Scott Sumner Critiques Krugman/Summers On Macro

Click here to read it.

"Paul Krugman likes to mock extremely talented conservative economists every time they make a statement that seems inconsistent with the textbook AS/AD model of demand shock-created recessions. And yet as far as I can tell, the views of people like Krugman and Larry Summers are just as heterodox as those of Lucas, Barro, Cochrane, Fama, etc. Krugman and Summers seem to think the world is stuck in a long-run period of stagnation that has demand-side causes.

Over at TheMoneyIllusion I recently did a post suggesting that there really was a Great Stagnation. I claimed that this could explain two facts. One is the very low 30-year bond yields in developed countries. And second, the fact that real GDP growth in the US has been very slow (about 2%) during a period of rapidly falling unemployment rates. But I had in mind the sort of supply-side stagnation that Tyler Cowen hypothesized, not a problem that could be fixed with more nominal spending (although I also think that's been a problem in recent years.)

It seems to me that the Krugman/Summers view has three big problems:

1. The standard textbook model says demand shocks have cyclical effects, and that after wages and prices adjust the economy self-corrects back to the natural rate after a few years. Even if it takes 10 years, it would not explain the longer-term stagnation that they believe is occurring.

2. Krugman might respond to the first point by saying we should dump the new Keynesian model and go back to the old Keynesian unemployment equilibrium model. But even that won't work, as the old Keynesian model used unemployment as the mechanism for the transmission of demand shocks to low output. If you showed Keynes the US unemployment data since 2009, with the unemployment rate dropping from 10% to 6.1%, he would have assumed that we had had fast growth. If you then told him RGDP growth had averaged just over 2%, he would have had no explanation. That's a supply-side problem. And it's even worse in Britain, where job growth has been stronger than in the US, and RGDP growth has been weaker. The eurozone also suffers from this problem.

The truth is that we have three problems:

1. A demand-side (unemployment) problem that was severe in 2009, and (in the US) has been gradually improving since.
2. Slow growth in the working-age population.
3. Supply-side problems ranging from increasing worker disability to slower productivity growth
Only the last two can explain the slowing long run trend rate of RGDP growth, as well as the low real interest rates on 30 year T-bonds.

I mentioned that there was a third problem with the Krugman/Summers view. They favor big government Keynesian demand-side remedies for what they see as a sort of permanent liquidity trap. This fits with the newly fashionable anti-neoliberal views on the left. Thomas Piketty's new book made the wildly implausible claim that neoliberal reforms had not helped countries like Britain. However the countries least likely to be mentioned in discussion of "The Great Stagnation" are precisely those countries that have pretty good supply-side fundamentals, and/or relatively small government. Here's the Heritage Foundation's list of the top 10 countries for Economic Freedom:


Now I don't want to oversell this list. Many of the top 6 countries have fast population growth. It's hard for any country to completely overcome the slowdown in the rate of global productivity growth. But I think any fair observer would note that (with the exception of Ireland) the "usual suspects" in the stagnation discussion (Japan, the US, Britain, the 18 eurozone members, etc) are conspicuously missing from that list. And while Ireland undoubtedly was hammered by a big demand shock, their RGDP rose 7.7% over the past 12 months, a rate the US could only dream about. So while the top ten countries are not perfect (Denmark's performance has been mediocre) they've clearly done better than most developed countries. That doesn't provide much support for the progressives' claim that the eurozone is doing really poorly because while they have the biggest governments on Earth, their governments need to be even bigger to overcome the Great Stagnation.

[The Fraser Institute top 10 list replaces Chile, Ireland and Denmark with the UAE, Bahrain and Finland.]

Also note that the eurozone country that is usually seen as doing best (Germany), greatly liberalized its labor markets in 2003-04. Back in 2007, before any of these problems developed, I did a study of neoliberal reforms in developed countries. I looked at all 32 countries with per capita incomes above $20,000. Guess which one had the least neoliberal economy? (Hint: It was doing well at the time of my study, which puzzled me.)

The answer is Greece."

The ozone hole was exaggerated as a problem

From Matt Ridley.

"Serial hyperbole does the environmental movement no favours

My recent Times column argued that the alleged healing of the ozone layer is exaggerated, but so was the impact of the ozone hole over Antarctica:

The ozone layer is healing. Or so said the news last week. Thanks to a treaty signed in Montreal in 1989 to get rid of refrigerant chemicals called chlorofluorocarbons (CFCs), the planet’s stratospheric sunscreen has at last begun thickening again. Planetary disaster has been averted by politics.

For reasons I will explain, this news deserves to be taken with a large pinch of salt. You do not have to dig far to find evidence that the ozone hole was never nearly as dangerous as some people said, that it is not necessarily healing yet and that it might not have been caused mainly by CFCs anyway.

The timing of the announcement was plainly political: it came on the 25th anniversary of the treaty, and just before a big United Nations climate conference in New York, the aim of which is to push for a climate treaty modelled on the ozone one.

Here’s what was actually announced last week, in the words of a Nasa scientist, Paul Newman: “From 2000 to 2013, ozone levels climbed 4 per cent in the key mid-northern latitudes.” That’s a pretty small change and it is in the wrong place. The ozone thinning that worried everybody in the 1980s was over Antarctica.

Over northern latitudes, ozone concentration has been falling by about 4 per cent each March before recovering. Over Antarctica, since 1980, the ozone concentration has fallen by  40 or 50 per cent each September before the sun rebuilds it.

So what’s happening to the Antarctic ozone hole? Thanks to a diligent blogger named Anthony Watts, I came across a press release also from Nasa about nine months ago, which said: “ Two new studies show that signs of recovery are not yet present, and that temperature and winds are still driving any annual changes in ozone hole size.”

As recently as 2006, Nasa announced, quoting Paul Newman again, that the Antarctic ozone hole that year was “the largest ever recorded”. The following year a paper in Nature magazine from Markus Rex, a German scientist, presented new evidence that suggested CFCs may be responsible for less than 40 per cent of ozone destruction anyway. Besides, nobody knows for sure how big the ozone hole was each spring before CFCs were invented. All we know is that it varies from year to year.

How much damage did the ozone hole ever threaten to do anyway? It is fascinating to go back and read what the usual hyperventilating eco-exaggerators said about ozone thinning in the 1980s. As a result of the extra ultraviolet light coming through the Antarctic ozone hole, southernmost parts of Patagonia and New Zealand see about 12 per cent more UV light than expected. This means that the weak September sunshine, though it feels much the same, has the power to cause sunburn more like that of latitudes a few hundred miles north. Hardly Armageddon.

The New York Times reported “an increase in Twilight Zone-type reports of sheep and rabbits with cataracts” in southern Chile. Not to be outdone, Al Gore wrote that “hunters now report finding blind rabbits; fisherman catch blind salmon”. Zoologists briefly blamed the near extinction of many amphibian species on thin ozone.  Melanoma in people was also said to be on the rise as a result.

This was nonsense. Frogs were dying out because of a fungal disease spread from Africa — nothing to do with ozone. Rabbits and fish blinded by a little extra sunlight proved to be as mythical as unicorns. An eye disease in Chilean sheep was happening outside the ozone-depleted zone and was caused by an infection called pinkeye — nothing to do with UV light. And melanoma incidence in people actually levelled out during the period when the  ozone got thinner.

Then remember that the ozone hole appears when the sky is dark all day, and over an uninhabited continent. Even if it persists into the Antarctic spring and spills north briefly, the hole allows 50 times less ultraviolet light through than would hit your skin at the equator at sea level (let alone at a high altitude) in the tropics. So it would be bonkers to worry about UV as you sailed round Cape Horn in spring, say, but not when you stopped at the Galapagos: the skin cancer risk is 50 times higher in the latter place.

This kind of eco-exaggeration has been going on for 50 years. In the 1960s Rachel Carson said there was an epidemic of childhood cancer caused by DDT; it was not true — DDT had environmental effects but did not cause human cancers.

In the 1970s the Sahara desert was said be advancing a mile a year; it was not true — the region south of the Sahara has grown markedly greener and more thickly vegetated in recent decades.

In the 1980s acid rain was said to be devastating European forests; not true — any local declines in woodland were caused by pests or local pollution, not by the sulphates and nitrates in rain, which may have contributed to an actual increase in the overall growth rate of European forests during the decade.

In the 1990s sperm counts were said to be plummeting thanks to pollution with man-made “endocrine disruptor” chemicals; not true — there was no fall in sperm counts.

In the 2000s the Gulf Stream was said to be failing and hurricanes were said to be getting more numerous and worse, thanks to global warming; neither was true, except in a Hollywood studio.

The motive for last week’s announcement was to nudge world leaders towards a treaty on climate change by reminding them of how well the ozone treaty worked. But getting the world to agree to cease production of one rare class of chemical, for which substitutes existed, and which only a few companies mainly in rich countries manufactured, was a very different proposition from setting out to decarbonise the whole economy, when each of us depends on burning carbon (and hydrogen) for almost every product, service, meal, comfort and journey in our lives.

The true lesson of the ozone story is that taking precautionary action on the basis of dubious evidence and exaggerated claims might be all right if the action does relatively little economic harm.

However, loading the entire world economy with costly energy, and new environmental risks based on exaggerated claims about what might in future happen to the climate makes less sense."

Is the middle class being "squeezed?"

From Scott Sumner of EconLog.

"Commenter Fed up directed me to an article at Yahoo discussing the squeeze on the middle class:

A survey by Pew this year found that 57 percent of Americans felt their income was trailing the cost of living -- the same proportion who felt so in October 2008 when the Great Recession was raging. Just before the recession began, the figure was 44 percent. The sensation of being squeezed persists even though the consumer price index, the most widely followed inflation gauge, has risen less than 2 percent a year since the recession ended.

One reason for the disconnect is that the CPI is weighted more heavily toward things people frequently buy -- food and gasoline, for example. While child care can be a huge expense for families with young kids, not everyone faces it. So it makes up just 0.7 percent of the consumer price index.

It's a much bigger bite in the Prosser household, however.
"We used to go out, we used to go to the opera," Prosser said. But now, "between mortgage, bills and the child care payment, that's pretty much everything."

I'm skeptical. But the article did cite a fairly long piece by the Center for American Progress, which contains lots of data showing that between 2000 and 2012 the American middle class was badly squeezed, with a much smaller share of income now available for discretionary purchases like opera. (Go to link to view the graph in an easier to read size):

 

I thought that if the middle class really was being squeezed, this ought to show up in the GDP accounts. Americans would be spending more on necessities and less on luxuries. There is no category for "opera," but I did find figures for "recreation" as well as "food service and accommodation" (basically hotel and restaurant.) Then I decided to contrast that with food purchased for eating outside the establishment (which is mostly groceries eaten at home.) Here's the most recent figures, as a share of GDP, as well as the figures for the second quarter of the 2000 tech boom--which people now see as a sort of golden age:

Groceries: 2000 -- 5.24% of GDP
Groceries: 2014 -- 5.11% of GDP
Recreation: 2000 -- 2.46% of GDP
Recreation: 2014 -- 2.56% of GDP
Hotel and Restaurant: 2000 -- 3.97% of GDP
Hotel and Restaurant: 2014 -- 4.31% of GDP

Now a few comments. Yes, these figures don't "prove" anything. I can imagine all sorts of objections:

1. The rich are eating out more. (But how big are the stomachs of the top 1%? And weren't the rich already eating out as much as they wanted in 2000?)
2. People are switching to fast foods. (But isn't McDonald's in steep decline?)
3. The cost disease in services. (But haven't you guys been telling me that wages for low paid workers like waitresses are stagnating? The cost disease is based on wages rising fast.)

And I'm sure there are lots of other objections. But the facts are clear. Americans are spending a larger and larger share of their incomes on luxuries, and a smaller and smaller share of their income on necessities like food. I'll leave it to others to decide whether this sort of consumer behavior is what you'd expect from a country where living standards were supposedly being squeezed.

PS. "Breastaurants" are also booming -- and somehow I don't think that's just the top 1%."

What's Worse Than a Subprime Auto Loan?

From Megan McArdle.

"Subprime auto loans lend themselves to heartrending stories: Single mothers who take on loans with double-digit interest rates just to get themselves to a job that pays an extra $4 an hour. Gimcrack cars sold at nosebleed prices to desperate people. The repossession that strands you at work or in the house just as your ailing mother needs to go to the emergency room.

The New York Times has been running a series of these, with all the usual sad tales. The latest installment covers the high-tech devices that lenders now use to make sure that they get paid (or get the car back), from GPS systems that check to see whether you’re still going to work every day to ignition kill switches that can be triggered remotely to prevent people who have missed payments from starting the car. All these stories are troubling, but there’s something missing here: an analysis of whether the borrowers would be better off without these devices. I suspect that for many of the people in question, the alternative to no remote monitoring is no car at all.

We’ve talked before about what the credit-scoring revolution did to the market for auto loans: better rates for the best credit risks, high down payments and interest rates for people with spotty payment histories. The people being targeted for remote monitoring and deactivation are the most marginal of the marginal credit risks, as indeed the latest story makes clear; many of the subjects seem to be chronically behind on their payments.

Lending to people who pay late multiple times a year is an expensive business, especially when you’re lending on an asset that can fairly easily be hidden from you. If a borrower doesn’t make their monthly nut, the lender has to go to the expense of sending a tow truck to find the car and bring it back to the lot. Borrowers know this, so they quite sensibly tend to put the car payment later on their list of priorities, behind more urgent items such as food, utilities and rent.

Don’t get me wrong: I'm not saying that the people who lend money to bad credit risks are splendid, public-minded fellows. It’s a tawdry business that most decent people prefer not to be involved with, because we’d find it difficult to take a car away from a sobbing single mother with three small children clinging to her legs -- and then we’d lose money on all our nonperforming car loans and have to get into some other line of business. Lending to financially unstable people who are unlikely to repay you without the application of serious leverage is usually a job for the hard-hearted. The subtext of many of the articles on subprime auto loans seems to imply that the dealers ought to let these poor people off the hook because they’re having a really difficult time. But that’s a hard precept to follow when your whole customer base consists of hard-luck cases.

And if those people don’t lend, are their would-be borrowers better off?

As a financial columnist, I always advise people to avoid subprime loans at all costs. Give up alcohol, cigarettes, meat and fun, and save up as fast as you can for something in decently good shape but ugly as sin. I offer that advice for housing, cars and anything else you might want to borrow money to buy.

But what if someone hasn’t followed that sterling advice and their car just broke down or their conveniently located employer just laid them off? Would I make them better off by making it easier for them to default -- and therefore harder for them to get a loan in the first place? I’m not so sure. It’s all very well to say that it would be better to have higher wages or better public-transit networks so that single moms don’t need a pricey car to get to work, but you can’t really let the kids go hungry while you wait for the urban-planning renaissance to arrive.

You see this with payday loans as well. Payday loans are really, really expensive, and you should never take one out if you can possibly avoid it. But when you talk to people who have done so, you often find that the loans were used to avoid some even more expensive disaster such as having your paycheck garnished, missing a registration deadline for classes, or getting your utilities shut off and having to pay $150 to get them reconnected.

Of course, you also see people who use payday loans to pay for a kid’s graduation party, then get trapped in a borrowing cycle where that $200 graduation party ends up costing $1,000 in interest. And there’s the rub: As experiments have shown, these markets are characterized by very binary outcomes. The majority of people are better off with the loans, but a substantial minority end up worse off. I suspect that if you did a study of subprime auto borrowers -- one that compared their experience to the strong possibility of no car at all, rather than a utopian universe where people with spotty payment histories somehow qualified for prime loan rates -- you’d see very similar results.
It’s good that these stories are highlighting how hard it is to be poor and in debt. But what’s missing is what we can’t see: how much harder it might be if they couldn’t get those loans."

Hiring Women and the Moral Inversion of Economics

By Alex Tabarrok of Marginal Revolution.

"In my post on why economics is detested I quoted Arnold Kling:

The intention heuristic says that if the intentions of an act are selfless and well-meaning, then the act is good. If the intentions are self-interested, then it is not good.

In contrast, economics evaluates an act not by its intentions but by its consequences. Since “bad” intentions can lead to good consequences (“as if by an invisible hand”). It’s not surprising that economists often praise what others denounce. Here’s a case in point: 

At a Sydney technology startup conference, Evan Thornley, an Australian multimillionaire and co-founder of online advertising company LookSmart (LOOK), gave a talk about why he likes to hire women. “The Australian labor market and world labor market just consistently and amazingly undervalues women in so many roles, particularly in our industry,” he said. When LookSmart went public on Nasdaq in 1999, he said, it was one of the few tech companies that had more women than men on its senior management team. “Call me opportunistic; I thought I could get better people with less competition because we were willing to understand the skills and capabilities that many of these woman had,” Thornley said.

…Thornley went on to say that by hiring women, he got better-qualified employees to whom he was able to give more responsibility. “And [they were] still often relatively cheap compared to what we would’ve had to pay someone less good of a different gender,” he concluded. To illustrate his point he showed a slide that said: “Women: Like Men, Only Cheaper.”

 For his comments, Thornley’s was labelled a sexist and loudly denounced, especially so by furious women. Strange? Not according to the intention heuristic which judges self-interested actions as bad.
 

If we judge actions by consequences, however, Thornley should be encouraged, perhaps even praised. Accepting for the sake of argument the truth of the story, it’s Thornley who has overcome prejudice (his or his society’s), recognized the truth of equality and taken entrepreneurial action to do well while doing good. It’s Thornley who is broadcasting the fact of equality to the world and encouraging others to do likewise. Most importantly, the consequence of Thornley’s actions are to increase the demand for women executives thereby increasing their wages.

Women’s wages aren’t pushed down by employers who hire women but by employers who don’t hire women. So why does Thornley get the blame? Instead of denouncing Thornley, whose actions push up the wages of women he hires and the wages of the women he does not hire, why not ask, How can we encourage employers not to overlook talented women and minorities?

For those wanting to break the bonds of discrimination whether they be women, blacks or Dalits, lower wages and a competitive market aren’t the cost of discrimination but the cure. It’s the lower wages that give employers an incentive to overcome prejudice, seek out talent, and experiment with new ways of doing business. And it is the self-interested pursuit of profit that is the surest means to increase the wages of the unjustly ignored and overlooked."

Other countries have restructured their air traffic control ( systems as self-supporting entities outside of their government bureaucracies

By Chris Edwards of Cato.

"Canada, Australia, New Zealand, Britain, and Germany appear to be doing a better job than America at embracing new technologies for air traffic control (ATC). Those countries have restructured their ATC systems as self-supporting entities outside of their government bureaucracies while we still run ours as part of the civil service in the Federal Aviation Administration (FAA).

More evidence that Congress should restructure our ATC system comes from today’s Wall Street Journal:

An effort to modernize the U.S. air-traffic-control system is seeing such a bumpy rollout that costs associated with some of the core technology outweigh potential benefits, according to a report soon to be released by a federal watchdog.

An audit report by the Transportation Department’s inspector general, slated to be released in the next few days, raises new questions about the design, deployment and projected benefits of one of the Federal Aviation Administration’s futuristic ways to enhance monitoring and management of aircraft.

The document is sharply critical about early implementation of ground-based radio towers that are part of a proposed $4.5 billion network designed to track the locations of planes more precisely than current radar. The new system, dubbed ADS-B, eventually aims to rely primarily on satellite-based navigation and tracking.

Some of the general criticism mirrors reports and comments by the inspector general and his staff over the past few years directed at the FAA’s overall air-traffic-modernization initiative, which it calls NextGen.

The federal bureaucracy would not be very good at running a high-tech firm, such as Apple, so it is no surprise that FAA has major problems running the high-tech ATC business. Our ATC system needs better management, higher efficiency, and more rapid innovation. We are more likely to achieve those goals if we privatized the system, as Canada did successfully almost two decades ago."

SBA’s Risky Franchise Lending

By Nicole Kaeding of Cato.

"The Small Business Administration’s (SBA) stated mission is to aid small businesses and strengthen the economy. Under its popular 7(a) program, SBA provides private lenders with loan guarantees. In the case of default, SBA steps in to cover up to 85percent of the lender’s losses. 

This structure encourages lenders to provide more loans, but also encourages the approval of riskier loans. The lenders are insulated from most of the risks of default.

A new analysis conducted by the Wall Street Journal confirms that this arrangement induces SBA to provide loans that result in a large number of defaults. Default rates for some franchise companies can be as high as 40 percent. According to the Wall Street Journal:

Quiznos, Cold Stone Creamery, Planet Beach Franchising and Huntington Learning Centers Inc. ranked among the 10 worst franchise brands in terms of Small Business Administration loan defaults.

Franchisees of the 10 brands in the ranking defaulted at more than double the rate for SBA borrowers who invested in all other chains, according to a Wall Street Journal analysis of charge-offs of all SBA-backed franchise loans in the past decade.

Put another way, franchisees of those 10 brands have left taxpayers on the hook for 21% of all franchise-loan charge-offs in the past decade, collectively failing to pay back $121 million in SBA-guaranteed loans from 2004 through 2013.

Thirty percent of the loans provided to Quiznos and Cold Stone Creamery franchises ended in default. The losses from loans to Quiznos franchises totaled $38.4 million during the 2004 to 2013 period, while losses to Cold Stone Creamery amounted to $34.1 million.

This is not the first time that SBA’s franchise lending has been criticized. In a report focused on franchises, SBA’s Inspector General noted in 2013 that SBA “had not implemented a program or process to monitor risk in its portfolio.” The report continues: “SBA did not monitor portfolio segments to identify risk based on default statistics…SBA continued to guarantee loans to high-risk franchises and industries without monitoring risks, and where necessary, implementing controls to mitigate the risks.”

Franchise businesses are an important component of SBA’s activities. In its new analysis, the Wall Street Journal points out that “SBA guaranteed nearly $18 billion in 7(a) loans [in 2013], including $2 billion for franchisees.”

Taxpayers are picking up the costs of these government loan guarantees. SBA charges lenders fees to mitigate the costs of default, but the fee amount seem to be too low. Most recent years, SBA has received a net outlay, or subsidy, from Congress.

What should be done? At the very least, SBA should take its inspector general’s recommendations and review its practices regarding franchise loans to reduce the number of defaults. Ideally as argued on www.downsizingovernment.org, SBA should be closed down."

Why is the UN denying IPCC climate science?

From Benjamin Zycher of AEI.

"So let us examine what the Intergovernmental Panel on Climate Change (IPCC) says and does not say. In its fifth assessment report (The Physical Science Basis, 2013, chapter 9) IPCC notes the recent "pause" in the climate trajectory, despite an increase in atmospheric greenhouse gas (GHG) concentrations of about 13 percent (from 354 ppm to almost 400 ppm) since 1990, and despite the predictions of 73 mainstream climate models. The length of the pause depends heavily on the data used, but appears to be 19 years in the surface record and 16 to 26 years in the lower troposphere. As an aside, the pause — that is, the absence of a recent temperature trend — is an enormous problem for the climate industry, as efforts to explain it (there now are at least 52 explanations offered in the literature and the public discussion, none of which were predicted by the climate models) have the effect of reducing the impacts of anthropogenic emissions, that is, they reduce the effect of mankind's activities."

"In the fourth assessment report (The Physical Science Basis, 2007, Table SPM.3), the range of predicted temperature increases is 0.11 to 0.64 degrees Celsius per decade; in the fifth assessment report (2013, p. 11-52), the range is 0.10 to 0.23 degrees C per decade."

"With respect to the effects of greenhouse gas concentrations, the evidence suggests that increases in extreme weather events have not happened despite the predictions of many. The past two years have set a record for the fewest tornadoes ever in a similar period, and there has been no trend in the frequency of strong (F3 to F5) tornadoes in the United States since 1950. The number of wildfires is in a long-term decline. It has been eight years since a Category 3 or higher hurricane landed on a U.S. coast; that long a period devoid of an intense hurricane landfall has not been observed since 1900. The 2013 Atlantic hurricane season was the least active in 40 years, with zero major hurricanes. There has been no trend in the frequency or intensity of tropical cyclones, and global cyclone activity and energy are near their lowest levels since reliable measurements began by satellite in the 1970s."

"The worst of these potential extreme events is the possible disappearance of the summer Arctic ice, an outcome that IPCC now views only as "likely" with "medium confidence," only under an extreme scenario called "RCP8.5," and one inconsistent with the recent satellite evidence. "Extreme" may be in the eye of the beholder; but IPCC displays little confidence in the inevitability of such events."

"What would the effect of an enforced global emissions agreement be, using an IPCC climate model? One such model is the MAGICC/SCENGEN climate simulator developed at the National Center for Atmospheric Research. An obvious scenario, however unlikely, is adoption of policies similar to those of the Obama administration by the rest of the world, including China and India.

Let us adopt the IPCC temperature sensitivity assumption: a 3.0 degree warming by 2100 attendant upon a doubling of greenhouse gas concentrations from pre-industrial levels. If the entire world were to reduce greenhouse gas emissions by 17 percent below 2005 levels by 2020 — the Obama policy — the predicted temperature reduction would be about 0.04 degrees C by 2050, and 0.15 degrees C by 2100. (Note that the standard deviation of the surface temperature record is about 0.11 degrees C.) What costs would be justified in pursuit of such outcomes?"

Unintended Consequences of De-Insuring Insurance: Making HIV Drugs Very Expensive To Price For Risk

From David Henderson of EconLog.

"Kevin Drum alerts us to some unintended consequences of a law that he advocates.

Over at Mother Jones, Kevin Drum has noticed that some health insurers are charging a huge co-insurance rate for HIV drugs. He writes:

If all your HIV drugs are expensive, then people with HIV will look for another plan. Technically, you're not discriminating against anyone with a pre-existing condition, but you're sure giving them a reason to shop around someplace else, aren't you? 

At the moment, this practice appears to be confined to just a few insurers and a few classes of drugs. But if it catches on, it will prompt everyone to follow suit. After all, you can hardly afford to be the insurance company of choice for chronically sick people, can you? This is worth keeping an eye on.

Under ObamaCare, health insurers are no longer allowed to price for risk. (The one major exception is that insurance premiums for the elderly can be as much as 3 times as high as premiums for the young.) In other words, ObamaCare has taken the insurance out of health insurance. This is a set-up for what economists call "adverse selection." (I have written about adverse selection here, here, and here. Bryan Caplan has written about it here.) The standard way to avoid adverse selection is to price for risk. People with pre-existing conditions tend to be higher risk. So the obvious way to avoid adverse selection is to price higher to people with pre-existing conditions. This is no different, in principle, from charging higher auto insurance premiums to single young men than to middle-aged married women or charging higher life insurance premiums to men than to women.

So, if an insurance company is to do well, it will look for ways to come as close as possible to charging for risk. One way is to charge high co-insurance rates for HIV drugs. This isn't as good a method as charging directly for risk because the insurance company doesn't want to dissuade people who are low-risk for HIV but who want to be insured for it. The best the insurance company can do is lump those who already have HIV together with those who don't but who might get it. That's one of the problems with the ObamaCare law.

Kevin Drum nails it with his second-last statement quoted above:

After all, you can hardly afford to be the insurance company of choice for chronically sick people, can you?

Exactly. Which is why we should expect to see more of the practice that Kevin Drum decries. But I predict that none of this will cause Kevin Drum to reconsider his pre-existing view that pricing for pre-existing conditions should be illegal."

Climate Science Is Not Settled

We are very far from the knowledge needed to make good climate policy, writes leading scientist Steven E. Koonin

From the WSJ. Excerpts: 

"The crucial scientific question for policy isn't whether the climate is changing. That is a settled matter: The climate has always changed and always will."

"during the 20th century the Earth's global average surface temperature rose 1.4 degrees Fahrenheit."

"There is little doubt in the scientific community that continually growing amounts of greenhouse gases in the atmosphere, due largely to carbon-dioxide emissions from the conventional use of fossil fuels, are influencing the climate."

"The impact today of human activity appears to be comparable to the intrinsic, natural variability of the climate system itself.

Rather, the crucial, unsettled scientific question for policy is, "How will the climate change over the next century under both natural and human influences?"

"those questions are the hardest ones to answer."

"human additions to carbon dioxide in the atmosphere by the middle of the 21st century are expected to directly shift the atmosphere's natural greenhouse effect by only 1% to 2%."

"A second challenge to "knowing" future climate is today's poor understanding of the oceans."

"precise, comprehensive observations of the oceans are available only for the past few decades"

"A third fundamental challenge arises from feedbacks that can dramatically amplify or mute the climate's response to human and natural influences."

"feedbacks are uncertain. They depend on the details of processes such as evaporation and the flow of radiation through clouds. They cannot be determined confidently from the basic laws of physics and chemistry, so they must be verified by precise, detailed observations that are, in many cases, not yet available."

"computer models: While some parts of the models rely on well-tested physical laws, other parts involve technically informed estimation."

"In a given model, dozens of such assumptions must be adjusted ("tuned," in the jargon of modelers) to reproduce both current observations and imperfectly known historical records."

"as far as the computer models go, there isn't a useful consensus at the level of detail relevant to assessing human influences."

"Although most of these models are tuned to reproduce the gross features of the Earth's climate, the marked differences in their details and projections reflect all of the limitations that I have described."

"The models differ in their descriptions of the past century's global average surface temperature by more than three times the entire warming recorded during that time."

"Although the Earth's average surface temperature rose sharply by 0.9 degree Fahrenheit during the last quarter of the 20th century, it has increased much more slowly for the past 16 years, even as the human contribution to atmospheric carbon dioxide has risen by some 25%."

"the models famously fail to capture this slowing in the temperature rise."

"they fail to describe the comparable growth of Antarctic sea ice, which is now at a record high."

"the models do not account for the fact that the rate of global sea-level rise 70 years ago was as large as what we observe today"

"Today's best estimate of the sensitivity (between 2.7 degrees Fahrenheit and 8.1 degrees Fahrenheit) is no different, and no more certain, than it was 30 years ago. And this is despite an heroic research effort costing billions of dollars."

"They are not "minor" issues to be "cleaned up" by further research."

"a public official reading only the IPCC's "Summary for Policy Makers" would gain little sense of the extent or implications of these deficiencies."

"the field is not yet mature enough to usefully answer the difficult and important questions being asked of it."

"rigidly promulgating the idea that climate science is "settled" (or is a "hoax") demeans and chills the scientific enterprise, retarding its progress in these important matters."

"Individuals and countries can legitimately disagree about these matters"

Don Boudreaux vs. Joseph Stiglitz On The Minimum Wage

From Cafe Hayek.

"Here’s a letter to the Financial Times:

Joseph Stiglitz concludes that raising the minimum wage in the U.S. will increase American workers’ bargaining power (“Pay pressure,” Sept. 19).  Mr Stiglitz reaches this conclusion by arguing that American workers’ pay is now kept low in part by “asymmetric globalization” - a phenomenon mentioned but not defined in your pages, but which Mr Stiglitz suggested last year in the New York Times involves the ability of “mobile capital” to demand “that workers make wage concessions.”

Mr Stiglitz’s argument for raising the minimum wage is flawed.

The high global mobility of today’s capital that he fingers as a culprit causing stagnant wages will not in the least be reduced by a hike in the minimum wage.  Instead, such a hike will only cause capital to more intently use this mobility to leave America in search of more foreign workers - workers who would be made even more attractive to mobile capital if Uncle Sam follows Mr Stiglitz’s advice to raise the minimum wage that must be paid to American workers.

In short, by the logic of Mr Stiglitz’s own premises, a higher minimum wage in the U.S. would weaken rather than strengthen American workers’ bargaining power.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Stiglitz’s argument is not only wrong; it is mysteriously, flagrantly illogical.  Ah well.  A much-better analysis is offered, in the same Financial Times article, by Deirdre McCloskey, who observes that

[t]o suppose that restricting free exchange makes the poor or the median better off is magical thinking.

Magical thinking indeed."

Obamacare Enrollees Are Paying Premiums. We Think.

From Megan McArdle.

"We know that 8 million people have enrolled in Obamacare. But how many of them have actually paid their premiums? The Barack Obama administration has been curiously silent on this point. By now, it must have the data, but for some reason, it chose not to issue it.

Until now. Apparently, Marilyn Tavenner, the head of the Centers for Medicare & Medicaid Services, just told Congress that 7.3 million people have paid premiums and are currently enrolled in exchange policies. What does that mean?

It’s a little hard to tell, because according to Jason Millman of the Washington Post, she also says that this is a “snapshot” of Aug. 15, not a cumulative figure. Why does that matter? Because there’s a 90-day grace period between missing a premium payment and getting dropped from your insurance. The administration says that this figure only includes people who have “paid their premiums." But what does that mean? That they paid a premium at least once? Or that they are current on their premium payments?
Remember that out of 8 million total enrollments, almost 4 million people signed up in March and early April, most of them in those last few weeks (about 910,000 just in April). Those people didn’t have their premiums due until May, or June 1. So someone who paid a single premium in May or June and then stopped paying would still be in the grace period, and they would technically still be covered by an exchange policy, pending payment. For that matter, if you started coverage in January and stopped paying six months later, you would still show up as enrolled in Tavenner’s figure.

How much does this matter? It depends on the relative attrition rate: How many people stopped paying, and how many people never paid at all? If the latter accounts for almost all the attrition, then we can expect that 7.3 million is pretty close to the final figure for paid enrollment in 2014; I wouldn’t expect it to fall much below 7 million,¹ and it might be well over that figure. If the “stopped paying” group is substantial, then we can expect this number to grow substantially as policies written during the late-enrollment surge lapse.

All of which points to the need for better data on what’s happening with the exchanges. The administration mysteriously stopped issuing enrollment reports as soon as open enrollment closed, leaving us to guess what’s happening from insurer statements and partial data like this.

Frankly, I’m kind of surprised that this is the first time we’ve heard those numbers. They’re pretty good. Oh, sure, they’re not as good as the optimists hoped, but it’s on the low end of estimates from industry expert Bob Laszewski, and certainly a lot better than the numbers we’ve been hearing from insurers. I expected them to be a lot worse, based somewhat on the insurer statements, but also because I figured the administration would have released them if they weren’t really awful. Obviously, the administration would prefer to tout the 8 million enrollment figure, but it has still exceeded the enrollment projected by the Congressional Budget Office for 2014. Why not stand proud?

One thing to note is what this means for the future: The administration needs to nearly double this enrollment in order to reach the CBO’s projection of 13 million exchange policies in 2015. How easy will that be?

I’m afraid I fall back on a standard answer when I write these columns: There’s no way to know. Open enrollment will be much shorter this year, November to February, and won’t be accompanied by the same sort of publicity blitz. It may get good word-of-mouth publicity, as people encourage friends and relatives to sign up. But you also won’t have the same kind of pent-up demand. So we’ll just have to see. Hopefully, by then, the administration will be able to offer us more complete data to work with.

¹ These numbers will evolve a bit in the next few months; more than 100,000 people stand to lose policies because they haven’t provided documentation of their immigration status, and almost 300,000 more are slated to have their subsidies reduced. Some of those will probably decide to shed their policies when premiums go up."

Should We Credit Global Warming When Disasters Don’t Happen?

By Paul C. "Chip" Knappenberger of Cato.

"Every time there is some sort of weather disaster somewhere, someone blames it on human-caused global warming. Maybe not directly, but the implication is clear. “While we can’t link individual events to global warming, the increase of this type of event is consistent with our expectations, blah, blah…”

Most recently this came in testimony from White House Science Adviser John Holdren before the Committee on Science, Space, and Technology of the U.S. House of Representatives:

In general, one cannot say with confidence that an individual extreme weather event (or weather-related event)—for example, a heat wave, drought, flood, powerful storm, or large wildfire—was caused by global climate change. Such events usually result from the convergence of multiple factors, and these kinds of events occurred with some frequency before the onset of the discernible, largely human-caused changes in global climate in the late 20th and early 21st centuries. But there is much evidence demonstrating that extreme weather events of many kinds are beginning to be influenced—in magnitude or frequency—by changes in climate.

Holdren then goes to list a bunch of types of extreme weather whose characteristics have changed (remarkably, all becoming worse), adding that:

There are good scientific explanations, moreover, supported by measurements, of the mechanisms by which the overall changes in climate resulting from the human-caused build-up of heat-trapping substances are leading to the observed changes in weather-related extremes.

Holdren’s implication is pretty clear—human-caused global warming is leading to changes in extreme weather. And just for good measure, he added this zinger:

[I]t is reasonable to say that most weather in most places is being influenced in modest to significant ways by the changes in climate that have occurred as a result of human activities.

If this were the case, then there is a lot of good news to be found here, for by and large the weather is pretty good, with rare examples to the contrary.

Take, for instance, what has been all abuzz this week in Washington, D.C.: how great the weather has been. The Washington Post’s Capital Weather Gang, which keeps close tabs on the pulse of D.C. weather, has commented repeatedly on how remarkable and enjoyable it has been. According to Holdren’s logic, we have global warming to thank, and yet I have not seen one news story that links the pleasant weather to human-caused climate change.

Across the country in Tucson, Ariz. (where I reside), the news this week has been dominated by the threat of the passage of the remnants of Hurricane Odile, which were forecast to move into the region from out of the Gulf of California. The predictions were for record-breaking rainfall amounts with the potential for widespread damage from flooding. The outlook stirred up memories of the passage of Tropical Storm Octave in 1983, which resulted in over $500 million (in 1983 dollars) of damage to the region. Thankfully, this did not come to pass. Instead, the heavy rains associated with Odile passed well east of the city, over much more sparsely populated country. Since apparently all weather is influenced by anthropogenic global warming, we have it to thank for averting what could have been a very costly and hugely disruptive situation affecting upwards of a million people.

And speaking of hurricanes, the first major hurricane (category 3 or greater) in almost two years formed in the Atlantic Ocean. But, in encountering conditions arguably consistent with human-caused climate change, Hurricane Edouard quickly weakened and remained far out in the open Atlantic, steering well clear of the U.S. mainland. Major disaster averted. It has now been nearly nine years since the last major hurricane made landfall in the United States, the longest such occurrence going back at least to the year 1900. Thanks, global warming!

I could go on, because there are a lot more cases of non-extreme weather than there are of extreme weather, and as many or more cases to be made for weather catastrophes averted by conditions “consistent with global warming” than caused by it.

So if you want to play the all-weather-is-influenced-by-global-warming game, you are going to lose.
Best bet would be to stick with the science, which for most types of extreme weather events and for most places indicates that a definitive link between event characteristics and human-caused climate change has not been established. Either talk about that situation or leave the attribution issue alone."

What's wrong with Hong Kong? (Too much government)

From Scott Sumner of EconLog.

"You often read very thoughtful progressives explain why the government sector in the US is too small. You'd think 40% of GDP would be enough, but they insist we have "unmet needs" for a single-payer health care system (18% of GDP), universal preschool, etc. We should be spending something closer to 50% to 55%, like France or the Nordic countries.

If you ever find yourself starting to be persuaded I suggest you visit Hong Kong. I just got back from a trip to Hong Kong (previously I had visited in 1991 and 1999), and marveled at the world class infrastructure. Others seem to have been similarly impressed, as a recent study ranked Hong Kong's infrastructure number one in the world. This in an economy where government spending is 18.5% of GDP, vs. 41.6% in the US.

I don't know how good their schools and health care are, but their life expectancy is third highest in the world (trailing Japan and Singapore) despite bad air pollution. And they score very well on international education rankings.

Hong Kong does have its share of problems. I've mentioned air pollution--although in fairness a lot of that is beyond the government's control--drifting down from the heavily industrialized Pearl River Delta. They also have a lot of income inequality. I'd say that's partly offset by two factors. Many of the poor are immigrants from much poorer countries, who come to HK to do jobs like housekeeping. And all classes in Hong Kong are vastly better off than a few decades ago.

Hong Kong's per capita GDP (PPP) is now about the same as the US. The appearance of the city is a real hodgepodge, with older buildings in Kowloon looking awful, unless you have nostalgia for the HK of films like Chungking Express and In the Mood For Love. (And what movie buff doesn't?) But those old concrete tenements are rapidly being replaced by glitzy new buildings. There's a big hole in the ground where they're building a new high-speed rail station. Imagine getting on the train in tropical HK, and getting off the train in wintry Beijing, the very same day.

What impresses me the most is not so much the current position of Hong Kong, but rather it's trajectory. Unlike the US and Europe, it is still seeing rapid improvement. The fact that an economy can do so well with the government spending only 18.5% of GDP makes me even more skeptical of the progressives' call for a bigger welfare state in the US. If we are spending 41% of GDP, then the problems here are not due to any lack of resources for the government.

Now let's consider what is universally viewed as Hong Kong's greatest failing---housing. It's very expensive, and even middle class people live in very small apartments in high-rise towers. Now consider that real estate is the one sector where Hong Kong's government is heavily involved in the economy. They own most of the land, and sell only very limited amounts of land for new construction. Many people in otherwise laissez-faire Hong Kong live in public housing projects. So it appears that the biggest problem in relatively libertarian Hong Kong is too much government. More specifically, too much government involvement in housing. They should privatize both the land and the public housing projects. Here's an interesting article by Richard Wong of the University of Hong Kong:

The value of Hong Kong's housing capital last year was estimated at HK$6.8 trillion, or 320 per cent of gross domestic product. This is the net value of private residential housing at market prices, based on gross market value minus the value of outstanding mortgage loans. Total loans were a modest HK$900 billion - a mere 11.8 per cent of the gross market value. 

French economist Thomas Piketty, in his book Capital in the Twenty-First Century, obtained similar figures internationally. . . .

In Hong Kong, private residential housing only accommodates about half the population. The other half is in government-provided public rental housing and subsidised ownership homes, mainly tenant purchase scheme and homeownership scheme flats.

The market value of government-provided housing is very substantial, but because there are extremely severe restrictions limiting their use either as rental property or as assets for sale on the open market, their values are highly discounted. They simply provide shelter for the original occupants. As such, they are marginal to the market economy and measured GDP.
Privatisation of public rental units and deregulation of sale restrictions for ownership units, on the other hand, would substantially enhance the market value of government housing. What would be their market value if such steps were taken?

Based on the open market transaction prices of HOS and TPS flats, the gross market value of public rental housing units is estimated at HK$2.45 trillion, TPS homes at HK$410 billion, and HOS flats at HK$1.56 trillion. The total value of government subsidised housing is therefore HK$4.42 trillion, or 208 per cent of GDP.

What will be the economic gain to society from the privatising of public rental housing and waiving or substantially lowering of unpaid land premiums on all government-subsidised housing units? The value of private and public housing stock would easily amount to HK$11.24 trillion, or 528 per cent of GDP.

To put this percentage into perspective, consider Piketty's estimates of the value of all forms of capital (and not just housing capital) as a percentage of GDP. He found this to be 617 per cent in France, 543 per cent in Britain, 418 per cent in Germany, 417 per cent in Canada, and 456 per cent in the US.

Hong Kong could be a very capital-rich city if only government housing units were privatised and deregulated, which would put an additional HK$3.36 trillion housing value in the market.

First, half the population would be happier because the gap between the rich and the poor would be sharply reduced in one fell swoop.

Second, the pressure on government to finance rising health care costs, old-age social welfare payments, education spending, and even housing investment would be indirectly alleviated, as many underutilised public housing units would become unlocked and return to market circulation.

Third, new economic activity at the grass-roots level could be spawned. Mortgaging parents' homes is often a key way to raise capital among those without credit rating.

Fourth, mortgaging parents' homes would also provide an important source of upward intergenerational mobility, both in providing human capital investments to children and making down payments for their home purchases.

Fifth, these benefits would come at no one's expense. The government would not even need to raise taxes.

PS. Whenever I do these posts people complain that Hong Kong is not a typical country. It's a single city, with only 7.3 million people. That's true, but of course there are many European economies with similar populations, and in most modern economies only about 3% of the population is farmers. You could argue that at least in terms of demographics Hong Kong and Sweden are more alike than either place is like the US, which has a much larger and more ethnically diverse population. I don't claim that Hong Kong proves that small government can work everywhere, but it certainly demonstrates that it can work somewhere."

Uncle Sam’s ‘War on Poverty’: A Snapshot History

From Cafe Hayek.

"Look at the graph below (which I get from this Heritage Foundation page).  (To enlarge this graph, just click on it.)  You tell me if the revving-up of Uncle Sam’s welfare-state activities in the mid-1960s can be considered, by any scientific criterion, to have been clearly successful at reducing officially measured rates of poverty in the U.S."

Wages and the Free Market, Part 1: Dispelling labor market myths with theory and data

From economics professor SANDY IKEDA of Foundation for Economic Education.

"If you have a superficial understanding of modern economics, the following argument sounds plausible: In the free market, employers have an incentive to lower costs by driving wages down, which is bad for workers. Since driving down wages is what efficiency requires, it follows that efficiency is bad for workers.

The argument dates back at least to Karl Marx. It’s wrong but it continues to have appeal because, like many of Marx’s arguments, it contains a half truth: Given the choice between paying a worker $12 or $11 an hour, other things equal, an employer would usually rather pay $11. I think it’s a useful exercise to think through why it’s wrong.

Problem No. 1

One of the things the argument doesn’t address is why or even whether a person would accept $11 an hour to work. We need to ask what a worker would be giving up by accepting $11. If the something else is more valuable to her than $11 an hour, then she won’t accept that wage. What could that something else be?

Well, it could be that her leisure is worth more to her than $11. Or perhaps another employer is willing to pay her more than $11. Let’s focus on the latter.

Just as there is competition among sellers of a product—say, cellphones—to underbid one another and among buyers to outbid one another, there is competition in the labor market among workers (on the supply side) to underbid one another to be hired and among employers (on the demand side) to outbid one another to hire workers. And, as in the cellphone market, in the labor market sometimes it’s a buyer's (hirer's) market and sometimes it’s a seller's (worker's) market. So the question is whether there are forces in a free market that would persistently create a hirer's market in labor.

Here’s where the argument against free markets sometimes gets more sophisticated.

But isn’t efficiency still bad for workers?

That argument says that if efficiency enables firms to use less labor and other production inputs, workers let go by one firm because of increased efficiency must try to find employment elsewhere. But if all firms in the economy are becoming more efficient and letting workers go, where are those other jobs going to be? So because efficiency is always increasing the supply of labor, wages will just keep falling.

Let’s address this argument in two parts.

First, note that the competition in the cellphone market that is making firms more efficient is also making them lower the price of their cellphones ever closer to the lower costs of production. That means people who buy cellphones—including cellphone workers—don’t have to spend as much of their incomes to buy cellphones. It’s the same for the other things they want to buy. In other words, it’s important to distinguish wages denominated in terms of money (nominal wages) from the goods and services those wages will actually buy (real wages). Other things equal, lower prices for consumer goods will increase real wages.

Second, note that the argument assumes that the demand for labor is not rising. But if the demand for labor is rising while the supply is also rising, nominal wages won’t be affected as strongly. In fact, if the demand for labor rises faster than the supply, real wages will actually rise even if the average prices of consumer goods stay the same. And if average consumer goods prices are actually falling, so that you can buy more with a dollar than before, then real wages would rise even faster.

Why would the demand for labor rise?

There are different reasons why the demand for labor would rise, but for now I’ll focus on gains in productivity. By productivity I mean how much the output of a business will increase when you add another worker to it. Say I’m currently hiring 20 people in my carwash who can together wash 400 cars a day. If by hiring one more person I can increase that output by 20 cars to 420 cars a day, and if I can charge $10 per wash, then that worker would bring in an additional $200 a day (20 x $10). While I might gladly pay that person nothing for working in my carwash, competition from other potential employers for her labor could push me to pay her as much as $200 a day, which is the revenue her labor brings to my business.

Now, I might invest in some new capital equipment at a cost of $1,000 a day, but only if the dollar increase in my workers’ productivity were greater than the cost. Suppose the new equipment increases the output of my original 20 workers from 400 to 600 cars a day, an increase of 200 cars. Let’s say I lower my price to $8 to bring in more cars. So at $8 per wash, my revenues would rise by $1,600 a day (200 x $8). That increase would certainly justify my investment in new capital. But I’ve also increased the average productivity of my workers by 50 percent, from 20 to 30 cars a day.

It’s certainly possible that instead of 200 more I might only be able to sell 140 more carwashes a day, even after lowering my price to $8. In that case, it’s still worthwhile to invest in new capital although I might indeed have to lay off two people. But note that I’m buying more equipment for my carwash. That increased production in the capital market means more money available for hiring those people I laid off, along with others who may have been laid off owing to efficiency gains elsewhere.

Overall, if the productivity and thus the average real wage of people in the rest of the economy is also increasing, via investment in capital, then workers in other markets, such as cellphones, can now afford more carwashes than before because nominal prices for carwashes (and cellphones, houses, education, and so on) are falling.

What the data show

The historical trend in per-capita real income since the year 1800 has been unambiguous. Per-capita real income around the world has been rising at an accelerating rate, which coincides with the spread of and respect for free-market ideas and practices. Deirdre McCloskey refers to this phenomenon as the “hockey stick” of economic growth.

Imagine a hockey stick lying on its side. For millennia, per-capita real income had been low and stagnant, about $1 to $3 a day for the vast majority of people everywhere. That’s the long handle of the stick. Suddenly, around the year 1800, there was an unprecedented increase in growth—up to a factor of 50 in some parts of the world—with no decrease, “except in places with the misfortune of tyrants on the model of Robert Mugabe in Zimbabwe, or entirely uncontrolled robbers or pirates as in Somalia.”

Now, some economists have argued that “conventional methods of analysis” show that real wages in developed countries such as the United States have been stagnant or falling since the 1970s, even as productivity has increased. The process is known as “decoupling.”

But economists Donald Boudreaux and Liya Palagashvili counter that “conventional methods” tend to exclude substantial fringe benefits and use inconsistent methods of accounting for inflation, both of which understate the growth of real wages. They also point out that conventional studies overlook the deadening effects of government policies and regulations on economic development.

So we’ve seen that lower prices of cellphones and carwashes will tend to increase sales of those products and increase real wages, and that rising demand for capital equipment can productively employ more people in those markets. So the question remains: What happens to those who are laid off and still can’t find a job?

The answer relates to something even more important than efficiency: Innovation. It’s the topic of my next column."

Fixing Climate Change Will Never Be Free

From Megan McArdle.

"Is fixing climate change free? That’s the suggestion of an international blue-ribbon panel in a new report, which has been enthusiastically embraced by people who would like to fix climate change. “This may sound too good to be true, but it isn’t," Paul Krugman says. "These are serious, careful analyses.”

I hate to be the person to pour cold water on this, but I happen to have this bucket right here …

The details are a bit fuzzy so far (the report promises more in a forthcoming technical appendix). But most of the benefit seems to come from reducing respiratory diseases in the developing world and ending fossil-fuel subsidies, which are, no matter what you may have heard on the Internet, also concentrated in the developing world, not the U.S. tax code.

Essentially, if developing countries stop selling artificially cheap gas, replace their coal plants with a combination of nuclear, solar and wind power, and get people to use gas or electricity for cooking and heating instead of wood, dung or coal, we can go a long way toward reducing total greenhouse-gas emissions. Further benefits come from building more compact cities (they’re looking at you, America) and better conservation of rural land.

These things may be splendid ideas. But as the New York Times suggests, it may be a bit optimistic to think that they will actually leave us with more cash in our hands. And getting the developing world to go along may be a bit tricky.

For example, I am sure that China would be a much healthier nation if it used more clean renewable energy instead of dirty coal plants. I can even believe that switching to clean renewable energy would generate enough savings in the future to cover the cost of the fix. Still, I have some questions.

The first, most obvious question: How much money would the Chinese would save on medical bills by switching to renewable power, compared with, say, installing stack scrubbers and other fixes to clean up particulate emissions from the plants they have? The second, perhaps less obvious, question: How far in the future will those benefits arrive -- in five years? Or are we saying that China should stop building coal plants now, build more expensive nuclear plants while hoping that solar and wind come to cost parity, and thus deliver to their grandchildren a cleaner country and a better budget picture?

Intertemporal comparisons of this sort get really tricky in a developing country. Poverty has an urgency that overrides other considerations, which is why so many people have migrated from pristine countryside to squalid city. This sort of cost benefit is relatively easy in America -- but it’s also not money-saving, because we already made war on our particulate emissions.

There are also political considerations. It’s easy to say that poor countries should get rid of their fuel subsidies -- I mean, there, I just said it, and it’s absolutely true, they should! On the other hand, I am not attempting to hold onto power in a country that has built all of its economic activity around absurdly cheap oil.¹ The transition costs away from fuel subsidies are high, and they are difficult to make in an economy where lots of people are subsisting close to the poverty line.

Noneconomic costs are always hard to factor into these sorts of calculations. But they need to be brought up, because they will factor heavily in any analysis of the political feasibility of your proposal. For example, they point out that Atlantans could save a lot of money on transportation if their city had the petite footprint of Barcelona. But said Atlantans would have to live in tiny apartments rather than large single-family homes with yards. They might not like that. Especially because the mini-Atlanta would have much less charm than Barcelona, its residents having lacked the foresight to build their city on a lovely beach in a long-declining European power.

This is not to say that the report is wrong. But many of the people who read it seem to have come away saying, “OK, great, it’s free, why can’t we do it?” Even if this is a free lunch over the long term, it is not a free lunch right now to the people who would need to make major changes in their lives. No matter how long you point to the equations, they will resist.

I’m a pessimist on the prospect of collective action on climate change, but I’m a mild optimist on the technological frontier, because human beings are endlessly creative, and so far, they’ve ultimately done what they needed to, though they might kick and scream along the way. I think that some combination of nuclear, solar and wind, plus adaptation and maybe geoengineering, are going to keep climate change from being catastrophic. But I doubt it will be free, and I’m quite sure it won’t feel that way to many of the people who are affected by whatever changes we do end up making.

¹ I know you think that America’s price is absurdly low, because negative externalities. But we’re not in the same class as Venezuela, which has long kept gasoline practically free."

Is Every 18 Year Old High School Graduate Worth $30,000 A Year?

If we made the minimum wage $15 per hour, that works out to about $30,000 a year. Is every 18 year old high school graduate capable of generating $15 per hour in revenue on any job they might get? My guess is that many of them are not and will not get a job when they graduate. So when will they get a job? Who knows. Maybe they will never get their first job and will never enter the world of work.

In fact, the WSJ recently reported that many college graduates barely make what a high school graduate makes:

"The median wage of an American with a bachelor's degree was $48,000 last year, far higher than the $25,052 earned by those with only a high-school diploma. But the lowest-earning quarter of college graduates make $27,000 or less."

So if many college grads cannot make $30,000 per year, how is it possible that each and every high school grad will? They probably can't

Ending slavery made America richer

From Scot Sumner of EconLog.

"Matt Yglesias has a good post that goes right at the "smiley-face" view of early US history--that we were a great country save for the regrettable aberration of slavery. He doesn't pull any punches:

Specifically, white Americans conquered a vast new empire (Alabama, Mississippi, Florida, Arkansas, Louisiana, Missouri, and Texas), populated it with millions of slaves forcibly transported from the Atlantic coast, and developed innovative new torture-based management techniques to enhance the productivity of this coerced labor.

Thus I regret to say that the title of the post sends the wrong message:

American prosperity was built on slavery and torture

In fact, countries with free labor tend to be more prosperous. Indeed Yglesias's post contains a graph (from Thomas Piketty's book) that undercuts the message in the title:

 

At first glance it doesn't look like there was much change in the capital stock between 1850 and 1880. But that's very deceptive, as Piketty classifies (or should I say mis-classifies) slaves as "capital." It's true that they were legally considered capital, but in a functional sense they were obviously labor. Slaves don't stop being people just because the government treats them like animals.

Between 1850 and 1880 the market value of slaves falls by just over 100% of GDP. And that decrease is almost precisely offset by a slightly more than 100% increase in capital (industrial and housing.) The total capital stock declines slightly in the Piketty graph, but that's only because of a fall in the value of agricultural land, not capital.

Now here's where mislabeling slaves as capital comes into the equation. At first glance it looks like America's capital stock was unaffected by the abolition of slavery. But the actual capital stock rose by over 100% of GDP---an industrial revolution. If you insist on treating slaves as "capital" it doesn't change the basic story. Because in that case a separate ledger of "labor resources" would have soared after 1865. Former slaves would now be classified as "labor," and hence the labor stock would rise dramatically, even on a per capita basis. Either way, abolishing slavery made America a much more productive, and hence richer country.

Now let me anticipate the "yes buts." Some Americans were made worse off. Obviously slave-owners, and less obviously those who were closely connected to the slave economy (bankers who financed them, cotton mills, etc.) But as Fogel showed (in a study of railroads), when thinking about any economy we tend to mentally overrate the importance of any one sector, especially big sectors. So despite the very real losses to a sizable group of Americans, the economy overall did much better as a result of the abolition of slavery.

Do we know that this was because of the abolition of slavery? There are very few certainties in economics, but consider:

1. Brazil didn't abolish slavery until the 1880s, and did worse than America. It also did worse than countries to the south of Brazil.
2. When the American South abolished Jim Crow, incomes in that region began to converge on those in the North. Indeed even southern whites began to catch up, especially when adjusting for cost of living differences. Freedom increases productivity.
3. Most of the rich countries around the world were places with free labor in the 19th century. Places that had slavery tend to be much poorer.
4. Superficially the South seemed "richer," but only if you don't count slaves. But why not count them? The North was far more dynamic, industrializing rapidly and drawing more immigrants from Europe. Why didn't more whites from Europe move to the South?
5. Countries are richer when workers have more rights---compare North and South Korea.
America still has a long way to go. Blacks (and whites) are legally barred from many professions by occupational licensing laws. It's also worth pointing out that Yglesias is one of the few progressives that frequently criticizes those laws.

America is much freer than it used to be, but there is more work to be done."

Robert Reich makes 36% more than average CEO and gets $40k for a one-hour talk vs. average worker pay of $46k/year

From Mark Perry.

"

Former Labor Secretary Robert Reich is currently a professor of public policy at the University of California-Berkeley and he was paid $242,613 in 2013 according to this University of California database. According to this link provided in an article by the Daily Caller, Professor Reich is scheduled to teach only one undergraduate class this fall semester – Public Policy 260 – that meets only one day a week (Monday) for two hours (12 – 2 p.m.). That works out to about $2,500 for each hour of lecture time that Professor Reich will spend with UC-Berkeley students this semester, or about the same amount as the average adjunct college professor gets paid for teaching an entire one-semester 15-week class ($2,700 according to this AAUP report)!

As the Daily Caller reported yesterday, Professor Reich took time off from his hectic one-course, two-hour a week teaching schedule to berate and excoriate American CEOs and Harvard Business School in a post on the Harvard Business Review blog for allowing “a pay gap between CEOs and ordinary workers that’s gone from 20-to-1 fifty years ago to almost 300-to-1 today.”

As I reported earlier this year on CD in a post about the never-ending claims of “excessive CEO pay” and the alleged 300-to-1 pay gap between CEOs and ordinary workers (modified and updated slightly):

We can get a more accurate and complete picture of CEO compensation in the US by looking at wage data released recently by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2013. The BLS report provides “employment and wage estimates by area and by industry for wage and salary workers in 22 major occupational groups, 94 minor occupational groups, 458 broad occupations, and 821 detailed occupations,” including the occupational category “chief executives.” In 2013, the BLS reports that the average pay for America’s 248,760 chief executives was only $178,400. The multi-million dollar salaries of the CEOs of the 200-350 S&P500 firms reported recently represent only one out of about every 1,000 firms in the country (or 1/10 of 1%) that have a CEO at the head. The larger sample of almost a quarter-million CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”

For the larger sample of CEOs reported by the BLS, their average pay of $178,400 last year was an increase of only 0.88% from the average CEO pay of $176,840 in 2012. In contrast, the BLS reports that the average pay of all workers increased by 1.42% last year to $46,440 from $45,790 in 2012. That’s right, the average worker last year saw an increase in their pay that was more than 60% greater than the increase in pay for the average US CEO. And the “CEO-to-worker pay ratio” for the average CEO compared to the average worker is only about 5-to-1, nowhere close to the pay ratio of 331-to-1 ratio reported by the AFL-CIO using the 350 highest-paid CEOs in the country or the 300-to-1 ratio that Robert Reich claims.

So at the same time that Reich complains about the excessive compensation of a small group of a few hundred highly paid CEOs, he actually makes 36% more than the average CEO in the US for lecturing a few hours a week (see chart above). Even considering additional work preparing lectures and grading papers or exams, it’s probably safe to assume that Professor Reich is putting in 50-60 hours per week like the majority of America’s CEOs for his very generous pay of more than a quarter-of-a-million dollars per year.

In addition to his annual CU-Berkeley salary of $242,613, Professor Reich is also a popular speaker on the nation’s lecture circuit, and he commands a handsome speaking fee of $40,000 for a one-hour talk (including Q&A) plus first class travel for one or two people from California, hotel accommodations for up to two nights, ground transportation, meals and incidentals. That’s the quote I got today from one of Professor Reich’s speaking bureaus for his fee to give a presentation as part of a “university program” — it’s possible that he charges even more for corporate events. So we have the former labor secretary complaining about a pay gap between CEOs and average workers, when he gets almost as much in compensation for a one-hour talk as the average American worker earns working full-time for an entire year (see chart above)! If he gives only six speeches a year, his annual income approaches half-a-million dollars a year, putting him solidly in America’s “top 1%” by income – a group the “class warrior” frequently criticizes (see examples here and here). .

As I said in a previous post, I think it’s actually great that Robert Reich gets a market-based fee for his speeches, and I applaud him for commanding $40,000 per one-hour speech that allows him to enjoy a very comfortable life in the “top 1%.” But it then seems deeply hypocritical when he complains that airlines are “deeply exploitative” when they use market-based, surge pricing (see post at the link above) or when he complains that the pay for several hundred CEOs relative to the average worker’s pay is excessive. In all cases – Robert Reich’s $242,613 UC-Berkeley salary, his $40,000 speaking fees, CEO pay, airline pricing, and the average worker pay – those salaries, prices and fees are not determined independent of the market, but in each case primarily determined by market forces. Therefore, it seems deeply inconsistent for Reich to complain about the market forces that determine CEO pay, airline surge pricing and average worker pay, but then take advantage of those same market forces to earn a $242,613 salary for teaching one class per semester and charge $40,000 for a one-hour talk and enjoy life in the “top 1%.” And in any discussion of CEO pay we should remember that the average CEO in America earned only $176,400 last year (not multi-millions of dollars), received an increase in salary less than the average worker, and earned only about 5 times more than the average worker (not 300X more).

HT: Steve Bartin, see his post today about Robert Reich here."