,” Duggan writes:

The generosity of private health insurance coverage has also been declining in recent years. For example, from 2006 to 2009, the fraction of covered workers enrolled in an employer-sponsored plan with a deductible of $1,000 or greater for single coverage more than doubled, from 10 to 22 percent. The increase in deductibles was also striking among covered workers with family coverage. For example, during this same three-year period, the fraction of enrollees in preferred provider organizations with a deductible of $2,000 or more increased from 8 to 17 percent. Similar increases in cost-sharing were apparent for visits with primary care physicians. The fraction of covered workers with a copayment of $25 or more for an office visit with a primary care physician increased from 12 to 31 percent from 2004 to 2009. (p. 192)

If the goal is to have people pay more attention to cost when buying health care, a goal that the vast majority of health economists, whatever their political stripe would share, this is good news. Yet Duggan seems to lament it.

Along the way, though, Duggan does give little nuggets that suggest that health insurance markets work better than he originally claimed. For instance:

Forty-four states now permit insurance companies to deny coverage, charge inflated premiums, or refuse to cover whole categories of illnesses because of preexisting medical conditions. (p. 188)

“Inflated” in the above quote simply means high and, given the risk, it makes sense to charge high rates. Here again Duggan undercuts his own “adverse selection” critique of insurance markets.

What do the data tell us about insurance companies rescinding coverage and refusing to pay claims if individuals fail to list any medical conditions? Here’s what Duggan writes:

A House committee investigation found that three large insurers rescinded nearly 20,000 policies over a five-year period, saving these companies $300 million that would otherwise have been paid out as claims (Waxman and Barton 2009). (p. 188)

Now, 20,000 sounds like a large number but remember that these are three large insurers who could easily, among them, have one million policy holders. 20,000 over five years is 4,000 a year. So taking the one-million assumption, which I think is too low, one would conclude that 4/10 of a percent of insured people every year lost their insurance in this way.

DRH note in 2026: I probably way underestimated the number of policy holders that the three large insurers insured. I bet that it was at least 10 million. So 4,000 people per year having their policies rescinded would constitute 1/25 of one percent. Should a huge intervention in the health market be justified on the basis of a problem for 1/25 of 1 percent of insured people.

Another nugget is his number on uncompensated care, which he estimates at $56 billion in 2008. Given that approximately 255 million had insurance at any given time that year, this amounts to $220 per insured person. That’s large, but it’s not huge. The Samaritan’s Dilemma, it appears, is smaller than many have thought."

Regulated Markets Are Slow to Handle Change

From Alex Tabarrok. 

"Gowrisankaran, Langer and Reguant have an excellent paper, Energy Transitions in Regulated Markets (WP), in the latest AER.

The basic idea is that regulation designed to prevent utilities from building useless power plants can induce them to keep obsolete power plants. Some background. We regulated electric utilities under the theory that they were natural monopolies and therefore we would do better by pushing their prices down. What’s a reasonable price? Hard to say, so regulated utilities were allowed to recoup their operating costs plus a fair return on their “rate base”—their capital stock. Makes sense, but once profits depended on the size of the capital stock, utilities had an incentive to build too much—the classic Averch–Johnson effect. Regulators responded with “prudence” requirements and the rule that capital must be “used and useful.” In a stable world, that rule is a check, albeit an imperfect check, on so-called gold-plating.

But now consider what happens in a time of technological change, such as a rapid decrease in the cost of generating electricity with natural gas (driven by fracking and improvements in combined-cycle natural-gas (CCNG) technology). In a free market, large decreases in costs would cause firms to abandon coal and move to natural gas—some would do this to make profits, others to avoid losses. In short, the market forces sunk investments to be abandoned when not profitable.

But there is another possibility under regulation. Tell the regulator that your plants are still viable. Well, telling is cheap talk so you keep burning coal to prove that the plant remains useful. If you can keep your base operating that’s better than abandoning it and to signal how valuable your coal plant still is, it may even be worth while to burn coal when the cost exceeds the price of electricity! The authors have some nice data on exactly this point.

Figure 3 takes a little work to understand, but the pattern is clear. Each point represents a state. In panel A, the vertical axis shows how much less likely a coal plant is to run when the cost of coal exceeds the price of electricity. Obviously, a strongly negative coefficient is the economically sensible response: when burning coal is more expensive than buying electricity, the plant should burn less.

The red points represent restructured states and the green points regulated states. In restructured states coal burning falls when prices fall, just as expected. Coal burning in regulated states responds much less. (I.e., the red points generally lie below the green points.) Indeed, the six states with the largest reductions in coal operation are all restructured states.

One objection to this analysis might be that utilities in general are just slow to respond to prices, so on the horizontal axis the authors plot how well utilities respond to a higher price of gas. Note that these coefficients are all negative and there is no obvious difference between regulated and restructured states. In both types of states, utilities respond well to the price of gas, but only in restructured states do utilities respond strongly to the price of coal. (Why coal and not gas? Because the used-and-useful standard binds on capital whose usefulness is in doubt—which, once gas got cheap, meant coal. In other words, the utilities have to defend coal to the regulators, not gas.)

Panel B on the right shows a slightly different way of presenting the same data. The vertical axis is again how much less likely a coal plant is to run when its cost exceeds the electricity price. The horizontal axis is the fraction of generation owned by electric utilities. Regulated states tend to be vertically integrated, while restructured states opened electricity generation to competition, so utility ownership and regulatory status are closely correlated. Regulated states generally have utility ownership above 60%, while all the restructured states but one are below 30%. The best-fit line slopes upward: in other words, the more generation a state’s utilities own, the less coal dispatch responds to price. A different perspective on the same story.

That is the direct empirical evidence. The authors then construct a more ambitious structural model. In theory, regulation could produce either too much or too little investment in the new technology; their estimates imply too much. Much, too much. Not only do regulated utilities retain too much coal, they also build too much gas capacity. In short, they accumulate both too much old capital and too much new capital. Averch–Johnson on steroids.

The bottom line is that regulation under dynamic conditions is much more difficult than under static conditions. My view is that it may not even be worth the candle"

Abstract

Natural gas has replaced coal as the dominant fuel for US electricity generation. However, utilities in regulated US states have retired coal more slowly than others. We build a structural model of rate-of-return regulation during an energy transition where utilities face trade-offs between lowering costs and maintaining and using legacy capacity. A regulated utility facing carbon taxes lowers short-run coal generation 48 percent as much as a cost minimizer would. Thirty years after a sudden energy transition, a cost minimizer has retired 71 percent more coal capacity than the regulated utility. Alternative regulations may jeopardize affordability and reliability goals during energy transitions.

 

Counties that build data centers are seeing new housing, higher home values, lower unemployment and more job growth

Tweet from Sara Eisen. 

 

 

Everything At the Grocery Store is On Sale Relative to 1980

By Jeremy Horpedahl.

"Back in May 2024, I wrote about grocery prices in 2024 compared to 1980. Relative to average wage increases, almost everything was more affordable — the one exception was bacon.

Grocery prices have continued to climb since 2024, but so have wages. What does the comparison look like now? Well, I have good news for bacon lovers:

Figure 1

  

The chart shows the change in relative affordability, as measured by how many minutes of work at the average wage it would take to purchase the item (using consistent product sizes and weights). As I wrote in that 2024 post, these are not items that I cherry picked. These are all 24 grocery items where BLS has price data in both 1980 and 2026 (out of about 150 items total). Perhaps there is some survivorship or selection bias as to which items are available in both years, but looking at the list this seems like a pretty reasonable shopping cart for a typical consumer (well, maybe there aren’t buying all the meats every week, but probably every month). The prices are updated through July 2026, with the CPI data just released this morning.

While I have used average wages here, that isn’t a trick. We don’t have a median wage for 2026 yet, but using a measure of median earnings you can see that average wages and median weekly earnings increased at exactly the same rate since 1980.

But consumers probably aren’t thinking about prices relative to 1980. Their time horizon is likely shorter. What if we made the same comparison to 2026 using the 2019 prices, which is right before the pandemic and within most shopper’s recent memory:

Figure 2 

 

Relative to 2019, things do look quite as rosy. Some items are “on sale” in terms of affordability, but a lot of items aren’t, especially a lot of proteins. And no doubt many consumers will focus on the items that are less affordable, rather than those that are more affordable (and even for these items, the nominal price is higher, so consumers might still be frustrated).

It is important to note that this basket of 24 items isn’t a perfect representation of all the items consumers purchase. Compared to the CPI “food at home” index, average wages have actually increased more since the beginning of 2019. But consumers are right to feel that beef and few other items are much less affordable than 2019, even if over the long run they are more affordable."

Figure 3

  

The unspoken truth about wildfires

By Matt Ridley. Excerpts:

"wildfires are getting less frequent worldwide, not more, as the globe warms. The acreage burned has decreased steadily since 2000, according to NASA’s satellites, and is thought to have almost halved in a century. The great fires of 1871 in Wisconsin and Michigan burned more than a million hectares long before anybody drove a car"

"this year is an unusually quiet year for wildfire: so quiet it is breaking records for lack of fires by this date, even in Europe. If you don’t believe me, check the figures produced by the Global Wildfire Information System: as of last week, the world had seen 106 million hectares burn this year, the lowest at this date since these records began in 2012. In Europe, just 3.6 million hectares have burned—less than half the average for this date."

"It has been known for many decades that in fire-prone habitats, the longer you go without a fire, the worse the fires will be. So preventing the build-up of tinder by controlled burns is the most important factor."

Here in Britain the government has consistently and relentlessly demanded less ‘cool’ burning—low-intensity, controlled fires—in winter on heather moorland, Britain’s most fire-prone habitat. Such fires have been used by farmers and gamekeepers for generations to create a mosaic of short and long heather. This encourages fresh young heather shoots for sheep and grouse to feed on and makes open areas for rare birds such as golden plover and curlew to nest in. If done in winter it can burn off the rank heather plants while leaving the moss underneath barely touched, as demonstrated by a famous video in which a gamekeeper places a Mars bar in the moss, lights a fierce fire over it, then picks up the unscorched, unmelted chocolate bar, unwraps it and eats it.

Natural England argues that regular cool burning harms the habitat; researchers at York University and elsewhere argue the opposite: that it encourages the growth of sphagnum moss and other species by letting light in. But both sides agree that regular cool burns can dramatically reduce the risk of much more damaging wildfires, which burn down through the moss layer and into the peat. Cutting heather instead is less effective but better than nothing. Yet Natural England has banned heather burning on deep peat altogether and is pushing hard to limit it further everywhere—or at least tie it up in complicated licensing rules. As a result, the fuel load on heather moorland has been increasing; in places the heather is now waist-deep. The National Fire Chiefs Council warned last year that such restrictions on heather management would increase ‘the danger to firefighters and the public’."

"The authorities know their policies increase the fire risks. Here is what the Cairngorm National Park says in its Integrated Wildfire Management Plan about plans to increase shrubs and other vegetation by reducing deer and stopping burning: ‘These habitats will take many years to develop and during the intervening period fuel loads will increase, as will the corresponding need for fire risk mitigation.’ So they knew the risk was increasing. But little was done. John Kirk, a board member of the Cairngorms National Park Authority, told the Strathspey Herald: ‘Everyone is furious… the entire Abernethy forest has no firebreaks.’"