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Economics & the Economy Archive

Thursday

7

January 2016

0

COMMENTS

Why Just Stop With Tariffs on China?

Written by , Posted in Economics & the Economy, Free Markets

Noted scholar and respected intellectual Donald Trump has unveiled another part of his plan to “make America great again:”

Donald J. Trump said he would favor a 45 percent tariff on Chinese exports to the United States, proposing the idea during a wide-ranging meeting with members of the editorial board of The New York Times.

…“I would tax China on products coming in,” Mr. Trump said. “I would do a tariff, yes — and they do it to us.”

Mr. Trump added that he’s “a free trader,” but that “it’s got to be reasonably fair.”

“I would do a tax. and the tax, let me tell you what the tax should be … the tax should be 45 percent,” Mr. Trump said.

Now, I know I’m just a simpleton, but something strikes me as off about this plan. Perhaps The Donald can help a poor confused sap make sense of all this.

Presuming he believes this tariff on goods coming in from China will benefit Americans, why does he not propose similar measures on goods from other countries?

But why stop there. If a tariff on goods coming into the U.S. is good for those within the U.S., then so too must a tariff on goods coming into a state be good for those within that state. Should Florida, then, tax goods made in Texas at 45%, or better yet, do so for goods made in any state other than Florida?

It seems to me that Donald Trump believes taxing goods when they cross borders makes us better off, so I’m having a hard time understanding why he isn’t compassionate enough to want to improve our lot even more by implementing that policy across the board. I mean, it’s all well and good to “make America great again,” but why not make it SUPER DUPER great? Hmm?

Wednesday

11

November 2015

0

COMMENTS

Market Power

Written by , Posted in Economics & the Economy, Free Markets

The Week has a great story (hat-tip: Alex Tabarrok) about how Feeding America, which runs the largest network of food banks and is the third largest non-profit in the U.S., drastically improved its operations by adopting a market approach to solve its food distribution problem.

Supermarkets usually donate food directly to their local food bank. But large food manufacturers often donate to Feeding America headquarters, which then allocates this food across its nationwide network of food banks…

Before 2005, Feeding America allocated food centrally, and according to its rather subjective perception of what food banks needed. Headquarters would call up the food banks in a priority order and offer them a truckload of food. Bizarrely, all food was treated more or less equally, irrespective of its nutritional content. A pound of chicken was the same as a pound of french fries. If the food bank accepted the load, it paid the transportation costs and had the truck sent to them. If the food bank refused, Feeding America would judge this food bank as having lower need and push it down the priority list. Unsurprisingly, food banks went out of their way to avoid refusing food loads — even if they were already stocked with that particular food.

It shouldn’t be difficult to see the warped incentive structure and information shortfalls that would plague such a system. Indeed, the author notes:

This Soviet-style system was hugely inefficient. Some urban food banks had great access to local food donations and often ended up with a surplus of food. A lot of food rotted in places where it was not needed, while many shelves in other food banks stood empty. Feeding America simply knew too little about what their food banks needed on a given day.

After seeking the advice of four University of Chicago economists, Feeding America adopted an internal price and auction system to take advantage of the vastly superior ability of price signals to transmit information.

Here’s how the new system works:

Every day, each food bank is allocated a pot of fiat currency called “shares.” Food banks in areas with bigger populations and more poverty receive larger numbers of shares. Twice a day, they can use their shares to bid online on any of the 30 to 40 truckloads of food that were donated directly to Feeding America. The winners of the auction pay for the truckloads with their shares.

Then, all the shares spent on a particular day are reallocated back to food banks at midnight. That means that food banks that did not spend their shares on a particular day would end up with more shares and thus a greater ability to bid the next day. In this way, the system has built-in fairness: If a large food bank could afford to spend a fortune on a truck of frozen chicken, its shares would show up on the balance of smaller food banks the next day. Moreover, neighboring food banks can now team up to bid jointly to reduce their transport costs.

Note everyone was thrilled with the idea, however:

Initially, there was plenty of resistance. As one food bank director told Canice Prendergast, an economist advising Feeding America, “I am a socialist. That’s why I run a food bank. I don’t believe in markets. I’m not saying I won’t listen, but I am against this.”

But the Chicago economists managed to design a market that worked even for participants who did not believe in it. Within half a year of the auction system being introduced, 97 percent of food banks won at least one load, and the amount of food allocated from Feeding America’s headquarters rose by over 35 percent, to the delight of volunteers and donors.

I can’t help but wish for some follow-up with Ms. Prendergast to see if her experience with the market system, and its superiority over the prior approach, has caused her to rethink her preference for central planning over markets. I argue in my column at EveryJoe this week that greater exposure to functioning markets, such as those popular in the emerging sharing economy, poses a threat to the political left. So her answer could help determine if I’m right.

Thursday

8

October 2015

0

COMMENTS

Getting Better All The Time

Written by , Posted in Economics & the Economy, Free Markets

You wouldn’t know it from the popularity of Thomas Piketty’s anti-capitalism treatise, or the Pope’s routine railing against free markets, but the world is getting ever more prosperous. The dramatic decline in global poverty in the last few decades is nothing short of remarkable.

According to a recent World Bank report, extreme poverty is expected to fall below 10% by the end of 2015, which will be a first in human history. I mentioned a few other improvements in a recent EveryJoe column chastising the Pope for spreading economic ignorance:

Across a variety of metrics, life continues to get better and better. Extreme poverty – measuring those living on $2 per day or less – has been cut in half since 1981 and will be all but eliminated by 2030. Global GDP per person has never been higher. Pick a measure of human wellbeing and it’s virtually the same story over and over again: life expectancy is up, infant mortality rates have plummeted, women are better represented in governments than ever before, etc. etc.

The world is simply not the horrible place the pope describes. It is better than it ever has been and we have precisely those institutions that he savages to thank for it.

Over at Cato, Ian Vásquez ties the decline in global poverty to the spread of economic freedom:

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Using updated methodology, the World Bank recalculated poverty figures back to 1990. The new data track closely with previous Bank figures, which I use in the graph to show the fall in poverty since the early 1980s when 43 percent of the world’s population was extremely poor…The drop in poverty also coincides with a significant increase in global economic freedom, beginning with China’s reforms some 35 years ago and the globalization that followed the collapse of central planning in the late 1980s and early 1990s.

Much more could be said on that point, but there are any number of examples demonstrated the superiority of market freedom when it comes to producing wealth (Argentina versus Chile, Venezuela versus Singapore, etc.). Yet the more things get better, the more we seem to worry that they’re not. As the totality of social problems decreases, we devote more energy to those that remain. Which in many ways is healthy. A benefit of being better off overall is that we need not tolerate things which we had no choice but to accept in the past.

But we must be careful not to lose perspective. Exaggerating current problems can lead to poor policy choices if it causes us to disregard the means by which we achieved our current prosperity in the first place.

Saturday

15

August 2015

0

COMMENTS

Third Time Won’t Be the Charm in Greece

Written by , Posted in Big Government, Economics & the Economy, Foreign Affairs & Policy, Free Markets, Taxes

Greece is getting bailed out for the third time in just five years, proving yet again that lessons from political mistakes are rarely heeded. As I wrote last month in a column for EveryJoe:

The simple explanation is that Greece tried socialism and it predictably failed, as socialism is wont to do… More specifically, Greece has saddled its economy and its people with heavy taxes to fund a corrupt government weighed down by excessive pensions for their bloated workforce. A byzantine and oppressive regulatory system further stifles growth and prevents the economy from keeping up.

To put some numbers on the problem, Greek debt exceeds 177 percent of its GDP. That means Greeks would have to work almost two years to produce an equivalent amount of goods and services. It’s unfunded future liabilities, which includes generous pensions, tops 875 percent of GDP! Its yearly spending on pensions alone accounts for a whopping 16 percent of Greece’s GDP, and overall the government spends upwards of 50 percent.

If all this proves that Greece is suicidal, it was its entrance into the European Union that gave it the rope needed to hang itself. When it joined the EU, Greece suddenly had access to levels of credit it never had before thanks to the implicit backing of stronger EU economies like Germany. Creditors determined – correctly, apparently – that if Greece couldn’t pay its debt then they would be bailed out by the larger economies. And like a kid that got his hands on his parent’s credit card for the first time, Greece went nuts. In economic terms that’s called a moral hazard, and the latest bailout has only reinforced it.

This week’s announcement of yet another bailout will only exacerbate the moral hazard, and demonstrates the continued folly of the EU’s grand experiment with a common currency without a common fiscal policy.

Continuing to prop up Greece’s bloated government will not solve the problem. There are no good solutions, but the least bad option is for them to go bankrupt and solve the root of their problem, which is excessive government spending.

Instead, Germany and the rich EU nations are offering yet another loan to the demonstrably irresponsible, on condition that they raise taxes and cut spending. Unfortunately, only one of those conditions will help while the other will prove counterproductive. Leftist bleating about ‘austerity’ conflates tax hikes with spending cuts, but the former is bad for growth and saps the political will for belt tightening, while the latter is a proven path toward fiscal solvency.

What Greece needs is to tear down its bloated bureaucracy and insane regulatory regime, but that won’t happen so long as the EU continues acting as enabler.

Saturday

27

December 2014

0

COMMENTS

Perhaps the Most Important Issue for the New Congress to Get Right

Written by , Posted in Big Government, Economics & the Economy, Liberty & Limited Government, Taxes, Waste & Government Reform

My column this week at EveryJoe argues the need for reform at CBO and JCT. It may seem like inside baseball type stuff, but it is critically important if we ever want to be able to shrink government.

Imagine you were participating for years in a high stakes contest that was consistently rigged in favor of your opponent. Specifically, the contest hinges heavily on the verdict of third-party judges that claim neutrality, but in fact choose to interpret the rules in a way that tilts the field in favor of the opposition.

Now, image you have the opportunity to replace those judges with new ones, as well as to make their deliberations more transparent and accountable. Would you take advantage and replace the judges, even if the opposition cried foul? The answer to this question may seem obvious, but for Congressional Republicans it’s not just a hypothetical, and they are pondering once again making the stupid choice to accept the status quo.

The organizations represented by the biased judges in this scenario are the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), which score policy proposals and predict the impact of legislation on the economy. They’ve typically held tremendous power over what does and does not make it into law, and for years have been actively hostile to the limited government agenda.

With current CBO Director Douglas Elmendorf’s term about to expire, Republicans not only have the power to name a better replacement, but also the opportunity to make some much needed rule changes that will ensure a fairer, more accurate, and more accountable legislative scoring system.

You can read the rest here.

Since I wrote the piece, news has leaked that Republicans intend to replace Elmendorf. This is good news, but it’s only a start. As the article explains, much more needs to be changed than just the man at the top. This Washington Examiner editorial also makes the case for moving toward accurate scoring.

Saturday

27

December 2014

0

COMMENTS

Critics, Not Uber, Should Apologize

Written by , Posted in Economics & the Economy

I recently sent the following letter to the Washington Post:

To the Editor:

Many reacted with disgust to the story about Uber’s use of surge-pricing during the recent hostage taking in Sydney [“Uber backtracks after jacking up prices during Sydney hostage crisis”]. Yet if actions are to be judged by outcomes rather than intentions, it is these critics and not Uber who should be forced to apologize.

When catastrophic events happen and people desperately require food, water, batteries, or transportation, higher prices encourage more suppliers to put themselves into danger and meet critical needs. Uber’s surge-pricing, in other words, encouraged drivers to help people escape the danger area by providing the extra incentive necessary to justify putting themselves in jeopardy.

Moral preening that results in rules to cap prices in times of emergency deny those most in need of a good or service precisely that which could save their life. Uber may be guilty of a callous disregard for the delicate sensibilities of those never quite comfortable with the functioning of a free market, but at least they don’t put the preservation of an emotionally-driven moral comfort zone above the welfare of their fellows.

Brian Garst
Director of Government Affairs
Center for Freedom & Prosperity

Sunday

5

October 2014

0

COMMENTS

Minimum Wage Follies

Written by , Posted in Economics & the Economy, Free Markets

The great Krugtron the Invincible argues the minimum wage can be increased without much consequence. He says there’s “hardly any cost to raising it,” and that “we can raise these wages without losing lots of jobs.” Notice the weasel language. We can raise it without losing “lots” of jobs, but regardless of what he subjectively considers to reach the “lots of jobs” threshold, there will unarguably be a lose of some jobs.

Bringing in some data, Antony Davies at the Mercatus Center demonstrates that as relative minimum wages have increased, so to has unemployment rates for those with anything less than a college diploma.

Min wage vs Unemployment by edu

So Krugman’s job is safe, but plenty of those poor folks he claims to champion will feel the warm, fuzzy benefits of his proposal all the way to the unemployment line.

In the latest episode of Hotnomics, host Emerald Robinson looks closer at the numbers and lays out the evidence against raising the minimum wage.

Thursday

18

September 2014

0

COMMENTS

Is Government Threat of Punishment Keeping Private Universities from Cutting Tuition?

Written by , Posted in Big Government, Economics & the Economy, Education

Federal policies unquestionably deserve some blame for skyrocketing tuition costs. Washington subsidizes student borrowing, and colleges in turn raise prices to capture federal dollars. Higher prices put pressure on Washington to increase subsidies and the cycle repeats.

But there are obviously other forces at work as well. In a typical market you would expect competition to drive prices down, for instance. However, cutting prices doesn’t have the expected effect. Ike Brannon explains:

[W]hy don’t private colleges simply reduce tuition and reap the benefits? Indeed, a few colleges have done precisely that, and have been rewarded with a sharp spike in applicants the first year or two afterwards.

However, the gains from such a tuition reduction are short-lived: the typical pattern from a unilateral price cut is that by the third year the market has forgotten the gauzy rhetoric behind the price reduction and perceives the cut-rate tuition as an indicator of an inferior good, and applications decline.

Colleges in this way act as a Veblen good, meaning demand is proportional to price, rather than inversely proportional as we would expect from the law of supply and demand. Colleges with higher tuition are perceived as more prestigious and of higher quality and afford their alumni bragging rights. Thus, slicing tuition in a vacuum can reduce demand.

But one college president proposed a solution that would benefit consumers. Unfortunately, the government sprung to action and threatened him with legal repercussions:

Private colleges can cut tuition and avoid such a death spiral, but only if they do so in concert. However, the specter of a few dozen private colleges organizing to reduce prices — which might seem like an unmitigated good to parents — risks the ire of the Justice Department, which launched an investigation when a college president suggested such an idea at a public conference. College presidents don’t like being told by an officer of the government that they’re risking jail time, and any nascent discussions quickly ceased.

The government has criminalized “price fixing” in the name of protecting consumers. But as we see here, good intentions mean little once government bureaucrats with tunnel vision are brought into the equation. Regardless of the rule’s intent, prosecutors are prepared to punish colleges for potentially agreeing to lower tuition despite both its obvious benefit to consumers and the action’s alignment with stated policy goals.

Government policies helped create the problem of exorbitant tuition costs, and now it is actively working to prevent others from solving it. To quote Ronald Reagan, “government is not the solution to our problem; government is the problem.”

Thursday

3

July 2014

0

COMMENTS

Moore Says Conservatives Losing Their Way on Taxes

Written by , Posted in Economics & the Economy, Taxes

Stephen Moore alleges that conservatives are losing their way on taxes:

A new economic plan is circulating called “Room to Grow,” and one of its premises seems to be that tax rates aren’t important for the middle class. One of its key proposals is to increase tax credits to families with children and even possibly raise tax rates on others to pay for it.

The idea here is that middle-class families with kids are facing a financial squeeze and need relief.

It’s well-meaning, but a classic misdiagnosis of the problem at hand. “This is anti–supply side policy,” fumes Larry Kudlow of CNBC. “It’s just awful growth policy.”

He’s right, and here’s why: Giving every family an extra tax break, as opposed to incentivizing businesses to invest and expand and workers to work, does nothing to grow the economy. This is pure redistribution to families with children. It is better to give a man a fish rather than to teach him to fish, in other words.

This completely misunderstands the source of the economic anxiety facing families today. For most middle-class families, the central problem is not that taxes are too high. It’s that before-tax wages and salaries are not rising — they’re even falling for many income groups — thanks to Obamanomics. On average, the median household has lost about $3,000 of purchasing power since the recession began in 2008. Half of Americans think we are still in recession. The middle class is getting squeezed because the recovery is so feeble and jobs are so scarce, not because of tax increases.

Moore is exactly right. I haven’t looked through all the other policy proposals in YG Network’s “Room to Grow” – though as John Tamny points out in another eloquent take-down of its shortcomings, David Brooks loves it so presumably I will not – but on the question of taxes and economic growth they have failed to diagnose the problem for the reasons Moore mentions. This malady in conservative tax thought can even be traced back to the Bush administration, where Keynesian assumptions were embraced in 2001 with “tax rebates” that failed just as thoroughly to “stimulate” the economy as Obama’s spending. There were, in a second attempt in 2003, better tax cuts under Bush that were more oriented toward supply-side growth, but the point is that conservatives sometimes buy into their own form of erroneous economic populism.

The point is not that taxes are not part of the problem – they certainly are – but rather that the problems caused by the tax code are its numerous disincentives for work, savings and investment. It is suppressing economic growth by punishing productive behavior. Those incentives need to be corrected, and that’s not done through gimmick handouts and a further narrowing of the tax base.

Saturday

26

April 2014

0

COMMENTS

Should We Punish Success as Inequality Fix?

Written by , Posted in Economics & the Economy, Taxes

Thomas Picketty has received a lot of attention for his attack on capitalism. His new book Capital in the Twenty-first Century has breathed new life into old Marxist critiques of capitalism, and been elevated to the status of very important book by the designated smart people™ who make it their business to decide what is important for the rest of us. It has received glowing coverage from the elite press like The New York Times and The Nation, and gushy reviews from prominent statists thanks to his assertion that capital is unfairly allocated, and that inequality poses an existential threat to democracy. In response, he calls for the admittedly utopian and impractical imposition of a global tax on wealth.

I’m not going to offer a rebuttal to Picketty. That work has already  been done. Rather, I’m here to note how his work has emboldened statists to admit their deepest policy desires – policies so radical and destructive that in the past were only whispered about at cocktail parties.

Matthew Yglesias writes at Vox that we need “confiscatory taxation” because “endlessly growing inequality can have a cancerous effect on our democracy.” Others are calling for a “maximum wage.”

There are problems with such proposals. First, inequality is largely misstated and misunderstood. Much of the data to back claims of rapidly growing inequality are being driven by statistical artifacts and cultural trends – creations of changes in the nature of households which make up the basis of inequality comparisons, or of changes in marriage patterns, or of problems with trying to take static snapshots of a dynamic economy.

Yglesias correctly notes that taxes influence behavior. Specifically, if you tax something, you get less of it. This forms the basis for his assertion that we should “apply the same principle of taxation-as-deterrence to very high levels of income.” If you start with the presumption that large incomes are unearned and without economic merit this might make sense. But if you believe that the market by-and-large distributes resources based on productivity, then this plan is quickly revealed as a tax on high levels of productivity. And with the agreed upon understanding that taxing a thing makes it less likely to occur, that means discouraging high levels of productivity. The net results is lower total output.

It is, in other words, the classic leftist plan to more evenly distribute a smaller economic pie. Or, as Margaret Thatcher would say, they would “rather that the poor were poorer, provided that the rich were less rich.”