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."

EU's Anti-GMO Crusade Is Unscientific and Harmful

By Matt Ridley.
"The European Court of Justice has just delivered a scientifically absurd ruling, in defiance of advice from its advocate general, but egged on by Jean-Claude Juncker’s allies. It will ensure that more pesticides are used in Britain, our farmers will be less competitive and researchers will leave for North America. Thanks a bunch, your honours.

By saying that genome-edited crops must be treated to expensive and uncertain regulation, it has pandered to the views of a handful of misguided extremists, who no longer have popular support in this country.

Let’s compare two plant varieties: golden promise barley and a wheat resistant to a fungal pest called powdery mildew. The barley was derived from seeds bombarded with gamma rays at a nuclear facility in the 1950s, scrambling some of their genes, which had the happy if accidental result of making better malting barley. It became (and remains) a popular variety for brewing beer among (wait for it!) organic farmers.

The wheat was produced by Calyxt, a US company, last year using a genome-editing technique to tweak one part of one gene, introducing no foreign DNA. It will need less fungicide sprayed on it than normal wheat. The US government says it needs no special regulation. The EU has effectively said it will take Calyxt many years and vast sums of money to find out whether it might or might not approve the wheat for growing.

Calyxt and others like it won’t bother applying, so we will be deprived of the chance to use less fungicide. We will miss out on a new genome-edited potato variety that needs 80 per cent less spray. We are already missing out on GM varieties of maize and other crops that use much less insecticide and are proven safe by 25 years of consumption.
A 2014 German survey found that the introduction of genetic modification elsewhere in the world had reduced pesticide use by 36.9 per cent on average, while increasing yields by 21.6 per cent. No wonder we are having to import more of our cattle feed from the Americas.
The ruling condemns Britain to the innovation slow lane, denying us greener crops. It will deter investment and drive our world-class scientists to move abroad. As one Canadian professor said: “Great news for Canadian and American farmers today. EU based environmental NGOs have politically manipulated their legal system to drive every last cent of ag R&D out of the EU, guaranteeing their farmers will no longer be competitive. Hope all Europeans enjoy their future higher food prices.”

Welcome to our continuing regulatory alignment with the EU."

Saturday, September 8, 2018

Deirdre McCloskey Reviews Jesse Norman's Book On Adam Smith

See Adam Smith: Father of Economics’ Review: Obvious, Simple and Wise-A Tory MP’s account of his idol is wise about how markets work but wrong about when government should get involved with them. Excerpts:

The big question is "whether Mr. Norman is right to recruit Smith for an interventionist conservatism, as he does."

"He makes the case for a version of a Smithian politics and economics, a “compassionate conservatism,” to use the title of a book he co-authored while serving as part of the brain trust for David Cameron’s prime ministership."

"Like many statists of left and right nowadays, the author believes that markets possess numerous “imperfections.”"

He attacks "the efficient-markets hypothesis in common stocks, which says that you can’t do better than the market. Mr. Norman raises theoretical objections to it. But he doesn’t inquire into whether it is roughly correct—“roughly correct,” after all, is enough to explain why even the brilliant Isaac Newton lost a fortune in the South Sea Bubble."

"on informational asymmetries in the health-care market—the doctor knowing (but not saying) that a generic would be just as good and the patient knowing (but not saying) that he’s not going to take the pill anyway. Arrow assumed that a government organization like the Food and Drug Administration is just the ticket to offset such imperfections. But Arrow had no factual evidence that the government can do better than a private prescriber."

He ignores "the scores of hostile remarks in Smith’s two books about the arrogance of the “man of system” advising governments to shift economic chess pieces."

"“Far from being intrinsically opposed, states and markets rely and benefit from each other.” Tell that to the farmer in Iowa facing retaliation from China and other countries for American tariffs. Tell it to the west-sider in Chicago excluded from employment in a new factory or a new grocery store by governmental restrictions that would have made Smith’s blood boil.

From Malthus in 1798 through Marx in 1867 and Keynes in 1936 to Thomas Piketty in 2013, we have been told over and over again how very imperfect, and anyway doomed, our market economies are. But something is radically wrong with the argument, because since 1800 the wretchedly imperfect market economy has enriched the poor of, say, Japan or Finland by fully 3,000%, a Great Enrichment born out of Smithian liberalism."

"most markets do in fact “just happen,” because people find them mutually beneficial. Markets “just happen,” to take the extreme case, inside jails and prisoner-of-war camps. Markets just happened among Australian aborigines buying boomerangs from better-skilled bands hundreds of miles distant."

Research shows quotas on female directors largely fail to improve pay, broader representation

See To Shatter the Glass Ceiling, Don’t Force It by John D. Stoll of The WSJ. Excerpts:
"For instance, in Norway—the egalitarian culture credited as the pioneer of such quotas—women CEOs are nearly nonexistent even though roughly 40% of directors are female. The Nordic nation’s pay gap is slimmer than the U.S.’s, but data from the Organization for Economic Cooperation and Development indicate Norway lags behind about 25% of the countries it tracks."

"Marianne Bertrand, a professor of economics at the University of Chicago’s Booth School of Business, co-wrote an analysis of Norway’s quotas in 2014 about a decade after they took effect. A key conclusion: “We find no robust evidence to support the view that the mandated greater share of women on the board improved outcomes for women employed in [these companies].”"

"In France, one of the bigger economies to adopt Norway-like reforms, 50% of directors at the largest companies are women, but 14% of senior executive officers are women."

Monday, September 3, 2018

Why We Need to Admire Entrepreneurs-Deirdre Nansen McCloskey

Interview in Peace Love Liberty. That's the magazine of the Austrian Economic Institute, Vienna.
"PLL: Why do we need entrepreneurs? What is their role in a free society?

We need entrepreneurs to decide what to do. The only alternative is governmental bureaucracy, which is good for national defense and a few other things, but very bad at most of what we do, from room rental to rock music . The entrepreneuse only succeeds if people like what she does, and agree voluntarily to pay for it. A free society is one of choice. Entrepreneurs give choice, bureaucrats crush it.

PLL: What framework and institutions do entrepreneurs need to thrive?

Not much. The framework and institutions, such as the rule of law applied to enterprise , can only survive if people have bought into an entrepreneurial ethic. Only if people approve of other people making profit from commercially tested betterment can we have free and rich societies. If people are angry and envious about entrepreneurs, we get socialism in one form or another .

PLL: Is it possible to have entrepreneurs in a socialist system?

No, because the contest then is about who controls the bureaucracy, the system of compulsion, not about who will pay voluntarily for goods and services an entrepreneur provides. In socialism we have fixers, judges, lobbyists, politicians, rent seekers. I n a free society we have producers. The one is about zero sum, the other about positive.

PLL: Are there certain traits that can be useful for innovators?

Yes, the virtue of courage combined with prudence and a pinch of hope. We call such a virtue “enterprise.” But every society has such people to more or less the same extent. So the proper focus is not on psychological traits, but on the attitudes of others towards such traits. What matters is the politics and especially the sociology, a widespread ethical approval for enterprise.

PLL: Is profit playing the key role in a market economy ?

Certainly. A profit tells the entrepreneur that what she is doing in providing room rent or rock music is a good idea, judging “goodness” by what people are willing to pay. The only alternative is that bureaucracy. In a small society of love such as a family, compulsion without profit wor ks fine. In a big society, not.

PLL: Isn’t it unfair, though, that billionaires sit on their money , while others starve because they don’t have enough food?

Of course it’s unfair, and the billionaire should be ashamed of himself. Many of them are, especially in places like the USA in which there is a deep tradition of “the gospel of wealth.” But the unfairness does not imply a public policy. Taking from him and giving to the poor does not work well. It’s much better to let him exercise his entrepreneurial abilities for the good of us all. It’s unfair that I don’t have Wittgenstein’s brain or Selm a Kurz’s voice. But the fact has no implications for public policy, except to let me buy their services voluntarily.

PLL: In Germany, entrepreneurship isn’t an overly popular career goal . In fact, most students seek a safe job environment at government institutions. Why is the role of the entrepreneur so diminished in today’s culture? In the German - speaking lands, yes, with the possible exception of Switzerland. The last hundred years has been a sustained attack on an enterprise - admiring civilization. We need to see that enterprise is not evil.

PLL: What can we do to champion entrepreneurship and innovation again?

Write long books in its praise. Interview people praising it in magazines. And (more seriously) persuade artists, especially popular artists, to see enterprise as virtuous."