Saturday, September 29, 2018

Average incomes in the freest nations are seven times higher than those in the least free

See The Compelling Case for Greater Economic Freedom By Alexander C. R. Hammond of HumanProgress.
"This morning, the Fraser Institute, a Canadian think tank, published the 22nd edition of its annual Economic Freedom of the World (EFW) report. For a long time, we’ve known that, on average, freer economies are richer, grow faster and have longer life expectancies.

But the 2018 edition of the EFW gives us more insight than ever before into the intrinsic link between economic freedom and other measures of human wellbeing — such as infant mortality, equality, happiness and extreme poverty rates.

To rank the level of freedom for 162 economies, the EFW analyses 42 indices across five major areas (size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation), using figures from 2016 — the most recent data available.

Yet again, Hong Kong takes the top spot in the EFW rankings — a position it has held since 1980. Singapore remains second, as it has since 2005. The remaining top 10 most free nations are: New Zealand, Switzerland, Ireland, the United States, Georgia, Mauritius, the United Kingdom, Australia, and Canada, the latter two being tied for 10th spot. The three least free countries are Argentina, Libya, and Venezuela.

The positions of the economies in the EFW matter because there is a significant correlation between economic freedom and human wellbeing. To analyse this, the Fraser Institute splits the 161 measured countries into quartiles (i.e. each quartile represents a quarter of the economies) based on their level of economic freedom.

The average income in the freest quartile of nations is a staggering 7.1 times higher than the average income in the least free quartile ($40,376 and $5,649 respectively). The bottom 10 per cent of income earners in the freest countries make, on average, 7.9 times more than the poorest 10 per cent in the least free quartile. Comparatively, extreme poverty (as defined by the World Bank as an income of than $1.90 per day) is almost non-existent in the freest countries. By comparison, almost a third of all people in the bottom quartile of economies live in extreme poverty. It is clear, then, that for the absolute poorest in any given society, it is unimaginably better to live in a freer economy.

But economic freedom isn’t just about money. Take life expectancy for example. In the freest countries, people live on average 15 years longer than those in the most restrictive systems. For many people, that amounts to a difference between knowing one’s grandchildren—or dying before their birth.

Infant mortality is another measure that highlights the immeasurable human cost of isolationist economic policies. Measured in the number of deaths per 1000 births, the devastating death rate in the least economically free nations is 6.8 times higher than the rate in the freest —42.2 and 6.2, respectively.

Problems of misogyny also creep in. When looking to the United Nations (UN) Gender Inequality Index, where zero represents complete gender equality and one represents complete inequality, the least free countries have an average score of just 0.46–compared to 0.18 for the freest quartile.

Free people are also happier people. The UN World Happiness Index asked respondents to rank their lives on a scale of zero to 10, with 10 representing the best possible life and zero representing the worst imaginable. The most economically liberal countries once more win out: the EFW shows that the freest quartile has an average score two points higher than the least free – 6.5 compared to 4.48.

There is more good news. Despite our tendency toward pessimism about the current state of the world, the EFW shows that economic freedom has increased substantially over the last 25 years and that the largest gains have been made in developing nations.

In 1990, the average economic freedom score for a “high-income industrial” country was 7.18 out of 10, compared to just 5.28 for the average “developing” country—a gap of 1.90. By 2016, that gap had narrowed by 46 per cent: developing economies were a mere 1.06 points behind the industrial nations. The rapid increase in the EFW score by many developing economies was primarily driven by gains in the area of trade liberalisation and sound money (meaning the stabilisation of purchasing power by combating inflation.)

The result of these advances is that, when weighted for population, the average person now lives in a far freer economy. Consider this: if the world of 1980 were a country today, its economic freedom score would place it at 160 out of 163 nations — ranking two places below war-torn Syria. But if a 2016 world was a nation in 1980, it would be the 12th freest, with a score of 6.62 — slightly above 1980 Australia.

The latest EFW once again shows the deep and continued link between economic freedom and important indicators of human wellbeing, including; wealth, poverty alleviation, life expectancy, inequality, infant mortality and happiness.

It is clear that despite the many challenges that remain, the poorest in society continue to benefit the most from secure property rights, loosened regulatory barriers, and greater trade liberalisation. Long may policymakers remember this so that the march toward greater economic freedom continues."

A study recently published in the American Economic Review provides new evidence that increases in the minimum wage reduce employment in the long run.

See How Higher Minimum Wages Impact Employment by Adam Millsap of Mercatus.
"The debate about the effect increases in the minimum wage have on employment is ongoing. Some studies find either no or only a small effect (here and here, for example), while others find significant effects (here and here). A study recently published in the American Economic Review provides new evidence that increases in the minimum wage reduce employment in the long run.

Economists often try to estimate the slope of a demand curve by looking for events that change the supply of the good in question but not demand. For example, unexpected good weather that boosts the tomato crop would increase the supply of tomatoes but wouldn’t affect demand, and this would allow economists to estimate how consumers respond to the supply increase.

But increases in the supply of labor are different. Unlike tomatoes, an increase in labor may also affect the demand for labor. This could occur for two reasons. First, more people can mean more demand for products already being produced. That, in turn, means established firms would need to expand to meet the increase in demand.

Second, demand can also increase if some of the new workers start their own businesses and thus demand additional workers. So while more tomatoes won’t demand even more tomatoes, more workers may demand even more workers. These dynamics make it tricky to estimate the effects of wage increases.

The authors of the new study—Paul Beaudry, David Green, and Ben Sand—create a framework to account for the effect an increase in the supply of labor can have on the demand for labor in order to isolate the effect of wages on employment. They find that increases in wages have a negative effect on employment over 10-year intervals.

In terms of magnitude, they find that a 1% increase in wages leads to a 0.3% to 1% decrease in the employment rate depending on whether wages increase citywide or in only one industry.

The authors find that most of the negative employment effects that result from wage increases (which are cost increases) are due to more firms closing rather than firms laying off workers. Since more firm closings and fewer openings take longer to show up in the data than less hiring and more firing, it makes sense that the long-term effects of wage increases on employment are larger than short term effects.

The idea that higher wages affect employment via firm closings is also consistent with a study that finds lower quality restaurants are more likely to close following a minimum wage increase. Another study also finds that minimum wage increases reduce employment primarily through firm closings.

The authors directly apply their framework to recent minimum wage increases—all to $15 per hour—in Seattle, Los Angeles, and San Francisco. They estimate that Los Angeles’s increase will lead to a three percentage point decline in the city’s employment rate in the long run, while Seattle’s will lead to a two percentage point decline and San Francisco’s will lead to a one percentage point decline.

The effects are different because the minimum wage affects different percentages of the labor force in each city. In relatively high-wage San Francisco, fewer workers and firms are affected by a $15 minimum wage than in lower-wage Los Angeles.

Similarly, an increase to $15 will have a larger effect on workers earning much less than $15 than it will on workers earning closer to $15 when the wage increase goes into effect. This is shown in the figure below from the paper.

effects of min. wage increasesBeaudry, Paul, David A. Green, and Ben M. Sand. 2018.

For Seattle workers (solid black line) initially earning $10 per hour, the long-term decline in the employment rate is estimated to be over 10%. For workers earning closer to $15 per hour the estimated decline is only about 7%. Again, San Francisco’s estimated long-term decline is smaller (highest line) since the city’s relatively high-wage economy is less impacted by the minimum wage increase.

These results don’t necessarily mean minimum wage increases are bad policy. They do, however, support the notion that higher minimum wages have a cost, namely fewer employment opportunities for lower-skill workers. It’s important that we recognize this cost in any discussion about minimum wage policy."

Sunday, September 23, 2018

The Apple iPhone is really created in many countries with much of the value coming from the U.S.

See Bringing iPhone Assembly to U.S. Would Be a Hollow Victory for Trump: The president’s tariffs on Chinese imports could hurt Apple without addressing the real challenge of China by Greg Ip of The WSJ. Excerpt:
"Apple’s iPhone is one of the most successful consumer products in history, and one of the most globalized. The iPhone 7’s camera is Japanese, its memory chips South Korean, its power management chip British, its wireless circuits Taiwanese, its user-interface processor Dutch and the radio-frequency transceiver American, according to a study of the value added in smartphones by Jason Dedrick of Syracuse University and Kenneth Kraemer of the University of California at Irvine.
The factory workers who assemble iPhones in China contribute just 1% of the finished product’s value. Apple’s shareholders and employees, who are predominantly American, capture 42%.

Suppose Apple decided that all the phones it sells in the U.S. would be assembled here. Mr. Dedrick estimates each phone requires two hours of assembly. For 60 million phones, that means 120 million hours of work, or roughly 60,000 jobs.

Hiring that many workers is no picnic: In 2013 Motorola Mobility set out to make its Moto X phone in the U.S. but struggled to find enough American workers according to Willy Shih, an expert in manufacturing at Harvard Business School who is also a director of Flex Inc., the contract manufacturer that Motorola used. In 2014 Motorola decided to outsource production. Apple has encountered similar problems assembling its Mac Pro computer in Texas.

Assuming Apple could find 60,000 workers, it would have to hire many away from other employers given how low unemployment currently is. The benefit of the wages they earn would be offset by the higher prices other Americans pay for their phones.

How much would that add to the price of a phone? Mr. Dedrick says about $30; Mr. Shih thinks it would be more because of the cost of shipping individual components to the U.S. Still, such an increase would hardly kill sales of iPhones, now priced at $449 to $1,099. The bigger cost of U.S. assembly, says Mr. Dedrick, would be the inability to quickly add hundreds of thousands of workers when new phones are launched, which is only possible in Asia. Apple can charge premium prices in part because it introduces superior features before its competitors do."

Wages Are Growing Faster Than You Think

A 0.1% annual rise turns into 1% when adjusted for inflation, benefits and the changing labor force.

By David R. Henderson. Excerpts:
"Standard wage data show that between the spring of 2017 and the spring of 2018, real wages in the U.S. increased only 0.1%. But there are three major problems with these data. First, they don’t account for fringe benefits, which are an increasing proportion of employee pay. Second, standard wage data use an index that overstates the inflation rate. Third, each year the composition of the workforce changes, as older, higher-paid workers retire and young, lower-paid workers enter the workforce.

A study released this month by the White House Council of Economic Advisers addresses these three biases and concludes that real wages grew by 1% in 2017-18, not the measly 0.1% reported in the wage data."

"An alternate measure of inflation [to the CPI], the personal- consumption-expenditures price index, while also imperfect, is a better measure of inflation. Economists at the Federal Reserve prefer the PCEPI to the CPI. Using the PCEPI adds 0.5 percentage point to the 2017-18 growth of real wages."

"The Census Bureau estimates that 3.57 million people turned 65 in 2017, compared with 2.68 million in 2010. Taking account of the decline in older, higher-paid workers and the increase in younger, lower-paid workers, the CEA estimates that this “composition factor” added 0.3 percentage point to real wage growth from 2017-18."

"Real after-tax wages increased 1.4% between 2017 and 2018, according to the CEA study."

Monday, September 17, 2018

High Tax Rates Hurt Innovation and Prosperity, New Data Suggest

Yet again, research shows tax rates should be as low as possible to produce as much prosperity as possible

By Daniel J. Mitchell. Excerpts:
"Let’s look at a new study by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva. Here’s the issue they investigated:
"…do taxes affect innovation? If innovation is the result of intentional effort and taxes reduce the expected net return from it, the answer to this question should be yes. Yet, when we think of path-breaking superstar inventors from history...we often imagine hard-working and driven scientists, who ignore financial incentives and merely seek intellectual achievement. More generally, if taxes affect the amount of innovation, do they also affect the quality of the innovations produced? Do they affect where inventors decide to locate and what firms they work for? …In this paper, we…provide new evidence on the effects of taxation on innovation. Our goal is to systematically analyze the effects of both personal and corporate income taxation on inventors as well as on firms that do R&D over the 20th century."
To perform their analysis, the economists gathered some very interesting data on the evolution of tax policy at the state level, such as when personal income taxes were adopted."

"Here are some of the findings from the study:
We use OLS to study the baseline relationship between taxes and innovation, exploiting within-state tax changes over time, our instrumental variable approach and the border county design. On the personal income tax side, we consider average and marginal tax rates, both for the median income level and for top earners. Our corporate tax measure is the top corporate tax rate. We find that personal and corporate income taxes have significant effects at the state level on patents, citations (which are a well-established marker of the quality of patents), inventors and “superstar” inventors in the state, and the share of patents produced by firms as opposed to individuals. The implied elasticities of patents, inventors, and citations at the macro level are between 2 and 3.4 for personal income taxes and between 2.5 and 3.5 for the corporate tax. We show that these effects cannot be fully accounted for by inventors moving across state lines and therefore do not merely reflect “zero-sum” business-stealing of one state from other states.
Here are further details about the statewide impact of tax policy:
A one percentage point increase in either the median or top marginal tax rate is associated with approximately a 4% decline in patents, citations, and inventors, and a close to 5% decline in the number of superstar inventors in the state. The effects of average personal tax rates are even larger. A one percentage increase in the average tax rate at the 90th income percentile is associated with a roughly 6% decline in patents, citations, and inventors and an 8% decline in superstar inventors. For the average tax rate at the median income level, the effects are closer to 10% for patents, citations, and inventors, and 15% for superstar inventors.
At the risk of understatement, that’s clear evidence that class warfare policy has a negative effect."

How the Market Helped to Make Workplaces Safer

It is in the interest of the employers not to expose their workers to unnecessary risks.

By Marian L. Tupy.
"The free market, some people allege, is incompatible with workplace safety. Competition drives down profits, the German philosopher Karl Marx asserted, which forces business owners to cut corners and expose their workers to growing risks. Yet, by historical standards, work-related fatalities are at an all-time low. Labor activism and government regulations deserve part of the credit for that happy state of affairs. But, a general improvement in living standards and, consequently, higher expectations on the part of the laborers, also played a part in improving workplace safety. Plainly put, a safer workforce is a more contented workforce. As so often, Marx had it backwards. It is in the interest of the employers not to expose their workers to unnecessary risks.

All economic activity involves some degree of physical risk. That has always been the case. Our hunter-gatherer ancestors had to contend with wild animals, poisonous snakes and other vagaries of nature that surely make the modern workplace a much safer alternative. Credible data on work injuries and fatalities during the agrarian era is difficult to come by, because most farm laborers were self-employed. Simply put, no entity, official or otherwise, had an incentive to collect occupational safety statistics. Yet agricultural work must have been quite unappealing, considering that most people preferred factory work over life on the farm.

Even today, notes the U.S. Department of Labor, agriculture “ranks among the most dangerous industries.” In 2011, the “fatality rate for agricultural workers was 7 times higher than the fatality rate for all workers in private industry; agricultural workers had a fatality rate of 24.9 deaths per 100,000, while the fatality rate for all workers was 3.5.” Likewise, the Workplace Safety and Health (WSH) Institute in Singapore found that global fatality rates per 100,000 employees in agriculture ranged from 7.8 deaths in high-income countries to 27.5 deaths in South-East Asia and Western Pacific regions in 2014. Manufacturing deaths ranged from 3.8 in high-income countries to 21.1 in Africa.

Collection of statistics came about as a result of industrialization and the birth of modern labor relations in the 19th century. Labor unions started to collect workplace safety statistics in order to achieve more advantageous working conditions for their members, while employers kept work safety data, because they were legally liable for injuries in the workplace. By modern standards, it is clear that working conditions in mines and factories during the first 100 years of the Industrial Revolution were appalling. As the then-U.S. President Benjamin Harrison put it in 1892, “American workmen are subjected to peril of life and limb as great as a soldier in time of war.”

In the United States, estimates Harvard University psychologist Steven Pinker in his 2018 book Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, 61 workers per 100,000 employees died in work-related accidents as late as 1913. That number fell to 3.2 in 2015. That’s a 95 percent reduction in work fatalities over a little more than 100 years. A similarly encouraging trend can be observed globally. According to the WSH Institute estimates, 16.4 workers per 100,000 employees died worldwide in 1998. By 2014 that number fell to 11.3. That’s a 31 percent reduction over a remarkably short period of 16 years. Considered in a slightly different way, workplace fatalities around the world seem to be falling by almost 2 percentage points each year.

What accounts for those improvements? Labor union activism, including strikes and protests, has been traditionally credited with making the workplace safer. But, improving working conditions cannot be divorced from the overall improvement in the standard of living. The massive economic expansion in the second half of the 19th century, in particular, tightened the labor market and workers started to gravitate toward more generous employers. It was only after a certain critical mass of workers achieved more tolerable working conditions that more general workplace regulations became imaginable and, more importantly, affordable. 

Thus, at least in the American context, the reduction in workplace fatalities preceded the Wagner Act of 1935, which enabled private sector employees to organize into trade unions, engage in collective bargaining and take collective action. By the time that the U.S. Occupational Safety and Health Administration was created in 1971, worker fatalities were roughly two-thirds lower than what they have been prior to World War I. Thus, as with working hours, government regulations tend to affirm that which is already happening in the labor market place anyway."

Sunday, September 9, 2018

Vehicle Safety Inspections Don’t Increase Safety

By Alex Tabarrok.
"In 2003 I wrote The Politician and Mechanic Conspire to Rip Me Off in which I cited a study (another here) showing that annual automobile safety inspections do not increase safety but do waste time and money and generate unnecessary repairs. I have continued to rant about these wasteful policies ever since.

Today, however, there is some good news. As vehicle quality is increasing, some states are actually discontinuing these “safety” inspections including the District of Columbia in 2009, New Jersey in 2010, and Mississippi in 2015. Repeal, however, is still hotly contested in many states:
“If [the repeal] is passed,” said Texas Senator Eddie Lucero, Jr., “I am going to have trouble sleeping at night. Why are you willing to place yourself and Texans in danger by passing [this repeal]?” Similarly, Utah Representative Jim Dunnigan claimed that many of his constituents “would drive their car until their brakes fall off and their muffler falls off and their tires fall off” and that an inspection was the only way to ensure that vehicle owners took care of potential safety concerns. These claims are backed by most automobile service stations, who generally profit from performing the inspections and now claim that repealing the inspection program “will definitely result in more accidents.”
That’s from a new paper by Hoagland and Woolley that uses New Jersey, a repeal state, to test whether repeal leads to more accidents. Using a synthetic control methodology and precise data on fatal accident rates from throughout the United States, Hoagland and Woolley conclude that:
…removing the requirements resulted in no significant increases in any of traffic fatalities per capita, traffic fatalities due specifically to car failure per capita, or the frequency of accidents due to car failure. Therefore, we conclude that vehicle safety inspections do not represent an efficient use of government funds, and do not appear to have any significantly mitigating effect on the role of car failure in traffic accidents.
It’s time to ditch the annual safety inspection and either move to no inspection system at all or like Maryland move to a system that requires safety inspections only at transfer. I’m not convinced that is necessary either, since at transfer is precisely when the buyer will run an inspection anyway, but at least that system would reduce the number of inspections significantly."