How Increasing Worker Productivity Has Led to the "Decline of Manufacturing" as a Share of U.S. GDP

Again, from Mark Perry at Carpe Diem. It has a graph which shows that output per work, adjusted for inflation, has tripled since 1950.

"As a follow-up to Friday's CD post about U.S. (and world) manufacturing's declining share of GDP, here's some perspective from Chicago Fed economist William Strauss, who explains how rising worker productivity (see chart above) has contributed to that trend:

"In 1950, the manufacturing share of the U.S. economy amounted to 27% of nominal GDP, but by 2007 it had fallen to 12.1%. How did a sector that experienced growth at a faster pace than the overall economy become a smaller part of the overall economy?

The answer again is productivity growth. The greater efficiency of the manufacturing sector afforded either a slower price increase or an outright decline in the prices of this sector’s goods. As one example, inflation (as measured by the Consumer Price Index) averaged 3.7% between 1980 and 2009, while at the same time the rise in prices for new vehicles averaged 1.7%. So while the number (and quality) of manufactured goods had been rising over time, their relative value compared with the output of other sectors did not keep pace. This allowed manufactured goods to be less costly to consumers and led to the manufacturing sector’s declining share of GDP.""

Clarification About Oil Company "Subsidies" and Oil Companies "Not Paying Their Fair Share" of Taxes

Great post from Mark Perry at Carpe Diem. Here it is:

"From the American Petroleum Institute:

"Contrary to what some in politics and the media have said, the oil and natural gas industry currently enjoys no unique tax credits or deductions. Since its inception, the U.S. tax code has allowed corporate tax payers the ability to recover costs and to be taxed only on net income. These cost recovery mechanisms, also known in policy circles as “tax expenditures”, should in no way be confused with “subsidies”, i.e., direct government spending."

Read the details here.

In addition to the misunderstanding that oil companies somehow receive direct subsidy payments from the government like the payments some farmers receive (sometimes for NOT growing certain crops), there is also the misunderstanding that oil and gas companies are "not paying their fair share" of income taxes. The assumption here must be that other companies or U.S. industries are paying "their fair share" and oil companies "get off easy."

The chart above is based on data from the API and shows that oil companies face a much higher income tax burden as a share of before-tax earnings (41.1%) compared to other S&P Industrial corporations. Keep in mind that oil companies pay a higher effective tax rate than even the highest corporate marginal income tax rate of 35% because they are also paying state income taxes and foreign income taxes. And there are also royalties, bonuses bids, excise taxes and other transfers to governments that aren't even included in the 41.1% tax expense rate."

In response to a commentor, Mark Perry wrote:

"Note: The percentage depletion allowance may ONLY be taken by independent producers and royalty owners and NOT by integrated oil companies."

It Is Not Likely That Government Will Make Health Care More Efficient

See New Efficiencies in Health Care? Not Likely: If the British experience is any indication, generic drugs and expert commissions will do little to lower costs, by THEODORE DALRYMPLE (the pen name of the physician Anthony Daniels. He is a contributing editor of the Manhattan Institute's City Journal). From the WSJ, 4-16-11. He discusses the experience in the UK. Excerpts:

"It turned out, however, that the costs of prevention were decidedly real, while the savings were inclined to be imaginary. This was for more than one reason. The bureaucratic costs of setting and monitoring health-improvement targets—which were often highly arbitrary—were far greater than anticipated, bureaucracies having an inherent tendency to increase in size and spending power. Many doctors started to be paid for procedures that they were already doing for no charge, like taking their patients' blood pressure. Screening procedures turned out to be highly equivocal in their efficacy. Thus the overall benefit was much less than anticipated. Some of the more common ills that had been targeted, such as strokes and heart attacks, were in marked decline anyway.

Worse, much of the expenditure on the treatment of disease proved intractable. Technology inexorably increased costs; and even if the health of the population improved rapidly, so that 70 was the new 60, 60 the new 50 and so forth, the proportion of old people in the population meant that the proportion of people ill with expensive chronic diseases increased. In the U.S., there were 37 million people over 65 in 2006, just over 12% of the population. That figure is projected to rise to 71 million, or 20%, by 2030."

"The long-term solution, I imagine, is the same for health care as it is for pensions: to pay for it with the income generated by dedicated savings accounts, which can be transferred to the next generation after death. The important thing is to reduce the insurance element, which encourages a pay-as-you-go system, a kind of Madoff scheme ensnaring the whole country."

More On The High Taxes Paid By Oil Companies

See The Gas Price Freakout: Ready-made energy incoherence as a gallon climbs towards $4. From the WSJ, 4-28-11. Excerpts:

"The liberal drive to tax Big Oil is rooted in an ideological commitment to higher energy prices, not consumer relief. The U.S. Energy Information Administration reports that the effective U.S. corporate tax rate for the oil majors was 26.3% in 2009, not counting royalties, excise taxes or bonus bids for leases. The effective rate typically tracks production and rises and falls with the price of oil. In 2008, it was 42.3%.

U.S. gas prices last peaked in 2008, largely due to a dollar plunge and global demand, before crashing along with the economy. Now prices are rebounding, with political unrest in the Middle East and North Africa tacking on a premium beyond the market fundamentals of rising demand as the world economy grows. Then there's the Ben Bernanke premium. The most important step the government could take to stabilize if not lower oil prices is to correct the Federal Reserve's weak dollar policy, which has sent commodity prices soaring across the board."

One Problem With Behavioral Economics

See Is 'Nudging' Really Enough? With things like burgers and electricity, we often need a shove, by Johan Lehrer, WSJ, 4-16-17. Excerpts:

"And yet the initial results of many of these policies have been humbling. Consider the new regulations in New York City requiring restaurants to list the calorie content of all menu items. (Similar regulations were part of the 2010 federal health-care reform legislation.) Although proponents of the law hoped that the extra information would lead consumers to shy away from Caramel Macchiatos and McGriddle sandwiches—officials estimated that, over a five-year period, the law would keep 150,000 New Yorkers from becoming obese—that hasn't happened. Instead, initial analyses by researchers at New York University and Yale have found that, since the law was enacted, the average restaurant-goer has actually been purchasing slightly more calories."

"The second problem is that such nudges are ill-equipped to solve thorny societal problems. Take energy consumption. As the behavioral economists George Loewenstein and Peter Ubel have pointed out, the most effective way to reduce energy consumption is to increase its cost through higher taxes on carbon."

The Cost Of Some Tax Breaks

See The 3 Biggest Tax Breaks — and What They Cost Us, from the NY Times magazine, 4-17-11.

It shows that the Exclusion for Employer-Provided Health Insurance costs about 0.7% of GDP. That probably works out to about $100 billion.

It then shows a graphic where the top 1% of households get about $6,000 from the Mortgage-Interest Deduction while the typical middle-income family gets about $215.

How Health Reform Punishes Work

The subsidies to buyers of 'qualifying' insurance policies will induce sharp reductions in the supply of labor. Click here to read it. From the WSJ, 4-25-11, by DANIEL P. KESSLER, professor of business and law at Stanford University and a senior fellow at the Hoover Institution. Excerpts:

"Starting in 2014, subsidies will be available to families with incomes between 134% and 400% of the federal poverty line. (Families earning less than 134% of poverty are eligible for Medicaid.) For example, a family of four headed by a 55-year-old earning $31,389 in 2014 dollars (134% of the federal poverty line) in a high-cost area will get a subsidy of $22,740. This will cover 96% of an insurance policy that the Kaiser Family Foundation predicts will cost $23,700. A similar family earning $93,699 (400% of poverty) gets a subsidy of $14,799. But a family earning $1 more—$93,700—gets no subsidy.

Economists call large, discontinuous changes in program benefits like this "notches." Although notches might be administratively convenient, they have terrible incentive effects. As Prof. Raj Chetty of Harvard points out in a recent National Bureau of Economic Research working paper, prior research on notches show that they induce sharp reductions in labor supply.

Consider a wife in a family with $90,000 in income. If she were to earn an additional $3,700, her family would lose the insurance subsidy and be more than $10,000 poorer. In addition, she would also pay more in income and Social Security taxes. Taken together, these policies impose a substantial punishment on work effort.

Notches also lead to unfairness. The principle that families of the same size with similar incomes should be treated similarly by tax law and transfer programs has deep philosophical roots and appeals to basic notions of equity. The notch turns this principle on its head. Next-door neighbors with virtually identical circumstances could receive very different levels of government assistance, depending on which side of the notch they happen to fall. This feature will justifiably increase public cynicism about the law and government in general.

Fixing the notch is not so easy. To phase out the subsidy smoothly for families with incomes of 134% to 400% of poverty, the law would have to take away $22,700 in subsidies as a family's income rose to $93,700 from $31,389. In other words, for every dollar earned in this income range, a family's subsidy would have to decline by 36 cents. On top of 25% federal income taxes, 5% state income taxes, and 15% Social Security taxes, this implies a reward to work of less than 20 cents on the dollar—in economists' language, an implicit marginal tax rate of over 80%. Although economists may differ on the effect of taxes on work effort, it is hard to fathom how anyone could argue that this will not reduce economic activity."