In my previous post about the Real Economy, I said that consumption is the reason we have an economy. That sounded good at the time, but it wasn’t quite correct. The next paragraph had a clue to a somewhat better reason for having an economy:

Economically speaking, consumption is the act of using goods and services to improve the quality of our lives[.]

The “quality of our lives”…also known as happiness.

Happiness is the true reason for having an economy, and it is the true measure of all economic decisions. When you consume something produced by our economy — a cheeseburger, a plane ride, the latest MCU movie — you do it because it makes you happier. Economists know that consumption makes you happier because otherwise why would you do it?

To be clear, consumption increasing your happiness doesn’t mean you will be happy in absolute terms. If you need a new hot water heater installed in your home because your old hot water heater died, you’ll probably be unhappy about the unexpected expense. Add to that the inconvenience and the amount of time you spend dealing with it, and the whole experience will almost certainly make you less happy.

Economically speaking, however, once the old hot water heater failed, you faced a choice: Either live without hot water or pay the cost to replace the hot water heater. If you chose to replace the heater, it’s because the happiness of having hot water outweighed the unhappiness from spending so much money. You probably don’t love spending the money, but it was the least bad choice.

By this point in the post you may be thinking “I don’t remember economists talking about happiness…”

That’s because no trained academic economist would ever use a simple and obvious word like “happiness.” No, when economists want to talk about happiness, they call it utility.

The concept of utility gives economists a way of converting consumed goods and services into a single common measurement for purposes of comparison. Let’s say you go to a restaurant that has only two kinds of sandwiches on the menu, beef and chicken, and you order the beef sandwich. Economists will explain that you chose beef because the beef sandwich had more utility than the chicken sandwich.

Utility may seem like a vacuous concept, but it is necessary to explain the fact that consumers make choices about what to consume. Economists need a model to describe how consumers make those choices, and thus they posit a utility function, which is the method by which consumers evaluate which goods and services will yield the most utility when consumed. That is, consumers choose the goods and services which will make them happiest.

There is actually a unit of utility, the util, although economists have no way of actually quantifying the utility of a particular instance of consumption. They can’t say that eating a beef sandwich would have given you 8 utils whereas eating a chicken sandwich would only give you 5 utils. Utils are theoretical units which cannot be measured and which have no connection to reality. The best that economists can do is estimate the relative utility of different acts of consumption, usually by observing consumers making choices about what to consume. Your choice of the beef sandwich is a clear indication that you believe beef has more utility than chicken.

Not everyone would have made the choice you did. All other things being equal, I might have ordered the chicken sandwich, which implies that for me a chicken sandwich has more utility than a beef sandwich. My utility function is different than yours. Economists would say we have different tastes.

If it seems like the concepts of utility and taste are of little use, that’s kind of the point. They represent one of the fundamental boundaries of economic thinking. Economic theory has very little to say about utility functions (more about this later) and nothing at all to say about taste. Economists accept people’s taste as a given: “There’s no accounting for taste.”

Of course, consuming goods and services is not the only way to increase our happiness. We need family and friends and a place in society. We need to find meaning and purpose in life. Maybe even spirituality or religion. We need personal growth, autonomy, and freedom. We need love.

Economics is sometimes criticized for not taking these factors into account, but I believe that’s actually one of the strengths of economic thinking: Economic theory isn’t very useful for analyzing and thinking about these kinds of intangible issues, so while economists recognize the importance of non-economic factors in happiness, they wisely refrain from saying much about them.

On a personal level, however, I am always deeply skeptical whenever I hear someone argue that we must give up provable, measurable economic benefits in order to gain some intangible benefit. I believe our personal utility functions should work just fine on intangible factors. We can make those decisions on their own.

This post by Mark Draughn at Windypundit was originally published at Decoding Economics: Happiness and Taste

As fascinated as I am by economics, I have been frustrated by the way politicians and pundits discussed economic issues during this last election season. They just weren’t talking about economics the way I’m used to. So I’m going to try to fill that gap a little by talking about some of the economic ideas that I’ve found most useful in thinking about public policy.

To be clear, I’m not a trained professional economist. But I’ve read a lot about the subject, and as always, my goal is to not make my readers stupider for having read my posts. (Readers are invited to point out when I fail that test.)

I might as well start with the Wikipedia definition of economics:

Economics is a social science that studies the production, distribution, and consumption of goods and services.

The most important part of this definition is “consumption of goods and services.” That’s the reason we have an economy: To consume goods and services.

Don’t mistake this for some kind of vulgar consumerism, which usually refers to the selfish and frivolous consumption of goods and services at harmful levels. Economically speaking, consumption is the act of using goods and services to improve the quality of our lives, starting with consumption that provides the most basic necessities of human survival: Food, shelter, and clothing.

Of course, we all want more from life than bare survival. We don’t just want food, we want nutritious food that travels well, stores well, is easy to prepare, and tastes good. We want shelters that include waterproof roofs, climate control, internal lighting, and entertainment systems. We want clothing that lasts long, protects us well, and looks stylish. Beyond that, we want transportation, communication, medical care, drugs, and safe streets. We want sports stadiums, music venues, good books, streaming television, and video games. We want it all.

We want to live good lives. And while there’s more to the good life than consumption of goods and services, consumption helps a lot. It’s a lot easier to have personal growth and a close family when you don’t have to worry where your next meal is coming from. So we need to go through the complicated process of deciding what we want most.

In order to consume goods and services, however, we first have to produce goods and services, and that involves a lot of decision making about what to produce and how to go about setting up production — where to get resources, what kind of factory to build, how many people to employ, and so on. Finally, we somehow have to decide how to distribute these goods and services. Which consumers get to consume which goods?

In an ideal world, all these decisions would be simple: Just produce everything everybody wants and distribute it to everyone who wants it so they can consume all that they want. Problem solved.

In reality, however, it’s not that easy because of an important constraint: Scarcity. We face insurmountable limitations in natural resources, labor, and capital. And so we cannot simply produce everything that everybody wants and distribute it to everybody who wants it. We have to make decisions and tradeoffs. Thus many economists would modify the Wikipedia definition of economics to read:

Economics is a social science that studies the production, distribution, and consumption of goods and services under conditions of scarcity.

And so consumers need to prioritize and decide which goods and services are most important to consume. Producers need to decide which goods and services to produce. And collectively we have to decide how the produced goods and services will be distributed to the consumers. All these difficult decisions, including all economic public policies, are necessary because of scarcity.

It’s important to notice what’s deliberately omitted from this definition of economics. There’s no mention of money or exchange rates. Nothing about banking or finance. Nothing about stocks and bonds, financial markets, or options trading. Nothing about mutual funds, hedge funds, or venture capital. No mention of mortgages, payday loans, or credit cards.

That’s because what ultimately matters in economics is the production, distribution, and consumption of goods and services, which economists usually refer to as the real economy. It’s not that all those financial and legal entities are unimportant to the economy, but they are of secondary importance. That is, they are important only to the extent that they affect the real economy.

For example, when the sub-prime mortgage crisis hit the U.S. around 2007, it started with the failure of a bunch of complex mortgage-backed financial securities, but it ended with a crushing recession that caused people to lose their jobs and their homes. Overall, from the initial decline until production finally caught up to where it should have been, the U.S. economy produced about $10 trillion less than it could have over the life of the recession. We were collectively $10 trillion poorer, and there was no way to fix it.

On the other hand, when a hedge fund called Long Term Capital Management failed in 1998, it sent shockwaves throughout the financial markets. But thanks to some careful interventions, the problem mostly stayed in the financial markets — eventually leading to a massive bailout/liquidation — without ever spilling out into the real economy. That’s why everyone remembers the Great Recession of 2007, but only a few of us economics nerds remember the LTCM failure.

The real economy is the ground truth behind the financial side of the economy. Every story we tell about the economy has to make sense when translated to the real economy.

Consider how a car loan works: Depositors put money into the bank, and the bank lends it out to someone to buy a car. Eventually, the car buyer pays the loan back, with interest, and the interest they pay is used to pay interest to the bank’s depositors. That’s the financial story.

Now here’s the same story in the real economy: Depositors make the decision to postpone immediate consumption by saving their money in a bank rather than using it to buy consumable goods and services. Those goods and services no longer need to be produced, which frees up production resources, which is convenient because the person who took out the car loan will use that money to direct the economy to use resources to produce a new car. Then, in order to make the loan payments, the car owner has to divert money away from the consumption of goods and services. As the payments are returned to the depositors, those goods and services are available for depositors to engage in the consumption they previously postponed. And since immediate consumption is always preferrable to future consumption, the borrower has to agree to additional interest payments, thus freeing up resources that allow depositors to consume more goods and services in the future as compensation for delaying their consumption.

When thinking about confusing economic policy ideas, I’ve often found it illuminating to figure out how the real economy is affected. If you can’t make the real economy side of the story make sense, then the whole story probably doesn’t make sense either.

This post by Mark Draughn at Windypundit was originally published at Decoding Economics: The Real Economy

Question 1

Speaking of the dangers of monopolies and large companies you said,

I think it just shows one of the dangers of what happens when you concentrate so much power and so much decision-making […]

You’re a 35-year-old with no more background in economics than I have, and you’re running what you describe as a small agency. And yet the FTC has enormous power over companies that make up a significant portion of the U.S. economy. So when you were expressing concerns about “what happens when you concentrate so much power,” did that inspire any moments of self-reflection?

Question 2

In your interview, you were concerned about the dangers of monopolies:

Look, monopolies harm Americans in a whole bunch of ways. You’re absolutely right that it’s not just higher prices. It can be lower wages. It can be suppliers getting muscled out of the market or seeing their own payments drop. It can also be shortages.

Your concerns about monopolies are well-founded.^[1]Although low wages are not usually considered one of the traditional problems with monopolies. Also, low wages have nothing to do with the FTC’s stated goal of consumer protection. However, I can’t help noticing that your agency has a budget of about $425 million which ultimately comes out of the pockets of taxpayers like me. And the thing is, if I don’t like the work the FTC is doing, I have no way to stop paying the FTC to do it. I can’t just take my share of your budget and pay it to a different agency. The only place I can get FTC services is from the FTC. And that is pretty much the definition of a monopoly. Given how awful monopolies are, how much damage has the FTC’s monopoly power done to American citizens? And would you like to apologize?

Question 3

When discussing the problem of monopoly-caused shortages, you used as examples the recent shortages of baby food and Adderall. Those are interesting choices.

It’s true the baby food shortage was initially caused by supply chain issues and contamination at a major producer’s facilities, but this was exacerbated by the fact that the U.S. government makes it difficult to import baby food from other countries. To sell baby food in the U.S., foreign producers would have to submit detailed data to the FDA, meet strict U.S. labeling standards, and endure a 90-day waiting period. And they would still be subject to high import tariffs. For all these reasons, foreign baby food producers did not have a presence in U.S. markets, so they were unable to help when the shortage hit.

As for Adderall, the the Drug Enforcement Administration (DEA) imposes production caps on Schedule I and II narcotics, including Adderall, and they actually harass pharmacies and doctors who they think are selling or prescribing too much. When the demand for Adderall went up during the Covid pandemic, the DEA did not raise production limits. In fact, the DEA shut down one manufacturer of Adderall in 2022 over their supposed failure to keep good records about production.

Ms. Khan, What, if anything, are you planning to do about these federal agencies that are causing so much economic disruption? Does your answer change if I remind you that they, like your own agency, are monopolies?

Question 4

Most people in the U.S. have only one choice of cable TV/internet provider. These are very clearly monopolies and have been for decades. These monopolies exist because many local governments only permitted one cable company to serve their residents. They created the monopolies that protect cable companies from competition and allow them to rake in profits.

Many states have some form of Certificate Of Need (CON) law requiring anyone who wants to build a new hospital (or expand an existing hospital) to prove that the community needs more hospital services. Existing hospitals can challenge new CON applications, and they often have a lot of influence over the government bodies that evaluate them. This creates artificial monopoly power for hospitals that would normally compete against each other.

Similar laws produce artificial government-created monopolies for other business such as casinos, cannabis distributors, bars, and taxi companies. They are often justified in the name of protecting consumers although, as with hospital CON laws, what they really protect are the profits of politically influential businesses.

At the national level there are laws such as the infamous Jones Act of 1920, which requires that only ships that are American built, owned, and operated are allowed to carry cargo between U.S. ports. A similar Foreign Dredge Act of 1906 prevents foreign owned or operated dredging in U.S. waters — which is probably going to drive up the City of Baltimore’s cost of recovering from the collapse of the Key bridge. Enacted in the name of protecting American business, these laws actually just give some U.S. businesses monopoly power against their customers.

And so my question: Given how many monopolies are created by governments, and given how durable they are for having been enshrined in legislation, do you really feel that going after private sector monopolies is anything more than a distraction from the real problem?

This post by Mark Draughn at Windypundit was originally published at A few questions for Lina Khan

Let me explain…

It’s common to use the word “capital” to mean money, as in capitalizing a corporation, but to an economist, capital refers basically to tools. That is, capital goods are the things we make in order to improve our ability to make the final goods and services that we actually consume — or that we sell to other people to consume.

To a baker, capital is the kitchen and cooking utensils. To an airline, capital is the airplanes and all the associated airport facilities and service equipment. To a web business like Twitter, capital is the website hardware and software and the buildings used to hold it all and the people who run it.^[1]In the real world, some of that stuff may be rented, but that’s not important to where I’m going with this argument.

Because capital goods have to be produced — or purchased from a producer of capital goods — they take away from the production of final goods and services that the company sells to earn revenue. So every business tries to optimize the amount of capital it needs to achieve the desired level of production, and it has to expend effort to first produce (or spend money to buy) capital goods before it can produce the final goods and services it will sell. You have to have a kitchen before you can bake some bread, you have to buy airplanes before you can sell travel tickets, and you have to build a social media website before you can monetize traffic.

Not all capital is physical goods like factories and airplanes and server farms. Economists recognize that some capital is intangible.

Consider why a surgeon earns far more money than most other laborers: Because he knows how to perform surgery. That’s a skill he acquired by paying for an expensive education and spending years in training. He could have spent that time working at a paying job, so developing the ability to perform surgery required a sacrifice, an investment of money, time, and energy that could have been spent on other things. But having made that investment, he now profits from being able to produce an incredibly valuable service. In other words, a surgeon’s training and skill is a form of capital. It’s an example of what economists call human capital.

Because it’s intangible, human capital is a difficult concept to work with. You can see physical capital like airplanes and factories and tools, and you can trace the transactions involved in its purchase or construction, but human capital is created and forever invisibly encoded in the mysterious convolutions of the human brain. This makes it less obvious than it probably should be. But just because it’s difficult to see doesn’t mean it’s any less real.

Like many high-tech companies, Twitter has a lot of human capital. Much of it was brought into the company by its employees when they were hired, but some of it was task-specific human capital that is specifically of value only to Twitter. The Java programming skills of a Twitter software engineer may be general-purpose, useful on any software product built in Java, but a software engineer working at Twitter will also develop Twitter-specific human capital: They will learn the architecture of the Twitter application suite, the structure of the code base, the operating procedures of the server farms, the capabilities of the build tools, the methodology for managing the software process, and much more. It typically takes 3 to 12 months for a new software engineer to learn the ropes and reach full productivity.

In addition, Twitter employees will build shared Twitter-specific capital in the form of teamwork. Just as armies become battle-hardened, teams become work-hardened: They learn to communicate better, they learn to reach consensus faster when planning, and they learn each other’s strengths and how to allocate tasks efficiently among the team members.

This knowledge makes the engineers more productive, so it is definitely human capital, but most of it will only increase their productivity at Twitter. Many parts of the job will be very different at other companies, so the Twitter-specific knowledge will provide little benefit at a different job. The thing about task-specific human capital is that you can’t take it with you.

The two types of human capital play different roles in the salary bargaining process. Incoming engineers can successfully demand higher salaries for their general-purpose human capital. And because they can credibly threaten to take that capital to another job where it will also earn them higher salaries, Twitter has an incentive to keep paying the cost for using the engineers’ human capital.

As for task-specific human capital, by definition engineers can’t bring task-specific human capital into Twitter — it has to be developed on the job — so it has no effect on their starting salary. However, as they work at the Twitter, the build-up of Twitter-specific human capital makes salary negotiations more interesting: On the one hand, since engineers can’t take Twitter-specific human capital with them to their next employer, it won’t help them earn a higher salary at a new job, which makes it harder to demand a higher salary at Twitter. On the other hand, if they do leave, Twitter will lose access to their Twitter-specific human capital, so Twitter has an incentive to pay them at least a little bit extra to stick around.

When Elon Musk lays off one of these software engineers, Twitter loses access to their human capital, both general and specific. What Twitter gains in return, however, is the reduction in expenses that comes from no longer having to pay that engineer’s salary. Since the engineer’s salary included the full carrying cost of the engineer’s general human capital, Twitter is more-or-less compensated for its loss. But Twitter wasn’t paying nearly as much for use of the Twitter-specific human capital, so Twitter saves far less when it goes away.

I’ve been talking about software engineers because I am one, but clearly many other well-paid jobs at Twitter must involve the sort of Twitter-specific learning curve that results in Twitter-specific human capital. And in simple terms, when Elon Musk lays off an employee, they take their general human capital with them to their new job, and Twitter is compensated for that loss by not having to pay them. But their Twitter-specific human capital is simply demolished on the spot. It’s a deadweight loss that benefits nobody.

In some ways, laying off skilled employees is a form of capital liquidation that reduces Twitter’s capability of producing final goods and services in return for a cost savings. It’s not much different from Twitter shutting down one of its server farms — Twitter loses some capabilities, but it saves the cost of operating the server farm, including the carrying cost of owning the servers.

In one important way, however, laying off employees is very different from shutting down a server farm, and it leads to a pernicious temptation for the people running the company: The value of the server farm is tracked by the company’s accounting system, but the value of the human capital is not. Thus the loss of value from laying off skilled employees doesn’t have an immediate effect on the balance sheet. This makes the savings from layoffs look like free money when in reality it has a high cost.

Since taking over Twitter, Elon Musk has terminated thousands of employees, and I think it’s fair to say that in doing so, he has destroyed hundreds of millions of dollars — if not billions of dollars — worth of Twitter assets in the form of human capital.

That’s not necessarily a bad thing, if the human capital assets would serve no purpose. If Elon Musk’s grand plan for Twitter doesn’t require the capabilities provided by all that human capital, then it’s not really capital at all because it wouldn’t help produce anything Twitter can sell. It’s no great loss. Or rather, it’s a loss of capital value that has already occurred, and Elon Musk is just trying to capture the savings.

But…does it really seem like Elon Musk is doing anything from a plan?

This post by Mark Draughn at Windypundit was originally published at Burning Down Twitter

There’s a lot of confusion about just what we mean by inflation. Some Biden critics are pointing at the high prices of cars and trucks, and the high price you have to pay to fill their tanks at the pump. Others point to the high costs of meat. There’s no doubt that these price increases make life more difficult, but these kinds of single-commodity price spikes are not what we normally mean by inflation.

Modern use of the term inflation refers to a sustained, wide-spread, across-the-board increase in prices, including the price of labor (wages and salaries). Everything goes up, all together. But those prices are expressed in US dollars, so it’s just as meaningful to say that the value of the dollar is going down. Sometimes referred to as monetary inflation, this is usually what we mean by inflation.

More limited types of “inflation” — increases in the cost of cars and trucks, meat, or gasoline — are understood these days to be the result of the ordinary changes in the prices of goods and services. If a major American oil refinery shuts down, reducing the supply of gasoline, the end users and intermediaries will bid up the price of the remaining supply, causing prices at the pump to increase. And if adaptations to the the COVID-19 pandemic make meat processing facilities less efficient, this will increase the labor and capital costs of getting meat into grocery stores, and grocers will have to raise prices to cover those costs. These changes have nothing to do with inflation: The US dollar didn’t lose value, oil and meat just became more expensive.

Measuring inflation is difficult. The measurement everyone’s talking about these days is the Consumer Price Index for Urban consumers (CPI-U). Every month, the Bureau of Labor Statistics gathers information from all over the U.S. about the store prices of over 200 representative products, weights those prices based on how much each product is consumed by households, and calculates an aggregate statistic representing the current cost of living. By looking at how much prices are changing each month, the BLS can estimate the inflation rate. That’s where the current figure of 6.8% inflation comes from.

There are several known problems with the Consumer Price Index. For one thing, while it’s easy to walk into a grocery store and look at prices, it’s a lot harder to get information about the volume of products sold. Consequently the weights applied to consumption are only adjusted every two years. This can cause the index to miss substitution effects. That’s what happens when people switch products because the prices have changed. For example, assume you buy a certain quantity of apples every week. If apples suddenly get much more expensive, you might realize that you don’t really want apples, you want fruit, so you switch to pears instead. If apples are tracked by the CPI, then BLS statisticians will calculate that your cost of living has gone up, when you actually avoided that increase by switching to less expensive alternative products. The CPI calculations will eventually catch up, but in the meantime, the CPI will overstate the cost of living and therefore the inflation rate.

Economists have been aware of this problem for decades, but it’s not easy to find a solution that doesn’t have other problems. There has been some tinkering with the way CPI is calculated over the years, but the biggest change is probably the use of Chained Consumer Price Index (C-CPI-U), which tries to detect substitution by re-weighting prices every month instead of every two years. In addition, there are other index such as the Personal Consumption Expenditures Price Index (PCEPI) or the GDP Deflator, which attempt to calculate similar indices in different ways.

By the way, the choice of index is more politically charged than you might think. Every time the BLS has adjusted the methodology for computing CPI, hard-money fanatics accuse them of trying to hide the “true rate” of inflation. Furthermore, things like Social Security benefits increase every year based on the CPI-U and switching to C-CPI-U would mean that benefits don’t go up as much each year. Seniors argue quite reasonably that they spend proportionately more on healthcare, so they benefit less from substitution effects than the general population. (The BLS also computes a CPI-E for the elderly, but there’s little enthusiasm to switch to CPI-E for some reason.)

I’ve tried to find out more about how the various index values are calculated, but it all becomes a blur — I can read the descriptions, but I don’t know enough economics or statistics to really understand what they mean. They differ on which products are surveyed, which expenditures count, how prices are weighted, how known seasonal cycles are adjusted for, and how all the data is boiled down to a final number.

I have no clue which index is best as a measure of inflation, but as it happens, they’re not too far apart. Here are values for all the indexes I’ve mentioned:

• CPI-U: 6.8%
• C-CPI-U: 6.7%
• CPI-E: 6.2%
• PCEPI: 5.0%
• GDP Deflator: 6.2%

Perhaps a more fundamental problem is figuring out if these price indexes are really measuring inflation. There’s kind of a chicken-and-egg problem here: We price goods and services in dollars, but dollars are only as valuable as the goods and services you can get for them — a dollar that couldn’t buy anything would be worthless. So when prices go up, is that because goods and services cost more? Or because the dollar is worth less? Only the latter is inflation.

Under normal circumstances the prices of some goods and services will rise and others will fall. Although these price changes are not really random, neither are they coordinated with each other. Some go up while others go down as the market responds to supply and demand changes. On average, these fluctuations should tend to cancel each other out to some extent. Furthermore, our economy’s methods of production and distribution have been getting more efficient every year.^[2]This is a recent development in human history, starting about two centuries ago. This means that the real costs of goods and services generally fall slightly every year.

So whenever there’s a widespread, across-the-board increase in prices, we have to ask ourselves which is more likely? That everything got more expensive at the same time? Or that inflation has reduced the value of one thing, the dollar, causing items sold for dollars to go up in price? That latter explanation seems much more plausible, which is why it seems justified to treat CPI-U and other price indexes as measures of inflation.

But these are not normal times. The entire world has been suffering under the COVID-19 pandemic for almost two years. Businesses are operating under special rules — social distancing, masking, etc. — that may impair their productivity. And there have been huge changes in consumption habits as many Americans have been working from home, ordering more deliveries, and so on. Our production capacity was developed to produce a different mix of goods and services from what we are consuming now, so it might not be working at previously high levels of efficiency.^[3]This, not hoarding, is the true reason for the toilet paper shortages at the start of the pandemic. The soft fluffy stuff you buy for your family is a substantially different product from the scratchy crap your employer was buying. It took time to make more of the good stuff.

It seems to me there’s a real possibility that our economic productivity has declined over that past two years. This would make everything more expensive, and it seems to me there’s a real possibility that our price indexes are reflecting that. In other words, the unlikely possibility happened — everything did get more expensive at the same time — and we are fooling ourselves into thinking it’s inflation, when it’s really a loss of productivity.

This might sound like I’m defending the Biden administration (“The inflation rate is not so bad…”) but it’s important to realize that a decline in productivity is much, much worse than inflation.

To see why, suppose Congress passed a law saying that at the stroke of midnight on New Year’s Eve, every person would get ten times as many dollars as they have, and all payments, wages, loans, and contracts would be adjusted to match. A family making $100,000/year on December 31, with $30,000 in the bank and a $250,000 mortgage on a $300,000 home would wake up on January 1 earning $1,000,000/year, with $300,000 in the bank and owing $2.5 million on a $3 million home.

It’s pretty obvious that the family is neither better nor worse off than before.^[4]Yes, I’m assuming tax brackets were also adjusted. They have 10 times more money, but everything they buy will cost 10 times as much. Fortunately, they also earn 10 times as much and have 10 times the home equity. The economy is still producing the same goods and services as before, they are all just priced 10 times higher. The nominal prices have changed, but everyone is able to consume exactly the same goods and services as before. Their economic well-being has not changed. Inflation — even 10-fold inflation overnight — is not in itself harmful.

On the other hand, if economic productivity declines, there’s less stuff to go around. Our civilization is impoverished. Goods and services are no longer being produced at the same quantities, and everyone is forced to consume less.^[5]Or work more, which is also bad. And we are all worse off for it.

That’s not to say we shouldn’t worry about inflation. For one thing, the change in the dollar’s value is never as coordinated as in this example. Prices at the grocery store may go up before wages do, and an increase in wages doesn’t automatically increase your savings, and bank interest rates may take even longer to go up. Meanwhile, fixed-rate mortgage loans will lose value because they can be paid back in cheaper dollars. That’s great if you have a mortgage, but it will send the industry into another tailspin.

When inflation is steady, we can plan for some of these changes, but an unexpected increase in the inflation rate can disrupt markets enough for the effects of inflation to spill over into the real economy of goods and services.^[6]And then there’s the possibility of devastating hyperinflation. But a productivity decline, by definition, always hurts the real economy. It’s never not a problem.

I don’t know how much of my story to believe. It certainly seems plausible that at least some of the increase in inflation is due to a decline in the real economy that is being misread by the CPI-U and other indices.

If so, it’s hard for me to say if the President is to blame. But there are certainly ways in which our presidents have not been helping. At least part of the price increase for cars and trucks (and home appliances) can be blamed on deliberate policy choices, such as Donald Trump’s idiotic steel tariffs, which drove up the cost of domestically produced vehicles and appliances. Of course, since our new President has delivered on his campaign promises about international trade, those are now Joe Biden’s idiotic steel tariffs (and quotas).

Other than that, I don’t know what’s causing the increase in prices. I’m hoping it turns out to be inflation, because we have some pretty good ideas about how to fight inflation. (Whether we have the willpower is a different matter.) Productivity, on the other hand, is mostly a mystery. We have some ideas about why it started growing so much faster a few hundred years ago, and we know that disasters like wars can destroy productivity, but we don’t know much about how to keep it growing, or what to do if it stops.

This post by Mark Draughn at Windypundit was originally published at Inflation or Productivity Loss?

Let me start by saying that what we need most from a pandemic relief bill is things that make the pandemic stop. More vaccine, more PPE, more testing, more contact tracing. More of whatever public health measures will most effectively stop the spread. There’s a bunch of that in the COVID relief bill, but it’s only about 5% of the total cost. (The medical fight to prevent an epidemic is not that expensive — it’s when prevention fails that it gets expensive.) These measures should have been carved out of the relief bill and passed weeks ago, instead of delaying them until the whole ugly bill passed.

Getting back to the stimulus… The ordinary Keynesian economic story about recessions is that they are caused when consumers lose confidence. If you’re worried you might not be able to make ends meet, you’ll probably want to cut back on spending, to try to build up some savings to get you through the hard times you’re expecting. And if something happens that makes everyone worry about their economic security, then everyone will try to cut back on spending. But one person’s spending is another person’s income — you stop eating out and prepare more meals at home, and waiters and cooks lose their jobs — so if everyone cuts back on spending, everyone’s economic situation becomes more precarious. That makes even more people want to cut back on spending, which causes even more insecurity, and so on. This is how a bustling economy can crash in just a few months.

But that’s not what happened to us.

Restaurant patrons didn’t stop going to restaurants because they were worried about the cost. They stopped going to restaurants because they didn’t want to get COVID-19. The same thing happened to varying degrees with most other in-person businesses — movie theaters, bars, hairdressers, dentists, non-essential shopping. Giving people more money isn’t going to make them safer from COVID-19, so it’s not going to get them to go back to all of those activities they’ve curtailed. It won’t bring back all those jobs.

What we need instead of a stimulus is welfare support. We need to get money to people who are hurting, so they can take basic care of themselves and their families. The bill has some of this in the form of extended unemployment benefits, which are a great way to target financial help at people who need it. (Yes, some people will use their unemployment benefits to avoid working, but that’s a price I think we can afford over the short term, given the genuine improvement it will bring for so many people.) Arguably, some of the Paycheck Protection Program (PPP) and emergency loans are a substitute for unemployment benefits — keeping people from becoming unemployed in the first place.

The one-time checks — currently for $1400 per person — may be helpful, but they aren’t particularly well targeted. Under some versions of the plan, even people doing fairly well will get the money, which is unnecessary and wasteful. And it’s almost certainly not a stimulus — one-time payments rarely are.

And that’s about it. The rest of the pandemic relief bill is…not really pandemic relief:

• $350 billion is going to state and local governments. Maybe some of that will go to fund aid to those in need, but maybe it won’t. It’s not even clear that state and local government tax revenues declined that much.
• The additional tax cuts for having children and the increases in aid for child care, rent, and food may all be good anti-poverty measures, but they have nothing directly to do with COVID-19 and are set to last indefinitely, long after the pandemic is over.
• The $130 billion to schools seems like little more than a political giveaway. A variety of schools have already reopened without a massive infusion of funds, and more than 90% of the money is expected to be spent in 2022 or beyond. Heck, most of the $100-million-plus in emergency school funding from 2020 hasn’t even been spent yet.

Finally, it looks like increasing the federal minimum wage to $15/hour is off the table. I think this is probably a good thing.

You may have noticed when you go shopping that there’s a bit less of everything. Fewer cuts of meat, and what you get isn’t as good. Less chicken and less seafood. Not as many flavors of Diet Coke in not as many sizes. Not as many flavors of soup. There’s a shortage of hand soap and paper towels. My favorite suspenders are available in fewer colors, and some office furniture I wanted is now backordered 4 months.

By definition, when you can’t get as much of what you want as you could before, you have gotten poorer. As a nation, we are poorer now because of COVID-19. Some these shortages are due to shifts in demand that have not been met by shifts in supply, but a lot of these shortages are due to the difficulty of producing goods and services in the middle of a pandemic. Every factory can hold fewer workers, and everything takes longer, and all the materials are also running short because your suppliers are also impaired by dealing with the pandemic. Our economy has become less productive. Our workers can’t make as much stuff as they did before. The pandemic has reduced their productivity.

And if they can’t produce as much, their employers can’t afford to pay them as much, because they aren’t able to sell as much product. Yes, some companies are making a lot of money, but on the whole, our economy has shrunk slightly instead of growing like it usually does. A bunch of businesses have gone under, and a bunch more are teetering on the edge of disaster. This seems like an especially bad time to present employers with the choice of raising wages or shutting down. They might make the choice that hurts a lot of people.

This post by Mark Draughn at Windypundit was originally published at We Don’t Need a Stimulus

My plan for broad student debt cancellation will:

• Cancel debt for more than 95% of the nearly 45 million Americans with student loan debt;
• Wipe out student loan debt entirely for more than 75% of the Americans with that debt;
• Substantially increase wealth for Black and Latinx families and reduce both the Black-White and Latinx-White wealth gaps; and
• Provide an enormous middle-class stimulus that will boost economic growth, increase home purchases, and fuel a new wave of small business formation.

Naturally, Democratic presidential candidate Bernie Sanders has his own plan to deal with college debt:

When Bernie is in the White House, he will:

• Cancel the entire $1.6 trillion in outstanding student debt for the 45 million borrowers who are weighed down by the crushing burden of student debt. This will save around $3,000 a year for the average student loan borrower.

There are a lot of things wrong with this idea.

For one thing, it’s not an incentive mechanism. Most of the time, when we as a society give money to someone for doing something, it’s because we want to encourage that activity. So we subsidize solar energy to encourage development of cleaner energy sources, and we subsidize housing to encourage home construction and ownership. Subsidizing certain things is usually a way to encourage socially desirable behavior.

But that’s not the case here: Student debt cancellation does nothing to encourage students to go to college because it only affects people who have already been to college. It’s a pure giveaway (that just happens to be going to a bunch of young people who are likely to vote).

Supporters of tuition debt cancellation are quick to argue that debt cancellation would provide an economic stimulus:

The result is a huge student loan debt burden that’s crushing millions of families and acting as an anchor on our economy. It’s reducing home ownership rates. It’s leading fewer people to start businesses.

First of all, we’re not exactly talking about gigantic loans. 45 million people owing $1.6 trillion works out to about $36,000 per person. That’s not a “crippling” debt. Most of the time, when you hear really high numbers, it’s for people getting loans for advanced degrees such as law or medicine. The average college debt is more like financing a well-equipped Ford Taurus.

Keep in mind, too, that people with college degrees tend to earn more money. According to the most recent Education Pays report,

In 2015, median earnings of bachelor’s degree recipients with no advanced degree working full time were $24,600 (67%) higher than those of high school graduates. Bachelor’s degree recipients paid an estimated $6,900 (91%) more in taxes and took home $17,700 (61%) more in after-tax income than high school graduates.

That difference alone is enough to theoretically pay off a $36,000 student debt in a little over two years at peak earnings. Even taking other costs into account — including the opportunity cost of going to college instead of working — a college education is a good investment:

The median four-year college graduate who enrolls at age 18 and graduates in four years can expect to earn enough relative to the median high school graduate by age 34 to compensate for being out of the labor force for four years and for paying the full tuition and fees and books and supplies without any grant aid.

In other words, paying off the tuition debts of college graduates means giving free money to  people who are already destined to be financially better off than most.

Furthermore, getting a college education is just one way of investing in your future. There are plenty of small business owners who have spent $36,000 to equip a restaurant or machine shop, or remodel an office. I’m sure they would also benefit if Elizabeth Warren or Bernie Sanders cancelled their debt.

Or what about people who took out loans to pay for college tuition and just now finished paying off their debt? They’ve got to feel cheated by all this. And it’s hard to argue that their case is much different, because I’m sure giving them $36,000 would help them buy a house or start a business too.

We should also consider the classic invisible people: Those who didn’t go to college because they couldn’t afford it. Imagine what it’s like the be a woman who made the prudent decision to stick with waitressing for a few more years only to hear that people who went to college are getting a $36,000 handout. Why shouldn’t she get $36,000 too? She probably needs the money more, and giving it to her would be at least as much of a stimulus as giving it to a college student.

Or for that matter, we could just let taxpayers have the money. All other things being equal, not paying college graduates $1.6 trillion would leave $4900 for every man, woman, and child in the United States. 

I should note that there is one group of people for whom debt cancellation makes some sense: People who went to college but did not graduate. These people are seriously screwed, because they’ve got the debt — for the cost of however many years as they went to college — but they don’t receive any of the benefits that come with earning a degree. And unlike college graduates, these people really are likely to be poor, so getting out from under the debt will be a serious struggle.

It’s almost like we need a debt cancellation program that is targeted to these people. Maybe some sort of means-tested program, that only cancels their debt if they really are having difficulty paying it down…

Of course, the U.S. already has such a program. It’s called bankruptcy. When someone has debts they can’t pay, declaring bankruptcy allows them to get out from under the debt and move on. The lender does take a loss when a debtor declares bankruptcy, but if the debtor was never really able to pay the loan, then the lender is really just recognizing a loss that has already occurred. And the great thing about bankruptcy is that it works for everyone who’s in debt over their head, not just college students.

Although, actually…college tuition loans are one of the few debts that cannot be discharged through the ordinary bankruptcy process. A series of murky changes to bankruptcy law since the 1970s have made it much harder to get out from under student loans. It can be done, but the process is poorly defined and applicants are unlikely to succeed.

While I question the wisdom of giving gobs of money to college graduates, I think it makes no sense to block people with tuition debt from having the same bankruptcy protections as everyone else. The good news is that there’s actually a bill that would fix this problem. It’s the Student Loan Borrower Bankruptcy Act of 2019, which is supported by both Sanders and Warren. Let’s use the debt protections we have, rather than inventing expensive new ones.

This post by Mark Draughn at Windypundit was originally published at Doing Something About Tuition Debt

100% of the net fees from the carbon fee are held in a Carbon Fees Trust fund and returned directly to households as a monthly dividend.

About two-thirds of households will break even or receive more than they would pay in higher prices. This feature will inject billions into the economy, protect family budgets, free households to make independent choices about their energy usage, spur innovation and build aggregate demand for low-carbon products at the consumer level.

Sigh. The billions of dollars it injects into the economy is, by basic accounting, exactly offset by the billions of dollars it takes from the economy, which will presumably hurt family budgets and reduce household choices in all matters. And the only way this increases demand for low-carbon products is by pricing high-carbon products out of the market. I suspect this chicanery is an attempt to head off criticism that carbon taxes are just another case of loving high taxes and big government. It’s understandable, but it ultimately feels dishonest. 

And no matter how many times Laden says otherwise, “carbon fees” or “carbon charges” really are taxes. In fact, they’re a very specific type of tax known as a Pigovian tax, after economist Arthur Cecil Pigou, who formalized the concept in the 1920s as a way to address a problem known as the “tragedy of the commons.” That’s the economics term for what happens when people have access to a resource they don’t have to pay for.

The idea is to get business incentives to align with society’s incentives. Under normal market conditions, when a bakery uses 1000 pounds of wheat flour to make 1000 loaves of bread, the benefit to society is that it gains 1000 loaves of bread, and the cost to society is that it loses 1000 pounds of wheat flour.

Those are also the costs and benefits facing the bakery: They have to buy 1000 pounds of wheat flour, and they get to sell 1000 loaves of bread. Because the bakery has to take market prices when buying and selling, they will only choose to bake bread if 1000 loaves of bread are worth more than 1000 pounds of flour. And since the price of flour and bread in their respective markets are determined by society, the bakery will therefore only choose to bake bread from flour if bread is more valuable to society than flour. In converting flour to the more valuable bread, they will be increasing the value of the goods available to society, and because the bakery faces the same benefit/cost trade-off as society, they have the right incentives to make a decision that is good for society as a whole.

Now consider a rancher who grazes his cattle in pastures not owned by anyone. The benefit to society is the resulting cattle, and the cost to society is the grass they consume. For the rancher, however, things are different. The benefit to the rancher is that he gets to sell the cattle, but the cost to the rancher is zero, because he doesn’t have to pay for the grass his cattle use.

The result is that the rancher derives a much greater net benefit from raising cattle than society does, which means the rancher has an incentive to raise far more cattle, using up far more grass, than would be best for society. Society would almost certainly be better off with fewer cattle and more grass, which could presumably be put to better use in some other way. In the worst case, so many ranchers raise so many cattle that they consume all available grazing land, at which point they have to stop raising cattle. Because Brits call public land “common land,” British economist William Forster Lloyd called this “the tragedy of the commons.”

It’s not hard to find examples. Catching a fish means one less fish in the sea, which is a cost for society as a whole, but not for the boat that catches the fish, and thus we get depleted fisheries like the Grand Banks, which pretty much ran out of cod after a few decades of commercial fishing. Chopping down a tree means one less tree for anyone else to use, but in old-growth forests nobody had to pay the cost of planting and growing the tree in the first place, so logging on public land (such a North American frontier land) led to deforestation and limited growth due to lack of lumber.

Not all examples of the tragedy of the commons involve direct consumption. Consider traditional industrial pollution, with giant factories belching smoke as they grind out manufactured goods. The goods they produce are a benefit to the factory owner, who gets to sell them, and to society, which gets to consume them. But the pollution is a cost only to society, which has to endure foul air.

To understand how this is similar to the cattle grazing example, it can be helpful to think not in terms of the cost of pollution, but of the cost some resource being consumed. So don’t think of the factories as creating dirty air. Instead, think of them as consuming clean air. Just as cattle are the benefit from the cost of consuming grass, factory goods are the benefit from the cost of consuming clean air. And since the factory doesn’t have to pay for clean air, the net benefit to factory owners is much higher than the net benefit to society. This gives factory owners an incentive to build a lot more factories and produce a lot more pollution than would be best for society.

(Note that while factory owners do suffer from general pollution like everyone else, they don’t suffer significantly from their own decision to pollute. The costs are distributed over so many people that their personal share is tiny. The costs they impose on any single other person is also tiny, but that cost can be considerable when summed across the whole of society. Alternatively, the cost per person can get quite high when the tiny personal cost of each polluting factory is summed across many thousands of factories.)

Pigou proposed a solution to this mismatch of incentives: Charge the factories for the clean air they consume. No one owns the air, of course, but through its power of taxation, the government can nevertheless charge factories for clean air, just as if it was a production input like flour. Then if the tax on using clean air truly represents the cost to society when it loses that clean air, then factory owners will be facing the proper incentive structure so that decisions they make to benefit themselves will also benefit society.

Economists prefer solutions like Pigovian taxes over government regulations because they are more flexible. Regulations tend to specify rigid rules and lock in narrow solutions. For example, a prohibition on a certain type of high-pollution industrial process would force all users of that process to switch to something else. That might be fine for 90% of the industry, but for the remaining 10% it might be economically infeasible. The would either go out of business or lobby Congress do carve out an exception or perhaps make use of some kind of exemption system built into the law already. This can quickly become a confusing and unpredictable mess where businesses live or die based on whether they can get government permission to do things a certain way.

Pigovian taxes, on the other hand, apply a relatively simple tax rule and let businesses and the market figure out a solution. So instead of banning a high-pollution process outright, they just increase the cost of that process by taxing the pollution. Now each business can figure out how to respond to that increase in costs. Most businesses would likely switch to an alternative, but for the 10% that find it too expensive, they could remain in business if they were willing to pay the taxes. That’s not a problem if the incentives are right, because what the business is producing is presumably more valuable than the clean air being consumed.

Of course, if the taxes were too expensive, they would still have to go out of business. But then they were never really a successful business anyway — they were just getting away with it because they were getting to pollute for free. Once they had to pay the full cost of what they were doing, they were faced with reality: They had been a net loss for society, and now they were experiencing that loss for themselves.

Anthropogenic global warming is also a tragedy of the commons. People and industries are dumping carbon dioxide into the atmosphere, and the Earth is warming up because of it. That imposes costs on everyone in the world, but the people releasing the carbon dioxide experience none of that cost. My knowledge of climate science isn’t good enough to figure out what resource they are consuming for free (The Earth’s carbon recycling buffer? Its energy handling capacity?), but they are definitely not paying the full social cost of using fossil fuels. At least in theory, a Pigovian tax — the carbon tax — would fix that.

Naturally, there are objections:

A resolution declaring carbon taxes to be “detrimental” to the U.S. economy sailed through the Republican-controlled House this morning with the support of most — but not all — of its GOP members.

Somehow, this is treated as controversial. But of course carbon taxes will hurt the U.S. economy. We’ve been using fossil fuels for many years without paying the full cost. Once that cost is imposed, we will begin to change our energy production technology to use less fossil fuels, either through increased efficiency or by switching to an alternative energy source such as nuclear or solar. Since those were not our first choices, switching to them represents a loss. It would have to, since using the more expensive energy necessarily means spending less on something else.

The world economy, on the other hand, experiences a net gain due to the reduction in greenhouse gases and, consequently, harm from global warming. The U.S. experiences some of that gain too, of course, but only a fraction of it.

Another objection is that it will be hard to determine the amount of the tax, since we’re talking about changes that will happen all over the world and far into the future. Given how much the world economy has changed in the last 300 years, I don’t think we can make reliable economic projections that far into the future, which makes it hard to calculate the level of carbon taxation needed to balance the harm. Any estimate we make will be not much more than a wild guess. But maybe that shouldn’t stop us from trying.

Note that the benefits of Pigovian taxes are obtained when the taxes are enacted and the people burdened by the tax change their behavior to be more in line with society’s welfare. Except for the relatively tiny cost of administering the tax, there’s no change to government spending. So if we impose a carbon tax, what should the government do with the extra revenue?

Well, if the government doesn’t need the money, the default position of most economists is that we should make the carbon tax revenue-neutral by lowering some other taxes. Let the American people keep their money and spend it however they want.

There’s an argument, however, that carbon taxes will hit poor people especially hard because energy costs are a larger proportion of the cost of living for the poor. Even if that’s not the case, the increase in energy costs will still increase the cost of living, which poor people will be less able to tolerate. For these reasons, many people think the carbon tax revenue should be used to increase aid to the poor, either by focusing the tax breaks on the poor or by giving them money with direct payments. The Citizens Climate Lobby’s “carbon dividend” proposal is to distribute the money evenly to everyone:

Equal monthly per-person dividend payments shall be made to all American households (½ payment per child under 18 years old, with a limit of 2 children per family) each month. The total value of all monthly dividend payments shall represent 100% of the net carbon fees collected per month.

In other words, they want to use the carbon tax to fund a Universal Basic Income (UBI) scheme.

I hate this kind of proposal. Whether or not a carbon tax is a good idea has nothing to do with whether or not universal basic income is a good idea. They are separate and unrelated decisions. The federal budget has to balance over the long term, but there’s no policy reason for specific line items like carbon tax revenue and UBI expenditures to match. If we want the government to help poor people with the increased cost of living due to rising fossil fuel costs, our expenditures should be based on the amount of help they need, not on how much money we’re getting from a single revenue stream.

Linking revenue and expenses this way is usually a cheap trick to justify a tax increase by tying it to something wholesome, e.g. “for the children.” Furthermore, if the carbon tax works as intended, fossil fuel use will decline by design, and therefore funding for the UBI “dividend” will decline. That’s a perverse relationship which could have perverse consequences. Either we will allow the “dividend” to decline and become less effective, or else UBI supporters will lobby to increase the carbon tax to raise more revenue, neither of which seems very smart.

(Or we will do something really stupid, like subsidize oil drilling to encourage more revenue-generating fossil fuel use. If that sounds too dumb even for our government, remember that the government used to run an anti-smoking public health campaign at the same time it gave subsidies to tobacco growers.)

The good news is that all of this may not matter. Solar energy has gotten a lot less expensive to produce than it was when I was a kid buying hobby solar panels to run a radio. Some estimates of costs indicate that utility scale photovoltaic solar power generation is actually cheaper than conventional production, without even factoring in global warming. If that’s an accurate estimate, it won’t be long before utilities switch to solar power just because it saves them money. Then we won’t need a carbon tax or a carbon dividend.

This post by Mark Draughn at Windypundit was originally published at Carbon Dividend/Carbon Tax

In response to U.S. duties on European steel and aluminum, the EU enacted tariffs Friday on more than $3 billion worth of U.S. goods including bourbon, yachts and motorcycles.

U.S. tariffs on steel and aluminum imports have increased the cost of Harley-Davidson’s raw materials at the same time the European tariffs on motorcycles made it less profitable to sell U.S.-made motorcycles in Europe, so the company is moving their manufacturing operation outside the U.S. to avoid both sets of border-crossing taxes. It’s a logical business decision, and the possibility that some U.S. manufacturers would do things like this in response to tariffs was entirely predictable to anyone with even a modicum of economic education or business experience.

Naturally, Harley-Davidson’s decision made Trump angry, because he’s a babyman who cries when he can’t get his way: 

A Harley-Davidson should never be built in another country-never! Their employees and customers are already very angry at them. If they move, watch, it will be the beginning of the end – they surrendered, they quit! The Aura will be gone and they will be taxed like never before!

— Donald J. Trump (@realDonaldTrump) June 26, 2018

God, what a bully Trump is. He’s the abusive boss who makes life hell for employees and then calls them “ungrateful losers” when they quit. He’s the father who beats his son and then calls him weak for crying. Trump is driving companies out of business and then blaming them for quitting.

Early this year Harley-Davidson said they would move much of their plant operations in Kansas City to Thailand. That was long before Tariffs were announced. Hence, they were just using Tariffs/Trade War as an excuse. Shows how unbalanced & unfair trade is, but we will fix it…..

— Donald J. Trump (@realDonaldTrump) June 26, 2018

That’s not true. Harley-Davidson was responding directly to new tariffs. They announced in May of 2017 that they were moving some production to Thailand to avoid that country’s just-announced 60% tax on imported motorcycles, In addition, by manufacturing in that region, they would also be able to avoid some taxes when selling into nearby countries. Of course, they wouldn’t need to do that if they were protected by some sort of free trade pact that limited tariffs against U.S. manufacturers, such as the Trans-Pacific Partnership agreement that Trump had pulled the U.S. out of just four months earlier.

Thanks to Trump foolishly tearing apart our hard-won international free trade policies, Harley-Davidson had a strong incentive to reduce production in the United States and open factories in not just one but two separate economic regions. This is not exactly shocking: When you create isolated islands of trade, the market will create isolated islands of production. That’s wasteful, and it will cost American jobs and ultimately reduce the income of Americans.

For example, Jack’s Ornamental Iron, a small ornamental metal working company, has been forced to cancel a planned expansion because of Trump’s taxes:

The two were caught off-guard when President Donald Trump announced tariffs on foreign steel. Jack’s watched the price of steel shoot up nearly 25 percent in just two weeks.

“We buy roughly a million dollars worth of steel a year,” Schow said, “so that’s going to be $150,000 to $200,000 in additional cost to our business.”

The tariffs have put a halt to the growth of the company — plans to buy a nearby building for possible expansion are no longer a reality, Schow said. Also, plans for employee raises and expanding their workforce of 25 have been put on hold for now.

This illustrates one of the worst aspects of Trump’s trade war: It’s unnatural and therefore unpredictable. Jack’s Ornamental Iron was following all the rules for success in in the market — hard work, high-quality production, good customer relations — and yet their plans for expansion were scuttled by changes in tariffs. Every business now faces additional uncertainty in its planning and investments because of Trump’s stupid trade war.

It gets worse. As Reason‘s Eric Boehm argues, Trump’s trade policy will put a lot of power over businesses into the hands of government bureaucrats:

At three manufacturing plants in Arkansas, some 1,500 workers are waiting to hear whether the Commerce Department will let them keep their jobs.

Those workers make a product that you’ve probably never thought much about: tire cords. They are the lattice-like structures, often made of steel fibers, that line the inside of rubber tires to help them maintain their shape. The owners of those three Arkansas-based tire cord manufacturing plants say they will have to close their doors and lay off their workers, Arkansas Today reports, because the type of steel wire needed to make tire cords is not available from domestic manufacturers and foreign suppliers are now subject to a 25 percent import tax. They have applied for a special exemption from President Donald Trump’s steel tariffs, and the Commerce Department is considering the request.

Because of Trump’s trade policies, it’s no longer enough to run an efficient business and produce a good product. You have to kowtow to bureaucrats.

Perhaps nothing else about the ongoing debate over tariffs so clearly demonstrates the quiet horror of the Trump administration’s attempt at central planning. Workers and factory owners who produce a necessary but unremarkable product, filling a hole in a supply chain that few Americans ever notice, now fear that they will be forced out of business if their application for relief does not find favor with federal bureaucrats.

They are hardly alone. More than 1,200 businesses have filed over 20,000 requests for exemptions from the Trump administration’s steel tariffs.

I started writing this last week, and since then the trade war has created a few more casualties:

On Friday, the Trump administration levied tariffs on some $50 billion of Chinese goods, including everything from x-ray tubes and aircraft tires to ultrasound machines and agricultural equipment. China retaliated with its own tariffs on imported Americans cars, meats, and produce.

[…]

“Every time there is a trade friction, the first thing that gets hit with retaliatory tariffs are the fresh products,” says Steve Reinholt, export sales director for the Washington-based agricultural export company Oneonta. “We pack and ship things within 48 hours. If you have a bit of a slowdown, it can effect things quickly.”

Hardest hit, says Reinholt, are the cherry growers his company buys from, who over the past decade had been doing steadily increasing business with China.

[…]

“We’re very much expecting to have less volume to China this year,” says Thurlby. “Historically we would ship two million boxes in July alone. There’s just no way we see that happening this year, not with the amount of tariffs we’re talking about.”

Exporting to China had always been a challenge for the 2,500 or so Pacific Northwest growers that Thurlby’s organization represents. In the past, these growers have had to contend with a flat 10 percent import tax as well as a 13 percent value added tax.

Trump’s trade policies have only made things worse.

In response to the U.S.’s protectionist drift, China has upped tariffs on U.S. produce twice in the last three months, once in April and again last week, getting us to the 50 percent tariffs growers now have to pay.

This sort of micro-management of the economy isn’t just some unfortunate side effect. Trump is bragging about it:

Now that Harley-Davidson is moving part of its operation out of the U.S., my Administration is working with other Motor Cycle companies who want to move into the U.S. Harley customers are not happy with their move – sales are down 7% in 2017. The U.S. is where the Action is!

— Donald J. Trump (@realDonaldTrump) July 3, 2018

I suspect that Trump gets this attitude from his years as a New York real estate developer. For a lot of people in local government, the job is not about the civics textbook version of government — passing good laws, running departments efficiently, serving constituents. Rather, it’s about making deals: Factory deals, strip mall deals, housing deals, stadium deals, land deals, development deals.

If you’re a businessman who wants to buy some land and develop it into a shopping mall with a residential complex, you will have to involve city politicians and planning officials every step of the way. You definitely need them to get zoning variances and permits, maybe some rent-control exceptions, permission for curb cuts, connections to city water and sewer, and so on. In addition, if you have enough influence (as Trump certainly did), you can probably get them to throw in some tax breaks, or maybe even use eminent domain to grab some of the real estate you need. You’ll get your lucrative development deal, and the politicians will get campaign contributions and bragging rights for bringing in new development and jobs.

That was the world Trump lived in for decades in New York, and that that seems to be his vision of what he should be doing now: Putting together deals for businesses that will help help him look good. In international trade, this means adding and removing tariffs to choose winners and losers, instead of letting the free market decide. This is pretty much the definition of crony capitalism.

The system of free international trade benefits everyone who participates, and Trump is tearing it down, hurting people on all sides. When you forcibly take value from other people to keep for yourself, that’s stealing. But when you simply destroy things that are valuable to other people, to the benefit of no one, that’s vandalism.

This post by Mark Draughn at Windypundit was originally published at Trump and the Art of the Vandal

Naloxone (a.k.a. Narcan) shuts down the effects of opioids, so it is commonly used by EMTs to rescue people who have overdosed on opioids, including heroin. Out of concern that it can take a while for EMTs to arrive, states have passed laws making it easier for ordinary people to get naloxone, allowing addicts to be rescued by family, friends, and fellow opioid users.

The Doleac-Mukherjee study explores the possibility that this is creating what economists call a “moral hazard.” The basic idea is that naloxone reduces the risk of dying, and the risk of dying is part of the non-financial cost of using opiods, so naloxone effectively reduces the price addicts pay to get high. The  law of demand predicts that when the cost of something goes down, people will buy more of it. So making naloxone more available could cause an increase in opioid usage.

If you’re not used to economic thinking, this might seem crazy. It’s hard to imagine addicts thinking, “Since people around me have naloxone, I can use more drugs!” It’s even harder to imagine that someone who has never used opiods will suddenly think, “Hey, with all this naloxone around, I think it’s time to try heroin!”

What makes this theory plausible, however, is that economic effects happen on the margins. Every day, some Americans decide whether or not they will use heroin that day. Some say “yes,” and some say “no.” And it’s reasonable to assume that some people who say “yes” are just barely saying “yes,” and some who say “no” are just barely saying “no.” Those are the people most affected by changes in incentives: Give them a slight nudge in the other direction and they might make the opposite choice. So while most heroin non-users will not be swayed by naloxone, there are likely to be some who change their mind.

Similar effects have been seen in other contexts. The most famous example is when seat belts were required for automobiles. Economist Sam Peltzman predicted that since seat belts made accidents less dangerous, people would start to have more accidents, and subsequent studies have confirmed this prediction. The effect is not huge, but it’s real. In economic terms, since seat belts reduced the “cost” of accidents, people “bought” more accidents.

That’s not to say that people literally make a conscious decision to have more accidents. But knowing that the seat belt will protect them from minor accidents, they may decide to drive faster, or they may feel it is safer to fiddle with the radio or talk to passengers more often.

If that still seems unlikely to you — if you’re sure that you would never drive recklessly just because your car protected you better — then consider a scenario suggested by economist Gordon Tullock: Disable your air bags, remove your seat belts, and mount a seven-inch steel spike in the center of your steering wheel, pointed straight at your chest. Now ask yourself how your driving would change. Given that even a moderate accident could drive that spike into your heart, you will probably drive a lot more carefully. But if you agree that making your car more dangerous would make you drive more carefully, then you must agree that the level of safety you currently enjoy is allowing you to drive less carefully. You are responding to an incentive by driving more recklessly.

(Use of the name “moral hazard” for this phenomenon is unfortunate, because it implies a judgement against some measure of morality, and that’s not usually how economics works. The term comes from the insurance industry, which has to worry that car owners who can’t make their loan payments will “sell it to the insurance company” by driving the car into a river and reporting it stolen, or that building owners who are upside down on their mortgage will burn the building down for the insurance money. But the problem also rears its head in more mundane ways, such as when people with theft insurance are more likely to leave their car windows cracked open on sunny summer days, and more likely to leave their car running in the driveway in winter with the keys inside. And yes, people with insurance also get into more accidents. The insurance industry takes a dim view of all this, thus the name “moral hazard.”)

Getting back to opiods and naloxone, there are no data sets that directly report opioid consumption, so the study looked at proxy variables, such as opioid-related crime and opioid-related emergency room visits. Because the dates on which naloxone became available vary from state to state, the study was somewhat able to randomize away confounding variables. E.g. The proxy measures in one state might change because law enforcement anti-drug activity changed at the same time that naloxone became available, but that coincidence would be unlikely to occur in every state. This creates a kind of “natural experiment” that allows for stronger results.

So, cutting to the chase, are addicts using more opioids because of naloxone?

Yes, and to a surprising degree. The Doleac-Mukherjee study observes that the introduction of easily-available naloxone is associated with a 17% increase in arrests for possession of opiods and a 27% increase in arrests for selling opioids. Opioid-related emergency room visits went up 15%.

(There are a few caveats, of course. The study is a working paper that is being released for review, so the results could be subject to revision. Also, as with any study of this kind, the authors make a lot of reasonable-seeming assumptions — which are extensively documented in the paper — some of which might turn out to be wrong in ways which substantially alter the conclusions.)

The opioid-related mortality figures are especially interesting, and I’ll get to them in a minute. But I want to address one part of the study that’s been upsetting people on Twitter:

Naloxone access may unintentionally increase opioid abuse through two channels: (1) saving the lives of active drug users, who survive to continue abusing opioids, and (2) reducing the risk of death per use, thereby making riskier opioid use more appealing.

To be very clear, contrary to what alarmed Twitter users are claiming, the study authors are not saying that saving the lives of drug users is a bad thing.

The reason they bring up this issue is because the study is intended to look at increasing opioid use due to the “moral hazard” behavioral change (channel 2), but opioid use could also increase simply because longer-lived drug users have more time to consume drugs (channel 1) and the study cannot directly distinguish between the two explanations. It would be dishonest not to mention this.

In any case, when we look at the mortality figures, Doleac and Mukherjee discovered something astounding:

On average across all urban areas, we find that these laws have no significant impact on the opioid-related death rate. Thus, while the risk per use has gone down due to Naloxone access, the number of uses increases enough that we find no net effect on opioid-related mortality.

In other words, in response to the availability of naloxone, opioid users appear to have increased their use of the drugs so much that it completely negates the life-saving benefits of naloxone.

The magnitude of this effect was a surprise to the researchers. In an email message, Dr. Doleac explained what it means for the first causal channel:

When we first started this paper, we expected to find a big decline in mortality, in which case that channel could be very important. Given that we don’t find a net decline in mortality, it is probably less important[.]

In her article about the Doleac-Mukherjee study, Megan McArdle discusses possible policy responses to this startling finding:

The coldly logical response to this would seem to be to discontinue naloxone use. But there’s something repulsive about that conclusion, and Doleac and Mukherjee can’t bring themselves to go there. “Our findings do not necessarily imply that we should stop making Naloxone available to individuals suffering from opioid addiction,” they write, “or those who are at risk of overdose. They do imply that the public health community should acknowledge and prepare for the behavioral effects we find here.”

Sally Satel echoes Doleac and Mukherjee, both on the moral hazard of naloxone and on whether access to it should continue. Satel, a psychiatrist who is also a drug policy scholar at the American Enterprise Institute, says the paper’s findings reinforce what she has heard from patients: “Patients occasionally tell me that having naloxone on hand has served as insurance against overdose. So, in some instances, it enhances risk taking.”

“That said,” she emphasizes, “we must use it to save people in the immediate term.”

So how can public policy prepare for those “behavioral effects” found by Doleac and Mukherjee? Satel suggests we look at civil commitment for patients who overdose multiple times in a short period. But she also notes that civil commitment can’t work without good treatment options — and in a lot of places, those aren’t available.

Which brings us back to something that’s easy to forget about the Peltzman Effect: It can be used to argue as much for more regulation as for less. Insurance companies, after all, have been fighting moral hazard for centuries, which is why they reward people who install burglar alarms or fill in their swimming pools (or punish people who don’t do those things). And so, too, can the government — for example, by aggressively ticketing speeders, passing tougher drunken driving laws, or using a combination of carrots and sticks to help addicts get clean. There are better policy responses to moral hazard than mounting a spike on the steering wheel — or depriving addicts of a second chance at life.

Much of that seems reasonable, but I wish McArdle had considered something else that’s easy to forget about the Peltzman Effect: It’s not necessarily a bad thing. When surgical anesthesia became a lot safer during the last century, we began to do a lot more surgery. When Elisha Otis invented the safety brake, people all over the world started riding elevators. As air travel becomes safer, more people flew through the sky. Doing more of what we want is usually considered a good thing.

That’s because economists usually make a formal assumption that people will act rationally to improve the quality of their lives. So if people decide to consume more of some goods — apples, oranges, antibiotics, haircuts, televisions, surgical anesthetics, elevators, airplanes — economists assume they do so because it makes their lives better. So why shouldn’t economists be happy that naloxone allows heroin users to consume more heroin?

There are two common answers to that question. One is to reject the idea that heroin is a “good.” This is a common position in public policy analysis, where certain actions, such as prostitution or consumption of illegal drugs, are deemed to be axiomatically bad. Doleac and Mukherjee kind of take this route by default, never really considering that increased opioid use may be a benefit. However, being good economists, they do allude to the possibility, noting that “welfare implications of drug and alcohol abuse themselves are unclear: Some argue that people can do whatever they want to their own bodies, no matter how harmful.”

McArdle takes the other route, arguing that because drug use is addictive, it’s not an actual choice:

It makes a certain amount of sense that the Peltzman Effect would show up particularly strongly in drug users; after all, drugs hijack the brain’s reward system, redirecting it toward drug-seeking even at high personal risk.

In other words, drug addicts fail to be rational in pursuing the improvement of their lives: Their addiction takes away their ability to make rational choices, so their apparent choices no longer represent consumption decisions that improve their lives. Somebody has to step in and make those choices for them.

McArdle’s argument is somewhat undermined by the Doleac-Mukherjee study itself:

It may seem surprising that drug users respond to incentives in a sophisticated way. One may think that drug users are poor decision-makers or that addiction makes rational choices impossible. Addiction surely clouds judgement and makes policy in this area difficult, but there is substantial evidence that even drug users respond to incentives. A large body of empirical evidence documents that the consumption of addictive substances is sensitive to prices. For example, increasing taxes on alcohol reduces alcohol consumption (Cook and Durrance, 2013). Alcohol abuse also responds favorably to increasing the likelihood of punishment, as seen in evaluations of the 24/7 Sobriety program (Kilmer et al., 2013). Hansen, Miller and Weber (2017) show that marijuana consumption is price inelastic in the short run, but quickly becomes price elastic, with consumers reducing their consumption in the face of higher marijuana taxes. And finally, Moore and Schnepel (2017) show that a massive reduction in the heroin supply in Australia resulted in a long-term reduction in heroin consumption among those using heroin at the time, due to a spike in the price of the drug. These findings suggest that, at least on the margin, drug abuse may be sensitive to non-monetary costs such as the risk of death.

If drug users are rational enough to alter their behavior to respond to these changes in incentives, that undermines the argument that their decision to consume drugs is irrational, leaving the way open for the possibility that increased opioid use is actually a benefit of naloxone.

That may seem a little insane, because, you know, it’s heroin. But suppose we could figure out a way to make opiates completely safe to use. This would likely cause a big increase in heroin use, but I hope you’ll agree that an increase in the use of completely safe drugs is not a health crisis. Nothing is completely safe, of course, but maybe between naloxone and some other policy changes, we can get close enough to greatly improve the lives of recreational opiate users.

Some nations have experimented with supervised injection centers which provide sterile equipment, trained staff, and of course a supply of naloxone.

Studies consistently show that supervised consumption facilities work. These kinds of sites have opened in Canada, Australia, and Europe, showing drops in drug overdoses, related emergency care calls, risky behaviors that lead to HIV or hepatitis C transmissions, and general public disorder and nuisance associated with drugs.

(I don’t know if there are studies on whether supervised injection centers lead to increased opioid use, but I wouldn’t be surprised if they do.)

One thing these centers do not provide are the drugs themselves, so addicts still face risks inherent to a drug supplied with uncertain concentrations, uncontrolled contamination, and unpredictable adulterants. At the risk of yet another increase in consumption, we could conceivably control all of those problems — and reduce the need for addicts to commit crimes to feed their habit — by permitting the development of a legal source of drugs that is inexpensive, uniform, sterile, and…hmm…I think I’ve just invented the friendly neighborhood Heroin Bar.

This post by Mark Draughn at Windypundit was originally published at Does Safer Heroin Use Mean More Heroin Use?

…the system we have, wherein people are given food stamps to spend at whatever store they please, is FAR better than a system wherein poor people are only able to get food from ONE specified grocery store in their neighborhood — and if that store is subpar and has a crappy selection of food, tough shit for them; if they want to shop at a decent grocery store, their only option is to move to a neighborhood which has one. Yet that dysfunctional hypothetical is EXACTLY how our public education system works now.

The SNAP program is far from ideal, but it’s much better than Jennifer’s laughably zany idea.

Fast forward a year, however, and it turns out that the Trump administration has come up with something much, much dumber.

The Trump administration wants to slash food aid to low-income families and make up the difference with a box of canned goods — a change that Office of Management and budget director Mick Mulvaney described in a Monday briefing as a “Blue Apron-type program.”

“What we do is propose that for folks who are on food stamps, part — not all, part — of their benefits come in the actual sort of, and I don’t want to steal somebody’s copyright, but a Blue Apron-type program where you actually receive the food instead of receive the cash,” Mulvaney said. “It lowers the cost to us because we can buy [at wholesale prices] whereas they have to buy it at retail. It also makes sure they’re getting nutritious food. So we’re pretty excited about that.”

People have come up with a lot of questions about this plan, and I have a few concerns of my own.

[Update: And so does my friend Jennifer, who scooped me on this angle with a post of her own.]

Will it really be cheaper? Sure, the government can buy the food in bulk, but they still have to distribute it to everyone, which is a job that retailers do right now. Can the government actually perform the distribution cheaper than people whose livelihood depends on controlling costs?

What about delivery costs? Under the current system, the cost of getting the food to people’s homes is born by the SNAP benefit recipients themselves, in the sense that they pick the food up themselves. Granted, delivery is probably a nice time-saving benefit for recipients, but there’s no way it’s cheaper for the government.

What about people who move a lot? What about transients and migratory farm workers? What about people who crash with friends? What about the homeless? How will the delivery service work for them?

(Frankly, I wouldn’t expect the deliveries to last. Somebody will decide that since poor people aren’t working, they have plenty of time to pick the food up from a local depot…thus more closely conforming to Jennifer’s original mocking suggestion.)

Even if the system of in-kind food distribution reduces costs, I’m pretty sure it will be far from cost effective — recipients will be getting far less bang for the buck. With food stamps or EBT cards, the recipients get to make their own choices about which foods to buy, which means they can carefully target their needs. That’s just naturally more efficient than letting distant bureaucrats decide what they need.

I hope these food packages will be customized to handle common medical situations, such as low sugar for diabetics, gluten-free for people with celiac disease, no peanuts for those with allergies. On the other hand, the proposed “America’s Harvest Box” program closely resembles the USDA’s current Commodity Supplemental Food Program, which offers only 52 different foods. Even a 7-Eleven stocks over a thousand items.

In any case, there are other reasons besides medical needs for customizing food choices. Secretaries, store clerks, dock workers, nursing mothers, and heart patients all have different food requirements. In addition, many poor people don’t have very versatile kitchens, so they would be better off if they could select foods they can cook easily. And it’s a lot easier to satisfy a picky child with the 30,000 choices from a grocery store than to force them to eat foods they don’t like.

In the long run, with billions of dollars to be spent on food every year, the selection of items to offer is almost certain to be captured by lobbyists for the agriculture industry. They won’t care what foods poor people like, and they won’t even much care what foods are healthy. Instead, food choices will be driven by which agricultural sectors contribute the most money to campaigns or have the most employees in swing states.

The craziest thing about “America’s Harvest Box” program is that it is a giant government-run program proposed by Republicans. Conservatives are supposed to love efficient free markets and hate planned economies, but when Republicans propose programs like this, it shows they don’t really understand why free markets are good. They don’t really believe that individual consumers making choices for themselves will be far better at it than buildings full of government bureaucrats. They only give lip service to “free markets” because it’s what they think their donors want to hear. In practice, gigantic socialist agricultural programs go over just fine with American Republicans. 

This post by Mark Draughn at Windypundit was originally published at America’s Harvest Box: Socialism for Republicans

The article is titled “Repulsed by Whitefish Energy? Maybe You Also Hate Capitalism.” That sounds like it might be a defense of the Whitefish mess in the name of greed-is-good capitalism. Or it could be a snarky send-up of that kind of that argument. But what it turns out to be is an argument that if you hate the Whitefish scandal, you might also want to start hating capitalism.

…Whitefish Energy is to disaster capitalism as Martin Shkreli is to America’s for-profit healthcare system: the most obviously bad actors in industries that are full of bad actors by design.

As Myerson wrote, “Satisfying though it might be to adorn his face with a black eye … there are more worthy objects of our loathing. All of Shkreli’s appalling antics and characteristics are in fact emblematic of the real villain: capitalism. Shkreli is capitalism embodied, and if you hate him, you’d do well to take up hating capitalism with at least equal fervor.”

The same goes for the eminently punchable team at Whitefish Energy. […] They did enter into a $300 million contract with the Puerto Rico Electric Power Authority (PREPA) to perform work that they are grossly unqualified to do, on a scale that dwarfs any of the contracts they’ve had thus far. Whitefish’s social media arm also got in a public spat with San Juan mayor Carmen Yulín Cruz, at one point writing, “We’ve got 44 linemen rebuilding power lines in your city & 40 more men just arrived. Do you want us to send them back or keep working?”

To review what we know: Whitefish Energy, a small company owned by a guy who is friends with with U.S. Interior Secretary Ryan Zinke, received a $300 million no-bid contract from the government-owned electricity provider of Puerto Rico. In other words, a government-run entity gave a very sweet contract to a guy with good contacts in high political offices. This is not — in any way, shape, or form — free-market capitalism.

Ironically, the Whitefish scandal could prime the pump to privatize PREPA entirely, a long-sought goal of corporate-friendly interests on the island. The federally-appointed fiscal oversight board that oversees Puerto Rico’s government recently announced that it would move to install a Flint-style emergency manager to oversee the utility with an eye toward selling off large chunks of it. Included in their official reasoning for the decision was PREPA’s contract with Whitefish.

Aside from the gratuitous reference to the awful mess in Flint, Michigan (also largely a failure of governmental entities) this sounds like maybe a step in the right direction. (Although if the privatization effort is overseen by the same corrupt people who ran the government entity, things are unlikely to improve much.)

There’s a general moral sickness to this that’s all-too-common, particularly when corporations and right-wing governments decide to profit off of disasters—financial, ecological or otherwise. Take the case of Jeffrey Chiesa, the lawyer appointed by his friend and ally Chris Christie, New Jersey’s governor, to put Atlantic City’s indebted fiscal house in order.

This is more of the same: The elected leaders of Atlantic City screwed up its finances, and the elected governor of New Jersey gave a sweetheart deal to one of his friends, and somehow that’s capitalism’s fault?

Look, just because a corporation is involved doesn’t mean it’s capitalism. The Whitefish Energy scandal looks like standard-issue government corruption: Somebody with influence got somebody with power to give them the public’s money. It’s insane to call that a problem with capitalism.

This post by Mark Draughn at Windypundit was originally published at The Dumbest Take Yet On the Whitefish Energy Scandal

Santorum claimed to be a lot less worried about consolidation in the watery beer market because, “There’s no town in American anymore that doesn’t have a brewery.” Given that alcohol is one of the most regulated markets, it’s odd that government involvement hasn’t created dangerous consolidation in bad beer.

Wheeler has this backwards. Government involvement did in fact cause consolidation in bad beer. At the very height of government involvement — the total prohibition of beer or any other kind of booze during the 1920’s — the beer market was consolidated under criminal gang bosses like Al Capone, who literally killed their competition. The beer was of terrible quality, and tainted alcoholic brews produced by criminal gangs are estimated to have killed thousands of people.

Even after prohibition, beer production was limited mostly to a few large companies, and it was hard for new and innovative breweries to get started, in part because of the red tape of regulation, and in part because the only place to learn beer making was the big breweries that were licensed for it. For most of the 20th century, the United States produced only a dreary selection of mass-produced corporate beers. If you wanted good beer in the U.S., you bought something imported.

That all began to change in 1979, when President Jimmy Carter signed the bill making it legal for people to brew beer in their homes. Over the next few decades, thousands of people learned to brew beer, and many of them got good enough at it to make the leap into commercial brewing. This was the start of the microbrewery revolution, and it transformed the United States from a country with famously bland beer to one of the most innovative and diverse brewing cultures in the world.

This post by Mark Draughn at Windypundit was originally published at Free (Brewing of) Beer

As if on cue, cavalcades of battered Ford Econoline vans grumble to the curbs, and the women jump in. It is the start of another workday for legions of New York City’s manicurists, who are hurtled to nail salons across three states. They will not return until late at night, after working 10- to 12-hour shifts, hunched over fingers and toes.

On a morning last May, Jing Ren, a 20-year-old who had recently arrived from China, stood among them for the first time, headed to a job at a salon in a Long Island strip mall. Her hair neat and glasses perpetually askew, she clutched her lunch and a packet of nail tools that manicurists must bring from job to job.

Tucked in her pocket was $100 in carefully folded bills for another expense: the fee the salon owner charges each new employee for her job. The deal was the same as it is for beginning manicurists in almost any salon in the New York area. She would work for no wages, subsisting on meager tips, until her boss decided she was skillful enough to merit a wage.

It would take nearly three months before her boss paid her. Thirty dollars a day.

It’s a well-reported, well-written story, and I have no doubt that there are some bad things going on in the nail salons. However, I think Nir is missing some important aspects to what’s going on in New York nail salons. When you encounter a tale of exploitation like this, there are some important questions you need to ask.

Probably the first of those question should be, If working in the nail salons is so awful, why don’t the women don’t just quit and get better jobs?

I’m sure just asking that question will make some readers want to tell me to “check my privilege,” but I think it’s important to think seriously about the answer. The news is full of complaints about McDonald’s and Walmart employees being paid only the minimum wage. That’s still more than these nail technicians are earning, so you’d think they would be applying for those jobs, offering to work for the same pay (but without protesting in the streets about it). So why don’t they? Why don’t they get better jobs?

Nir never address the issue directly, but she nevertheless supplies a few answers:

Almost all of the workers interviewed by The Times, like Ms. Ren, had limited English; many are in the country illegally. The combination leaves them vulnerable.

These workers are foreigners in this country illegally, so the biggest reason why these women can’t get better jobs is that the United States government doesn’t want them to work here at all. Most legitimate businesses, including major employers like McDonald’s and Walmart, are simply not allowed to hire them. They have to take what work they can get.

Also, they’re probably afraid to complain too much about working conditions because they fear they’ll be deported if they attract too much attention. My boss can only fire me, but Ms. Ren’s boss can get her thrown out of the country if she pisses him off.

Besides, even if their immigration status allowed them to work here legally, they still wouldn’t be allowed to work as nail technicians in New York because they haven’t met the state licensing requirements.

Between U.S. immigration law and New York State professional licensing requirements, government restrictions have robbed these women of much of their bargaining power.

The next question to ask is What do these women have to offer employers?

Not much, according the the facts in Nir’s story. Most of them don’t even know how to do the job yet, so they will have to be trained by whoever who hires them, and their inability to speak English means they can’t serve a customer without help.

In fact, their lack of English language skills severely limits the jobs they can do: Not only do they need to find a job where talking to English-speaking customers is not a requirement, they are also limited to seeking employment at businesses where the managers speak their language.

Another question to ask is What do these women get out of this?

The 20-year-old woman mentioned in the quote above, Jing Ren, starts out by paying $100 to get the nail salon job, and she works for almost three months for free, after which she earns $30/day for a 10-12 hour shift. Here’s the last report on how she’s doing:

She quit on March 8. Her boss said nothing; one colleague hugged her goodbye. After 10 months she had made about $10,000, she said.

Last month, she found a $65-a-day job at another nail salon.

Even if she only works an 8-hour day, that’s less than the New York minimum wage (but more than the minimum for tipped employees).

That doesn’t sound very good, but it does bring me to the next question. These workers certainly make less than regular American workers, but How do their wages compare to wages where they came from?

The Davos global wage calculator tells me that the average private sector wage in China is 32706 CNY, or about $5267. So Ms. Ren paid the equivalent of one week’s wages for the average Chinese worker to get her nail salon job, and worked for free for three months, and yet still managed to earn $10,000 that year. That means that at the age of 20 she is already earning the world average wage, or almost double the average wage in China. With her new $65-a-day job, she will be able to repeat that annual performance by working only three days a week. If she works a full five days a week, she will earn triple the average Chinese wage.

To put that in perspective, the equivalent for an American would be a 20-year-old without a college degree getting an offer to work overseas, paying an $800 fee to get into the program, working through a 3-month internship, and then going on to earn $80,000 the first year and $120,000 the next.

I’m not saying that all the nail salon owners are wonderful people — there’s way too much going on in that article (and its followup) to believe that. Nevertheless, that hasn’t stopped an ambitious, hard-working, risk-taking young immigrant like Ms. Ren from prospering. And as with most immigrants, if she has children, they will probably do even better.

(Obviously, I don’t know much about Ms. Ren’s specific circumstances, and I’m greatly simplifying things for purposes of this post, but I don’t think it invalidates the point that she seems to be doing pretty good compared to where she came from.)

The last question, and arguably the most important one, is What do these women want?

We can figure out what these women want by looking at the choices they make. Jing Ren chose to leave her home and cross the ocean to America to work as a nail technician in a string of seedy New York nail salons. And within a year, her mother came over to do the same. That tells us a lot.

Which brings me to my special bonus question: What happens next?

Well, the Governor has a (hastily pulled together) plan of sorts:

Gov. Andrew M. Cuomo ordered emergency measures on Sunday to combat the wage theft and health hazards faced by the thousands of people who work in New York State’s nail salon industry.

[…]

Nail salons that do not comply with orders to pay workers back wages, or are unlicensed, will be shut down.

In other words, if Cuomo’s task force finds workers who are being exploited, they will solve the problem by taking away their jobs? I understand that the goal here is to coerce nail salons into treating workers better by threatening to put them out of business, and it’s possible that this could have a net positive effect. But I guarantee that talk like this is scaring the crap out of all those workers Cuomo says he’s trying to protect. This could easily turn into a disaster that puts thousands of them out of a job. And if Cuomo thinks the nail salons are exploitative, he’s really going to hate some of the alternatives (NSFW).

“We will not stand idly by as workers are deprived of their hard-earned wages and robbed of their most basic rights.”

“Basic rights” like the right to work in a job they find acceptable for a wage they find acceptable?

Some of the proposed regulations seem like they might improve health and safety, but others show a real lack of understanding of the problem:

Salons will now be required to be bonded — which is intended to ensure, through a contract with a bonding agency, that workers can eventually be paid if salon owners are found to have underpaid the workers.

Yeah…salon owners employ illegal immigrants to do unlicensed work at illegal wages, but I’m sure they’ll get right on that bond thing…

The framework for the emergency measures began to take shape shortly after the first article was published on Thursday, according to Alphonso B. David, counsel for the governor. Staff members from several agencies reacted strongly, and began to call one another upon reading the findings, convening on Friday for hours of brainstorming sessions to hash out the plan. A decision was made to take emergency measures rather than go through the usual route by which policies are updated, which involve time-consuming steps like periods of public comment […]

I hear all the best government work begins that way. What could possibly go wrong?

Well, for one thing, the plan to force nail salons to pay their workers more might succeed. As Rich Lowry puts it in his wildly off-the-mark opinion piece,

Surely, one reason that salons can pay so poorly is that the supply of illegal workers is so plentiful.

And this supply of labor must, at least at the margins, crowd out workers already here who might consider working in salons if pay and conditions were better.

These immigrant women bring very little to the bargaining table except their willingness to work in unpleasant conditions for low pay. If you force the salon owners to spend more money on wages and equipment, they’re not going to stick with their unskilled labor force. They’re going to replace them with nail technicians who are already trained, who speak English, and who have the legal right to work here.

Apparently there’s also been a public backlash against low-cost nail salons in New York, with lots of middle class women saying they’ll stop using them. I think their hearts are in the right place, but a move like that that could put the cheap nail salons out of business, which would put immigrant workers like Ms. Ren out of a job.

I understand the desire to try to help, but it’s important to remember that these nail salon jobs (and other low-paying jobs like them all over the country) provide a path up out of poverty for thousands of people every year. The wrong response could shut that down and do a lot more harm than good.

This post by Mark Draughn at Windypundit was originally published at Some Questions to Ask About Those New York Nail Salons

Anyway, Bernstein has a post about the Trans-Pacific Partnership (TPP) trade agreement that is currently winding up negotiations, and which will soon be up for ratification by Congress. He criticizes supporters of the agreement for being too simplistic (emphasis mine):

Supporters of the Trans-Pacific Partnership (TPP), a trade agreement under negotiation between the United States and 11 other countries, make this case: Trade between countries is always good, and more trade with more countries is even better. Harvard economist Greg Mankiw goes further in a recent New York Times piece, arguing that anyone opposed to trade deals does not understand elementary economics.

Note the highlighted phrase. Because two paragraphs later, he writes this (emphasis mine again):

In the simple models of introductory textbooks, countries improve their respective economic outcomes by specializing in their “comparative advantage” — the goods they produce more efficiently than their trade partners — thereby increasing the supply of goods and lowering prices.

Actually, that’s not what comparative advantage is. In fact, it’s a common misunderstanding of comparative advantage. If Bernstein was an Economics 101 student, I think he’d lose a bunch of points for giving that definition in an exam.

Consider a pair of dentists, Alice and Bob, who make all of their money filling cavities and doing root canals. Patients needing a filling are willing to pay $100, and patients needing a root canal are willing to pay $200, and they arrive with equal probability.

Alice has years of experience and is very fast at everything. She can fill a cavity in 20 minutes and do a root canal in 30. Thus, in an 8-hour day she can serve an average of 9.6 patients of each type, earning an average of $960 for doing fillings and $1920 for doing root canals, for a total of $2880 per day.

Bob is a new dentist, and he’s a lot slower. It takes him 30 minutes to fill a cavity and 90 minutes to do a root canal. At that rate, he can only see an average of 4 patients of each type per 8-hour day, earning an average of $400 for doing fillings and $800 for doing root canals, for a total of $1200 per day.

Now suppose Alice and Bob combine their offices and share all their patients, splitting the work as efficiently as possible. In that case, Alice will do 16 straight root canals in each 8-hour day to earn $3200 per day, and Bob will do 16 straight fillings in each 8-hour day to earn $1600 per day.

Note that both Alice and Bob make more money by splitting the work. And note that it’s worth it for Alice to let Bob do some of the work even though she is better at everything than he is.

We can see why this works by looking at their respective opportunity costs for each procedure.

• Alice earns $300/hour doing fillings and $400/hour doing root canal procedures, so she makes more money by doing root canal procedures. Looked at another way, every hour she has to spend filling cavities instead of doing root canals will cost her $100. Alice therefore prefers to do root canals.
• Bob earns $200/hour doing fillings and $133/hour doing root canal procedures, so he actually makes more doing fillings. Looked at the other way, every hour he spends doing root canals instead of filling cavities will cost him $67. Bob therefore prefers to fill cavities.

Thus, even though Alice as an absolute advantage over Bob in everything, she’s still better off by letting him fill all the cavities so she can do all the root canal procedures because she has a comparative advantage in root canals and he has a comparative advantage in fillings.

Of course, Alice and Bob don’t have to merge offices to do this. They can simply refer patients to each other. It’s still better for both of them that way. And if Alice and Bob are in separate countries, then whenever Alice refers a patient to Bob, that would count as an import from Bob’s country to Alice’s country, and vice versa.

(I probably should have picked an example with transportable goods instead of services — maybe bakeries where one is more efficient at making cakes and the other is more efficient at making pies — but it works out the same. When you buy services from outside your country, such as staying overnight in a hotel as a tourist, it counts as an import in the national accounts, the same as if you’d imported a physical good.)

That’s comparative advantage. Bernstein defined it as applying to “the goods they produce more efficiently than their trade partners,” but even if a country doesn’t produce anything more efficiently than its trading partners, it will still make economic sense to concentrate on the things it does best and outsource production of the rest to other countries. Thus there’s always something for everyone to do, no matter how inefficiently they do it.

It doesn’t really make much of a difference in the rest of Bernstein’s article — he goes on to make a good point about the lack of transparency in TPP negotiations and a dubious point about currency manipulation — but if you’re going to argue that academic economists are using a theory that is too simplistic, it helps if you state the theory correctly.

This post by Mark Draughn at Windypundit was originally published at It Helps To Get the Elementary Economics Right

5. Help women to prosper: Women are twice as likely as men to work for minimum wage. The gender pay gap in the retail sector alone costs women $40 billion annually in lost wages. This wasn’t so bad in 1960 when only 11 percent of American households had a female head, but it’s dire today when women are the primary breadwinners in 40 percent of homes. Plus, it’s bad for the economy. Equal pay would raise American GDP by 2.9 percent, or $448 billion.

The numbers in that last sentence are stunning, but I couldn’t see how equal pay legislation could increase GDP.

Tracing the link in the original article leads to last year’s U.S. Senate Budget committee testimony by Heather Boushey, Executive Director and Chief Economist for the Washington Center for Equitable Growth. She in turn cites a 2014 briefing paper titled “How Equal Pay for Working Women would Reduce Poverty and Grow the American Economy” by Heidi Hartmann, Jeffrey Hayes, and Jennifer Clark of the Institute for Women’s Policy Research.

Here’s what that paper has to say in the summary of its findings. Notice the very careful phrasing (emphasis mine):

The U.S. economy would have produced additional income of $447.6 billion if women received equal pay; this represents 2.9 percent of 2012 gross domestic product (GDP).

The paper gets to those numbers by using data from the 2010-2012 Current Population Survey Annual Social and Economic Supplement to estimate the pay difference between men and women, controlled for age, education, annual hours of work, metropolitan residence, and region of the country. The authors then use those figures to project how much more money women would have made if they had been paid the same as men.

The authors calculated that women earned an average of $36,129 a year, and that their pay was 85% as much as men for the same work. So if women earned as much as men, they would be earning $42,380 per year. That’s an increase of $6,251 a year for all 71.6 million working women. Multiply it out, and you get $447.6 billion, which is 2.9% of GDP. (I get a slightly different figure when I do the math, but it’s close enough.)

Income and production are two sides of the same process: We earn our income by selling our production of goods and services, and we spend that income buying and consuming the same goods and services. So if our collective income increases, production must also have increased. Consequently, if women earn more money, and they do not do so at the expense of anyone else, then the additional income would have to increase gross domestic product.

(There are actually many variations on income and production figures, depending on which components and flows are included in the calculations, and care has to be taken to add and subtract the right components when transforming numbers between two national accounts. In the U.S. we calculate GDP from both production data and from income data. In theory, this is an accounting identity, but there are always data discrepancies that keep income and production figures from matching exactly.)

The point of the careful phrasing in the summary is that $447.6 billion is the estimated amount that GDP would have been higher if women had somehow earned at the same rate as men, all other things being equal. How exactly that could happen is carefully left unsaid. In particular, the study does not say that equal pay legislation would increase GDP by that amount.

If we just passed a law that forced employers to pay women 17% more for their work, that would increase women’s paychecks, which would increase the national income accounts…but not really.

For an economic story to make sense, it has to make sense when applied to the real economy of goods and services. So even though U.S. GDP is expressed in dollars, what really matters is the total amount of goods and services that are produced. So in order for GDP to increase by $447.6 billion, it’s not enough for paychecks to increase by $447.6 billion. Our economy must actually produce $447.6 billion worth of additional goods and services.

But by definition, the equal pay legislation is simply giving women more money for the work they are already doing, which means that the increase in paychecks is not accompanied by an increase in the production of real goods and services. We’d be paying more money for the exact same stuff.

When you pay more for the same thing, we call it inflation. The U.S. Bureau of Economic Analysis calculates both nominal GDP, which is inflated, and real GDP, measured in constant dollars adjusted for inflation. The increase in women’s nominal earnings would show up as inflation of nominal GDP, while real GDP would be unchanged.

Since we’re not raising men’s incomes, the inflation would actually eat away at their real earning power. So the benefits to women would come at the expense of men. Women would be getting a larger share of the pie, but the pie would still be the same size. The deadweight $447.6 billion gain to GDP that Domini and Faruqi envision from the simplistic IWPR calculation is a fantasy.

This post by Mark Draughn at Windypundit was originally published at Equal Pay Won’t Help GDP

It’s sad that, as soon as the second paragraph, the writer here demonstrates the ignorance of rent regulation laws in New York City that advocates indicated exists on the panel. It’s almost as if advocates said, “beware if you write about rent regulation in NYC – because you probably do not understand it” and then the author proceeded to prove them right. Once you address this fundamental error in paragraph 2 I will read the rest of the article: “And apparently sets increases to the same amount for everyone, as if there was no variation in the housing market from one neighborhood to the next.”

I will not help you out by explaining how this is almost, but not quite completely, wrong. Please contact people at whatever organization offering expertise in this area and they will explain it to you. Until you do, writing about rent regulation in NYC should be in your “Let me wait and find out first” file (lol) and when this is corrected, I, for one, will be happy to read the rest of the article.

First of all, I don’t particularly care if Joe reads the rest of my post. (Or this one.) But he shouldn’t criticize it as broadly as he does later if he hasn’t actually read it. It’s like a reviewer who says he walked out of a movie and then complains about the ending.

Second, telling me I’m wrong and then not explaining why is a weak attempt to hide the lack of an argument. This isn’t Twitter, where space is limited. Joe could easily have written a brief argument or provided a few links.

Third, when you write “I will not help you out by explaining,” you’re not fooling anyone. We’ve all seen that trick before:

“Lots of zoologists will tell you that unicorns are real!”

“Like who?”

“You can find them if you know where to look.”

“Do you have any names? Or maybe a link?”

“I’m not going to do your work for you.”

Joe’s trying to spin his response as if he’s refusing to help a lazy writer like me find something obvious, in the hope that no one will notice that he hasn’t provided support for his argument.

Fourth, my main source for the assertion that rent control “…apparently sets increases to the same amount for everyone, as if there was no variation in the housing market from one neighborhood to the next” is Fraade’s own article, which describes a single 1% rate increase cap for all rent stabilized housing in the entire city of New York.

Fifth, a plain reading of the explanatory statement for most recent Apartment Order from the New York City Rent Guidelines lists a single rate for the entire city, as does the Apartment Order itself.

Sixth, I realize that there are differences between apartments based on the regulations they fall under, the year they were built, their individual rental history, and any improvements to the building or the individual units. But the 1% city-wide rent stabilization cap nevertheless implicitly assumes a certain unnatural sameness, regardless of changes in market value. I have yet to find anything that contradicts this.

Please don’t take that the wrong way – I’m not being arrogant about knowledge here; just insisting that you start off with an understanding of the rent regulation laws in NYC rather than letting your ideology guide you in discussing it. Look closely at the facts first (and get them right), do some research on the matter (your own research if you really want to impress your readers) and then construct an argument that gives us something to think about that is not talking points regurgitated from economics 101.

Suggesting I do research seems like a reasonable demand, but it’s actually another trick argument. It works like this:

“There are trolls living under our bridges!”

“I’ve never seen any.”

“Ah, then you must not be looking hard enough.”

If I say that I looked into it and can’t find anything wrong with what I said, he can respond that I’m just bad at research. Which is a lot easier than showing me his research that explains my error. I mean, it’s amusing that Joe’s advice on what I can do to impress my readers is to do research and construct an argument, since he does none of that in his comment.

(Seriously, the point about uniform rent increases is not actually a major part of the point I was making, but if anyone out there can show me where I got it wrong, I’d appreciate the correction.)

Further, Joe’s assertion that I shouldn’t let my ideology guide my discussion is just nuts. That’s what ideology is for. I swear, some people use “ideology” as a way to make having principles sound dirty. Joe doesn’t have to agree with my ideas, and Lord knows he’s welcome to dispute them, but to say I shouldn’t be bringing my ideas into an argument is just silly.

Joe tries the same trick again when he refers to my argument as “talking points.” Saying that you’ve heard my argument from someone else is not the same as proving me wrong. I have to admit though, while I’ve seen political pundits attacking each other for spouting Republican or Democratic talking points, I’ve never before seen someone refer to economics as talking points.

I guess maybe Joe’s tired of hearing opponents of rent control explain over and over that the problems of price controls are “basic Economics 101.” But that doesn’t change the fact that the problems of price control are basic Economics 101. Literally. As in, the effects of price caps on supply is covered in Chapter 6 of one of the most popular introductory economics textbooks. (If you don’t want to buy a whole textbook, this is quick summary of the effects of price controls, and this summary even uses New York rent control as an example.)

Economists disagree over a lot of things, but the awfulness of rent control is not one of them. Only 2% of the members of the IGM Experts Panel agreed with the statement that “Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”

I mean, for God’s sake, economists as far apart as Paul Krugman and Thomas Sowell are both against rent control. Do you realize how crazy that is? The reason you keep hearing economics “talking points” about rent control is because the idea that rent controls reduce the quality and quantity of housing is arguably the most agreed-upon proposition in economics.

This post by Mark Draughn at Windypundit was originally published at It Helps To Have an Argument

For something that so deeply affects the workings of the city’s housing market, rent regulation in New York is widely misunderstood. At a recent event put on by the Pratt Institute and the NYC Planners Network, a group of progressive city-planning professionals, housing advocates on the panel spent as much time explaining how rent regulation works as they did explaining why we should keep it.

The only sensible response to rent control is to get rid of it. All of the discussion should be about how to phase out rent control in a way that doesn’t produce painful market shocks that devastate poor tenants.

Rent stabilization is less stringent; it covers multi-unit dwellings built between 1947 and 1974, and yearly rent increases are set by the Rent Guidelines Board (currently 1 percent, the lowest in fifty years).

A board that oversees pricing. And apparently sets increases to the same amount for everyone, as if there was no variation in the housing market from one neighborhood to the next. This is how the Soviets managed their economy, and look where it got them.

In rent stabilized apartments, tenants have the right to renew their leases, and have more leeway than market-rate tenants when pursuing legal remedies against their landlords if they are being mistreated. (Rent-stabilized tenants have historically and frequently been targets of landlord harassment.)

The linked story is about a building owner with a criminal history who is harassing tenants by degrading the quality of the building. This is to be expected under rent control.

Property owners want to earn a profit. That’s why they buy apartment buildings. When owners can’t increase their gross income by improving the building and raising the rent, their only choice is to cut costs by skimping on building maintenance and operation. They fire the doorman, let the carpets wear thin, and give tenants buckets to collect water when the roof leaks. They switch to lower wattage lights in all the public areas. They shut down the elevator, close the laundry room, and stop replacing busted security cameras. They let repairs go as long as possible, and they use substandard materials and unlicensed contractors. If anyone complains or makes trouble, they get harassed into leaving.

That’s a shitty way to run a building, and decent landlords will try not to run that kind of building. Of course, the easiest way to avoid being a shitty landlord is to not be a landlord at all. Thus rent control discourages good people from owning rental properties, pretty much guaranteeing that landlords are disproportionately likely to be shitty.

According to the panelists, renewing both these regulations is their first priority, simply because they affect so many people—2.5 million New Yorkers, living in about 45 percent of the city’s apartments.

This is why we can’t solve the rent control problem the easy way — by letting it expire. Disrupting the housing of 2.5 million people all at once would create havoc, with some tenants of formerly rent-controlled apartments being forced to seek housing in lower-cost neighborhoods, bidding up the rental prices there. Eventually some tenants will pay more, some tenants will leave, some landlords will lower their rents, and some developers will build new housing until the turmoil settles. But a good plan for getting rid of rent control would get the city to that same endpoint without all the disruption and pain in the middle.

And despite a media tendency to hold up middle-class Manhattanites as the face of rent control, rent-regulated tenants are disproportionately low-income people in low-income neighborhoods. This fact led Delsenia Glover of the Alliance for Tenant Power to make perhaps the most dramatic prediction of the night: if rent regulation is not renewed, low- and moderate-income people will be forced out of New York within a decade.

Either that or New York would have to come up with realistic housing policies. Which is what they do in the vast majority of the U.S. that doesn’t have rent control and yet still have low and middle-income residents living in apartments they can afford. It’s not like free-market housing is a wacky libertarian idea that’s never been tried.

The main problem with rent control in New York is that the system is administered in the clumsiest way possible.

No. The main problem with rent control in New York is the rent control.

Even worse, according to Harvey Epstein of the Urban Justice Center, 250,000 units have been removed from the rolls of rent-stabilized apartments over the years. This happens in a variety of ways, most notably through “vacancy decontrol,” which infamously allows landlords to make an apartment market-rate once the rent reaches $2,500 per month and the tenants move out (Mayor de Blasio has come out in favor of repealing this rule). No matter how it’s done, though, once an apartment becomes market-rate, it stays that way for good.

If you’ve been following along, New York rent control means that if you own apartments that rent for less than $2500 a month, your rent increase last year was capped at 1 percent. That’s less than the inflation rate of 1.6 percent, so your real income actually went down. On the other hand, if you own apartments that rent for more than $2500 a month, you can raise the rent as much as the market will bear.

That leads me to a question: All other things being equal, if you were investing in New York real estate, would you rather invest in units that rent for less than $2500 or more than $2500?

And then I have a followup question: Can you think of any reason why New York might be experiencing a shortage of affordable rental units?

Which leads us to…

The roots of 421a are in the distressed New York of the 1970s, when city leaders feared developers would never again build new housing. In some neighborhoods, 421a comes with no strings attached—if you build, you get a tax break. In other areas, developers can only take the tax break if they include 20 percent affordable housing in a project.

Either way, the result has been a bonanza for builders, allowing luxury towers like One57 to be built mostly tax-free. Williams estimated that the city loses $1.1 billion per year to 421a, and has only gained a measly 12,000 units in exchange. Most housing advocates in the city want the program to be significantly scaled back or scrapped altogether.

Having made the construction of affordable housing unprofitable because of rent control, the city then sets up a program to give away taxpayer money to developers. Through the miracle of regulatory capture, however, many of those developers aren’t actually using the money on projects that advance the affordable housing goals of the program. The programs do manage to further tie up the city’s housing stock in regulatory knots.

Which leads to…

Noting that 90 percent of all tenants in housing court appear pro se, Epstein said that New York’s current system for resolving housing disputes is “complaint-driven,” explaining that “we’ve set up a structure that prevents people from preserving affordable housing because no one’s looking over the landlord’s shoulder, and they know it.”

In a functioning free market, the people “looking over the landlord’s shoulder” are the tenants. If they don’t like the way their landlord is treating them, they can move out. If the vacated unit rents for a $1000-a-month, and it takes the landlord a month to get somebody in it, that’s equivalent to fining the landlord $1000 for mistreating the tenant. Landlords will work hard to avoid that, if not because they’re nice people, then because they like their money.

That incentive system breaks down under rent control. The threat to move out and stop paying rent is less effective when the rent is low because the landlord has less to lose. And if the tenant has locked in a good rate, the threat to leave isn’t very credible since it would mean moving someplace with higher rent. Actually, since decades of low rental rates have discouraged investment in rental properties, where would the tenant go? Tenants are stuck and the landlords know it, so they don’t have to try very hard to hang onto good tenants.

Without the discipline of the market, tenants’ rights advocates are stuck proposing layer after layer of regulations and procedures, each one trying to offset the perverse incentives of what came before.

There has been plenty of advocacy around the rights of rent-regulated tenants—like this spring’s battle to renew state rent laws, and last year’s unsuccessful fight to get a rent freeze. But there’s been little visible work done on behalf of tenants who are still a majority of the city’s renters: those who don’t live in rent-stabilized or public housing. I asked Williams after the panel what market-rate tenants might be able to expect after this spring’s battles, and she was blunt: “They’re screwed.”

I’d like to hear more of an explanation of why Williams thinks that. According to Landlord.com only four states have rent control — California, Maryland, New Jersey, and New York — along with the District of Columbia. The rest of us live without rent control, and we’re not exactly living in a hellscape. In fact, Googling around for the “Top 10 priciest U.S. cities to rent an apartment,” seven of them — San Diego, Oakland, San Jose, Los Angeles, Washington D.C., New York City, San Francisco — have some kind of rent control.

That doesn’t mean that rent control causes higher rents — the causality could go the other way, with high rents making it politically likely that a city will adopt rent control — but it does cast doubt on the long-term effectiveness of rent control.

Furthermore, some basic economics tells us that artificially capping the price of a good is likely to create a shortage. We had a spectacular example of this during the 1973 oil crisis, when the government respond to shocks in the oil market with price controls. As with New York real estate investors who stopped building rental units, oil companies stopped importing as much oil, and gas stations started running out of gas at the pumps. Even with alternate-day rationing, there were long lines for the gas stations, and fights would break out between people waiting in line. The trucking industry was especially hard hit by the high prices and shortages, and tensions rose to the point that there were shootings and bombings.

In the housing production chain, renting an apartment to a tenant is only the last step, and trying to force prices lower there is only going to work if the production process itself can actually be modified to operate less expensively. If New York isn’t producing enough affordable housing, they place to fix it is further back in the process. You have to figure out what barriers are keeping the market from producing the low-cost housing that is so clearly in demand.

We do this all the time with other products. Just in my lifetime we’ve figured out how to make lots of things less expensive — food, clothing, appliances, mobile phones, televisions. The most extreme example I can think of is computers. When the Cray 2 supercomputer was released in 1985 it cost $40 million in today’s dollars. Equivalent computing power costs maybe $800 today (and it’s more reliable and fits in your briefcase). But we didn’t hammer down the cost of computers by having an Alliance For Computer Users that pressured the Computer Pricing Guidelines Board into lowering the caps on computer prices.

And that won’t work for housing either.

This post by Mark Draughn at Windypundit was originally published at Clap If You Believe In Rent Control

The base pay for a fast-food worker in Denmark is $20, and the pay package includes considerable non-wage benefits, including five weeks’ paid vacation, paid maternity and paternity leave and a pension plan. What’s the U.S. fast-food pay package? Um…not so much. The average hourly wage is $8.90, with few benefits, and the base wage is closer to $8.

Now, this huge difference poses a huge problem for those who want to argue that such compensation levels are set solely by the market fundamentals of supply, demand and productivity.

I don’t know too many people who argue that that compensation levels are set solely by the market, but lots of free market advocates argue that compensation levels should be set solely by the market.

Surely those factors play a role, but the difference in pay is too large to be explained by market factors alone. Denmark and the United States are different countries serving different markets, but a burger is a burger — and we’re not in different universes.

Clearly, Bernstein doesn’t know very much about burgers if he thinks they’re all like Big Macs, but I’ll grant that McDonald’s burgers are probably mostly the same everywhere. But that doesn’t mean that McDonald’s restaurants are operated the same everywhere. I’m guessing that a McDonald’s with those labor costs operates a bit differently than the ones I’m used to.

An economy is a complex system, and trying to push it around often produces unintended consequences. Bernstein implies that the higher pay for McDonald’s workers comes at the cost of making restaurants less profitable. If that’s the case, then we would expect that the higher wages would force McDonald’s to cherry-pick its best locations for restaurants, and drop all the less profitable locations, or never build anything there in the first place.

And indeed that seems to be the case. In proportion to its population, Denmark has about 1/3 as many McDonald’s as the U.S. Now I’m not saying that Denmark could triple the number of jobs in its fast food sector by allowing lower wages — there are undoubtedly other factors explaining the relative lack of McDonald’s — but the high wages probably aren’t helping, and if they’re widespread in other sectors of the economy, they may be contributing to the high cost of living in Denmark.

Denmark does have a much more balanced distribution of income according to World Bank estimates, but their overall income is lower, with the average person in Denmark earning a GDP per capita that is about 80% of what U.S. residents make. Denmark also currently has an extra point of unemployment.

Naturally, the higher labor rates raise the prices on a McDonald’s menu:

Of course, burgers cost more in Denmark. A Big Mac is $5.60 there, compared to $4.80 here. But that price difference is dwarfed by the wage difference. Not that she’d necessarily want to, but a Danish worker can buy almost twice as many Big Mac’s on her wage than her American counterpart.

A worker at McDonald’s could buy almost twice as many Big Macs on her wage, but every other person in Denmark who is not a McDonald’s worker can only buy about 85% as many burgers as their American counterparts because of the higher price. The burger price increase may not be as steep as the wage increase, but it affects many times more people.

Here in the United States, we’re all about lower prices. What we often fail to do is connect lower prices to lower wages. In part, that’s the result of a national economic model that puts the consumer at the center of the action.

That’s a little mixed up. Prices and wages are connected, but not just in the way Bernstein suggests. Let me see if I can explain what I mean.

To keep it simple, let’s suppose you work for one hour a day for $10 per hour, and you spend all $10 every day on food at McDonald’s. Day in, day out, that’s your routine: Work for an hour, buy food to stay alive.

Then one day, you negotiate with your boss for a 10% raise. Now you make your daily trip to McDonald’s with $11 in your pocket. You still spend $10 on a burger, fries, and a drink, but you have $1 left over to spend on something else — maybe a mini-desert at McDonald’s, or something to read, or maybe you save up and buy an article of clothing. Whatever you buy with that extra dollar is the tangible manifestation of your increased income.

But suppose that when you get to McDonald’s, you’re shocked to discover that prices have gone up 10%, so your regular meal now costs $11. You can still afford to eat, but don’t have money left over for anything else. Once again, you’re working an hour a day and spending all your income on the same food. Your quality of life has not changed. Your income has gone up in nominal terms, but in reality nothing has changed because you are not able to consume any more than before.

Finally, let’s back up and suppose your negotiation with your boss failed, and you still earn $10 an hour. Feeling a little dejected, you stroll into McDonald’s only to receive a pleasant surprise: McDonald’s has cut its prices by 10%. Your meal now only costs $9, meaning you have $1 left over to spend on something else, just as you would have if you had received a 10% raise. By lowering its prices, McDonald’s has effectively given you a small raise.

The true measurement of your income is not the money that you’re paid, but the goods and services you can consume. You are better off if your employer pays you more money per hour of work, but you are also better off if the production of things you buy becomes more efficient, so you can buy more stuff for the same amount of money. The money itself is only the medium of exchange that you use to convert your hard work producing goods and services into an improved quality of life by consuming goods and services. In fact, we can take the money out of the equation entirely and conclude that your quality of life is directly related to the amount of goods you are able to consume for every hour of work you do.

If we expand our view to encompass the whole economy, it’s pretty clear that we can only consume as much as we produce — because those consumer goods and services don’t materialize out of nowhere. (I’m ignoring fluctuations due to imports, exports, and warehousing for the sake of simplicity.) So the more we can produce in an hour, the more we have available to consume. Or to put it another way, the less labor it takes to make something, the more of that thing we can produce with our existing labor force, and the more we have to consume.

Labor productivity has increased dramatically in the developed world, and it has made us rich. Historically, keeping humanity fed used to require the labor of anywhere from 50 to 80 percent of the population, including women and children. But over the past few hundred years we’ve figured out much more efficient forms of agriculture, and the percentage of agriculture workers in developed countries like the United States has fallen to less than 2 percent.

All those people who used to labor at farming are now working to produce everything else we have — sturdy housing, reliable transportation, electric power, advanced medicine, colorful clothing, instant communications, stimulating entertainment — all the advantages of our modern civilization. We have so much more than our ancestors because it’s all so much cheaper to produce.

In denouncing the pursuit of low prices, Berstein is attacking the source of our prosperity.

This post by Mark Draughn at Windypundit was originally published at The Unappreciated Virtues of Low Prices

There are a number of arguments against raising the minimum wage — it’s poorly targeted, it causes economic distortions, it’s unfair — but the one that attracts the most attention is the argument that increasing the minimum wage will cause a drop in employment among the kinds of workers who earn minimum wage.

Exactly how the job market responds to increases in the minimum wage is a somewhat murky issue, and research on the effects of raising the minimum wage have been inconclusive. However, the idea that increasing the minimum wage will hurt employment is not based on some esoteric theoretical proposition that has caught economists’ fancy. It’s based on a very broad theory that has proven itself often: When the cost of something goes up, people will buy less of it.

It’s that simple. The whole world of commerce is built around that theory, and we see it working every day. For example, it’s a lot easier to eat at a restaurant than to make dinner at home, and restaurant food likely offers better taste and more variety, and yet people don’t eat dinner out every day, because restaurants are more costly than eating at home. Alternatively, if you’re at the grocery store and you notice a great sale on your favorite food, you’ll probably buy more, which means that before it went on sale, the higher price was making you buy less. That quantity demanded declines as prices increase is pretty much the way of the world.

Therefore, I think we can safely say that raising the minimum wage (1) increases the income of low-skilled workers who were earning less than the minimum wage, (2) raises the cost of hiring low-skilled workers, and therefore (3) makes hiring low-skilled workers less attractive for employers. The benefit of increased pay comes in exchange for increased labor costs for employers.

Still, raising the minimum wage does provide some benefit to low-skilled employees, and it may even provide a net benefit, since the people who lose their jobs will be losing crappy minimum wage jobs. There are worse ways to help low-skilled workers.

As proof of that, Sarah Jaffe at In These Times is touting an even worse idea: The Bad Boss Tax.

As conceived, the “bad business fee” legislation would require companies to disclose how many of their employees are receiving public assistance from the state or federal government. Companies would then pay a fine based on the de facto subsidies they receive by externalizing labor costs onto taxpayers.

Some of the proposals for implementing this “bad business fee” would be a compliance nightmare:

The fee might be implemented on a per-employee basis—in Cook County, Illinois, NPA and JWJ partners are considering a $5,000 charge for each employee receiving public assistance—or as a lump sum based on how much an entire sector costs taxpayers, which would then be split up among the employers in that sector. The organizers also want to hold big businesses accountable for their supply chains and franchisees. For instance, if McDonald’s Corporation got slapped with a fee for each restaurant that underpays its workers, it could be pushed to include higher wages in its franchise contracts. Similarly, if Walmart had to pay not just for its retail employees, but the workers in its warehouses, it might have an incentive to require better wages from subcontractors.

Well, whatever else it does, this will certainly increase employment of accountants and lawyers. I mean, can you imagine the nightmare of a business having to obtain these reports from dozens or hundreds of suppliers and thousands of franchisees?

And can anyone seriously believe that charging businesses $5000 for hiring people who are on public assistance will not discourage businesses from hiring people who are on public assistance? How will low-skilled laborers acquire the skills they need to get off public assistance if we make it harder for businesses to give them jobs?

In fact, the low-skilled laborers are being cut out of the process almost completely. As with raising the minimum wage, the bad boss tax would also take money away from businesses that hire low-skilled workers, making them less attractive as employees, but at least increasing the minimum wage funnels the money from employers to low-skilled employees. The “bad business fee,” on the other hand, would take money from employers and give it to the government.

To be sure, the money would only be used to fund the finest of progressive social programs:

At a municipal level, Murray explains, the money could go to an existing development department that could manage and distribute the money. On a statewide level, it could be distributed through the revenue department as a tax break for workers. There’s also the possibility of distributing some of the funds to nonprofits involved with direct worker support, childcare or food assistance.

McGrath says the money could go to bolster the public services that workers rely on, or to hire more people to enforce wage and hour laws. “Minnesota succeeded in raising its minimum wageto $9.50 an hour by 2016 and indexing it to inflation,” he says. “But we have a paltry number of wage and hour investigators in our state. How will we know that people are actually being paid the wage that was just won?”

Elsewhere, other community and labor partners are busy brainstorming about what would make sense in their states and cities. In Chicago, housing subsidies are a possibility; in New York, the money could be used to offset the rising costs of public transportation; in San Francisco, a combination of housing and transportation issues is under consideration, as gentrification has rapidly made it harder for low-wage workers to live near their jobs. In New Mexico, using a bad business fee to support early childhood education is being discussed.

This is a familiar pattern for spending on social welfare programs. It seems that wherever you find a recognizable group of disadvantaged people, you will find a buzzing cloud of middle class people who make a living off of providing them with government-paid services. It would be simplest, and arguably most efficient, to just give poor people the money they need to improve their lives, but instead the money is used to hire social workers, clerks, lawyers, psychologists, and childcare specialists or it’s used to fund programs in education, public transit, or housing.

In this case, to be completely cynical about it, the logic at work seems to be, “Those greedy companies aren’t paying workers enough, so we should tax the companies and use the money to hire people like me to provide services to their workers.”

The public choice implications aren’t pretty either. Once there are thousands of people earning a living by providing services paid for by the “bad boss tax” on workers receiving public assistance, won’t that create a constituency that never wants workers to get off public assistance?

In that way, the fee is win-win. If companies seek to avoid it, they end up doing something just as good for their employees, or even better. Martin says, “For me in particular, the better part is my boss may be thinking, ‘Well, I should just pay my employees better. I should just pay a living wage. I should just give Cliff some benefits.’ ”

Or “Cliff shows promise and I was thinking of promoting him, but now I can’t afford the $5000 I’d have to pay to keep him around. Better to terminate him and give the hours to Mary and Bill.”

Or “I should just terminate Cliff and Mary and Bill and replace all three of them with one employee trained to operate the machine that does their job.”

I think proponents of this idea are sacrificing the welfare of the people they claim to be helping so that they can revel in the joy of punishing businesses they don’t like.

This post by Mark Draughn at Windypundit was originally published at What Could Be Worse Than Raising the Minimum Wage?

The URL at the bottom indicates it’s from the folks at “I love it when I wake up in the morning and Barack Obama is President.” I’m assuming the numbers are accurate. There’s no date on it, but with that Dow number it has to be fairly recent.

Economic recessions are, by definition, deviations from the norm. The economy is humming along, everybody is working, output is growing a little every year…and then something goes wrong. For some reason, the economy slows down. People want to work, but they can’t find jobs, even though offices and factories sit empty and ready for use. Somehow the economy loses efficiency, the market no longer links up jobs and capital with customers. Output falls, consumption falls, and people suffer. Why exactly it happens is the subject of some controversy — there are several major theories — but recessions are part of the business cycle, and the economy eventually works its way back to its normal state of employment and growth. There may or may not be much the government can do to help with that (again, there are several theories).

Barack Obama took over the Presidency while the United States was in the midst of a deep depression caused by the mortgage crisis. The recession ended, and the economy improved. Just like it always does when a recession ends. So it’s not clear to me that President Obama should really be given credit for the economic growth depicted in the 5 Years of Obama meme, unless you want to give him credit for ending the recession. And if you do give him credit for ending the recession, you also have to hold him responsible for how long it took:

Change in U.S. Non-Farm Employment in Post-WWII Recessions

This has been the longest and deepest post-war recession in terms of the employment rate. The same is true when you look at production:

Change in U.S. Real GDP in Post-WWII Recessions

You might argue that Obama isn’t responsible for the depression, since that started during George W. Bush’s presidency. In that case, Obama reigned over one of the slowest recoveries:

Change in U.S. Non-Farm Employment in Post-WWII Recoveries

Change in U.S. Real GDP in Post-WWII Recoveries

I don’t know how much President Obama can really affect the business cycle, but if he’s responsible for it, he hasn’t been doing a very good job. Those are the pesky facts.

(Charts are from the Federal Reserve Bank of Minneapolis, The Recession and Recovery in Perspective.)

This post by Mark Draughn at Windypundit was originally published at 5 Years of the Business Cycle

It’s the last field which attracts the attention of Kent Scheidegger at Crime and Consequences, who quotes from Becker’s biographical sketch at the Library of Economics and Liberty:

Not even crime escaped Becker’s keen analytical mind. In the late 1960s he wrote a trail-blazing article whose working assumption is that the decision to commit crime is a function of the costs and benefits of crime. From this assumption he concluded that the way to reduce crime is to raise the probability of punishment or to make the punishment more severe. His insights into crime, like his insights on discrimination and human capital, helped spawn a new branch of economics.

This meets with Scheidegger’s approval, and he goes on to comment,

The latter point seems so obvious now, yet the people running around proclaiming themselves “smart on crime” today apparently don’t get it.  The genuinely smart people do.

I’m not sure what Scheidegger means by “smart on crime,” but I have no doubt that Becker said something like that, and I’m pretty sure I agree with him. One of the basic rules of economic thinking is to assume that people respond to incentives. That seems like an obvious thing to say, but economists treat it almost as an axiom of human behavior. They assume that people will respond to incentives at all times, in all places, under any circumstances. Always.

This is obviously something of an oversimplification, of course, but in decades of testing the theory that people respond to incentives against observations of the real world, economists have rarely had cause to regret the assumption. So of course economists like Becker believe that punishing people for committing crimes will encourage them to commit fewer crimes. Anything else would violate one of the most important rules economists have about human nature.

It’s too bad, though, that the folks at Crime & Consequences (especially Bill Otis) don’t take to heart some of Gary Becker’s other writing. For example, economists generally assume that when you make a decision about how to live your life, you will do so with the intent of improving the quality of your life. And since you have to live with the results of your decision, you have more of an incentive to make the right decision than anyone else.

Further, unless you have some sort of mental incapacity (due to age or infirmity, say) you also have more information than anyone else about exactly what will make you happy. It therefore follows that, assuming the goal of public policy is to maximize our combined quality of life, the best approach is to allow each person to make as many decisions about their own life as possible, with the important limitation that they must also allow everyone else to do the same.

Basically, the more people are free to choose, the more they will choose to make the world better. And rather a lot of economists see no reason not to extend this reasoning to include illegal drugs: If you choose to consume them, it must be because you believe they will improve the quality of your life, and nobody has more information or a better incentive to make that consumption choice than you.

Although not the most radical of anti-prohibition economists, Gary Becker had this to say:

The 40 year-old American “war on drugs” has been a colossal failure. No progress in dealing with drugs can be expected until that basic truth is recognized. Every conceivable approach has been tried to help the war succeed, such as long prison terms for persons convicted of selling or using drugs, trying to prevent drugs from entering the US from Mexico and other countries, and confiscating huge quantities of drugs (remember The French Connection?). At some point all wars that fail are terminated, and alternative approaches explored.

…

The evidence from Portugal, a country that decriminalized all drug use in 2001, offers some support for the claim that decriminalization of drug use will reduce addiction to drugs. A 2010 study in the British Journal of Criminology concluded that decriminalization in Portugal reduced imprisonment on drug-related charges, only slightly increased, if at all, drug experimentation among young persons, increased visits to clinics that help end drug addictions, and reduced deaths from drug overdoses.

…

The retreat from the war on drugs has already begun. The question is whether it will be a sensible retreat with systematic changes in the law toward decriminalization and legalization of drugs, or a disorganized retreat that leaves users and sellers of drugs with unclear legal status.

Becker and other economists have been saying stuff like that for a long time. It seems inconsistent to believe that people will change their behavior as a rational response to punishment in order to improve the quality of their lives, and yet to assume that observed behavior such as drug consumption is not also a rational response that improves the quality of their lives.

This post by Mark Draughn at Windypundit was originally published at Gary Becker on Crime

Republicans in America suffer a crippling anxiety. It’s the terrible fear of corporations paying poor workers too much.

I don’t have any special claim to understanding why Republicans do the things they do, but this is at least plausible, in the sense that Republicans might be craven servants of business who want to prevent corporate owners from paying too much. Unfortunately, Gerard’s argument very quickly degenerates into lies and confusion.

The GOP is so afraid that the nation’s lowest wage earners will get a raise that Republican politicians across the country are working overtime to outlaw wages above $7.25 an hour for these workers.

That’s simply a lie. Nobody is trying to outlaw higher wages for workers. Under any of the laws Gerard describes, employers can pay employees as much as they want. What he’s complaining about is something different:

They’re passing legislation forbidding towns and counties from raising the minimum wage in their jurisdictions. Republicans insist: no pay bump for those raking in $15,080 a year!

That second sentence doesn’t follow from the first. From his own description, Republicans aren’t preventing workers from getting raises, they’re preventing small government units from forcing businesses to give workers raises. Businesses are still free to give pay bumps if they want to. They just can’t be forced to do so above and beyond the state minimum wage.

On the other side, however, there’s no amount of pay, perks, private jets, premium health plans and golden parachutes that Republican politicians believe could possibly be too much for a CEO.

As long as the corporate owners are okay with paying their CEO a crapton of money, I don’t see why it should be Republicans’ business. Or Leo Gerard’s.

That Oracle CEO Larry Ellison took home $78,440,657 last year is completely reasonable in the minds of Republicans. That it would take a minimum wage earner 5,201 years to earn what Larry took out of his company for one 365-day period is, according to Republican-think, a morally correct calculation.

I don’t see what Larry Ellison’s paycheck has to do with minimum wage laws. I suppose you could argue that if Oracle wasn’t paying him so much, they’d have more to pay their workers, but Oracle has 120,000 employees, so that’s only about $654 per employee, which works out to about 33 cents per hour over the course of a year. I suppose that’s something, but it’s not much.

Also, the reason businesses pay minimum wage workers so little is because that’s the wage the workers are willing to work for. I don’t see how reducing the CEO’s salary would change the amount the workers are willing to work for, so I don’t see how it could raise their wages very much. (Wages are the result of bargaining, and having an extra $78 million in cash might hurt the business’s bargaining position a little, so there might be a small benefit, but as I said, it’s not much.)

That is why Republicans are working so hard to prevent Walmart and McDonald’s workers from earning more money while, at the same time, doing nothing but congratulating Time Warner Cable CEO Rob Marcus for grabbing $79.9 million for six weeks of work.

Same argument, same problems. In fact, the whole rest of the piece is pretty much that argument repeated over and over: Republicans aren’t raising the minimum wage, and corporate CEOs make too much money. Although some versions of the argument are sillier than others:

[…] they believe James A. Skinner is worth every penny of the $28 million McDonald’s paid him in 2012.

They don’t believe that there are a dozen Wharton School MBAs who could take his place tomorrow and, frankly, sell hamburgers just as well for say, $280,000 rather than $28 million. They don’t see how his excessive pay might affect dividends to shareholders or the cost of fries.

Look, I think a lot of CEOs get more money than they’re really worth because of agency problems in corporate governance — I think the people who decide CEO salaries are not acting in the best interests of the shareholders — but replacing them with a bunch of MBAs is just nutty. And if paying them so much doesn’t bother the shareholders, why should anyone else care?

There may be good arguments for raising the minimum wage, but this isn’t one of them. Gerard’s argument is little more than an appeal to envy.

This post by Mark Draughn at Windypundit was originally published at An Argument From Envy

Aside from the poor grammar and gratuitous attention-getting reference to 9/11, its implications about the history of our national debt are just plain wrong.

On 9/11 we were attacked. Immediately after military expenditures doubled. Do you recall the Bush administration seeking added taxes or other revenue to pay for this spending?

No. Because they didn’t. They didn’t seek to pay for the invasion of Iraq, or Afghanistan, or Medicare Part D or anything else. In fact They CUT taxes. And now they blame Obama for their debt.

In some sense this is probably correct. The blurb doesn’t say who “they” are, but I imagine the reference is to Republicans and right-wing pundits, and I’m sure many of them are trying to blame Obama for the debt incurred during the Bush administration, but it’s not as if the debt didn’t get a heck of a lot bigger after Obama took office.

Here’s the available data since 1990:

The blue dots and line are the raw data. I added the other lines by hand to give a rough indication of the rate of increase of the debt under each of the last three presidential administrations. You can feel free to quibble with where I drew the lines, but even without them, it’s pretty clear that the Clinton years were great for debt hawks, with relatively little debt growth at all. (I think these are nominal figures, so that may just be inflation rather than real debt growth.)

Debt growth under the Bush administration was somewhat steeper, probably for all the reasons mentioned in the meme image. But then starting with the Obama era, the debt begins to climb even faster. (It starts to tail off toward the end, but note that those are based on estimated budget figures, not actual results.)

It looks even worse when you plot debt as a percentage of national income:

I didn’t draw any slope lines this time, but you can see how well-off we were in the 1990s as the debt actually stopped climbing and started to decline. The Bush era erased that decline, and the Obama era blew it out of the water. (Again, the decline at the end is based on estimates.)

Timing does not necessarily identify causation, of course. Just as Bush was not responsible for the dot-com crash and recession that he inherited from Clinton, Obama was not responsible for the bank panic and recession that he inherited from Bush. And it’s not clear to me that any president had much responsibility for the recessions that started under their terms. Taxation and spending — and for that matter, banking policy — are under the control of Congress rather than the President. And much of the skyrocketing debt from Obama’s first years in office was due to the massive stimulus package passed by both parties.

Whoever you choose to blame, the size of the debt is pretty disturbing.

(All data drawn from the White House Office of Management and Budget historic budget tables.)

This post by Mark Draughn at Windypundit was originally published at Plenty of Blame to Go Around for the National Debt

I’m not talking about accusations of welfare fraud, and I don’t just mean politicians who call them “moochers” and “takers.” I’m talking about the people who think that if they were born poor, they could do better. They believe most poor people could move into the middle class if they just had a better work ethic and made smarter decisions. You know, like middle class people.

I’m thinking about this because a few days ago Scott Greenfield tried to correct that attitude with a couple of interesting links explaining why poor people don’t behave more like us middle class people. One is a paper by Ruby Payne titled “Understanding and Working with Students and Adults from Poverty” that tries to explain some of the differences in terms of “hidden rules” that are different for people living in subcultures with different levels of wealth. Payne also makes use of Martin Joos’s classification of speaking styles into linguistic registers, arguing that poor people’s informal register leaves them ill-prepared for discussing and making long-term plans. (I’m over-simplifying, but I’m also not convinced that this is good cognitive science. It seems a little too just-so, which is usually a reason for suspicion, but I’m willing to be convinced.)

The other article is by Linda Tirado, and it’s a collections very personal observations of how poor people have to think about everyday life decisions. Here’s a sample:

I know how to cook. I had to take Home Ec to graduate high school. Most people on my level didn’t. Broccoli is intimidating. You have to have a working stove, and pots, and spices, and you’ll have to do the dishes no matter how tired you are or they’ll attract bugs. It is a huge new skill for a lot of people. That’s not great, but it’s true. And if you fuck it up, you could make your family sick. We have learned not to try too hard to be middle-class. It never works out well and always makes you feel worse for having tried and failed yet again. Better not to try. It makes more sense to get food that you know will be palatable and cheap and that keeps well. Junk food is a pleasure that we are allowed to have; why would we give that up? We have very few of them.

It’s an interesting bit of insight, except that since I started writing this post a few days ago, word has gotten out that it seems to be a bit of a fake. Tirado now says things like,

How is it that someone with such clarity and evocation has any right to assert that they are poor? It is likely untrue. Well, it is and it isn’t. You have to understand that the piece you read was taken out of context, that I never meant to say that all of these things were happening to me right now, or that I was still quite so abject.

At best, it sounds like she went through some bad times and wrote about what it was like for her. She may have been broke for a while, but it appears she is not a product of generational poverty and has not spent a lot of time living in poverty.

However, some of her insights ring true. Poor people have to approach life in a very different way from those of us in the middle class. One of the best explanations of this is an article by Megan McArdle in the Atlantic titled “If I Were a Poor Black Kid” in reference to Gene Marks’ silly piece of the same title (which I linked to in the second paragraph above), but most of her points apply to anyone living in poverty.

McArdle has some economic training, and with that comes the respectful assumption that people — including poor people — are rational, which leads to one inescapable conclusion:

If you grew up as a poor black kid, you’d be making decisions under the same constraints, which probably means you’d make the same decisions. The fact that different decisions could produce different outcomes is important–but to state this is not to state an obvious solution.

McArdle goes on to list a number of impediments for poor people trying to move up into the middle class, the first of which is that the path out of poverty isn’t very easy to understand unless you’re in a position to see other people do it, which is unlikely if you and everyone you know is poor.

A closely related problem is that the path out of poverty has a lot of uncertainty:

Middle class kids can assume that if they work hard enough, they’ll make it through college and get some sort of a decent job. Most poor kids can’t assume that–a lot of those who try, flunk out–and those who try and fail won’t have much help to get a second chance.

Bigotry exacerbates the problem: If you expect that your effort to improve the quality of your life will be thwarted by bigots, then there’s a lot less reason to make the effort.

By definition, poor people have a hard time accumulating capital. Since the economic purpose of capital is to increase efficiency — better tools to do more work, a bigger house to live more comfortably — poor people are forced to live inefficient lives:

If you have to keep buying a $1,000 car every six months because your last $1,000 car broke down, you end up spending a lot more than if you could have bought a $5,000 car. If you don’t have the money for an apartment deposit, you end up living in a much more expensive motel. Buying in bulk from Costco is cheaper than buying in small lots from a corner store. Etc.

People who have access to this kind of capital tend not to realize how much they benefit from it. For example, people think it’s easy to live on a food stamps budget, because they price out a month’s worth of food in bulk at Costco, and all the numbers work. But it works for them only because they already have a lot of important stuff that many poor people lack, such as a Costco membership, a vehicle capable of transporting all that food, a large refrigerator for perishables, storage space for the rest, and a working kitchen.

The upshot is that the poor have to defer a lot more consumption to get their hands on a given amount of capital. That makes it hard to decide to amass the capital.

Then there’s the problem that our badly-designed system of programs for the poor creates some strange incentives. Poor people can face effective marginal tax rates that would make millionaires weep:

Because of benefit losses and tax-credit phase outs, it is very possible for working poor people to be made actually worse off by getting a raise or a better job.  They face higher marginal tax rates than all but the most affluent people in our society, which makes it less than surprising that they find it hard to move that far above the poverty line.

Not only will they find it hard to increase their income, but they may find it doesn’t even make sense. For a single parent with one child earning $10,000 – $20,000/year, the effective marginal tax rate is over 60 percent (it peaks at 95 percent!), and disposable income is more or less flat for the first $20,000/year of earned income. So it doesn’t make any immediate financial sense to take a full-time job earning less than $10/hour, and if you include the difficulty of being away from home for 40 hours a week — such as finding someone to watch the kid — the breakeven point is pushed even higher.

Sure, getting the work experience would probably pay off eventually in a better job, but that’s a long way in the future, and the future is uncertain when you’re poor. Welfare benefits pay off right now.

Then there’s the disaster that befalls anyone who gets a criminal record:

Criminal records make it very, very hard to get a good job. A middle class kid who joy rides in a car or gets a DUI gets the benefit of the doubt when he claims that this was just youthful hijinks. Poor black kids with recognizably “black” names–or poor white kids with recognizably “poor” names–mostly don’t. Once you’re in that place, what’s the point of trying?

Poor people can also have a harder time staying out of trouble with the law because many of their ordinary activities have been criminalized (especially if they’re homeless). Just being outside can get them arrested for crimes such as drinking in public, loitering, or blocking pedestrian traffic (also known as standing on the sidewalk). Also, poor people generally can’t afford as much time in private indoor spaces — they don’t have spacious homes or belong to clubs, and they can’t afford the prices in restaurants and bars — so they spend more time outdoors, which exposes them to more police scrutiny.

Once arrested, poor people face a harder time in the justice system. If they don’t have the cash for bail, they’ll be stuck in jail until trial — losing their job and maybe their children — unless they take a plea, which can discourage them from fighting even the weakest charges. They also can’t afford a lawyer, which is supposed to mean the system provides one for them, but Gideon‘s promise doesn’t always work out as well as it should.

The point is — and this should not come as a surprise — poverty makes life hard. And when your life is hard, it’s hard to change your life.

Having a low-wage, low status job is usually not very enjoyable.  Nor does it leave you much money for enjoyments outside of work.  This makes it harder to get up the mental energy to do even more joyless tasks, like studying or harassing your kids about their homework.

Recent psychological studies seem to indicate that willpower is a limited personal resource that can be depleted. Self-control and discipline are not just aspects of personal character, they are also biological processes within the brain, and it appears that our brains have a limited capacity. If you have to force yourself to work all day at a difficult and unrewarding job, and if you have to force yourself to forgo many of life’s minor pleasures because of the cost, then there isn’t going to be much willpower left for self-improvement.

This post by Mark Draughn at Windypundit was originally published at Poor Ain’t Stupid

The first category consists of cuts that would be pretty damned awesome:

• …Illinois will lose about $587,000 in Justice Assistance Grants that support law enforcement, prosecution and courts, crime prevention and education, corrections and community corrections, drug treatment and enforcement, and crime victim and witness initiatives…
• …the automatic cuts would reduce loan guarantees to small businesses by up to approximately $900 million…
• …The FBI and other law enforcement entities would see a reduction in capacity equivalent to more than 1,000 Federal agents…
• …The Economic Development Administration’s (EDA) ability to leverage private sector resources to support projects that spur local job creation would be restricted…
• …U.S. Customs and Border Protection (CBP) would not be able to maintain current staffing levels of border patrol agents and CBP officers as mandated by Congress. CBP would have to reduce its work hours by the equivalent of over 5,000 border patrol agents and the equivalent of over 2,750 CBP officers…
• …The Transportation Security Administration (TSA) would reduce its frontline workforce, which would substantially increase passenger wait times at airport security checkpoints. TSA would need to initiate a hiring freeze for all transportation security officer positions in March, eliminate overtime, and furlough its 50,000 officers for up to seven days.

Intrusive busybodies, useless bureaucrats, politically connected businesses, and thugs with no respect for freedom. Fuck them all. And the Administration’s report leaves out the best part:

• …the Drug Enforcement Administration will lose $166 million from its $2.02 billion staffing and appropriations budget…
• DOD’s Drug Interdiction and Counter-Drug Activities budget of $1.6 billion will be reduced by $157 million
• DOJ’s Interagency Crime and Drug Enforcement budget of $528 million will be reduced by $43 million
• The DEA Diversion Control Fee Account budget of $335 million will be reduced by $25 million
• The Office of National Drug Control Policy budget of $25 million will be reduced by $2 million
• The High-intensity Drug Trafficking Areas Program budget of $239 million will be reduced by $20 million
• “Other Federal Drug Control Programs,” with a total budget of $100 million, will undergo $8 million in cuts.

Don’t think of it as budget cuts, think of it as an investment in freedom. Reading that list makes me feel like the night before Christmas.

The second category of cuts, on the other hand, consists of threats that, if allowed to happen, should be grounds for impeaching President Obama:

…Up to 1,100 disadvantaged and vulnerable children could lose access to child care, which is also essential for working parents to hold down a job…

…around 5,230 fewer children will receive vaccines for diseases such as measles, mumps, rubella, tetanus, whooping cough, influenza, and Hepatitis B…

…up to 373,000 seriously mentally ill adults and seriously emotionally disturbed children could go untreated…

…At the major gateway airports, average wait times could increase by 30-50 percent. At the nation’s busiest airports, like Newark, JFK, LAX, and Chicago O’Hare, peak wait times could grow to over 4 hours or more. On the southwest land border, our biggest ports of entry in California and Texas could face wait times of 5 hours or more during peak holiday weekends and travel periods…

…Title I education funds would be eliminated for more than 2,700 schools, cutting support for nearly 1.2 million disadvantaged students…

…Cuts to special education funding would eliminate Federal support for more than 7,200 teachers, aides, and other staff who provide essential instruction and support to preschool and school-aged students with disabilities…

…More than 100,000 formerly homeless people, including veterans, would be removed from their current housing and emergency shelter programs, putting them at risk of returning to the streets…

…close to 8,900 homeless persons with serious mental illness would not get the vital outreach, treatment, housing, and support they need…

The federal budget is famously bloated and wasteful. Yet when forced to trim between 1 and 2 percent of the budget (depending how you count) these are the things Obama says he would cut.

Let’s put that in perspective. At the beginning of the year, the federal government unceremoniously (and with surprisingly little debate or media coverage) increased payroll taxes by 2 percent. And all over America, millions of middle-to-low income-families — anybody with earnings below the cap, really — quietly learned to live with a 2 percent cut in the family budget.

But now when the government is asked to cut its budget by about the same percentage, they say they’ll have to cut programs that help women and children, the sick and the disabled. It’s hard to interpret this as anything other than a threat.

This whole problem came to a head originally with the debt ceiling crisis in the summer of 2011, at which point Obama gave the Republicans everything they wanted and set up the sequestration plan in return for postponing the hard decisions until after the election. If the Democrats are right that the Republicans are holding us hostage, it’s only because the Democrats sold us out to them so they could stay in power.

Despite all this, my gut tells me that thoughtlessly imposing across-the-board cuts is a dumb idea. But you know what? We’ve been trying the dumb idea of profligate borrowing and spending since 2008 and it hasn’t done much to fix the economy. Could sequestration really be any worse than that mess? I say let’s try it and find out.

This post by Mark Draughn at Windypundit was originally published at Sequestration — Bring It On

Every four years, they blame it on the election. Here’s how Charles Riley at CNN tries pathetically to find a story in the overnight markets:

World markets react to Obama victory

HONG KONG (CNNMoney) — World markets struggled to find direction Wednesday as U.S. election results left the balance of power in Washington little changed.

After an initial decline, Asian markets closed mixed. The Hang Seng in Hong Kong ended up 0.3%, while the Nikkei in Tokyo and the Shanghai Composite dropped by a fraction of a percent.

Yeah. Those damned markets. When they’re not rising or falling, they’s struggling to find direction. Thanks for keeping us apprised of the situation. Be sure to let us know if there are new developments.

This post by Mark Draughn at Windypundit was originally published at Obama Wins, Markets Do Something

Over at In These Times, the President of the United Steelworkers International union, Leo Gerard, is praising President Obama for propping up politically connected businesses, although that’s not quite how he puts it:

President Barack Obama…has given some love to American car companies and American car workers.

He also gave them many billions of taxpayer dollars.

He rescued Chrysler and General Motors, preserving the American icon companies and hundreds of thousands of American car manufacturing jobs.

Icon companies? We spent all that money because they are icons? Fuck.

As for the hundreds of thousands of jobs, does Gerard really expect us to believe that GM and Chrysler would have just closed their doors and never opened them again? People will still want new cars, and someone has to build them. Sure, the other automakers could ramp up production, but increasing their production capacity would take a long time.

Unless, of course, they just buy the GM and Chrysler facilities, complete with an already trained workforce standing by to man the production line. Anyone running a multi-billion dollar manufacturing business would see the advantages of that. In fact, given that the American bankruptcy rules recognize that companies are more valuable to their creditors alive than dead, the factories probably wouldn’t have missed more than a few days of production. American companies go through bankruptcy without closing their doors all the time.

He imposed sanctions on Chinese tires that received improper export subsidies, a move that saved thousands of U.S. tire-building jobs.

In other words, he forced millions of Americans to pay more for tires.

And now he’s challenging illegally subsidized Chinese auto parts to sustain American companies and workers.

And now he wants millions of American car owners to pay more for all the other parts as well. Thanks a lot.

Romney claims he loves American cars. But the actions of his private equity firm, Bain Capital, in buying companies that were “pioneers” in offshoring American jobs, suggest he’s fine with American firms making cars and car parts overseas.

Well, I certainly am. I love my Toyota and Acura. (Both of which are partially manufactured in America.)

Obama, by contrast, took the action necessary to ensure American cars are made in America by American companies employing American workers.

Thus making them cost a lot more for everyone who buys them.

This post by Mark Draughn at Windypundit was originally published at “Obama Loves American Car Workers”

Steve Chapman has a takedown of Mitt Romney today which describes the problem pretty well. The angry folks on the right love to use that 47% figure to conjure up visions of lazy people on welfare stealing from us hard-working folks. But all that 47% figure means is that a little less than half of all Americans are not a significant presence in the workforce: Americans such as our children, our spouses who stay home to take care of those children, and our parents who took care of us and are now retired.

The latter group is especially huge:

From where has the growth in “dependency” come? Mainly Social Security and Medicare. Since 1990, the number of people getting Social Security benefits has risen by more than a third. That’s not because the government has suddenly enlarged the program in an effort to undermine self-reliance. It’s because there are more old people.

The advantage of Social Security, for those worried about soul-sapping dependency, is that it rewards work. It’s an earned benefit. The alleged moochers worked when younger so they could take it easy in old age. That’s how things are supposed to work.

In essence, these people are living off of their savings. Or else they’re living on credit, which is not a bad thing if done wisely, with the intent of returning to the workforce, or of joining the workforce, as is the case with students, who make up another big segment of the 47%. Apparently Mitt Romney thinks that someone who takes off a year or two to go to school is mooching off the hard work of others, when they’re really investing in their own ability to do hard work.

There’s also this:

Romney may not realize that one reason many low-income Americans pay no federal income taxes is the Earned Income Tax Credit, which covers some 27 million people, up from 19 million in 2000.

The program does not subsidize sloth but labor, since it’s available almost exclusively to adults who are employed, particularly those with children. It was conceived to give the able-bodied poor greater incentives to enter the labor force, and it works.

Easing the tax burden on those who have the least was not always anathema to conservatives. In signing the historic 1986 tax reform, President Ronald Reagan expressed pride that “millions of the working poor will be dropped from the tax rolls altogether.”

Besides, low-income workers are subject to federal payroll taxes, which are not trivial.

Many people on EITC will eventually get raises or move into better jobs that pay more, and they they will begin paying income tax. So will those students, and so will the parents who took time off to care for their children. So will the temporarily unemployed, and the temporarily disabled, all of whom are in Romney’s 47%. Just because someone isn’t paying income tax right now doesn’t mean they will go their whole lives that way.

Read the whole thing.

This post by Mark Draughn at Windypundit was originally published at Romney’s Disturbing Ignorance About the American Economy

If you won that cash prize, the federal government’s tax bite would be about $136 million, based on the top marginal tax rate of 35%. (And really, the top bracket is all that matters for this kind of money.) There could also be a state income tax, depending where you live. For those of you here with me in Illinois, that’s another 5% or about $19.5 million.

That leaves you with a mere $233 million after time-value-of-money and tax calculations. Given the 1 in 175,711,536 odds of winning the Mega Millions jackpot, this means that each Mega Millions lottery ticket you purchase has a mathematically expected value of $1.33.

That’s right, for the first time I know of, the Mega Millions lottery is above the breakeven point. It could actually make some kind of financial sense to buy a ticket.

Of course, that’s only if you’re completely risk-blind, since the most likely outcome by far is loss of all your money. By comparison, synthetic CDO’s backed by residential mortgages were a much safer investment even during the crash.

If you have a handy $175 million in cash, it might make sense to use it to buy all 175,711,536 possible lottery tickets, which would guarantee you a $58 million profit.

Well, that’s not quite true. You see there’s one thing these calculations didn’t take into account, which is that someone else could also pick the winning number. I don’t know the odds of that happening — it depends on how many people buy tickets — but if even one other person wins, it will cut your prize in half to about $117 million, for a net loss of $59 million.

Because of this possibility — multiple winners splitting the prize pool — even at a jackpot of over half a billion dollars, the Mega Millions lottery still might not actually be at breakeven.

This post by Mark Draughn at Windypundit was originally published at Mega Millions Breakeven?