Problems With Recent Estimates Of The Costs And Benefits Of Regulations

See Reading Past The Headline In OMB's Report To Congress by Susan E. Dudley of Forbes.
Susan Dudley is Director of the George Washington University Regulatory Studies Center.

"On Friday, the Office of Management and Budget released a draft report to Congress on the benefits and costs of the federal regulations issued over the last decade. Reporters will likely seize on the report’s finding that the annual benefits of rules issued during that period range from $287 to $911 billion, while estimated costs are between $78 and $115 billion. These figures imply that regulatory benefits are at least 3-and-a-half times—and possibly as much as eight times—their costs.

Given such dramatic beneficial results from regulation, why is the Trump administration so bent on deregulation? Reading past the top line numbers offers a rationale.

Problems with Benefit and Cost Estimates

First, OMB’s figures are not independent estimates, but tallies of estimates agencies presented to justify individual rules at the time they were issued. Regulators naturally want to present their rules in the best light, and they rely on hypothetical models and assumptions to project benefits that exceed costs. The Environmental Protection Agency has been the most adept at calculating very large benefits from its rules. According to the Report, “EPA rules account for over 80% of the monetized benefits and over 70% of the monetized costs” of all federal regulations over the last decade.

The Report presents a list of important caveats regarding the EPA benefit estimates in particular, including large uncertainty regarding causation, projected exposures, health risk assumptions, and quantification of health effects. It emphasizes that the fact that it reports these results “does not imply an endorsement by the current Administration of all of the assumptions made and analyses conducted at the time these regulations were finalized.”

Second, OMB emphasizes that “none of these costs reflect retrospective evaluation of their impacts.”  The numbers summarized in the Report were developed before anyone had a chance to observe what compliance really entailed or what impact the rules actually had. As the Report notes, “prospective analyses can never fully capture all uncertainties and future changes in the regulated industries and communities.” Despite requirements to do so, agencies rarely look back to evaluate whether their regulations worked as intended.

Another reason to interpret the top line numbers with caution is the Report’s limited scope. First, because it covers fiscal years 2007 through 2016, it does not include the costs and benefits of regulatory activity in the current administration nor during the last four months of the Obama administration (a period that saw a higher than normal rate of regulations). We’ll have to wait until the 2018 report for those data.

Conversely, some of the rules issued in FY 2016 have since been overturned by the Congressional Review Act or are being reconsidered by the new administration, yet the Report includes them “in order to provide an estimated, but not necessarily realized, impact of the rules finalized during the fiscal year the Report covers.”

Also, as has been OMB’s practice, the Report only covers major regulations for which agencies have estimated both benefits and costs.  That means that although agencies issued 36,255 final rules over the 10-year period, the Report only includes benefit and cost information for 137 of them, or less than one-half of one percent. The Report covers only 5% of rules that were considered significant enough to require OMB review, and 22% of “major” rules (those likely to have impacts of at least $100 million in a year).

The reported estimates do not include benefits and costs of regulations issued by independent regulatory agencies, whose rules are not subject to OMB review. However, based on publicly-available information, OMB presents information for the 18 rules those independent agencies classified as “major” in FY 2016 and finds that, while most include some quantification of some costs, none attempt to quantify benefits."

How China Suffered When It Turned Its Back On Trade In The Fourteenth Century

From Cafe Hayek.

"from pages 199-200 of the 2015 Fourth Edition of Douglas Irwin’s important volume, Free Trade Under Fire:

The greatest example of a country turning its back on the world economy is China in the fourteenth century.  The imperial court prohibited any foreign trade (without official permission) for about two centuries after 1371, even going so far as to forbid the construction of new seagoing ships in 1436.  While these efforts did not completely eliminate trade, they severely curtailed it at a time when Chinese merchants were very active in the Indian Ocean and Africa.  China’s action did not stop globalization.  But China lost its technological leadership and fell very far behind the rest of the world in military and commercial strength.  Eventually it fell prey to political domination by the West in the nineteenth century."

Why America Is Going Broke

Entitlements are driving deficits and debt. Absent reform, the problem will soon become a crisis.

By John F. Cogan. Excerpts:

"Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster."

"all—yes, all—of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending. Since the late 1940s, entitlement claims on the nation’s output of goods and services have risen from less than 4% to 14%. Surprising as it may seem, the share of GDP that is spent on national defense and nondefense discretionary programs combined is no higher today than it was seven decades ago."

"Since the early 1970s, entitlements have been the federal budget’s largest spending category, the sole source of the federal budget’s growth relative to GDP, and the primary cause of chronic budget deficits. Today, entitlement spending accounts for nearly two-thirds of federal spending. Defense spending still only accounts for about a sixth of the federal budget, even with recent increases."

"this year Social Security and Medicare expenditures will exceed the payroll taxes and premium payments dedicated to supporting them by $420 billion. Social Security and Medicare deficits will account for half this year’s total budget deficit."

How to Punish American Workers

Steel and aluminum tariffs would cost more jobs than they save.

WSJ Editorial. Excerpts:

"Start with national security, which Commerce construes broadly to include “economic welfare.” There’s little risk that the U.S. couldn’t procure sufficient steel and aluminum for defense even during a war. Defense consumes 3% of U.S.-made steel and about one-fifth of high-purity aluminum. U.S. steel mills last year operated at 72% of capacity while aluminum smelters ran at 39%. Both have ample slack to raise production for defense and commercial demands."

"Canada accounts for 43% of aluminum imports—more than twice as much as China and Russia combined. Steel imports are also diversified with Canada (17%), South Korea (12%) and Mexico (9%) accounting for three of the top four foreign sources. China accounts for about 2% of steel and 10% of aluminum imports.

Commerce nonetheless complains that China has driven down steel and aluminum prices by flooding the global market. Yet Commerce has already imposed 164 anti-dumping and countervailing duties on steel imports including more than two dozen on China. The department has also slapped tariffs on Chinese aluminum. Despite these tariffs, Commerce says rising imports “continue to weaken the U.S. steel industry’s financial health.”

Perhaps Mr. Ross missed the domestic manufacturers’ rosy earnings reports last month. Nucor ’s earnings soared by two-thirds in 2017 to $1.3 billion amid a 35% spike in the price of scrap metal. Steel Dynamics reported record sales, income and shipments last year. Even U.S. Steel posted a $387 million profit after a $440 million loss in 2016. Tariffs have padded profits amid growing U.S. demand.

As for aluminum, 18 smelters have shut down over the last decade amid rising electricity and declining aluminum prices. But production of secondary aluminum from scrap metal has been increasing, resulting in a 3% increase in employment across the industry between 2013 and 2016."

"Each option would raise prices for U.S. industries such as construction, transportation and mining. About 16 times more workers are employed today in U.S. steel-consuming industries than the 140,000 American steelworkers. Economists Joseph Francois and Laura Baughman found that more U.S. workers lost jobs (200,000) due to George W. Bush’s 2002 steel tariffs than were employed by the entire steel industry (187,500) at the time. Job losses hit Ohio (10,553 jobs lost), Michigan (9,829) and Pennsylvania (8,400).

About a quarter of a car’s cost is tied to steel, which is also a key component of domestically-produced wood chipper knives used in lumber, sawmills and landscaping. The oil-and-gas industry uses steel in drilling equipment, pipelines, production facilities, terminals and refineries. Aluminum inputs make up nearly half of the cost of a beer can.

Raising the cost of steel and aluminum inputs would impel many manufacturers to move production abroad to stay competitive globally. Does Mr. Trump want more cars made in Mexico? Mr. Ross has suggested letting businesses petition the government to exclude certain steel and aluminum products from the quotas or tariffs. But this review would be politicized and cause production delays."

Why Economists Are Worried About International Trade

By N. GREGORY MANKIW. Excerpts:

"In a model pioneered by my Harvard colleague Marc Melitz, when a nation opens up to international trade, the most productive firms expand their markets, while the least productive are forced out by increased competition. As resources move from the least to the most productive firms, overall productivity rises."

"In a 1995 paper, the economists Jeffrey D. Sachs and Andrew Warner studied a large sample of nations and found that open economies grew significantly faster than closed ones."

"when closed economies remove their trade restrictions. Again, free trade fares well. Throughout history, when nations have opened themselves up to the world economy, the typical result has been an increase in their growth rates. This occurred in Japan in the 1850s, South Korea in the 1960s and Vietnam in the 1990s."

"Some countries trade less because of geographic disadvantages.

For example, New Zealand is disadvantaged compared with Belgium because it is farther from other populous countries. Similarly, landlocked nations are disadvantaged compared with nations with their own seaports. Because these geographic characteristics are correlated with trade, but arguably uncorrelated with other determinants of prosperity, they can be used to separate the impact of trade on national income from other confounding factors.

After analyzing the data, Mr. Frankel and Mr. Romer concluded that “a rise of one percentage point in the ratio of trade to G.D.P. increases income per person by at least one-half percent.”"

Tech Giants Are Less Powerful Than They Seem

A hallmark of companies cresting into middle age is a preoccupation with regulatory politics

By Holman W. Jenkins, Jr.. Excerpts:

"Google is said to be dominant in a certain kind of “search,” but searching for purchasable items now often begins on Amazon. Meanwhile, much of the online information that most preoccupies Americans is to be found inside Facebook, Twitter and other apps whose data isn’t reachable by Google.

Facebook is surely dominant in the business of algorithmically sifting your friends’ posts to decide which you’ll see, but there remain plenty of other ways for friends to exchange information.
Facebook and Google together are said to be dominant in digital advertising. But digital ads are ads, a $540 billion annual market they hardly dominate.

Amazon is said to be dominant in e-commerce, with a 44% share. But its share of total U.S. retail sales is 4%. Its share of global retail sales is less than 0.5%.

–– ADVERTISEMENT ––

What’s more, companies dominant today won’t be dominant a decade or two from now. That’s the lesson of history. Today’s leaders will guard existing cash flows and leave it to others to try to catch the next bit of lightning in a bottle. And for good reason: The iPhone, Google’s search box and the Facebook twist on social media were far from certain to be the windfalls they turned out to be."

"Apple is lashed to a single product, the iPhone, whose latest model is hardly leaping off the shelf. Apple’s fabulous margins are increasingly maintained by jacking up prices. The company is moving into a grandiose new headquarters even as it falls far behind in the video-streaming market it once imagined conquering.

Already visible down the road are wearable technologies, augmented and artificial reality, various services that render the limitations of location meaningless. Anybody who thinks he knows which companies will capture these opportunities is fooling himself.

The truth is, today’s digital giants are providers of easily dispensable or replaceable services, so must act constantly to keep users happy or risk being eclipsed."

"The tech giants were all but pushed into being influential voices in the net-neutrality fight, not because they believed in the cause, but because anything that centralizes control in Washington naturally appeals to companies with the biggest lobbying clout. At the same time, their greatest fear is Congress deciding their own platforms should be treated as “public utilities” too."

Children’s Health-Care Myths-CHIP won’t be ended, though Democrats once said it should be

WSJ Editorial. Excerpts:

"The program known as CHIP was passed in the 1990s to offer health insurance to children in low- and middle-income families that earn too much to qualify for Medicaid. CHIP expired Sept. 30"

"House Republicans suggested paying for part of the program with slightly higher premiums for affluent Medicare beneficiaries. Democrats refused."

"Last week the Congressional Budget Office reduced the cost of a five-year extension to $800 million over 10 years from more than $8 billion. Here’s why: Republicans as part of tax reform zeroed out the ObamaCare penalty for declining to buy health insurance."

"CHIP crowds out private insurance. States can also set eligibility requirements that reach up to 405% of the poverty level, which means fewer resources for the truly needy. The program started as a partnership but in 2016 states pitched in less than $2 billion of the $15.6 billion total"

"Someone should track down Henry Waxman, the former Democratic Congressman who during the Affordable Care Act debates of 2009 told Kaiser Health News that “once health care reform is in place, however, the case for a separate program for children” that excludes parents is “less compelling.”"

In New York, Many Apartments In The Affordable Housing Policy "were slated for middle-income occupants"

See At $3,700 a Month, ‘Affordable’ Apartments Go Begging by GINIA BELLAFANTE of The NY Times. Excerpt:

"Ten percent of the apartments are meant for those with “extremely low” incomes (a family of three earning about $26,000 a year or less, for instance) and about 15 percent are for those in the second category (a family of the same size with an annual income in the range of $26,000 to $43,000). This leaves a vast majority of “affordable” apartments in the hands of those who earn anywhere from 51 to 165 percent of the median income for the metropolitan area, or from $43,000 to upward of $141,000 for a family of three. Advocates maintain that the balance ought to be shifted to those further down the income chain and that the greatest need exists among those families making about $35,000.

The fate of a building at 535 Carlton Avenue in Brooklyn, would suggest that they are right. The building was developed with all 300 of its units designated as affordable and available to prospective tenants through a city housing lottery. Half the apartments, though, were slated for middle-income occupants, and although the lottery received more than 93,000 applications, an inadequate number of qualified tenants in the highest income brackets has left 80 apartments empty. The developer, Greenland Forest City Partners, is now advertising them via StreetEasy, social media and so on.

As it happens, 535 Carlton delivers a lot in terms of Instagram friendliness. Designed by CookFox Architects, whose work includes luxury condominiums in the West Village, it looks like the kind of place where everyone is supposed to arrive by Dutch cargo bike and ascend to well-stocked kitchens to make momentous decisions about whether or not tonight’s grain salad ought to be topped with a poached farm egg or something more adventurous. There is a gym, a playroom and a lounge, but using those spaces requires additional fees, which is likely to leave most residents getting their cardio by running up and down the stairs from the lobby. To qualify for a currently available three-bedroom apartment — the rent for which is $3,716 a month — a family of five would have to have a household income of between $129,000 and $170,000.

Logic, or perhaps a pleasant knowledge deficit about the mechanics of New York real estate, would tell us that to fill the vacant spaces, the remaining apartments should simply be offered to people making a lot less money. (The city faced a similar predicament with Gotham West, an affordable development in Hell’s Kitchen that did not attract enough qualified high earners through a lottery; in that case, 224 of 432 middle-income apartments were leased through conventional means.) The way that these public-private partnerships are structured and underwritten, however, the revenue from more expensive units helps offset the rents of those apartments intended for lower-income tenants (some one-bedroom apartments at 535 Carlton, for example, cost as little as $589 a month). Developers can’t just lower the rents to accommodate demand and keep the projects financially viable."

Those metropolitan areas with higher levels of economic freedom tend to experience net in-migration

See Economic Freedom, Migration and Income Change among U.S. Metropolitan Areas by J. Matthew Shumway of Brigham Young University.

"Abstract

Even though metropolitan area governments have no control over state level monetary, labor, or fiscal policies, they are able to enact policies designed to enhance local living conditions— however determined. Such policies include local taxes, labor and wage policies, and regulations that can differ substantially from other metropolitan areas even within the same state. Collectively such policies create differing levels of economic freedom, as measured by standardized indices. We examine differences in levels of economic freedom across United States metropolitan areas and explore how these differences affect migration patterns and local aggregate and per capita income changes. We find that those metropolitan areas with higher levels of economic freedom tend to experience net in - migration and positive changes in aggregate and per capita income, although the balance between in- state and out-of-state migration confounds these patterns."

Forest regrowth can be achieved through higher incomes and high-yield farming techniques, not by coercive sustainable policies while policies to “fight climate change” are causing deforestation

See Go ahead and print your emails, US forests have been growing for 50 years and a global forest regrowth is coming by Mark Perry.

"From the op-ed “The Coming Global Forest Regrowth” by Steve Goreham in The Daily Caller:

Today, forested area is declining in about one-third of the world’s countries, stable in one-third, and growing in one third (see map above). Forests are stable or growing in more than 100 nations, including Australia, Canada, China, India, Japan, New Zealand, Russia, the US, and in most of Europe.

Forests in the United States have been growing for about 50 years. Today, more than 90% of US paper comes from high-yield forests planted specifically to be harvested. Company promotional campaigns to “go electronic and save a tree” have little factual basis, at least in the US.
As the income of nations rises, deforestation changes to forest regrowth. Modern high-yield agriculture techniques reduce the need for additional farmland. Modern fuels, such as propane and natural gas replace wood for heating and cooking. The great promise of forest regrowth can be achieved by boosting the income of nations and the adoption of high-yield farming techniques, not by coercive sustainable policies to restrict forestry or agriculture.
Paradoxically, policies to “fight climate change” are causing deforestation. Biofuel programs pursued by Europe and the United States during the last two decades caused an additional 41 million hectares of land to be used for ethanol and biodiesel production, an area the size of Germany. Rain forests in Indonesia have been cut down and replaced with palm oil plantations, so that feedstock for biodiesel can be shipped 10,000 miles to Germany to meet biofuel targets.
At the same time, evidence shows that rising atmospheric carbon dioxide, partly driven by industrial emissions, is boosting forest growth. Satellite data shows an eleven percent growth in global leaf area from 1982 to 2010. Scientists attribute most of this growth to rising atmospheric carbon dioxide.
Despite all the concern about deforestation, the great news is that world forests will be growing on net within the next few decades."

America’s top five inbound vs. outbound states: How do they compare on a variety of economic, business climate and tax burden measures? Part II

From Mark Perry.

"In a CD post last month, I looked at America’s top five inbound and top five outbound states last year, based on household moving data from North American Moving Services US Migration Report for 2017. Specifically, I compared the top five inbound and top five outbound states on a variety of measures of economic performance, business climate, business and individual taxes, fiscal health, and labor market dynamism, and those comparisons are displayed graphically in the table above.

Yesterday USAToday published a nice summary of The Tax Foundation‘s report “Facts & Figures 2017: How Does Your State Compare?” that analyzes the total tax burden in each state, measured as the percentage of a state’s income that goes to taxes for state and local governments (income taxes, property taxes and sales taxes). I’ve added that measure of total tax burden in the table above (in bold) as the new first row in each group above (Top 5 Inbound and Top 5 Outbound states), along with the state ranking for total tax burden.

For example, four of the top five outbound states (Illinois ranked No. 46, Connecticut at No. 49, New Jersey at No. 48, and California at No. 47) were among the five US states with the highest tax burden — New York was No. 50 (highest tax burden). The average tax burden of the top five outbound states was 11.2%, with an average rank of 43.2 out of 50. In contrast, the top five inbound states have an average tax burden of 8.7% and an average rank of 16.6 out of 50. As would be expected, Americans are leaving states with some of the country’s highest overall tax burdens (IL, CT, CA and NJ) and moving to states with lower tax burdens (TN, SC and AZ).

Bottom Line: As I concluded in the original post, now supplemented with another measure of total tax burden by state, the migration patterns of US households last year followed predictable patterns based on differences among states for tax burden, economic growth, vitality and dynamism, labor market robustness, fiscal health, and party control of state legislatures. The comparison above shows that there are significant differences between the top five inbound and top five outbound US states when they are compared on a variety of measures of economic performance, business climate, tax burdens for businesses and individuals, fiscal health, and labor market dynamism. There is empirical evidence that Americans do “vote with their feet” when they relocate from one state to another, and the evidence suggests that Americans are moving from states that are relatively more economically stagnant, Democratic-controlled fiscally unhealthy states with higher tax burdens, more regulations and with fewer economic and job opportunities to Republican-controlled, fiscally sound states that are relatively more economically vibrant, dynamic and business-friendly, with lower tax and regulatory burdens and more economic and job opportunities."

How can we remedy the shortage of health providers?

By Jeffrey S. Flier. He was dean of Harvard Medical School from 2009 to 2016. Excerpts:

"Ironically, one of the biggest obstacles to improving access to health care providers is the profession itself, enabled by a plethora of public and private agencies that control licensing and certification. These often inadvertently limit access to care rather than enhance it.

The current system for training doctors dates to the early 20th century, when medicine transitioned from a largely ineffective and amateurish enterprise to one rooted in science. Physician training and licensing have certainly evolved since then, but at a disappointingly slow pace. Physician shortages are increasing as the population ages, while many enthusiastic and capable students and trained foreign-born caregivers are shut out of the profession.

Why has so little attention been paid to the number and quality of health care providers? Physician education, licensing, and credentialing are determined by an alphabet soup of organizations that change at a glacial pace. Their roles and interactions are difficult to delineate, even for a former dean of Harvard Medical School, and this complexity makes change difficult.

Worse, while the mission statements of these licensing organizations stress public health, they also serve the interests of incumbent professionals, who may be wary of new competitors. Tension between these conflicting interests produces a less innovative, less diverse, and less accessible workforce than could be the case.

Accreditation is regulated by the Liaison Committee on Medical Education, a body sponsored by the Association of American Medical Colleges and the American Medical Association and recognized by the Department of Education for accrediting programs leading to the M.D. degree. It manages a rigorous process that, despite many benefits, raises the bar too high for creating new medical schools and slows the rate of educational innovation.

After completing medical school, graduates must pass a three-part exam and complete a one-year internship to become eligible for state licensing. Most physicians undertake further clinical training and specialization in hospitals, overseen by other certifying organizations. Hospital committees conduct evaluations before granting admitting privileges to carry out specific procedures or tasks.

As my colleague Jared Rhoads and I argue in a white paper on the U.S. health provider workforce, the key is to substitute competency-based assessments for the process-driven approaches used today. Some costly exams and recertification processes have little or no evidence to support their use. Which schools a doctor has attended or exams she has passed matter far less than her competence. And please don’t misconstrue finding new ways to train and certify competent providers as lowering standards or expectations for quality — it’s quite the opposite.

The number of U.S. medical schools and the size of each year’s class have increased over the past decade, but not enough to solve the pressing workforce issue. Nearly a quarter of currently licensed physicians — well over 200,000 — are foreign trained, and the care they provide equals that of graduates of U.S. medical schools. They disproportionately practice in rural and underserved communities. Why not increase their numbers?

The Educational Commission for Foreign Medical Graduates certifies international medical graduates from legitimate medical schools, regulates access to the same exams that U.S. grads must pass, and authorizes the residencies required for licensing. But many more foreign medical graduates are eligible for residency positions in U.S. hospitals than there are available slots for them.

If training slots are limited, why not allow fully trained foreign physicians to fill the void? Under current rules, to secure a license they must repeat in U.S. hospitals the residencies and fellowships they already completed in their home countries. Many outstanding doctors will not do this. It would not be difficult to design a system through which hospitals and other health organizations facilitate and take responsibility for physician relocation.

Another indicator of the medical profession’s inadequate response to consumer demand is the rapid growth of nonphysician health providers. Nurse practitioners undertake advanced training that enables them to diagnose and treat disease, write prescriptions, and bill for services. They can practice independent of physician oversight in 21 states and the District of Columbia.

Today’s 234,000 licensed nurse practitioners can’t provide every health service. But for those they are able to perform, the quality of the care they deliver and patient satisfaction are equivalent to that provided by physicians. They fill major unmet needs, such as primary care. Yet some states still seek to limit the activity and independence of nurse providers."

How Building Regulations Subsidize Mansions

From Alex Tabarrok of Marginal Revolution.

"Regulations that prevent land from being fully developed raise the price of housing. That’s true but land use regulations can also make some types of housing less expensive. In particular, Jaap Weel has a good post explaining how land regulations subsidize mansions.

Consider the buildings below: a mansion on a 1 acre lot in Atherton, and a 350 unit mixed use condo on a 1.6 acre lot 2 miles further up the peninsula in Redwood City. The mansion just sold for $6m. The condo building, when finished, will probably fetch hundreds of millions.

If it weren’t for Atherton’s zoning code, you’d never be able to buy that mansion for a mere $6m. A developer that wanted to tear it down and build condos could bid far more than that. But the zoning code mandates single-unit buildings with a floor area ratio below 18% on lots of at least 1 acre, so $6m it is. Quite the bargain.

In a market economy bidding tends to move resources from low-valued uses to high-valued uses. Regulations that prevent bidding freeze resources into low-valued uses–that’s bad for the resource owners and bad for society as the total value of production is reduced but it can be good for the consumers of low-valued uses.

Addendum: For more on floor area ratio regulations, see my video on skyscrapers and slums in Mumbai."

Wikipedia on Floor area ratio.

"Floor area ratio (FAR) is the ratio of a building's total floor area (gross floor area) to the size of the piece of land upon which it is built. The terms can also refer to limits imposed on such a ratio through zoning.

As a formula FAR = (gross floor area) / (area of the plot)"

The legalization of the cannabis market across US states is inducing a crime drop

Crime and the legalization of recreational marijuana by Davide Dragone, Giovanni Prarolo, Paolo Vanin and Giulio Zanella in Journal of Economic Behavior & Organization.

Abstract

"First-pass evidence is provided that the legalization of the cannabis market across US states is inducing a crime drop. We exploit the staggered legalization of recreational marijuana enacted by the adjacent states of Washington (end of 2012) and Oregon (end of 2014). Combining county-level difference-in-differences and spatial regression discontinuity designs, we find that the policy caused a significant reduction in rapes and property crimes on the Washington side of the border in 2013-2014 relative to the Oregon side and relative to the pre-legalization years 2010-2012. The legalization also increased consumption of marijuana and reduced consumption of other drugs and both ordinary and binge alcohol. Four possible mechanisms are discussed: the direct psychotropic effects of cannabis; substitution away from violence-inducing substances; reallocation of police effort; reduced role of criminals in the marijuana business."

The More Gender Equality, the Fewer Women in STEM

A new study explores a strange paradox: In countries that empower women, they are less likely to choose math and science professions.

By Olga Khazan of The Atlantic. Excerpt:

"Though their numbers are growing, only 27 percent of all students taking the AP Computer Science exam in the United States are female. The gender gap only grows worse from there: Just 18 percent of American computer-science college degrees go to women. This is in the United States, where many college men proudly describe themselves as “male feminists” and girls are taught they can be anything they want to be.

Meanwhile, in Algeria, 41 percent of college graduates in the fields of science, technology, engineering, and math—or “STEM,” as its known—are female. There, employment discrimination against women is rife and women are often pressured to make amends with their abusive husbands.

According to a report I covered a few years ago, Jordan, Qatar, and the United Arab Emirates were the only three countries in which boys are significantly less likely to feel comfortable working on math problems than girls are. In all of the other nations surveyed, girls were more likely to say they feel “helpless while performing a math problem.”

So what explains the tendency for nations that have traditionally less gender equality to have more women in science and technology than their gender-progressive counterparts do?

According to a new paper published in Psychological Science by the psychologists Gijsbert Stoet, at Leeds Beckett University, and David Geary, at the University of Missouri, it could have to do with the fact that women in countries with higher gender inequality are simply seeking the clearest possible path to financial freedom. And often, that path leads through STEM professions.

The issue doesn’t appear to be girls’ aptitude for STEM professions. In looking at test scores across 67 countries and regions, Stoet and Geary found that girls performed about as well or better than boys did on science in most countries, and in almost all countries, girls would have been capable of college-level science and math classes if they had enrolled in them.

But when it comes to their relative strengths, in almost all the countries—all except Romania and Lebanon—boys’ best subject was science, and girls’ was reading. (That is, even if an average girl was as good as an average boy at science, she was still likely to be even better at reading.) Across all countries, 24 percent of girls had science as their best subject, 25 percent of girls’ strength was math, and 51 percent excelled in reading. For boys, the percentages were 38 for science, 42 for math, and 20 for reading. And the more gender-equal the country, as measured by the World Economic Forum’s Global Gender Gap Index, the larger this gap between boys and girls in having science as their best subject. (The most gender-equal countries are the typical snowy utopias you hear about, like Sweden, Finland, and Iceland. Turkey and the United Arab Emirates rank among the least equal, according to the Global Gender Gap Index.)

The gap in reading “is related at least in part to girls’ advantages in basic language abilities and a generally greater interest in reading; they read more and thus practice more,” Geary told me.

What’s more, the countries that minted the most female college graduates in fields like science, engineering, or math were also some of the least gender-equal countries. They posit that this is because the countries that empower women also empower them, indirectly, to pick whatever career they’d enjoy most and be best at.

“Countries with the highest gender equality tend to be welfare states,” they write, “with a high level of social security.” Meanwhile, less gender-equal countries tend to also have less social support for people who, for example, find themselves unemployed. Thus, the authors suggest, girls in those countries might be more inclined to choose STEM professions, since they offer a more certain financial future than, say, painting or writing.

When the study authors looked at the “overall life satisfaction” rating of each country—a measure of economic opportunity and hardship—they found that gender-equal countries had more life satisfaction. The life-satisfaction ranking explained 35 percent of the variation between gender equality and women’s participation in STEM. That correlation echoes past research showing that the genders are actually more segregated by field of study in more economically developed places."

The Shocking Election That Saved Israel's Economy: It wasn't easy, but the capitalist reforms set in motion by Prime Minister Menachem Begin 40 years ago were transformative

By Zev Chafets. Zev Chafets is a journalist and author of 14 books. He was a senior aide to Israeli Prime Minister Menachem Begin and the founding managing editor of the Jerusalem Report Magazine.

"It was May 17, 1977."

"There had never been a change of governing party before in Israel. For the first time, Mapai, the socialist party founded by David Ben-Gurion and now led by his disciple Shimon Peres, was out of power."

"Perhaps the worst accusation they had leveled against Begin was that he was a capitalist."

From Israel's founding until the 1977 vote, Mapai or its affiliated Histadrut labor organization tightly controlled most of the country’s agriculture and industry, health care and social welfare, infrastructure and development, education, housing and radio."

"Begin, who had spent an instructive year in a Siberian Soviet gulag during World War II, was skeptical of such power. He had simple instructions for his finance minister, Simcha Ehrich: Free the economy and make life better for the common people (by which he meant Likud voters).

"Ehrlich was devoid of formal education or economic training. The Israeli media began calling him a follower of Milton Friedman, the free market guru who had recently won the Nobel for economics. But Ehrlich, who couldn’t read or write English, didn’t know Milton Friedman from Kinky Friedman.

A few months before the 1977 election, in an address to a business group, Ehrlich set out his core economic belief: “Israel is too small and too poor to maintain a welfare state.”"

"In some ways, the economy had more in common with the Communist satellites of Eastern Europe than with Western countries. But as welfare states went back then, Israel was pretty good. It provided free public schools and cheap university tuition; affordable, high-quality public health care; subsidized food; available work with strong labor protections; and decent social services. But the price for all this was confiscatory income taxes, high tariffs on foreign-made luxury goods (almost anything fancier than a can opener qualified), low incomes and poorly made local products.

Like Begin, Ehrlich thought that Israel’s economic potential was being stifled by misguided ideology and political self-interest of the socialists. His mission was to turn things around. Rarely has anyone been less suited for a task.

When Ehrlich arrived at the Finance Ministry, he came alone. The senior staff, largely Labor Party loyalists trained in Keynesian economics and fond of the status quo, gave him very little help. But Ehrlich plowed ahead with his agenda: deregulating foreign currency, lowering import barriers, allowing the Israeli pound to trade freely, cutting government spending, shrinking the bloated bureaucracy, and weakening the power of the labor by introducing mandatory arbitration.

As a free market plan, this sounded good. As a practical matter, it provoked an epic fiasco. Only a few small reforms were put in place. Foreign currency moves were popular. Small businesses were intoxicated. But the budget cutting didn’t go over well with the Likud’s base of working-class voters. The niceties of fiscal policy and foreign currency didn’t mean much to these folks, and they did not want their subsidies cut just because some Tel Aviv businessmen thought it was inflationary or wasteful. They complained loud enough for Begin to hear. He told his finance minister that government spending cuts were no longer a priority. Shortfalls could be covered at the printing press.

Inflation had been a problem in Israel since the 1973 Yom Kippur War. Rebuilding the army and air force required the kind of money Israel couldn’t print. And, in the wake of the oil boycott, fuel prices drove inflation to about 30 percent -- which helped put the Likud in office in 1977.

Unfortunately, the Likud had no answer. Within two years, the Israeli pound was inflated by 110 percent, and Ehrlich was sent to political Siberia as minister of agriculture.

Things would get worse before they got better. The signature move of the next finance minister, Yigal Horowitz, was to scrap the pound and replace it with the shekel, a Biblical name that didn’t fool anyone. Israeli currency was nearly worthless, by any name. Soon the entire economy was being conducted in dollars, the price of which soared on the black market.

During this time, Begin focused on making peace with Egypt, planning the destruction of the Iraqi nuclear reactor, building settlements and infrastructure in the West Bank, and fighting the Palestinian terrorism emanating from across the northern border. On the eve of the 1982 War in Lebanon, the Ministry of Finance, now under its fourth minister, warned about the economic burden of a military campaign. Begin shrugged, and quoted Napoleon: “The cavalry charges ahead, while the supply mules follow behind.”

The ministry, however, had a point. When Begin retired in 1983, inflation was about 300 percent and rising. After new elections, Labor and Likud finished in a near tie and, in 1985, formed a government of national unity led by Peres, now of Labor. He and Likud Finance Minister Yitzhak Modai put together a bold and politically fraught plan to stabilize the economy. It called for deep budget cuts and a deficit reduction, wage and price controls, and another new currency -- the “new shekel,” which came with 20 percent devaluation and limits on the freedom of the Bank of Israel to print more.

Amazingly, it worked. In its first year, the plan lowered inflation by half, and it reached a manageable 10 percent within a decade. The prospect of social and economic collapse gradually became a memory.

It pained the socialist Peres to make a deal that would, in effect, end the Labor Zionist dream of a centrally controlled egalitarian workers’ democracy. But Peres clearly saw what Ehrlich had dimly perceived -- that free market global capitalism was the irresistible wave of the Israeli future.

The process had been set in motion. In the 1990s, a million Jewish immigrants full of energy and entrepreneurial dreams arrived. Universities and elite military units began turning out a generation of cyber wizards, high-tech innovators and MBAs. Prime Minister Yitzhak Rabin (another son of socialist Mapai) capitalized on this windfall of human capital by offering very generous tax incentives to foreign investors. A few years later, Benjamin Netanyahu, a genuine Friedmanite serving as finance minister, implemented a major round of privatization and cut income and corporate taxes.

But we shouldn't discount Begin's leadership that set up Likud, despite all the economic stumbles and rough patches, to rule the country for most of the last 40 years and rules it still.

In 2010, Israel was accepted into the Organization for Economic Cooperation and Development, the club of prosperous free market nations. Its population now exceeds 8 million. It is neither “too small nor too poor” to be a viable welfare state, as Ehrlich once said, nor too idealistic to brag about its capitalist credentials."

Sarbanes-Oxley promotes inequality

See A Pox on SOX, It’s Bad for Stocks: Sarbanes-Oxley promotes inequality by discouraging companies from going or remaining public by Scott S. Powell. Mr. Powell is an economist and senior fellow at Discovery Institute in Seattle. Excerpts:

"Section 404 of Sarbanes-Oxley imposed an intrusive audit regime on almost every aspect of a public company’s operation. This has proved to be one of the most costly and counterproductive regulations ever introduced, with compliance adding about $2 million in annual costs for the smallest public companies and far more for bigger companies.

Section 404 audits focus on minute operational details, not on detecting the kind of high-level accounting fraud that took WorldCom down. The costs Section 404 imposes have disproportionately affected small public companies and discouraged many promising venture-capital-backed enterprises from going public."

"Combined with the impact of mergers, acquisitions and corporate failures, Sarbanes-Oxley has dramatically reduced the number of public company investment opportunities in the U.S. In 1996 there were 7,322 public companies listed on U.S. stock exchanges; today there are 3,671. With fewer initial public offerings, powerful incumbent firms have raised barriers to new entrepreneurship and made it harder for competing startups to raise funding, tamping down innovation.

Before Sarbanes-Oxley, young companies on the path to an IPO could remain entrepreneurial and nimble. But the law created massive disincentives to seeking capital from public markets. Instead of going public and accepting the huge costs of SOX compliance, young companies increasingly sought acquisition by other larger public or private businesses. Many startups chose to stay private in the portfolios of venture-capital and private-equity firms.

Wall Street and the capital markets also adjusted to the law. Investment banks redirected resources into originating, structuring and trading real-estate mortgage debt, which helped create the financial excesses that nearly sank the economy in 2007-08. Investment dollars increasingly fled from public markets, finding their way instead into private equity and venture capital firms.

By reducing investment opportunities for middle-class Americans, Sarbanes-Oxley had the unexpected consequence of exacerbating wealth inequality. The world of venture capital and private equity is an exclusive club for the rich, while the public markets cater to diverse investors—both affluent and of modest means. When companies went public earlier in their lifetimes, employees and average investors had more opportunities to build wealth.

The share of wealth owned by the top 1% of Americans has surged over the last generation in part because those not already at the top have been increasingly shut out of the wealth-creation process. To redress this growing wealth disparity and invigorate entrepreneurial dynamism in the U.S. economy and capital markets, Congress can take some fairly simple legislative action."

The High Cost of ‘Affordable Housing’ Mandates

‘Inclusionary zoning’ laws create a vicious circle of higher prices and reduced demand.

By Paul Kupiec and Edward Pinto of AEI. Excerpts:

"Philadelphia, Detroit and Atlanta are requiring developers to set aside some portion of their new units to sell or rent at below-market prices to low-income households. Like many progressive promises, this is a fool’s errand. These laws will reduce the cost of housing for targeted political groups if they increase the cost of housing for everyone else."

"While the intent of these laws is to increase the supply of affordable housing, history shows they increase the cost of housing and limit the supply of new affordable units."

"Consider a project plan to produce 100 identical new housing units with development outlays for land, materials, zoning site preparation and other costs of $23.75 million. Including a 5% return for the developer, the project costs $25 million. Without government involvement, the market price for each housing unit will be $250,000. The successful sale of 100 units at this price would cover all out-of-pocket development costs and earn the developer a competitive profit.

What happens if the municipality requires the developer to sell 10% of these new units at below-market prices? Laws are rarely so specific, but assume that the municipality caps the price on affordable units at $125,000. The law doesn’t change the cost of building. It merely changes the price the developer can legally charge for some of its new housing units. The total cost of $25 million must now be spread over 10 units, each with a maximum legal price of $125,000, and 90 units priced to cover the remaining cost. Each of the 90 “market price” units must sell for $263,889 for the developer to cover costs.

Policy makers may view inclusionary zoning as a free lunch, but requiring developers to sell or rent 10% of their housing units at below-market prices to “qualified households” means charging above-market prices to everyone else. The affordable-housing requirement increases the median house price in the development by 5.5%."

"If the potential pool of nonsubsidized qualified home buyers falls short of 90 households when new units are priced at $263,889, the developer won’t undertake the project."

"A 2004 study by the Reason Foundation found that inclusionary zoning laws led to less affordable housing in the San Francisco Bay area. The total production of new housing units declined, and the production of new affordable-housing units declined precipitously."

"Studies by both the Cato Institute and the Brookings Institution show that housing is more affordable where there are fewer land-use restrictions. If zoning, building codes, fees and inclusionary zoning laws raise development costs, housing will be expensive."

In 2016, solar and wind provided just 0.8% of the world’s energy

From Mark Perry.

"In 2016, solar and wind provided just 0.8% of the world’s energy, even after trillions of dollars in taxpayer-extracted subsidies, and will reach only a 3.6% share of energy in 2040, according to the International Energy Agency World Energy Outlook 2017 forecast (see graphic above). The world’s energy future of tomorrow, even almost a quarter century from now in 2040, will look very much like it does today, with fossil fuels supplying the large majority of our energy (81% today vs. 75% in 2040) and renewables playing a relatively minor role as energy sources.

Sources: Bjorn Lomborg and Matt Ridley (“Shale is the Real Energy Revolution”)."

Sky-high cigarette taxes are the new Prohibition: The consequences are eerily similar

By Michael Lafaive & Todd Nesbit. LaFaive is senior director of fiscal policy at the Mackinac Center for Public Policy. Nesbit is an assistant professor of economics at Ball State University.

"As long as New York levies a stratospheric $4.35 per pack in cigarette taxes — tied for the highest of any state — the authorities’ inability to stop smuggling should not surprise anyone. It has roots in America's past.

Our analyses of cigarette taxes and related smuggling — which we’ve been doing since 2008 — show that in 2015 an amazing 57% of all cigarettes consumed in the state were tied to tax evasion and avoidance. The catchall term “smuggling” describes this phenomenon in which cigarettes are brought in from another taxing jurisdiction, either by customers trying to save a buck or by organized criminals.

Not only are high cigarette taxes ineffective, they can be costly for governments. Law enforcement devotes substantial resources to a largely futile effort. And New York lost somewhere in the neighborhood of $1.6 billion in tax revenue due to cigarette tax evasion and avoidance in 2015.
Cigarettes are a legal product, but the excise taxes imposed on them are so high in New York (and many other states) that they create a powerful incentive for people to behave in illicit or illegal ways. This includes many similarities to the era of alcohol prohibition.

Consider just a few examples.

First, cigarette taxes lead to criminals moving illicit products for profit. As with real alcohol prohibition, people are engaging in organized crime on a wide scale. By moving cigarettes from low-tax states to high-tax states for illegal resale, syndicates can generate enormous sums. In June of last year officials arrested members of an operation that purchased 5,000 cartons per week in Virginia and North Carolina for purported resale around New York City.

Second, brazen theft. Attempts to steal from retailers and wholesalers are not uncommon today. In Brooklyn last summer a duo was aggressively walking off with about $10,000 in stolen cigarettes from multiple locations. One robbery alone netted $1,000.

During Prohibition, stealing meant robbing fellow criminals rather than retailers, and that happens with illicit cigarettes today. In 2015 one Richmond, Virginia headline read, “Robbery Victim Arrested, Charged in Cigarette Trafficking.” The victim ran illegal smokes out of his business and was apparently robbed by an employee. That same article read, “New York authorities complain traffickers there have been robbing each other of cash and valuables, readily disposable cigarettes.”

Third, murder-for-hire (yes, you read that right). As with Prohibition, operating in an illegal market carries risks beyond getting caught by authorities. Participants must sometimes settle disputes without legal mechanisms such as lawyers and lawsuits. In October 2013 two men were indicted in New York for their part in a murder-for hire gambit against people they thought were cooperating with authorities against them in a smuggling case. It is not the only instance.

The list of parallels goes on and on. Others include selling “loosies” (like shots of whiskey during Prohibition), poorly made counterfeit cigarettes (bathtub gin), public corruption, impersonating police officers, and the production of potent, homemade wine and liquor. Today people roll their own and regulate their nicotine intake by including or foregoing filters."

Private Jet-Setters Against Better Air Travel

The folks who don’t fly commercial are blocking air-traffic reform

WSJ editorial. Excerpts:

"The contention that the airlines would own the sky is a powerful political argument because the public imagines the traffic director of the heavens as a United gate agent. But the major airlines would nominate only one seat on a 13-member board, as the Reason Foundation’s Robert Poole has pointed out, down from four in a previous proposal.

Also on the board are members nominated by cargo airlines, regional airlines, airports, business jets, unions and others, none of whom will be easily reaccomodated to whatever the major airline agenda is. Board members cannot be employed or paid by any aviation business or group during their tenure. The bill also exempts general aviation from paying any air-traffic user fees. This includes business jets.

Another canard is that small communities will be stranded. The bill continues to throw money into the Airport Improvement Program, which exists to funnel money into runway and other updates, especially for rural airports. The bill also maintains Essential Air Service that pours cash into rural routes that are often barely patronized. One near certainty: Congress won’t end these subsidies.

What’s really going on? The business jet industry pays 0.6% of aviation user taxes but accounts for 11% to 13% of controlled traffic, as Marc Scribner of the Competitive Enterprise Institute has noted. The industry would like to keep it that way.

Then again, perhaps his members should ask Mr. Bolen for a refund. The point of a spinoff is that private expertise could implement new technology that allows planes to take off and land in more efficient patterns and fly more direct routes. A CEO flying to Los Angeles for lunch is sensitive to 30 minutes awaiting takeoff.

The status quo comes at your expense. The Eno Center for Transportation recently compared weight and distance fees like Canada’s with U.S. taxes. Fees on an Airbus A320 from New York to Fort Myers, Fla., would be 43% lower than today’s taxes, and on some routes the figures dipped to a 60% reduction. This translates to a radical cut in the annoying list of costs tacked on to your ticket price."

Infrastructure spending won’t transform America

By George Will.

"What rural electrification was eight decades ago, broadband access might be today: a blessing not widely enough enjoyed. But infrastructure spending will not have the economically and socially transformative effect that it had before America became a mature urban society. Princeton historian James M. McPherson writes that before all-weather macadamized roads, it cost the same to move a ton of goods 30 miles inland as it cost to bring a ton across the Atlantic.

Some historians even suggest that there might not have been a Civil War if the fourth president, James Madison, had not vetoed (on constitutional grounds; he thought that no enumerated power authorized Congress to do such things) the infrastructure bill of South Carolina’s Sen. John C. Calhoun, who became a secessionist firebrand. Their theory is that improved infrastructure might have moved the South away from reliance on a slavery-based agricultural economy.

Today, the nation needs somewhat increased infrastructure spending to increase productivity by reducing road and port congestions and boosting the velocity of economic activity. Unfortunately, this subject is not immune to the rhetorical extravagance that infects all of today’s political discourse.
The American Society of Civil Engineers constantly views with high-decibel alarm the fact that governments at all levels do not buy as much as the ASCE thinks they ought to buy of what civil engineers sell. A calmer assessment comes from the RAND Corp.’s study “Not Everything Is Broken”:

Since the mid-1950s, public infrastructure spending “has generally tracked the growth of the U.S. economy.” In 2014, state and local governments — they always have done, and always should do, most infrastructure spending — made 62 percent of the nation’s capital expenditures and 88 percent of operations and maintenance for transportation and water infrastructure. Federal capital spending on highways has been declining since the interstate highway system was mostly completed, but at the end of 2016, municipal bond issues to finance infrastructure were the highest in history, more than double the 1996 level. And although the construction industry and unions might disagree, not everything ever built merits maintenance in perpetuity.

The last surge of infrastructure spending, in the Obama administration’s stimulus, taught a useful lesson: Because of the ever-thickening soup of regulations, there are no “shovel-ready” projects. So, such spending cannot be nimble enough to ameliorate business cycles. This is just as well: Government attempts to fine-tune the economy are folly. America got many marvels — e.g., the Hoover Dam and the Golden Gate Bridge — from New Deal infrastructure spending. It did not get what the spending was supposed to provide: a cure for unemployment, which never fell below 14 percent until the nation prepared for World War II."

U.S. Charter Schools Produce a Bigger Bang with Fewer Bucks

By Corey A. DeAngelis of Cato.

"The evidence is in. And it’s great news for kids in charter schools. A just-released study by my colleagues at the University of Arkansas and me finds that, overall, public charter schools across eight major U.S. cities are 35 percent more cost-effective and produce a 53 percent higher return-on-investment (ROI) than residentially assigned government schools.

And every single one of the cities examined exhibited a charter school productivity advantage over their district school counterparts. As shown in Figure 1 below, charter schools outperformed district schools in each city on student achievement despite receiving significantly less resources per student. Charter schools in all eight cities studied are getting more bang for the buck. And in places like D.C. and Indianapolis, charter schools are doing more with a lot less.

Figure 1: Charter School Funding and Performance



Our ROI models consider the effect that each schooling sector has on children’s lifetime earnings relative to the total taxpayer investment for children’s K-12 education in each sector. As shown in Figure 2 below, charter schools provide a huge ROI for taxpayers. And D.C. charter schools are knocking it out of the park by producing an 85 percent higher ROI for their taxpayers than district schools.

Let’s make this a bit more concrete. The data show that every thousand dollars spent on education in D.C. district schools translates to around a $4,510 increase in students’ lifetime earnings. That is commendable. But that same thousand-dollar-expenditure produces an estimated $8,340 in students’ lifetime earnings if allocated to a public charter school in the city. And that 85 percent advantage is huge considering that taxpayers spend over $458,000 for each child’s K-12 education in D.C. district schools.

Figure 2: ROI for Charter Schools Relative to TPS (13 Years)



Notably, charter schools in Boston and Indianapolis both produced ROIs that were over 60 percent higher than their neighboring district schools. New York City, San Antonio, and Denver all produced ROIs that were 29 to 32 percent higher than district schools.

But these results shouldn’t surprise anyone. When educational institutions have the incentive to spend money wisely, they do just that. Because residentially assigned government schools do not have to attract their customers, they can spend tons of money on administration and fancy buildings. On the other hand, charter schools must spend money on kids – rather than administrators – if they want to keep their doors open."

Nearly 1,500 economists attest to the economic benefits of immigration

By Douglas Holtz-Eakin & Patrick Hefflinger.

"Nearly 1,500 economists, including six winners of the Nobel Prize in Economics and covering the spectrum of political preferences, signed a letter to President Trump and the leadership of the House and Senate attesting to the economic benefits of immigration. (I organized the letter along with the folks at New American Economy.) The letter makes the very straightforward points:

• Immigration brings entrepreneurs who start new businesses that hire American workers.
• Immigration brings young workers who help offset the large-scale retirement of baby boomers.
• Immigration brings diverse skill sets that keep our workforce flexible, help companies grow, and increase the productivity of American workers.
• Immigrants are far more likely to work in innovative, job-creating fields such as science, technology, engineering, and math that create life-improving products and drive economic growth.

In short, immigration is — on balance, as there are admittedly costs as well as benefits — a central contributor to American economic dynamism. Moreover, it has remained so even as the character of immigration has changed over the centuries (hat tip to the Wall Street Journal for this fantastic graphic), with the most recent period dominated by Latinos.

The old joke is that if you laid all the economists end-to-end, they would not reach a conclusion. Immigration may be the exception that proves this rule."

Why the Dynamics of Competition for Online Platforms Leads to Sleepless Nights But Not Sleepy Monopolies

By David S. Evans. He is from the Global Economics Group; University College London.

Abstract

"Recent claims that online platforms have secured permanent monopolies, protected by barriers to entry from network effects and stockpiles of data, and should be the focus of intense antitrust and regulatory scrutiny, are inconsistent with the economics, technology, and history of online competition. Online platforms face dynamic competition as a result of: disruptive innovation that provides opportunities for entry; competition from online platforms that have secured a toehold in one area but compete across multiple areas; the fragility of category leadership resulting from the fact that network effects are reversible and entry costs are low; and the prevalence of ad-supported models which result in seemingly disparate firms competing for consumer attention and advertiser dollars. The last two decades of online platform competition demonstrate that category leaders are often toppled, unexpectedly, through some combination of technological change, business model innovations, and cross-platform rivalry. The palpable threat of displacement prevents online platforms from taking their customers for granted. The history of online platform competition also provides empirical refutation of the proposition that data on users protects platform leaders from competition or puts an insurmountable obstacle before entrants. All this points to online platforms facing sleepless nights since any online platform that tries the quiet life of monopoly risks catastrophe."

Competition in Tech is More Vibrant than It Looks

Ryan Khurana of CEI.

"Calls for regulatory action against big tech firms, including Amazon and Google parent company Alphabet, have intensified after they reported record profits. The case that the largest online giants are monopolies that require antitrust action has been made by critics from both left and right. The case against these companies, however, is on shaky ground.

On the surface, it looks like there is significant market concentration. Facebook owns the top three social media apps—Facebook, WhatsApp, and Messenger, all of which exceed 1 billion unique monthly active users. The company captures 20.9 percent of total U.S. digital ad revenue, putting it only behind Alphabet, which, through products like Google Search and YouTube, captures 42.2 percent, leading to claims that these two firms form a duopoly (although Amazon is fast encroaching on this space).

However, putting these numbers in perspective makes the picture more complicated.
First, while Facebook dominates social media apps, this does not mean it dominates mobile entirely. Apple’s native iMessage service, which does not show up in social media download statistics, shows much higher user engagement than Facebook Messenger, especially among younger demographics. While Snapchat has less than one third of Instagram’s users, those under 25 use Snapchat much more heavily, suggesting that demographics need to be taken account in order to assess long-term dominance. The market space online is far more complex than direct competition, as each social media site seeks to carve out its own niche.

One criticism levied against a firm like Facebook is that its dominant position can be used to influence its users in a way others cannot. Claims about addictiveness and the network effects that make Facebook difficult to leave are cited to justify claims that Facebook is too big. Yet, this obscures the fact that Facebook has not been able to leverage its market dominance. For instance, in 2014, Facebook attempted to develop a standalone Camera app to compete against the rising Snap and Instagram, but it quickly failed and was discontinued.

Competitiveness online requires developing ecosystems for users, given the difficulty of leveraging existing user bases to sell new products.

This reveals one of the difficulties in seeing who is competing against whom online. Facebook competes not only against other social media sites like Snap, but also against the likes of Google, Apple, and Microsoft in various domains. Online competition requires a firm being able to provide for a variety of user demands or seed ground to rival startups. Unless a firm like Apple can provide a messaging service  its users enjoy, it would allow Facebook to gain ground, weakening the long-term prospects of the business. These “platform wars” mean that competition between tech giants takes place over many different products and services, at various tiers, and that to understand the level of concentration, one cannot specify the market too narrowly.

The recent international controversy surrounding the amount of “fake news” on Facebook reveals that the company’s market dominance only appears strong when the market is defined incorrectly. The firm responded to claims that it bears responsibility for “fake news” and has been trying to change its user experience to respond to those pressures. Its latest gambit, which involved prioritizing well-being, cost it users—which will likely show up in decreased ad revenue. Consumers’ ability to voice their concerns to Facebook—and Facebook’s profits being on the line if it does not take those concerns seriously—suggest that claims that the firm has the ability to abuse its market dominance are unfounded.

It is a feature of platform economics that interaction with the user base drives improvements in the platform. If platforms fail to respond to user concerns or needs, they can fall from seemingly dominant positions rapidly—as recent history amply demonstrates.

Correctly specifying the market makes the claim that Facebook and Google constitute a duopoly in online advertising similarly unfounded. When one looks at advertising in general, the two firms together account for 20 percent of ad revenue. While digital ad revenues are growing, it is fallacious to claim that there is too much concentration when the two companies take up only a fifth of the total advertising marketplace. If Facebook and Google are increasing their revenues to the detriment of newspapers, neglecting newspaper print ads exaggerates the supposed concentration.

The line between what is and is not an online company is increasingly blurry. Alphabet continues to branch out into physical products, while Apple is both an established software and hardware manufacturer. Netflix is a streaming service, but among its competitors are distributors that release films in theatres, which incentivized Disney to rethink its future business models with its Fox buyout. Thus, the concentration levels of these companies looks artificially inflated due to the difficulty in specifying what their market actually is.

One thing is perfectly clear. Consumers are by and large happy with their services. None of the Big Five tech companies—Alphabet, Amazon, Microsoft, Apple, and Facebook—have an approval rating below 60 percent. These companies may be large, but competition among them is as fierce as ever, incentivizing them to consistently innovate and provide consumers with new and better services.
Attempting to force “competition” (according to a model developed in the pre-tech economy), without a clear understanding of the current market dynamics and the consumer welfare implications, would leave users worse off. These days, that means all of us."

Restricting Trade After Factory Accident Would Hurt Bangladeshi Women

By Chelsea Follett of HumanProgress.org.

"A tragic boiler explosion killed 10 Bangladeshi garment workers over the summer, an incident reminiscent of the catastrophic 2013 Rana Plaza building collapse, which focused public attention on working conditions in that developing country. Last month, a factory fire killed six more workers. In the wake of such disasters, many people in rich countries assume the compassionate response is to impose trade restrictions and stop buying clothes made in Bangladesh.
Ironically, such a response would actually harm Bangladeshi garment workers, most of whom are women, by forcing them into far worse situations than factory work.

What many people do not know is that the rise of factory work in the country has helped bring about significant positive change in many Bangladeshi lives—particularly for women.

The country is home to 18.4 million of the world’s poorest people and has strict gender norms. Yet Bangladesh was recently called “the happiest economic story in the world right now,” as extreme poverty has plummeted.
Despite its dangers, factory work has slashed extreme poverty and increased women’s educational attainment while lowering rates of child marriage in Bangladesh. It has also sparked cultural change towards more freedom for women, not only by enabling them to earn money but by granting them freedom of movement.

The country’s women-dominated garment industry transformed the norm of purdah, or seclusion (literally, “veil”), that traditionally prevented women from working beyond the home, walking outside unaccompanied by a male guardian, or even speaking in the presence of unrelated men.

Many Bangladeshi women now interpret purdah to simply mean modesty instead of social and economic segregation. In the words of social economist Naila Kabeer of the London School of Economics, factory work let women “renegotiate the boundaries of permissible behavior.” Today, in Dhaka and other industrial cities, women walk outside and interact with unrelated men.

When Kabeer interviewed 60 factory women in her native Bangladesh, she found that the factories had expanded women’s options and were viewed positively overall. More and more experts share that assessment. The World Bank has acknowledged that factories play “a significant role” in reducing poverty and combating child marriage. The Financial Express’ Monira Munni stated earlier this year that factories have “socially empowered women workers in Bangladesh to have better control over their own lives.”

According to Kabeer, “it took market forces, and the advent of an export-oriented garment industry, to achieve what a decade of government and non-government efforts had failed to do: to create a female labor force.”

The country industrialized rapidly, growing its number of export-oriented factories from a handful in the mid-1970s to around 700 by 1985. Women now hold more than 80% of manufacturing jobs.

The expansion of manufacturing in the country met with challenges early on. In 1985, Britain, France, and the United States imposed quota limitations on imports from Bangladesh in response to anti-sweatshop campaigns financed by labor unions in the rich countries. Within three months, two thirds of Bangladeshi factories shuttered their gates and over 100,000 women were thrown out of work, many to face destitution.

The quotas were, in short, a disaster for Bangladeshi women. Britain and France removed their quotas in 1986, and Bangladesh’s garment industry has since expanded to thousands of factories employing millions. Unfortunately, protectionist sentiment is growing in rich countries, aided by sensationalized accounts of working conditions. The Bangladeshi General Secretary of National Garment Workers has warned that these could restrict Bangladesh’s growth.

Despite their frequent depiction as passive victims, Bangladeshi factory women are making their own choices. Kabeer’s research found that “the decision to take up factory work was largely initiated by the women themselves, often in the face of considerable resistance from other family members.”

Yet societal change is definitely underway. “Garments have been very good for women,” a factory woman named Hanufa, whose earnings allowed her to escape her physically abusive husband, told Kabeer. “Now I feel I have rights, I can survive.”

In fact, the earning power of women is eroding the custom of bridal dowries, and earning power typically increases the weight a woman’s priorities carry within the household.

Tragedies like the Rana Plaza building collapse garner a lot of press. The garment industry’s wider-reaching effects on the material well being and social equality of women in Bangladesh receive less attention. Rich countries should not rush to impose trade restrictions on poor countries after disasters. As one factory worker put it: “The garments have saved so many lives.”"

The Boston Globe editorial board unloads on the ‘pipeline absolutism’ of environmentalists

By Mark J. Perry.

"In a CD post last week, I posed the question “Why is LNG coming 4,500 miles to Boston from the Russian Arctic when the US is the world’s No. 1 natural gas producer? (see map above of the route). The simple answer to the question is a lack of natural gas pipelines in New England due to the “pipeline absolutism” of anti-fossil fuel environmentalists who have blocked all new pipeline expansions, as I explained in a recent Boston Herald op-ed “Epic U.S. energy boom cruises by region,” here’s an excerpt:

Although America is a global energy superpower and the U.S. has been the world’s top producer of natural gas since 2009, New England relies on imported LNG from faraway countries for about 20% of its natural gas. This is what happens when you don’t build your own natural gas pipelines, which are the safest and most economical way to transport energy. The trouble is there isn’t enough pipeline capacity to bring in natural gas from the Marcellus shale in Pennsylvania to New England in times of high demand. Even as America’s natural gas production has soared, the pipeline capacity to get it to where it’s needed hasn’t kept up. The problem: political obstacles driven by environmental groups.
In the past two years, regulatory obstacles have led to the cancellation of two pipeline projects, which is ominous for a region that desperately needs more natural gas to make up for the shutdown of nuclear and coal plants. Moreover, there are those in the region who promote themselves as climate leaders but continually block new gas pipeline capacity.

Now the editorial board of the Boston Globe is weighing in on “pipeline absolutism” with a lengthy, 2,000-word editorial yesterday “Our Russian ‘pipeline,’ and its ugly toll, here’s part of the opening (emphasis added):

To build the new $27 billion gas export plant on the Arctic Ocean that now keeps the lights on in Massachusetts, Russian firms bored wells into fragile permafrost; blasted a new international airport into a pristine landscape of reindeer, polar bears, and walrus; dredged the spawning grounds of the endangered Siberian sturgeon in the Gulf of Ob to accommodate large ships; and commissioned a fleet of 1,000-foot ice-breaking tankers likely to kill seals and disrupt whale habitat as they shuttle cargoes of super-cooled gas bound for Asia, Europe, and Everett.
On the plus side, though, they didn’t offend Pittsfield or Winthrop, Danvers or Groton, with even an inch of pipeline.
Massachusetts’ reliance on imported gas from one of the world’s most threatened places is also a severe indictment of the state’s inward-looking environmental and climate policies. Public officials have leaned heavily on righteous-sounding stands against local fossil fuel projects, with scant consideration of the global impacts of their actions and a tacit expectation that some other country will build the infrastructure that we’re too good for.
As a result, to a greater extent than anywhere else in the United States, the Commonwealth now expects people in places like Russia, Trinidad and Tobago, and Yemen to shoulder the environmental burdens of providing natural gas that state policy makers have showily rejected here. The old environmentalist slogan — think globally and act locally — has been turned inside out in Massachusetts.
And there’s a trendy, but scientifically unfounded, national fixation on pipelines that state policy makers have chosen to accommodate. Climate advocates have put short-term tactical victories against fossil fuel infrastructure ahead of strategic progress on reducing greenhouse gas emissions. They’ve obsessed over stopping domestic pipelines, no matter where those pipes go, what they carry, what fuels they displace, and how the ripple effects of those decisions may raise overall global greenhouse gas emissions.
The environmental movement needs a reset, and so does Massachusetts policy. The real-world result of pipeline absolutism in Massachusetts this winter has been to steer energy customers to dirtier fuels like coal and oil, increasing greenhouse gas emissions. And the state is now in the indefensible position of blocking infrastructure here, while its public policies create demand for overseas fossil fuel infrastructure like the Yamal LNG plant — a project likely to inflict far greater near and long-term harm to the planet.

A long read, but highly recommended."