BrianGarst.com

Malo periculosam, libertatem quam quietam servitutem.

Economics & the Economy Archive

Saturday

27

July 2013

0

COMMENTS

When Data Misleads

Written by , Posted in Economics & the Economy

Data is important in public policy. In many situation, the right piece of information can settle a dispute, though even then it probably won’t. But sometimes data can mislead, especially if the interpreter lacks any theoretical basis upon which to judge the information.

Let me give an example. Better yet (for me), let me borrow one from Don Boudreaux, though I’ll present the information in a slightly different order.

Suppose a new business opens in the area, let’s call it Mal Wart, and it employs mostly low skilled labor and pays low wages. Sometime after the business opens, a new survey finds that average wages in the area have declined. Has Mal Wart made the people around it worse off?

Looking just at the data I described, many would say yes. But they would most likely be wrong. Consider Boudreaux’s example:

Suppose that only just yesterday did some clever entrepreneur – seeking only to increase his own material wealth – figure out a way to profitably employ workers each of whom contributes (say) $10.00 or less per hour to any employers’ revenues.  Until this entrepreneur – let’s call him Wally Marsh – devised this new business plan (or technological breakthrough), no employer in the United States has ever before found it profitable to employ any workers whose productivities are so low.

Profit-grabbing capitalist that he is, Wally implements his innovation and hires scores of low-skilled workers, paying each of these workers wages commensurate with their productivity, with none of these newly hired workers being paid more than $10 per hour.

What happens to the average and median wage rate in the U.S. as a result of Wally’s innovation?  (Answer: it falls.  Before Wally’s innovation, only workers who produced $10.01 per hour or more were employed; no worker, therefore, was paid an hourly wage less than $10.01.)

The data in this case is not wrong, but realizing what it measures and what it does not is crucial to properly interpreting the information. A person with a theoretical foundation in economics is likely to properly see what the data measures and means than a person without such a foundation. This is why theory matters and not everything can easily be reduced to a simple empirical test.

Boudreaux’s post brought to mind another good example of frequently misinterpreted data involving income mobility. This video from LearnLiberty explains:

 

Saturday

13

July 2013

3

COMMENTS

DC Council to the Poor: Screw You!

Written by , Posted in Big Government, Economics & the Economy, Government Meddling, Labor Unions

The unemployment rate in Washington DC is 8.5%, a point higher than the national average. Compared to the rest of the nation, the District is poverty and crime-ridden. Given these facts, you’d think the DC Council would welcome the nation’s largest employer to the area. But that’s failing to take into account the fact that DC politicians are reactionary economic illiterates.

D.C. lawmakers gave final approval Wednesday to a bill requiring some large retailers to pay their employees a 50 percent premium over the city’s minimum wage, a day after Wal-Mart warned that the law would jeopardize its plans in the city.

The retail giant had linked the future of at least three planned stores in the District to the proposal. But its ultimatum did not change any legislators’ minds. The 8 to 5 roll call matched the outcome of an earlier vote on the matter, taken before Wal-Mart’s warning.

The law, which unconstitutionally targets specific businesses with different rules (in a handout to Big Labor, it exempts unionized shops that would otherwise fit the criteria), amounts to a big middle finger aimed at the District’s poor.

Not only are politicians making it harder for them to find work, but in doing their best to keep Wal-Mart out they are reducing access to lower priced goods that could raise their standard of living. Even left-wing economist Jason Furman, appointed by Obama to be Chairman of the Council of Economic Advisors, understands the tremendous impact Wal-Mart has had in helping America’s poor:

Wal-Mart’s low prices help to increase real wages for the 120 million Americans employed in other sectors of the economy. And the company itself does not appear to pay lower wages or benefits than similar companies, or to cause substantially lower wages in the retail sector…

[T]o the degree the anti-Wal-Mart campaign slows or halts the spread of Wal-Mart to new areas, it will lead to higher prices that disproportionately harm lower-income families…

By acting in the interests of its shareholders, Wal-Mart has innovated and expanded competition, resulting in huge benefits for the American middle class and even proportionately larger benefits for moderate-income Americans.

Tuesday

12

February 2013

0

COMMENTS

Friday

1

February 2013

0

COMMENTS

No, Defense Spending Decline Not Behind Lackluster Economy

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

President Obama has found a new way to blame Republicans for his poor economic record. The government released preliminary GDP numbers for the 4th quarter of last year, and they were not good. The popular spin coming from the White House, his ideological echo chamber and the sycophantic media has been that government spending cuts, namely to defense, are to blame. In other words, it’s the fault of those wascally Wepublicans.

The claims being made are partly true, in that reducing government spending will, at least in the short run, reduce GDP. But that’s a tautology – GDP is defined to produce that result. It tells us nothing about the drivers of economic growth. Where the claims go wrong is in asserting that the same relationship exists between government spending and actual economic health. GDP is just a tool for measuring the economy, and it’s not even the best one. Dan Mitchell explains:

GDP numbers only measure how we spend or allocate our national income. It’s a very indirect way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub.

Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable?

The same principle is true – or should be true – for a country.

That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income.

These numbers are much better gauges of national prosperity.

Consider this. We are being asked to believe that the US economy took a hit because the government spent less on defense. For that to be true, we must accept the flip side that defense spending grows the economy? But is that true? Certainly defense spending, up to a debatable level and excluding waste, has value to society in that it protects us from harm. But that’s not the same as making us wealthier. In fact, we accept that we are sacrificing a bit of wealth to pay for security. But let’s not pretend there’s no sacrifice at all – that we wouldn’t have an even higher standard of living if government wasn’t taking that money in the first place. Of course we would. Every tank is a neighborhood never built, or an office building that couldn’t be funded, or a business that wasn’t be expanded.

Put another way, if defense spending grew the economy, then all it would ever take to end a recession is to increase defense spending. That’s essentially the Keynesian stimulus argument, though for ideological reasons they typically prefer other forms of government spending than defense. But that’s not how the economy works.

The point is that how we measure things can deceive us if we do not differentiate the statistical tool itself from the thing it is measuring. The economy does not grow because government redistributes wealth, it grows when capital accumulated through savings and investment is put to use.

Thursday

24

January 2013

0

COMMENTS

Economic Luddites Blame Obama Economy On Technology

Written by , Posted in Economics & the Economy

Many of us mocked the president when he blamed ATM’s for his poor economy. Now, a pair of Luddites at the AP are working hard to continue the attack on technology as the source of our economic ills, conveniently distracting attention away from the failed policies of the president.

They write that, “The uncomfortable truth is technology is killing jobs with the help of ordinary consumers by enabling them to quickly do tasks that workers used to do full time, for salaries.” The horror! They go on to make sure you understand that your greedy and selfish desire to save time and live a more prosperous life are to blame:

Use a self-checkout lane at the supermarket or drugstore? A worker behind a cash register used to do that.

Buy clothes without visiting a store? You’ve taken work from a salesman.

Click “accept” in an email invitation to attend a meeting? You’ve pushed an office assistant closer to unemployment.

Book your vacation using an online program? You’ve helped lay off a travel agent. Perhaps at American Express Co., which announced this month that it plans to cut 5,400 jobs, mainly in its travel business, as more of its customers shift to online portals to plan trips.

Software is picking out worrisome blots in medical scans, running trains without conductors, driving cars without drivers, spotting profits in stocks trades in milliseconds, analyzing Twitter traffic to tell where to sell certain snacks, sifting through documents for evidence in court cases, recording power usage beamed from digital utility meters at millions of homes, and sorting returned library books.

You see, all your newfangled technology has eliminated jobs! Don’t you feel bad yet?

Of course, if the AP really believes that hiring expensive workers to do what can be done cheaper and better by technology is the way to promote a strong economy, then they should lead by example. I have some suggestions:

  1. Require employees to use a pulled rickshaw instead of cars. How can they morally justify driving when they are depriving someone the opportunity to pull them around wherever they want to go?

    Backward is forward!

  2. Burn all company computers, replace them with typewriters and hire typists to take dictation. It’s not fair for writers to also transcribe their words, depriving someone else of the opportunity to do so. Nor should they benefit from modern conveniences like word processors and spellcheck, which reduce the amount of editors needed.
  3. Ban the pushing of elevator buttons by employees and instead hire operators. It’s unconscionable to take advantage of technology that allows riders to operate elevators when it used to require someone standing on an elevator all day pulling a lever.
  4. Speaking of which, every door must have its own doorman and bathroom its own attendant. Want to open a door or wipe your butt for yourself? You must hate jobs!

On and on it could go. The list of activities made easier, and jobs made obsolete, by technology is nearly endless. And contrary to the new economic luddites, it’s neither new nor alarming.

Great leaps forward in prosperity and standards of living come on the heels of massively disruptive technological advances. It once took the vast majority of available labor just to feed the nation’s population. When technology made farming less labor intensive, the work force was freed up to produce in new ways. The industrial revolution was the result. As advances in manufacturing have over time continuously allowed us to produce more with less, labor has been freed up to engage in other activities. The information revolution soon followed.

But from now on, we are lead to believe, those freed from one task by technology have no other task to tend to. History stops today. There is nothing left to do. We’ve built everything. Invented everything. Provided every service. Created every piece of entertainment.

Does anyone really believe that?

When all is said and done, the only real “evidence” provided in the piece for the end-of-all-new-jobs thesis is that job growth is slow at present. But might not there be other explanations? Just spitballing here, but how about an onerous and recently passed health care law? A cumbersome and destructive tax code? A critical mass of costly regulations?

Or we can just blame the robots.

Saturday

5

January 2013

4

COMMENTS

Cash For Clunkers – As Bad For The Environment As It Was The Economy

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

The economic failure of the Cash for Clunkers program are well understood, despite the administrations insistence it would function as economic stimulus. But the administration also trumpeted environmental concerns as a reason for instituting the subsidy program. So how did it do on that front? Miserably:

According to E Magazine, the “Clunkers” program, which is officially known as the Car Allowance Rebates System (CARS), produced tons of unnecessary waste while doing little to curb greenhouse gas emissions.

The program’s first mistake seems to have been its focus on car shredding, instead of car recycling. With 690,000 vehicles traded in, that’s a pretty big mistake.

According to the Automotive Recyclers Association (ARA), automobiles are almost completely recyclable, down to their engine oil and brake fluid. But many of the “Cash for Clunkers” cars were never sent to recycling facilities. The agency reports that the cars’ engines were instead destroyed by federal mandate, in order to prevent dealers from illicitly reselling the vehicles later.

The remaining parts of each car could then be put up for auction, but program guidelines also required that after 180 days, no matter how much of the car was left, the parts would be sent to a junkyard and shredded.

Shredding vehicles results in its own environmental nightmare. For each ton of metal produced by a shredding facility, roughly 500 pounds of “shredding residue” is also produced, which includes polyurethane foams, metal oxides, glass and dirt. All totaled, about 4.5 million tons of that residue is already produced on average every year. Where does it go? Right into a landfill.

Another terrific showing by central planners.

Wednesday

5

December 2012

0

COMMENTS

An Unconvincing Case for Protectionism

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

A few weeks ago, Rep. Tom Rooney took to the Daily Caller to make “a conservative case for sugar tariffs.” He failed in my view, but he did succeed in proving my recent point that bringing home the bacon and handing out political “gifts” is a bipartisan disorder.

Rep.  Rooney makes the following arguments, as I understand it:

1) All countries use protectionist and interventionist policies in the sugar market – therefore we must too.
2) Brazil has captured a lot of the market and will drive out US producers with low prices if they don’t receive government assistance.
3) Jobs will be lost and prices will rise if that assistance isn’t provided.

He goes on to say that government assistance shouldn’t be too high, nor should it involve dictating business practices. That’s not enough; it shouldn’t exist at all. I agree with Milton Friedman’s view that even unilateral free trade is a better option than meeting subsidies with subsidies and tariffs with tariffs. If Brazil wants to “plow another $1 trillion into its sugar market over the next few decades,” we should let them. It’s money straight from their taxpayers pockets and into the hands of US consumers. It harms them, not us. As for the 142,000 US jobs supposedly on the line, it’s not either/or. The choice is not between subsidizing US sugar or seeing those people forced into unemployment. Their labor can be used elsewhere, and when combined with lower sugar prices than we would have otherwise seen if not for Brazilian subsidies, the net result is greater production for us. We get cheap sugar and we get whatever else those 142,000 people are able to produce. The only real loser in this equation is the Brazilian taxpayer.

Sure, the decline of US sugar producers would be disruptive to the people whose jobs were lost, but I think the social safety net (more like hammock these days) is more than big enough to handle it. And disruptions happen in all markets in a competitive system. Whether or not its because another firm has developed a more efficient business model or because of foreign subsidies doesn’t really make any difference, so long as it’s not our taxpayer doing the subsidizing. The real issue is that bad government policy has so encumbered the market that absorption of displaced workers is difficult, but more taxpayer handouts are not the solution to that problem.

Rooney repeatedly warns of a Brazilian led OPEC for sugar, presumably to explain his seemingly contradictory (amazingly, I find myself in agreement with Think Progress of all places) concern that Brazilian control over the market will mean both lower prices (to drive out American producers) and higher prices (to hurt US consumers), but OPEC strikes me as a bad comparison. An oil cartel can be effective (somewhat) at manipulating prices because oil production is necessarily concentrated in places where oil can be found, and the major national producers are few. If you have no oil deposits, it doesn’t matter how high and enticing prices get, you can’t join the market. It’s true that sugar cane cannot grow just anywhere, but the barriers to entry are not near so significant as oil. Non-Brazilian producers can simply increase production to offset any attempts by Brazil to artificially raise prices. In other words, even if US producers dwindle because Brazil is able to charge below-market prices thanks to subsidies, any later attempt to raise prices and charge above-market rates after capturing a dominant position would result in the return of US producers, or other new entrants to the market.

There is also a national defense issue with regard to oil that doesn’t exist for sugar. Interruption in the supply of sugar does not pose the same concerns as interruptions in the supply of oil.

What I think it comes down to is whether we adopt the protectionist view that within all arbitrarily designated political borders there must be complete self-sufficiency, or we instead allow ourselves to be blessed by the productive advantages brought about by global trade. Free trade is best, to be sure, but if the only available choices are between letting others foolishly distort their markets or joining them and doing the same to ours, I think it’s an easy decision which path to follow.

Saturday

24

November 2012

1

COMMENTS

Canadians Turn to Private Care as Government Fails

Written by , Posted in Big Government, Economics & the Economy, Free Markets, Health Care, Welfare & Entitlements

Private markets can be their own worst enemy. Rather than force people to deal with the consequences of bad policy choices, they provide a relief valve for ill-considered socialist schemes. Such is the case in Canada right now, as patients are increasingly forced to seek refuge from their “universal” health care debacle.

Surgery wait times for deadly ovarian, cervical and breast cancers in Quebec are three times longer than government benchmarks, leading some desperate patients to shop around for an operating room.
But that’s a waste of time, doctors say, since the problem is spread across Quebec hospitals. And doctors are refusing to accept new patients quickly because they can’t treat them, health advocates say.

…The worst cases are gynecological cancers, experts say, because usually such a cancer has already spread by the time it is detected. Instead of four weeks from diagnosis to surgery, patients are waiting as long as three months to have cancerous growths removed.

“It’s a crisis for Quebec women,” said Lucy Gilbert, director of gynecological oncology and the gynecologic cancer multi-disciplinary team at the McGill University Health Centre. Her team has had access to operating rooms only two days a week for the past year, with dozens of patients having surgeries postponed week after week.

…One worried patient, a mother of five children who waited three months for surgery for invasive breast cancer, said she is worried about the effects of such a long wait. After surgery, she paid $800 for a bone scan in a private clinic rather than wait five months for a scan at the Jewish General Hospital.

There are always costs. You cannot legislate them away. Trying to do so through price controls just forces them to manifest elsewhere. In this case, the cost is increased wait times, which when it comes to health equates to increased mortality rates. The reason is simple: when you remove the market signals generated by free floating prices, you lose the most effective means known to man for allocating resources. A bunch of government bureaucrats cannot anticipate demand and allocate the appropriate resources to meet it as well as the invisible hand.

Wednesday

7

November 2012

1

COMMENTS

Election Kicks Can Down the Road, And What Republicans Can Learn

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

The public voted for status quo. President Obama was reelected, joining only Woodrow Wilson on the list of President’s elected to a second term with a lower electoral college total than their first. The Senate stayed Democratic, the House Republican, and both by very similar margins as before. In other words, nothing changed. And Hester Peirce of the Mercatus Center points out, even a party flip for either branch still would have left much of the policy-making apparatus on auto pilot and unresponsive to public input – that of the bureaucracy. But I digress. The point is that the public decidedly rejected changing course, despite mostly believing that things are “seriously off on the wrong track.”

In terms of America’s great fiscal challenges, no real solutions will be in the offing. More than likely we can expect more temporary extensions of most current tax rates, with Republicans caving and foolishing offering more “revenue” through ill-conceived class-warfare tax hikes. And let’s be clear, class warfare was a big winner of the election. It sustained the President’s campaign and elected far left radical Elizabeth Warren to the Senate. Exit polls further show an electorate that has bought the class warfare rhetoric, with 47% wanting to increase taxes on those with incomes over $250,000 (plus 13% wanting to raise them on everyone), 55% believing the US economic system “favors the wealthy,” and 53% saying that Romney’s policies would generally favor the “rich.”

These numbers suggest failure on Romney’s part to win the key arguments of the campaign. In a bit of good news, 51% says that “Government is doing too many things better left to businesses and individuals,” which represents a change from 2008 when a majority wanted government to do more. But 24% of those who think government is doing too much voted for Obama, which is a massive failure of the Romney campaign and the Republican party. That they still cannot more easily and decisively separate themselves in the eyes of voters from the Democrats on the size of government question is inexcusable. Romney’s inability to sufficiently connect with the electorate was also confirmed by the degree to which his voters expressed their support: Obama won more voters who said they strongly favored their candidate, while Romney won more of those who had reservations, or simply disliked the other candidates. Romney voters, in other words, were more against Obama than they were for Romney.

It’s worth pointing out that, despite a majority at one point saying that want to raise taxes either on everyone or just the wealthy, 63% also said that taxes should not be raised to help cut the budget deficit. This apparent contradiction in the numbers indicates that some of the tax hiking support cited earlier is “soft,” and is certainly welcome news for those of us seeking to limit the growth of government.

All of this suggests two things: 1) Advocates for limited government have a lot of work to do in combating leftist class warfare attacks and educating the public, 2) The Republican party has work left to do when it comes to convincing small government voters that the GOP is a welcome home again, and furthermore in identifying candidates capable of accomplishing  number 1.

With the President likely to renew pursuit of his economically destructive agenda, the 2016 landscape should favor Republicans. It would be both to their benefit, and those who support limited government, to nominate someone capable of connecting where Romney failed, and educating where Romney could not. In other words, it should be Marco Rubio’s election to lose.

Monday

5

November 2012

0

COMMENTS

If Obama Beat Hoover, So What?

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

You know your record as President is abysmal when supporters are reduced to touting how much better you’ve done than Herbert Hoover. But that’s where Obama is at, apparently, as historian Robert McElvaine took to the New York Times a few days ago to make exactly that case. Seeking to combat unfavorable comparisons to the pace of recovery under Obama with that of other Presidents, such as Reagan or Clinton, McElvaine dismissed them all us irrelevant and asserted that the only comparison that matters is between Obama and Hoover. And on that measure, we are told that Obama passes with flying colors!

He makes two points that I dispute: 1) That the only meaningful comparison for the recession that preceded Obama’s tenure is the crash that lead to the Great Depression, and 2) That the comparison proves Obama has done a good job on the economy. Neither is true.

McElvaine asserts that, “the most appropriate presidential term to use as a benchmark is Herbert Hoover’s. He was the last president to face an economic crisis on a scale similar to the one that confronted Obama when he took office.” But while he makes a case for comparing the two, he doesn’t explain what makes the other comparisons less valid. In particular, there is a lot that can be learned by comparing the current recovery, such that it is, to that seen under Reagan, because a case can equally be made that the early 80’s recession was as bad or worse than 2008-2009.

Both the 2008 and early 80’s recession were financially caused. Unemployment was also similar when each president took office,  at 7.5% under Reagan versus 7.8% under Obama, though joblessness peaked higher in 1982 than 2009, and Reagan had the added challenge of dealing with double digit inflation. Yet despite this Reagan did a much better job turning things around, and the economy grew an average of 5.6 percent for the first three years following the bottom of the recession he inherited, versus only 2.2 percent growth under Obama in the same time frame.

The similarity between these recessions makes the comparison valid.

But even if we accept the Hoover comparison as decisive, it doesn’t prove what McElvaine suggests. No where in his argument does he point to specific policy choices and explain how they produced the results he highlights. Sure, he mentions the stimulus bill, but doesn’t provide any actual evidence that it helped. It didn’t, as explained in this video. In other words, his argument fails to account for the very plausible explanation that Obama was merely less bad than Hoover. That Obama’s policies might not have done quite as much damage as Hoover, another big spending government interventionist, does not suggest he should be praised, merely that we could have done worse, if ever so slightly. But surely we can still do better.

Newer Entries →
← Older Entries

About Me

profileI serve as Vice President of the Center for Freedom and Prosperity, a non-profit think tank dedicated to preserving tax competition and free markets. This site features my personal views, which are not reflective of CF&P.

Search Site

Categories

Archives