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Brooks Wilson's Economics Blog: May 2009

Friday, May 29, 2009

Economists on American Democracy

William Davis and Bob Figgins ask the question, "Do Economists Believe American Democracy Is Working?" in the May 2009 Econ Journal Watch.  To answer this question, they randomly selected groups of 1,000 members of the American Economic Association for survey.  The survey contained thirteen questions meant to assess whether economists believe that American democracy works.  The authors broke down the responses into political affiliation.  The questions were graded on a scale of 1 to 5, with 5 representing the most skeptical view in eight of the thirteen questions and 1, the most skeptical view in the remaining questions.  I have reproduced the first three questions and overall results, dropping the political affiliation, to provide a sample of the results.   
In the U.S. special interest groups typically have more than a negligible impact on public policy formation (4.55).

Elected officials in the U.S. typically construe issues to create a "feel good" mentality among their constituents (3.87).

Elected officials typically use media outlets to "spin" a political viewpoint rather than to communicate the issue in an unbiased manner (4.28).

Davis and Figgins summarize their findings.
On every proposition a majority—usually a large majority—of economists express views that indicate they do not believe American democracy is working. In fact, for Question 9, only ten percent of all respondents either agree or strongly agree that the typical bill passed by the United States Congress and signed into law generates a positive net social benefit for society. Perhaps the most salient finding of the survey is that, regardless of political affiliation, a large majority of economists appear to be skeptical of elected officials to act on economic issues in an unbiased and objective manner. Further, the results generally indicate that economists believe elected officials employ creative methods to hoodwink their constituents while seeking re-election.
The authors ask why the profession is oriented toward the status quo when economists express so much doubt about American democracy?  They offer four possible explanations: (1) The poll was conducted in 2006 when the Bush presidency was very unpopular, (2) Many economists may view the political process as reliably beneficial (or reliably less destructive than alternatives), (3) Economists do not have allegiance to the status quo but its presumptions are focal to the research community, and (4) Research about vastly different institutions force economists to be less empirical and more speculative.

I hope that the analysis will be extended in another direction.  Seeing a need for change in governance, would economists support a greater reliance on markets, reform of democratic institutions that would improve incentives for elected representatives to work for the net benefit of society, or greater reliance on governmentally sponsored institutions like the Fed and the EPA that are largely shielded from the influence of elected politicians?

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Thursday, May 28, 2009

I Had This Idea Too! It Can't Be Good.

From Paul Wagenseil of Fox News, ("Energy Secretary's White-Paint Proposal Puzzles Climate-Change Experts," May 28, 2009), we learn that,
Energy Secretary Steven Chu stunned the audience at a London scientific conference Tuesday with a radical but simple proposal to combat global warming: Paint all the roofs of all the buildings in the world white.If we did so, the Nobel Prize-winning physicist said, and if we also made sure the world's roads and sidewalks were light-colored, it would have the same effect on global warming as taking all the cars in the world off the world's roads for 11 years.

The idea is to harness the "albedo effect" -- the theory that a reflective planet warms up less as heat from the sun is bounced back into space.

Palace Nobel Laureate Symposium, said the calculations are based on work done at Lawrence Berkeley National Laboratory, where he used to work and where three researchers concluded last year that changing surface colors in the world's 100 largest cities would offset 44 billion tons of carbon dioxide emissions.

But at least one science expert thinks Chu is nuts.

"It's past simplistic -- it's ridiculous," says Steven Milloy, publisher of and an avowed climate-change skeptic. "Imagine the glare on roads, in urban areas, imagine the UV radiation bouncing around. Snow blindness would be replaced by road blindness."

But Dr. Gordon Bonan, a climate scientist at the National Center for Atmospheric Research in Boulder, Colo., says there's a kernel of truth in the science behind Chu's idea.

"That's been a pretty standard idea many for many years now," says Bonan. "It's related to the idea of an urban heat island -- that a big city will generate a large amount of heat. In urban planning and urban design, the idea is that painting roofs white will absorb less solar radiation and keep the city cooler."

"In terms of roads, that does work," he continued. "You can test it yourself by walking barefoot on a hot summer day. The asphalt is going to be much hotter than the concrete and the white lines painted on top of the asphalt."...

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Epstein on Sotomayor

Richard Epstein, writing on the Sotomayor nomination to the Supreme Court, expresses dismay over President Obama's and Sotomayor's lack of concern about the protection of property rights ("The Sotomayor Nomination," Forbes, May 26, 2009)

We have already seen a president whose professed devotion to the law takes a backseat to all sorts of other considerations. The treatment of the compensation packages of key AIG executives (which eventually led to the indecorous resignation of Edward Liddy), and the massive insinuation of the executive branch into the (current) Chrysler and (looming) General Motors bankruptcies are sure to generate many a spirited struggle over two issues that are likely to define our future Supreme Court's jurisprudence. The level of property rights protection against government intervention on the one hand, and the permissible scope of unilateral action by the president in a system that is (or at least should be) characterized by a system of separation of powers and checks and balances on the other.

Here is one straw in the wind that does not bode well for a Sotomayor appointment. Justice Stevens of the current court came in for a fair share of criticism (all justified in my view) for his expansive reading in Kelo v. City of New London (2005) of the "public use language." Of course, the takings clause of the Fifth Amendment is as complex as it is short: "Nor shall private property be taken for public use, without just compensation." But he was surely done one better in the Summary Order in Didden v. Village of Port Chester issued by the Second Circuit in 2006. Judge Sotomayor was on the panel that issued the unsigned opinion--one that makes Justice Stevens look like a paradigmatic defender of strong property rights.

I have written about Didden in Forbes. The case involved about as naked an abuse of government power as could be imagined. Bart Didden came up with an idea to build a pharmacy on land he owned in a redevelopment district in Port Chester over which the town of Port Chester had given Greg Wasser control. Wasser told Didden that he would approve the project only if Didden paid him $800,000 or gave him a partnership interest. The "or else" was that the land would be promptly condemned by the village, and Wasser would put up a pharmacy himself. Just that came to pass. But the Second Circuit panel on which Sotomayor sat did not raise an eyebrow. Its entire analysis reads as follows: "We agree with the district court that [Wasser's] voluntary attempt to resolve appellants' demands was neither an unconstitutional exaction in the form of extortion nor an equal protection violation."

Maybe I am missing something, but American business should shudder in its boots if Judge Sotomayor takes this attitude to the Supreme Court. Justice Stevens wrote that the public deliberations over a comprehensive land use plan is what saved the condemnation of Ms. Kelo's home from constitutional attack. Just that element was missing in the Village of Port Chester fiasco. Indeed, the threats that Wasser made look all too much like the "or else" diplomacy of the Obama administration in business matters.

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A Political Edge to Dealership Closings?

Mark Tapscott, ("Furor grows over partisan car dealer closings," Washington Examiner, May 27, 2009) reports that there may be political overtones to the closing of Chrysler dealerships. Dealerships of Republicans and their campaign contributors seem to be closing in larger numbers than their Democratic rivals. Josh Painter of reports a high correlation between dealership closings and Republican congressional districts ("Dancing with the Dealers 3: Targeting GOP Districts," May 27, 2009). Two reasons for caution come to mind in reporting the story. First, sounds like a blog written by people with a conservative or Republican viewpoint, which might affect their objectivity. Second, I have not seen statistical analysis demonstrating the correlation, and correlation is not causation as the old saying goes. I must note that both writers have offered the necessary disclaimers given their lack of statistical reporting.

If the authors are correct and there is correlation between party affiliation and the closings, this should be a national scandal. It shows the dangers of increased government involvement in the economy--the opportunity to distribute more blatant political favors.

Here are some of Tapscott's observations,
Evidence appears to be mounting that the Obama administration has systematically targeted for closing Chrysler dealers who contributed to Repubicans. What started earlier this week as mainly a rumbling on the Right side of the Blogosphere has gathered some steam today with revelations that among the dealers being shut down are a GOP congressman and closing of competitors to a dealership chain partly owned by former Clinton White House chief of staff Mack McLarty.

The basic issue raised here is this: How do we account for the fact millions of dollars were contributed to GOP candidates by Chrysler who are being closed by the government, but only one has been found so far that is being closed that contributed to the Obama campaign in 2008?...

Also fueling the controversy is the fact the RLJ-McCarty-Landers chain of Arkansas and Missouri dealerships aren't being closed, but many of their local competitors are being eliminated. Go here for a detailed look at this situation. McClarty is the former Clinton senior aide. The "J" is Robert Johnson, founder of the Black Entertainment Television, a heavy Democratic contributor.

A lawyer representing a group of Chrysler dealers who are on the hit list deposed senior Chrysler executives and later told Reuters that he believes the closings have been forced on the company by the White House.

"It became clear to us that Chrysler does not see the wisdom of terminating 25 percent of its dealers. It really wasn't Chrysler's decision. They are under enormous pressure from the President's automotive task force," said attorney Leonard Bellavia.'s Josh Painter has a useful roundup of what has been found so far by a growing number of bloggers digging into what could be a very big story indeed. Also, see my column on this issue and how it fits into the larger context dubbed by the Examiner's Michael Barone as "gangster government."

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Is Sarkozy Getting Cold Feet Over Global Warming?

HT Drudge)  I don't know what to make out of the story by Financial Times writer, Ben Hall, ("Sarkozy in climate row over reshuffle,") that French President Sarkozy plans to appoint a climate-change sceptic to an important ministry.  It may mean that French leaders, like Australian, are growing cautious about imposing carbon taxes that at best impose an intergenerational transfer that harms current voters to benefit future voters, and at worst, imposes a tax with no future benefits.  It may mean nothing more than Sarkozy likes Allegre.  Key elements of the story read,
President Nicolas Sarkozy's desire to appoint an outspoken climate-change sceptic to a new French super-ministry of industry and innovation has drawn strong protests from party colleagues and environmentalists.

Claude Allègre argues that global warming is not necessarily caused by human activity. Putting him in charge of scientific research would be tantamount to "giving the finger to scientists", said Nicolas Hulot, France's best-known environmental activist...

Alain Juppé, the former centre-right prime minister, said the appointment would send a "terribly bad signal" ahead of international negotiations to secure a successor to the Kyoto treaty on cuts to carbon emissions.

One critic said that associating Mr Allègre with the government's ambitious environmental policy was like putting "organic farming alongside Chernobyl".

Mr Allègre hit back at his critics and their "lies and distortions" about his record and beliefs. The climate was certainly changing, he said, but not all the reasons for it were known. "As a scientist and citizen, I, unlike others, do not want environmentalism to accentuate the crisis or make the least well-off suffer more," he said.

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Wednesday, May 27, 2009

Scalia and Epstein on Economic Rights

Yesterday, Sonia Sotomayor was nominated for the Supreme Court by President Obama.  Many have written on her qualifications. As a change of pace, I am posting on a debate in the January/February 1985 issue of Regulation Magazine between Antonin Scalia ("On the Merits of the Frying Pan") and Richard Epstein ("The Active Virtues") on the Supreme Court's lack of desire to constitutionally challenge legislative intrusions into the economy.

At the time the written debate took place, Scalia was a judge on the United States Court of Appeals for the District of Columbia Circuit.  In a nut shell, Scalia defends the Supreme Court's inaction in protecting constitution economic rights by postulating that these efforts would be interpreted as judicial activism, justifying past and future activism, and that the Supreme Court might further limit economic freedom rather than protect it.  I selected a few quotes to illustrate his arguments.  He begins by defining the debate.

Fundamental or rarefied, the point is that we, the judiciary, do a lot of protecting of economic rights and liberties. The problem that some see is that this protection in the federal courts runs only by and large against the executive branch and not against the Congress. We will ensure that the executive does not impose any constraints upon economic activity which Congress has not authorized; and that where constraints are authorized the executive follows statutorily prescribed procedures and that the executive (and, much more rarely, Congress in its prescriptions) follows constitutionally required procedures. But we will never (well, hardly ever) decree that the substance of the congressionally authorized constraint is unlawful. That is to say, we do not provide a constitutionalized protection except insofar as matters of process, as opposed to substantive economic rights, are concerned.
Scalia makes his case. my view the position the Supreme Court has arrived at is good-or at least that the suggestion that it change its position is even worse. skepticism arises from misgivings about, first, the effect of such expansion on the behavior of courts in other areas quite separate from economic liberty, and second, the ability of the courts to limit their constitutionalizing to those elements of economic liberty that are sensible...

The second basis for my skepticism is the absence of any reason to believe that the courts would limit their constitutionalizing of economic rights to those rights that are sensible.  In this regard some conservatives seem to make the same mistake they so persuasively argue the society makes whenever it unthinkingly calls in government regulation to remedy a "market failure." It is first necessary to make sure, they have persuaded us, that the cure is not worse than the disease-that the phenomenon of  "government failure," attributable to the fact that the government, like the market, happens to be  composed of self-interested human beings, will not leave the last state of the problem worse than the first. It strikes me as peculiar that these same rational free-market proponents will unthinkingly call in the courts as a deus ex machina to solve what they perceive as the problems of democratic inadequacy in the field of economic rights. Is there much reason to believe that the courts, if they undertook the task, would do a good job?
Epstein was the James Parker Hall professor of law at the University of Chicago.  Epstein argues that we must compare the imperfections of the legislative branch relative to the judicial. 
IN MY VIEW, Scalia has addressed only one side of a two-sided problem. He has pointed out the weaknesses of judicial action. But he has not paid sufficient attention to the errors and dangers in unchanneled legislative behavior. The only way to reach a balanced, informed judgment on the intrinsic desirability of judicial control of economic liberties is to consider the relative shortcomings of the two institutions---judicial and legislative-that compete for the crown of final authority. The constitutionality of legislation restricting economic liberties cannot be decided solely by appealing to an initial presumption in favor of judicial restraint. Instead the imperfections of the judicial system must be matched with the imperfections of the political branches of government...

THE THEORY OF CONSTITUTIONALISM, as I understand it, tries to find a way to minimize the sum of the abuses that stem from legislative greed on the one hand, and judicial incompetence on the other. There is, by and large, no third alternative to this sorry state of affairs. What I fear is wrong with Scalia's  statement of the argument is this: by focusing exclusively on the defects he finds in the judicial part of the process, he tends to ignore the powerful defects that pervade the legislative part of the process. Our constitution reflects a general distrust toward the political process of government-a high degree of risk aversion. That is why it wisely spreads the powers of government among different institutions through a system of checks and balances...

Judicial restraint is fine when it keeps courts from intervening in areas where they have no business intervening. But the world always has two kinds of errors: the error of commission (type I) and the error of omission (type II). In the context of our discussion, type I error refers to the probability of judicial intervention to protect economic rights when such intervention is not justified by constitutional provisions. And type II error refers to the probability of foregoing judicial intervention to protect economic liberties when such intervention is justified. This second type of error cannot be ignored.

What Scalia has, in effect, argued for is to minimize type I error. We run our system by being most afraid of intervention where it is not appropriate. My view is that we should minimize both types of error.
Scalia may be tactically correct, but I believe Epstein's arguments are more sound.

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Tuesday, May 26, 2009

Voting With Their Feet

HT Drudge for this article and several others that I have failed acknowledge)  From the Wall Street Journal, "Millionaires Go Missing," May 26, 2009.
Here's a two-minute drill in soak-the-rich economics:

Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.

No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey (see here).

The Maryland state revenue office says it's "way too early" to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It's easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: "Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it's easy for them to change their residency."

All of this means that the burden of paying for bloated government in Annapolis will fall on the middle class. Thanks to the futility of soaking the rich, these working families will now pay Mr. O'Malley's "fair share."

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Unemployed Retiring to Collect Social Security

Many Social Security eligible unemployed are retiring early and drawing reduced benefits rather than rebuilding their retirement accounts.  From Mike Dorning of the Los Angeles Times, "Early retirement claims increase dramatically," May 24, 2009. 
Reporting from Washington -- Instead of seeing older workers staying on the job longer as the economy has worsened, the Social Security system is reporting a major surge in early retirement claims that could have implications for the financial security of millions of baby boomers.

Since the current federal fiscal year began Oct. 1, claims have been running 25% ahead of last year, compared with the 15% increase that had been projected as the post-World War II generation reaches eligibility for early retirement, according to Stephen C. Goss, chief actuary for the Social Security Administration.

Many of the additional retirements are probably laid-off workers who are claiming Social Security early, despite reduced benefits, because they are under immediate financial pressure, Goss and other analysts believe.

The numbers upend expectations that older Americans who sustained financial losses in the recession would work longer to rebuild their nest eggs. In a December poll sponsored by CareerBuilder, 60% of workers older than 60 said they planned to postpone retirement.

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Orszag on Health Costs

Peter Orszag, the director of the White House Office of Management and Budget, pitched the Obama administrations health care reforms as budget makers ("Health Costs Are the Real Deficit Threat," Wall Street Journal, May 15, 2009).  Rather than using the egalitarian and humane argument that health care should be expanded to cover all, including the poor, Orszag argues that health care can be reformed to lower costs without compromising the quality of care.  In fact, he doesn't mention  that the plan expands coverage (see "The Obama Medical Plan").  Expanding coverage will expand the taxpayers bill.

Orszag asserts that cost lowering, quality enhancing reforms can be achieved because,
In health care, unlike in other sectors, higher quality currently seems to be associated with lower cost -- not the opposite.
This assertion if simply not true. Goods and services that have a lasting place in the market provide consumers the most satisfaction per dollar.  The 2010 Toyota Prius, costing approximately $25,000, will not have a successful competitor offering lower quality at $32,500.  Rather than argue for more government intervention in highly regulated health care markets the Obama administration should begin by asking why health care markets fail to achieve the common outcome of less regulated markets.  Could it be that the tax code and insurance market regulation contributes to a decoupling of price and quality?

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Monday, May 25, 2009

California Wins Standoff with Obama Administration

Peter Nicholas writes in the Los Angeles Times ("U.S. backs off threat to withhold California stimulus money," May 20, 2009),
Reporting from Washington -- The Obama administration has backed off its threat to withhold billions of dollars in stimulus money from California, telling Gov. Arnold Schwarzenegger the state did not violate federal law in cutting pay for home healthcare workers in a bid to help balance the budget.

In a letter that was given to the governor this morning, the U.S. Department of Health and Human Services said the state remains eligible to receive another $8 billion in stimulus money for its Medicaid program, a ruling that may offer some solace for state officials coping with the resounding voter defeat Tuesday of five ballot measures aimed at closing California's huge budget shortfall.

The decision resolves a bitter standoff between the Obama and Schwarzenegger administrations, in which California officials questioned the involvement of an influential union -- the Service Employees International Union. The Obama administration set up a conference call on April 15 to discuss whether the state had violated the new stimulus law by cutting the pay of unionized home healthcare workers from a maximum of $12.10 an hour to a maximum of $10.10. California officials took the step to save $74 million and move closer to narrowing the state's multibillion-dollar budget gap.
This is a good outcome.

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Boeing Requests Regulation

Bjorn Lomborg, the director of the Copenhagen Consensus, in an op-ed article written for the Wall Street Journal, ("The Climate-Industrial Complex, My 22, 2009) describes the emergence of business seeking to benefit from fear of a carbon based ecological disaster. 
The tight relationship between the groups echoes the relationship among weapons makers, researchers and the U.S. military during the Cold War. President Dwight Eisenhower famously warned about the might of the "military-industrial complex," cautioning that "the potential for the disastrous rise of misplaced power exists and will persist." He worried that "there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties."

This is certainly true of climate change. We are told that very expensive carbon regulations are the only way to respond to global warming, despite ample evidence that this approach does not pass a basic cost-benefit test. We must ask whether a "climate-industrial complex" is emerging, pressing taxpayers to fork over money to please those who stand to gain.
The day after Lomborg's article was published, Scott Carson, the president and CEO of Boeing Commercial Airplanes, pushes for governmental favors for his firm and industry in combating carbon emissions. I am not sure if Carson is part of the climate-industrial complex or just fears that federal environmental action will make Boeing less competitive relative to their international competition.  He begins by pointing out that commercial jets have reduced carbon emission, even without government mandate or, for much of the discussed period, concern over carbon emissions.
Historically, fuel has been the airlines' second-biggest operating expense next to labor. Last year, with oil reaching $140 a barrel, fuel costs even outstripped labor costs, rising to 40% of total airline operating expenses. So airlines have demanded increased efficiency from airplane and engine manufacturers. And manufacturers have responded big time. Over the past 50 years, the efficiency of commercial jets has risen an astounding 70%. This means that carbon emissions per mile flown have dropped 70% -- all without a regulatory requirement for greenhouse gas emissions.
Airlines have been good citizens because they have been constrained to produce more efficient products by markets.  This efficiency means lower costs for airlines and their customers as well as lower levels of pollutants.  Why then do we now need government involvement?

Despite the market driven record of improving standards, Carson suggests that regulation is now desirable.
That said, we believe properly structured regulations could be useful. It's not often that an industry asks for additional regulation, but Boeing, GE and other airplane and engine manufacturers are convinced that a fuel-efficiency standard for new airplanes is an effective way to drive the development of fuel-saving technologies.
Milton Friedman disagreed with Carson's assessment that "It's not often that an industry asks for additional regulation."  In an EconTalk podcast of Milton Friedman hosted by Russ Roberts, Friedman explains that business support regulation that increases their profit.  
[I]t's always been true that business is not a friend of a free market...It's in the self-interest of the business community to get government on its side. It's in the self-interest of a particular business...But the real puzzle—puzzle isn't quite the right word—the real problem here is where do you find the support for free markets? If free markets weren't so damn efficient, they could never have survived because they have so many enemies and so few friends. People think of capitalism or free markets as something that obviously is supported by business. People think that if a business party is a party in politics, it will promote free market. But that's wrong. It will be in the self-interest of individual businesses to promote a tariff here and a tariff there…
Specifically, Carson asks the government through the International Civil Aviation Organization to impose an efficiency standard for new airplane designs, improve air-traffic management, and government loans to biofuel refiners that are extended when oil prices are low and repaid when they are high. 

My guess is that the first request is an attempt to protect Boeing from federal attempts to promote "efficiency" that will harm it in international markets.  The second request, that the government improve air-traffic management with existing technology is reasonable, but illustrates the general inefficiency of government.  It is the same inefficiency that has allowed Social Security, Medicaid, and Medicare to operate for decades with huge projected deficits.  Finally, the request for aid to biofuel refiners would lower the airlines' long run fuel cost, increasing the demand for new airliners. 

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Sunday, May 24, 2009

We Are Out of Money Now

From the Drudge Report, "We're Out of Money," May 24, 2009.
In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: "We are out of money."

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.
In one short paragraph, President Obama pronounces that the government is broke, ducks blame and passes the the buck to elected officials over the last several decades.  Does anyone smell a tax increase to fund medical care reform?

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Saturday, May 23, 2009

Cut Spending, Increase Taxes, Or Do Nothing?

Robert Schmidt reports on concerns expressed by Treasury Secretary Timothy Geithner ("Geithner Vows to Cut U.S. Deficit on Rating Concern (Update2)," Bloomberg, May 22, 2009).
Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.
To close the deficit, our elected officials can cut spending or increase taxes.  Of course, they can also do nothing and let the large deficits fester.  Which course will they follow? 

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Thursday, May 21, 2009

Weekly Unemployment

The Department of Labor released its, "Unemployment Insurance Weekly Claims Report," which began,
In the week ending May 16, the advance figure for seasonally adjusted initial claims was 631,000, a decrease of 12,000 from the previous week's revised figure of 643,000. The 4-week moving average was 628,500, a decrease of 3,500 from the previous week's revised average of 632,000.

Because of research by Robert J. Gordon which finds that recessions often bottom out shortly after the 4-week moving average peaks, interest in the average has increased.  The 4-week moving average may have peaked in the week ended March 14, 2009. 

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Civan and Maloney on Pharmaceutical R&D

The Berkeley Electronic Press has published an article by Abdulkadir Civan and Michael T. Maloney titled, "The Effect of Price on Pharmaceutical R&D.  They conclude,
The results of our research clearly indicate that society benefits from the money spent by people in the United States on prescription drugs. The retail price of existing drugs induces new drug development. The higher the prices of existing drugs in a therapeutic category, the larger the number of drugs in the development pipeline in that therapeutic category. We find this result by looking crosssectionally at the drug development pipeline sorted by the types of diseases that new drugs target.

The estimated price elasticity of drug development across numerous specifications averages approximately 35 percent, and is 0.51 in our preferred specification.  This implies that if drug prices decline by 50 percent, a number well within the range of possibility if drug re-importation becomes common, the number of drugs in the development pipeline could decline by 25 percent.
Of course, our estimates are based on a cross-sectional analysis of the marginal choice of drug companies to develop drugs in one category versus another.  These estimates may not apply to an across-the-board decline in prices. However, as we have shown before, the fact that the U.S. drives drug development means that these estimates of price elasticity must be considered carefully in the debate over drug re-importation and other price controls. It is possible that lowering price will kill the goose that lays the golden eggs.
The emphasis added by bolding is mine.  Provisions in health care reform that focus on government bargaining power to control cost scare me.  They may result in lower current costs at the expense of future benefits through innovation.  Effective reform will treat the symptom of increasing costs, highly regulated health care system, with an injection of market incentives and not treating the symptom with government provision or financing of health care services. 

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The Honda Insight

(HT Anthony Watts, Watts Up With That)  I have not driven the Honda Insight, so I cannot confirm or disavow Jeremy Clarkson's review, but it is the most wickedly entertaining auto review that I have read ("Honda Insight 1.3 IMA SE Hybrid," TIMESONLINE, May 17, 2009).  I do think he made one error--the Insight is ahead of its time.  Given the new CAFE standards, this is the type of vehicle most of us will be driving in 2016.
Much has been written about the Insight, Honda’s new low-priced hybrid. We’ve been told how much carbon dioxide it produces, how its dashboard encourages frugal driving by glowing green when you’re easy on the throttle and how it is the dawn of all things. The beginning of days.

So far, though, you have not been told what it’s like as a car; as a tool for moving you, your friends and your things from place to place.

So here goes. It’s terrible. Biblically terrible. Possibly the worst new car money can buy. It’s the first car I’ve ever considered crashing into a tree, on purpose, so I didn’t have to drive it any more.
The biggest problem, and it’s taken me a while to work this out, because all the other problems are so vast and so cancerous, is the gearbox. For reasons known only to itself, Honda has fitted the Insight with something called constantly variable transmission (CVT).

It doesn’t work. Put your foot down in a normal car and the revs climb in tandem with the speed. In a CVT car, the revs spool up quickly and then the speed rises to match them. It feels like the clutch is slipping. It feels horrid.

And the sound is worse. The Honda’s petrol engine is a much-shaved, built-for-economy, low-friction 1.3 that, at full chat, makes a noise worse than someone else’s crying baby on an airliner. It’s worse than the sound of your parachute failing to open. Really, to get an idea of how awful it is, you’d have to sit a dog on a ham slicer.

So you’re sitting there with the engine screaming its head off, and your ears bleeding, and you’re doing only 23mph because that’s about the top speed, and you’re thinking things can’t get any worse, and then they do because you run over a small piece of grit.

Because the Honda has two motors, one that runs on petrol and one that runs on batteries, it is more expensive to make than a car that has one. But since the whole point of this car is that it could be sold for less than Toyota’s Smugmobile, the engineers have plainly peeled the suspension components to the bone. The result is a ride that beggars belief.

There’s more. Normally, Hondas feel as though they have been screwed together by eye surgeons. This one, however, feels as if it’s been made from steel so thin, you could read through it. And the seats, finished in pleblon, are designed specifically, it seems, to ruin your skeleton. This is hairy-shirted eco-ism at its very worst.

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Legislating Vacations

HT Drudge)  From Politico's Erika Lovely ("Alan Grayson to introduce Paid Vacation Act," May 21, 2009),
Rep. Alan Grayson was standing in the middle of Disney World when it hit him: What Americans really need is a week of paid vacation.

So on Thursday, the Florida [representative][1] will introduce the Paid Vacation Act — legislation that would be the first to make paid vacation time a requirement under federal law.
The bill would require companies with more than 100 employees to offer a week of paid vacation for both full-time and part-time employees after they’ve put in a year on the job. Three years after the effective date of the law, those same companies would be required to provide two weeks of paid vacation, and companies with 50 or more employees would have to provide one week.

The idea: More vacation will stimulate the economy through fewer sick days, better productivity and happier employees.
Oft sited on this blog are Bryan Caplan's four biases about economics held by Americans ("The Myth of the Rational Voter," Princeton University Press 2007).  The pertinent bias in this post is antimarket bias, the tendency to underestimate the value of the market mechanism.  In the case of vacations, perhaps the public believes that firms have an unfair advantage in negotiating employment contracts.  Caplan sagaciously observes, 
Merriam-Webster's Collegiate Dictionary defines a demagogue as "a leader who makes use of popular prejudices and false claims and promises in order to gain power."  Put bluntly, rule by demagogues is not an aberration.  It is the natural condition of democracy.  Demagoguery is the winning strategy as long as the electorate is prejudiced and credulous.
[1]  Reference to political parties changed to a neutral term.

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Wednesday, May 20, 2009

More Bailouts?

The next beneficiary of tax dollars may be minority owned broadcasters (Silla Brush, "Democrats seek financial rescue of minority-owned broadcasters," The Hill, May 20, 2009)
High-ranking House [members] are urging the Treasury Department to prop up minority-owned broadcasters suffering from a lack of capital and lost advertising revenue amid the economic slump.

House Majority Whip James Clyburn (S.C.) is leading an effort to convince Treasury Secretary Timothy Geithner to take “decisive action” by extending credit to this sector of the broadcasting industry.

Clyburn and other senior members, including House Financial Services Committee Chairman Barney Frank (Mass.) and Ways and Means Committee Chairman Charles Rangel (N.Y.), argue that minority-owned broadcasters are sound businesses, but that the recession could undermine the government’s efforts to diversify the airwaves.
I have edited out of the quote references to party affiliation.

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Tuesday, May 19, 2009

The Jock Tax

(HT Colin Cowherd, ESPN Radio)  In a previous post, I wrote on the frequently observed tendency of politicians to fund projects in their districts with tax revenues generated from other districts.  A close cousin is the tendency of politicians to impose taxes on taxpayers living outside their districts.  Speed traps and hotel taxes are examples and anger us when we fall victim.  They are taxation without representation.  The jock tax is another example, and in my book, every bit as immoral as a speed trap even though it is paid by rich athletes.  Kevin Baxter explains the history of the tax and its collection ("The taxing life of a pro athlete," Los Angeles Times, April 12, 2009).
The advent of the jock tax is commonly traced to the 1991 NBA Finals in which the Chicago Bulls beat the Lakers, then received tax bills from California for the three games played in Los Angeles. However, nonresident tax laws have been on the books in the state since the 1950s...

Athletes are taxed based on "duty days" they spend in each state. In baseball, there are approximately 181 "duty days," meaning a player earning $1.81 million would make $10,000 each duty day. Therefore, if that player's team had three games in California, he would be responsible for taxes on $30,000 of income.
The jock tax is taxation without representation and unfair.  Voters as taxpayers don't care because athletes are rich.
As salaries have skyrocketed, the so-called "jock tax" has become widespread and controversial. Its imposition has raised questions of fairness and, for tax expert Joseph Henchman, has laid waste to the once-revolutionary prohibition on taxation without representation.

"Politicians are seeking to shift tax burdens to people that don't vote," he says. "It does create a rather disturbing trend because it essentially allows politicians to provide more government services than [citizens] are willing to pay for." ...

"Nothing surprises me that the government does to try to get some money," says Oliver [athlete], who will make $3.665 million this summer. " . . . The common person, they're not going to feel sorry for us. And if I was that person, I would be saying the exact thing. I can see both sides of it."

"No, it's probably not fair," says Ralph Espinosa, a Miami-based CPA who has done tax work for several NFL and major league players. "But they make more money than most of us. Their information is easily accessible online. Most people know their salaries [and] they can go in and see their schedules."
We should stop thinking of the rich as tax targets to pay for government our services.  Certainly, some progressivity in the tax code is justifiable, but past a certain point it is robbery even if legal.  The jock tax is another example of piling on.  We should limit the ability of politicians to impose taxes on people living outside their districts. 
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Monday, May 18, 2009

The Batteries Tradeoff: American Jobs Vs Clean Environment

Economics involves tradeoffs.  The tradeoff is not one I believe[1], but based on goals stated by the Obama administration: clean energy and domestic job creation.  Two pieces of legislation exemplify these goals, one passed, the other pending.  The stimulus package, formally known as the American Recovery and Reinvestment Act, provides $190 billion of funds for green energy research and development, including batteries.  Pending legislation would provide funding for 100,000 U.S. made plug-in hybrid cars.  Both bills include buy American provisions.  Richard Waters, describes the current battery market (Battery makers view for US aid," Financial Times, May 17, 20090.  The emphasis added is mine.
A handful of US battery makers is scrambling for government support ahead of a deadline this week as the US struggles to win back lost ground from Asian competitors in one of the world’s next important technologies.

The race is also the first test of how the administration will use the near-$190bn in stimulus money earmarked this year to support “green” technologies, from alternative fuels to energy-efficient building materials.
Advanced batteries are seen as a strategic technology, given their importance to electric and hybrid vehicles, and their military applications.

As with the chip industry two decades ago, the US has lost the lead to manufacturers in Asia that have invested in high-volume manufacturing.
Currently, buying American batteries is more costly, implying that companies that use them in their products will be selling them at a higher priced input than they would if they could buy foreign batteries.  The supply of alternative fuel vehicles will grow more slowly and pollution, decline more slowly than otherwise.

[1]  I do not agree with the notion that forcing governments, or economic agents to buy American produces jobs.  It moves jobs from one sector to another.  I also do not believe that it is easy to isolate "green" sources of energy as the production of energy necessarily produces pollutants.  We only select the pollution type that we find less objectionable.
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Sunday, May 17, 2009

A Less Rosy Budget Projection

Roger Runningen and Hans Nichols of Bloomberg ("Obama Says U.S. Long-Term Debt Load ‘Unsustainable’ (Update2)," May 14, 2009) report that,
President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

Earlier this week, the Obama administration revised its own budget estimates and raised the projected deficit for this year to a record $1.84 trillion, up 5 percent from the February estimate. The revision for the 2010 fiscal year estimated the deficit at $1.26 trillion, up 7.4 percent from the February figure. The White House Office of Management and Budget also projected next year’s budget will end up at $3.59 trillion, compared with the $3.55 trillion it estimated previously.

Two weeks ago, the president proposed $17 billion in budget cuts, with plans to eliminate or reduce 121 federal programs. Republicans ridiculed the amount, saying that it represented one-half of 1 percent of the entire budget. They noted that Obama is seeking an $81 billion increase in other spending.
Constrained by the recession, President Obama must balance the cost of his ambitious reorganization of government priorities with tax revenues on the one hand with the difficulty in cutting existing programs on the other.  As noted in an earlier post, legislators of both parties oppose the proposed $17 billion in budget cuts.  Apparently, all spending is sacred. 
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Saturday, May 16, 2009

Innovation in Pharmaceuticals

In a recent post, I expressed concern that President Obama's proposed medical care reform would restrain creativity and innovation in the health care sector.  John Lechleiter, the chairman and CEO of Eli Lilly & Co., describes contribution that pharmaceuticals have made to longevity, the creativity of the private pharmaceutical industry, and how proposed reform would slow innovation ("Health-Care Reform and the 'Innovation Test'," Wall Street Journal, May 14, 2009). 

Life expectancy has improved to due pharmaceuticals.
Inventions such as these -- and my list includes only the partial output of the company I work for -- have transformed the most basic expectations of human life in the last century. Today, the average life expectancy at birth in the U.S. is 78; when my mother was born in 1928 it was 57. (She's still in great health, by the way.)

Even in the last two decades of the 20th century, new medicines accounted for 40% of the increase in life expectancy in more than 50 countries, according to a recent study by Columbia University economist Frank Lichtenberg. In other words, for every year that life expectancy has increased, five months can be attributed to the availability of new medicines.
The private sector is the "heart and soul" of the innovation.

Today, a record 861 new medicines and vaccines are in human trials or awaiting regulatory approval in the fight against cancer, along with more than 300 for heart disease and stroke, another 300 for mental illnesses -- including Alzheimer's disease -- and 90 for HIV/AIDS.

U.S.-based private industry is the heart and soul of this innovation drama, investing $58 billion in research and development for new medicines in 2007 alone. Virtually no discovery reaches the point of regulatory approval if it is not shepherded through clinical development by a large biotech or pharmaceutical company. This means companies too often maligned as "Big Pharma" are in fact the only entities with the right combination of expertise, infrastructure and financing to pull this off.

Some widely discussed reform proposals would negatively impact innovation.
Yet in today's policy-reform drama -- if early clues from Washington are a guide -- the requirements of innovation may be written out of the script. Already in defensive mode, several large pharmaceutical companies are restaging the old merger play -- continuing to narrow the ranks of firms with the full-scale capacity to innovate. Meanwhile, skittish investors have retreated, leaving nearly half of all publicly traded biotech companies with less than a year of cash on hand. These trends amount to show-stoppers if they continue...

So it is vital to all of us that we insist that reform proposals pass the "innovation test." Providing insurance to millions of Americans through a government-run plan would fail the test. Similar efforts around the world have led to rationing of health care and created hurdles between patients and the most advanced treatments...

Curtailing health-care costs by allowing the federal government to dictate prices for branded medicines also would fail the test. Price controls and rebate requirements tend to be arbitrary and make it much harder for innovators to attract and recoup investments.

The stakes are high.  Medical care reform should be carefully considered and not rushed through the legislative process as so much recent legislation.

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Trade Policy Turning Protectionist

Since Adam Smith wrote the Wealth of Nations in 1776, economists have advocated free and open international trade, believing that trade allows a country to specialize in the production of goods and services in which it has a comparative advantage.  Increasing trade neither creates nor destroys jobs but transfers labor and other resources from newly importing industries to newly exporting industries.  This conclusion is supported by the high levels of employment that the United States enjoyed from 1983 through 2008, a period of expanding trade.  Trade benefits a nation by allowing it to specialize in what it does best, and to consume not only what it does best, but what other countries do best as well.  It makes countries wealthier.   

Trade policy in the United States currently seems to be directed by elected officials who do not understand or ignore the benefits of trade.  They seem to suffer from what Bryan Caplan calls antiforeign bias and make-work bias.  Antiforeign bias is a tendency to underestimate the value of economic interchange with foreigners.  Make-work bias focuses on jobs, whether or not they are productive, and ignores the benefits of conserving labor.  An excellent article focusing on U.S. and Canadian trade by Anthony Faiola and Lori Montgomery ("Trade Wars Brewing In Economic Malaise," Washington Post, May 15, 2009) illustrates how these biases seem to be guiding policy makers.  They give several examples legislation containing protectionist buy American clauses.  They include the stimulus package, a $14 billion program to fund clean-water projects, and a $6 billion program to fund environmentally friendly school construction.   Besides limiting trade, the buy American clauses value jobs over productivity.  A clean water project that uses only American products will result in less clean water and at a higher price than a project that buys the best resources regardless of their point of origin. 

Faiola and Montgomery provide an intriguing example of a buy American provision gone awry.
Take, for instance, Duferco Farrell Corp., a Swiss-Russian partnership that took over a previously bankrupt U.S. steel plant near Pittsburgh in the 1990s and employed 600 people there.

The new buy American provisions, the company said, are being so broadly interpreted that Duferco Farrell is on the verge of shutting down. Part of an increasingly global supply chain that seeks efficiencies by spreading production among multiple nations, it manufactures coils at its Pennsylvania plant using imported steel slabs that are generally not sold commercially in the United States. The partially foreign production process means the company's coils do not fit the current definition of made in the USA -- a designation that the stimulus law requires for thousands of public works projects across the nation.

In recent weeks, its largest client -- a steel pipemaker located one mile down the road -- notified Duferco Farrell that it would be canceling orders. Instead, the client is buying from companies with 100 percent U.S. production to meet the new stimulus regulations. Duferco has had to furlough 80 percent of its workforce.

"You need to tell me how inhibiting business between two companies located one mile apart is going to save American jobs," said Bob Miller, Duferco Farrell's executive vice president. "I've got 600 United Steel Workers out there who are going to lose their jobs because of this. And you tell me this is good for America?"
Protectionists have forgotten the lesson of the Smoot-Hawley Tariff Act, which its authors believed would create American jobs by making foreign goods more expensive.  Our tariffs led to retaliation and lengthened and deepened the Great Depression.  Other countries like Canada will react.
Outrage spread in Canada, with the Toronto Star last week bemoaning "a plague of protectionist measures in the U.S." and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts -- the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.
We will not get out of the recession by attempting to push off our unemployment onto our friends.  Stimulus policy should focus on funding worthwhile projects at the lowest cost--the projects that most enhance productivity. These projects will set the stage for economic recovery and long-run growth.

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Friday, May 15, 2009

The "Deliberative: Attorney-Client Privilege" Memo

On May 12, 2009, Senator John Barrasso of Wyoming revealed a memo he received titled "Deliberative: Attorney-Client Privilege" that was sent  by the Office of Budget Management to the Environmental Protection Agency (EPA) before it released its "endangerment findings" while questioning EPA director, Lisa Jackson.  The memo is critical of the endangerment finding, concluding that it does not provide an adequate explanation of health risk and underestimates economic costs.
The finding rests heavily on the precautionary principle, but the amount of acknowledged lack of understanding about basic facts surrounding GHGs seem to stretch the precautionary principle to providing for regulation in the face of unprecedented uncertainty. (The TSD notes several areas where essential behaviors of GHGs are "not well determined" and "not well understood" (e.g., why have U.S. methane levels decreased recently?).) This could be remedied by expanding the discussion on pp. 25-31 to articulate more clearly how the Administrator weighed the scientific evidence related to each impact or how/whether she have more or less weight to particular impacts for either the public health or the welfare finding and how she weighed uncertainty in her deliberations...

Making the decision to regulate CO2 under the CAA for the first time is likely to have serious economic consequences for regulated entities throughout the U.S. economy, including small businesses and small communities. Should EPA later extend this finding to stationary sources, small businesses and institutions would be subject to costly regulatory programs such as New Source Review.
Many bloggers have written on the climate science and political impact of the memo.  I will focus on the precautionary principle (the emphasis added in the quote is mine).  The precautionary principle states that in the absence of conclusive scientific findings on actions that may have highly negative or irreversible effects, the burden of proof rests on the party advocating the action to demonstrate that it is safe. 

In an EconTalk interview titled "Sunstein on Worst-case Scenarios," Cass Sunstein observes,  
The problem with it [the precautionary principle] is that it forbids the the very steps that it requires so that things that the precautionary principle bans are banned by the ban.  So if you say, for example, that because you have to be better safe than sorry, we can't have nuclear power, that makes sense, but banning nuclear power gives rise to probabilistic risk of various kinds including climate change.  So the ban on nuclear power violates the precautionary principle as well as being compelled by the precautionary principle. 
Using the precautionary principle to limit carbon emissions may save lives by slowing climate change, but reducing carbon emissions will make electricity more expensive, limiting people's ability to heat and cool their homes and marginally increasing climate related deaths.  The precautionary principle is a bad decision making rule.  We need another for policy that is likely to impose serous costs on taxpayers and consumers.   

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The Dead: Voting and Spending

(HT Drudge) In Chicago, the dead vote (Peter Carlson.  "Another Race To the Finish," Washington Post, November 17, 2000); throughout the country,they receive stimulus checks ("Dead People Get Stimulus Checks," Fox News, May 14, 2009). 
The Social Security Administration, which sent out 52 million checks, says that some of those checks mistakenly went to dead people because the agency had no record of their death. That amounts to between 8,000 and 10,000 checks for millions of dollars...

The feds blame a rushed schedule, because all the checks have to be cut by June. The strange thing is, some of the checks were made out to people...who were never even part of the Social Security system.

If some of the checks are cashed, will they provide a fiscal stimulus?

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Why Do We Need The Credit Cardholders' Bill of Rights (HR 627)?

An old 1992 single frame cartoon shows a man and woman standing in front of a tombstone that reads, "Here Lies a Good Man and a Banker."  The woman asks the man, "When did they start burying two people in one grave?"  As a former banker, I can firmly state that bankers are less popular now they they were then.  It is precisely when a group becomes the target of public and private scorn that we need to be vigilant in guarding their rights.
The White House is pushing legislation that would "protect" consumers from "unfair" credit card lending practices.  The Treasury Department (US Treasury Dept. Supports HR 627-Need For Credit Card Reform) provides a bullet list of the protections that the bill provides as well as a longer explanation of each bullet item.  The bullets are,

  • Ban Unfair Rate Increases
  • Prevent Unfair Fee & Interest Rate Charges
  • Plain Sight / Plain Language Disclosures
  • Consumer Right to Know
  • Accountability
  • Protections for Students and Young People

I have seen two lines of reasoning supporting the legislation.  Some supporters of the bill argue consumers are the easy prey of ruthless bankers who force credit onto naive borrowers.  Once credit is extended and the consumers are hooked, the lenders raise the rates to exorbitant levels based on fine print rules that nobody can read or understand.  Others argue that borrowers have no willpower, and take out credit until they can only meet minimum payments.  These arguments are old and tired and underestimate the intelligence of the average borrower and the competitive nature of consumer credit markets.

Todd Zywicki, in an EconTalk interview with Russ Roberts ("Zywicki on Debt and Bankruptcy", March 2, 2009) describes evolution of consumer credit market.  Fifty years ago, consumers borrowed from friends and family.  Pawnshops also provided credit as did retail lenders who provided installment loans or lay-away plans.  High interest rates of 30 to 40% were hidden in the price of purchases.  Financial innovation separated the purchase from the loan, increasing both transparency of the transaction and consumers' choices. Credit cards offer more flexible payment options and lower interest rates.  I might add that the Internet makes it easy to compare and shop terms and rates.  MSN Money is one of many sites that allow shoppers to compare terms and conditions offered by different lenders.  Consumer credit markets are now national and very competitive.  If a consumer doesn't like terms of your current account, they can switch lenders.  Even when borrowers get in trouble, they have a way out.  Bankruptcy laws in the United States are generous, the most generous in the world.  Finally, current levels of consumer debt are not historically high, Zywicki observes.  Debt appears high because we focus on a relatively new type of debt, credit card debt, that has replaced older forms of debt.   

The rhetoric is certainly aimed at banks, as is the majority of the proposed law's text, but make no mistake, you cannot make it more expensive to lend and not affect the amount of credit offered in markets.  Nor is all of the text aimed at lenders.  Using the section of the bill dealing with students as an example, it is easy to see how less credit will be extended.  A THOMAS (Library of Congress) summary of the bill states,
(Sec. 7) Prohibits extensions of credit to consumers under age 18, unless they are emancipated under state law, or the consumer's parent or legal guardian is designated as the primary account holder.

Prescribes procedures for the issuance of credit cards to full-time, traditional-aged college students. Limits the maximum amount of credit which may be extended to a college student for whom no one else assumes joint liability to the greater of: (1) 20% of the student's annual gross income; or (2) $500. Limits the aggregate credit limits of all such credit cards to 30% of the student's annual gross income in the most recently completed calendar year.
Do you believe consumer credit markets are not competitive, that consumers are abused, stupid, or just lack willpower?  Perhaps I have created a straw man.  Are there other arguments for supporting the Credit Cardholders' Bill of Rights?  Maybe, just maybe, consumers do not need rescuing and government action is not necessary.

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Wednesday, May 13, 2009

The Obama Medical Plan

Scott Gottlieb, a former official at the Centers for Medicare and Medicaid Services, a fellow at the American Enterprise Institute and a practicing internist, has written an interesting article in the Wall Street Journal ("How ObamaCare Will Affect Your Doctor," May 12, 2009).

The new plan will be modeled on Medicare, which, according to government projections, will run out of funding in eight short years (Kenneth Bazinet. "Medicare's in critical condition, cries report," Daily News, May 13, 2009).
At the heart of President Barack Obama's health-care plan is an insurance program funded by taxpayers, administered by Washington, and open to everyone. Modeled on Medicare, this "public option" will soon become the single dominant health plan, which is its political purpose. It will restructure the practice of medicine in the process.
The government will use market power, the ability to alter a competitive market price, and political leverage to negotiate lower prices. The government program will crowd out private plans meaning that your employer may push you into the government plan.
Like Medicare, the "public option" will control spending by using its purchasing clout and political leverage to dictate low prices to doctors. (Medicare pays doctors 20% to 30% less than private plans, on average.) While the public option is meant for the uninsured, employers will realize it's easier -- and cheaper -- to move employees into the government plan than continue workplace coverage.

The Lewin Group, a health-care policy research and consulting firm, estimates that enrollment in the public option will reach 131 million people if it's open to everyone and pays Medicare rates, as many expect. Fully two-thirds of the privately insured will move out of or lose coverage. As patients shift to a lower-paying government plan, doctors' incomes will decline by as much as 15% to 20% depending on their specialty.
Ironically, the Obama administration believes that tactics the government will use to reduce costs are illegal when used by private firms. Christine A. Varney, the new head of the Justice Department's antitrust division said (Brent Kendall. "UPDATE: DOJ Antitrust Chief Withdraws Bush Monopoly Law Report," Wall Street Journal, May 11, 2009)
Some dominant firms may need reminding that their right to compete aggressively remains qualified. When their conduct becomes predatory or unjustifiably exclusionary, the division will take action.
Doctors will earn less, an unfair outcome given the time and effort needed to earn a medical degree, and the quality of service will decline.
Physician income declines will be accompanied by regulations that will make practicing medicine more costly, creating a double whammy of lower revenue and higher practice costs, especially for primary-care doctors who generally operate busy practices and work on thinner margins. For example, doctors will face expenses to deploy pricey electronic prescribing tools and computerized health records that are mandated under the Obama plan. For most doctors these capital costs won't be fully covered by the subsidies provided by the plan...

Doctors will consolidate into larger practices to spread overhead costs, and they'll cram more patients into tight schedules to make up in volume what's lost in margin. Visits will be shortened and new appointments harder to secure. It already takes on average 18 days to get an initial appointment with an internist, according to the American Medical Association, and as many as 30 days for specialists like obstetricians and neurologists.
The private sector is creative. The government sector is not. Rather than come up with an innovative product, the Obama administration will structure its new program after Medicare. To illustrate that government is neither innovative nor creative, and in other ways, a bad supplier of goods and services, I ask my students if they would like the government to pick their music. They demur, concluding that they would be listening to classical music or polkas, yet we are about to let the government provide our medicine.

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Tuesday, May 12, 2009

Taxes, Even Carbon Taxes Are Not Popular in Australia

From the Wall Street Journal, "Carbon Reality, Again," May 12, 2009.
It's turning out that the biggest problem with carbon taxes is political reality. Australian Prime Minister Kevin Rudd has just announced he will delay implementing his trademark cap-and-trade emissions trading proposal until at least 2011. Mr. Rudd's March proposal would have imposed total carbon permit costs (taxes) of 11.5 billion Australian dollars (US$8.5 billion) in the first two years, starting in 2010. This would have increased consumer prices by about 1.1% and shaved 0.1% off annual GDP growth until at least 2050, according to Australia's Treasury. Support has fallen among business groups and individuals who earlier professed enthusiasm for Aussie cap and trade. Green gains were negligible; Australia accounts for only 1.5% of global greenhouse gas emissions.

The reversal, or "backflip," has caused Mr. Rudd much embarrassment. He may still push ahead with legislation in some form, as he promised when running in the 2007 election. But it's becoming clear the proposal won't be a shoo-in despite all the votes Mr. Rudd won when he campaigned as an anti-carbon apostle.

This is yet another example of politicians elsewhere cashing in politically on the current anti-carbon enthusiasm, only to discover that support diminishes as the real-world costs become clear.

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Three Tax Proposals

Next year's budget deficit is projected to top $1.2 trillion, an ocean of red ink.  Putting aside the merits of a fiscal stimulus during a prolonged recession, budget deficits are a perennial problem because of perverse incentives faced by members of Congress and their constituents.  Using the House of Representatives as an example, nearly all the benefits of a project are collected by those living in a district while the costs are distributed more evenly between all 435 districts.  So long as a project has $1 dollar of benefit locally to $435 of cost nationally, a congressman will support it.  The story in the Senate is only slightly better where a senator has incentive to vote for a project if it has $1 of benefit in her state to $50 of cost nationally.  Stevens' bridge to nowhere and Murtha's airport to the same location illustrate the problem as does the resistance to President Obama's announced plans to cut a miniscule $17 billion in expenditures.  As voters, we experience the same perverse incentives.  How many times have you heard someone say, "I don't agree with many of my congressman's positions but he really brings home the bacon”?  We love pork spent in our districts but we hate it spent in other districts.  I am proposing three rule changes that would alter voter and representative incentives.
The first proposal is based on the benefit principle of taxation, the idea that those receiving the benefits of expenditures should pick up the tab. The income tax code should be modified to reflect expenditures in each congressional district. The modification should make the tax structure less progressive.  If a congresswoman brings home twice the average level of expenditures, her constituents’ tax rates should be twice the average. A natural constituency opposing wasteful spending within each district would quickly materialize because the constituents would now pay for the pork.

The second proposal is to broaden the income tax base and increase its progressivity as expenditures decline as a percentage of GDP. While the first proposal would reduce the unequal distribution of pork between districts, it would not be as effective at reducing the size of government. It is important to inhibit the growth of government because economists generally agree that big government is bad for economic growth. By broadening the tax base to include all income earners, the proposal would give all an incentive to only support valuable spending. The proposal makes both parties pay for something they want with something they don’t. Democrats, who traditionally support a larger role for government, would have to pay for it with a less progressive tax code. Republicans, who traditionally support a smaller role for government, would pay for it with a more progressive tax code.

The third proposal has been floating around for years and is aimed at reducing deficit spending by automatically raising tax rates annually after three periods of consecutive economic growth if the federal government is running a budget deficit. The rates could be raised to close 25% of the projected deficit. Tax rates could automatically fall after one quarter of economic decline building in an automatic fiscal stabilizer.

While all proposals for tax reform meet resistance, these proposals will have natural constituencies. First, it would have support in 50% of the House districts that receive less than average expenditures. It would have support of Republicans that truly believe in small government in theory, but work within the current perverse incentive system that rewards representatives who bring revenues into their districts. Finally, it would gain the support of some Democrats who think that a progressive tax code is more important to economic equality than big government.

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On Deficit Reduction

(HT Drudge and Cafe Hayek).  President Obama has proposed cutting $17 billion from the $3.6 trillion budget.  That is less than one half of one percent of the proposed budget and one and a half percent of the projected deficit.  As small as the cuts are, Democrats in the House and Senate are vowing to fight the cuts.  Lori Montgomery and Amy Goldstein writing for the Washington Post in "Democrats Assail Obama's Hit List," quote one senator and three congressmen who oppose cuts in their districts. 
Sen. Dianne Feinstein said she is "committed" to keeping a $400 million program that reimburses states for jailing illegal immigrants, a task she called "a total federal responsibility."

Rep. Mike Ross said he would oppose "any cuts" in agriculture subsidies because "farmers and farm families depend on this federal assistance."

And Rep. Maurice D. Hinchey vowed to force the White House to accept delivery of a new presidential helicopter Obama says he doesn't need and doesn't want. The helicopter program, which cost $835 million this year, supports 800 jobs in Hinchey's district. "I do think there's a good chance we can save it," he said.
Reducing the size of the deficit will be extraordinarily difficult, and projections showing cuts are probably optimistic.

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Monday, May 11, 2009

Freezing Union Wages in California

Evan Halper, writing for the Los Angeles Times in "U.S. threatens to rescind stimulus money over wage cuts," describes how the Obama administration is threatening to cut $6.8 billion in stimulus if the state of California does not restore salary cuts to members of the Service Employees International Union and the United Domestic Workers which would save the state $74 million.  The wages of the union members would fall from a maximum of $12.10 per hour to $10.10.  The Obama administration believes that the cuts violate provisions in the American Recovery and Reinvestment Act (the stimulus). 

The story illustrates at least three faults of the stimulus bill.  First and foremost, it violates the principle of federalism which divides governing authority between different levels of government.  The legislators that passed the bill and President Obama who signed it show hubris assuming that they understand the California budgetary constraints better than California's elected representatives.  They also favored union members, a special interest group, over the taxpayers of California.  Finally, a great deal of economic evidence suggests that freezing wages at high levels by both the Hoover and Roosevelt administrations contributed to the length of the Great Depression.  As Lest Chandler (America's Greatest Depression: 1929-1941, Harper and Row, 1970) notes,
During the first years of the depression, decreases of money wage rates were quite limited in both numbers and amounts.  Wage cuts in a depression usually come only after a delay, but this time President Hoover launched a campaign to prevent them.  Summoning to the White House representatives of both employers and labor, he extracted promises from employers that they would not initiate wage reductions, and promises from labor leaders that there would be no moves for wage increases beyond those already in process.  He emphasized the desirability of maintaining wage rates because of the human considerations involved and also as a means of maintaining the consuming power of the country.  He seems to have paid little attention to wage rates as a determinant of costs of production, and to the possibility that the rise of real wage rates accompanying decreases in the prices of output might actually decrease total employment. 
Harold Cole and Lee Ohanian in an article titled "How the Government Prolonged the Depression," written for the Wall Street Journal on February 2, 2009 ask
So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.
I don't want to exaggerate the harm I believe the administration's interference with California government will cause.  This violation of federalism is small and has precedent, as does the support of unions over taxpayers or consumers.  The wages of these union workers is an infinitesimal fraction of the nation's wages.  But in each case, the administration's actions move good governance and the economy in the wrong directions. 

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Keeping Score

Too often, we seem to score political success by passed legislation rather than the measured effect of that legislation.  Perhaps rational ignorance provides an explanation for the behavior.  Rational ignorance occurs when the cost of obtaining knowledge exceeds the benefit it bestows.  New laws may take years to implement and more time still to impact decisions of economic agents.  Tracking the impact of legislation is a long slow process that may take years and would probably be difficult to statistically measure.  Furthermore, it is unlikely that anyone who has made the effort to be informed will have any impact on future policy beyond an informed vote. An alternative view to rational ignorance is that we may have beliefs that we don't want to challenge with fact. 

The passage of the stimulus provides an example of how we keep score.  President Obama and his allies count the stimulus as a great political and economic victory and their opponents, the opposite.  President Obama thought that it was important for taxpayers to be able to track the projects funded by the stimulus.  To accomplish this objective, he established the Recovery Act Accountability and Transparency Board, but few if any are concerned with its actions.  The House Committee on Science and Technology's subcommittee on investigations and oversight recently held hearings on the progress of the board, and only three of ten subcommittee members attended (HT Drudge), (Joseph Curl.  "CURL: Stimulus oversight left up to taxpayers," Washington Times, May 6, 2009).  The three that attended were Brad Miller (chairman), Paul Broun, and Kathy Dahlkemper; they deserve special recognition.  Those that did not attend also deserve special recognition.  They are Steven R. Rothman, Lincoln Davis, Charles A. Wilson, Alan Grayson, Bart Gordon, and Ralph M. Hall.  Brian P. Bilbray was a tweener, attending one of three hours the hearings. 

During the hearings, Earl Devaney, the chairman of the board, claimed that he would have millions of inspectors general helping him police spending.  Why then did so few members of the committee attend the hearings and why were the hearings such a minor news story?  I believe the answer is that their voters don't think that the hearings were important.  They were rationally ignorant, knowing that the effort that they made to be informed about spending would have no impact spending, or they already had scored the passage of the stimulus as a victory or a loss.

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Sunday, May 3, 2009

What's in a Name?

That which we call a rose by any other name would smell as sweet.  Maybe a rose by any other name might smell as sweet, but would it sell?  From John Broder of the New York Times in "Seeking to Save the Planet, With a Thesaurus," we learn that,
EcoAmerica has been conducting research for the last several years to find new ways to frame environmental issues and so build public support for climate change legislation and other initiatives...

The answer, Mr. Perkowitz said in his presentation at the briefing, is to reframe the issue using different language. “Energy efficiency” makes people think of shivering in the dark. Instead, it is more effective to speak of “saving money for a more prosperous future.” In fact, the group’s surveys and focus groups found, it is time to drop the term “the environment” and talk about “the air we breathe, the water our children drink.”

“Another key finding: remember to speak in TALKING POINTS aspirational language about shared American ideals, like freedom, prosperity, independence and self-sufficiency while avoiding jargon and details about policy, science, economics or technology,” said the e-mail account of the group’s study.
Broder discusses and then links to a New York Times editorial dated March 23, 2009 titled, "Environmental Word Games."  Not surprisingly, Republicans use the same tactics.  The article reads,
Whenever the Republicans find themselves in trouble on environmental issues, the call goes out for Frank Luntz, a respected party strategist. Back in 1995, Mr. Luntz urged the party to soften its language when it became clear that the Gingrich revolution had gone too far in its attacks on environmental law. Mr. Luntz is now making the same point. In a memorandum recently described by The Times's Jennifer 8. Lee, he warns that after two years of regulatory rollbacks, environmental issues have become ''the single biggest vulnerability for the Republicans and especially for George Bush.''

Mr. Luntz's remedy is not to change the policy, but to dress it up with warm and fuzzy words. As in 1995, he says that the problem is one of communication, and that what must be done is to start using comforting words like ''balance,'' ''common sense,'' ''safer,'' ''cleaner'' and ''healthier.''
Broder uses Drexel University professor, Robert Brulle as a foil to take a stab at politicians, an easy and popular endeavor that I recommend. 
Robert J. Brulle of Drexel University, an expert on environmental communications, said ecoAmerica’s campaign was a mirror image of what industry and political conservatives were doing. “The form is the same; the message is just flipped,” he said. “You want to sell toothpaste, we’ll sell it. You want to sell global warming, we’ll sell that. It’s the use of advertising techniques to manipulate public opinion.”

He said the approach was cynical and, worse, ineffective. “The right uses it, the left uses it, but it doesn’t engage people in a face-to-face manner,” he said, “and that’s the only way to achieve real, lasting social change.”
Neither Broder nor Brulle mentioned that politicians often exaggerate their side of an argument.  Read anything on climate by world climate change leader Al Gore, or this article (HT Drudge) describing House Minority Leader John Boehner's claim on the cost of cap-and-trade.  Apparently exaggeration is leadership.  

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Friday, May 1, 2009

Evaluating President Obama's First 100 Days

President's have been graded on their first 100 days in office since the Roosevelt administration.  During President Obama's first 100 days, his administration has been active in foreign policy as well as domestic, by regulatory edict as well as through legislation.  The Congress passed a massive stimulus bill, but little spending has yet occurred.  The EPA issued a finding that carbon emissions may be dangerous to human health, setting the stage for cap-and-trade.  Will a cap-and-trade system affect world carbon emissions and ultimately the climate?  Insufficient time has passed for the administration to implement their programs let alone determine if they were successful.

I do have a comment based on President Obama's remarks commemorating his first 100 days in office.  Too often, President Obama scapegoats his actions with a bogeyman in the form of the Bush administration.  His statement, delivered in Missouri illustrates the "Bush as bogeyman" excuse (Calvin Woodward.  "FACT CHECK: Obama disowns deficit he helped shape," AP in MyWay, April 29, 200 ).
Number one, we inherited a $1.3 trillion deficit.... That wasn't me. Number two, there is almost uniform consensus among economists that in the middle of the biggest crisis, financial crisis, since the Great Depression, we had to take extraordinary steps. So you've got a lot of Republican economists who agree that we had to do a stimulus package and we had to do something about the banks. Those are one-time charges, and they're big, and they'll make our deficits go up over the next two years.
It reminds me of the scene in Forest Gump in which Jenny's boyfriend, Wesley, an SDS organizer, smacks Jenny, and apologizes with the eloquent words,
Jenny? Things got a little out of hand. It's just this war and that lying son of a bitch Johnson and-- I would never hurt you. You know that.
It is understandable that Obama is attempting to distance himself from the current and future budget deficits by pinning them on his predecessor, but his statements are disingenuous.  Unlike his clear differences with President Bush on the Iraq War, I have difficulty distinguishing between President Bush's and President Obama's policies regarding the budget and the financial crisis.  On the budget, their spending priorities are different, but they both like to spend.  As a senator, Obama voted for all the Iraq War funding bills save one.  They both took a similar position on the financial crisis in the fall of 2008.  Not only did Obama vote for TARP as a member of a democratically controlled Congress that wanted to make the bill bigger, but many of the people in his administration were part of the Bush team that crafted the bailouts. President Obama claims that there was "almost uniform consensus among economists..."we had to take extraordinary steps" in dealing with banks and a stimulus package. Many brilliant economists supported his measure, others supported some sort of stimulus other than the one he proposed, and many thought that it would be ineffective or harmful (Jeffrey Miron, speaking at Reason, provides justification for doing nothing).

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