tag:blogger.com,1999:blog-68243456612891057992024-03-06T00:38:55.126-06:00Brooks Wilson's Economics BlogBrooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.comBlogger704125tag:blogger.com,1999:blog-6824345661289105799.post-8865328811039756102019-08-21T12:37:00.000-05:002019-08-21T12:48:56.267-05:00Update of the Impact of Current Policy on Concurrent GrowthIn this post, I update the November 24, 2018, “<a href="https://drbseconomicblog.blogspot.com/2018/11/among-people-interested-in-politics.html">Current Policy and Concurrent Economic Performance.</a>” Economists overwhelmingly believe that current economic policy has little to do with concurrent economic performance, yet voters look to current economic performance as a metric of the success or failure of an administration’s policies. For evidence of my claim, see the European IGM Economics Expert Panel’s response to the statement, “<a href="http://www.igmchicago.org/surveys/governments-and-economic-performance">Voters overestimate the effect that current governments have on their economies.</a>” Sixty-four percent of the respondents strongly agreed or agreed whereas only 4% strongly disagreed or disagreed. Six percent were uncertain, while 4% held no opinion, and the remaining 22% did not answer the question. Expressed slightly differently, 82% of economists responding to the statement believe that voters overestimate the effect.
Politicians certainly tie positive outcomes to their policies. As an example, President Trump trumpets his economic successes (“<a href="https://www.forbes.com/sites/yuwahedrickwong/2019/07/19/cheap-credit-and-lack-of-competition-gums-up-the-u-s-economy/#670bcaaf50c7">Trump Says U.S. Economy is ‘Best It Has Ever Been,’ But Facts Tell a Different Story</a>”), while blaming others for failures, or even possible failures (“<a href="https://www.cnbc.com/2019/08/14/trump-hammers-clueless-jay-powell-rails-against-crazy-inverted-yield-curve.html">'Crazy Inverted Yield Curve!'—Trump rips 'clueless Jay Powell' and the Fed as the market slides</a>”).
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To check claims of the “best economy every,” I have used a single metric, real GDP growth by quarter beginning with the first quarter of 1981 under President Reagan and continuing through the second quarter of 2019 under President Trump. The data is presented as a bar chart in the first graph. Republican presidents are in red, and Democrats in blue. Second terms are represented by light red or light blue. Fluctuations in growth appear to have moderated. The U.S. has not experienced a quarter of economic decline during the Trump presidency, nor has it experienced a quarter of high growth.
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTCdcG8BTW9mzOKaASBw1jOl265r8_U-bbiuQBT2RHuR-5_43eUsCVtk9XoVVCFJ52Nm47e5QC-z1qnkrE6WQy52ET7R2pfz5oJvh8mEUHUSPAgilHBe9ij5qsmo8wJzjaVymsdUwLM0I/s1600/Points.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTCdcG8BTW9mzOKaASBw1jOl265r8_U-bbiuQBT2RHuR-5_43eUsCVtk9XoVVCFJ52Nm47e5QC-z1qnkrE6WQy52ET7R2pfz5oJvh8mEUHUSPAgilHBe9ij5qsmo8wJzjaVymsdUwLM0I/s320/Points.jpg" width="320" height="169" data-original-width="576" data-original-height="304" /></a></div>
I present the data as unconnected points in the second graph. Republican presidencies, with the exception of the Trump presidency are shown in red, and Trump in purple while Democratic presidencies are shown in blue. I have also added three horizontal lines that represent average growth (black), two standard deviations above average growth (purple), and two standard deviations below average growth (blue). Average growth for all presidents is 2.74%. Average growth for all Republicans is 2.64 and for Democrats is 2.86. Average growth under Trump is 2.64%, the mean level of growth for all Republicans, and the economy has not experience a quarter of exceptionally high (two standard deviations above the mean) or low (two standard deviations below the mean) growth during his presidency.
Observing that current policies and concurrent economic performance are exaggerated by voters does not imply that current policy does not have an impact on economic performance. It does imply that the impact is difficult to disentangle the impact of a policy from all other influences. Without offering evidence, I believe that the most important contributors to current economic performance are individual economic agents each maximizing their own welfare through markets.
</span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-71110816135995037432019-04-25T11:47:00.003-05:002019-04-25T11:47:59.760-05:00Capitalism and DemocracyPete Buttigieg, a presidential candidate for the Democratic Party, appeared recently on CNN’s “New Day” with Poppy Harlow and John Avlon. He commented on socialism, capitalism, capitalism’s relationship with democracy, and criticized Stephen Moore, a Trump administration nominee for the Federal Reserve Board of Governors, for a comment he made on the same subject. I attempt to bring more context to both men’s statements. Please note that I am not digging into other statements on this subject that might give additional context.
Although the interview was with CNN, Tom Boggioni, in RAWSTORY, provided the best transcript that I found. I edited Boggioni transcript a bit, eliminating editorial comments that bridged sentences, and one error in transcription. Harlow asked if Democratic office holders have vilified capitalism to a dangerous level given that most Democratic voters view socialism more favorable than capitalism. Buttigieg said,
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“I think the reason we’re having this argument over socialism and capitalism is that capitalism has let a lot of people down. I guess what I’m out there to say is it doesn’t have to be so.”
“I believe in democratic capitalism, the democratic part is extremely important. There was this assumption that capitalism and democracy were almost the same thing — if you were for capitalism, you were also for democracy. Right now, we see democracy and capitalism coming into tension.”</blockquote>
<span class="fullpost">Overall, Buttigieg gave a good answer, much better than I expect from a presidential candidate, but there were a few problems with it. First off, he did exercise discretion, and discretion is generally good, by not criticizing fellow Democrats, but he evaded the question, not responding to directly to whether Democrats in office have excessively vilified business and capitalism giving rise to a preference for socialism among Democrat voters. He did say that capitalism “has let a lot of people down.” This is true, but so has socialism. Comparatively speaking, competitive capitalism has a much better record than socialism. As noted by Milton Friedman in an interview with Phil Donohue,
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<span class="fullpost">“In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear that there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”</span></blockquote>
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Buttigieg is correct to limit his praise to democratic capitalism. The success of capitalism to create long-run prosperity seems to be limited to those countries that combined democratic and market institutions. The two can work to strengthen each other. Economists have emphasized this relationship in their empirical findings after Friedman made his statement. While I disagree with Buttigieg’s wording, “we see democracy and capitalism coming into tension,” he certainly captures the mood of many voters. To be clear, democracy and capitalism are not people; they don’t make decisions and they don’t experience tension. Focusing on economic agents is more productive than ascribing human characteristics to institutions. Politicians from both parties, combined with politically empowered businesspersons, have designed law to benefit each other to the detriment of large groups of voters.
Buttigieg brought one of President Donald Trump’s advisors, Stephen Moore, into the fray.
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“It was alarming to hear recently one of the president’s economic advisers [Fed nominee Stephen Moore] said between capitalism and democracy, he’d choose capitalism.”</blockquote>
It is easy to pick out part of a quote and criticize the originator for it. As best I can tell, the quote is from Michael Moore’s documentary, Capitalism: a Love Story. The full quote reads,
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“Capitalism is a lot more important than democracy. I’m not even a big believer in democracy. I always say that democracy can be two wolves and a sheep deciding on what to have for dinner. Look, I’m in favor of people having the right to vote and things like that. But there are a lot of countries that have the right to vote that are still poor. Democracy doesn’t always lead to a good economy or even a good political system.”
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Just as Buttigieg focuses almost exclusively on the weakness of capitalism in its interaction with democracy, Moore almost exclusively focuses on the weakness of democracy. Sure, there are a lot of countries with some democratic institutions that are poor, but all wealthy countries have successfully combined democratic and market institutions to become so. Unlike Bittigieg, in this particular quote Moore does not recognize the positive outcomes when they two types of institutions operate together.
</span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com1tag:blogger.com,1999:blog-6824345661289105799.post-70585376492859575532018-11-24T15:26:00.003-06:002019-01-10T09:45:05.103-06:00Current Policy and Concurrent Economic PerformanceAmong people interested in politics, there is a natural desire to discover a positive relationship between their favorite party and good economic performance. I shared this belief, and it only faded slowly after many years of studying and teaching economics. Why shouldn’t many people share this belief? Our politicians certainly encourage it, taking credit for positive outcomes, and blaming opponents for negative outcomes. I have accumulated data on quarterly real GDP growth from the Reagan administration through the first two years of the Trump administration, and presented the data in a series of graphs to informally test the hypothesis that current policy influences current economic performance. As a note, fourth quarter 2018 growth during the Trump was estimated by the Atlanta Federal Reserve.
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<span class="fullpost"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYahrLe_nYUhEpWHSyOz3LeIjqmcs0lTVlImYidKnT9WJI4UOkztZyXkb1mlKOQc5Fzo1vFxa1NPTdIF23oFCawlhDuTUrPGqQvQLhXfmi7iC91OEcTN4xzntrG94XYty42UiKsRcFrbQ/s1600/GDP+growth+by+administration.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="373" data-original-width="576" height="207" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYahrLe_nYUhEpWHSyOz3LeIjqmcs0lTVlImYidKnT9WJI4UOkztZyXkb1mlKOQc5Fzo1vFxa1NPTdIF23oFCawlhDuTUrPGqQvQLhXfmi7iC91OEcTN4xzntrG94XYty42UiKsRcFrbQ/s320/GDP+growth+by+administration.jpg" width="320" /></a></span></div>
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The first graph shows the quarterly growth of real GDP by administration from 1981 to the present. The data in red demarks the first term of a Republican president, and the data in blue, a Democrat president. Likewise, the light red reflects the second administration of a Republican president, and the light blue, a Democrat president. I could not visibly determine a difference in outcomes by party. Other readers may pick up trends that I missed.
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<span class="fullpost"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHv_4B2JfEcAZkSElVGuVsosBU5DunDX0m0wfL6vvOAoZ04H86s958TzyGOPCOdJiApGjgLGv0qcmUdx522Ppar9Dlv7aW5bwJz1rFZOqghEL5WPdrdbDFu1XZ-mOKliLqqC2rN1DITsA/s1600/GDP+growth+by+republicans+and+democrats.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="376" data-original-width="576" height="209" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHv_4B2JfEcAZkSElVGuVsosBU5DunDX0m0wfL6vvOAoZ04H86s958TzyGOPCOdJiApGjgLGv0qcmUdx522Ppar9Dlv7aW5bwJz1rFZOqghEL5WPdrdbDFu1XZ-mOKliLqqC2rN1DITsA/s320/GDP+growth+by+republicans+and+democrats.jpg" width="320" /></a></span></div>
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The first histogram displays real GDP growth 88 quarters (22 years) of Republican administration and 64 quarters (16 years) of Democrat administrations. The red is the Republican, the blue, the democrat, and the purple, the overlap between the two parties. There are differences in the performance between the two parties. Republican administrations seem to have weathered the most severe downturns, and enjoyed the highest levels of economic growth. More striking is the overlap. The red represents the histogram of Republicans and the blue and purple, the Democrats. The distribution of growth between the two parties center around the same mean, 2.7 for the Republicans and 2.9 for the Democrats.
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<span class="fullpost"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv3SgcufiBO075iQSYGXvS6B9O95T8O4WzgIreFu9BSMx01aNfYYU-X7b-M4Q1Xyk-Kp4TwlEQgEUTxfrs9rcIjFKw1e5nkuQUslYEvKxA4F7YmsFwEziqUC1xgcl43vmEJJrEd83KZ4c/s1600/GDP+growth+by+republicans+democrats+trump.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="377" data-original-width="576" height="209" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv3SgcufiBO075iQSYGXvS6B9O95T8O4WzgIreFu9BSMx01aNfYYU-X7b-M4Q1Xyk-Kp4TwlEQgEUTxfrs9rcIjFKw1e5nkuQUslYEvKxA4F7YmsFwEziqUC1xgcl43vmEJJrEd83KZ4c/s320/GDP+growth+by+republicans+democrats+trump.jpg" width="320" /></a></span></div>
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Picking on President Trump because he is the current president, and because he recently asserted that second quarter 2018 growth is “<a href="https://www.cbsnews.com/news/us-gdp-growth-touted-as-historic-by-trump-is-totally-standard/">an economic turnaround of historic proportion</a>,” the second histogram separates the Trump administration figures from the other Republican administrations. Growth to date for his administration averages 2.8%, splitting the difference between Democrats and other Republicans.
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<span class="fullpost"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCYt7BlqWV0iO24OUIi1tREiz0F_Nzt7innS7lZEuAG5FrIwkwOR3sUeONRvPZOy45ZZx4ldByqxvPrD6SbjUQmFQWHK-MHjIpmOTKa94DjjjcSNm01oJwnxcw-1eHZpVniSM8V1UZ6OU/s1600/GDP+growth+bands.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="380" data-original-width="576" height="211" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCYt7BlqWV0iO24OUIi1tREiz0F_Nzt7innS7lZEuAG5FrIwkwOR3sUeONRvPZOy45ZZx4ldByqxvPrD6SbjUQmFQWHK-MHjIpmOTKa94DjjjcSNm01oJwnxcw-1eHZpVniSM8V1UZ6OU/s320/GDP+growth+bands.jpg" width="320" /></a></span></div>
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The final graph places real GDP quarterly growth by administration along with the average level of growth, and both a two standard deviations upper and lower band. Growth during the Trump administration is nothing out of the ordinary. It centers around the mean and does not approach the two standard deviation threshold. While disproving President Trump’s claim of historic growth, it also dispels the notion that Trump’s policies have already ruined the economy. </span></div>
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<span class="fullpost">The fact that current policies do not seem to immediately influence economic outcomes is not my belief alone. The European IGM Economic Experts Panel was recently asked to respond to the statement, “<a href="http://www.igmchicago.org/surveys/governments-and-economic-performance">Voters overestimate the effect that current governments have on their economies’ concurrent economic performance.</a>” Sixty-four percent of the respondents strongly agreed or agreed whereas only 4% strongly disagreed or disagreed. Six percent were uncertain, while 4% held no opinion, and the remaining 22% did not answer the question. As an aside, several of the economists surveyed offered valuable comments. </span></div>
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<span class="fullpost">There are many reasons why policy seems to have no immediate impact. We participate in a market economy, and the independent actions of economic agents attempting to maximize their outcomes might overwhelm the actions of any president or party. Perhaps policy of both parties is more similar than different. Autonomous agencies, like the Federal Reserve, might have more impact than presidential administration. Professional bureaucracies that span administrations may act as a ballast to policies that deviate from norms. Finally, both good and bad policies might take time before their impact is realized, and might not be easily associated with a past administration, suggesting that policy is important, but its impacts are often not immediate. </span></div>
Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com1tag:blogger.com,1999:blog-6824345661289105799.post-68062580858017784462018-11-09T12:32:00.000-06:002018-11-09T12:44:28.875-06:00What Do Economists Think about Immigration<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigsKHRB5FZBuIzz6NyCmZJVCJ4N9H_x-z3jYBP4WU1_4zV52C0__QVVpoMEf2_dtpY-R2-c6qq9QAbxM8ru4uQWuQHqR-QfDdW5RtpusetJekiY5nohHqE2OVGQ9OOAxw8YiDPCR3dchA/s1600/Increase+in+Supply+of+Labor.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="400" data-original-width="500" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigsKHRB5FZBuIzz6NyCmZJVCJ4N9H_x-z3jYBP4WU1_4zV52C0__QVVpoMEf2_dtpY-R2-c6qq9QAbxM8ru4uQWuQHqR-QfDdW5RtpusetJekiY5nohHqE2OVGQ9OOAxw8YiDPCR3dchA/s320/Increase+in+Supply+of+Labor.jpg" width="320" /></a><span style="font-size: 14pt; line-height: 107%; margin: 0px;"> </span></div>
<span style="font-family: "calibri";">When I speak to friends about the impact of immigration,
legal and illegal on the United States, they typically argue that the influx
of workers causes a drop in wages.<span style="margin: 0px;"> </span>The
equilibrium wage drops as the supply of labor shifts outward.<span style="margin: 0px;"> </span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbNEbspEaiFkTbd_NS4geY1RrV_RXNC-AY7unralFlJLC6QddpDW0xv4cSupaiTS0gqsKh4X6pkvAZb3ZiFC1hM3_4WF05YWy_eeAH9pDV6T7QM3pvWF_SlORyDlq_JSIWMsWLRE1lSXo/s1600/Increasein+the+demand+for+labor.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="400" data-original-width="500" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbNEbspEaiFkTbd_NS4geY1RrV_RXNC-AY7unralFlJLC6QddpDW0xv4cSupaiTS0gqsKh4X6pkvAZb3ZiFC1hM3_4WF05YWy_eeAH9pDV6T7QM3pvWF_SlORyDlq_JSIWMsWLRE1lSXo/s320/Increasein+the+demand+for+labor.jpg" width="320" /></a></div>
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<span style="font-family: "calibri" , sans-serif; font-size: 11pt; line-height: 107%; margin: 0px;">Increasing supply of labor is only a first
step.<span style="margin: 0px;"> </span>Immigrants also buy goods and
services, leading to an increase in labor demand.<span style="margin: 0px;"> </span>Wages rise as the demand for labor
increases.<span style="margin: 0px;"> </span>Which labor effect is the
greatest determines if wages fall or increase with immigration. </span></div>
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<span style="font-family: "calibri" , sans-serif; font-size: 11pt; line-height: 107%; margin: 0px;">The impact of immigration on wages is only one question economists
ask when studying immigration.<span style="margin: 0px;"> </span>Given
that they are our countries experts on the economy, it might be wise to learn
what they have concluded.</span></div>
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Economists overwhelmingly believe that immigration is good
for the United States.<span style="margin: 0px;"> I offer a few pieces of evidence. </span>In 2017, a group
of economists wrote an <a href="http://www.newamericaneconomy.org/wp-content/uploads/2017/04/EconomistLetter_AUG2017.pdf"><span style="color: #0563c1;">open
letter on immigration</span></a> to the president, and key members of the
Congress.<span style="margin: 0px;"> </span>The letter was eventually
signed by 1,470 economists, many of whom I know personally, through study, or
by reputation.<span style="margin: 0px;"> </span>They represent all sides
of the political and economic spectrum.<span style="margin: 0px;"> </span>The
end of the letter reads,</div>
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“We view the benefits of
immigration as myriad:</div>
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• Immigration brings entrepreneurs
who start new businesses that hire American workers. </div>
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• Immigration brings young workers
who help offset the large-scale retirement of baby boomers. </div>
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• Immigration brings diverse skill
sets that keep our workforce flexible, help companies grow, and increase the
productivity of American workers. </div>
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• Immigrants are far more likely to
work in innovative, job-creating fields such as science, technology,
engineering, and math that create life-improving products and drive economic
growth.</div>
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Immigration undoubtedly has
economic costs as well, particularly for Americans in certain industries and
Americans with lower levels of educational attainment. But the benefits that
immigration brings to society far outweigh their costs, and smart immigration
policy could better maximize the benefits of immigration while reducing the
costs.</div>
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We urge Congress to modernize our
immigration system in a way that maximizes the opportunity immigration can
bring, and reaffirms continuing the rich history of welcoming immigrants to the
United States.”</div>
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As a frame of reference, an open letter on a politically
controversial topic will often draw about 600 signers, and an open letter
response, similar in magnitude, by economists on the other side of the
issue.<span style="margin: 0px;"> </span>To my knowledge, and I searched
on several occasions, there was never an open letter written by economists who
favor more restricted immigration.<span style="margin: 0px;"> </span></div>
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I have provided links to a couple of other, much smaller
surveys conducted by the Chicago Booth IGM Forum on immigration issues.<span style="margin: 0px;"> </span>The surveys again include a economists with a
wide range of economic and political views.<span style="margin: 0px;">
</span>The exact wording is important, and should not be interpreted beyond the
answer to the statement.</div>
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Statement 1: The influx of refugees
into Germany beginning in the summer of 2015 will generate net economic
benefits for German citizens over the succeeding decade.<span style="margin: 0px;"> </span></div>
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When you view the<span style="margin: 0px;">
</span>results, note that 17% of the economists did not respond.<span style="margin: 0px;"> </span>This does not suggest an opinion but rather
that they didn’t have time to respond.<span style="margin: 0px;">
</span>At least a couple of those who did not respond, signed the open letter. </div>
<div style="margin: 0px 0px 10.66px;">
</div>
<div style="margin: 0px 0px 10.66px 48px;">
Statement 2:<span style="margin: 0px;"> </span>Over the past two years, all else equal, the
appeal of the US as a destination for immigrants has changed in ways that will
likely decrease innovation in the US economy.</div>
<div style="margin: 0px 0px 10.66px;">
<span style="font-family: "calibri" , sans-serif; font-size: 11pt; line-height: 107%; margin: 0px;">Of those who signed, 72% strongly agreed or agreed
with the statement.<span style="margin: 0px;"> </span>Only 2%
disagree,<span style="margin: 0px;"> </span>Nine percent did not answer
the question.<span style="margin: 0px;"> </span></span><b></b><i></i><u></u><sub></sub><sup></sup><strike></strike></div>
</span><br />Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-84037941083118770502014-11-22T09:30:00.000-06:002014-11-22T09:30:09.647-06:00Subsidiarity and Textbooks in TexasThe State of Texas approves school textbooks. At best, it is a costly
but meaningless exercise. According to <a href="http://www.foxnews.com/us/2014/11/21/texas-oks-most-new-controversial-history-textbooks-amid-outcry/">Fox
News</a>, “A 2011 state law allows school districts to buy books both on and off
the board list.” <br />
At worst, it limits the democratic process by centralizing decision making at
an unnecessarily concentrated level. According to the Merriam-Webster
Dictionary, subsidiarity is “a principle in social organization: functions which
subordinate or local organizations perform effectively belong more properly to
them than to a dominant central organization.” <br />
It is a principle that most conservatives accept. It is a principle that
politicians beyond the local level often ignore. Governor elect Abbot show your
conservative principles and dismantle this committee!<br />
<br />
<br />
This is your teaser
<span class="fullpost">Replace this text with...</span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com1tag:blogger.com,1999:blog-6824345661289105799.post-83082447930568854412014-02-12T09:27:00.001-06:002014-02-12T09:27:26.960-06:00The U.S. behind Romania in Press Freedom<p>A fall in freedom of any kind should be a big story in the United States.  From Meghan Drake of the Washington Times, “<a href="http://www.washingtontimes.com/news/2014/feb/11/press-freedom-suffers-under-obama-global-survey-fi/">Survey: U.S. press freedom plunges under Obama to 46th in world, after Romania</a>.”</p> <blockquote> <p>The U.S. fell from 32nd to 46th in the 2014 World Press Freedom Index, a drop of 13 slots. The index, compiled by the press advocacy group <a href="http://www.washingtontimes.com/topics/reporters-without-borders/">Reporters Without Borders</a>, analyzes 180 countries on criteria such as official abuse, media independence and infrastructure to determine how free journalists are to report…</p> <p>“Journalists are being caught up in what is, I think, fairly characterized as a rapidly growing surveillance apparatus, and this is happening all over the world,” said <a href="http://www.washingtontimes.com/topics/geoffrey-king/">Geoffrey King</a>, Internet advocacy coordinator for the Committee to Protect Journalists.</p> </blockquote> <p>The Huffington Post reports the same.  See Josh Stearns, “<a href="http://www.huffingtonpost.com/josh-stearns/us-plummets-in-global-pre_b_4770182.html">U.S. Plummets in Global Press Freedom Rankings</a>.”</p> Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com4tag:blogger.com,1999:blog-6824345661289105799.post-56558800045946569752012-07-18T14:44:00.001-05:002012-07-18T14:44:18.435-05:00Market Income, Transfers and Taxes<p>I am indebted to <a href="http://gregmankiw.blogspot.com/">Greg Mankiw</a> for his recent post “<a href="http://gregmankiw.blogspot.com/2012/07/progressivity-of-taxes-and-transfers.html">The Progressivity of Taxes and Transfers</a>” for two reasons.  First, it citied a <a href="http://www.cbo.gov/publication/43373">CBO report</a> 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.</p> <p>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.  </p> <p>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.  </p> <table border="0" cellspacing="0" cellpadding="2" width="449"><tbody> <tr> <td valign="top" width="150"><font size="4"><strong>2009</strong></font></td> <td valign="top" width="62"> <p align="center">Market <br />Income</p> </td> <td valign="top" width="63"> <p align="center"> <br />Transfers</p> </td> <td valign="top" width="59"> <p align="center">Taxes</p> </td> <td valign="top" width="113"> <p align="center">Effective Tax Rate</p> </td> </tr> <tr> <td valign="top" width="150">First Quintile</td> <td valign="top" width="62"> <p align="right">$7,600</p> </td> <td valign="top" width="63"> <p align="right">$22,900</p> </td> <td valign="top" width="59"> <p align="right">$0</p> </td> <td valign="top" width="113"> <p align="right">-301.3</p> </td> </tr> <tr> <td valign="top" width="150">Second Quintile</td> <td valign="top" width="62"> <p align="right">30,100</p> </td> <td valign="top" width="63"> <p align="right">14,800</p> </td> <td valign="top" width="59"> <p align="right">2,200</p> </td> <td valign="top" width="113"> <p align="right">-41.9</p> </td> </tr> <tr> <td valign="top" width="150">Third Quintile</td> <td valign="top" width="62"> <p align="right">54,200</p> </td> <td valign="top" width="63"> <p align="right">10,400</p> </td> <td valign="top" width="59"> <p align="right">7,700</p> </td> <td valign="top" width="113"> <p align="right">-5.0</p> </td> </tr> <tr> <td valign="top" width="150">Fourth Quintile</td> <td valign="top" width="62"> <p align="right">86,400</p> </td> <td valign="top" width="63"> <p align="right">7,100</p> </td> <td valign="top" width="59"> <p align="right">15,400</p> </td> <td valign="top" width="113"> <p align="right">9.6</p> </td> </tr> <tr> <td valign="top" width="150">Highest Quintile</td> <td valign="top" width="62"> <p align="right">218,800</p> </td> <td valign="top" width="63"> <p align="right">6,000</p> </td> <td valign="top" width="59"> <p align="right">53,400</p> </td> <td valign="top" width="113"> <p align="right">21.7</p> </td> </tr> <tr> <td valign="top" width="150">Breakdown of Highest Quintile</td> <td valign="top" width="62"> </td> <td valign="top" width="63"> </td> <td valign="top" width="59"> </td> <td valign="top" width="113"> </td> </tr> <tr> <td valign="top" width="150">81st-90th</td> <td valign="top" width="62"> <p align="right">125,800</p> </td> <td valign="top" width="63"> <p align="right">5,800</p> </td> <td valign="top" width="59"> <p align="right">25,800</p> </td> <td valign="top" width="113"> <p align="right">15.9</p> </td> </tr> <tr> <td valign="top" width="150">91st-95th</td> <td valign="top" width="62"> <p align="right">169,800</p> </td> <td valign="top" width="63"> <p align="right">5,700</p> </td> <td valign="top" width="59"> <p align="right">38,300</p> </td> <td valign="top" width="113"> <p align="right">19.2</p> </td> </tr> <tr> <td valign="top" width="150">96th-99th</td> <td valign="top" width="62"> <p align="right">266,200</p> </td> <td valign="top" width="63"> <p align="right">6,200</p> </td> <td valign="top" width="59"> <p align="right">66,800</p> </td> <td valign="top" width="113"> <p align="right">22.8</p> </td> </tr> <tr> <td valign="top" width="150"> <p align="left">Top 1 Percent</p> </td> <td valign="top" width="62"> <p align="right">1,219,600</p> </td> <td valign="top" width="63"> <p align="right">9,000</p> </td> <td valign="top" width="59"> <p align="right">356,300</p> </td> <td valign="top" width="113"> <p align="right">28.5</p> </td> </tr> </tbody></table> <p>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.</p> <a name='more'></a> <p>The fifth column, the effective tax rate, is taxes less transfers as a percentage of market income.  A negative percentage means that the average household in the quintile receives more in transfers from the government than they pay in taxes.</p> <p>Mankiw was surprised to learn that, on average, households in the third quintile had a negative effective tax rate.  I was most surprised by the lack of market income of the first quintile.  The average household in this quintile had market income of $7,600.  I would find an explanation of the composition of these households interesting. </p> Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com1tag:blogger.com,1999:blog-6824345661289105799.post-48360803806850056392012-07-06T14:21:00.000-05:002012-07-06T14:27:59.462-05:00The ACA and National Income Accounts<p>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.  </p> <p>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.  </p> <p>Personal income and disposable income are defined in equations (1) and (2)</p> <p>(1) Personal Income (PI) = National Income (NI) – retained earnings – indirect business taxes – corporate income taxes – social insurance taxes + interest on government debt + government transfers,</p> <p>and </p> <span class="fullpost"> <p>(2) Disposable personal income (DI) = PI – personal taxes – nontax payments.</p> <p>Substituting equation (1) into (2) and regrouping terms yields equation (3) which contains the accounts that  will be affected by the ACA.</p> <p>(3) DI = NI – indirect business taxes – retained earnings - corporate income taxes – social insurance taxes – personal taxes – nontax payments + interest on government debt + government transfers.</p> <p>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.  </p></span> Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com3tag:blogger.com,1999:blog-6824345661289105799.post-72392699080527392492012-07-03T09:24:00.000-05:002012-07-03T09:24:22.182-05:00An Example of Age and Educational SuccessLast 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.
<blockquote>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.</blockquote>
<blockquote>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.</blockquote>
<span class="fullpost"><blockquote>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.</blockquote>
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
<blockquote>Please learn from my mistakes and allow me to save some of you time, stay in school. There is no substitute.</blockquote>
</span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com3tag:blogger.com,1999:blog-6824345661289105799.post-20369945084246829612012-07-01T19:15:00.001-05:002012-07-01T19:15:15.909-05:00Mismeasurement of the Cost of For-Profits?<p>The Obama and the Bush administrations distrust the quality of education offered by for-profit schools (John Hechiger and John Lauerman, “<a href="http://www.bloomberg.com/news/2012-06-26/for-profit-colleges-may-lose-tax-money-under-new-rules.html">For-Profit Colleges May Lose Tax Money Under New Rules</a>”).  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.</p> <p>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.    </p> Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com2tag:blogger.com,1999:blog-6824345661289105799.post-25469453748609528042012-06-29T13:07:00.001-05:002012-06-29T13:07:43.906-05:00The Constitutionality of the Affordable Care Act<p>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 href="http://www.nytimes.com/2012/06/29/opinion/a-confused-opinion.html?_r=1&ref=todayspaper">A Confused Opinion</a>”</p> <blockquote> <p>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.</p> </blockquote> <p>The Court has been swift to protect political rights but slow to protect economic rights.  The two are intertwined and both deserve protection.  </p> Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com1tag:blogger.com,1999:blog-6824345661289105799.post-75352586525261509842012-06-28T13:13:00.000-05:002012-06-28T13:13:21.766-05:00Hoover and the Great DepressionA 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.
<br />
<blockquote>
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… </blockquote>
<blockquote>
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). </blockquote>
<blockquote>
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.
</blockquote>
<blockquote class="tr_bq">
<span class="fullpost">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”.)</span> </blockquote>
<blockquote class="tr_bq">
<span class="fullpost">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.”</span> </blockquote>
<blockquote class="tr_bq">
<span class="fullpost">
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…</span> </blockquote>
<blockquote class="tr_bq">
<span class="fullpost">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.
</span></blockquote>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-12266209898951026372012-05-19T14:43:00.001-05:002012-05-19T14:43:07.547-05:00Bain Capital and Make-work Bias<p>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.  </p> <p>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.</p> <blockquote> <p>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.</p> </blockquote> <p>Bryan Caplan exquisitely explains this misunderstanding in <em><a href="http://www.amazon.com/The-Myth-Rational-Voter-Democracies/dp/0691129428">The Myth of the Rational Voter</a>.</em></p> <blockquote> <p>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.  </p></blockquote> Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com2tag:blogger.com,1999:blog-6824345661289105799.post-59671782146401286302012-05-16T11:35:00.001-05:002012-05-16T11:35:42.014-05:00Signaling and Tax Reform<p>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.</p> <p>Most republican candidates have committed their votes on tax reform by signing the following pledge</p> <blockquote> <p> 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.</p> </blockquote> <p>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.”</p> <p>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.  </p> <p>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.  </p> <p>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.    </p> Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-82343707859325484922012-04-25T12:25:00.001-05:002012-04-25T12:25:46.778-05:00Susan Sarandon<p>In <em><a href="http://www.barnesandnoble.com/w/capitalism-and-freedom-40th-anniversary-edition-friedman-milton-friedman-rose-d-friedman-milton-friedman-rose-d/1015396266?ean=9780226264189">Capitalism and Freedom</a></em>, Milton Freidman penned the then controversial but now status quo thought on the relationship between economic freedom and political power. </p> <blockquote> <p>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.</p> </blockquote> <p>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. </p> <p>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 <a href="http://movies.yahoo.com/blogs/movie-talk/susan-sarandon-denied-white-house-clearance-162538391.html">claims</a> 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.  </p> <p>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.”</p> Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-40852339504188159572012-04-17T12:54:00.000-05:002012-04-17T12:54:01.054-05:00Jay on Cohabitation<p>Meg Jay’s article on cohabitation (“<a href="http://www.nytimes.com/2012/04/15/opinion/sunday/the-downside-of-cohabiting-before-marriage.html?_r=3&pagewanted=print">The Downside of Cohabiting Before Marriage</a>”) 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.  </p>
<p>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.</p>
<p>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.  </p>
<p>Jay describes the new hypothesis.</p>
<span class="fullpost"><blockquote>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
</blockquote>
<p>I might add that I am more likely to like any research that picks up an idea used by economists.  </p></span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-43920385809712482812012-04-16T12:43:00.000-05:002012-04-16T12:43:46.346-05:00Florida and Welfare ReformFlorida 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. <br />
<br />
Based on these numbers, Catherine Whittenburg (“<a href="http://www2.tbo.com/news/politics/2011/aug/24/3/welfare-drug-testing-yields-2-percent-positive-res-ar-252458/">Welfare drug-testing yields 2% positive results</a>”) calculates the cost of testing versus the estimated savings in welfare payments to taxpayers. <br />
<blockquote>
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. </blockquote>
<blockquote>
That compares with roughly $32,200-$48,200 the state may save on one month's worth of rejected applicants. </blockquote>
<blockquote>
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. </blockquote>
<blockquote>
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. </blockquote>
<blockquote>
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.</blockquote>
I like Whettenburg’s “back of the envelope” calculations and I have some thoughts but reach no conclusions.
<span class="fullpost">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. </span><br />
<br />
<span class="fullpost">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. </span><br />
<span class="fullpost">
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 “<a href="http://www.amazon.com/Fault-Lines-Fractures-Threaten-Economy/dp/0691146837">Fault Lines</a>” (page 95).<br />
<blockquote>
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.</blockquote>
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. </span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-29816599230203533322012-04-02T11:15:00.001-05:002012-04-02T11:15:43.272-05:00The Health of Manufacturing in the United States<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQ6GhBG7EMrMa_709aqKhhh1Y4JkU-2EaOEuJGFLLTKxYyZNUECgmJwYwsY77UspeyffM5MvujN9r3uqOJ1cH5fR8Ita_rmcJu6pAMfl0H3RDfcmoXVehl2AquHqg4IqLY_UfMR55Z9c4/s1600/Manufactureing.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="309" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQ6GhBG7EMrMa_709aqKhhh1Y4JkU-2EaOEuJGFLLTKxYyZNUECgmJwYwsY77UspeyffM5MvujN9r3uqOJ1cH5fR8Ita_rmcJu6pAMfl0H3RDfcmoXVehl2AquHqg4IqLY_UfMR55Z9c4/s400/Manufactureing.JPG" width="400" /></a></div>
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. <br />
Steve Chapman (“<a href="http://www.realclearpolitics.com/articles/2012/03/18/manufacturing_an_economic_myth_113515.html">Manufacturing an Economic Myth</a>”) does a good job explaining the myth that our manufacturing sector is in decline. <br />
<blockquote>
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.<br />
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.<br />
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.</blockquote>
I recommend the entire article.<br />
<br />Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-9321563265702476092012-03-30T09:31:00.001-05:002012-03-30T09:31:35.566-05:00Unemployment During the Great RecessionIf 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.<br />
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January 2008.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBGDVL4eAslbPasTNRZgw5MKoJQ1JxrZsCOUYYH5KghgZI2yYVSlx5YV4_EJXOMCk65sVx7gDo6P2-LH8OPebOIyk7ri5FDyS_OFFmiReoeC9odWPS6CvRXKpPVd0M8RE2VY4Ggl2rZjs/s1600/Jan2008.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBGDVL4eAslbPasTNRZgw5MKoJQ1JxrZsCOUYYH5KghgZI2yYVSlx5YV4_EJXOMCk65sVx7gDo6P2-LH8OPebOIyk7ri5FDyS_OFFmiReoeC9odWPS6CvRXKpPVd0M8RE2VY4Ggl2rZjs/s400/Jan2008.jpg" width="360" /></a></div>
July 2008
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikIlWxzQ-xK5j7ySIbQZ50PLMaz_55dVOW6wgBRxYBK-FwJS0OeI0HjuZe6mZCIzu2DjLsUzprIiXnJv_8-wiRTDSjprcFkxwmy7h4PPcAKmScso-F7T9-MhwJqQzeDkVXJT4bPfPDlZs/s1600/Jul2008.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikIlWxzQ-xK5j7ySIbQZ50PLMaz_55dVOW6wgBRxYBK-FwJS0OeI0HjuZe6mZCIzu2DjLsUzprIiXnJv_8-wiRTDSjprcFkxwmy7h4PPcAKmScso-F7T9-MhwJqQzeDkVXJT4bPfPDlZs/s400/Jul2008.jpg" width="360" /></a></div>
January 2009
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<span class="fullpost"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgcv5IECGPna0Xf4mdu6yh1psw_Jc-CFy7tUKI4_1PHUq_06JSt9O8LtzZAm7E4yCcIKYNm2GvGdVwV-Qnf-dpjcnIB4TK75CwzfoyYo3jQCpBicnvZe-ODtpsE9biq_dxFpgdnGJ_FeE/s1600/Jan2009.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgcv5IECGPna0Xf4mdu6yh1psw_Jc-CFy7tUKI4_1PHUq_06JSt9O8LtzZAm7E4yCcIKYNm2GvGdVwV-Qnf-dpjcnIB4TK75CwzfoyYo3jQCpBicnvZe-ODtpsE9biq_dxFpgdnGJ_FeE/s400/Jan2009.jpg" width="360" /></a></span></div>
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July 2009
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<span class="fullpost"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyVFOylHhiCy3qGdl8nQscEBXIzFXDpxJs9-qRV-OHvKiW5hXGAh9jzvAqQAQQtiEO5u0s_L9OoERezaIXgPrCCkiy6ujrzT-cLYFdrJtHG5sa9OlQ4ma76B97GneF6TrDMDMpCbfZRyE/s1600/Jul2009.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyVFOylHhiCy3qGdl8nQscEBXIzFXDpxJs9-qRV-OHvKiW5hXGAh9jzvAqQAQQtiEO5u0s_L9OoERezaIXgPrCCkiy6ujrzT-cLYFdrJtHG5sa9OlQ4ma76B97GneF6TrDMDMpCbfZRyE/s400/Jul2009.jpg" width="360" /></a></span></div>
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January 2010
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<span class="fullpost"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDuWDm0YBK8vWVhYDISo5knOzTb1_6y2ryDrIBAhUAyErLqlJhnDpgAHufrtzeptfZXzZEJz-EtJzbiFu94Vfveb0JNn0AAEBGwGZZSKp4qSjk7mCycEPVRNNLVGx50yBFR668X2jMDDI/s1600/Jan2010.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDuWDm0YBK8vWVhYDISo5knOzTb1_6y2ryDrIBAhUAyErLqlJhnDpgAHufrtzeptfZXzZEJz-EtJzbiFu94Vfveb0JNn0AAEBGwGZZSKp4qSjk7mCycEPVRNNLVGx50yBFR668X2jMDDI/s400/Jan2010.jpg" width="360" /></a></span></div>
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July 2010
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkC9prVxSX2SuMJ9_zhvngHmPNiX2yUf8arSHjw6zM4KazuZ3BFOszNSCMVFep_Iz_p6wa_p8rIwhLbG5Bfk12oAeo8wkA9aQ2j3jroIV8ggnx7h67WqKEGx5mwXWRKH4G1WGQolcZIms/s1600/Jul2010.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkC9prVxSX2SuMJ9_zhvngHmPNiX2yUf8arSHjw6zM4KazuZ3BFOszNSCMVFep_Iz_p6wa_p8rIwhLbG5Bfk12oAeo8wkA9aQ2j3jroIV8ggnx7h67WqKEGx5mwXWRKH4G1WGQolcZIms/s400/Jul2010.jpg" width="360" /></a></div>
January 2011
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5sC6Yn_sO1Qy0Z2TJU4cIrGAF9jLJsbgcFb14EjfoW8GYyvsu0CwF87wzPtR9V9mrg_s4F-n2ek_G1cG72Px-sgjqdxjbXBTPMpkCMLK9mBpl6H3LIOFv2tI8IhZo8ujPRg4IBTpeHgQ/s1600/Jan2011.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5sC6Yn_sO1Qy0Z2TJU4cIrGAF9jLJsbgcFb14EjfoW8GYyvsu0CwF87wzPtR9V9mrg_s4F-n2ek_G1cG72Px-sgjqdxjbXBTPMpkCMLK9mBpl6H3LIOFv2tI8IhZo8ujPRg4IBTpeHgQ/s400/Jan2011.jpg" width="360" /></a></div>
July 2011
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtPVaoPHgJHICh9ijTfcDZ8fGujYXmwf5_dgZ-peZIF137JnF03vzeWXLgx1xjNYqCmxTgmRdMmwsow9a4PANGcVyvz1g1plSvZcvkb8hwRGsxedYqqeGCHEi86uNELCbYZGZGSzt02_w/s1600/Jul2011.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtPVaoPHgJHICh9ijTfcDZ8fGujYXmwf5_dgZ-peZIF137JnF03vzeWXLgx1xjNYqCmxTgmRdMmwsow9a4PANGcVyvz1g1plSvZcvkb8hwRGsxedYqqeGCHEi86uNELCbYZGZGSzt02_w/s400/Jul2011.jpg" width="360" /></a></div>
January 2012
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8k2sV8ChxXkoVU06XP4GWy2RK7CL7uLABQ9ZL9NsxurY1-v4psXrz93UxnY778BOM7keVN_X7FdQNm9C4SaN7FnbtROWbITa0VknB-GfSJyMZdAqim0CSQHtHAqwluY5zF_RljtQIsj8/s1600/Jan2012.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="339" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8k2sV8ChxXkoVU06XP4GWy2RK7CL7uLABQ9ZL9NsxurY1-v4psXrz93UxnY778BOM7keVN_X7FdQNm9C4SaN7FnbtROWbITa0VknB-GfSJyMZdAqim0CSQHtHAqwluY5zF_RljtQIsj8/s400/Jan2012.jpg" width="360" /></a></div>
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<br />Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-67179020235674954332012-03-20T13:56:00.000-05:002012-03-30T09:18:20.558-05:00Using Supply and Demand to Illustrate How Policy Impacts the Gasoline MarketVoters’ 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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbHPv0hoz8ByCZeylU5kJyUqLRx_Wi7-kTgrpkQXCdrGm1Xtk_MMw9cTog_QWhdMcS0S3iZ4HkY5pBCaj16r0kA4a0T5uMG1Gz6_wWrlE_A6HkKqLVDRDGP0_7gtBqiZBLLIBaj59qqxg/s1600/RetailGasPrices.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="307" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbHPv0hoz8ByCZeylU5kJyUqLRx_Wi7-kTgrpkQXCdrGm1Xtk_MMw9cTog_QWhdMcS0S3iZ4HkY5pBCaj16r0kA4a0T5uMG1Gz6_wWrlE_A6HkKqLVDRDGP0_7gtBqiZBLLIBaj59qqxg/s400/RetailGasPrices.JPG" width="400" /></a></div>
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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.<br />
<br />
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. <span class="fullpost">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. </span><br />
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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.<br />
<br />
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.<br />
<br />
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. <br />
<br />
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<br />
<br />
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.<br />
<br />
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. <br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.<br />
<br />
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.Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-85110094193488279342012-03-09T12:46:00.001-06:002012-03-09T12:47:35.208-06:00Can 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.<br />
<br />
Romney described his plan before the Hispanic Leadership Network (“<a href="http://www.c-span.org/Events/Mitt-Romney-amp-Newt-Gingrich-Attend-Hispanic-Conservatives-Conference/10737427683/">Mitt
Romney & Newt Gingrich Attend Hispanic Conservatives Conference</a>”) 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.<br />
<br />
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. <br />
<br />
I also find Romney’s position on illegal immigration, which I will describe
latter, harsh. <span class="fullpost">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 (“<a href="http://in.reuters.com/article/2012/02/27/usa-campaign-mormons-immigration-idINDEE81Q0Q120120227">Romney's tough line on immigration jars with some Mormons</a>”). Finally, the economic literature does not support the contention that illegal immigration is costly to our country. The opposite is probably correct (“<a href="http://drbseconomicblog.blogspot.com/2011/10/as-best-i-can-tell-economists-favor.html">Economists’ on Immigration</a>”).<br />
<br />
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.
</span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com1tag:blogger.com,1999:blog-6824345661289105799.post-75871847489007826642012-03-05T20:15:00.000-06:002012-03-19T07:23:34.839-05:00Comparative Advantage and Manufacturing SubsidiesPresident 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.
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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.<br />
<span class="fullpost">
</span><br />
<table border="0" cellpadding="2" cellspacing="0" style="width: 398px;"><tbody>
<tr>
<td align="right" valign="top" width="182"><br /></td>
<td align="right" valign="top" width="51">U.S.</td>
<td align="right" valign="top" width="52"><br /></td>
<td align="right" valign="top" width="61">China</td>
<td align="right" valign="top" width="50"><br /></td>
</tr>
<tr>
<td valign="top" width="183"><br /></td>
<td align="right" valign="top" width="51">Cars</td>
<td align="right" valign="top" width="52">Fruit</td>
<td align="right" valign="top" width="61">Cars</td>
<td align="right" valign="top" width="50">Fruit</td>
</tr>
<tr>
<td valign="top" width="183">Autarky</td>
<td align="right" valign="top" width="51"><br /></td>
<td align="right" valign="top" width="52"><br /></td>
<td align="right" valign="top" width="61"><br /></td>
<td align="right" valign="top" width="50"><br /></td>
</tr>
<tr>
<td valign="top" width="183">Production=Consumption</td>
<td align="right" valign="top" width="51">8</td>
<td align="right" valign="top" width="52">24</td>
<td align="right" valign="top" width="61">8</td>
<td align="right" valign="top" width="50">8</td>
</tr>
<tr>
<td valign="top" width="183">With Trade</td>
<td align="right" valign="top" width="51"><br /></td>
<td align="right" valign="top" width="52"><br /></td>
<td align="right" valign="top" width="61"><br /></td>
<td align="right" valign="top" width="50"><br /></td>
</tr>
<tr>
<td valign="top" width="183">Production</td>
<td align="right" valign="top" width="51">4</td>
<td align="right" valign="top" width="52">36</td>
<td align="right" valign="top" width="61">16</td>
<td align="right" valign="top" width="50">0</td>
</tr>
<tr>
<td valign="top" width="183">Trade</td>
<td align="right" valign="top" width="51">5</td>
<td align="right" valign="top" width="52">-10</td>
<td align="right" valign="top" width="61">-5</td>
<td align="right" valign="top" width="50">10</td>
</tr>
<tr>
<td valign="top" width="183">Consumption</td>
<td align="right" valign="top" width="51">9</td>
<td align="right" valign="top" width="52">26</td>
<td align="right" valign="top" width="61">11</td>
<td align="right" valign="top" width="50">10</td>
</tr>
<tr>
<td valign="top" width="183">Gains from Trade</td>
<td align="right" valign="top" width="51">1</td>
<td align="right" valign="top" width="52">2</td>
<td align="right" valign="top" width="61">3</td>
<td align="right" valign="top" width="50">2</td>
</tr>
<tr>
<td valign="top" width="183">With Tax Distortions</td>
<td align="right" valign="top" width="51"><br /></td>
<td align="right" valign="top" width="52"><br /></td>
<td align="right" valign="top" width="61"><br /></td>
<td align="right" valign="top" width="50"><br /></td>
</tr>
<tr>
<td valign="top" width="183">Production</td>
<td align="right" valign="top" width="51">12</td>
<td align="right" valign="top" width="52">12</td>
<td align="right" valign="top" width="61">0</td>
<td align="right" valign="top" width="50">16</td>
</tr>
<tr>
<td valign="top" width="183">Trade</td>
<td align="right" valign="top" width="51">-9</td>
<td align="right" valign="top" width="52">6</td>
<td align="right" valign="top" width="61">9</td>
<td align="right" valign="top" width="50">-6</td>
</tr>
<tr>
<td valign="top" width="183">Consumption</td>
<td align="right" valign="top" width="51">3</td>
<td align="right" valign="top" width="52">18</td>
<td align="right" valign="top" width="61">9</td>
<td align="right" valign="top" width="50">10</td>
</tr>
<tr>
<td valign="top" width="183">Grains from Trade</td>
<td align="right" valign="top" width="51"><br /></td>
<td align="right" valign="top" width="52"><br /></td>
<td align="right" valign="top" width="61"><br /></td>
<td align="right" valign="top" width="50"><br /></td>
</tr>
<tr>
<td valign="top" width="183">Compared to Autarky</td>
<td align="right" valign="top" width="51">-5</td>
<td align="right" valign="top" width="52">-6</td>
<td align="right" valign="top" width="61">1</td>
<td align="right" valign="top" width="50">2</td>
</tr>
<tr>
<td valign="top" width="183">Compared to Free Trade</td>
<td align="right" valign="top" width="51">-6</td>
<td align="right" valign="top" width="52">-8</td>
<td align="right" valign="top" width="61">-2</td>
<td align="right" valign="top" width="50">0</td>
</tr>
</tbody></table>
<span class="fullpost">
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)). </span><br />
<br />
<span class="fullpost">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. </span><br />
<br />
<span class="fullpost">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. </span><br />
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<br />
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 12pt;">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. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Arial","sans-serif"; font-size: 12pt;">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)). </span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Arial","sans-serif"; font-size: 12pt;">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. </span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-40912000946581435262012-02-27T13:01:00.000-06:002012-02-27T13:01:15.281-06:00The Slippery Side of the Laffer Curve?<div class="separator" style="clear: both; text-align: left;">
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.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh58xmB4AT0LuJxyxskGL9wvovlHZSibXVFlOV-2fXfArOIptMWG-hAUQHCixIEy_tiDLkYU7_xFf0zna7zno-YM6deuuyGlIYLEEjH7fK7LFm0ZdxvNTyczplPSQ-gigqpd0pSebW2Haw/s1600/Laffer+Curve+2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="218" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh58xmB4AT0LuJxyxskGL9wvovlHZSibXVFlOV-2fXfArOIptMWG-hAUQHCixIEy_tiDLkYU7_xFf0zna7zno-YM6deuuyGlIYLEEjH7fK7LFm0ZdxvNTyczplPSQ-gigqpd0pSebW2Haw/s400/Laffer+Curve+2.jpg" width="360" /></a></div>
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.
<span class="fullpost"> </span><br />
<br />
<span class="fullpost">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. </span><br />
<br />
<span class="fullpost">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 </span><br />
<span class="fullpost"> 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….</span><br />
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<br />
<span class="fullpost"> 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. </span><br />
<br />
<span class="fullpost">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. </span></blockquote>
<span class="fullpost"> 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.
</span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-9245289843406639962012-02-20T21:50:00.001-06:002012-02-20T21:52:00.829-06:00Deregulate the Lunch Box<p>A second four-year-old girl at West Hoke Elementary School was told her mother’s lunch was not up to snuff (“<a href="http://www.theblaze.com/stories/exclusive-2nd-n-c-mother-says-daughters-school-lunch-replaced-for-not-being-healthy-enough/">Exclusive: 2nd N.C. Mother Says Daughter’s School Lunch Replaced for Not Being Healthy Enough</a>”).  </p> <p>While packing lunches necessitates government supervision, sex change operations for minors do not (“<b><a href="http://apnews.myway.com/article/20120220/D9T13HO02.html">Sex-changing treatment for kids: It's on the rise</a></b>”).  </p> <blockquote> <p>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…</p> <p>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.</p> <p>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.</p> </blockquote> <p>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.</p>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0tag:blogger.com,1999:blog-6824345661289105799.post-47963766583325193632012-02-17T11:46:00.000-06:002012-02-17T11:46:23.094-06:00The Volt: Struck Twice by LighteningThe 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. <br />
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I believe that the policy is bad economics for two reasons. First, governments are bad at picking market viable technologies. <a href="http://online.wsj.com/article/SB10001424052970204883304577221630318169656.html">Michael Boskin</a> recently quoted Larry Summers who was at the time President Obama’s chief economic advisor who said, “the government is a crappy venture capitalist” (“<a href="http://online.wsj.com/article/SB10001424052970204883304577221630318169656.html">Washington's Knack for Picking Losers</a>”). 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 (“<a href="http://dailycaller.com/2012/02/13/obama-hikes-subsidy-to-wealthy-electric-car-buyers/">Obama hikes subsidy to wealthy electric car buyers</a>”). 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. <br /><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsWXWn6-J68y-MbKGCoEOzOYR1x9bDewOttYPTCxyoHt_PrqJY1yVt4YDek3PG4tyff0KKv8cBEOZdYgPfx5Hna-oxVC4x8fUStaVcxxWguyRlGRJmFbUf8_iyH4mYDzwLSV0GSkg8nb8/s1600/Chevy+Volt+2.jpg" imageanchor="1" style="margin-left:1em; margin-right:1em"><img border="0" height="320" width="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsWXWn6-J68y-MbKGCoEOzOYR1x9bDewOttYPTCxyoHt_PrqJY1yVt4YDek3PG4tyff0KKv8cBEOZdYgPfx5Hna-oxVC4x8fUStaVcxxWguyRlGRJmFbUf8_iyH4mYDzwLSV0GSkg8nb8/s400/Chevy+Volt+2.jpg" /></a></div>
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, (“<a href="http://drbseconomicblog.blogspot.com/2011/02/chevy-volt.html">The Chevy Volt</a>”), 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.<br />
<span class="fullpost"><p>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.   </p>
<p>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.</p></span>Brooks M. Wilsonhttp://www.blogger.com/profile/17097849558228531431noreply@blogger.com0