"Helicopter drops" are a bad idea at any time

By Scott Sumner of EconLog.

"Market monetarists tend to prefer using monetary policy to stabilize the path of NGDP, not fiscal policy. We are skeptical of the efficacy of fiscal policy, and also view it as being inefficient. Now David Beckworth has suggested that a helicopter drop approach could be brought into play if monetary policy was hampered by a liquidity trap.

I have several problems with using fiscal stimulus at the zero bound:

1. Fiscal stimulus is inefficient and might not work.

2. Fiscal stimulus is not needed. As Mishkin said in the number one money textbook, monetary policy remains "highly effective" at the zero bound.

I should first explain that most people use "helicopter drop" as a metaphor for combined money/fiscal expansion, as when the Fed creates money and deposits it in each citizen's bank account (or accounts at the Fed itself.)

The fiscal part of this plan is inefficient for the same reason as it would be inefficient to give people money when not at the zero bound---the deadweight cost of taxation. Some people respond that the funds are created out of thin air, so there is no deadweight cost. That's wrong for two reasons. First, the funds will probably have to be partly removed when the economy exits the zero bound, in order to prevent high inflation. That requires distortionary taxes. Yup, there's still no free lunch. And even if the funds never had to be removed, if we are at the zero bound forever, there is an opportunity cost; the same funds could be used to reduce distortionary taxation.

That raises the second issue. Let's assume helicopter drops are not perfect, might they still be better than mass unemployment? Of course, and I'd favor them if they were needed. But they are not; monetary policy is still highly effective.

1. The best solution to the zero bound problem is to adopt a policy of NGDP targeting, level targeting.

2. Now it's theoretically possible (although unlikely) that the country might be at the zero bound even if they had an optimal NGDPLT policy. In that case they should buy more Treasury securities.

3. Now its theoretically possible (although very unlikely) that a central bank might be at the zero bound even with NGDPLT, and even after buying all the Treasury debt out there. In that case they should buy agency debt and safe foreign government bonds.

4. Now its theoretically possible (although exceedingly unlikely) that a central bank might be at the zero bound even with NGDPLT, and even after buying all the Treasury debt, agency debt, and safe foreign government debt out there. In that case they might want to consider:

a. Set a higher NGDP target growth rate.
b. Negative interest on reserves.
c. Both

5. Now there is a very tiny, tiny, risk that we've gotten past step 3 and step 4 options are not feasible for political reasons. Should you do fiscal stimulus in that case? No! Or at least not the sort of fiscal stimulus most economists imagine (tax cuts, infrastructure projects that are otherwise not worth doing, government consumption, etc.) Of course some of those projects may be worth doing, but in that case it's not fiscal stimulus, it's just ordinary government spending, worth doing even when not at the zero bound. I'm talking about the sort of stimulus that wouldn't ordinary pass cost/benefit analysis, were it not for the assumed benefit of reducing the unemployment rate. That's not worth doing, even if all the preceding initiatives leave us stuck at the zero bound.

Instead the government should buy riskier assets such as index funds of stocks and bonds. Thomas Piketty tells us that the government can expect to earn 5% in real terms in the long run, and since governments live forever, they can take the long view. Keynesians will insist this is actually fiscal policy, but I don't buy that. Fiscal policy has a cost; the deadweight loss associated with distortionary taxes required to finance debt in the long run. That's not true (on average) for purchases of stocks and bonds, although obviously it might be true in a few cases. The point is that the government should never do the sort of fiscal stimulus that is expected to lead to efficiency losses from taxes. If "something should be done," it's purchase AAA bonds, then other bonds, then stocks, etc.)

Of course all this is "angels on a pin" stuff, in the real world we'd never get beyond step 2. So no need to worry about creeping socialism.

PS. I do realize that the logic of Piketty's figures imply that countries like Switzerland and Singapore might want to borrow a lot of money at near zero rates and buy so much wealth that they can eventually live off just the 5% income generated, and free their citizens from taxes. Better yet they should have done so in March 2009. But that utopian thought is better left for another post."

What Would Piketty’s 80 Percent Tax Rate Do to the U.S. Economy?

By Michael Schuyler of the Tax Foundation. Excerpt:

"In his best seller, Capital in the Twenty-First Century, Thomas Piketty calls for much higher taxes on upper-income individuals. He recommends a global wealth tax and, for the United States, top income tax rates of 80 percent on income above $5 or $10 million to combat inequality and 50 or 60 percent on income above about $200,000 to combat inequality and grow the government.

We used the Tax Foundation’s Taxes and Growth (TAG) model to estimate the economic and revenue effects if Professor Piketty’s suggested income tax rates became law.

Key Findings

• If ordinary income were taxed at the top rates of 80 and 55 percent, our model estimates that after the economy adjusts, total output (GDP) would be 3.5 percent lower, wage rates would drop 1.6 percent, the capital stock would be 7.4 percent less, and there would be 2.1 million fewer jobs.
• If capital gains and dividends were taxed at the new tax rates along with ordinary income, the economic damage would be much worse. GDP would plunge 18.1 percent (a loss of $3 trillion dollars annually in terms of today’s GDP), the capital stock would be 42.3 percent smaller than otherwise, wages would be 14.6 percent lower, 4.9 million jobs would be lost, and despite the higher tax rates, government revenue would actually fall.
• Although Piketty’s proposed income tax increase may appear to target only upper-income taxpayers, all income groups would suffer from the economic fallout.
• Our model estimates that the after-tax incomes of the poor and middle class would drop about 3 percent if the higher rates do not apply to capital gains and dividends and about 17 percent if they do."

Where Is The Monopsony Power? Adam Ozimek On Minimum Wage Laws

Click here to read this article from Forbes.

"You hear it claimed relatively often today that low wage employers have monopsony power. For example, this is a sometimes cited explanation for the claim that there is no disemployment effect of the minimum wage. A monopsony is when an employer has market power in the labor market, sort of the employer equivalent of a monopoly. The argument is that a monopsonist is able to hold wage below the equilibrium level, just like a monopolist would hold prices below the competitive equilibrium. Economic theory suggests that in response to a price floor that increases prices slightly, a monopsonist might not decrease labor demand. However, a recent study provides empirical evidence that seems somewhat at odds with this: large retailers pay more than small retailers.

You can find more about the study here, I’ll quote myself summarizing the results:

The researchers found some starting facts. For instance, after controlling for individual and store characteristics, firms with at least 1,000 employees pay 9% to 11% more than those employing 10 or fewer. Looking at individual establishments rather than firms, large stores pay 19% to 28% more than small ones. This is consistent with research in non-retail industries that finds, all else equal, big firms tend to pay more. In addition, they find that retail managers make more per hour than non-managers in manufacturing, and that there are more managers in retail than in manufacturing.

So this raises something of a puzzle to me. If monopsony power is an important feature of the labor market, and monopsony power should be prevalent when firms are bigger and therefore have a larger share of the local industry, then why do big firms pay more than small firms? The small mom and pops should be closest to operating in a competitive labor market and have little bargaining power, but they pay less. Maybe the productivity effects of big retailer outweigh the monopsony effect, but that just is another way of saying it’s not as an important feature of the market. In addition, ask yourself whether you predicted this result of big firms paying more before you read about this study. Be honest, if someone asked you to predict the results, would you have told a story about big firms bargaining workers down to lower wages? If so, it is time to re-evaluate your views."

Why the U.S. Needs to Lift the Ban on Oil Exports

Click here to read the WSJ article by Daniel Yergin And Kurt Barrow. Mr. Yergin is vice chairman, and Mr. Barrow, vice president, of IHS,a research and consulting company. They are lead authors for the new IHS study, "U.S. Crude Oil Export Decision: Assessing the Impact of the Export Ban and Free Trade on the U.S. Economy." Excerpts:

"exporting U.S. crude will increase, not reduce, domestic oil supplies and lower, not raise, domestic gasoline prices."

There were two reasons for the original export ban. First, because of fear of inflation and panic about supplies in the 1970s, price controls were slapped on crude oil and refined products. But if cheaper price-controlled oil could be shipped to higher-priced world markets, it would undermine the price-control system. The second reason was to prevent the newly-flowing oil from Alaska's North Slope being sent to Japan instead of the U.S. West Coast.

Yet oil price controls were abolished in January 1981, and the ban on exporting gasoline and other petroleum products was lifted a few months later."

"Domestic oil production has since dramatically surged—by 3.3 million barrels a day since 2008, a 66% increase."

"Yet the U.S. still imports about 30% of its oil. So why allow exports? The reason is that the new crude being produced—so called tight oil, or "light oil" recovered by hydraulic fracturing and horizontal drilling—is a poor match for refineries in the Midwest and along the Gulf Coast. 

Refineries have spent more than $100 billion in recent decades reconfiguring their equipment to process heavy, lower-quality imported oil from Canada, Mexico and Venezuela, as well as the new supplies coming from the Gulf of Mexico. They have been able so far to absorb the new light crude but are reaching their limit even as tight production keeps growing. If these reconfigured refineries run more light instead of heavy crude oil, they lose output capacity—and revenue—due to a mismatch of the light oil with their equipment. To make up for the lost revenue, refineries won't buy the light oil except at a discount, which could run as high as 20%. At that price, oil producers can't cover the cost of some of the new wells, and cash flows would decline. This means less drilling and lower crude production. 

Specialized new refineries can be built to handle light oil, but that can take years."

"Allowing exports would enable light-oil producers to get world market prices, and their revenues would flow back into higher investment in U.S. production. Meanwhile, refineries would continue to import heavier crude."

"We estimate that removing the export ban, combined with continuing innovation in production technologies, would lead to as much as 2.3 million barrels per day of additional production over the next 15 years, and new investment approaching $1 trillion. That increase would support an average of 860,000 more jobs over the same period and generate nearly $3 trillion of additional government revenues.

Yet what about gasoline? How can U.S. crude oil receiving higher prices on world markets lead to lower prices at the pump?

The answer is the difference between the gasoline and crude oil markets. U.S. gasoline is part of a freely traded global market. The U.S. both exports gasoline from the Gulf Coast and imports it on the East Coast because it costs less to import surplus gasoline from Europe than ship it by tanker from Texas. U.S. gasoline prices are set by global gasoline prices, not domestic crude oil prices. 

The additional domestic oil production that results from allowing exports means more oil on world markets—and lower prices. That means lower global gasoline prices and, because the U.S. gasoline market is part of that global market, lower prices for American motorists. We estimate this would reduce the price by as much as 12 cents a gallon, saving U.S. motorists $420 billion over 15 years."

Minimum wage and employment numbers are highly sensitive to the time period analyzed

See These Numbers Lend No Good Support to the Case for the Minimum Wage by Don Boudreaux of Cafe Hayek.

"GMU Econ PhD student Liya Palagashvili and I have studied some numbers that Barack Obama and plenty of pundits have seized upon as evidence that raising the minimum wage is good economic policy.  Here – in U.S. News & World Report – is our first attempt to expose the flimsiness of those numbers and the wrongheadedness of using them to argue in favor of raising the minimum wage.  (In this U.S. News essay we had only 600 words, but the pro-minimum-wage case that is built on these numbers is infected by several other errors that we had no space here to point out.)  A slice:

Second, these statistics are disturbingly sensitive to small changes in their starting and ending dates. It’s true that employment in the 13 states that raised their minimum wages in January was, on average, 0.85 percent higher in June 2014 than it was in December 2013. It’s also true that, over this same time span, employment in the 37 states that did not raise their minimum wages rose by only 0.61 percent. (These are the very figures that minimum wage proponents are now trumpeting.) But if we shorten this time span by just one month — looking now at January 2014 to June 2014 — we get a very different picture.

In June, the number of jobs in the 13 minimum-wage states was, on average, only 0.59 percent higher than it was in January, while, for the same time period, the number of jobs for the 37 states that did not raise their minimum wages was higher, on average, by 0.69 percent. Job growth since January (the month that these 13 states actually hiked their minimum wages) was slower in states that raised the minimum wage than in states that did not.

We don’t report these particular statistics as evidence that raising the minimum wage slows job growth. Our point instead is that finding simple trends, especially those that are highly sensitive to the time period analyzed, and then drawing policy conclusions is scientifically illegitimate. Using such a method makes it far too easy to cherry-pick from the data those numbers that support your preferred policy. So just as our comparison of January 2014 to June 2014 employment data is no evidence that raising the minimum wage reduces job growth, Obama’s comparison of December 2013 employment data to June 2014 data is no evidence that raising the minimum wage enhances job growth."

Intervention Leads to More Intervention

From David Henderson of EconLog.

"The late Ludwig von Mises famously argued that when governments intervene in the economy, they often create new problems. Then, to address these problems, they impose new regulations that themselves to new problems, etc. 

I thought of that when reading this Wall Street Journal article from Thursday, July 24, 2014. The title of the print version, by Russell Gold, Betsy Morris, and Bob Tita, is "U.S. Puts Brakes on Oil Trains." The dec line is "Proposed Rules Would Limit Speeds Until Tank Cars Are Upgraded, Replaced." Here's a segment from the article:

The federal government's sweeping proposals come after a string of explosive derailments involving trains filled with oil from the Bakken Shale and will change how flammable liquids are transported in North America. But they aren't as stringent as some in the rail and energy industry feared. 

Crude-carrying tank cars would need to upgraded by 2017. The proposed regulations would also give the ethanol industry until 2018 to improve or replace tank cars that carry that fuel. The deadline for cars used to transport other flammable liquids that typically pose less of a hazard than oil or ethanol would extend to 2020.

Other new requirements proposed include a 40-mile-per-hour speed limit until sturdier tank cars can be built or existing railcars can be strengthened, as well as other rules that cover tank-car design, routing, brakes and testing of hazardous liquids.

Shipping oil by train is much more dangerous than shipping by pipeline. But the federal government has a number of regulations that slow or even prevent building of pipelines. One intervention--preventing the construction of pipelines--leads oil to be carried in more hazardous ways. In response, the government does not reduce the regulation that slows the building of pipelines. Instead it regulates shipping by train. Mises strikes again."

Solar power is by far the most expensive way of reducing carbon emissions

See What is the cheapest form of green power? from Marginal Revolution.

"From Free Exchange:

    …levelised costs do not take account of the costs of intermittency…

    Seven solar plants or four wind farms would thus be needed to produce the same amount of electricity over time as a similar-sized coal-fired plant. And all that extra solar and wind capacity is expensive.

    If all the costs and benefits are totted up using Mr Frank’s calculation, solar power is by far the most expensive way of reducing carbon emissions. It costs $189,000 to replace 1MW per year of power from coal. Wind is the next most expensive. Hydropower provides a modest net benefit. But the most cost-effective zero-emission technology is nuclear power. The pattern is similar if 1MW of gas-fired capacity is displaced instead of coal. And all this assumes a carbon price of $50 a tonne. Using actual carbon prices (below $10 in Europe) makes solar and wind look even worse. The carbon price would have to rise to $185 a tonne before solar power shows a net benefit."

Some Additional Questions for Supporters (Especially Among Economists) of the Minimum Wage

Great post from Don Boudreaux of Cafe Hayek.

1. Suppose that all low-skilled workers telecommute to their jobs in the U.S. from foreign countries, and that Congress imposes a tariff on the importation of such services.  Do you predict that employers of these workers will continue to hire the same hours of labor from such workers – under the exact same terms of employment – as these employers hire without the tariff?  If not, why do you believe that obliging employers to pay to low-skilled workers a per-hour tax called “minimum wage” will not reduce the number of hours that employers hire of such labor?

2. Suppose the government, expressing pity for producers of low-priced metals, passes and enforces a minimum-price-of-metal statute that prevents metals from selling at prices as low as some metals have been selling for recently.  Suppose also that researchers from Ivy League schools report, from their empirical investigations, that this government action results in no empirically detectable reduction in the amounts of metal used in the construction of skyscrapers, automobiles, lawn mowers, snowblowers, outdoor grills, and other products made with lots of metal.  Would you conclude that government can raise the incomes of all metal producers simply by passing such legislation?  Would you wonder why metal is apparently an exception to the foundational law of demand?  How many such studies would be required before you conclude that, yes indeed, the market for metal (especially low-quality metal) is so different from that of other goods and services that the law of demand is inoperative in that market (at least for relatively modest, government-imposed hikes in the price of metal)?

And even if you become convinced that these empirical studies are flawless and that their findings are indisputable, would you worry that the minimum-price-of-metal legislation caused a substitution away from the use of lower-quality metals in production toward the use of more higher-quality metals?  (That is, would you worry, even if the absolute amount of metal used in production is unchanged by the minimum-price-of-metal legislation, that lower-quality metals – the ones whose makers the government meant to help – are being used less while higher-quality metal are now being used more?)

A Recovery Stymied by Redistribution

Public policy intended to make layoffs less painful actually made layoffs cheaper and more common.

Click here to read this WSJ article by Casey B. Mulligan. He is an economics professor at the University of Chicago economics. Excerpts:

"Major subsidies and regulations intended to help the poor and unemployed were changed in more than a dozen ways—and although these policies were advertised as employment-expanding, the fact is that they reduced incentives for people to work and for businesses to hire."

"But there is also the food-stamp program. It got a new name and replaced the stamps with debit cards. Participants are no longer required to seek work and are not asked to demonstrate that they have no wealth. Essentially, any unmarried person can get food stamps while out of work and can stay on the program indefinitely.

There were new mortgage-assistance programs. People who owed more on their mortgage than their house was worth could have their mortgage payments set at a so-called affordable level—in government-speak, that means that you pay full price for your house only if you have a job and earn money."

"All of these programs have in common that they, like taxes, reduce incentives to work and earn."

"Waves of new programs increased the typical marginal tax rate from 40% to 48% in two years."

"The more you help low-income people, the more low-income people you'll have. The more you help unemployed people, the more unemployed people you'll have."

"I met a recruiter—a man whose job it is to find employees for businesses and put unemployed people into new jobs—and he described the trade-off pretty well. Stacey Reece was his name, and he said that in 2009 his clients again had jobs to fill. But he ran into a hurdle he hadn't seen before. People would apply for jobs not with the intention of accepting it, but to demonstrate to the unemployment office that they were looking for work.

As Mr. Reece described it, the applicants would use technicalities to avoid accepting a position. The applicants would take Mr. Reece through the arithmetic of forgone benefits, taxes, commuting costs and conclude that accepting a job would net them less than $2 per hour, so they'd rather stay home."

"you could just as well say that this situation arises from the employer's failure to up his bid so that it competes better with unemployment benefits. My point here is not to assign fault but to illustrate that a lot of different actors contribute to market outcomes."

"the new and expanded programs for the unemployed and poor were subsidizing layoffs—they were making layoffs cheaper."

"the federal unemployment-insurance expansions were paid by taxpayers generally, which means that an employer could lay off as many people as he wanted without adding to his federal tax burden."

"Lay somebody off during the crisis and, for the first time, among other things, the employer wouldn't have to pay for former-employee health insurance."

Government Dries Up California's Water Supply

Price and other controls make it much harder to deal with the drought.

Click here to read this WSJ article by Edward P. Lazear. Mr. Lazear, former chairman of the President's Council of Economic Advisers (2006-09), is a professor at Stanford University's Graduate School of Business and a Hoover Institution fellow. Excerpts:

"Government-dictated prices, coupled with restrictions on the transfer of water, have made a bad situation much worse.

Shortages are generally caused when governments place ceilings on prices or when they prevent markets from operating freely in some other way, like restricting trade. Gasoline is a case in point. Thanks to the 1970s oil shocks, gas became less abundant and prices rose. The U.S. government's response was to put ceilings on gasoline prices, which caused shortages and long lines at gas stations.

The current water situation resembles oil in the mid-1970s. Prices are determined in large part by state and federal government dictates rather than by the market. When drought hits, the price to some users, most notably agriculture, is too low to clear the market and shortages result."

"Markets would encourage farmers to sell water to urban users, thereby increasing residential supply and driving residential water prices down, as the University of California's Howard Chong and David Sunding showed in a 2006 study"

"San Francisco Bay Area residents obtain much of their water from the Hetch Hetchy reservoir. The pipes from Hetch Hetchy to the Bay Area intersect the California Aqueduct, which supplies water both to agriculture and urban areas. Residential users of aqueduct water in San Diego pay rates that can be more than five times as high as those paid by the farmers in Kern County. 

So if some people, businesses or localities have rights to water and others would be willing to pay more for those rights, why not trade? Answer: government controls and lawsuits."

"In 2012, the Public Policy Institute of California reported on the morass of regulations that continue to restrict the exporting of local water to other communities."

"To solve California's water problem, the first step is to let all owners of water sell their rights with minimal government limitations. This would ensure that water goes to its highest valued use.

Second, federal and state agencies that redirect water to environmental use should pay the market price for it."

"Third, farmers who now receive water at below-market prices should be compensated for having to pay higher prices by giving them the rights during a transition period to use or sell the water that they typically use."

cities across California have encouraged residents to tattle on their neighbors for wasting water

Sweden’s school choice disaster? Nope

Great post by Michael McShane of AEI.

"Earlier this week, an article in Slate by Columbia Business School professor Ray Fisman provocatively titled “Sweden’s School Choice Disaster” made the rounds on Twitter, with the perfunctory head nodding and tut-tut-ing from the anti-school choice crowd.

From the jump, much of Fisman’s analysis didn’t really make sense. He blames the drop Sweden has seen in international test scores since 2000 on the country’s voucher program, even though that program precedes the drop by almost a decade. He also highlights the fact that only about 25% of secondary school students and only 13% of elementary school students use vouchers to attend private schools, so it would be hard to blame any nation-wide problems on such a small program. He further cites studies that appear to show that voucher and non-voucher students score about the same on fairly-grade exams. This is perhaps a scandal for schools with inflated grades, but it is not evidence that the voucher program is a “failure.”

But that’s about as deep as I want to dig. Luckily, several others went farther down the rabbit hole to get into numerous other problems with the piece.

Over at National Review, Tino Sanandaji offered myriad other possible explanations for Sweden’s poor performance on assessments. A key paragraph:

There is no doubt that the voucher reform was poorly implemented, but this doesn’t change the fact that the reform worked. Surveys suggest that parents and pupils in private schools tend to be more satisfied than average. Many of the worst schools have simply closed as few students choose them. Bullying is a major problem in Swedish schools; with school choice, children are no longer forced to attend the same school as their tormentors. Ambitious immigrant children have the option to escape the ghetto and attend better schools. Some — though admittedly not most — private schools have been innovative and significantly improved education.

At Education Next, the Cato Institute’s Andrew Coulson lowered the boom. He writes:

Nevertheless, Slate claims that competition from private schools may have led to “a race to the bottom” in Sweden. But since Sweden’s private schools score higher on PISA than its public schools, it’s not obvious what this might mean. Could Slate be claiming that the performance of private schools has been declining faster than that of public schools? If so, the reverse is true. Since the PISA test was first administered in 2000, Swedish private schools lost a scant 6 points overall. The nation’s public schools lost 34 points over the same period—nearly six times as much. If one of these sectors is leading a race to the bottom, it’s not the private sector.

Finally, Jay Greene of the University of Arkansas offers Fisman’s work as a cautionary tale on his blog:

Fisman would never make such sloppy mistakes in a journal submission or conference presentation.  His colleagues would laugh at him.  But nothing seems to deter Fisman or other would-be Paul Krugmans from making laughable claims in the popular press.  Maybe academics should not be given such a free pass for whatever they write outside of journals.  Maybe the credibility of their scholarly work and their status within the academic community should also be called into question if they are willing to be so reckless.

All good food for thought and worth checking out in full!"

Fraud Rampant and Unpoliced on Obamacare Health Insurance Exchanges

Great post By Hans Bader of the Competitive Enterprise Institute Blog.

"Almost anyone can fraudulently obtain taxpayer subsidies to cover most of the cost of their health insurance on the Obamacare health insurance exchanges. That’s the gist of recent news coverage in The New York Times, Reason, and Associated Press. The fraud is possible because the government doesn’t check’s people’s eligibility, or verify the claims they make in their applications, contrary to what former HHS Secretary Sebelius certified in January.  

Applicants can submit a fake name and social security number, and no one even checks—not the government, not  insurers, not Obamacare contractors. This is the finding of a recent investigation by the federal Government Accountability Office, as described in The New York Times and Reason magazine.

This matters because most of the cost of health insurance policies on the exchanges is picked up by taxpayers through tax credits, to the tune of billions of dollars a year. (87% of Healthcare.gov customers are getting taxpayer subsidies to purchase health insurance, with taxpayers on average footing 76% of the bill.)
Applicants have included documents showing their income is too high to qualify for a subsidy, and received a subsidy anyway.  

As Reason magazine observes, “neither the administration, which wants to sign up as many people as possible regardless of actual eligibility, nor the insurers, which get paid for each person who signs up, have much of an incentive to make the system work better.”

As Peter Suderman noted at Reason,

On January 1 . . . former Health and Human Services Secretary Kathleen Sebelius submitted a  letter to the president. On the very first page of the letter, Sebelius personally certified that Obamacare’s health insurance exchanges “verify that applicants for advance payments of the premium tax credit and cost-sharing reductions are eligible for such payments and reductions” as required by the law. “When a consumer applies . . . [the exchange] verifies application information provided by the consumer” in order to assess eligibility.

In short, when people apply for Obamacare’s health insurance subsidies, there’s a robust, reliable system in place to check their documentation . . .But as it turns out, there isn’t. . .Not one that actually works, or even really attempts to work.

Undercover investigators from the Government Accountability Office (GAO) spent some time this year attempting to see if it would be possible to get subsidies using false application information. They set up fake names and Social Security numbers that aren’t real, then claimed citizenship or legal residence, according to the AP, which obtained an early copy of the GAO report. They submitted applications with income amounts that should have been too high to get subsidies. In other words, they fed the system blatantly fraudulent information that should have been swiftly rejected.

But the majority of their attempts were successful anyway (. . .The New York Times reports 11 of 12). Indeed, the agency is still paying its share of the premiums on those accounts, because the Obama administration, which certified the validity of its subsidy verification system, just a few months ago, hasn’t caught on to the fraudulent accounts yet. . .The lone rejection occurred when the GAO investigator refused to supply a Social Security number at all. . .The federal contractor supposedly in charge of weeding out fraudulent applications told the GAO that “it does not seek to detect fraud and accepts documents as authentic unless there are obvious alterations.” . . .

The upshot, then, is this: Not only did the administration not set up a working verification system, they lied about it and said they did.

These tax credits awarded to participants in the Obamacare exchanges have eligibility requirements that operate as massive marriage penalties and work disincentives. The Congressional Budget Office estimated those work disincentives may shrink the number of people employed in America by two million people.  That is one reason why analysts at institutions such as Bank of America expect Obamacare to increase the budget deficit. The GAO estimated in a 2013 report that Obamacare will increase the long-term federal deficit by $6.2 trillion."

Why Does Government Fail?

By Peter Boettke of "Coordination Problem." 

"One of the books I have been reading this summer is Peter Schuck's Why Government Fails So Often? (Princeton, 2014).  So far, it is excellent.  Here is David Henderson's reaction to his work, which I basically share.

My own view of how to approach this question takes its cue from Ronald Coase's 1959 paper on the FCC published in the Journal of Law and Economics.  As Coase walks through his argument, he states clearly on p. 18 the following:

This "novel theory" (novel with Adam Smith) is, of course, that the allocation of resources should be determined by the forces of the market rather than a result of government decisions.  Quite apart from the misallocations which are the result of political pressures, an administrative agency which attempts to perform this function normally carried out by the pricing mechanism operates under two handicaps.  First of all, it lacks the precise monetary measure of benefit and cost provides by the market. Second, it cannot, by the nature of things, be in possession of all the relevant information possessed by the managers of every business which uses or might use radio frequencies, to say nothing of the preferences of consumers for the various goods and services in the production of which radio frequencies could be used.

In this short passage, Coase highlights the incentive problems that government faces in making decisions about resource utilization, the problems of bureaucracy and interest groups, the problem of monetary calculation (or the absence thereof), and the discovery and use of dispersed information/knowledge in the economic system.  And, of course, he is right to link the identification of these problems with governmental decision making back to Adam Smith.  Economists have known about these problems for a long time -- though of course in the course of the history of economic thought different individuals have given particularly crisp explanations of the respective problems -- most notably the work of Mises-Hayek and Buchanan-Tullock.  But Coase gets this right, and from what I have read so far of Peter Schuck's book -- so does he."

The Lingering, Hidden Costs of the Bank Bailout

Why is growth so anemic? New economic activity has been discouraged. Here are some ways to change that.

Click here to read this WSJ article by Noble prize winner Vernon L. Smith. Excerpts:

"New economic activity is hobbled if it is not freed from the burden of sharing its return with investors who bore risks that failed. The demand for new economic activity is enlarged when its return does not have to be shared with former claimants protected from the consequences of their risk-taking."

"Requiring new investment to share its return with failed predecessors is tantamount to having required Henry Ford to share the return from investment in his new horseless carriage with the carriage makers, livery stables and horse-breeding farms that his innovation would render obsolete. 

This burden on new investment helps explain the historically weak recovery since the "Great Recession" officially ended in June 2009, and the recent downturn in gross-domestic-product growth." 

"Japan and Sweden are examples of economies that followed distinct pathways after crises in the early 1990s. In Japan the economy floundered in slow growth for over two decades; Sweden recovered much more quickly. The difference can be attributed to following different policies in the treatment of severe bank distress."

"Japanese policy permitted banks to carry mortgage loans at book value regardless of their accumulating loss. Loans were expanded to existing borrowers to enable them to continue to meet their mortgage payments. This response could be rationalized as "smoothing out the bump." Bank investors were protected from failure by stretching out any ultimate return on their investment, relying on a presumed recovery from new growth that never materialized. This accounting cover-up was coupled with government deficit spending—tax revenues declined and expenditures rose—as a means of stimulating economic growth that was delayed into the future."

"From the beginning Japan was caught in the black hole of too much negative equity. The banks, burdened with large inventories of bad loans, geared down into debt reduction mode, reluctant to incur more debt, much as their household mortgage customers were mired in underwater mortgages and reluctant to spend. The result was a decade of lost growth that stretched into and absorbed a second decade of dismal performance. The policy cure—save the banks and their incumbent investors—created the sink that exceeded the pull of recovery forces."

"Sweden's response to deep recession in the early 1990s was the opposite of Japan's: Bank shareholders were required to absorb loan losses, although the government financed enough of the bank losses on bad assets to protect bank bondholders from default. This was a mistake: Bondholders assumed the risk of default, and a bank's failure should have required bondholder "haircuts" if needed. Nevertheless, the result was recovery from a severe downturn."

"The political process will always favor prominent incumbent investors."

"Invisible are the investors whose capital will flow into the new economic activity that constitutes the recovery."

"U.S. firms face exceptionally high corporate income-tax rates, the highest in the developed world at 35%, which hobbles growth and investment."

"To encourage investment, the U.S. needs to lower its corporate rates by at least 10 percentage points and reduce the incentive to escape the out-of-line and unreasonably high corporate tax rate."

Average hourly earnings have increased more over the last 14 years than food and beverage prices

See Chart of the day: Hourly wages vs. CPI-Food vs. CPI-All by Mark Perry of "Carpe Diem."

"
 

Updated: The chart above shows the percent changes between January 2000 and June 2014 for: a) Average Hourly Earnings (blue line), b) the CPI for Food and Beverages (red line) and c) the CPI for All Items. As the chart shows, average hourly earnings have increased over the last 14 years by more (49.6%) than food and beverage prices (45.7%) and all prices on average (40.3%).

Updated: This then provides more evidence that: a) average hourly earnings have increased more than the CPI for Food and Beverages since 2000, and b) real, inflation-adjusted average hourly earnings have risen since 2000.

Note: This chart is partly in response to a recent article in The Federalist by Sean Davis who claims that “food inflation blows away wage growth,” “food prices have soared since 2009,” and “food prices are growing 64 percent faster than wages.”"

Is the U.S. in the midst of a bee-pocalypse? The science says no.

See Why the Buzz About a Bee-pocalypse Is a Honey Trap: Populations of the pollinators are not declining and a ban on neonic pesticides would devastate U.S. agriculture. From the WSJ. By Henry I. Miller. Dr. Miller, a physician and molecular biologist, is a fellow at Stanford University's Hoover Institution. He was the founding director of the FDA's Office of Biotechnolog. Excerpts:

"Bee populations in the U.S. and Europe remain at healthy levels for reproduction and the critical pollination of food crops and trees. But during much of the past decade we have seen higher-than-average overwinter bee-colony losses in the Northern Hemisphere."

"Citing this disorder, antipesticide activists and some voluble beekeepers want to ban the most widely used pesticides in modern agriculture—neonicotinoids ("neonics" for short)—that account for 20% of pesticide sales world-wide. This would have disastrous effects on modern farming and food prices."

"neonics are much safer for humans and other vertebrates than previous pesticides."

"Yet there is only circumstantial or flawed experimental evidence of harm to bees by neonics. Often-cited experiments include one conducted by Chensheng Lu of the Harvard School of Public Health that exposed the insects to 30-100 times their usual exposure in the field."

"According to University of Maryland entomologist Dennis vanEngelsdorp, no cases (of collapse) have been reported from the field in three years. 

The reality is that honeybee populations are not declining. According to U.N. Food and Agriculture Organization statistics, the world's honeybee population rose to 80 million colonies in 2011 from 50 million in 1960. In the U.S. and Europe, honeybee populations have been stable—or slightly rising in the last couple of years—during the two decades since neonics were introduced, U.N. and USDA data show. Statistics Canada reports an increase to 672,000 honeybee colonies in Canada, up from 501,000, over the same two decades."

"Australian honeybee populations are not in decline, despite the increased use of [neonicotinoids] in agriculture and horticulture since the mid-1990s."

"In April the EU released the first Continent-wide epidemiological study of bee health in Europe, covering 2012-13 (before the EU's neonic ban went into effect). Seventy-five percent of the EU's bee population (located in 11 of the countries surveyed) experienced overwinter losses of 15% a year or less—levels considered normal in the U.S. Only 5% of the EU's bee population (located in six northern countries) experienced losses over 20%, after a long, severe winter."

"A ban on neonics would not benefit bees, because they are not the chief source of bee health problems today. Varroa mites are, along with the lethal viruses they vector into bee colonies. If neonics were dangerous, how to explain that in Canada, Saskatchewan's $19 billion canola industry depends on neonics to prevent predation by the ravenous flea beetle—and those neonic-treated canola fields support such thriving honeybee populations that they've been dubbed the "pastures for pollinators.""

East Germans who were exposed to socialism cheat more than West Germans who were exposed to capitalism.

See Moral Effects of Socialism by Alex Tabarrok of "Marginal Revolution"

"Dan Ariely and co-authors have an interesting new paper looking at moral behavior, specifically cheating, in people who grew up in either East or West Germany. 

From 1961 to 1989, the Berlin Wall divided one nation into two distinct political regimes. We exploited this natural experiment to investigate whether the socio-political context impacts individual honesty. Using an abstract die-rolling task, we found evidence that East Germans who were exposed to socialism cheat more than West Germans who were exposed to capitalism. We also found that cheating was more likely to occur under circumstances of plausible deniability.

…If socialism indeed promotes individual dishonesty, the specific features of this socio-political system that lead to this outcome remain to be determined. The East German socialist regime differed from the West German capitalist regime in several important ways. First, the system did not reward work based to merit, and made it difficult to accumulate wealth or pass anything on to one’s family. This may have resulted in a lack of meaning leading to demoralization (Ariely et al., 2008), and perhaps less concern for upholding standards of honesty. Furthermore, while the government claimed to exist in service of the people, it failed to provide functional public systems or economic security. Observing this moral hypocrisy in government may have eroded the value citizens placed on honesty. Finally, and perhaps most straightforwardly, the political and economic system pressured people to work around official laws and cheat to game the system. Over time, individuals may come to normalize these types of behaviors. Given these distinct possible influences, further research will be needed to understand which aspects of socialism have the strongest or most lasting impacts on morality.

It’s interesting that Ariely et al. try to explain cheating as a result of socialism. My own approach would look more to the virtue ethics of capitalism and Montesquieu who famously noted that

Commerce is a cure for the most destructive prejudices; for it is almost a general rule, that wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.

 See Al-Ubaydli et al. for a market priming experiment and especially McCloskey on The Bourgeoise Virtues for more work consistent with this theme."

Global income inequality has been falling for the last 20 years, moving the world in a fundamentally better direction

From Mark Perry of "Carpe Diem."

"

An excerpt from Tyler Cowen’s excellent op-ed in today’s NY Times Income “Inequality Is Not Rising Globally. It’s Falling.“:

Income inequality has surged as a political and economic issue, but the numbers don’t show that inequality is rising from a global perspective. Yes, the problem has become more acute within most individual nations, yet income inequality for the world as a whole has been falling for most of the last 20 years. It’s a fact that hasn’t been noted often enough.

The finding comes from a recent investigation by Christoph Lakner and Branko Milanovic. And while such a framing may sound startling at first, it should be intuitive upon reflection. The economic surges of China, India and some other nations have been among the most egalitarian developments in history (see chart above showing declining world poverty rates, especially in East Asia).

Of course, no one should use this observation as an excuse to stop helping the less fortunate. But it can help us see that higher income inequality is not always the most relevant problem, even for strict egalitarians. Policies on immigration and free trade, for example, sometimes increase inequality within a nation, yet can make the world a better place and often decrease inequality on the planet as a whole.

International trade has drastically reduced poverty within developing nations, as evidenced by the export-led growth of China and other countries. Yet contrary to what many economists had promised, there is now good evidence that the rise of Chinese exports has held down the wages of some parts of the American middle class. At the same time, Chinese economic growth has probably raised incomes of the top 1 percent in the United States, through exports that have increased the value of companies whose shares are often held by wealthy Americans. So while Chinese growth has added to income inequality in the United States, it has also increased prosperity and income equality globally.

From a narrowly nationalist point of view, these developments may not be auspicious for the United States. But that narrow viewpoint is the main problem. We have evolved a political debate where essentially nationalistic concerns have been hiding behind the gentler cloak of egalitarianism. To clear up this confusion, one recommendation would be to preface all discussions of inequality with a reminder that global inequality has been falling and that, in this regard, the world is headed in a fundamentally better direction.

The message from groups like Occupy Wall Street has been that inequality is up and that capitalism is failing us. A more correct and nuanced message is this: Although significant economic problems remain, we have been living in equalizing times for the world — a change that has been largely for the good. That may not make for convincing sloganeering, but it’s the truth.

Yes, we might consider some useful revisions to current debates on inequality. But globally minded egalitarians should be more optimistic about recent history, realizing that capitalism and economic growth are continuing their historical roles as the greatest and most effective equalizers the world has ever known."

CBO makes clear what Obamacrats don’t: Tax hikes won’t come close to solving US debt problem

By James Pethokoukis of AEI.

"

The New York Times is happy that a new Congressional Budget Office report is forecasting slower Medicare spending growth — even if the reason is puzzling. From reporter Margot Sanger-Katz:

The last few years have seen a puzzling and welcome new trend in health care spending: Instead of going up and up, increases have slowed way down. Since health care costs are growing more slowly than they have in decades, they’re making budget forecasts look better and better.

Here’s your trouble: while it is good news that Medicare is now expected to make up 4.6% of GDP in 25 years vs. 4.9% in last year’s estimate, the US budget is still a snowball headed for hell. The above chart shows the 2013 and 2014 long-term CBO estimates under the extended baseline scenario (current spending and tax provisions continue or expire according to law) and alternative fiscal scenario (what is likely to happen to current spending and tax laws).
What more, the CBO report clearly states we cannot just  tax our way out of this problem. As summarized by the Committee for a Responsible Federal Budget:

CBO projects that revenues will also grow as a share of GDP, but from a lower starting point and not as quickly. Specifically, revenues will rise from 17.6 percent of GDP this year to 18.4 percent by 2025, 19.5 percent by 2040, 21.3 percent by 2060 and 23.6 percent by 2085. By comparison, revenue has averaged about 17.4 percent of GDP over the past 40 years.
Over time, CBO projects spending will grow significantly, from more than 20 percent of GDP in 2014 to nearly 23 percent by 2025, 26 percent by 2040, nearly 30 percent by 2060, and nearly 36 percent by 2085. By comparison, spending has averaged about 20.5 percent of GDP over the past 40 years. 

So even though revenue will rise 6 percentage points over historical levels, spending will rise by 16 points over historical levels. Record tax revenue, but also record spending. As I said, there’s your trouble."

The Market And Bee Colony Collapse

See Mind Your Own Beesness by David Henderson of EconLog.

"Rucker and Thurman point out that outbreaks of bee disease are not new: reading their article is your chance to get up to speed on varroa mites, tracheal mites, the bacterial infection called American foulbrood, and the nosema and chalkbrood fungus. Colony collapse disorder doesn't seem to have a single cause, but two bee pathogens not previously active in the U.S. seem to be playing a role: in case you need to know, they are the Israeli Acute Paralysis Virus and and adult honey microsporidian parasite called Nosema ceranae. 

The authors also point out that beekeepers lose some bees every winter, and so they often split healthy hives into two separate hives. If necessary, they can also buy or trade with other beekeepers for queens or additional bees. Replacing the losses from colony collapse disorder has thus imposed costs, but otherwise been fairly straightforward. As a result, the number of bee colonies was actually higher in 2009 than in 2006, ever after several years of colony collapse disorder.

This is from "Do Markets Work for Bees?" Conversable Economist, July 10, 2014. Timothy Taylor's bottom line to the question posed in the title is: yes. But that hasn't stopped the feds. Taylor writes:

Naturally, the proposed government solution is the creation of a Pollinator Health Task Force to create a National Pollinator Health Strategy, with representation from 17 different government agencies. We'll see how that goes in the next six months or so, when the strategy is supposedly due.

Taylor's bottom line:

At least to me, all of this looks like markets in action: shocks to supply, producers finding ways to adjust, globalization of the product, production costs and demand interacting to affect price. I am underconfident that the 17 agencies participating in the Pollinator Health Task Force, starting their deliberations a mere eight years after the problem became apparent, will add much value, although I'm sure National Honey Board could use some support for its grant program to study bee health. Maybe the task force should have some actual private-sector beekeepers and pollination customers, not just government officials? Or is that crazy talk?

Taylor also references this: "Wally Thurman on Bees, Beekeeping, and Coase," Econtalk, December 16, 2013."

Click here to read this post by Megan McArdle.

"corporate tax law has now passed well beyond the point where it is possible for a single expert to be familiar with its ins and outs. This makes it harder to plan business expansions, harder to forecast government revenue, and it requires both sides to hire more experts in order to determine whether corporations are compliant. It also means more lawsuits, and longer ones, as both sides wrangle over how this morass of laws should be applied to real-world situations.

You can think of it this way: Every new law has possible intersections with every other tax law in existence. As the number of laws grows, the number of possible intersections grows even faster. And each of those intersections represents both a possible way to avoid taxes and a potential for unintended consequences that inadvertently outlaw something Congress never intended to touch. This growing complexity makes it more and more difficult for either companies or lawmakers to forecast the ultimate effects of new tax laws. That’s bad. It’s also expensive."

"Most of the “loopholes” that we argue about are not a result of congressional pandering, or even sharp lawyers who bend sensible rules. They’re an artifact of the fact that calculating corporate income is really hard. 

Why is it so hard? Because unlike with the personal income tax, calculating corporate income tax requires taking account of a corporation’s expenses. The Internal Revenue Service basically ignores most personal expenses because it can assume that the operating costs are the same from person to person. You may think that a BMW and a pied-a-terre in Gstaad are basic survival equipment, but the IRS doesn’t care. Everyone gets the same standard deduction; if they itemize, they can only itemize select big-ticket expenses -- children, excessive medical costs, mortgage interest and so forth.

But that won’t work for a corporation because basic living expenses can vary wildly, from tech firms whose only assets are a few computers and a handful of programmers to airlines and aluminum mills that run huge workforces and buy lots of heavy equipment meant to last decades. If you ignore expenses and just tax revenue, you’ll either end up giving the tech firms a hell of a deal or handing low-margin businesses such as grocery stores a tax bill for 800 percent of their profits.

Once you’ve decided to tax profits instead of gross revenue, you’re going to spend a huge amount of time arguing over what constitutes a legitimate expense (say, flying to Vegas for a major trade show: If you say yes, you’ll ensure that trade shows and conventions are held in a lot of prime vacation slots so business owners can catch a little tax-deductible R&R on the side; if you say no, you may have just outlawed the trade show), when revenue and expenses are recognized, and whether particular transactions have a genuine business purpose. This is not because businesses are all engaged in a nonstop tax scam on the public. It’s because -- as you may know from your own interactions with the IRS -- it’s possible to have legitimate differences of opinion from the government."

"there is no such thing as a fair, simple corporate tax code that can’t be gamed. And the harder we try to squeeze them for each extra dime, the harder -- and more expensively -- they will resist. So here’s my proposal: Let’s not try. Let’s eliminate the corporate income tax, or at least lower the rate so far that they won’t spend so much time and energy trying to avoid it.

There are two possible objections to this. One is that corporations won’t be paying “their fair share” and the other is that giving up the corporate income tax would be very expensive.

The first objection is not a good reason to keep trying to pummel more money out of American companies. Now, I know you’re getting all red in the neck, but hear me out. The truth is that you can’t tax a corporation at all. All “corporate taxes” ultimately come out of the pocket of some person: an owner, a manager, a customer, an employee. A corporation can’t pay its “fair share” because, in the end, a person is paying. 

And the corporate income tax is not a particularly good way to ensure that those individuals are paying their fair share. It’s a blunt instrument that falls equally on all owners -- from filthy-rich hedge-fund managers to lonely widows sitting on a few hundred shares of AT&T. 

But while I don’t agree that we need to make corporations pay their “fair share,” I do agree that jettisoning the corporate income tax would be expensive. So here’s my proposal: Eliminate the corporate income tax and take the money from people. That’s what you’re doing anyway, so do it in a simpler, fairer and more progressive way, by raising income taxes on the wealthy and taxing capital income (dividends plus capital gains) more like ordinary income. And stop wasting everyone’s time and money on this insane, unwinnable chess game."

North Dakota Has Lessons For The Minimum Wage

See North Dakota’s booming job market — where you can make 24% more delivering pizzas than the average college graduate. By Mark Perry of "Carpe Diem."

"The average starting salary this year for college graduates is $45,473. But in the booming oil patch of North Dakota, you can get a job in Stanley (population 1,800; unemployment rate of 1.3%) making and delivering pizzas, and start at $56,400 per year (plus benefits) without any educational requirements! That’s what Jimmy’s Pizza is offering on this Craigslist post (via a post by Kathy Hoekstra at the Job Creators Network website titled “North Dakota: What Happens when a Market is Free to Run Wild”).

Pizza Delivery Driver (Make $56,400 per year + benefits)

Jimmy’s Pizza of Stanley is building a staff and needs delivery drivers. Looking for self motivated, hardworking individuals who love being part of a strong team moving toward its goals. Must have a clean driving record and no criminal history as well as a reliable vehicle.
Drivers Compensation:
Salary: $36,000 per year
Tips & Delivery Charges: $20,400 per year
Total Yearly Income: $56,400
Benefits Include:
- One week paid vacation every 6 months after your first six months.
- During your week of paid vacation you also receive a $1,000 bonus.
- We will match up to $100/month in an employee savings account.
- If you like, we also offer a Personal Financial Assistant to pay bills, do taxes and help manage your money.
Responsibilities include:
-Making pizzas, taking orders and delivering pizzas
-Work 6 days per week (about 49 hours per week)
We will be opening more locations soon, so there is huge potential for advancement. If you are interested please send your resume. Must be available to start immediately.

That works out to about $23 per hour as a starting wage to make and deliver pizzas in Stanley, ND, or more than three times the federal minimum wage of $7.25 per hour. But what about housing in the oil patch, which we always hear is so expensive? According to the Craigslist posting,

We do have rooms available to rent for $900/month if you are in need of housing.

And about 70 miles away from Stanley in Williston (where the jobless rate is 0.80%), the nation’s busiest Walmart is offering starting wages of $17 per hour for full-time and part-time workers, see photo below of the sign in the Williston Walmart parking lot:



Check out some of the hundreds of other job openings near Williston, ND listed on Craigslist here, (there are currently 647 current job openings with the word “Williston” in the listing), many offering signing bonuses of $500, $1,500, $3,000, $5,000 (here and here) and $6,000. That’s what happens when there’s a booming economy and a high demand for labor – starting wages get bid up many multiples of the federal minimum wage for entry-level positions, and firms actually start engaging in bidding wars to get the best workers by offering signing bonuses of thousands of dollars. The hottest job market in the country is now in western North Dakota, thanks to the oceans of shale oil that are now being accessed with advanced drilling technologies. And thanks to the “miracle and magic of the marketplace” of course.
Here’s Kathy Hoekstra’s conclusion, an excellent and well-taken point:

As the minimum wage battles spread from Seattle to other parts of the country, our policymakers need to heed the lessons of North Dakota, that is, a market allowed to operate freely does a much better job at determining our paychecks than government."

Kathryn Shelton and Richard McKenzie explain why the “rich” can grow wealthier faster than the “poor.”

From Cafe Hayek.

"Much of the income inequality debate in the United States has focused on “fifths,” “tenths” or “the top 1 percent” of households. Such divisions give the appearance of inequality, but there are far more people and workers in the top income brackets than in the lower ones. Indeed, there are 82 percent more people in the top fifth of households than in the bottom fifth. In 2006, 81 percent of households in the top quintile had two or more workers; but only 13 percent of households in the bottom fifth had two or more workers. In nearly 40 percent of these households, no one was working.

Further, people in different income divisions do not remain at those income levels throughout their lives. The Federal Reserve Bank of San Francisco found that absolute mobility – that is, the extent to which children earn more than their parents – is high:

• Of all U.S. adults, 67 percent had higher incomes than their parents; and among those born into the lowest income bracket, 83 percent exceeded their parents’ income.
• About 40 percent of people in the lowest fifth of income earners in 1986 moved to a higher income bracket by 1996, and roughly half the people in the lowest income quintile in 1996 had moved to a higher income bracket by 2005.

Indeed, one study found that a majority of Americans reach the upper income brackets at some point during their lives. Over a 44-year period, 12 percent of 25- to 60-year-olds moved into the top 1 percent for at least one year; 39 percent reached the top 5 percent; over half reached the top 10 percent; and nearly three-fourths were in the top fifth of the income distribution."

Don Boudreaux On Why Open Boarders Will Not Lead To A Flood Of Immigrants

See No Limit on Immigration.

"Commenting on this recent Cafe post, John Cunningham asks:

Prof Boudreaux, would you set any upper limit on the number of illegal immigrants to be welcomed in? about 60-70% of this year’s entrants on the southern borders are adults, of 300K or so. as Steve Sailer points out, there are 5 billion people in the world living in countries poorer than Mexico. would you be OK with 30 million immigrants yearly? what about 60 million? do you have an upper limit?

I can’t tell if the question is asked sarcastically or not.  I will assume not.  Either way, though, my answer is that I oppose any upper limit.  None.  I am for open borders.

Many people (I think) imagine that if the U.S. had open borders – or if we returned to the immigration regime we had in, say, 1880 – that the great majority of non-Americans who are poorer than Americans would flood into the U.S. indiscriminately.  Concerns about where to live and whether or not a job was likely to be found would be, apparently, ignored by almost every one of the poor immigrants.  But that’s not how the world works.  (If it were, then the places those poor people would be fleeing from would be so utterly miserable and inhumane that we Americans should be especially eager to help such people by allowing them to live in the U.S.)  Market and social forces – such as relative wages and prices, and job availability – govern immigration patterns just as they govern other economic and social phenomena.

There are no legal limits on the number of people who are allowed to seek residence in Manhattan.  And the U.S. is full of people who are poorer than is the typical resident of Manhattan.  Yet we don’t witness New York City being deluged to the point of inability to cope with immigrants from poor states such as Mississippi, Louisiana, Arkansas, and West Virginia flooding indiscriminately into that city.  Why should we expect to see a different outcome when the borders in question happen to be national as opposed to state or local?"

John Kenneth Galbraith wrote a book in 1979 called The Nature of Mass Poverty (not one of his better known works). He devoted the entire last chapter to migration. One passage reads: “Migration, we have seen, is the oldest action against poverty. It selects those who most want help. It is good for the country to which they go; it helps to break the equilibrium of poverty in the country from which they come. What is the perversity in the human soul that causes people so to resist so obvious a good?”

The American super-wealthy are not primarily living off returns to capital

See Piketty’s Can Opener by Jim Manzi of National Review. Excerpts:

"He [Pikettty] believes that this increase in taxes would not affect economic output, saying that “the evidence suggests that a rate on the order of 80 percent on incomes over $500,000 or $1 million a year not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.” In fact, in this quote he hints that we might not just get a free lunch, but might get paid to eat as well, since such very high taxes would reduce only two kinds of activities: those that produce zero extra output (“useless” activities) and those that actually reduce welfare (“harmful” activities).

Tax rates are not the only thing that drives behavior, but the idea that you could institute tax rates at this level and have no impact on output is a pretty extraordinary claim. This is what explains his repeated insistence on a very specific mechanism that has created the so-called supermanagers in the US: In plain English, that large company CEOs and their cronies have gamed the compensation process."

"When we get to Piketty’s research papers, we will see that all of it is, in fact, based on public companies."

"Piketty’s argument with respect to America is simple and linear: (1) Top managers of large companies have gamed the compensation system to seize more income; (2) this activity has not added any economic value; and therefore, (3) the government can take this excess income back through taxes and redistribute it without any loss in economic output.

But when thus seen clearly, his entire case rests on his “finding” that growing wage inequality is explained by executives gaming the compensation system."

"I don’t believe that his asserted finding is credible, for three reasons. First, there just aren’t enough top managers of relevant companies to account for most of the growing incomes at the top. Second, executives of public companies represent a shrinking share of top incomes. And third, Piketty’s “bargaining power model” for executive compensation in public companies is extremely naïve."

"There about 150,000 people in the top 0.1 percent. Piketty claims on page 303 that 60 to 70 percent of these, or about 100,000 people, are “top managers.” There are about 5,000 public companies in America. If Piketty is correct, therefore, an average of something like 20 people per company should be pulling down more than $1.5 million per year. "

"The problem is that while this is true for the very largest companies, it’s not remotely true for a majority of public companies. I looked at companies 491–500 in the Fortune rankings. The average number of executives with total comp reported through SEC filings above $1.5 million in this group is 4. For those ranked 991–1000, the average is 2.8."

"Illustratively, a very aggressive estimate would be 100 people per company make more than $1.5 million in the top 100 companies; 20 people per company in the next largest 400 companies; 10 people per company in the next 500 companies (where, remember, we count an average of 3–4 people per company at this income level from proxies); and 5 people per company for the remaining roughly 4,000 public companies. This adds up to 43,000 people, or 29 percent of the count of those in top 0.1 percent. These assumptions are very aggressive, and we are still nowhere near Piketty’s assertion of 60 to 70 percent."

"In 2005 (the most recent year reported in the paper), 42.5 percent of these top earners were “executives, managers and supervisors” in non-finance industries, and 18 percent were “financial professions, including management.” The other categories are not those to which Piketty’s model realistically applied – things like lawyers, doctors, “business operations” (at this level of income, basically high-end management consultants), entrepreneurs and so forth. 42.5 + 18 = 60.5 percent, so thus far it looks like evidence in favor of Piketty’s claim.

But down in the addendum to Table 3, the paper breaks out the non-finance “executives, managers and supervisors” into those who work for closely held companies versus those who are “salaried.” Basically, the salaried are those who work in the classic public company with a distributed shareholder base and elected board of directors that is purportedly subject to gaming by Piketty’s bargaining model. Of the 42.5 percent, 23.6 percent work for closely held companies, leaving only 19 percent who are salaried. “Finance professions” are not broken out in this way in the paper, but even if we assume that they have roughly the same split between closely held and salaried (and given the structure of the high end of the finance industry, this likely over-estimates the number of salaried earners), this would mean another 8 percent of the top 0.1 percent would be salaried. Adding these two together, we have about 27 percent of the top 0.1 percent to which Piketty’s model could realistically apply. So, a careful reading of the paper Piketty cites results in an estimate closely in line with the prior estimates I made.

So, to be clear, however you estimate it, Piketty’s theory doesn’t even apply to something like three-quarters of top 0.1 percent."

"executives are the one group that has had a collapsing share of the top 0.1 percent over the past several decades.

By the narrowest definition, reading straight from the addendum to Table 3 in the paper, salaried executives in non-finance industries were 32 percent of the top 0.1 percent in 1979, and declined to 14 percent in 2005. This is, by a long shot, the biggest absolute loss in share of any group reported in the table. By the broader definition I established earlier (all salaried employees in non-finance industries plus the estimated salaried employees in finance), those large company employees subject to Piketty’s asserted mechanism of gaming the comp system declined from 47 percent of the top 0.1 percent in 1979 to the 27 percent in 2005 cited earlier."

"Who is grabbing this share that these large company employees are giving up? It’s not predominantly lawyers, doctors, entrepreneurs, and the like, but rather, mostly executives, managers, and supervisors of closely held companies, and finance as an industry (again, without a breakout in the paper between public and closely held companies).

In summary, according to Piketty, top managers of public companies are driving the explosion in executive comp among the top 0.1 percent, despite being something like one-fourth of the people in it, and despite being the exact group that is rapidly losing share to those who are not subject to the bargaining model he asserts."

"What is more questionable is his resulting assertion that this means that increases in executive compensation over the past several decades have been the result of “lower marginal tax rates encourage[ing] executives to negotiate harder for higher pay.”

In his book, Piketty cites a key paper that he co-authored as evidence for this assertion. In it, he evaluates the causes of increasing public company CEO pay, In Piketty’s paper, he cites macro evidence for the U.S., then international macro evidence, and then micro evidence based on CEO pay. 

Here is the conclusion of his section on macro U.S. evidence: “Therefore, this evidence based on a single country is at best suggestive. Hence, we next turn to international evidence.”
Here is his conclusion of that section on international macro evidence:

As an important caveat, those regressions rely on a very strong identifying assumption, namely that any deviation of GDP growth from its trend not caused by top tax rates is uncorrelated with the evolution of top tax rates. Many potential factors could invalidate this assumption. . . . To provide more compelling evidence, we next turn to micro evidence using CEO pay.

So, by Piketty’s own reasoning, none of the macro evidence is sufficiently compelling."

"Start with the observation that you have a few hundred data points as the raw data upon which you are trying to build a theory that explains a fairly complex human behavior. As I’ve described in more detail in a prior article on CEO compensation, the whole process of decomposition of sources of variance cannot be definitively established by such an approach.

And amusingly, at the end of the section on the empirical validation of his model for CEO pay, Piketty has this to say about his empirical test of this theory: “Naturally, this test is not definitive as luck shocks could affect differently the productivity of CEOs vs. other workers. Hence, the possibility remains that CEOs’ true marginal product of effort could vary with the performance of the industry.” In other words, as with the prior two lines of evidence, he can’t rule out an obvious alternative theory that would also explain the data – in this case, that it may be that when times are booming in an industry, it’s worth more to keep the CEO on board. In fact, there multiple papers that provide evidence for exactly this effect this that is as strong (or really, as weak) as Piketty’s."

"Further, there are numerous other plausible theories for rising CEO pay, including agency explanations, the managerial labor market, technological shocks driving corporate strategy and change, and misperceptions about stock options. One of the clearest is that between 1980 and 2003 U.S. CEO pay increased by a factor of six, and over that same period, large company capitalization increased by . . . a factor of six. This makes sense if you think that the CEO will now affect, to whatever degree CEOs affect things, six times as much economic value. Piketty’s response to this very widely discussed result was:” The problem is that this theory is based entirely on the marginal productivity model and cannot explain the large international variations observed in the data…” But Piketty has previously described the U.S. as the land of “meritocratic extremism,” and so this is hardly an argument for why this would not apply to the U.S."

"Piketty asks the wrong question to test the idea that CEOs have gamed the process, which is not, “Are CEOs paid for marginal productivity?” but more practically, “Would shareholders make more money if CEOs were paid less?”"

"“Would paying the CEO with performance-indexed instruments make the shareholders better off than paying with straight options or stock?” He doesn’t consider the well-known problem that indexed options and other similar methods can create a large accounting charge, and this can outweigh other advantages. He doesn’t consider that attractive CEOs can quit at any time, and that it is often when an industry gets hot that they will have the most tempting other offers, and therefore it can be wise to make sure they are well-compensated even if this looks like luck."

"Most crucially, he doesn’t really consider the details of the employment contracts that he is characterizing at an abstract level in his model. At the end of 2006, the SEC mandated the disclosure of relative performance evaluation in CEO compensation. Recently, a couple of enterprising academics used this data to construct what is a direct test of Piketty’s hypothesis. Their conclusion was that there is “little evidence” to support hypotheses based on managerial power. What explains why firms use more or less of the strategy of tying CEO pay to indexed performance? The degree of uncertainty in establishing a peer group."

"He has ignored obvious alternative explanations, and has ignored data and analysis that contradicts his theory.

In summary, Piketty has weak evidence to support his theory for why CEO pay has increased in America. What evidence he has covers only CEOs of public companies, and hence about 3 percent of the top 0.1 percent. His whole model, even if correct and extended beyond what is supported by the evidence could only apply to about one-fourth of the top 0.1 percent. And this very group that he claims is responsible for driving income inequality in America is collapsing as a share of the top 0.1 percent."

Manzi answers his critic Ryan Cooper