Update of the Impact of Current Policy on Concurrent Growth

In this post, I update the November 24, 2018, “Current Policy and Concurrent Economic Performance.” 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, “Voters overestimate the effect that current governments have on their economies.” 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 (“Trump Says U.S. Economy is ‘Best It Has Ever Been,’ But Facts Tell a Different Story”), while blaming others for failures, or even possible failures (“'Crazy Inverted Yield Curve!'—Trump rips 'clueless Jay Powell' and the Fed as the market slides”).

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.

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.
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Three Pronged Support for Ethanol

As a fuel, corn based ethanol is a dog that strangely enough provides rich pork for its producers.  It uses about as much energy in its production as it yields in consumption.  It diverts agricultural land from other crops, decreasing their supplies and increasing prices to consumers.  It is not environmentally friendly in its production or consumption.1  With no apparent beauty, corn based ethanol has been protected with three programs by the government: mandated use, subsidies, and tariff protection. All three harm the economy by inefficiently allocating resources and increasing fuel costs without a corresponding improvement in the environment.

The mandated use forces consumers to buy 13.8 billion gallons of ethanol, a product that they normally would purchase in smaller quantities or forgo.  Ethanol producers, not satisfied with mandated use alone, have legislatively secured a 45 cent-per-gallon blending tax credit at a cost of $6 billion annually to American taxpayers.  American corn based ethanol has foreign competitors that produce ethanol from sugar, a more energy rich crop.  To ensure that American consumers do not benefit from the low cost production, and that American corn growers have a guaranteed market, ethanol producers have legislatively secured a 54 cent-per-gallon tariff on imported ethanol. 

The political battlefield may be shifting in the Senate.  The current fracas concerns the extensions of the blending tax credit, and tariff on imported ethanol.  It pits Senators from corn producing states against everybody else.  Two competing letters to Senate Majority Leader Harry Reid illustrate that this is not a right vs. left conflict but geographic.The first letter, signed fifteen Senators, nine Democrats and six Republicans supports an extension of both the blending subsidy and the tariff.  While the support for the bill is bipartisan, it is not geographically dispersed.  Only 7.5% of Senators signed the letter, but 60% of the Senators from the top ten corn producing states signed.  The three Senators who signed the letter represent states that were 12th and 13th in corn production.  In the letter, the Senators argue that ethanol frees the country from dependence on foreign oil.  As a consumer, I don’t feel “freed” from foreign gasoline costing $2.50 a gallon when I am forced to buy ethanol blended gasoline costing $2.75.  As an American taxpayer, I do not feel safer knowing that hostile foreign governments can secure cheaper fuel to help power their economies.

The second letter, signed by seventeen Senators, nine Democrats and eight Republicans oppose an extension blending tax credits and tariffs.  Opposition to the extensions is bipartisan but dispersed.  Only 8.5% of Senators signed the letter and no Senator from the top 15 corn growing states signed.  In the letter, the Senators site studies that conclude that “ethanol tax credits cost taxpayers $1.78 for each gallon of gasoline consumption reduced, and $750 for each metric ton of carbon dioxide equivalent emissions reduced,”  and that a “one-year extension of the ethanol subsidy and tariff would lead to only 427 additional direct domestic jobs at a cost of almost $6 billion, or roughly $14 million of taxpayer money per job.”  

Tables 1 and 2 list the signatories, their party affiliation, the bushels of corn produced in their states, and their states ranking as a corn producer.  The bipartisan natures of those who support and oppose the extensions suggest that ideology is not an issue.  The sciences, both environmental and economic suggest that corn based ethanol is an inferior fuel.  The three pronged support for ethanol producers that not only mandate use, but use of American corn based ethanol combined with the other two inferences suggest a fourth and fifth: corn producers care more for their own wellbeing than that of the nation, and elected officials in their states from both parties are happy to indulge them. 

Table 1.  Senators Signing Letter to Support Extension of Ethanol Subsidies

Senator	Party-State	Corn Production (000 bushels)	Rank
Tom Harkin	D-IA	2,368,350	1
Charles Grassley	R-IA	2,368,350	1
Mark Kirk	R-IL	2,283,750	2
Ben Nelson	D-NE	1,472,000	3
Mike Johanns	D-NE	1,472,000	3
Amy Klobuchar	D-MN	1,138,800	4
Al Franken	D-MN	1,138,800	4
John Thune	R-SD	544,500	6
Tim Johnson	D-SD	544,500	6
Sam Brownback	R-KS	518,000	8
Christopher Bond	R-MO	461,500	9
Claire McCaskill	D-MO	461,500	9
Debbie Stabenow	D-MI	291,400	12
Kent Conrad	D-ND	272,600	13
Byron Dorgan	D-ND	272,600	13

Table 1.  Senators Signing Letter to Oppose Extension of Ethanol Subsidies

Senator	Party-State	Corn Production	Rank
Richard Burr	R-NC	102,000	19
Bob Corker	R-TN	83,210	21
Benjamin Cardin	D-MD	46,865	24
Tom Coburn	R-OK	39,150	25
Diane Feinstein	D-CA	36,000	27
Barbara Boxer	D-CA	36,000	27
Jim Webb	D-VA	34,425	28
Mark Warner	D-VA	34,425	28
Chris Coons	D-DE	17,945	31
Mike Enzi	R-WY	7,740	35
Jon Kyl	R-AZ	4,255	38
John McCain	R-AZ	4,255	38
Bob Bennett	R-UT	3,256	40
Jack Reed	D-RI	NA	NA
Sheldon Whitehouse	D-RI	NA	NA
Susan Collins	R-ME	NA	NA
Jeanne Shaheen	D-NH	NA	NA

1.  See for example, Sierra Magazine, “Bio-Hope, Bio-Hype” by Frances Cerra Whittelsey.

…corn is the source of 95 percent of the United States' ethanol. Although politically popular in farm states, corn is a problematic source of fuel: It requires good land and petroleum-intensive cultivation and fertilization, and it can also readily feed both humans and livestock. (Food prices are already increasing because of competition with ethanol.) If the mill processing the corn is powered by coal, ethanol produces more net greenhouse gases than gasoline does.

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The Nanny State: Pet and Human Welfare

We put too many burdens on our neighbors through the state.  Jaya Narain describes the actions of an overweening state protecting society from a 66 year-old woman selling goldfish to a minor in "Pet shop owner fined £1,000 and told to wear an electronic tag... for selling a GOLDFISH to a boy aged 14" published by Mail Oline.

Her offence was to unwittingly sell a goldfish to a 14-year-old boy taking part in a trading standards 'sting'.

At most, pet shop owner Joan Higgins, 66, expected a slap on the wrist for breaking new animal welfare laws which ban the sale of pets to under-16s.

Instead, the great-grandmother was taken to court, fined £1,000, placed under curfew - and ordered to wear an electronic tag for two months.

The punishment is normally handed out to violent thugs and repeat offenders.

The prosecution of Mrs Higgins and her son Mark is estimated to have cost taxpayers £20,000 and has left her with a criminal record.

Mark, 47, was also fined and ordered to carry out 120 hours of unpaid work in the community.

If members of a free society must police the sale of goldfish, is it any wonder that the United Kingdom has budget problems? 

Narain also reported that the police also found a cockatiel with a bad eye and a broken leg which was ironically put down to stop its suffering.  I wonder which metric they used to determine that the bird's future suffering outweighed its future pleasure? 

Did those who designed the law stop to think that pet stores that attempt to sell damaged goods don't sell much? 
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Mankiw on the ITC as a Fiscal Stimulus

Greg Mankiw describes "Nine Observations about Investment," on Greg Mankiw's Blog. In the fourth observation, he explains why he believes that an investment tax credit would be an effective fiscal stimulus. I quote the first four.

1. Above is a chart of the growth rate, from four quarters earlier, of real investment in equipment and software. Notice the left scale. Investment spending is very volatile. This is one of the standard stylized facts about the business cycle.

2. Investment has been particularly weak during this economic downturn. Weak residential investment is not a surprise, as the downturn was started by events in the housing market. But as this graph shows, business investment has also been very weak. Indeed, by the metric used in this graph, it is far weaker than in previous deep recessions, such as 1982.

3. Why is business investment so weak? Part of the reason is that the downturn is severe and investment responds to the overall economy. Part of the reason is that the credit crunch makes financing more difficult. Part of the reason is that the policy environment seems adverse to business. I am referring here to a group of policies that include higher minimum wages, the seeming retreat from free trade, proposed mandates to provide employees health insurance, higher prospective energy costs from climate change regulation, and the likelihood of higher future tax rates resulting from the huge fiscal imbalance we are now experiencing. All of these factors have worked in concert to depress business investment.

4. The recent weakness of business investment was one of unstated reasons why, in my recent NY Times column, I suggested that an investment tax credit (ITC) might have been a better form of fiscal stimulus than what we in fact were given. Given the amount of money being spent on stimulus, the ITC could have been sizable. The measure of investment used in the chart above is about $1 trillion per year. So, to give a very rough example, if Congress had passed a 20 percent ITC in 2009, 10 percent in 2010, it would have cost the Treasury about $300 billion. Essentially, the Treasury would have picked up 20 percent of the cost of all of these investments if done this past year, and half that amount next year.

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A Blast From the Past: Global Cooling

I just finished rereading, "The Weather Conspiracy: The Coming of the New Ice Age" written by the Impact Team and published in 1977.  The members of the impact team are given, but after an Internet search of three names and not a single useful hit.  The book captures exaggerated concerns of global cooling by a fear mongering media.  They quote a few papers and discuss the extreme outcomes, suggesting that these are the likely.  They conclude that we are headed for a new ice age with catastrophic consequences for civilization: war, famine and pestilence.  A typical passage reads,

America and the rest of the Northern Hemisphere are returning to normal weather. After fifty years of unprecedentedly temperate climate, the world is returning to the more radical shifts and the cooler climate that characterized the previous eight hundred years. Many climatologists believe that since the sixties the world has been slipping toward a new ice age. The only questions in their minds are: What kind of ice age will it be, little or great? How soon will it happen?

Temperatures would only have to drop by 2.8 degrees F to plunge the world into a new ice age.  The authors provide a small list of consequences of a little ice age.

India would have a major drought every four years, and 30-50 million metric tons would be required from the world's grain reserves to prevent the death of 150 million Indians.

China would have starvation conditions every five years and need 50 million metric tons of grain for its people.

Canada would lose 50 percent of its food production, and reduce exports by 75 percent. 

The consequences of a great ice age, apparently equally likely to occur would be much greater and little or great, our descent could happen rapidly. 

The causes of global cooling are natural as well as man-made, dust from pollution blocking the warming energy of the sun.  Intriguingly, the authors mention carbon dioxide emissions as a warming mechanism that does not sufficiently offset cooling, setting up the concern of some scientists that man-made global warming may kill millions, not global cooling.

Many hot-earth men believe that global temperatures will rise by at least 3.8 degrees F by 2020, given that the volume of carbon dioxide is doubled in the next fifty years. If this happened, ships could well sail the entire Arctic Circle, and the melting of the polar ice caps could cause the sea level to rise by two hundred to four hundred feet. London and New York would vanish. So would Rome, Paris, Brussels, Antwerp, Marseille, and hundreds of other cities. Trees would grow in Alaska and Siberia; cattle would be raised on what was once tundra.

Their conclusions sound familiar.  Temperatures have warmed, but we are not underwater yet.  We are not even close to losing a major city. 

Given the more probable event, global cooling, the authors conclude,

Under coming conditions, clearly the rich countries of the world (in other words, the tiny minority) will have to make do with less food.  With the exception of the U.S., they will run a food balance-of-payments deficit that will put a big dent in their economies and cause some degree of social disruption. 

For the poor countries of the world, the implications are more ominous.  Many will starve.  This future will place an almost unbearable moral and political burden on the U.S. and its people.  We must face up to the following "unthinkable questions":

1.  How much food will we keep for ourselves?  In other words...

2.  How much are we willing to reduce our standard of living to feed others?  For example, would we all be willing to stop using our air conditioners if the energy so released would feed another 400,000 people?  Or would we rather stay cool and let them starve?

3.  Are we going to give away our food or sell it?

Who gets how much, and why?

The authors disdain for the market system is clear.  Our accumulation of wealth through markets created the problem.  We consume too much.  It does not fairly treat price as a rationing mechanism.  If food becomes scarcer, it's price would rise and we would buy less.  If food costs more and cooling reduces wealth, we will use less air conditioning (a bad example in a cooling world) and less heating as well. 

Yesterdays misreading of climate change has implications for us today.  I fear that some advocates of the theory of global warming hurt the science supporting their position by focusing on low probability extreme events to rally support for political action to curtail carbon emissions.  If ice caps don't melt, wiping out cities, devastating agriculture, and causing energy wars, science is likely to be blamed.  
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Plasma TVs: CO2 Emitting Demons or Stimulative Saints?

First, England prosecutes the Metric Martyrs, for selling veggies by the pound, then the state of New York considers a tax on sugar- laced sodas aiming to protect citizens against obesity wether they want to be thin or not, and now the EU will ban certain types of energy hogging, CO2 emitting  plasma televisions.  Fiona Macrae of Mail Online writes in an article titled, "Energy-guzzling plasma TVs will be banned in Brussels eco blitz,"

Giant energy-guzzling flatscreens are expected to be banned under legislation due to be agreed by the EU this spring.

Plasma screens have been nicknamed the '4x4s' of the living room because they use up to four times as much electricity and are responsible for up to four times as much carbon dioxide as traditional cathode ray tube sets.

The most energy intensive will be phased out under the new EU standards for minimum energy performance...

The remaining TVs of all types will have to carry energy rating labels designed to make it easy to distinguish between the best and worst performers.

The moves are part of an effort to tackle climate change by stemming the spiralling electricity consumption in households...

Families have nearly three times as many electrical appliances and gadgets as a generation ago and the amount of electricity used to power them has doubled.

The government's economic justification is that the three named activities create negative externalities in which your private transactions affect third parties, and sometimes all of mankind!  Sell veggies by the pound, and your neighbors might not ever figure out the kilo.  Drink sugary sodas, and New York taxpayers may have to pick up some of your medical costs.  And worst of all, watch a plasma television and cause the polar ice caps to melt, polar bears to drown, sea levels to rise, and perhaps eliminate humans from our planet.

Maybe, some of the externalities are real.  Maybe anthropogenic global warming does threaten to impose large costs on society, but please, don't ban plasma televisions, or any other device. 

I confess that I have more electric gadgets than I did when I was a child, and I further confess that I like them all: my leaf blower, iPod, multiple televisions, microwave, cell phone, and believe me I could go on.  In the future, I hope to have more gadgets, not less.  Just tax electricity at a little higher rate like New York is doing with sodas, and let consumers decide how best to reduce their electrical consumption. 

Let me offer an alternative theory.  Plasma televisions are not  devils, but angels, offering a much needed stimulus to the world economy.  Electricity is a complementary good, and the more plasma TVs, the more windmills, nuclear power plants, and other green forms of energy.  Jobs will be created, the economy will expand, and full employment restored.  Maybe, just maybe, we can also drink more sugary sodas, which will induce us to buy more treadmills, stationary bicycles, continuing this virtuous cycle of job creating consumption. 

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Metric Martyrs

(HT Drudge) Seinfeld brought us the Soup Nazi, now England brings us the Veggie Nazis.

David Harrison of the Telegraph.co.uk, tells the story of Janet Devers, 64. She was brought up on 13 criminal counts of selling vegetables using traditional measures such as pounds, ounces, and bowls. What a desperado! She insisted on a jury trial. The court dropped the four charges that would allow her to appear before a jury, and convicted her on eight of the remaining charges. Mr. Harrison writes,

Mrs Devers...was ordered by Thames magistrates to pay £5,000 in costs and received a criminal record after being convicted of eight charges of using imperial measures and selling vegetables by the bowl, under the Weights and Measures Act.

Not mentioned in this quote is her brother, Collin Hunt, 60, who has similar legal difficulties. But the story gets better. For whatever reason, the "police" at Weights and Measures were after Mrs. Devers and her brother. In a follow-up article, Mr. Harrison writes,

Council chiefs are to launch an independent investigation into allegations that street market inspectors were ordered to target a convicted "metric martyr" and his sister while ignoring other traders who sold goods in pounds and ounces.

As in the U.S., legal defense is expensive, and the Metric Martyr Defense Fund has been established to help Mrs. Devers and others convicted under the Weights and Measurement Act. Mrs. Devers is seeking to get her convictions overturned. Unfortunately, her brother and she are not the only victims of this abusive law. Christopher Booker, also of the Telegraph.co.uk writes,

The final goal, as Neil Herron of the Metric Martyrs Defence Fund insists, must then be a pardon for the late Steve Thoburn and the four other original "martyrs" who were found guilty in 2002...of breaking laws so ridiculous that the EU Commission has even denied they existed (but which are still on the statute book).

Good luck and best wishes from friends of freedom across the pond.

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