Infrastructure-Spending Benefits Questioned

By Mark Magnier of the WSJ. Excerpts:

"“When you flip the infrastructure switch, the light doesn’t necessarily turn on,” said Andrew M. Warner, an economist at the International Monetary Fund. “The returns are a long way from being automatic.”"

"Washington-based Progressive Policy Institute concludes that every dollar spent on U.S. roads, bridges and public transport spurs $1.50 to $2 of growth."

"In the 1980s, research by economist David A. Aschauer concluded infrastructure spending produced sizable benefits, sparking others to posit that projects could pay for themselves nearly three times over through added tax revenue. Later research using more refined models that factored in the impact of higher taxes needed to pay for building programs, for example, pared these estimates.

Mr. Warner, in an August paper, found little evidence that infrastructure projects spark economic booms. While big projects are often credited with spurring growth, he says, many are initiated after an economy is gearing up and may be a result, rather than the cause, of expansion."

"He cites the cases of South Korea and Taiwan, which saw high growth for decades without evidence of an infrastructure-led boost, and Bolivia, Mexico and the Philippines, which saw low growth despite high infrastructure spending.

Another potential problem is the reliability of data used to justify many projects, much of which comes from government agencies and groups with a vested interest in approval.

Politicians often prefer dams, long-distance highways and bullet trains that make the news, critics add, rather than schools, hospitals and smaller projects that may be more economically productive."

"A more recent IMF report hit a cheerier note. Conditions for ramped-up investment are ideal, it said, provided projects are well chosen and structured, address a pressing need, are financed through efficient public investment systems and pass a vigorous risk-benefit analysis." (that is a pretty tough list of requirements)

The Bad Argument Behind the FCC’s Move to Regulate the Internet Like a Utilit

From Reason.

"Earlier today, Federal Communications Commission Chairman Tom Wheeler proposed reclassifying broadband Internet service from a Title I "information service" to a Title II "telecommunications service"—essentially declaring that the FCC plans to regulate the Internet as a public utility.

It has been clear for at least a month that Wheeler planned to take some version of this approach. At a tech conference in early January, Wheeler, who had long resisted reclassification, said he had an "aha moment" when he looked at the regulatory treatment of wireless phone networks. Under the Telecommunications Act of 1996, wireless companies were officially regulated under Title II, but were not subject from some of its requirements, like rate regulation. "Under that for the last 20 years, the wireless industry has been monumentally successful," Wheeler said.

In an op-ed for Wired today announcing the Title II proposal, he reiterated the argument, saying that "over the last 21 years, the wireless industry has invested almost $300 billion under similar rules, proving that modernized Title II regulation can encourage investment and competition."

The problem with that bit of reasoning, as Jon Healey of the Los Angeles Times pointed out at the time, was that in 2007, wireless data networks—which account for a significant portion of wireless industry investment and innovation—were exempted from Title II.

Wheeler is now pointing specifically to the voice component of the wireless industry as an example of a success. This seems at least a little odd: It’s hard to imagine most people pointing to the voice component of the mobile industry as being particularly innovative or interesting over the last several years. In recent years, the mobile industry has seen voice use flatline and mobile data surge. That’s not likely to reverse; data usage is growing not only because of new connections, but because each connection is using more data. So if anything, the voice component of wireless is on track to become far less relevant.

Yet the Times reports that Wheeler is not only planning to circulate a proposal that reclassifies broadband as a utility, he "may also suggest putting wireless data services under Title II and adding regulations for companies that manage the backbone of the Internet."

Wheeler, in other words, plans to significantly increase the regulatory burden on the fastest growing and most innovative segment of the industry he initially said was the model of a Title II success.

No doubt Wheeler and his backers would argue that the continuing growth and importance of wireless data service is the reason for changing the way it is regulated; the more important it is, the more oversight it requires. According to the FCC, mobile data now accounts for more than half of online traffic.

But that growth, and the relative stagnation of mobile voice usage, undermines Wheeler's argument about how the success of the wireless industry makes the case for Title II. Instead, it suggests that Wheeler wants to pursue reclassification not because the wireless sector has been successful under Title II, but because of the service that has been successful without it.

It’s possible that the argument doesn’t hold up because Wheeler’s story is better understood as cover for succombing to political pressure. It’s more likely that Wheeler’s original "aha" moment came not when he looked at the path of the wireless industry, but in November, when President Obama announced support for "the strongest possible rules" in service of net neutrality.


The Title II switch would give the FCC more power over the Internet broadly, and thus make it more likely that any net neutrality rules would pass legal scrutiny. Previous attempts by the FCC to set up net neutrality requirements have been thrown out in court.

Wheeler’s proposal isn't officially available for the public to see immediately, but Wheeler spells out the basics of the plan in an op-ed for Wired. The five member commission will vote on the proposal on February 26.

What seems clear enough, though, is that the FCC, technically an independent agency, is bent on radically overhauling the way it regulates Internet service after prodding from the White House. The weakness of its case for making the shift apparently matters less than the political pressure to make the change."

Shut Out: How Land-Use Regulations Hurt the Poor

From FEE. By SANDY IKEDA, professor of economics at Purchase College, SUNY.

"People sometimes support regulations, often with the best of intentions, but these wind up creating outcomes they don’t like. Land-use regulations are a prime example.

My colleague Emily Washington and I are reviewing the literature on how land-use regulations disproportionately raise the cost of real estate for the poor. I’d like to share a few of our findings with you.

Zoning

One kind of regulation that was actually intended to harm the poor, and especially poor minorities, was zoning. The ostensible reason for zoning was to address unhealthy conditions in cities by functionally separating land uses, which is called “exclusionary zoning.” But prior to passage of the Civil Rights Act of 1968, some municipalities had race-based exclusionary land-use regulations. Early in the 20th century, several California cities masked their racist intent by specifically excluding laundry businesses, predominantly Chinese owned, from certain areas of the cities.

Today, of course, explicitly race-based, exclusionary zoning policies are illegal. But some zoning regulations nevertheless price certain demographics out of particular neighborhoods by forbidding multifamily dwellings, which are more affordable to low- or middle-income individuals. When the government artificially separates land uses and forbids building certain kinds of residences in entire districts, it restricts the supply of housing and increases the cost of the land, and the price of housing reflects those restrictions.

Moreover, when cities implement zoning rules that make it difficult to secure permits to build new housing, land that is already developed becomes more valuable because you no longer need a permit. The demand for such developed land is therefore artificially higher, and that again raises its price.

Minimum lot sizes

Other things equal, the larger the lot, the more you’ll pay for it. Regulations that specify minimum lot sizes — that say you can’t build on land smaller than that minimum — increase prices. Regulations that forbid building more units on a given-size lot have the same effect: they restrict supply and make housing more expensive.

People who already live there may only want to preserve their lifestyle. But whether they intend to or not (and many certainly do so intend) the effect of these regulations is to exclude lower-income families. Where do they go? Where they aren’t excluded — usually poorer neighborhoods. But that increases the demand for housing in poorer neighborhoods, where prices will tend to be higher than they would have been.

And it’s not just middle-class families that do this. Very wealthy residents of exclusive neighborhoods and districts also have an incentive to support limits on construction in order to maintain their preferred lifestyle and to keep out the upper-middle-class hoi polloi. Again, the latter then go elsewhere, very often to lower-income neighborhoods — Williamsburg in Brooklyn is a recent example — where they buy more-affordable housing and drive up prices. Those who complain about well-off people moving into poor neighborhoods — a phenomenon known as “gentrification” — may very well have minimum-lot-size and maximum-density regulations to thank.

When government has the authority to restrict building and development, established residents of all income levels will use that power to protect their wealth.

Parking requirements

Another land-use regulation that makes space more expensive is municipal requirements that establish a minimum number of parking spaces per housing unit.

According Donald Shoup’s analysis, parking requirements add significantly to the cost of housing, particularly in areas with high land values. For example, in Los Angeles, parking requirements can add $104,000 to the cost of each apartment. Parking requirements limit consumers’ choices and increase the cost of housing even for those who prefer not to pay for parking.

Developers typically build only the minimum amount of parking required by law, which indicates that those requirements are binding. That is, in a less-regulated environment, developers would devote less land to parking and more land to living space. A greater supply of living space will, other things equal, lower the cost of housing.

Smart-growth regulations

In the 1970s, municipalities enacted new rules that were designed to protect farmland and to preserve green space surrounding rapidly growing cities by forbidding private development in those areas. By the late 1990s, this practice evolved into a land-use strategy called “smart growth.” (Here’s a video I did about smart growth.)  While some of these initiatives may have preserved green space that can be seen, what is harder to see is the resulting supply restriction and higher cost of housing.

Again, the lower the supply of housing, other things equal, the higher real-estate prices will be. Those who now can’t afford to buy will often rent smaller apartments in less-desirable areas, which typically have less influence on the political process. Locally elected officials tend to be more responsive to the interests of current residents who own property, vote, and pay taxes, and less responsive to renters, who are more likely to be transients and nonvoters. That, in turn, makes it easier to implement policies that use regulation to discriminate against people living on low incomes.

Conclusion

Zoning, minimum lot sizes, minimum parking requirements, and smart-growth regulations demonstrably and significantly increase the cost of housing for everyone by raising construction costs and restricting the supply of housing.

The average household in the United States today, rich or poor, spends about a third of its income on housing. But higher home prices hit lower-income households disproportionately hard because a dollar increase in housing expenditure represents a larger percentage of a poorer household’s budget. Indeed, the bottom 20 percent of households spends around 40 percent of income on housing.
In other words, these land-use regulations are unfairly regressive. Relaxing or even removing them would be a step toward achieving greater equity."

the big increase in the one percent's income share came between 1980 and 2000

From Greg Mankiw.

"

Piketty and Saez have updated their famous one-percent graph to 2013.  It is above. (Click on graphic to enlarge.)

One thing that commentators sometimes fail to notice is that the big increase in the one percent's income share came between 1980 and 2000. Since 2000, it has fluctuated but without much of a trend.  Why, then, are we all talking about income inequality only now? I am not sure. One hypothesis is that we don't worry about inequality when everyone is doing well. Another hypothesis is that we now have a president with a political ideology that sees inequality as especially pernicious"

Minimum wage, maximum sorrow for San Francisco bookstores

From Mark Perry.

"Proponents of the
minimum wage lawgovernment-mandated wage floor that guarantees reduced employment opportunities for America’s teenagers and low-skilled workers can’t possibly anticipate in advance all of the adverse and unintended consequences of artificially raising wages for unskilled and low-skilled workers. As an example of an adverse and unintended consequences that the citizenry of San Francisco didn’t anticipate last November when they overwhelmingly voted to increase the city’s minimum wage to $15 per hour by 2018, a San Francisco book store is closing. Reason? There’s a limit to how much a bookstore can increase book prices to offset higher labor costs because the publisher sets the list price of the book and it’s printed on the book cover.

From the website of Borderlands Books:

Borderlands is closing.

In 18 years of business, Borderlands has faced a number of challenges. The first and clearest was in 2000, when our landlord increased our rent by 100% and we had to move to our current location on Valencia Street. The steady movement towards online shopping, mostly with Amazon, has taken a steady toll on bookstores throughout the world and Borderlands was no exception. After that and related to it, has been the shift towards ebooks and electronic reading devices. And finally the Great Recession of 2009 hit us very hard, especially since we had just opened a new aspect to the business in the form of our cafe.

But, through all those challenges, we’ve managed to find a way forward and 2014 was the best year we’ve ever had. Overall, Borderlands has managed to defeat every problem that has come our way. At the beginning of 2014, the future of the business looked, if not rosy, at least stable and very positive. We were not in debt, sales were meeting expenses and even allowing a small profit, and, perhaps most importantly, the staff and procedures at both the bookstore and the cafe were well established and working smoothly.

So it fills us with sorrow and horror to say that we will be closing very soon.
In November, San Francisco voters overwhelmingly passed a measure that will increase the minimum wage within the city to $15 per hour by 2018. Although all of us at Borderlands support the concept of a living wage in principal and we believe that it’s possible that the new law will be good for San Francisco — Borderlands Books as it exists is not a financially viable business if subject to that minimum wage. Consequently we will be closing our doors no later than March 31st.

Many businesses can make adjustments to allow for increased wages. The cafe side of Borderlands, for example, should have no difficulty at all. Viability is simply a matter of increasing prices. And, since all the other cafes in the city will be under the same pressure, all the prices will float upwards. But books are a special case because the price is set by the publisher and printed on the book. Furthermore, for years part of the challenge for brick-and-mortar bookstores is that companies like Amazon.com have made it difficult to get people to pay retail prices. So it is inconceivable to adjust our prices upwards to cover increased wages.

The change in minimum wage will mean our payroll will increase roughly 39%. That increase will in turn bring up our total operating expenses by 18%. To make up for that expense, we would need to increase our sales by a minimum of 20%. We do not believe that is a realistic possibility for a bookstore in San Francisco at this time.

The other obvious alternative to increasing sales would be to decrease expenses. The only way to accomplish the amount of savings needed would be to reduce our staff to: the current management (Alan Beatts and Jude Feldman), and one other part-time employee. Alan would need to take over most of Jude’s administrative responsibilities and Jude would work the counter five to six days per week. Taking all those steps would allow management to increase their work hours by 50-75% while continuing to make roughly the same modest amount that they make now (by way of example, Alan’s salary was $28,000 last year). That’s not an option for obvious reasons and for at least one less obvious one — at the planned minimum wage in 2018, either of them could earn more than their current salary working only 40 hours per week at a much less demanding job that paid minimum wage.

Although the major effects of the increasing minimum wage won’t be felt for a while, we’ve chosen to close now instead of waiting for two reasons. First, the minimum wage has already increased from $10.74 per hour to $11.05 (as of January 1st) and it will increase again on May 1 to $12.25. Continuing to pay the higher wage without any corresponding increase in income will expend the store’s cash assets. In essence, the store will have less money (or inventory) six months from now, so closing sooner rather than later makes better business sense. But more importantly, keeping up our morale and continuing to serve our customers while knowing that we are going to close has been very painful for all of us over the past three months. Continuing to do so for even longer would be horrible. Far better to close at a time of our choosing, keep everyone’s sorrow to a minimum, and then get on with our lives.

Bottom Line: Over several decades, Borderlands Books was able to survive a 100% rent increase, the effects of the Great Recession, and competition from Amazon, ebooks and electronic reading devices. But they won’t be able to survive the voter-endorsed 
minimum wage lawgovernment-mandated wage floor that guarantees bookstores in the city will be forced to close down. And Borderlands Books is probably not an isolated case – many of the other book stores in San Francisco will likely face the same fate. In other words, the economic lesson here is “minimum wage, maximum sorrow” for San Francisco book stores.""

The Minimum Wage Ravages Inner-City Chicago

From Cafe Hayek.

"Here’s a letter to the Chicago Tribune:

Although your reporter seems unaware of the fact, your report “Weak hiring rate persists for teens” (Feb. 1) offers strong and direct evidence for three of the worst consequences that economists have long warned result from minimum-wage legislation.  To wit -

- persistently low employment rates for teenagers generally; (at 16 percent, the employment rate for all teens in Chicago is lower than the overall employment rate in Chicago);

- even lower employment rates for minority teenagers; (while 30 percent of white Chicago teens are employed, paying jobs are held by only 21 percent of Chicago’s Hispanic teens, and by only a paltry 10.5 percent of Chicago’s black teens) – meaning that the teens who are lucky enough to get and to keep jobs at the minimum wage come disproportionately from more affluent households while the teens who suffer unemployment because of the minimum wage come disproportionately from the poorest and most disadvantaged households;

- teens and other low-skilled workers with little or no job experience are displaced from jobs by more experienced (and, hence, less risky to hire) low-skilled workers – workers such as retirees who are reentering the workforce and, to use your reporter’s wording, “snatching entry level jobs that were once reserved for teenagers”;

These long-predicted consequences of minimum-wage legislation are tragic – a reality that renders inexcusable your reporter’s failure even to mention the minimum wage as a possible culprit in the economic disenfranchisement of inner-city black kids.

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

"the cut in unemployment benefit duration led to a 2% increase in aggregate employment"

See President Costanza’s Jobs Boom from the Wall Street Journal. Excerpts:

"At a Dec. 13 event, Mr. Obama invoked the needy and explained that this supposed abdication was “bad for our economy and that’s bad for our cities, because if they don’t have the money to pay the rent or be able to buy food for their families, that has an impact on demand and businesses and it can have a depressive effect generally. In fact, what we know is the economists have said failing to extend unemployment benefits is going to have a drag on economic growth for next year.”

The White House Council of Economic Advisers forecast direct job losses reaching 240,000 as aggregate demand fell. The Keynesians at the Congressional Budget Office warned of a recession.

As late as a June 2014 rally in Minneapolis, Mr. Obama added that the Republicans had harmed “more than three million Americans who are out there looking every single day for a new job, despite the fact that we know it would be good not just for those families who are working hard to try to get back on their feet, but for the economy as a whole.”

Instead, job growth in 2014 was roughly 25% higher than any post-2009 year. Joblessness plunged to 5.6% from 6.7%. Net job creation averaged 246,000 a month. What happened?

Writing for the National Bureau of Economic Research, economists Marcus Hagedorn, Iourii Manovskii and Kurt Mitman treat the 2014 benefits cutoff as a natural experiment. The extra federal benefits ranged from nothing to 47 weeks state by state, and then all at once fell to 26 weeks nationwide. This variation allowed them to compare the employment effects between states sponsoring more generous benefits and those with less.

Assuming that the pre-2014 trends would have continued among the two groups, the authors find that “the cut in unemployment benefit duration led to a 2% increase in aggregate employment, accounting for nearly all of the remarkable employment growth in the U.S. in 2014.” They then confirm these results with a second experiment that compares adjacent counties in different states whose economies are otherwise equal except for their unemployment benefits.

Notably, job growth improved most in states and counties that offered the most generous benefits before Congress took away the punch bowl. This suggests that the extra jobless benefits reduced the incentives for businesses to create jobs and for jobless workers to fill the vacancies.

Paying people not to work means they have less incentive to get on a payroll. More generous benefits also discourage businesses from hiring. Since benefits raise the price at which people are willing to search for work, employers must pay above-market wages in the more generous regions, and respond by creating jobs elsewhere or not at all. More jobs draw more people back into the labor force, in a virtuous cycle.

Since the states with the highest unemployment were targeted with the most federal benefits, the extra benefits harmed the people and regions that suffered the worst of the recession and weak recovery. Had Mr. Obama done the opposite, the stimulus might have recognized that people prefer the dignity of a job to claiming a government stipend for not having one. Both individuals and the larger economy would have been healthier."