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Brooks Wilson's Economics Blog: 2012

Wednesday, July 18, 2012

Market Income, Transfers and Taxes

I am indebted to Greg Mankiw for his recent post “The Progressivity of Taxes and Transfers” for two reasons.  First, it citied a CBO report that I had not seen and enjoyed reading.  Second, his post reports transfers as a percentage of market income, and this is the fifth column of my table.

A current political debate focuses on the “fairness” of federal taxes.  Fairness means something different for everybody, but a clear view of a presentation of data should clear up some misunderstandings or data cherry picking on one side of the political aisle or the other. 

The income data is broken into quintiles, or fifths of the country’s households.  The highest quintile is further divided into smaller groupings.  Market income is the sum of labor income, business income, capital gains, capital income, income received in retirement for past services, and other sources of income.  Labor income includes in-kind payments such as health insurance. 





Effective Tax Rate

First Quintile





Second Quintile





Third Quintile





Fourth Quintile





Highest Quintile





Breakdown of Highest Quintile        















Top 1 Percent





Transfer are are cash payments and in-kind benefits from social insurance and other government assistance programs.  Taxes include the federal income tax, social insurance taxes, corporate income tax, and excise taxes.

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Friday, July 6, 2012

The ACA and National Income Accounts

I was reviewing my notes on national income accounting as the great debate about whether the payment under that Affordable Care Act that forces citizens to buy health insurance is a tax or a penalty raged.  Although I would bet dollars to doughnuts that the Department of Commerce has worked out most of the particulars, what follows is my musings on how these payments will fall. 

My analysis uses definitions from Greg Mankiw’s and my favorite principles text.  The income approach starts with gross domestic product, and through the deletion and addition of accounts, is reduced successively to gross national product, net national product, national income, personal income, and finally, disposable income.  Important to this post are national income, the income households receive from wages, profit, rent and interest, personal income, which is defined below, and disposable income, the sum that households have at their disposal to consume or save. 

Personal income and disposable income are defined in equations (1) and (2)

(1) Personal Income (PI) = National Income (NI) – retained earnings – indirect business taxes – corporate income taxes – social insurance taxes + interest on government debt + government transfers,


(2) Disposable personal income (DI) = PI – personal taxes – nontax payments.

Substituting equation (1) into (2) and regrouping terms yields equation (3) which contains the accounts that  will be affected by the ACA.

(3) DI = NI – indirect business taxes – retained earnings - corporate income taxes – social insurance taxes – personal taxes – nontax payments + interest on government debt + government transfers.

I believe that the benefits of the ACA will be part of government transfers, in this case, subsidized medical insurance payments.  The costs will show as social insurance taxes or nontax payments such as parking tickets and other penalties.  From an economic accounting perspective, there is little difference between a tax and penalty. They both reduce disposable income.  In the long-run, payments and penalties will exceed the subsidized insurance payments because it is costly to collect taxes.  The income does not leave the economy.  This cost will consist in part in wages to new government employees that administer the ACA bureaucracy and those who interface with them in the private sector. 

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Tuesday, July 3, 2012

An Example of Age and Educational Success

Last week, I had a pleasant and useful conversation with an older student who described to me his past and current attempts at earning a BA degree. They sounded typical of a number of MCC’s students so I asked him to briefly describe his efforts.
I have attempted to complete my college degree on three different occasions, my current being my most successful. Right out of high school, my parents sent me to MCC to begin my college journey and my first semester was great, I went to classes and really studied. On my second semester, I realized that my professors did not care if I showed up to class, and there was no one to call my parents and let them know that I was not going. So I began it skip classes and got lured away from college by a full-time job, making what I thought was a lot of money. So my parents gave me an option. Finish College and they would pay for it, or I could quit and I would have to pay for any type of school later on my own. So off into the real world I went.
Fast forward 5 years, and I am now married and we are expecting our first born. Realizing that my full-time job was not going to be able to provide for my wife and child, I went back to school for my second try. This time, I was going to TSTC for computer networking, and this time, I was paying for everything myself. After about a year of schooling, I got a job at a local retail store as a department manager. I thought it over and spoke to my wife and I made a decision to quit school and focus on my career once again.
Now fast forward 10 more years. I have been promoted to a store manager and my career was doing very well. Then at one point I came to a stale mate. I was no longer up for promotions and I was not getting moved any longer. I looked around and tried to figure out what it was that I was doing wrong and I found nothing. What I did find out was that everyone at this level was just as good as me, if not better. We all had the same skill levels. The individuals that were getting promoted did have an advantage over me; they had actually finished their degrees. They all had Bachelors or Master Degrees. So, here we are at my third and final attempt at completing my Bachelor’s Degree in Business Mgmt. This time is different as I have learned from my previous mistakes. By continuing my college education, I have been able to see the rewards. I have been able to use some of my new found skills in my current role. By demonstrating to my current supervisors my drive and focus, I feel that I will once again be recognized.
Why is this student enjoying more success in his third attempt? Let me suggest a few possible explanations. He is older and older students are more focused. This is not a very satisfying explanation. Does aging cause physical changes that make us better students? Do additional years help us better measure benefits of a degree? During his first attempt at earning a degree, his parents paid the bill. Beginning with his second attempt—earning a computer networking degree for TSTC—he paid his own bills. Have skin in the game may increase effort but the real improvement did not come until his next attempt. His third attempt came after glancing up the corporate ladder and seeing that those above him all had degrees and really were as good as or better than him and that their edge probably came from their educations. Was necessity the mother of educational effort? His parting words of advice to students
Please learn from my mistakes and allow me to save some of you time, stay in school. There is no substitute.

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Sunday, July 1, 2012

Mismeasurement of the Cost of For-Profits?

The Obama and the Bush administrations distrust the quality of education offered by for-profit schools (John Hechiger and John Lauerman, “For-Profit Colleges May Lose Tax Money Under New Rules”).  The schools derive income from tuition paid largely by student loans.  Apparently, a high percentage of their students graduate with large student loans that they cannot payoff with income earned based on their degrees and taxpayers are left with the bill.

Is the government’s concern due in part to mismeasurement?  Public colleges and universities are subsidized by taxes and for-profit colleges are not.  Student loans may be a good estimate of the cost of the education at a for profit but a poor estimate of the cost at a public institution.  The tax subsidy per student at public institutions must be added to a student’s loan balance to more accurately compare the costs to the taxpayer.  Public institutions should undergo the same scrutiny as for-profits.   

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Friday, June 29, 2012

The Constitutionality of the Affordable Care Act

I am not an expert on Constitution law, so my opinion is of limited value but as you might have guessed, I will give an opinion anyway.  Yesterday’s decision on the Affordable Care Act is of course now constitutional law but it is not the decision I would have preferred.  The Constitution was written to limit governmental powers and the decision expands it by permitting the government to fine individuals through taxation for not buying health care.  As Richard Epstein, a professor of law at New York University, writes in “A Confused Opinion

Chief Justice Roberts has ignored this fundamental principle: If direct regulation is beyond the scope of the Commerce Clause (as he held), then taxation as an indirect route to the same regulation should be off limits as well (as he failed to hold). This is a baby that should not be split. His attempt to do so undermines his ruling, the court and the Constitution.

The Court has been swift to protect political rights but slow to protect economic rights.  The two are intertwined and both deserve protection. 

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Thursday, June 28, 2012

Hoover and the Great Depression

A student recently asked me about Herbert Hoover’s role in the Great Depression. To answer that question, I quote Robert Higgs from Crisis and Leviathan to describe his actions and to correct a common myth.
WHAT DID HOOVER DO? The traditional answer, of course, is nothing. If the man in the street remembers anything about Herbert Hoover it is that his middle name was Laissez-Faire and he did nothing while the American economy went to rack and ruin. As usual the knowledge of the man in the street leaves something to be desired. The popular remembrance of Hoover’s quiescence in the face of the depression is a myth. The Great Engineer may have had his faults, but fiddling while the economy burned was not one of them. “Do nothing” was never his motto; his middle name was actually Clark…
President Hoover rejected completely the liquidationist school of thought. He believed that the federal government could and should take actions to cushion and reverse the economic decline. As time passed and the government’s policies failed to arrest the contraction, the Hoover administration intervened more actively. Because later the New Deal went so much further, Hoover’s antidepression policies are customarily pilloried as at best “far too little, much too late”. Yet no previous administration had done nearly so much to remedy an economic bust. (In the presidential campaign of 1932, candidate Roosevelt criticized Hoover for failing to balance the budget).
Hoover‘s first action after the stock market crashed was to make reassuring speeches, a practice he continued throughout his unhappy term in office. This struck him as seemly-after all, if the President himself were to play the role of Chicken Little, what would the public do? It also comported with his theory of recovery. He believed that recovery hinged on a revival of private investment spending, which required an adequately optimistic state of “business confidence”. By maintaining a personally sanguine outlook, at least in his public pronouncements, Hoover hoped to encourage investors to pour their money into new factories and equipment. Although, he has been ridiculed ever since for his reassuring displays, they could hardly have done much harm.
Hoover next resorted to a series of meetings in November 1929 with the leaders of selected businesses, labor unions, and farm organizations. Ostensibly the parleys produced only choruses to sing in harmony with the President’s melody of optimism. (Apparently accomplishing nothing of substance, they inspired J.K. Galbraith to invent the amusing and insightful concept of the “no-business meeting”.)
But it is possible-one cannot know for sure-that the meetings did have an important effect, ironically a harmful effect. From the employers attending his conferences the President extracted a promise not to cut wages any faster than the cost of living declined. He believed that real wage cuts, besides being unfair and productive of strife, would reduce consumer purchasing power and thereby exacerbate the recession. Whether because of fidelity to the Presidents or for other reasons, many employers did not reduce money wages much until well into 1931. Meanwhile deflation proceeded apace. Workers who continued to receive the same money wage were getting an increasingly higher real wage. Given the extreme decline of the demand for labor, which happened to be greater in the sectors most refraining from wage cuts, a higher real wage implied a magnified reduction in the quantity of labor that employers would find it worthwhile to hire-that is, the increased real wage caused a great deal of unemployment. Unfortunately, as Lester Chandler has observed, the President “seems to have paid little attention to wage rates as a determinant of costs of production.”
Hoover backed various measures to stimulate federal spending and extensions of the government’s credit, including increased appropriations for public works and the Federal Land Banks, creation of the Agricultural Credit Banks and the Home Loan Banks, liberalization of the Federal Reserve Banks’ lending authority by the Glass-Steagall Act of 1932, and passage of Emergency Relief and Construction Act of 1932, which allowed the federal government to give (officially, to lend) the state governments funds to use for relief of the unemployed. Hoover also used his discretionary authority to reduce immigration-he supposed that an immigrant would either become a public charge or displace someone else from a job. To quiet the unsettling international disputes over reparations and war debts, he secured a moratorium on intergovernmental payments. None of this suggests a dogmatic adherence to laissez-faire…
The administration’s most important antidepression action, the creation of the Reconstruction Finance Corporation, clearly benefited from the emergency rationale and the wartime analogy. The RFC Act, which became law on January 22, 1932, was officially entitled, “An Act to provide emergency financing facilities for financial institutions, to aid in financing agriculture, commerce, and industry, and for other purposes.

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Saturday, May 19, 2012

Bain Capital and Make-work Bias

Mitt Romney claims to have created 100,000 jobs as the head of Bain Capital.  In a new political add, the Obama campaign claims that he destroyed jobs.  The both feed into a common error in voters’ understanding of economics. 

Steven Rattner, who oversaw the auto rescue/bailout for President Obama, recognizes that both campaigns stray from economic reality in focusing on Bain’s role in job creation.

I think the ad is unfair. Mitt Romney made a mistake ever talking about the fact that he created 100,000 jobs. Bain Capital’s responsibility was not to create 100,000 jobs or some other number. It was to create profits for his investors, most of whom were pension funds, endowments and foundations. It did it superbly, acting within the rules and acting very responsibly and was a leading firm. So I do think to pick out an example of somebody who lost their job unfortunately, this is part of capitalism, this is part of life. And I don’t think there’s anything Bain Capital did that they need to be embarrassed about.

Bryan Caplan exquisitely explains this misunderstanding in The Myth of the Rational Voter.

The public often literally believes that labor is better to use than conserve.  Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress, but as a danger.  i call this make-work bias, a tendency to underestimate the economic benefits of conserving labor.  Where noneconomists see the destruction of jogs, economists see the essence of economic growth—the production of more with less. 

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Wednesday, May 16, 2012

Signaling and Tax Reform

Candidates for elected federal office must run a dangerous political gauntlet that can both wound the candidates’ election prospect as well as their ability to govern if elected.  One tradeoff that they must make is between committing their vote on issues and maintaining neutrality to allow negotiating.  Voters know where a candidate stands when they signal their positions but committed votes on too many issues transforms a congressman or senator into an ineffectual ideologue who is unable to cut deals.  Voters may not know where the pragmatist stands but she can engage in the give and take required to pass legislation in divided government.  A great candidate may be able to convey their ideology without committing their vote.  Most elected candidates are a little above average.

Most republican candidates have committed their votes on tax reform by signing the following pledge

I, _______________, pledge to the taxpayers of the _____ district of the state of__________, and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Democrats have left themselves a little more negotiating room on taxes but have less specifically committed to maintaining current levels of entitlements to be funded by increasing taxes on “millionaires and billionaires.”

Voters seem to prefer ideologues but the intransigence it causes does not bode well for the nation’s fiscal well-being. We face a long period of mounting debt caused mostly by deficits in entitlement programs.  Political stalemate preserves the status quo and will eventually bankrupt entitlement programs causing a fiscal crisis similar to what Greece, Italy, and Spain face today. 

Neither Republicans nor Democrats control a 60 seat majority in the Senate after the election.  The other party will be able to block any legislation from either side that could solve the problem. 

I prefer small government to large, but I would rather have a big government like Germany’s than ineffectual government like Greece’s.  My guess is that most Republicans have the same preference.  Similarly, Democrats who insist that the rich fund a more government expenditures should recall that all countries, even the poorest have wealthy elites.  Only a handful lead by the United States have a health middle class.  Our political and economic institutions have not primarily benefited the 1% but the 99%.  As I prefer Germany to Greece, I believe that most Democrats would likewise prefer the smaller safety net of the Eisenhower administration to that of Greece.  Certainly there is room for compromise.   

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Wednesday, April 25, 2012

Susan Sarandon

In Capitalism and Freedom, Milton Freidman penned the then controversial but now status quo thought on the relationship between economic freedom and political power.

Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.

Competitive capitalism may have created a third power, celebrity.  People with high profiles that evolves into public fascination gain celebrity status.  Michael Jordan has it, Karl Malone who had more points, more rebounds and almost as many assists did not.  Barak Obama has it and Mitt Romney does not.

Susan Sarandon has managed to turn her celebrity into political power and has brought attention to many causes she has supported over the years, but that celebrity has hit a political wall.  A friend of democrats and the left, she claims that she has been subject to government surveillance and that she has been a denied clearance to visit the White House.  I will assume that the her claims are true. 

Celebrity does not usually translate to expertise and my libertarian leanings often put me on different sides of causes that she has supported but I am mystified as to the threat she posses to the government.  As Voltaire taught, “I may not agree with what you say, but I will defend to the death your right to say it.”

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Tuesday, April 17, 2012

Jay on Cohabitation

Meg Jay’s article on cohabitation (“The Downside of Cohabiting Before Marriage”) is a great illustration of the use of the scientific process.  I believe that reading and understanding it is a good investment of time and effort, particularly for a young person considering cohabitation.  Jay begins with an observation.  Beginning in 1960, there has been a tremendous increase in cohabitation.  Currently, 7.5 million people live together without marriage and half of all marriages will be preceded by cohabitation. 

An observation is followed by questioning and measurement.  A survey of young adults found that two thirds believed that cohabitating before marriage was a good way to reduce the probability of divorce.  This belief is contradicted by experience as measured by research.  Cohabitating prior to a commitment to marry increases the probability of divorce.

A hypothesis is formed to explain the higher divorce rate of cohabitors: the population of cohabitors was different than the population as a whole; they were less bound by social norms and therefore both more likely to cohabitate and divorce. As cohabitation became the norm and the result that divorce rates among cohabitors remained higher, other hypotheses were needed.  One was that cohabitation itself introduced risk to a marriage following cohabitation. 

Jay describes the new hypothesis.

Moving from dating to sleeping over to sleeping over a lot to cohabitation can be a gradual slope, one not marked by rings or ceremonies or sometimes even a conversation {This is called sliding into cohabitation]. Couples bypass talking about why they want to live together and what it will mean.

WHEN researchers ask cohabitors these questions, partners often have different, unspoken — even unconscious — agendas. Women are more likely to view cohabitation as a step toward marriage, while men are more likely to see it as a way to test a relationship or postpone commitment, and this gender asymmetry is associated with negative interactions and lower levels of commitment even after the relationship progresses to marriage. One thing men and women do agree on, however, is that their standards for a live-in partner are lower than they are for a spouse.

Sliding into cohabitation wouldn’t be a problem if sliding out were as easy. But it isn’t. Too often, young adults enter into what they imagine will be low-cost, low-risk living situations only to find themselves unable to get out months, even years, later. It’s like signing up for a credit card with 0 percent interest. At the end of 12 months when the interest goes up to 23 percent you feel stuck because your balance is too high to pay off. In fact, cohabitation can be exactly like that. In behavioral economics, it’s called consumer lock-in.

Lock-in is the decreased likelihood to search for, or change to, another option once an investment in something has been made. The greater the setup costs, the less likely we are to move to another, even better, situation, especially when faced with switching costs, or the time, money and effort it requires to make a change.

I might add that I am more likely to like any research that picks up an idea used by economists. 

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Monday, April 16, 2012

Florida and Welfare Reform

Florida passed a law requiring applicants for welfare to take a drug test.  Applicants pay for the test but those who pass are reimbursed by the state.  Applicants found using drugs would be ineligible for welfare for a year although the children of the drug users would still be eligible through a third party.  Since the state began testing in July, 96% of the applicants were drug free.  Another 2% were disqualified for using drugs and the remaining 2% were not completing the application process for unknown reasons. 

Based on these numbers, Catherine Whittenburg (“Welfare drug-testing yields 2% positive results”) calculates the cost of testing versus the estimated savings in welfare payments to taxpayers. 
Cost of the tests averages about $30. Assuming that 1,000 to 1,500 applicants take the test every month, the state will owe about $28,800-$43,200 monthly in reimbursements to those who test drug-free.
That compares with roughly $32,200-$48,200 the state may save on one month's worth of rejected applicants.
The savings assume that 20 to 30 people -- 2 percent of 1,000 to 1,500 tested -- fail the drug test every month. On average, a welfare recipient costs the state $134 in monthly benefits, which the rejected applicants won't get, saving the state $2,680-$3,350 per month.
But since one failed test disqualifies an applicant for a full year's worth of benefits, the state could save $32,200-$48,200 annually on the applicants rejected in a single month.
Net savings to the state -- $3,400 to $8,200 annually on one month's worth of rejected applicants. Over 12 months, the money saved on all rejected applicants would add up to $40,800-$98,400 for the cash assistance program that state analysts have predicted will cost $178 million this fiscal year.
I like Whettenburg’s “back of the envelope” calculations and I have some thoughts but reach no conclusions.  Utilitarians and libertarians might find the savings insufficient to justify the cost in terms of return on dollars invested or government intrusion in private lives but I doubt that typical taxpayers would come to the same conclusion based on classroom experiences.  While covering the composition of federal, state, and local budgets in class, students frequently suggest that tax payers could save billions of dollars by eliminating welfare fraud. One time this happened, I decided that it was a good time to bring up the principle of tradeoffs. Fraud can be eliminated but at a cost. I took an informal survey of students and found that they view welfare fraud as being so morally reprehensible that they would increase payments for enforcement even if the cost of enforcement exceeded the reduction in welfare due to fraud. I repeated the survey in several other classes and found the same result. 

The reported statistics may miss important costs and benefits.  Potential applicants who use drugs will self-select out.  Why put up the money for the test if you are not going to pass?  The number of applicants should decline.  These non-applicants still need money.  Some will engage in or increase their participation in prostitution, illegal drug sales, and other criminal activity to support their drug use.  While a taxpayer may dismiss the cost of drug use on the user, it is more difficult to ignore the impact on the users’ children and the victims of their crime.  Other non-applicants might give up drugs to qualify for government assistance. 
Many economists have found that taxpayers in ethnically diverse communities are less willing to pay welfare than taxpayers in homogenous communities.  Raghuram Rajan summarizes this view in “Fault Lines” (page 95).
We should also not minimize the importance of population heterogeneity.  “There but for the grace of God go I” offers a powerful rationale for social insurance.  People are more willing to be taxed to benefit others if they believe that the benefits go largely to people like themselves, and not disproportionately to groups they do not identify with.  This may also explain why Americans give generously to charities: they have more control over who the beneficiaries are.  Politicians who want to derail benefits legislation have often been quick to raise the specter of hard-earned taxpayer money going to the undeserving, irresponsible, and lazy, and such demagoguery is especially potent when the bogeymen look and behave differently from their constituents.
By demonstrating that welfare recipients are not drug users, taxpayers in heterogeneous communities may ironically be more willing to fund welfare programs.  Requiring welfare applicants to pass a drug test will create many interesting questions for economists to answer in their research. 

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Monday, April 2, 2012

The Health of Manufacturing in the United States

Many Americans believe that our manufacturing sector has all but disappeared.  The graph shows that the belief is wrong.  The horizontal axis measures time from 1992 to February 2012.  The left vertical axis measures manufacturing in dollars and the right, as an index in which the January, 1992 level of manufacturing equals 100.  Other than periods of recession, manufacturing has grown. 
Steve Chapman (“Manufacturing an Economic Myth”) does a good job explaining the myth that our manufacturing sector is in decline. 
The first is that it's not declining in the ways that matter. Compared to1990, the total value of U.S. manufacturing output, adjusted for inflation, was up by 75 percent in 2010 -- despite a drop caused by the Great Recession.
It has declined as a share of gross domestic product only because other industries have expanded even more rapidly. Economist Mark J. Perry of the University of Michigan-Flint points out that in 2009, the total value of America's manufacturing output was nearly 46 percent greater than China's. Over the past two decades, our share of the world's manufacturing has been pretty stable.
The decline in the number of manufacturing jobs is taken as evidence that the sector is sick or uncompetitive or the victim of unfair trade practices. In reality, the change indicates sound health. Our manufacturing workers have become so much more productive that they can churn out more goods with a far smaller workforce.
I recommend the entire article.

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Friday, March 30, 2012

Unemployment During the Great Recession

If a picture is worth a thousand words, this is a long post.  The plots of the United States measure the biannual changes in the unemployment rate by state beginning in January 2008.  Low rates of unemployment are yellow and high rates, dark red.

January 2008.
July 2008
January 2009
July 2009
January 2010
July 2010
January 2011
July 2011
January 2012

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Tuesday, March 20, 2012

Using Supply and Demand to Illustrate How Policy Impacts the Gasoline Market

Voters’ blood pressure has soared as rising gasoline prices have hammered their budgets. Many heap blame on President Obama as they have on past presidents for events that occur under their administrations, perhaps because politicians running for office claim they can fix all problems. Seizing an opportunity to win votes, Republican politicians blame President Obama’s policy for rising gasoline prices and promise to dramatically lower prices just as Democratic claimed power to solve pertinent economic problems four years ago. Politicians are not omnipotent and even when policies affect outcomes; their policies can be overwhelmed by market forces.

The graph “EIA U.S. All Grades Formulations Retail Gasoline Prices” plots the price of gasoline over the past eleven years beginning with President Bush’s first term. As President Obama’s Republican critics state, the price of gas has nearly doubled since he took office. Picking a starting point is a good way to trick unwary readers. By using a longer time frame, it is clear that rising prices preceded the Obama administration and that the trend was only interrupted by the Great Recession. In March 2001, the price of gasoline was $1.45 per gallon compared to $3.64 per gallon last week.

In this post, I use tools presented to principles of economics students to describe the markets for gas and related products and the possible influence events and policy have on them. Skip the remainder of this paragraph if you are not interested in the pedagogical background of supply and demand. The demand for gas can be described using an equation without functional form, Qg=D(Pg, I, Ps, Pc, N, Txd), where Qg is the quantity of gas demanded, Pg is the price of gas, I is the income level of consumers, Ps is the price of substitutes for gasoline, Pc is the price of complementary goods, goods used with gasoline, N is the number of consumers, and Txd is taxes on consumers. The supply for gas can be similarly described, Qg=S(Pg, Pi, Tc, Txs, E), where Qg is the quantity of gas supplied, Pg is the price of gas, Pi, the price of inputs, Tc, technology, Txs, taxes on suppliers, and E, suppliers’ expectations.

The Law of Demand states that holding all variables but price and quantity constant, as price rises, the quantity demand of a good or service falls. The Law of Supply states that holding all variables but price and quantity constant, as price rises the quantity supplied increases. The graph “U.S. Gasoline Market: 2001-2012” is a simplification of the market at the beginning and end of the eleven years. It depicts supply and unchanging and contains two demand curves, the first for March 2001 and second, March 2012; the equilibrium prices are taken from the trend line in the first graph.

In the remainder of post, I change one supply or demand variable at a time to explain the trend; this technique is called comparative statics. The first variable of note is income (I). Over the last two decades, world income has grown rapidly, leading to increased demand for gasoline with much of that demand coming from China and India. While income has grown, the increase in gasoline prices has had a subtle negative impact on income. The increase in gasoline prices reduces remaining purchasing power producing the same result as a decrease in income. Because consumers can substitute away from gasoline, the increase in income will not be completely offset by the increase in gasoline prices. The increase in world income is probably the most important variable causing demand to increase (shift to the right from D01 to D12) between 2001 and 2012.

To understand the market for gasoline, it is necessary to understand the market for its most important input, oil. The cost of producing gasoline largely reflects the price of its major input (Pi), oil. The supply equation for oil is slightly different than that of gasoline, Qo=S(Po, Tco, Txo, R) where the variables, where Qo is the quantity of oil produced, Po is the price of oil, Tco is oil technology, Txo is taxes on oil and R is oil reserves.

I believe that it is the reserve of oil (R) that explains the lack of a supply response to the upward march of prices. As demand has increased, increasing prices, gasoline manufacturers have a profit incentive to produce more, requiring more oil. The oilfields that are cheapest to exploit are producing. New oil must be produced from fields that are more costly and time consuming to exploit. New technology, (Tco), such as the conversion of tar sands to oil in Canada and hydraulic fracturing will allow supply to expand more rapidly (a movement from S to SI), slowing the pace of oil price increases directly and gasoline prices through its major input, oil, but when all is said and done, oil is a finite resource and its reserves will eventually be depleted.

In 2008, candidate Obama ran in part as an environmental warrior ready, willing and able to use the resources of United States government to combat carbon emissions primarily from the consumption of oil and coal. In office, President Obama has introduced programs that affect the price of substitute goods to gasoline. He promoted the electric car with $7,500 per vehicle tax credits (a subsidy is a negative tax, Tx), and invested directly in alternative fuel companies lowering the price of substitutes, a type of related good. The graph “U.S. Gasoline Market: Shifts in Demand” illustrate the impact of these policies. Because they make alternatives to gasoline less expense, they decrease the demand for gasoline (shifting demand to the left, D to DD where DD is a decrease in demand). He has also increased EPA standards for all vehicles (a constraint on the technology of complements (Tc). This technology variable is part of the supply of vehicles. On the demand side, higher EPA standards increase the fixed price of a compliment to gasoline while lowering the operating price making the overall impact on the demand for gasoline is ambiguous.

The graph “U.S. Gasoline Market: Shifts in Supply” depicts possible supply responses. On the supply side, the administration quietly followed a policy to slow down the domestic production of oil which again, other things equal, decreases supply (a shift from S12 to SD where SD is a decrease in supply) and increases the price of gasoline. In a 2008 interview with the Wall Street Journal, Steven Chu who is now the energy secretary, said, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.” The price of a gallon in Europe is above $8.00 per gallon. This policy might makes sense if you believe that carbon emission will cause extensive and costly damage to the economy and if unilateral action of the part of the United States will significantly slow global carbon emissions.

The president claims an “all of the above approach” to energy production but policy seems aimed at slowing production without saying no. In Alaska, the administration has slow walked approval of infrastructure projects necessary to extract oil. In the Caribbean, the time it takes to get a permit to drill has nearly doubled. Leases to drill on federal land in the West are down 40%. The administration killed the Keystone XL pipeline that would bring tar sands oil to the United States. Each project has a legitimate environmental concern, but when all are summed, they total a policy aimed at maintaining high gasoline prices by slowing exploration and extraction that would lead to increasing the supply of gasoline.

These policies reduce the purchasing power of U.S. consumers. They can only be welfare improving if the environmental benefits exceed the loss in purchasing power. They are unlikely to bring technological breakthroughs. European countries maintain policies that have kept gasoline prices high for a very high for a very long time and they have not resulted in technological breakthroughs. It seems unlikely that policies designed to do the same here will have any more success.

Candidate Gingrich has claimed that if elected, his policies would lead to $2.50 per gallon gasoline. If elected, he would control U.S. policy, not markets and market forces are likely to overwhelm policy. Like candidate Obama, he promises too much.

If you believe that carbon emissions are costly to future generations and that unilateral U.S. action can reduce emission, policies to restrict gasoline supply make sense. If you do not, they do not. If you believe that the government is better at venture capital, investing in startup companies, than markets, then the president’s policies make sense. If you do not, they do not.
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Friday, March 9, 2012

Can Romney Recapture the Center on Immigration?

Pete Dominick, a radio talk show host for POTUS, recently asked how Mitt Romney, a politician often viewed as a centrist who veered right in running for president in the Republican primaries could move toward the center if he the nomination. I will describe how Romney can move to the center and increase his appeal to Hispanic voters by further describing rather than changing his immigration policy.

Romney described his plan before the Hispanic Leadership Network (“Mitt Romney & Newt Gingrich Attend Hispanic Conservatives Conference”) He would establish a low cost method for employers to verify that an employee was qualified to work in the United States. Deprived of employment, many illegal immigrants would return to their countries of origin. Workers that are here illegally would be given a temporary work permit to an orderly exit. He would also expand the visa program for hospitality and agriculture.

Before proceeding, I have a small confession. Mitt Romney and I share the same religion and we both served missions for the Church of Jesus Christ of Latter-day Saints, Romney in France and I in Argentina. Because of that shared experience, I looked for candidates that were not LDS (Mormons) that I could support but they did not run or dropped out of the race. I now grudgingly and reluctantly support his run for the Republican nomination despite my mission experience. The dynamic nature of our economy and foreign policy distracted potential proselytes from our gospel message. People often approached us, and yes we travel in twos, asking questions like why President Ford or Carter took some action or why the United States spent so much on the NASA rather than giving more international aid. These distractions would explode under a Romney presidency.

I also find Romney’s position on illegal immigration, which I will describe latter, harsh. My opinion is three parts normative and one part positive. First, having lived in Argentina, a relatively prosperous country that was mired in a low grade civil war known as the Dirty War, I understand completely why many wish the peace and security of the United States. Like virtually every other religion, mine teaches that parents have a God given duty to care for their families. For many, illegal immigration not only helps fulfill that mandate, it is the only chance they have to do so successfully. Second, Romney’s policy also fails to explicitly address the problem of families with split nationalities. Mexican parents may have four kids under ten, two who are Mexican citizens and two who are United States citizens. Under Romney’s plan, parents without legal status would return to Mexico and apply for legal status. In the meantime, two of their children would remain in Mexico, receive a bad education for the U.S. workforce and have the legal right to enter the United States and earn welfare benefits when the turn eighteen. The plan to end illegal immigration could slow the growth of the LDS church in Hispanic communities, a very high price to pay for having and LDS president (“Romney's tough line on immigration jars with some Mormons”). Finally, the economic literature does not support the contention that illegal immigration is costly to our country. The opposite is probably correct (“Economists’ on Immigration”).

Romney’s plan could easily become generous to current illegal immigrants while slowing future entrants. The Unites States has a quota of 700,000 for those seeking to immigrate. That number could be raised to two million per year. Grant work visas for five years for the parents of U.S. citizens born prior to January 1, 2012 and give them priority when filing for citizenship from their countries of origin. He already plans to expand work visas; granting a generous number of visas makes economic sense. Vigorously enforce the law. These changes are within the bounds of the policy that Romney has described and would be generous to current illegal workers, clarify their legal status without attracting people to enter illegally to work in the future.

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Monday, March 5, 2012

Comparative Advantage and Manufacturing Subsidies

President Obama, Republican presidential candidate Rick Santorum and many other politicians have proposed granting tax cuts for domestic manufacturers to recapture markets lost in competition with foreign producers. Beginning with Adam Smith, economists have favored free trade domestically and internationally including freedom from tax distortions. This post uses the first trade model presented in introductory classes that was first developed by Adam Smith and improved by David Ricardo to demonstrate that, given a set of assumptions, trade results in higher national well-being than a policy of no international trade or autarky. The model will be exploited to show that tax distortions that promote domestic production lower a country’s well-being.
The model assumes two countries, the United States and China. Both produce two goods, cars—a manufactured good, and fruit—an agricultural good. The models are depicted in two graphs and a table. The first graph depicts the movement from autarky to free trade, and the second, from free trade to trade distorted by taxes and subsidies. The red lines are the production possibilities frontiers (PPF) and show the output combinations of the two goods that maximize the output that can be achieved with the country’s resources. Resources move costlessly from the production of one good to the other. The slope of the PPF gives the physical tradeoff between the two goods; the tradeoff is the opportunity cost of cars in terms of fruit. The slope in the United States is 3 implying that the country gives up three tons of fruit to produce 1 car. The slope in China is 1, implying that China gives up 1 ton of fruit to produce 1 car.


Cars Fruit Cars Fruit

Production=Consumption 8 24 8 8
With Trade

Production 4 36 16 0
Trade 5 -10 -5 10
Consumption 9 26 11 10
Gains from Trade 1 2 3 2
With Tax Distortions

Production 12 12 0 16
Trade -9 6 9 -6
Consumption 3 18 9 10
Grains from Trade

Compared to Autarky -5 -6 1 2
Compared to Free Trade -6 -8 -2 0
Without international trade, a country consumes what it produces. The model does not set production levels or trade prices for each good making a little story telling necessary. The story does not detract from the outcome. Through the interaction of economic agents in markets, the United States produces and consumes 8 cars and 24 tons of fruit (P1=C1(8, 24)). China produces and consumes 8 cars and 8 tons of fruit (P1=C1(8, 8)). 

Trade increases the well-being of a country because it promotes specialization. The United States and China decide to trade. Because the United States gives up 3 tons of fruit to make a car, it specializes in the production of fruit. Because the China gives up only one ton of fruit to make a car, it specializes in the manufacture of cars. China has the comparative advantage in the manufacture of cars and the United States, in the production of fruit. 

Through the interaction of economic agents in international markets, the price settles at two tons of fruit per car. The United States increases its production to 36 tons of fruit while cutting car manufacture to 4. China specializes completely in the manufacture of cars producing 16 cars and no fruit (P2(16, 0)). Economic agents in the United States trade 10 tons of fruit for 5 cars and Chinese economic agents make the opposite trade, getting 10 tons of fruit for 5 cars. The blue arrows are the trade paths; both have a slope of -2 but the arrows point in different directions. They connect the second production points to the second consumptions points. After trade, both countries consume more than they did prior to trade as summarized in the graph and table. The United States consumes 9 cars and 24 tons of fruit (C2(9, 264)) and China, 11 cars and 10 tons of fruit (C2(11,10)). The United States gains 1 car and 2 tons of fruit. China gains 3 cars and 2 tons of fruit. 

The United States government decides that more economic agents should specialize in the production of the manufactured good, cars.  To accomplish its goal, it taxes production of fruit and subsidizes the manufacture of cars.  The international price changes to 2 tons of fruit for 3 cars.  In response to the incentives, production in the United States shifts to 12 cars and 12 tons of fruit (P3(12, 12)).  In response to the change in the international price, China specializes completely in the production of fruit (P3(0, 16).  When the Unites States subsidizes the manufacture of cars it changes the allocation of resources and the international price in both countries. 

The new trade path is represented by the green arrows in the graphs of each country.  It demonstrates how the tax distortion harms the United States but allows China to consume above its PPF.  Rather than set the international price between the countries by the slopes of the two country’s production possibilities frontiers, their trade is determined by the tax distorted price in international markets and the opportunity cost in China.  The distortions move specialization in the wrong direction in the United States.  Because the slope of the trade path is greater than slope of the PPF (-2/3 > -3) in the United States and because the United States is specializing in cars, trade moves to the interior of the PPF.  It consumes 3 cars and 18 tons of fruit (C3(3, 18)). 

The United States would be better off not trading than subsidizing the manufacture of cars.  It loses 5 cars and 6 tons of fruit compared to autarky and losses 6 cars and 8 tons of fruit compared to free trade.  Because China has not distorted its markets and shifts market production according to the relationship of the slope of its PPF, its opportunity cost and the international price, it again consumes above its PPF but its net gain is 1 car and 2 tons of fruit compared to autarky and -2 cars and 0 tons of fruit when compared to free trade.  Although China is better off even with distortions in the international markets caused by tax policy, it is worse off than under a free trade.  Compared to autarky, it gained 1 car and 2 tons of fruit but compared to free trade it lost 2 cars.
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Monday, February 27, 2012

The Slippery Side of the Laffer Curve?

The United Kingdom increased its top marginal tax rate to 50% for households earning more than 150,000 pounds ($238,000) to attempt to close its budget deficit. Like the political debate in the United States, liberals argue that increasing taxes on the rich produces a more fair tax system. Very early results indicate that the tax increase has decreased tax revenues (“50p tax rate 'failing to boost revenues’”) implying that the United Kingdom is on the wrong side of the Laffer curve named after Arthur Laffer.

The graph plots a possible Laffer curve that is not based on data. It shows tax revenue increasing until the marginal tax rate reaches 57%. The point of maximum revenue does not indicate the best size of government. Raising the top marginal rate beyond that point would punish the wealthy rather than generate more revenues. The maximum revenue level does not suggest the best size of government. It could easily be smaller but not larger.  

Suppose government officials demonstrate that larger government expenditures would increase social welfare. Those expenditures would require deficit financing which may slightly increase the size of government but would soon give rise to unmanageable levels of debt. 

Have the British reached the slippery side of the Laffer curve? Mathias Trabandt and Harald Uhlig suggest they might have given the increase in the top marginal rate in “How Far Are we From The Slippery Slope? The Laffer Curve Revisited” Using date from 1995 until 2007, they conclude that 
 For benchmark parameters, we have shown that the US can increase tax revenues by 30% by raising labor taxes and by 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. A dynamic scoring analysis shows that 54% of a labor tax cut and 79% of a capital tax cut are self-nancing in the EU-14….

 However, transition effects matter: a permanent surprise increase in capital income taxes always raises tax revenues for the benchmark calibration. Finally, endogenous growth and human capital accumulation locates the US and EU-14 close to the peak of the labor income tax Laffer curve. 

We therefore conclude that there rarely is a free lunch due to tax cuts. However, a substantial fraction of the lunch will be paid for by the efficiency gains in the economy due to tax cuts. Transitions matter. 
 Trabandt and Uhlig’s work might provide an explanation as to why countries that tax a larger share of GDP than the United States have less progressive tax structures. The rich earn a larger percentage of their income from capital which is inherently more difficult to tax due to the ability of the wealthy to avoid taxes. The United State and the EU-14 may also be much closer to the peaks of their capital Laffer curves than their labor Laffer curves.
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Monday, February 20, 2012

Deregulate the Lunch Box

A second four-year-old girl at West Hoke Elementary School was told her mother’s lunch was not up to snuff (“Exclusive: 2nd N.C. Mother Says Daughter’s School Lunch Replaced for Not Being Healthy Enough”). 

While packing lunches necessitates government supervision, sex change operations for minors do not (“Sex-changing treatment for kids: It's on the rise”). 

CHICAGO (AP) - A small but growing number of teens and even younger children who think they were born the wrong sex are getting support from parents and from doctors who give them sex-changing treatments, according to reports in the medical journal Pediatrics…

Guidelines from the Endocrine Society endorse transgender hormone treatment but say it should not be given before puberty begins. At that point, the guidelines recommend puberty-blocking drugs until age 16, then lifelong sex-changing hormones with monitoring for potential health risks. Mental health professionals should be involved in the process, the guidelines say. The group's members are doctors who treat hormonal conditions.

Those guidelines, along with YouTube videos by sex-changing teens and other media attention, have helped raise awareness about treatment and led more families to seek help, Spack said.

A sex change operation is more consequential for a child than a bad lunch if the lunch were indeed bad.  If parents are competent to decide a sex change, they are certainly competent to pack a lunch.  It is time that home lunch preparation regained the same deregulated status as sex change operations.

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Friday, February 17, 2012

The Volt: Struck Twice by Lightening

The Obama administration is hell bent for leather on placing one million new-tech automobiles on our highways by 2015.  To help accomplish this goal, the administration intends to increase the subsidy on battery-powered vehicles like the Chevrolet Volts, and on natural gas powered vehicles. 

I believe that the policy is bad economics for two reasons.  First, governments are bad at picking market viable technologies.  Michael Boskin recently quoted Larry Summers who was at the time President Obama’s chief economic advisor who said, “the government is a crappy venture capitalist” (“Washington's Knack for Picking Losers”).  Second, the demand for vehicles like the Volt is probably inelastic meaning that it would take a large increase in the subsidy to cause a significant increase in the number of cars sold.  The average Volt buyer earns $170,000 annually and approximately 50% drive a Prius or BMW (“Obama hikes subsidy to wealthy electric car buyers”).  My guess is that the buyers are trying to make a personal statement about their commitment to the environment and this statement is not particularly dependent on price.

The graph of the “Market for the Chevy Volt” provides some important economic details of the Volt market and the impact of the federal tax credit subsidy.  As with my first attempt to describe the possible outcome of a subsidy for the Volt, (“The Chevy Volt”), a lot of guess work went into the shape of the supply and demand curves.  In this graph, I made demand more inelastic; I did try to find a realistic price but not sales volume.  I almost certainly exaggerate sales.  The supply (S) and original demand curve (DO) represent the market for the Volt prior to the federal tax credit subsidy. Without a subsidy Chevrolet sells 38,800 Volts at approximately $42,400 a piece (point E0).  The $10,000 federal tax credit increases demand (D0 to DN).  At the new equilibrium (E1), Chevrolet sells 4,000 more Volts and equilibrium price increases by $2,000 to $44,400.  With the $10,000 subsidy, the buyer’s price falls to $34,400.

The EPA gives the Volt a combined gasoline/electric fuel economy of 60 mpg, or about twice the mileage of a similarly sized car.  Assuming that a typical Volt owner will drive 15,000 miles per year, and that gasoline costs $4.00 per gallon, the Volt will save its owner approximately $1,000 per year in fuel expenses.  If a traditional subcompact costs $20,000, and assuming the buyer does not respond to the lower operating cost by driving more, the Volt will have a fourteen year payback period ([$34,400-$20,000]/$1,000 per year=14.4 years) for the owner.  

The private market has a new partner, the taxpayer—the forgotten man.  The yellow rectangle is the subsidy paid by taxpayers.  It is $428 million dollars ($10,000 times 42,800 Volts).  The government estimates that approximately one third of buyers will not qualify for the subsidy, reducing the taxpayer’s bill to approximately $285.3 million, or approximately $71,300 per additional Volt sold.  To benefit society, the sale of Volts must generate sizeable positive externalities like a reduction in pollution or a more rapid technological development, etc.  I have a hard time believing that there will be a positive return on societal investment.

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Wednesday, February 15, 2012

Ward or Free Women?

(HT: Drudge Report) An employee of an elementary school in North Carolina to a preschool girl that her homemade meal wasn’t healthy enough and replaced that meal with one from the school cafeteria (“Food police reject preschooler's homemade lunch... in favour of chicken nuggets”). The Department of Health and Human Services determines what is healthy and requires students to eat put it on their plates. The girl’s incensed mother responded,
What got me so mad is, number one, don’t tell my kid I’m not packing her lunch box properly…I pack her lunchbox according to what she eats. It always consists of a fruit. It never consists of a vegetable. She eats vegetables at home because I have to watch her because she doesn’t really care for vegetables. 
You can lead a girl to vegetables but you can’t make her eat. She ate the chicken nuggets on the school provided plate but nothing else. The mother was charges $1.25 for the lunch.

Two winners of the Nobel Prize in Economics suggest two problems with the school’s action. The minor issue was that the school action almost necessarily reduced the wellbeing of the girl. Hayek argues that government action lacks local knowledge, in this case the girl’s eating habits, which is needed for an efficient decision.

The bigger issue is the role that citizens should give the state. Milton Friedman addresses this issue by criticizing a much quoted statement by President Kennedy. Upon reading Friedman’s critique, I first disagreed, but on subsequent readings, I have flip-flopped and completely and whole-heartedly agree with it. The following quote is from the introduction to Milton Friedman's 1962 book "Capitalism and Freedom".

In a much quoted passage in his inaugural address, President Kennedy said, "Ask not what your country can do for you - ask what you can do for your country." Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your 'country" implies the government is the master or the deity, the citizen, the servant or the votary.

To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.
The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather "What can I and my compatriots do through government" to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom?
And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect?
Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.
The girl and her mother were no longer free women but wards of the state.
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Monday, February 13, 2012

Santorum on the CPAC Straw Poll

(HT Drudge Report)  Mitt Romney won the Conservative Political Action Conference (CPAC) with 38% of the vote.  Rick Santorum took second with 31%.  Gingrich took third and Paul, fourth.  Santorum dismissed by innuendo Romney’s win claiming that  Romney like Paul in previous years “rigged the straw poll,” and “stacked the deck” by buying tickets for supporters (“Santorum: 'I Don't Try to Rig Straw Polls'”).

“For two years Ron Paul has won those [CPAC straw poll] because he just trucks in a lot of people, pays for their ticket, and they come in and vote and they leave. We didn’t do that. We don't do that. I don't try to rig straw polls.”

Santorum accused Romney of similar tactics at this year's conference. “You'll have to talk to the Romney campaign and [see] how many tickets they bought. We've heard all sorts of things.”

Santorum stopped short of accusing his rivals of dirty politics, saying that stacking the deck is “standard procedure for straw polls” and noting that, “there’s nothing wrong with that.”

“We just don’t think that’s a good use of our resources,” he said. “Governor Romney obviously may have a different idea.”

Even if the accusation is true, winning the straw poll is a legitimate victory for Romney.  Packing the building with supporters is a function of the enthusiasm of supporters, and the ability to organize and to raise contributions to fund the ticket purchases.  Yes, generating enthusiastic supporters is not considered a Romney strength, but management of a campaign is.  Does anyone believe that Santorum would refrain from “stacking the deck” if he had the resources and campaign organization to do so?

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Wednesday, February 8, 2012

Biblical Support for a Progressive Tax

President Obama said at the National Prayer Breakfast
If I'm willing to give something up as somebody who's been extraordinarily blessed, and give up some of the tax breaks that I enjoy, I actually think that's going to make economic sense," he said. "But for me as a Christian, it also coincides with Jesus's teaching that “for unto whom much is given, much shall be required [Luke 12:48].”
The president misses the mark in his biblical justification of a biblical justification for a more progressive tax structure because the verse is about personal responsibility and not tax structure.  A similar verse about personal responsibility could be used to suggest that Jesus preferred regressive taxes.
For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.
And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth [Matthew 25: 29-30].
Leaving behind the appropriateness of using the National Prayer Breakfast as a forum to defend the administration’s economic initiatives, the New Testament can be combined with economic theory to justify a government that aids the poor through a progressive tax structure.  Jesus taught to feed the hungry, cloth the naked and visit the sick and afflicted (Mark 12 34-40).  The poor, at least to some extent, cannot feed or cloth themselves so it must be done by those who are not poor. 
The primary lesson of the parable of the widow’s mite (Luke 21:1-4) is that the poor widow who gave only a small amount to the treasury gave more than the rich who gave out of their abundance fits well with the economic theory of the declining marginal utility of money.  The more wealth or money a person has the less a new dollar of wealth or income adds to their wellbeing.  By transferring resources from the wealthy to the less wealth the resources are placed with those who value them more.
The parable of the good Samaritan told of two men who knew that they should have helped another who had been robbed and wounded but did not and a third man who did not have an obligation but did (Luke 10: 30-36).  A progressive tax may force wealthy free-riders who believe that aiding the poor is their social responsibility to meet the obligation that they believe they owe but wish to avoid.  Combining the admonition to care for the poor, the declining marginal utility of money and the free-rider problem, a Christian could build the case for policy to help the poor paid for by a progressive tax system. 
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Saturday, February 4, 2012

January 2012 Unemployment Report.


The Bureau of Labor Statistics released the “Employment Situation Summary” for January.  It was an encouraging report.  Unemployment fell .2% to 8.3%.  Total nonfarm payroll employment increased by 243,000.  The labor-force participation rate did fall from 64.0% to 63.7% because the number of adults not in the labor-force increased by 1.18 million largely because of the aging of the population; 1.07 million people 65 and older dropped out of the labor-force. 

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Wednesday, February 1, 2012

Candidates, Money, Votes and Reverse Causality

Political pundits often err discussing the role of money in politics arguing that money buys elections for candidates when the opposite is true, good candidates win elections and that attracts money.  In an otherwise excellent article David Paul Kuhn (“Will Romney's Strengths Prove Moot Against Obama?”) makes this error writing

Mitt Romney is winning the GOP race for two reasons: big money and weak competition. That should distress Republicans…In the general election, Republicans will face a more practiced, more disciplined and equally financed opponent. Gingrich should be the easy part. Yet it will remain hard. Gingrich is not going away. On money and performance, we have seen how one Republican after another can lose the race. Romney still has to prove he can win it.

Research by Steven Levitt convinces me that the candidate is the important issue and not the money.  Levitt and Dubner describe Levitt’s research in Freakonomics: A Rogue Economist Explores the Hidden Side of Everything.

…picture two candidates, one intrinsically appealing and the other not so.  The appealing candidate raises much more money and wins easily.  But was it the money that won him the votes, or was it his appeal that won the votes and the money?

That’s a crucial question but a very hard one to answer.  Voter appeal, after all, isn’t easy to quantify.  How can it be measured?

It can’t, really—except in one special case.  The key is to measure a candidate against…himself.  That is, Candidate A ran against Candidate B in two consecutive elections but in each case spent different amounts of money. Then, with the candidates’ appeal more or less constant, we could measure the money’s impact.

As it turns out, the same two candidates run against each other in consecutive elections all the time—indeed, in nearly a thousand U.S. congressional races since 1972.  What do the numbers have to say about such cases?

Here’s the surprise: the amount of money spent by the candidates hardly matters at all.  A winning candidate can cut his spending in half and lose only 1 percent of the vote.  Meanwhile, a losing candidate who doubles his spending can expect to shift the vote in his favor by the same 1 percent.  What really matters for a political candidate is not how much you spend; what matters is who you are. 

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Monday, January 30, 2012

It’s the Horse Race

George Mason University’s Center for Media and Public Affairs announced a study covering 118 stories by NBC, CBS, ABC and Fox on the Republican primaries between January 1 and January 10 (“Study: TV News Bashes Romney, Boosts Horse Race”).  I found the experimental methodology interesting and a finding a depressing.

The press release covers their methodology which is designed to create a statistical control and an examination process that can be replicated.
The Center for Media and Public Affairs (CMPA) is a nonpartisan research and educational organization which conducts scientific studies of The Center for Media and Public Affairs (CMPA) employs content analysis to study news coverage. "Content analysis" is a social scientific method for producing an objective and systematic description of communicative material. In order to be scientific, such analysis requires explicit rules and procedures that minimize a researcher's subjective predispositions. Categories and criteria are rigorously defined and applied consistently to all material. Each system must be reliable, meaning that additional researchers using the same criteria should reach the same conclusions. Because it is both systematic and reliable, content analysis permits the research to transcend the realm of impressionistic generalizations, which are subject to individual preferences and prejudices... 

CMPA researchers have honed their skills on a wide variety of projects since 1987, making them among the best trained and most experienced at news media content analysis. Researchers examine news stories on a statement-by-statement level, recording all overt opinions expressed by either the reporter or other individuals quoted in the story. Each opinion is catalogued according to the source of the comment, the target, and the issue under discussion. Researchers do not assign overall positive and negative scores to entire stories, since such an approach fails to fully account for the nuances within each story. Individual statements are logged into a computerized database, allowing statistical analyses to fully describe the relationships among news sources, time periods, the focus of coverage and the tone of coverage.
Depending on the length and breadth of the study, CMPA's codebooks (which contain the categories and rules for coding) range from 100 to 300 pages long and include 20 to 50 different analytic variables. Research assistants are trained for between 150 and 200 hours before they begin work on a project. During the training process, researchers code sets of stories, and their work is compared to that of previous coders until a minimum reliability level of 80% is reached for all variables. That means that the new coders must reach the same conclusions as their counterparts at least four out of five times. For most variables, the level of agreement is much higher.
The story compares the number of positive to negative content of stories by each network for each candidate but that is not the part interested me. You will have to follow the provided link if this part of the story interests you. 

The researchers found that 105 major topics of the stories covered the campaign as a “horse race” and only 16 on the policies of the candidates. I assume that the news organizations know best how to maximize their audience and am left to conclude that their viewers would rather know about today’s poll, mudslinging, name calling and money raising than the candidates issue positions and the likelihood that these they would achieve their stated objectives. That is a sad conclusion.

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Saturday, January 28, 2012

GDP Growth for 2011

The Bureau of Labor Analysis released its estimate of GDP growth yesterday; fourth quarter growth for 2011 was 2.8%, slightly below projections and 1.7% for the year.

The graph “GDP Growth: 1970-2011” gives some historical context to the current recession. The orange line plots GDP growth from 1970 through 2011 and the green dashed line plots average growth for the same period. Because I used annual data rather than quarterly and recessions are normally defined by quarterly data, the graph smoothes out the depth of some recessions. The yellow boxes represent recessions and the length of the boxes, their duration. The black vertical lines represent the end of one presidency and the beginning of another.

One insight from the graph is that the current recession is the deepest during the time frame and that the 1982 recession was the second biggest.
The second graph, “GDP Growth Following Three Recessions,” shows the GDP growth beginning with the first year of negative growth and following the subsequent nine years. The Great Depression (1929-1939) was clearly the longest and deepest, followed by the recession of 2008 and 1982. 

The Great Depression and the 2008 recession were both financial crises. Work by Reinhart and Rogoff, This Time Is Different: Eight Centuries of Financial Folly, concludes that financial crises are the most enduring. Not only is the fall in growth larger, but the subsequent growth more shallow. The second graph supports their conclusion. 

Next year’s growth statistics will be interesting. Will growth accelerate, more closely mirroring growth following the Great Depression, or will it continue to tract under the recovery following the 1982 recession? 

The graphs leave many more questions unanswered than answered. Does policy encourage recovery and if so what type? Rather than focusing on GPD contraction and growth, why not focus on movements in the unemployment rate? How do recessions impact sovereign debt? Asking a good question is exciting, searching for its answer, invigorating, and finding an answer, satisfying.
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Thursday, January 26, 2012

Rogoff on Capitalism

Most economists agree with Greg Mankiw’s sixth principle of economics, “markets are usually the best way to organize economic activity.  Kenneth Rogoff, a coauthor of This Time Is Different: Eight Centuries of Financial Folly, illustrates economists trust in capitalist markets.

I am often asked if the recent global financial crisis marks the beginning of the end of modern capitalism. It is a curious question, because it seems to presume that there is a viable replacement waiting in the wings. The truth of the matter is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism.

Read “Is Modern Capitalism Sustainable?” to learn Rogoff’s alternatives to Anglo-American capitalism, their weaknesses and strengths. 

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