In an environment of poverty and corruption, rigorous building codes do more harm than good

See Nepal's Earthquake: How Not to Rebuild a Nation by Todd Krainin of Reason.

"The great tragedy of Saturday's earthquake in Nepal may have taken the rest of the world by surprise, but to many Nepalese, it was only a matter of time. All of the ingredients for a lethal, nationwide disaster in the land of Everest have been in place for ages: high population density, isolated mountain communities, extreme poverty, ramshackle development, political instability, state corruption, and a seismic fault line deep enough to cut through the Himalayas.

As the Nepalese know all too well, there's no easy or obvious fix for any of this. Nepal has spent centuries struggling to resolve its many problems, with results ranging from disappointing to tragic. Ke garne? as the old saying goes, meaning "What to do?" It's a quintessentially Nepalese expression born of perceived political helplessness, usually accompanied by a dim smile and fatalistic wave of the hands.


Far from the gloomy sentiments on the street, experts in the West think they know exactly what to do. The United States Agency for International Development (USAID) has an optimistic three-year plan to help Nepal develop a regional community of experts capable of establishing mandatory building standards that will minimize earthquake damage. CityLab and the United Nations agree, calling for Nepal to tighten its National Building Code to prevent future tragedies.

Although the Code has been on the books for twenty years, local builders have been free to ignore it with impunity. Today, most construction remains unregulated. To the everlasting disappointment of Shangri-La-seeking tourists, Kathmandu's slapdash sprawl gleams not with gold, but with corrugated tin rooftops and rusty, naked rebar jutting out of half-finished concrete columns. Even after a devastating earthquake in 1934 took over 10,000 lives, no comprehensive system of building regulations, planning, or enforcement was ever put into effect.

With so much at stake, why has Nepal stubbornly refused to modernize its urban landscape? Buildings designed, engineered, and constructed to withstand earthquakes survive disasters better than those slapped together with shoddy materials and construction. But the real question is always one of tradeoffs and in many parts of the planet insisting on First World construction standards would leave millions without shelter.

Nepal's Ministry of Physical Planning, Works, and Transport Management has even written up its own plans for implementing building standards, but for reasons that should be obvious, they've never gotten off the ground floor.

The first reason is cost. In a country where a quarter of the population survives on an income of less than $1.25 per day, code compliance is beyond the means of millions of Nepalese. For tens of thousands of low caste and landless squatters, known as sukumbasi, the availability of cheap, improvised housing is a matter of daily survival. Yet in supporting the establishment of quake-resistant building codes, journalists often fail to consider the prohibitive cost, and potential damage involved in criminalizing the construction of shacks and shantytowns in one of the poorest countries in the world.

The World Bank looked at the impact of building codes in the "developing" world, considering benefits and costs. For most construction, they advocate a light regulatory touch:

"Regarding building regulations in developing countries, for private homes and other small buildings, it may be that the best default approach is to educate rather than regulate, leaving regulatory construction engineers and planners to focus their efforts on relatively few high-traffic public buildings."

The World Bank made its recommendations without specific reference to Nepal, where the challenges of regulating construction are especially steep. Any retrofitting would have to accommodate buildings that range from modern shopping malls to ancient Buddhist shrines at high altitudes. It would have to create a community of professional structural engineers and standards enforcement that doesn't yet exist.

More crucially, the code would have to function within a system long reviled for bureaucratic ineptitude and endemic state corruption. Not only has Nepal's government been unable to provide a steady flow of electricity to its citizens, for the last eight years the country has stumbled along as politicians have failed to agree on a written constitution to guide the nation.

And now, as protesters rally against the government's inadequate response to the earthquake, it's not even clear whether a national emergency can unite the country.

Are you feeling that sense of Nepalese fatalism yet? Before you wave your hands and cry Ke garne?, know that past disasters offer some hope for the future. Nepal rebuilt some of its old monuments after the 1934 earthquake, and soon added a few new ones. New Road was constructed after the quake, and it quickly became home to the most desirable and prosperous businesses in the city. The absence of expensive building codes may have sped the rebuilding process considerably.

If the central government can maintain a light regulatory touch, new, vibrant communities may yet emerge from the rubble of an ancient Himalayan world."

Baltimore shows how progressivism has failed urban America

See The Blue-City Model from the WSJ. Excerpts:

"let’s not forget who has run Baltimore and Maryland for nearly all of the last 40 years.

The men and women in charge have been Democrats, and their governing ideas are “progressive.” This model, with its reliance on government and public unions, has dominated urban America as once-vibrant cities such as Baltimore became shells of their former selves. In 1960 Baltimore was America’s sixth largest city with 940,000 people. It has since shed nearly a third of its population and today isn’t in the top 25.

The dysfunctions of the blue-city model are many, but the main failures are three: high crime, low economic growth and failing public schools that serve primarily as jobs programs for teachers and administrators rather than places of learning.

Let’s take them in order. The first and most important responsibility of any city government is to uphold law and order. When the streets are unsafe and crime is high, everything else—e.g., getting businesses to invest and create jobs—becomes next to impossible.

"It’s not that we don’t know what to do. Rudy Giuliani proved that in New York City, which he helped to revive in the 1990s starting with a revolution in policing that brought crime rates to record lows. A good part of this was policing in areas that had previously been left to the hoodlums.

His reward (and that of his successor, Mike Bloomberg, who built on Mr. Giuliani’s policies) was to become a villain of the liberal grievance industry and a constant target of attack. Few blue-city mayors elsewhere have been willing to take that heat.

Or take the economy. In the heyday of Lyndon Johnson’s Great Society, the idea was that the federal government could revitalize city centers with money and central planning. You can tell how that turned out by the office buildings and housing projects that failed to attract middle-class taxpayers. Baltimore’s waterfront is a gleaming example of this kind of top-down development, with new sports stadiums that failed to attract other businesses.

The latest figures from Maryland’s Department of Labor show state unemployment at 5.4%, against 8.4% for Baltimore. A 2011 city report on the neighborhood of Freddie Gray—the African-American whose death in police custody sparked the riots—reported an area that is 96.9% black with unemployment at 21%. When it comes to providing hope and jobs, we should have learned by now that no government program can substitute for a healthy private economy.

Then there are the public schools. Residents will put up with a great deal if they know their children have a chance at upward mobility through education. But when the schools no longer perform, the parents who can afford to move to the suburbs do so—and those left behind are stuck with failure. There are many measures of failure in Baltimore schools, but consider that on state tests 72% of eighth graders scored below proficient in math, 45% in reading and 64% in science. 

Our point is not to indict all cities or liberals. Many big-city Democrats have worked to welcome private investment and reform public education. Some of the biggest cities—New York, Boston and San Francisco—have also had inherent economic advantages like higher education and the finance and technology industries.

But Baltimore also has advantages, not least its port and one of the nation’s finest medical centers in Johns Hopkins. If it lacks the appeal of New York or San Diego, that is all the more reason for city officials to rethink their reliance on high taxes, government spending and welfare-state dependency.
For a time in recent decades, it looked like the reform examples of New York under Messrs. Giuliani and Bloomberg and the growth of cities like Houston might lead to a broader urban revitalization. In some places it did.

But of late the progressives have been making a comeback, led by Bill de Blasio in New York and the challenge to sometime reform Mayor Rahm Emanuel in Chicago. This week’s nightmare in Baltimore shows where this leads. It’s time for a new urban renewal, this time built on the ideas of private economic development, personal responsibility, “broken windows” policing, and education choice."

Was Monetary Policy Loose During the Housing Boom?

By David Beckworth of Cato. Excerpt:

"The third development is that in the decade leading up to the financial crisis that the Fed became a monetary superpower that could flex its muscles. It controlled the world’s main reserve currency and many emerging markets were formally or informally pegged to dollar. Thus, its monetary policy got exported across much of the globe, a point acknowledged by Fed chair Janet Yellen. This meant that the other two monetary powers, the ECB and the Bank of Japan, were mindful of U.S. monetary policy lest their currencies became too expensive relative to the dollar and all the other currencies pegged to the dollar. As as result, the Fed’s monetary policy got exported to some degree to Japan and the Euro area as well. Chris Crowe and I provide formal evidence for this view here as does Colin Gray here.

Now let’s tie all these points together and see what it says about the Fed’s role in the housing boom. Let’s begin by noting that when the large positive supply shocks buffeted the global economy they created disinflationary pressures that bothered Fed officials. They did not like the falling inflation. So Fed officials responded by easing monetary policy. Recall, though, that the supply shocks were raising the return to capital and expected income growth and therefore putting upward pressure on the natural interest rate. The Fed, consequently, was pushing down its policy rate at the very time the natural interest rate was rising. Monetary policy was inadvertently being loosened.

This error was compounded by the fact that the Fed was a monetary superpower. The Fed’s easing in the early-to-mid 2000s meant the dollar-pegging countries were forced to buy more dollars. These economies then used the dollars to buy up U.S. treasuries and GSE securities. This increased the demand for safe assets and ostensibly reinforced the push to transform risky private assets into AAA assets. To the extent the ECB and the Bank of Japan also responded to U.S. monetary policy, they too were acquiring foreign reserves and channeling credit back to the U.S. economy. Thus, the easier U.S. monetary policy became the greater the demand for safe assets and the greater the amount of recycled credit coming back to the U.S. economy. The 2003-2005 decline in the term premium, in other words, was to some extent an endogenous response to the easing of Fed policy during this time."

Only innovation can save us

From Matt Ridley. Excerpts:

"Fifty years ago yesterday, a young computer expert called Gordon Moore pointed out that the number of transistors on a silicon chip seemed to be doubling every year or two and that if this went on it would “lead to such wonders as home computers . . . and personal portable communications equipment”.

Today, for the cost of an hour of work on the average wage, you can buy about a trillion times as much computing power as you could when Moore wrote his article. The result has had a huge impact on our standard of living, indeed it is one of the biggest factors behind world economic growth in the past half century.

Back in the 1950s the American economist Robert Solow calculated that 87 per cent of economic growth came not from applying more capital or more labour, but from innovation making people more productive. It’s probably even higher today. New materials, new machines and new ideas to cut costs enable people to spend less time fulfilling more of their needs: that’s what growth means.

Technological change is the chief reason that economic growth for the world as a whole shows no sign of reaching a plateau but keeps marching up at 3-5 per cent a year. Innovation is the main reason the percentage of the world population living in absolute poverty has more than halved in 35 years. And hostility to innovation is one of the reasons for Europe’s current stagnation."

"innovation is a great demolisher of inequality. A century ago, you had to be very rich to own a car or your own home, to have more than three pairs of shoes, to have a spare bedroom, to buy on credit, to have indoor plumbing, to eat chicken regularly, to have a library of books, to be able to watch great acting or great music regularly, to travel abroad. Today all those things are routine for people on modest incomes thanks to the invention of container shipping, fertiliser, better financial services, cheap materials, machine tools, automation, the internet, television, budget airlines and so on.

It’s true that the very rich can now afford a few more things that are beyond the reach of those on modest incomes, but they are mostly luxuries: private planes, grouse moors, tables in the very best restaurants. We would like those on low incomes to have access to better medicines, better schooling, cheaper homes and lower energy bills, and in each case the technology exists to provide these: it’s mainly government policies that get in the way.

Technology is the great equaliser: today some of the poorest African peasants have mobile phones that work as well as Warren Buffett’s — at least for voice calls. In the 1940s, Joseph Schumpeter said that the point of commerce consists “not in providing more silk stocking for queens, but in bringing them within reach of factory girls”.

It was not planning, trade unions, public spending, welfare or tax that made the poor much richer. It was innovation.

But can politicians do anything about innovation? Not directly. It happens to its own inexorable rhythm, unpredictably. Trying to pick winners usually results in picking losers. There was no policy to encourage search engines and social media, but they happened anyway. What’s much more predictable is where they happened: Silicon Valley has had just the right mixture of freedom, skills, permissive law, critical mass of talent and capital to make innovation thrive."

Does America Have Less Economic Mobility? Part 2

From Scott Winship. 

"On January 12, 2012, Alan Krueger, then the chair of President Obama’s Council of Economic Advisors gave a speech at the Center for American Progress entitled, “The Rise and Consequences of Inequality in the United States.” The administration had attempted to show in December that rising inequality hurt upward mobility, but the rough modeling it conducted at the time to make its case failed to hold up. Krueger’s speech took a new tack—one that referenced the U.S.’s lower mobility as compared with other countries.

Modifying a chart that economist Miles Corak had produced earlier, Krueger plotted a number of countries as dots, arraying them along the dimensions of income inequality and intergenerational mobility. Following Corak, he displayed the straight line that ran most closely through the dots. This upward-sloping line—which Krueger dubbed the “Great Gatsby Curve”—indicated a positive relationship between inequality and immobility across countries; countries with more income inequality had more immobility (less mobility). Effectively arguing that this relationship was a causal one, he then plotted the current level of inequality in America on this chart and used the Great Gatsby Curve to predict a large increase in immobility in the United States arising because of increasing inequality.

In response to this argument, I issued a variety of criticisms. But it turns out that the biggest problem with the chart was one I neglected at the time, even though my earlier National Review essay had anticipated it: the Great Gatsby Curve was based on a comparison of income inequality levels to intergenerational elasticities (IGEs). As I discussed in Part 1 of this series, the IGE is a problematic measure of mobility. It indicates lower “mobility” when income inequality grows at a faster rate between generations. Countries with the same relative mobility (the same pattern of movement from bottom to middle, middle to top, and top to bottom) have different IGEs if they experience different inequality growth. Since inequality has grown more in the U.S. than in most other nations, its IGE shows worse “mobility,” and the same is true generally for countries with higher inequality growth.*

What no one realized at the time was that Corak’s own on-going research was demonstrating this problematic feature of the IGE. In a working paper with Bhashkar Mazumder and Matthew Lindquist, a version of which was publicly available** just three months after Corak and Krueger rolled out their Great Gatsby Curves, Corak found that when measures of relative mobility are used rather than the IGE, intergenerational mobility may be no lower in the United States than in Sweden, and only somewhat lower than in Canada. The higher rates of Canadian mobility reflect more downward mobility from the top rather than more upward mobility from the bottom.

The paper was published in the journal, Labour Economics, in October of last year. Its first key finding was that comparing IGEs across countries is potentially misleading unless data sources are of comparable reliability and the methods used are comparable. Corak, Lindquist, and Mazumder took great care to make the estimates from the three countries in their paper as comparable as they could. They found IGEs of 0.26 in Canada, 0.25 in Sweden, and 0.40 in the United States. In other words, the U.S. has the lowest mobility and Sweden the highest (barely beating out Canada). In Corak’s version of the Great Gatsby Curve, the estimates were 0.19 for Canada, 0.27 for Sweden, and 0.47 for the United States.

More important, however, is what the paper revealed about comparisons of relative mobility. In Part 1 of this series I described the “rank-rank slope,” a measure of relative mobility that gives the typical percentile difference in adulthood income between the poorest and the richest children. An equivalent measure used by Corak, Lindquist, and Mazumder is the Spearman rank correlation. This measure was 0.24 in Canada, 0.30 in Sweden, and 0.30 in the U.S.—very small differences given that this measure can range from -1.00 to 1.00. The authors indicate that part of the reason that the U.S. and Sweden have the same rank correlation is that the U.S. data include fewer years of earnings averaged together for fathers and sons. They estimate that if the Swedish data were comparable to the American data, its rank correlation would be 0.26. Even this is a small difference, though, and not substantively meaningful. 

Their paper examined additional measures of relative mobility that describe specific kinds of upward and downward mobility. For example, the share of sons starting out in the bottom fifth of father earnings that remains in the bottom fifth in adulthood is 31 percent in Canada, 32 percent in Sweden, and 32 percent in the United States. That is to say, upward mobility from the bottom is no worse in the U.S. than in Sweden or Canada. The share of sons starting out in the top fifth of father earnings that stays in the top fifth in adulthood is 33 percent in Canada, 40 percent in Sweden, and 38 percent in the U.S. Sweden looks a bit better than the U.S. when the sample is adjusted to correspond better to the U.S. data, but not by enough to alter the conclusion that there are minimal substantive differences between the two countries.

Remarkably, the findings of this paper have been largely ignored. The only references to the working paper’s findings of which I am aware were in a comprehensive review paper by Markus Jantti and Stephen Jenkins in November 2013 and in an essay I wrote with Donald Schneider in early 2014. Google Scholar indicates the published article has been cited twice. Corak, to my knowledge, has never cited the findings. In contrast, a Google web search indicates over 250 hits for “Great Gatsby Curve” in the past twelve months, 35 of them from Corak’s blog.

Corak has sought to distance himself from the emphasis I have placed on his paper and my interpretation that it is devastating for the argument that the Great Gatsby Curve tells about inequality hurting mobility. On his blog, in a post that suggested I may have the facts wrong and that I was letting my ideological priors affect my interpretation of evidence, he wrote,

I also want to go on the record and note that when he says my ‘most recent paper highlights serious problems [with the Great Gatsby Curve and my] previous research,’ it should be clear that this is Mr. Winship’s interpretation of my research, and not my understanding of my own research.

He also suggested I should reach out to him to get his views of his results. I have since done so, but after a brief (cordial) email exchange, we failed to connect. But honestly, when it comes to interpreting evidence, it does not really matter what the author of a paper believes. If he does not believe his results, he should not attempt to publish the paper. Otherwise, it is the scholar’s job to lay out all of the relevant evidence in such a way that misinterpretations of it are not possible. I have not mischaracterized the findings of the paper. It is true that I generally have not noted the caveats included in the paper by Corak and his coauthors that downplay their findings—and I should emphasize here that I know and admire Mazumder—but that is because I do not find the caveats compelling.

The authors argue that the IGE may be a better indicator of inequality of opportunity than relative mobility measures because it incorporates income inequality. For the reasons I gave in Part 1 of this series, I don’t believe that aligns with the way most Americans think about opportunity, and it begs the question of why income inequality per se is important. Regardless, the IGE is definitively not a good measure of relative mobility.

More substantively, Corak and his coauthors note that their U.S. estimates indicate more mobility than previous research, citing estimates from the 2006 paper by Jantti and his colleagues that I mentioned in Part 1 of this series—and to which I will return—as well as a study by my former colleagues in the Brookings Center on Children and Families for my former colleagues at the Pew Charitable Trusts. They note that both those studies use parental family income rather than father earnings in childhood. They found U.S. results more comparable to these earlier studies when they looked at combined parental earnings instead of fathers’ earnings.

The authors also cite research indicating that the administrative data they use to obtain their U.S. estimate may be worse than survey data at capturing low incomes accurately, implying that their estimate for the U.S. may be inferior to estimates based on survey data.

Let’s put these concerns to rest right now. First, as the authors note, they cannot estimate mobility for Sweden and Canada using combined parental income or earnings, so we have no way of knowing whether Sweden and Canada would have more mobility than the U.S. by this approach. Even if they did, that would not invalidate the paper’s finding that male earnings mobility is not substantively different across the three countries. Without any estimates of family income mobility in other countries, it is simply putting a thumb on the scale for the authors to discount their own findings on this basis.

More to the point, there are estimates of father-son earnings mobility in the United States against which to compare the Corak, Lindquist, and Mazumder estimates against. Using a survey called the Panel Study of Income Dynamics, Pew estimated that 31 percent of men who grew up in the bottom fifth of father earnings remained in the bottom fifth of earnings as adults. Corak and his coauthors estimated it was 32 percent. Their conjecture that the administrative data produce too-high upward mobility because they poorly measure incomes at the bottom is simply wrong.

Even the paper’s finding that Canada has more mobility than the United States—and than Sweden—should be viewed as provisional. One reason to be concerned with the Canadian estimate: in a 1999 paper with Andrew Heisz, Corak reports that about half of sons are excluded from the Canadian data used in the new paper because they did not file taxes, could not be matched to fathers who were tax filers, or both. This group includes many sons of immigrants and sons of single mothers, who are generally excluded from all analyses of father-son mobility. But even accounting for these men, that leaves a sizable fraction of sons out of the Canadian sample. To be included, sons had to file tax returns while living at home as adolescents. As Corak notes in the paper with Heisz, there are good reasons to think that the omitted sons are poorer than the sons in the sample. He conducted a crude test in the earlier paper of whether the omission biased his results and found that it did not, but I think most economists would characterize the test as not especially informative.

But nothing in the Corak, Linduist, and Mazumder paper suggests that U.S. and Swedish levels of mobility differ meaningfully from each other. That still leaves the 2006 paper by Jantti and his coauthors, which found that the U.S. had lower relative mobility—at least for sons starting out at the bottom—than Denmark, Norway, Sweden, Finland, and the U.K. I’ll explain why this paper’s conclusion is also incorrect and explore some additional research comparing the U.S. to other countries in my final installment.

*In fact, when combined with another feature of Corak’s and Krueger’s versions of the Great Gatsby Curve, a relationship between inequality and “mobility” was almost baked into the cake. That’s because the measure of inequality they used indicated inequality levels in adulthood rather than in childhood. If people in countries with higher inequality in adulthood tend to have experienced stronger inequality growth between childhood and adulthood, then a positive relationship between income inequality in adulthood and immobility is mathematically inevitable.

** The link is now dead and unavailable on archive.org, but was http://www.eale.nl/Conference2013/program/Parallel%20session%20A/add215310_konuoeQdIq.pdf. A later draft was also posted online but is available now only at archive.org: https://web.archive.org/web/20150401075918/http://www2.sofi.su.se/~mjl/docs/Cross_country_mobility_March_21_2014.pdf.  A copy of the earlier draft is in my possession.

Scott Winship is the Walter B. Wriston Fellow at the Manhattan Institute for Policy Research."

Brian Wesbury Challenges Stiglitz On Inequality & The Recession

See One Man Against the 1%: For the past 50 years, liberals have gotten almost exactly the policies they’ve wanted. So why are they still complaining? Excerpts:

"The reality, however, is that the financial crisis was not caused by inequality or by banks. It was caused when the government used Fannie Mae and Freddie Mac, under the banner of equality, to encourage subprime lending to promote homeownership. Then the government allowed a very strict mark-to-market accounting rule to be enforced, turning a fire into an inferno. The crisis would have never spun out of control if government had avoided overly strict mark-to-market accounting rules.

Mr. Stiglitz acknowledges that global inequality has narrowed in recent decades, but he says that “American inequality began its upswing 30 years ago, along with tax decreases for the rich and the easing of regulation on the financial sector.” He contrasts this with the decades after World War II, when the U.S. “grew at its fastest pace, and the country grew together.” But now, he says, “the American dream is a myth.” The 1% are sailing along, while the rest are drowning. Like advisers to FDR who believed the Soviet Union had found the secret to growth through central planning, Mr. Stiglitz holds up China as a role model, praising the country’s top-down economic management. Yet the truth is that embracing Western-style free markets and adopting technologies invented in the U.S.—not central planning—have lifted hundreds of millions of Chinese out of poverty.

A running theme of the book is that the American dream is dead because policy makers have failed to implement truly liberal policies. But for the past 50 years, liberals have gotten almost exactly what they wanted. Between 1950 and 1965, government spending outside of defense was just 7.8% of GDP. Liberals weren’t happy with that, so they proposed to make America a “Great Society” by creating the modern welfare state along with Medicare and Medicaid. After five decades of growth in these redistribution programs, nondefense government spending is now 16.8% of GDP. In other words: Core, prosperity-sharing government spending has more than doubled, while military spending has fallen from 9.5% of GDP to less than 3.5%.

Liberals have shaped the tax code to their preference as well. In 1979 the top 1% paid 14.2% of all federal taxes. In 2011 that share had risen to 24%. The lowest quintile paid just 0.6% of all federal taxes in 2011, down from 2.1% in 1979. Following the expiration of the temporary Bush tax cuts in 2012, and the new surcharges in ObamaCare, this dichotomy has widened.

Mr. Stiglitz constantly refers to income inequality without adjusting for taxes and transfers. But this is misleading. A 2014 Congressional Budget Office (CBO) study showed that the lowest quintile of income earners saw their market income grow just 16% between 1979 and 2011, while the highest quintile experienced a 77% increase. But after adjusting for taxes and transfers, the CBO found that the lowest quintile, which receives about a third of its income from transfers, saw an increase in income of 72%, while the top quintile had a gain of 87%. In other words, liberal policies of tax and redistribute have created a much more level playing field than liberals will admit.

Liberals are the like the dog that finally caught the car. Now what will they do? If Mr. Stiglitz is indicative, they will gripe about the wealthy, argue that their ideas of redistribution weren’t tried hard enough and blame self-interest for hampering real progress. Conservatives said that our current fiscal path would be bad for the economy; liberals insisted that it would be good. The fact that Mr. Stiglitz is still complaining would seem to be proof that liberals were wrong.

Mr. Wesbury is chief economist at First Trust Advisors LP in Wheaton, Ill."

Did Reaganonomics Set Stage For Growth In The 1990s?

See The real lessons of Reaganomics, at least as I see them by James Pethokoukis of AEI.

"If you want to promote pro-market policies by citing the success of Reaganomics, don’t do it the wrong way. And the wrong way is suggesting that the Reagan tax cuts paid for themselves. They didn’t (although their deficit impact was smaller than a static analysis shows). And that’s true whether you look at (a) income tax revenue/GDP or (b) real GDP growth to real revenue in the 1970s vs. 1980s, or (c) academic research.

Nor should you suggest the Reagan tax cuts immediately ushered in a period of crazy-go-nuts hypergrowth. They didn’t. Real GDP growth in the 1980s was about the same as the 1970s. Nor was their a pickup in productivity.

But, but, but … the way to judge a huge change in public policy is over the long term. “Making changes to the tax system and regulatory policies of a mammoth economy like the U.S. is like turning the rudder slightly on a supertanker: The initial effects are small, but it leads to a big shift in course over time,” economist Michael Mandel wrote in a fantastic 2004 magazine piece on Reagan’s economic legacy. This is especially true of sweeping tax reform and how changes in tax rates affect “investment in schooling, occupational choice, and business creation and development,” as AEI’s Aparna Mathur, Sita Slavov, and Michael Strain explain in “Should the Top Marginal Income Tax Rate Be 73 Percent?”

Looking at the economic performance in the 1980s alone may not provide the best evidence for the success of Reagan’s pro-market policies — despite their help in transitioning out of the volatile, high-inflation 1970s — especially given the role of monetary policy during that decade and natural post-recession rebound. Adopting a longer perspective brings the realization, for instance, that after 1980 only countries adopting aggressive pro-market reforms gained on America, in terms of per capita GDP. Sorry, Old Europe. But this from Mandel seems even more important:

In a way that few have realized, Reagan’s economic legacy is inextricably interwoven with the Information Revolution that the IBM PC helped kick off. His message of competitive markets, entrepreneurial vigor, and minimal regulation found a willing audience in an era of rapid technological change, where innovation was opening new opportunities seemingly every day. Reagan’s first term saw the creation of such future giants as Sun Microsystems, Compaq Computer, Dell, and Cisco Systems (CSCO) — the greatest entrepreneurial burst of new companies since the early 20th century. … Taken together, the changes Reagan championed in the tax system fostered innovation and entrepreneurialism even as they encouraged the development of venture capital and investment in human capital. And Reagan’s willingness to push for more flexible labor markets and less regulation helped companies react faster to economic changes, including new technologies. As a result, the impact of the policies Reagan set out in the 1980s, which slowly worked their way through the economy, helped lay the groundwork for the Information Revolution of the 1990s.

Mandel points out (a) the 1981 cut in top rates “made it far more attractive for people to raise their incomes by getting more education or taking the risks of starting a company; (b) the 1986  tax reform was especially beneficial to “idea-based” firms such that  companies such as Oracle and Microsoft that saw big drops in their average tax rates.

That stuff aside, these stories make to me — not surprisingly —  intuitive sense. I certainly want to believe them. Of course, as Mandel also points, the “Reagan helped cause the 1990s tech and productivity boom” argument isn’t universally held. And you say rising inequality and wage stagnation, I say 50 million net new jobs and a 40% rise in real incomes. As liberal economist Jason Furman once wrote before becoming an Obama economic adviser, “[People] are substantially better off than they were 30 years ago.” And in a way that few, especially on the left, would have predicted in 1980.

At the same time, you still have to pay the bills today.  The US debt-GDP ratio is three times higher than when Reagan took office, and we are only now feeling the fiscal impact of all those retiring Baby Boomers. So smart tax reform should focus on boosting long-term productivity (and providing middle/working-class tax relief as Reagan did) while also making sure it doesn’t make the red ink flow even faster. Meanwhile, when presidential candidate Hillary Clinton talks about the roaring 1990s, Republicans shouldn’t be afraid to suggest the Gipper and an embrace of optimistic, entrepreneurial capitalism just may have had a key role to play in the Long Boom and America’s continuing global innovation dominance."

Minimum wage workers tend to be young, single, part-time workers with less than a high school diploma

From Mark Perry

"The Bureau of Labor Statistics just released its annual report on the “Characteristics of Minimum Wage Workers, 2014,” and here are some highlights:

Age. For workers ages 16 to 19 years old, only 15.3% made the minimum wage or less in 2014 (about 1 in every 6.5 workers in that age group) and almost 85% of those workers earned more than the federal minimum wage last year. For workers ages 25 and older, only 2.5% (1 in 40) earned the federal minimum wage or less last year. So even the vast majority of teenagers (more than 8 of every 10) earn more than the federal minimum wage.

Education. For workers with less than a high school diploma, 7.3% of those workers earned the minimum wage last year, compared to 3.5% (1 in 29) of high school graduates, 2.2% (1 in 45) of workers with an associate’s degree and fewer than 2% of workers (about 1 in 53) with a bachelor’s degree or higher who earned the minimum wage last year.

Marital Status. For never married workers, who tend to also be young, 6.7% of that cohort worked last year at the minimum wage, compared to only 1.9% (about 1 in 53) of married workers with a spouse present who worked at the minimum wage in 2014.

Hours Worked. Among full-time workers only 1.8% (1 in 56) earned the minimum wage or less, compared to 9.5% (1 in 11) of part-time workers.

Bottom Line: Four important factors that will help workers earn a wage above the federal minimum wage are: 1) age (experience), 2) education, 3) marital status and 4) hours worked. Only 1-in-40 workers age 25 and above make the minimum wage, only 1-in-45 workers with an associate’s degree or higher makes the minimum wage, only 1-in-53 married workers earns the minimum wage, and only 1-in-56 workers working full-time earns the minimum wage. The evidence seems clear that the minimum wage applies only to a very small group of young, inexperienced, single, part-time workers, with a lack of education. The path to higher wages includes staying in school, getting job experience, working full-time and getting married. Raising the minimum wage will make that path to higher wages more difficult, not easier, because it will price many younger, less-educated, less experienced workers out of the labor market — and will deny them the opportunity to work, gain experience, and gain the job skills they need that paves the path to higher wages."

66% of the union members voted against a higher minimum wage (actors)

See Hollywood Loves Minimum Wage So Much, It Dodges It by LARRY ELDER. 

"Welcome to Hollywood, where dreams become real — and where logic, reason and Economics 101 become dreams.

Take the current battle over the minimum wage. In Los Angeles County, the minimum wage is $9 per hour.

Theater actors, however, can be paid as little as $7 a performance, and an actor can even work long rehearsal hours with no pay.

Three decades ago, L.A. County actors sued their union for an exception to union wages for theaters with 99 seats or fewer seats.

Why do these stage actors work for so little? They want to work. By working, they improve their skills, stay sharp and or perhaps have a chance to get spotted by an agent.

Some say simply having something to do is better than just sitting around and waiting for a casting agent to call.

Actors Equity, the national union, wants to change this. According to the New York Times: "The union, seizing a moment when organized labor is having some success pressuring low-wage employers to pay higher salaries, says many of this city's small theaters — which currently pay actors nothing for rehearsals, and stipends as low as $7 per (hour for) performances — should start paying California's minimum wage of $9 an hour."

But then a very Republican thing happened — 66% of the union members voted against a higher minimum wage.

Their rationale was simple: A higher minimum wage means fewer plays get performed. Fewer plays mean fewer opportunities for actors and therefore fewer opportunities to gain experience, stay in practice or get discovered.

But the union's national council ignored this advisory vote and ordered, with some exceptions, a $9 per hour minimum wage.

When it comes to their own lives, these actors understand the law of economics: Artificially raise the cost of a good — in this case the price of an actor in a stage play — and you reduce the demand for actors.

Last year, meanwhile, actor Kevin Spacey lobbied Maryland lawmakers to extend their tax credit program. He films his Netflix series, "House of Cards," in Maryland.

That state offers generous tax credits and relaxed union rules, so the Netflix series earned more money than would be the case if the show filmed in Hollywood.

In Maryland, a production company can claim a credit on its income taxes equivalent to 25% to 27% of the costs of their film or TV production. If the credit is larger than a company's tax liability, the company can receive a refund from the state."

It's kinder to push people into work than to park them on benefits

See Welfare reform and unemployment by Matt Ridley.

"My Times column on Britain's remarkable and unexpected plunge in unemployment and what lies behind it: 

Five years ago, almost nobody expected that inflation would vanish, as tomorrow’s figures are expected to show, or that unemployment would plummet, as Friday’s numbers will confirm. Whatever else you think about this government, there is no doubt it has presided over an astonishing boom in job creation like nowhere else in the developed world.

The milestones are impressive: an average of a thousand new jobs a day over five years; unemployment down by almost half a million in a year; a jobless rate half the eurozone’s; more jobs created than in the rest of Europe put together; more people in work, more women in work, more disabled people in work than ever; the highest percentage of the population in work since records began. All this while the public sector has been shedding 300 jobs a day.

In a speech in September 2010, Ed Balls accused George Osborne of “ripping away the foundations of growth and jobs” and said that “against all the evidence, both contemporary and historical, he argues the private sector will somehow rush to fill the void left by government and consumer spending, and become the driver of jobs and growth”. (Yup, Ed, it did.)

Is it too good to be true? I’ve talked to economists who think the statistics must be misleading. The Labour party says that the sanctioning of benefit seekers for the most trivial offences, such as turning up late for interviews, has driven hundreds of thousands out of the numbers, into dead-end apprenticeships, cruel zero-hours contracts or doomed self-employment.

In a sense, they are not wrong. The government’s reforms, pushed by Iain Duncan Smith, are indeed a crucial cause of the surprising surge in employment. The reforms have indeed used tough love to push people back into the workforce and off welfare. As long as they are no worse off, this is no bad thing. Given that welfare has treated people like children and conditioned them not to take responsibility for their lives, it is a good thing.

For example, early trials found that making unemployment claimants sign contracts in which they promise to look for work (which is now universal) frightened quite a few people off the system straight away — they had been working while claiming to be unemployed. Regular re-testing of those who claim sickness benefits has brought many fit people back into the labour force, while actually increasing benefits for some of those whose conditions have deteriorated. Paying work programme providers by results, so that if they get people back into employment they get a bonus, has worked.

And yes, the threat of sanctions if claimants do not treat unemployment benefit as a wage for the full-time job of looking for work has helped. The philosophy behind these reforms has not been about cuts, IDS insists, but about reconditioning people’s attitudes so they take responsibility for their choices. Little things can make a big difference: like not having rent paid for you, but having to budget for it from your housing benefit. Most benefits are paid fortnightly but most employers pay monthly, so going from welfare to a job often brings a budgeting crisis. Universal credit is paid monthly wherever possible.

To general surprise, the welfare reforms have proved to be among the most popular things this administration has done. Four in five trade union members think the £26,000 cap on benefits is a good idea, which is why the Conservatives are planning to push it down to £23,000 if re-elected. Polls suggest that a policy of limiting benefits to two children, so you could not get rehoused by having extra children, would be wildly popular, as would a manifesto promise to withhold benefits from immigrants till they have contributed taxes for four years.

Tory candidates out canvassing tell me they are finding that welfare reform, while horrifying the metropolitan elite, is most popular in the meanest streets — where people are well aware of neighbours who play the system. It is a staggering fact that when Labour was in power and while the economy was growing, the cost of welfare rose by 50 per cent in real terms, even as immigrants poured in to work here.

The latest figures also suggest that British people from inner-city estates are increasingly competing with immigrants for low-paid jobs. We now have the smallest number of households with nobody working and a record rise in the number of people who live in social housing who are working. That feeds through to healthier lives and less crime.

Universal credit, where it is being rolled out, has had an immediate impact in making people more likely to go to interviews and more likely to take jobs. Australian, New Zealand, Canadian, German and American teams are monitoring Britain’s welfare reforms with a view to emulating them.

Another international comparison is illuminating. Switzerland has 3 per cent unemployment, Spain 23 per cent. As James Bartholomew recounts in his book The Welfare of Nations, Swiss unemployment benefit is slightly more generous than Spain’s, at least initially, but to receive it you must prove every month you are actively looking for a job. Switzerland has one of the strongest such “search requirements”.

In Spain the requirement for the unemployed to seek work is much less onerous. It is up to a public agency to find jobs for you to consider and you don’t have to accept them if they are outside your line of work or based more than 19 miles away. It is possible to take long holidays abroad while receiving unemployment benefit. There are other differences. Switzerland has no minimum wage and makes it comparatively easy to fire people, both of which make employers keener to hire unskilled young people. In Spain, the cost of hiring somebody at a salary of 1,500 euros a month is about twice as much as the employee receives after tax and social security — three times as large a “wedge” as in Switzerland.

This government’s reforms have made us less like Spain and more like Switzerland. Nor are most of the jobs created in the past five years insecure, poorly paid and part-time. Since 2010, 60 per cent of the rise in employment has come from managerial and professional jobs. In any case, shoving people into some kind of work rather than parking them on welfare has to be better for their morale and their future.

Update: subsequent to my article, the latest unemployment figures showed continuing strong improvement in Britain's workforce statistics:
Employment up 248,000 on 3 months before
Unemployment down 76,000
Claimant count down 21,000
Number not in the workforce down 104,000
Weekly earning and vacancies both up"

How about a ‘Capitalism Day’ to balance ‘Earth Day’ to remind us of what’s behind environmental improvements

From Mark Perry.

"In a great editorial in 2009 (excerpts appear below), Investor’s Business Daily reminded us of the main, but unrecognized force that has driven the environmental improvements that have taken place since the first Earth Day in 1970 – capitalism, and the wealth generated by the free market. Schools all over America today will celebrate Earth Day, and students nationwide will get a heavy dose of the anti-market, pro-government message that motivates Earth Day. They’ll probably hear all about the evils of free market capitalism and its role in harming the environment, and learn that the only solutions to environmental issues are market-suppressing, heavy-handed government regulations. As Steven Landsburg observed, the messages about the environment delivered in most schools today inculcate the very dangerous substitution of biases for analysis.

To complement and offset the environmental hysteria promoted by Earth Day, IBD suggested an annual event called “Capitalism Day.” What a great idea, especially if Capitalism Day was given “equal time” in our schools nationwide to provide some academic balance for Earth Day, but whose time unfortunately will probably never come…….

Today’s airwaves, print media, cable news shows and Webosphere will be filled with nonsense about the scourge of capitalism, corporations and humanity. All of it will ignore the real truth. Buried beneath all the badgering and fear-mongering about lavish Western lifestyles is a reality that the stuck-on-green left won’t talk about and the average American isn’t aware of: The world, especially in developed nations, is a cleaner — and greener — place than it was when the environmental movement began.

We’re not saying the Earth, or even any part of it, is environmentally pristine. It’s not, it never has been and never will be. Yet there’s actually more positive news to celebrate than there are problems. Of the estimated 1 billion people who will observe Earth Day worldwide this year, few will know about the progress that has been made. Fewer still will know how it was made. The media, uninterested in looking at the real story, will simply credit the environmental movement for the improvements.

We won’t discount the movement’s contribution. Four decades ago, it helped show the world the value of global stewardship. But that movement is no longer interested in a cleaner world. Filled with extremists and anti-capitalist crusaders, its primary goals have changed. Topping the agenda of today’s environmentalist groups is the pulling down of market economies, the raising up of central planning for egalitarian goals, forced lifestyle changes and the vilification — in hopes of the elimination — of signs of wealth.

None of these advance the planet’s environmental health. But capitalism has. Through wealth generated by the free market, we have enough resources to move beyond the subsistence economies that damage the environment, enough disposable income to fund clean-up programs, enough wealth to scrub and polish industry. Only in advanced economies can the technology needed to recycle hazardous waste or to replace dirty coal-fired power plants with cleaner gas or nuclear plants be developed. That technology cannot be produced in centrally planned economies where the profit motive is squelched and lives are marshalled by the state.

There’s nothing wrong with setting aside a day to honor the Earth. In fairness, though, it should be complemented by Capitalism Day. It’s important that the world be reminded of what has driven the environmental improvements since Earth Day began in 1970."

Measurable goals for a stronger Earth

By Bjørn Lomborg

This Earth Day, choose the environmental goals that deliver most benefits per dollar. 

"Earth Day is a noble idea, to ensure we cherish and improve our environment. But we have to make sure it is not just symbolism and feel-good gestures. We have to focus on the most important environmental issues, not just the ones that get the most attention.

For this Earth Day it is especially important we focus on the world's top priorities. In September, all 193 governments will meet at the UN to set targets for the world for the next 15 years in what is explicitly labeled "Sustainable Development Goals." So, it is worth looking at what we should do first. At my think tank, the Copenhagen Consensus, we've asked 60 teams of top economists including several Nobel laureates to evaluate the economic, social and environmental costs and benefits of the targets, so we can pick the best ones. Here is what we should do in environment.

Indoor air pollution is often overlooked but is in fact the world's deadliest environmental problem. It kills 4.3 million people each year, mainly because 2.8 billion people still use firewood, dung and coal for cooking and keeping warm, breathing polluted air inside their homes every day. For many people, indoor air pollution from cooking and heating with open fires is equivalent to smoking two packs of cigarettes a day.

An effective way to address this problem is to provide 30% of these 2.8 billion people with improved cooking stoves — which dispel smoke outside through chimneys and vents. It will save almost 400,000 lives each year. The cost will be around $11 billion a year, but this investment will yield economic, social and environmental benefits amounting to $161 billion a year. In other words, every dollar spent will do $10 worth of good — a phenomenal target.

Many goals to improve biodiversity have been suggested, and the experts highlight stemming the loss of coral reefs as a very effective target. Coral reefs act as fish hatcheries and fishing resources while housing a large numbers of species. At the same time, coral reefs attract tourists, generating tourism revenues. At the same time most of us would also be willing to pay a certain amount to make sure coral reefs don't get ruined. Reducing global coral loss by 50% would cost about $3 billion a year but the total benefits are likely run to at least $72 billion, or about $24 dollars back for every dollar invested.

Of course, climate change is also high on the agenda. Some of the suggested climate targets are phenomenal while others are poor. It is important that policy makers carefully pick the right targets to achieve as much climate benefit from each dollar spent as possible. The research on climate change targets shows that investing in the development of better energy technology is an effective goal.

Focusing on R&D in energy technologies can help create green energy solutions that are effective enough to take on fossil fuels on the market. This could be funded with a slowly rising carbon tax (giving businesses an incentive to cut emissions but not telling them how to do it). In total, this solution would avoid $11 of climate damages for every dollar spent.

Compare this to another very prominent climate goal: double the share of renewable energy in the global energy mix. While it will do a lot of good — it will provide energy and combat climate at a tune of $415 billion annually — it also comes at a very large cost of $514 billion annually. Unfortunately, this solution will return less than a dollar for every dollar spent because the technologies are still immature and intermittent.

Another great goal would be to phase out fossil fuel subsidies. The world spends a whopping $548 billion on such subsidies, almost exclusively in developing countries. This drains already streched budgets of resources that could be used to provide health and education services, while encouraging greater carbon-dioxide emissions. Moreover, gasoline subsidies mostly help rich people, because they are the ones who can afford cars. Economists estimate that phasing out fossil fuel subsidies would reap benefits 15 times the cost (you will still need to help the most vulnerable to energy access) by relieving strained government budgets while reducing the greenhouse gas emissions that cause climate change.

This Earth Day, we shouldn't just celebrate the environment, we should pledge to focus on the best ways to improve it. Don't just pick goals that sound great, have the cutest animals or the strongest lobby groups but rather choose the goals that deliver the most benefits per dollar spent.

Bjørn Lomborg, author ofThe Skeptical Environmentalistand Cool It, is president of the Copenhagen Consensus Center."

the fastest trains are slower than flying; the most frequent trains are less convenient than driving; and trains are almost always more expensive than either flying or driving.”

By Randal O'Toole of Cato.

"“Why can’t America have great trains?” asks East Coast writer Simon Van Zuylen-Wood in the National Journal. The simple answer is, “Because we don’t want them.” The slightly longer answer is, “because the fastest trains are slower than flying; the most frequent trains are less convenient than driving; and trains are almost always more expensive than either flying or driving.” 

Van Zuylen-Wood’s article contains familiar pro-passenger-train hype: praise for European and Asian trains; selective statistics about Amtrak ridership; and a search for villains in the federal government who are trying to kill the trains. The other side of the story is quite different.

For example, he notes that Amtrak “ridership has increased by roughly 50 percent in the past 15 years.” But he fails to note that the biggest driver of Amtrak ridership is gasoline prices, which 15 years ago were at an all-time low (after adjusting for inflation). Now that prices are falling, so is Amtrak’s ridership.

He also ignores the fact that Amtrak’s ridership is minuscule compared with flying or driving. Whereas highways moved around 87 percent of passenger travel and airlines around 12 percent in 2012, Amtrak’s share was just 0.14 percent. While that is an increase from 0.11 percent in 1999, it is a decrease from 0.15 to 0.16 percent in most of the years from 1975 through 1993, when gas prices were high.

Trains are great for moving large volumes of goods from point A to point B. America’s freight railroads are the envy of the world, but they make most of their money moving coal from mine to power plant; grain from elevator to port; and containers from port to inland distribution center. The railroads conceded less-than-carload shipments, the freight equivalent of passengers, to trucks and air freight back in 1975 when the Railway Express Agency went out of business.

Passenger train proponents argue that, over certain distances such as New York to Washington, trains can compete with airlines because trains have shorter downtown-to-downtown travel times. But the reality is that only 8 percent of Americans work downtown while less than 1 percent live downtown; in most urban areas, more people live or work within a few minutes of an airport than a train station.
One reason Amtrak’s share of travel is so low is that it is so expensive. While airfares averaged 13.8 cents per passenger mile in 2012, Amtrak fares averaged 33.9 cents. Amtrak is more expensive than driving, too, as Americans spend about 25 cents a passenger mile on auto travel (calculated by multiplying average auto occupancies by miles of driving divided by personal expenditures on driving).

Amtrak fares are high despite the subsidies it receives from federal and state governments. Rail proponents argue that all modes of transportation are subsidized, but they neglect to mention that Amtrak subsidies per passenger mile are close to twenty times greater than subsidies to highways or airlines. Comparing government revenues and expenditures by mode with passenger miles of travel over the past decade reveals that subsidies to driving and flying have each averaged a bit more than a penny per passenger mile, while subsidies to Amtrak are nearly 24 cents per passenger mile.  Counting user costs and subsidies, Amtrak is four times more expensive than flying and more than twice as expensive as driving.

Van Zuylen-Wood takes it for granted that Amtrak subsidies should be massively increased to bring America’s passenger rail system up to the standards found in Europe and Japan. Americans who visit Europe are often impressed by the region’s trains, but what they don’t see is that, despite the heavy subsidies to European passenger trains, European travel habits are not much different from our own. According to the European Union’s Panorama of Transport, residents of the EU-27 used intercity trains for just 6 percent of their travel while they drove for 74 percent in 2006, when Americans drove for 85 percent of travel. France has built lots of high-speed trains, yet 79 percent of travel there is by car.

Moreover, the countries that have built high-speed rail lines have succeeded mainly in capturing passengers away from low-speed trains, not cars or planes. Rail’s share of European travel was 8 percent before they began building high-speed rail lines; now it is just 6 percent.

Japan’s example is even more stark: when it built the world’s first high-speed rail line in 1964, only 12 percent of travel was by car and 70 percent was by train. Today, Japan has numerous high-speed trains, but trains carry little more than 25 percent of travel while cars carry 60 percent. The reality is that passenger trains are as obsolete in Europe and Japan as they are here, but local politicians keep throwing money at them.

Van Zuylen-Wood is so eager for his rail subsidies that he never mentions the clear alternative: intercity buses. In the last decade, and with virtually no subsidies, Megabus has revolutionized the intercity bus industry with low fares, mostly non-stop schedules, and free WiFi and power ports at each seat. While Van Zuylen-Wood repeats Amtrak’s claims that it carries more passengers in the New York-Washington corridor than the airlines, he neglects to mention that intercity buses carry even more than Amtrak (and automobiles carry many times more than all public conveyances combined).

Buses are more energy-efficient than rail, and between numerous city pairs offer more frequent and faster service than Amtrak at lower fares. For those who would turn up their noses at riding a bus, a number of companies offer luxury bus service between major cities with fewer seats, on-board food service, entertainment centers, and other amenities.

Amtrak supporters such as former Federal Railroad Administration director Joseph Szabo argue that passenger “rail deserves a predictable and reliable federal funding stream.” But it has one: fares. If fares won’t support passenger trains, there is no reason why the 99 percent of Americans who rarely if ever ride trains should be required to subsidize them. Let’s end all subsidies to all forms of transportation and let passenger trains operate where they can compete on a level playing field. That way people like Van Zuylen-Wood and myself can enjoy the trains we are willing to pay for and not expect others to subsidize our hobbies."

Chart of the day: In 2014, the US economy was more than twice as energy efficient (‘green’) as in 1970 when Earth Day started

From Mark Perry

" 


The EIA released new energy data recently showing that the US had the most energy-efficient economy in history last year, based on the amount of energy expended to produce each real dollar of Gross Domestic Product (GDP). In 2014, it required only 6,110 BTUs of energy (petroleum, natural gas, coal, nuclear and renewables) to produce each real dollar of GDP, which was the least amount of energy required to produce a dollar of real GDP in US history (see chart above).

Here’s another way to understand America’s most energy-efficient economy in history: The US produced $16.1 trillion of real GDP last year (in 2009 dollars), which was a 2.4% increase over 2013 and the largest annual amount of GDP in US history. Compared to 2000 when real GDP was only $12.6 trillion (in 2009 dollars), the US economy was 28% larger last year than 14 years ago, even though slightly less total energy was required in 2014 than in 2000 (98.324 vs. 98.819 quadrillion BTUs) to produce $3.5 trillion more real output. That would be like adding an economy about the size of Germany’s to the US, but without requiring any additional energy to produce 28% more output!  


Looking over longer time periods (see chart above), the increases in energy efficiency of the US economy have been consistent and impressive. For example, since 1949 the size of the US economy has grown by a factor of 8 times, from $2.0 trillion in real GDP to $16.1 trillion in 2014. But over that time period, the annual amount of energy consumed in the US has increased by a factor of only 3 times, from 32 quadrillion BTUs in 1949 to 99.32 quadrillion BTUs in 2014, and that’s led to a 62% decline in the amount of energy required to produce a dollar of real output from 15,930 BTUs in 1949 to 6,110 BTUs last year.

Compared to 1970 when the first Earth Day was celebrated and 14,400 BTUs of energy were required for every dollar of output, the energy efficiency of the US economy has more than doubled – we use less than half that amount of energy today (6,110 BTUs) for every dollar of output (see chart). Thanks to innovation, increases in energy efficiency, and advances in technology, the US is able to produce ever-increasing amounts of real output with continually decreasing amounts of energy usage per dollar of real GDP.

The new EIA data showing the ongoing improvements in the energy efficiency of the US economy rarely gets much media attention (especially compared to an event like Earth Day), even though it’s a remarkable story of environmentally-friendly, green achievement. As Steven F. Hayward commented in 2008, “The consistent improvement in America’s energy efficiency is an untold and under-appreciated long-term story.”

Bottom Line: On Earth Day, let’s celebrate the most energy-efficient, and therefore most green economy in US history, as a remarkable achievement of energy-saving technologies and innovation."

Reason Takes On Neo-Malthusians

The Big Coffee Table Book of Doom! by Ronald Bailey. Excerpts:

"the total global fertility rate has fallen from over 5 children per woman in 1970 to 2.45 today, rapidly approaching the 2.1 rate that is the threshold of population stability. The fact is that education is great contraception; the higher the female literacy rate, the lower a country's total fertility rate. And according to United Nations data, female adult literacy has increased from 70 percent in 1980 to over 82 percent today. Since 1980, literacy among women ages 15 to 24 has increased from 78 percent to 90 percent.

Longer life expectancy,lower infant mortality, and mass access to education, modern contraception, and market opportunities outside of the home are attainable only in countries where there is some measure of social peace and rule of law. If the global trend toward less violence continues, then opportunities for women to control their own fertility will grow."

"In a 2013 study, Spanish demographers Félix-Fernando Muñoz and Julio A. Gonzalo calculated that future population growth will most likely continue to track the U.N.'s low-variant trends. "Overpopulation was a spectre in the 1960s and '70s but historically the U.N.'s low fertility variant forecasts have been fulfilled," noted Muñoz."

"Butler chooses a Google Earth aerial photograph of the New Delhi city grid to make the point that human beings are now "urban animals.""

"he caption for the New Delhi photo notes that the city has an average population density of 30,000 per square mile. Sounds bad, right? Not when you consider that the population density of Brooklynk averages 35,000 people per square mile. Manhattan's population density today is 70,000 people per square mile, down from 87,000 per square mile in 1910."

"Urban dwellers have greater access to education, market opportunities, and medicine, and they have fewer kids. Meanwhile, reducing the number of people tearing up the landscape as hardscrabble subsistence farmers ultimately means that more land can be set aside for nature."

"humanity may have reached peak farmland. Agricultural productivity per acre is improving faster than the demand for food; as a result, fewer acres are needed to grow crops. These trends suggest that as much as 400 million hectares could be restored to nature by 2060, an area nearly double the size of the United States east of the Mississippi River. Secondary forests like the one that surrounds my cabin in Virginia are now expanding on abandoned farmland."

"rash disposal has been largely tamed in rich countries. A 1991 report for Resources for the Future once calculated that if the current rate of waste generation is maintained, all of America's garbage for the next 1,000 years would fit into a landfill measuring 120 feet deep and encompassing 44 square miles, about one-thousandth of one percent of the surface area of the United States."

""by the middle of the twenty-first century most of the world's industrial wood will be produced from planted forests covering a remarkably small land area, perhaps only 5 to 10 percent of the extent of today's global forest." Again, human ingenuity produces more from less, sparing nature."

"In rich countries, skies are actually lightening. The Environmental Protection Agency reports that since 1980, emissions of carbon monoxide, nitrogen oxides, volatile organic compounds, particulates, and sulfur dioxide are down by 67, 52, 53, 50, and 81 percent respectively. The best evidence finds that increasing wealth from economic growth correlates with a cleaner natural environment. That is to say, richer becomes cleaner."

"the United Nations Intergovernmental Panel on Climate Change's 2014 Synthesis Report notes that there is low confidence that climate change has so far affected any global trends toward increased flooding, hurricanes and typhoons, or droughts."

"In his insightful 2013 book The Infinite Resource, the technologist Ramez Naam counters such thoughts with another question: "Would your life be better off if only half as many people had lived before you?" In this thought experiment, you don't get to pick which people are never born. Perhaps there would have been no Newton, Edison, or Pasteur, no Socrates, Shakespeare, or Jefferson. "Each additional idea is a gift to the future," Naam writes. "Each additional idea producer is a source of wealth for future generations." Fewer people means fewer new ideas about how to improve humanity's lot and to further decouple our endeavors from the natural world. "If we fix our economic system and invest in the human capital of the poor," Naam writes, "then we should welcome every new person born as a source of betterment for our world and all of us on it.""

Honeybees are Not Headed for Extinction

By Angela Logomasini of CEI. 

"In my recently released paper, I point out many misconceptions circulating regarding recent challenges to honeybee hive health. Today, I came across another example of the confusion about this issue in a letter to the editor in a Canadian newspaper. The title says it all:  “Honeybees Headed for Extinction.” I agree with the author’s conclusion that planting certain flowers around farms to give the bees a more diverse diet is a good idea—and I do that myself.  However, honeybees are not going extinct. Consider a few points I make in my paper:

The number of honeybee hives in the world has increased overall. Globally, far more honeybees are used for honey production than pollination services, and the amount of honey produced has increased. U.S. and European commercial hives have decreased because honey production simply moved to other nations, where the number of hives has grown substantially. According to the United Nations Food Agricultural Organization (FAO) statistics the number of beehives kept globally has grown from nearly 50 million in 1961 to more than 80 million in 2013.

There have been some hive health problems in the United States and Europe in recent years related to a number of factors outlined in my paper. Fortunately, surveys in 2014 show that American and European honeybee hives have improving survival rates. And hives kept for pollination services in the U.S. and Europe have shown better survival rates in recent years, much closer to what beekeepers consider normal.

Farming and food production is not about to collapse because of poor pollination. About one third of food production in the United States benefits from honey bee pollination, according to the U.S. Department of Agriculture. Poor hive health is unlikely to completely undermine production of these foods, but it could make them more expensive. Fortunately, improved hive survival can mitigate such issues.

So, yes, plant flowers, but there is no good reason to believe that honeybees are going to completely disappear."

Don Boudreaux Exposes Mother Jones' Straw Man Argument On Minimum Wage Laws

See Minimum Logic, Maximum Straw.

"Here’s a letter to Mother Jones:

Congratulations!  You’ve well and truly slain a straw man by reporting that “[c]onservatives have long portrayed minimum-wage increases as harbingers of economic doom, but their fears simply haven’t played out” (“As Cities Raise Their Minimum Wage, Where’s the Economic Collapse the Right Predicted?” April 16).

No serious opponent of minimum wages has ever said that they are “harbingers of economic doom” and sparks of “economic collapse.”  Not Milton Friedman.  Not F.A. Hayek.  Not Thomas Sowell.  Not my colleague Walter Williams.  No credible scholar or pundit has ever made such a prediction about minimum wages at the relatively low levels that these wages are set in the United States.  The reason is that only a small percentage of the workforce earns wages at, or just above, the prevailing legislated minimum.  Therefore, minimum-wage hikes of the sort that are typical in the U.S. cannot possibly propel the economy to the brink of “collapse” or unleash economic “doom.”

What minimum-wage hikes do unleash, however, is devastation upon a relatively small number of largely invisible workers – workers who are the least skilled and most disadvantaged.  Raising the minimum wage destroys jobs for many of these poor workers while making the jobs of other such workers more onerous.  But because these workers are so relatively few in number, their suffering, while very real, is easy to miss when looking at the aggregate data.  This fact explains why some – by no means a majority – of minimum-wage studies (particularly those that examine only short spans of time) find no negative employment effects.

Serious opponents of minimum-wage legislation insist that it is unjust to overlook the suffering of people forcibly priced out of work or into jobs less preferable than the ones they would otherwise have – unjust even if the number of affected workers is so small as to be missed by weak empirical studies and too tiny to be classified as ”doom.”

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"

Improved (macro) performance was closely associated with more rules-based policy

From John Taylor. Excerpts:

"Then in the early 1980s policy changed. It became more focused, more systematic, more rules-based, and it stayed that way through the 1990s and into the start of this century.  Using the same performance measures, the results were excellent. Inflation and unemployment both came down.  We got the Great Moderation, or the NICE period (non-inflationary consistently expansionary) as Mervyn King put it. Researchers like John Judd and Glenn Rudebush at the San Francisco Fed and Richard Clarida, Mark Gertler and Jordi Gali showed that this improved performance was closely associated with more rules-based policy, which they defined as systematic changes in the instrument of policy—the federal funds rate—in response to developments in the economy.

Researchers found the same results in other countries. Stephen Cecchetti, Peter Hooper, Bruce Kasman, Kermit Schoenholtz, and Mark Watson showed that as policy became more rule-like in Germany, U.K., and Japan, economic performance improved.

Few complained about spillovers or beggar-thy-neighbor policies during the Great Moderation.  The developed economies were effectively operating in what I call a nearly international cooperative equilibrium, another NICE to join Mervyn King’s.  This was also a prediction of monetary theory which implied that if each country followed a good rules-based monetary policy then the international system would operate in a NICE way.

But then there was a setback. The Fed decided to hold the interest rate very low during 2003-2005, thereby deviating from the rules-based policy that worked well during the Great Moderation.  You do not need policy rules to see the change: With the inflation rate around 2%, the federal funds rate was only 1% in 2003, compared with 5.5% in 1997 when the inflation rate was also about 2%. The results were not good. In my view this policy change brought on a search for yield, excesses in the housing market, and, along with a regulatory process which broke rules for safety and soundness, was a key factor in the financial crisis and the Great Recession.

During the ensuing panic in the fall of 2008 the Fed did a good job of providing liquidity through loans to financial firms and swaps to foreign central banks. Reserve balances at the Fed expanded sharply due to these temporary liquidity provisions. They would have declined after the panic were it not for Fed’s initiation of its unconventional monetary policy, the large scale purchases of securities now called Quantitative Easing. Regardless of what you think of the impact of QE, it was not rule-like or predictable, and my research shows that it was not effective.  It did not deliver the economic growth that the Fed forecast and it did not lead to a good recovery.  And yet another deviation from rules-based policy was the continuation of a near zero interest rate through the present, long after Great Moderation rules would have called for its end."

"This short history demonstrates that shifts toward and away from steady predictable monetary policy have made a great deal of difference for the performance of the economy, just as basic macroeconomic theory tells us. This history has now been corroborated by David Papell and his colleagues using modern statistical methods.  Allan Meltzer found nearly the same thing in his more detailed monetary history of the Fed.

The implication of this experience is clear: monetary policy should re-normalize in the sense of transitioning to a predictable rule-like strategy for the instruments of policy.  Of course, it is possible technically for the Fed to move to and stick to such a policy, but the long departures from rules-based policy show that it is difficult."

"Some argue that the historical evidence in favor of rules is simply correlation not causation.  But this ignores the crucial timing of events:  in each case, the changes in policy occurred before the changes in performance, clear evidence for causality.  The decisions taken by Paul Volcker came before the Great Moderation.  The decisions to keep interest rates very low in 2003-2005 came before the Great Recession. And there are clear causal mechanisms, such as the search for yield, risk-taking, and the boom-bust in the housing market which were factors in the financial crisis.

Another point relates to the zero bound. Wasn’t that the reason that the central banks had to deviate from rules in recent years? Well it was certainly not a reason in 2003-2005 and it is not a reason now, because the zero bound is not binding. It appears that there was a short period in 2009 when zero was clearly binding. But the zero bound is not a new thing in economics research. Policy rule design research took that into account long ago. The default was to move to a stable money growth regime not to massive asset purchases.

Some argue that a rules-based policy is not enough anymore and that we need more international coordination.  I believe the current spillovers are largely due to these policy deviations and to unconventional monetary policy.  We heard complaints about the spillovers during the stop-go monetary policy in the 1970s.  But during the 1980s and 1990s and until recently there were few such complaints.  The evidence and theory is that rules-based policy brings about NICE results in both senses of the word

Some argue that rules based policy for the instruments is not needed if you have goals for the inflation rate or other variables. They say that all you really need for effective policy making is a goal, such as an inflation target and an employment target. The rest of policymaking is doing whatever the policymakers think needs to be done with the policy instruments. You do not need to articulate or describe a strategy, a decision rule, or a contingency plan for the instruments. If you want to hold the interest rate well below the rule-based strategy that worked well during the Great Moderation, as the Fed did in 2003-2005, then it’s ok as long as you can justify it at the moment in terms of the goal.

This approach has been called “constrained discretion” by Ben Bernanke, and it may be constraining discretion in some sense, but it is not inducing or encouraging a rule as a “rules versus discretion” dichotomy might suggest.  Simply having a specific numerical goal or objective is not a rule for the instruments of policy; it is not a strategy; it ends up being all tactics.  I think the evidence shows that relying solely on constrained discretion has not worked for monetary policy.

Some of the recent objections to a rules-based strategy sound like a revival of earlier debates.   Larry Summers makes analogies with medicine saying he would “rather have a doctor who most of the time didn’t tell me to take some stuff, and every once in a while said I needed to ingest some stuff into my body in response to the particular problem that I had. That would be a doctor who’s [advice], believe me, would be less predictable.”

So, much as the proponents of discretion in earlier rules versus discretion debates (such as Walter Heller and Milton Friedman), Summers argues in favor of relying on an all-knowing expert, a doctor who does not perceive the need for, and does not use, a set of guidelines.

But much of the progress in medicine over the years has been due to doctors using checklists.   Experience shows that checklists are invaluable for preventing mistakes, getting good diagnoses and appropriate treatments. Of course doctors need to exercise judgement in implementing checklists, but if they start winging it or skipping steps the patients usually suffer. Checklist-free medicine is as bad as rules-free monetary policy.

Many say that macro-prudential policy of the countercyclical variety is an essential part of a monetary policy for the future. In my view it is more important to get required levels of capital and liquidity sufficiently high. We do not know enough about the impacts of cyclical movements in capital buffers to engage in fine tuning, and it puts the central bank in the middle of a very difficult political issue.

Some argue that we should have QE forever, leave the balance sheet bloated, and use interest on reserves or reverse repos to set the short term interest rate.  But the distortions caused by these massive interventions and the impossibility of such policy being rule-like indicate that QE forever should not be part of a monetary policy for the future. The goal should be to get the balance sheet back to levels where the demand and supply of reserves determine the interest rate. Of course, interest rates on reserves and reverse repos could be used during a transition. And a corridor system would work if the market interest rate was in between the upper and lower bands and not hugging one or the other.

Should forward guidance be part of a monetary policy for the future?  My answer is yes, but only if it is consistent with the rules-based strategy of the central bank, and then it is simply a way to be transparent.  If forward guidance is used to make promises for the future that will not be appropriate in the future, then it is time-inconsistent and should not be part of monetary policy.

For all these reasons monetary policy in the future should be centered on a rule or strategy for the policy instruments designed to achieve stated goals with consistent forward guidance but without cyclical macroprudential actions or quantitative easing."