In the first year of new FCC rules, broadband spending declines

See Tom Wheeler’s Internet Debacle, editorial from the WSJ. Excerpt:

"Unhappy anniversary! Chairman Tom Wheeler is congratulating himself, a year after his Federal Communications Commission followed President Obama’s orders to apply ancient telephone regulations to the Internet. “Strong rules of the road have provided certainty for innovators & investors so #broadband network deployment continues,” he tweeted.

Ah, no. A new study shows that broadband deployment is heading south after years of rapid growth. And congressional investigators have released new evidence of political interference and possible legal violations in the FCC’s rule-making.

The FCC enacted this historic blunder on a partisan 3-2 vote. Dissenting Republicans Mike O’Rielly and Ajit Pai warned that bureaucratic costs plus uncertainty about future enforcement would discourage Internet service providers from costly build-outs. Mr. Wheeler promised to exercise “forbearance” from the most onerous of the traditional phone rules.

Now broadband providers are the ones forbearing—from investment. Capital expenditures by Internet service providers rose by 8.7% in 2013, according to the U.S. Telecom Association. Then investment slowed to 4% growth in 2014 as the FCC considered new rules. Economist Hal Singer now reports that in 2015 industry capital expenditures declined by 0.4%.

Commissioner Pai warned last year that the FCC would enjoy “a roving mandate to review business models and upend pricing plans that benefit consumers.” And, sure enough, he says the FCC “is now hauling companies into our headquarters to justify their service plans. Take T-Mobile ’s Binge On program, which lets customers choose to stream videos without it counting against their data usage.”"

One reason many of us are often skeptical of government fiscal policy is because we see it being messed up so much, not because we are “aggregate demand denialists.”

See State and local fiscal policy and pensions by Tyler Cowen.

"In short, the reason why the unfunded liabilities of state and local pension funds are so much higher in 2016 than 30 years ago isn’t because the overall stock market performed poorly. Instead, it’s a grim story of mistiming the moves in the market (rather than just being steadily invested throughout), trying out alternative investments that didn’t pan out, not putting enough money aside in the first place, and overpromising what benefits could be paid. I have a lot of sympathy for the retirees and soon-to-be retirees who were depending on a pension from a state or local government, and are now finding that the money isn’t there to pay for the promises. But when blame gets assessed for this grim situation, it’s worth remembering that those who have been making the decisions about state and local pensions had a very favorable situation 30 years ago–that is, unfunded liabilities near zero, with a period of strong stock market growth over the next three decades coming up–and they messed it up.

That is from Timothy Taylor.  I would add that those decisions too are fiscal policy.  One reason many of us are often skeptical of government fiscal policy is because we see it being messed up so much, not because we are “aggregate demand denialists.”  I would note that automatic stabilizers often do not have these problems to the same degree.

Similarly, I have seen highly intelligent people calling for fiscal stimulus for Brazil.  I would (rather desperately) favor some new infrastructure spending for Brazil, but overall I see a country whose government has been spending far beyond its means for decades.  Brazil is a middle-income country, yet in terms of a percentage of gdp it basically spends as does the United States, and not very effectively.  They need less government spending, not more, and clearly their problems are structural and long-run in nature and closely related to the low quality of governance."

Free Trade Does Not Benefit Only The Rich (Who Are Paying High Taxes)

See Kleiman on Trade and Taxes by David Henderson of EconLog.

"So when the modern Republican Party (R.I.P), in the name of "small government" and opposition to "class warfare," set its face against policies to redistribute the gains from economic growth, it destroyed the theoretical basis for thinking that a rising tide would lift all the boats, rather than lifting the yachts and swamping the trawlers. Free trade without redistribution (especially the corrupt version of "free trade" with corporate rent-seeking written into it) is basically class warfare waged downwards.

This is from drug policy expert Mark Kleiman's recent post, "Trade, Trump, and Downward Class Warfare." His piece is not long and so if you want to completely follow my critique, you might want to read it.

The paragraph I quoted above gives the gist of his argument. He leads with this:

In a nutshell: opponents of taxing the rich have destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone.

Do you see the problem? Kleiman doesn't and Brad DeLong doesn't. I do.

 Kleiman's argument shows that by "the rich" he means high-income people, not wealthy people. His discussion is about incomes.

There are two problems with Kleiman's argument.

First, on taxes. Opponents of taxing the rich have been singularly unsuccessful. Under both Obamacare and the tax deal negotiated between Vice-President Biden and Senate Majority Leader Mitch McConnell, the marginal tax rate on income for high-income people shot up in the last few years. Under Obamacare, the Medicare tax rate on high-income people was raised from 2.9% to 3.8%. Under the Biden/McConnell tax deal, the top marginal tax rate rose from 35% to 39.6%. As a result, high-income people are paying a much higher percent of their income in taxes than lower-income people.

This isn't exactly a secret. Check any public finance text and you'll likely find a table that gives the percent of income paid in taxes for various income levels. Or check this report from the Congressional Budget Office, dated November 2014, after the tax increases were in place.

According to the CBO report, the top 1% paid an average of 33% of their income in taxes, up from 29% before the Biden/McConnell deal, and the lowest quintile paid an average of 3% (up from 2%). The people in 81st to 99th percentile paid an average of 22%, up from 21%. The people in the middle 3 quintiles paid an average of 13%, up from 12%.

In short, Kleiman's idea that opponents of taxing the rich have succeeded is a fantasy.
That's what I'm sure of.

The second problem with Kleiman's argument is one that I'm only 90% sure of: who gains from trade. Kleiman feels confident that international trade benefits only the rich, and, I remind you, by "the rich" he means high-income people. He writes:

But the bottom line is that all of the gains, not merely from trade but from economic growth, have been concentrated in the hands of a relative few.

I'm pretty sure he's wrong. I think of clothing, in which we have had a major increase in free trade in the last few years. Almost everyone in America buys clothing. Another item is oil. There has not been a major increase in free trade on the import side: we already have it. But oil is traded internationally and its price has fallen like a rock. Almost everyone buys oil, either directly or embodied in a product such as gasoline or transportation of consumer items.

Kleiman is making the classic mistake that Frederic Bastiat warned about over 160 years ago: looking at "what's seen" and ignoring "the unseen that must be seen." He is probably looking at job losses for relatively low-income people who lost their jobs because of free trade and often went to other jobs that paid less. There could be a few million people in this category and they have lost. But he's leaving out the tens of millions of low-income Americans who did not lose their job to free trade and are benefiting from buying the cheaper internationally traded items.

To his credit, though, Kleiman reminds us of the biggest gainers from trade with China, writing:

It also ignores the biggest gainers from trade: workers in low-wage countries, most notably the Chinese factory workers whose parents were barefoot peasants."

A decline in the average wage is not necessarily bad news

See Interpreting Statistics Correctly Is No Mean Feat by Don Boudreaux of Cafe Hayek.

"Here’s a letter to the Wall Street Journal:

Contrary to the tone and implication of your report on the employment data released this morning, a decline in the average wage is not necessarily bad news (“Hiring in U.S. Rebounds, but Wage Growth Slips,” March 4).

The surprisingly large increase in the number of jobs in February might well have been caused by falling wages.  For the workers who have these new jobs, being employed at whatever wages they’re now earning is better than being unemployed when wages are higher.  If (as is certain) healthy job growth is applause-worthy, and if (as is possible) this job growth would not have occurred had wages not fallen, then it is mistaken to lament this fall in wages.

Alternatively, it’s quite possible that, despite the fall in the average wage, the wage of each and every worker rose.  If most of the jobs created in February pay wages below the average wage for January, then this growth in jobs for newly hired workers can easily pull down the average wage even if no workers’ wages were cut – indeed, even if all workers’ wages rose.  In this plausible scenario, all workers’ incomes rise: newly hired workers’ wages rise from $0 to whatever wages they now earn, while non-newly hired workers also enjoy higher wages.

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"

Study Finds Older Americans Have Significant Capacity to Work More, Underscoring the Need for Social Security Reform

From Charles Hughes of Cato.

"The latest working paper in the ongoing Social Security Programs and Retirement Around the World project asks whether older people are healthy enough to work more years, and finds that there is a significant amount additional work capacity due to health and mortality gains. While piecemeal reforms like increasing the retirement age or changing how benefits are indexed are not as comprehensive as allowing young workers to invest a portion in personal accounts, they could be part of some comprehensive package to address the program’s shortfall. In a recent AP/NORC poll, 85 percent of respondents said protecting the future of Social Security is extremely or very important, but under current law, the Congressional Budget Office projects the trust fund will be exhausted by 2029 and benefits the following year would need to be cut by 29 percent. Delaying the needed reforms only increases the magnitude of changes that will be needed.  Increases in life expectancy and the additional capacity for work at older ages should be considered when designing those reforms.

In the report, the authors use a few different methods and find that in each scenario, due to gains in health and life expectancy, older people are able to work significantly more than they currently do. In the Milligan-Wise (MW) method, the authors estimate additional work capacity by comparing employment rates for men in 2010 with men at the age with the same mortality rates from previous years. For all age groups, older men have significantly more work capacity, as much as 42 percent for men between ages 65 and 69, for example.

Additional Work Capacity by Age Group, MW Method 2010 vs. 1977

Source: Coile et al. (2016).

In the Cutler et al. (CMR) method, the authors estimate a relationship between employment and health for people between 50 and 54, and then combine this estimation with actual health for older age groups. With this method, they also find significant additional work capacity: 31.4 percent for men between ages 65 and 69, and even more for the older age group.

Source: Coile et al. (2016).

While older Americans have more work capacity overall, if the health status of people with lower-educational attainment hasn’t seen any improvement, it’s possible that they would have difficulty working additional years. To examine this question, the authors look at Self-Assessed Health (SAH) and find significant reductions in the percent of men responding that they were in poor or fair health across all education quartiles. The quartile with the lowest educational attainment saw a 22 percent improvement, and the second education quartile enjoyed an almost 44 percent improvement. Older Americans have seen significant gains in self-assessed health across all levels of education. While this is admittedly just one subjective metric, taken with the other findings of the paper, it suggest that older Americans have the capacity to work more than they do now.

Increasing the retirement age is one option to begin to address the program’s shortfall, although a better reform would allow younger workers to choose to divert some of their payroll taxes into some form of personal accounts. Without significant changes, Social Security will be unable to pay all scheduled benefits long before today’s young workers get close to retirement age. Absent reform, this shortfall will require significant tax increases or benefit cuts, and it only gets worse the longer policymakers delay. Due to welcome gains in life expectancy and other health improvements, older Americans can work more, and this should be considered when crafting reform proposals."

The new ‘restaurant math’ of Seattle’s $15 an hour minimum wage is starting to ‘break the system’

From Mark Perry.

"For its Notable and Quotable item today, the WSJ featured a short excerpt from the much longer article “Seattle’s $15 Minimum Wage is Driving My Restaurant Out of Business.” That article originally appeared on the EcomCrew website a few weeks ago, and was written by Seattle restaurant owner Grant Chen about his struggles to stay in business as he faces a 61% increase in his labor costs from Seattle’s $15 minimum wage initiative. As I’ve mentioned before on CD, the $15 an hour minimum wage law isn’t really ultimately “a political problem as much as it’s a simple math problem,” as Anthony Anton of the Washington Restaurant Association explained the situation. And Grant Chen and other Seattle restaurateurs like Brendan McGill (owner of Hitchcock Restaurant and Hitchcock Deli) are finding out that the new restaurant math of Seattle’s $15 minimum wage is breaking the system.

As I point out in the Venn diagram above, a 61% increase in wages from $9.32 to $15 an hour is like imposing an annual tax on restaurants of $11,360 per full-time employee. If you understand that a $11,360 tax per employee (and $113,600 in higher labor costs for every 10 employees) would drive many restaurants out of business, you’ll understand why the “new restaurant math of a $15 minimum wage” is making Grant Chen’s restaurant unprofitable, and why it is driving him out of business.

Here are some excerpts below from Grant Chen’s article about the new “restaurant math” in Seattle. He starts with some basic restaurant economics:

Most people think that restaurants are some type of hugely profitable enterprise. The reality is that restaurants are “profitable” but are usually paying back loans or trying to recoup initial costs of building out the restaurant. The breakdown of expenses is usually along these lines:

• 25-40% food cost
• 30-35% employee wages
• 15-25% rent plus utilities

If you add up the low side, it equals 70% expenses, leaving 30% profit. If you add the high side all up, it actually equals 100%, leaving little profit. If you’ve ever wondered why the steak or lobster costs so much at the fancy restaurant in downtown, it’s because the margins are thin and expenses are high. Famed Seattle restaurateur Tom Douglas stated that his profit margins were 5% and he has some of the most popular restaurants in Seattle.

For this reason, buying or building a restaurant is a form of gambling. You put a huge amount of money up front and hope to make your initial investment back in about three to five years (if you’re lucky). That means for those years, even if everything goes according to plan, you can not make money if something happens at the end of the third year. As it stands, most restaurants fail during the first or second year, because they can’t get enough traction or repeat customers during this incubation period or they simply run out of cash. It’s a risky business, because you have to generate immediate cash flow, otherwise your business is burning through cash keeping your rent paid, the ovens on and servers to stand around doing nothing.

Grant then discusses the restaurant math of a 61% increase in labor costs:

As of January 2016, Seattle’s minimum wage is $13 an hour, which represents a 40% increase in our labor cost from the prior hourly wage of $9.32. This puts our expenses over 100% [of sales revenues], but we’re trying to offset it with price increases of 10% across the board and cutting hours by about 10% as well.

The difficulty in increasing prices is that 5 minutes away, the Seattle city boundary ends, which means that we are competing with restaurants that don’t need to charge extra. If our customers don’t run away, we anticipate a slight loss or ideally, a break even year. Most other restaurant owners we’re talking to are all in the same boat of trying to raise prices without upsetting customers and digging into profits to make it work. Those with sit down service can at least go from a tip system to service charge system, at the risk of alienating their best servers. So far, customer complaints have been fairly muted, with the occasional mention, but we usually just tell them that it’s the side effect of minimum wage.

To put things into perspective, the average American household in 2013 spent almost $3,000 or 6% of their budget on gasoline at $3.50 per gallon. If you take an overall 20% increase in restaurant expenses and apply an equivalent increase to a gas budget of 6%, it would be the equivalent of $11.70 per gallon gasoline prices. This is the type of shock that restaurant owners are facing.

Come next year, when minimum wage of $15 an hour goes into effect, it will be a 61% increase in our labor cost, which will bring our total expenses to well over 120% [of sales revenue]. This is when the real economics experiment begins, when we can no longer cut hours and have to raise prices by another 20% just to break even. Will customers balk at this price or will the general lift in wages throughout the city enable people to afford to pay more while eating out?

I really don’t know, but we’re all going to find out soon enough.

Note: I’d add some of my own restaurant economics here and point to the economic reality that a 20% increase in Grant’s menu prices won’t generate a 20% increase in sales revenues unless the demand for his food is completely inelastic, a totally unrealistic assumption. Given any normal assumptions about the price elasticity of demand for restaurant food and accounting for the reduction in the number of meals served following price increases, it’s highly likely that there is no increase in menu prices that will generate a 20% increase in Grant’s sales revenue.

Grant ends by discussing how higher government-mandated labor costs have forced him to operate now as a “private charity” as he anticipates the inevitable closing of his restaurant:

This will be a complete loss of savings and retirement money that we put into the restaurant. Rather than being “rich old white guys,” we’re young, minority entrepreneurs. Two of us just became proud fathers last year and another is about to have his first this year. The final kick is that since the mass exodus from the retail space, commercial leases almost always require a personal guarantee. In the event that we the tenant cannot pay the bills, the guarantor and their personal assets (read: our homes) are on the hook. This means that even with a failing business, we would be better served continuing to bleed money instead of letting the landlord come after us, short of negotiating a buy-out or other arrangement.

When we eventually close the restaurant, we’re going to be laying off a team of extraordinary employees. They are hard workers and I respect all of them and they deserve the increase in pay. I simply wish I could continue paying them while making a living myself. As it stands, we’re more or less operating a private charity now.

Bottom Line: It’s unlikely that Grant Chen’s situation operating a restaurant in Seattle today is in any way unique. It’s probably a pretty typical example of the new “restaurant math” that all restaurants in Seattle are now facing. If the typical restaurant makes a profit margin of 5%, there’s just no way that most restaurants can possibly survive a 61% increase in labor costs. In the end, it’s about math, not politics. And the restaurant math of a $15 an hour minimum wage is an arithmetic for restaurant failures, not restaurant survival. Apparently that math is already starting to “break the system.”"

My Comments On A Clinton Ad

A TV ad for Hillary Clinton claims that far too many Americans are not getting paid what they are worth as we see her in a factory with a female worker, implying that women are not getting equal pay for equal work.

We often hear how women only make 77% as much as men. It is that type of statistic that the ad is alluding to.

But that number is misleading. Differences in pay can exist because of differences in hours worked, experience and occupation.

Harvard labor economist Claudia Goldin has said that there is not enough evidence to show systematic discrimination in pay between genders and the differences are mostly a result of choices individuals make.

Former director of the Congressional Budget Office June O'Neill said "For men and women who never marry and never have children, there is no earnings gap.”

If companies could pay women 77% of what they pay men for the same work, they would stop hiring men. They could instantly cut their labor costs by 23%.

Why don’t companies do that? Because the pay gap exists due to the other factors mentioned above and women are not getting paid less for the same work.

If that sounds unrealistic, recall that those on the left often accuse companies of outsourcing jobs to cut labor costs. In 2004, Democratic presidential candidate John Kerry talked about “Benedict Arnold CEOs.”

The ad could have also implied support for a higher federal minimum wage. But raising it to just $10.10 could cost 500,000 jobs according to the Congressional Budget Office.

On the “fight for $15” former chief economic advisor to President Obama Alan Krueger says “the push for a nationwide $15 minimum wage strikes me as a risk not worth taking” because it is far out of the range of anything economists have studied. Alan Blinder, another economic advisor to Democrats, said something similar.

Workers might not get paid what they are worth if labor markets are not competitive and we don’t have enough firms hiring. But Christina Romer, Obama’s first chief economic advisor, said in 2013 that labor markets in the U.S. are generally very competitive.

It is also impossible for any government agency to determine who is underpaid. There are 150 million workers and no one can check the productivity level of all them.

Our biggest economic problem is slow growth. The gross domestic product has risen less than 3% annually ten straight years (adjusted for inflation). That is a record.

This hurts job growth. Currently, only 77.7% of 25-54 year olds have a job, still below the 79.7% in December of 2007, when the recession started.

That means we are still down about 2 million jobs. We can get them back with higher GDP growth, as another Democratic economist from the 1960s, Arthur Okun showed.

The ad said nothing about this. It did mention that we can’t reach our full potential as a country unless all individuals can.

But that won’t happen until the job picture improves. Many economists think that too many regulations are stifling investment, which hurts growth.

The Kauffman Foundation reports that “the startup rate in the United States has roughly halved since the 1980s.” That might limit GDP and job growth, which will not be helped by more regulations.

Today25-30% of jobs require a license, while it was only 5% in the 1950s. Even a White House report issued last said that was a problem.

We need a growing, entrepreneurial economy, with fewer restrictions on workers. Not more government control as Clinton promises.