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I’m glad the United States is now ranked #1 in the World Economic Forum’s Global Competitiveness Report, though I point out in this interview that Trump’s performance is mostly a net wash.

His sensible approach to tax and regulation is offset by his weak approach to spending and his problematic view of monetary policy.

I’m embarrassed to admit that I forget to mention protectionism as another area where Trump is pushing in the wrong direction.

But let’s not focus on Trump. Instead, let’s take a closer look at the new data from the World Economic Forum.

And we’ll start with a look at the top 20. You’ll see some familiar jurisdictions, places that always get good grades, such as Singapore, Switzerland, and Hong Kong.

But you’ll also notice that there are several European welfare states with very good scores.

That’s because the GCR – unlike Economic Freedom of the World or the Index of Economic Freedom – does not rank nations based on economic policy. It’s more a measure of the business environment.

But since good policy tends to create a good business environment, there is a connection. Nations such as Germany and the Netherlands, as well as Scandinavian countries, have big welfare states. But the damage of those policies is offset by a very laissez-faire approach to businesses. So the big companies that help put together the GCR understandably give those places good scores.

By the way, it’s also worth mentioning that the 2018 edition uses a revised methodology. And based on this new approach, the United States retroactively gets the top score for 2017 as well.

All that being said, does it matter if a nation is ranked higher rather than lower?

Based on this strong relationship between competitiveness scores and economic output, the answer is yes.

The bottom line is that there’s a very meaningful link between economic liberty and national prosperity.

Now let’s take a closer look at the scores for the United States. As you can see, our top score is mostly due to our market efficiency and innovation environment.

For what it’s worth, I don’t fully agree with the report’s methodology. But that’s mostly because I prefer to look at the degree of economic liberty rather than whether a nation is business friendly. There’s an overlap, of course, but it’s nonetheless important to distinguish between pro-market and pro-business.

In any event, here are a couple of additional findings that caught my eye.

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When Trump imposes protectionist trade barriers, he doesn’t realize that the harm imposed on other nations is matched by damage to the U.S. economy.

As I warn in this interview, something similar could happen if the federal government convinces other nations to reject the dollar because they no longer want to acquiesce to the extraterritorial imposition of U.S. laws.

This is a wonky issue, but the bottom line is that the United States benefits enormously because the rest of the world uses the dollar.

The best article I can recommend was published earlier this year by the Cayman Financial Review. It’s a good tutorial on the issue and it explains why the United States enjoys an “exorbitant privilege” because the dollar is the world’s reserve currency.

A reserve currency is a currency that governments hold in their foreign exchange reserves to settle international claims and intervene in foreign exchange markets. …Governments overwhelmingly choose one currency – the U.S. dollar… U.S. dollar-denominated assets comprised 63.79 percent of disclosed foreign exchange reserves… The Bank for International Settlements (BIS) reported that 88 percent of all foreign exchange transactions in 2016 involve the U.S. dollar on one side. …In 2014, 51.9 percent of international trade by value and 49.4 percent of international trade by volume of transactions were invoiced in U.S. dollars. …Major internationally traded commodities such as oil are priced in U.S. dollars. …The status of the U.S. dollar as the world’s reserve currency and the resulting foreign demand for U.S. dollars creates what French Finance Minister Valéry Giscard d’Estaing described in 1965 as an “exorbitant privilege” for the United States. …While difficult to measure, empirical studies suggest the privilege is worth about ½ percent of U.S. GDP (or roughly $100 billion) in a normal year.

And Peter Coy’s column for Bloomberg does a good job of explaining why the rest of the world is tempted to abandon the dollar.

America’s currency makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are priced in dollars, not euros or yen. …threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia. …Political leaders who once accepted the dollar’s hegemony, grudgingly or otherwise, are pushing back. …In March, China challenged the dollar’s dominance in the global energy markets with a yuan-denominated crude oil futures contract. …French Finance Minister Bruno Le Maire told reporters in August that he wants financing instruments that are “totally independent” of the U.S. …This disturbance in the force isn’t good news for the U.S. …As it is now, when trouble breaks out, investors flood into U.S. markets seeking refuge, oddly enough even when the U.S. itself is the source of the problem, as it was in last decade’s global financial crisis. …The most immediate risk to the dollar is that the U.S. will overplay its hand on financial sanctions, particularly those against Iran and countries that do business with Iran. …European leaders, in response to what they perceive as an infringement on their sovereignty, are openly working on a payments system that would enable their companies to do business with Iran without getting snagged by the U.S. Treasury Department and its powerful Office of Foreign Assets Control. …dissatisfaction with the dollar’s dominance…is only mounting. …Lew said in 2016, “the more we condition use of the dollar and our financial system on adherence to U.S. foreign policy, the more the risk of migration to other currencies and other financial systems in the medium term grows.”

Here’s some of what I said on the issue of sanctions in a different interview.

But notice that it’s not just sanctions.

The rest of the world is irritated by FATCA and other aspects of extraterritorial taxation.

Other nations also are irked by the pointless imposition of “know your customer” rules and other anti-money laundering policies that impose heavy costs without having any impact on actual criminal behavior.

Anyhow, let’s review some additional analysis, starting with this editorial from the Wall Street Journal.

More than any recent U.S. President, Mr. Trump is willing to use economic leverage for coercive diplomacy. He’s now targeting Turkey… Turkey is vulnerable because of Mr. Erdogan’s economic mismanagement. In the runup to June elections, he blew out the fisc on entitlements and public works. …As tempting as sanctions often are, they should be used sparingly and against the right targets. They make sense against genuine rogue states like Iran and North Korea, as well as to show Vladimir Putin that there are costs… But sanctions against allies should be used only in rare cases. They would also be less risky if they weren’t piled on top of Mr. Trump’s tariff war. …If Mr. Trump is determined to use coercive economic diplomacy, including tariffs and sanctions, then the Treasury will have to be ready to deal with the collateral financial damage.

Writing for Real Money, Mike Norman is very worried.

The United States is increasingly using sanctions as a form of warfare. …It’s a form of soft warfare that targets a country’s economy and its ability to transact business and safeguard its financial wealth in today’s dollar-based economy. Do you know what the result of these sanctions will be? The dollar will get crushed. Something like 80% of all international transactions take place in dollars. The global financial system rests on a dollar architecture. That includes funds transfer, clearing, payments, etc. …How long do you think the rest of the world will operate under such a risk? A risk that at any moment if you fall out of favor with the fools in Washington your entire economy and lifeline to the world’s financial system can be shut down? That is too much risk. No country and no citizen wants that risk hanging over them.

Professor Barry Eichengreen expresses similar concerns in a column for Project Syndicate.

…the Trump administration is eroding the dollar’s global role. Having unilaterally reimposed sanctions on Iran, it is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. The threat is serious because US banks are the main source of dollars used in cross-border transactions. …In response to the Trump administration’s stance, Germany, France, and Britain, together with Russia and China, have announced plans to circumvent the dollar, US banks, and US government scrutiny. …This doesn’t mean that foreign banks and companies will shun the dollar entirely. US financial markets are large and liquid and are likely to remain so. US banks operate globally. …But in an era of US unilateralism, they will want to hedge their bets. …there will be less reason for central banks to hold dollars in order to intervene in the foreign exchange market and stabilize the local currency against the greenback. …In threatening to punish Europe and China, Trump is, ironically, helping them to achieve their goals. Moreover, Trump is squandering US leverage.

And Michael Maharrey elaborates on the warning signs in a column for FEE.

…the U.S….weaponizes the U.S. dollar, using its economic dominance as both a carrot and a stick. …”enemies” can find themselves locked out of the global financial system, which the U.S. effectively controls using the dollar. …It utilizes the international payment system known as SWIFT…the Society for Worldwide Interbank Financial Telecommunication. …SWIFT and dollar dominance give the U.S. a great deal of leverage over other countries. …China, Russia, and Iran, have taken steps to limit their dependence on the dollar and have even been working to establish alternative payment systems. A growing number of central banks have been buying gold as a way to diversify their holdings away from the greenback. …even traditional U.S. allies have grown weary of American economic bullying. On Sept. 24, the E.U. announced its plans to create a special payment channel to circumvent U.S. economic sanctions… De-dollarization of the world economy would likely perpetuate a currency crisis in the United States, and it appears a movement to dethrone the dollar is gaining steam.

All of the above articles could be considered the bad news.

So I’ll share one small bit of good news from Coy’s column. The one thing that may save the dollar is that there aren’t any good alternatives.

The best thing the dollar has going for it is that its challengers are weak. The euro represents a monetary union… Italy’s recent woes are only the latest challenge to the euro zone’s durability. China is another pretender to the throne. But China’s undemocratic leadership is wary of the openness to global trade and capital flows that having a widely used currency requires.

I agree. Indeed, I wrote way back in 2010 and 2011 that the euro lost a lot of credibility when the European Central Bank surrendered its independence and took part in the bailouts of Europe’s welfare states.

So why jump from the dollar to the euro, especially since Europe will be convulsed by additional fiscal crises when the next recession occurs?

That being said, the moral of today’s column is that the crowd in Washington shouldn’t be undermining the attractiveness of the dollar. Here’s a chart to give you some idea of what’s been happening.

P.S. I want to close with a point about trade deficits. It turns out that being the world’s reserve currency requires a trade deficit. That was explained in the Cayman Financial Review column.

A significant part of the U.S. current account deficit and the U.S. trade deficit (whether measured as goods and services or as goods only) is attributable to the U.S. dollar’s status as the world’s reserve currency. Even if every country in the world were to practice free trade and not to engage in any currency manipulation, the United States would still record persistent current account deficits so long as the U.S. dollar remains the world’s reserve currency.

Likewise, here’s the relevant portion from the Real Money column.

Since most of of the world’s commerce is denominated in dollars and because oil was priced in dollars, it necessitated that the rest of the world ran trade surpluses with the U.S. in order to get dollars. Therefore, our trade deficits were an expression of high demand for dollars, not vice-versa. …We never understood, or at least our policy makers never understood, that we had the better part of the deal. When the rest of the world labors for low wages to build finished goods that they send to us for our paper currency, that is a benefit to us, not a cost.

Last but not least, here are excerpts from Peter Coy’s column.

…for the U.S. to supply dollars to the rest of the world, it must run trade deficits. Trading partners stash the dollars they earn from exports in their reserve accounts instead of spending them on American goods and services. …the U.S. gets what amounts to a permanent, interest-free loan from the rest of the world when dollars are held outside the U.S. As Eichengreen points out, it costs only a few cents for the U.S. Bureau of Engraving and Printing to produce a $100 bill, but other countries have to pony up $100 worth of actual goods and services to obtain one.

I share all these excerpts to reinforce my oft-made point that there is nothing wrong with a trade deficit. Not only does it represent a financial surplus (formerly known, and still often referred to, as a capital surplus), it also reflects the benefit the U.S. enjoys from having the dollar as a reserve currency.

P.P.S. This issue also reinforces my oft-made point that laws should not extend beyond borders.

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Politicians can interfere with the laws of supply and demand (and they do, with distressing regularity), but they can’t repeal them.

The minimum wage issue is a tragic example. If lawmakers pass a law mandating wages of $10 per hour, that is going to have a very bad effect on low-skilled workers who can only generate, say, $8 of revenue per hour.

You don’t need to be a libertarian to realize this is a problem.

Catherine Rampell leans to the left, but she warned last year in the Washington Post about the danger of “helping” workers to the unemployment line.

…the left needs to think harder about the unintended consequences of…benevolent-seeming proposals. In isolation, each of these policies has the potential to make workers more costly to hire. Cumulatively, they almost certainly do. Which means that, unless carefully designed, a lefty “pro-labor” platform might actually encourage firms to hire less labor… It’s easier, or perhaps more politically convenient, to assume that “pro-worker” policies never hurt the workers they’re intended to help. Take the proposal to raise the federal minimum wage to $15 an hour… raising wages in Seattle to $13 has produced sharp cuts in hours, leaving low-wage workers with smaller paychecks. And that’s in a high-cost city. Imagine what would happen if Congress raised the minimum wage to $15 nationwide. …Why wouldn’t you want to improve the living standards of as many people as possible? The answer: You won’t actually be helping them if making their labor much more expensive, much too quickly, results in their getting fired.

By the way, while I’m glad Ms. Rampell recognizes how big increases in the minimum wage will have an adverse impact, I think she is rather naive to believe that there are “carefully designed” options that wouldn’t be harmful.

Or does she have a cutoff point for acceptable casualties? Maybe she thinks that an increase in the minimum wage is bad if it throws 500,000 people into unemployment, but a small increase that leads to 200,000 fewer jobs is acceptable?

In any event, the voters of DC apparently didn’t read her column and they voted earlier this year to restrict the freedom of employers and employees in the restaurant sector to engage in voluntary exchange.

But then something interesting happened. Workers and owners united together and urged DC’s government to reverse the referendum.

The Wall Street Journal opined on this development.

…last week Washington, D.C.’s Democratic city councillors moved to overturn a mandatory minimum wage for tipped workers after bartenders, waiters and restaurant managers served up a lesson in economics. …The wage hike was billed as a way to give workers financial stability… But tipped workers realized the policy came with serious unintended consequences. …workers pushed for repeal. Though restaurants pay a $3.89 hourly wage to tipped workers, “we choose these jobs because we make far more than the standard minimum wage” from tips, bartender Valerie Graham told the City Council. …“Increasing the base wage for tipped workers who already make well above minimum wage threatens those who do not make tips,” such as cooks, dishwashers and table bussers, Rose’s Luxury bartender Chelsea Silber told the City Council. …Repeal requires a second council vote, but Democratic Mayor Muriel Bowser says she agrees. Congratulations on the revolt of the restaurant masses.

Let’s review another example.

There’s now a mandate for a higher minimum wage in New York. Ellie Bufkin explains some of the consequences in a column for the Federalist.

This minimum wage spike has forced several New York City businesses to shutter their doors and will claim many more victims soon. Businesses must meet the $15 wage by the end of 2018, the culmination of mandatory increment increases that began in 2016. …For many businesses, this egregious law is not just an inconvenience, it is simply unaffordable. The most recent victim is long-time staple, The Coffee Shop… In explaining his decision to close following 28 years of high-volume business, owner Charles Milite told the New York Post, “The times have changed in our industry. The rents are very high and now the minimum wage is going up and we have a huge number of employees.” …Of all affected businesses, restaurants are at the greatest risk of losing their ability to operate under the strain of crushing financial demands. They run at the highest day-to-day operational costs of any business, partly because they must employ more people to run efficiently. …Eventually, minimum wage laws and other prohibitive regulations will cause the world-renowned restaurant life in cities like New York, DC, and San Francisco to cease to exist.

For what it’s worth, I don’t think restaurants will “cease to exist” because of mandates for higher minimum wages.

But there will definitely be fewer establishments with fewer workers.

Why? Because business aren’t charities. They hire workers to increase profits, so it’s unavoidable that we get bad results when government mandates result in some workers costing more than the revenue they generate.

Which is what we’re now seeing in Seattle.

I’ll close by recycling this debate clip from a few years ago. I made the point that faster growth is the right way to boost wages.

And I also gave a plug for federalism. If some states want to throw low-skilled workers out of jobs, I think that will be an awful outcome. But it won’t be as bad as a nationwide scheme to increase unemployment (especially for minorities).

P.S. As is so often the case, the “sensible Swiss” have the right perspective.

P.P.S. Here’s a video making the case against government wage mandates. And here’s another interview I did on the topic.

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I periodically explain that you generally don’t get a recession by hiking taxes, adding red tape, or increasing the burden of government spending. Those policies are misguided, to be sure, but they mostly erode the economy’s long-run potential growth.

If you want to assign blame for economic downturns, the first place to look is monetary policy.

When central banks use monetary policy to keep interest rates low (“Keynesian monetary policy,” but also known as “easy money” or “quantitative easing”), that can cause economy-wide distortions, particularly because capital gets misallocated.

And this often leads to a recession when this “malinvestment” gets liquidated.

I’ve made this point in several recent interviews, and I had a chance to make the same point yesterday.

By the way, doesn’t the other guest have amazing wisdom and insight?

But let’s not digress.

Back to the main topic, I’m not the only one who is worried about easy money.

Desmond Lachman of the American Enterprise Institute is similarly concerned.

Never before have the world’s major central banks kept interest rates so low for so long as they have done over the past decade. More importantly yet, never before have these banks increased their balance sheets on anything like the scale that they have done since 2008 by their aggressive bond-buying programmes. Indeed, since 2008, the size of the combined balances sheet of the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England has increased by a mind-boggling US$10tn. …in recent years, if anything central bank monetary policy might have been overly aggressive. By causing global asset price inflation as well as the serious mispricing and misallocation of global credit, the seeds might have been sown for another Lehman-style economic and financial market crisis down the road. …the all too likely possibility that, by having overburdened monetary policy with the task of stabilizing output, advanced country governments might very well have set us up for the next global boom-bust economic cycle.

If you want the other side of the issue, the Economist is more sympathetic to monetary intervention.

And if you want a very learned explanation of the downsides of easy money, I shared some very astute observations from a British central banker back in 2015.

The bottom line is that easy money – sooner or later – backfires.

By the way, here’s a clip from earlier in the interview. Other than admitting that economists are lousy forecasters, I also warned that the economy is probably being hurt by Trump’s protectionism and his failure to control the growth of spending.

P.S. The “war on cash” in many nations is partly driven by those who want the option of easy money.

P.P.S. I worry that politicians sometimes choose to forgo good reforms because they hope easy money can at least temporarily goose the economy.

P.P.P.S. Easy money is also a tool for “financial repression,” which occurs when governments surreptitiously confiscate money from savers.

P.P.P.P.S. Maybe it’s time to reconsider central banks?

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One of the more elementary observations about economics is that a nation’s prosperity is determined in part by the quantity of quality of labor and capital. These “factors of production” are combined to generate national income.

I frequently grouse that punitive tax policies discourage capital. There’s less incentive to invest, after all, if the government imposes extra layers of tax on income that is saved and invested.

Bad tax laws also discourage labor. High marginal tax rates penalize people for being productive, and this can be especially counterproductive for entrepreneurship and innovation.

Though we shouldn’t overlook how government discourages low-income people from being productively employed. Only the problem is more on the spending side of the fiscal equation.

In today’s Wall Street Journal, John Early and Phil Gramm share some depressing numbers about growing dependency in the United States.

During the 20 years before the War on Poverty was funded, the portion of the nation living in poverty had dropped to 14.7% from 32.1%. Since 1966, the first year with a significant increase in antipoverty spending, the poverty rate reported by the Census Bureau has been virtually unchanged. …Transfers targeted to low-income families increased in real dollars from an average of $3,070 per person in 1965 to $34,093 in 2016. …Transfers now constitute 84.2% of the disposable income of the poorest quintile of American households and 57.8% of the disposable income of lower-middle-income households. These payments also make up 27.5% of America’s total disposable income.

This massive expansion of redistribution has negatively impacted incentives to work.

The stated goal of the War on Poverty is not just to raise living standards, but also to make America’s poor more self-sufficient and to bring them into the mainstream of the economy. In that effort the war has been an abject failure, increasing dependency and largely severing the bottom fifth of earners from the rewards and responsibilities of work. …The expanding availability of antipoverty transfers has devastated the work effort of poor and lower-middle income families. By 1975 the lowest-earning fifth of families had 24.8% more families with a prime-work age head and no one working than did their middle-income peers. By 2015 this differential had risen to 37.1%. …The War on Poverty has increased dependency and failed in its primary effort to bring poor people into the mainstream of America’s economy and communal life. Government programs replaced deprivation with idleness, stifling human flourishing. It happened just as President Franklin Roosevelt said it would: “The lessons of history,” he said in 1935, “show conclusively that continued dependency upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber.”

In another WSJ column on the same topic, Peter Cove reached a similar conclusion.

America doesn’t have a worker shortage; it has a work shortage. The unemployment rate is at a 15-year low, but only 55% of Americans adults 18 to 64 have full-time jobs. Nearly 95 million people have removed themselves entirely from the job market. According to demographer Nicholas Eberstadt, the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. …insisting on work in exchange for social benefits would succeed in reducing dependency. We have the data: Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%. But no reform is permanent. Under President Obama, federal poverty programs ballooned.

Edward Glaeser produced a similar indictment in an article for City Journal.

In 1967, 95 percent of “prime-age” men between the ages of 25 and 54 worked. During the Great Recession, though, the share of jobless prime-age males rose above 20 percent. Even today, long after the recession officially ended, more than 15 percent of such men aren’t working. …The rise of joblessness—especially among men—is the great American domestic crisis of the twenty-first century. It is a crisis of spirit more than of resources. …Proposed solutions that focus solely on providing material benefits are a false path. Well-meaning social policies—from longer unemployment insurance to more generous disability diagnoses to higher minimum wages—have only worsened the problem; the futility of joblessness won’t be solved with a welfare check. …various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work. …The past decade or so has seen a resurgent progressive focus on inequality—and little concern among progressives about the downsides of discouraging work. …The decision to prioritize equality over employment is particularly puzzling, given that social scientists have repeatedly found that unemployment is the greater evil.

Why work, though, when government pays you not to work?

And that unfortunate cost-benefit analysis is being driven by ever-greater levels of dependency.

Writing for Forbes, Professor Jeffrey Dorfman echoed these findings.

…our current welfare system fails to prepare people to take care of themselves, makes poor people more financially fragile, and creates incentives to remain on welfare forever. …The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future. …It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish, but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people. …The third flaw in the government welfare system is the way that benefits phase outs as a recipient’s income increases. …a poor family trying to escape poverty pays an effective marginal tax rate that is considerably higher than a middle class family and higher than or roughly equal to the marginal tax rate of a family in the top one percent.

I like that he also addressed problems such as implicit marginal tax rates and the failure of job-training programs.

Professor Lee Ohanian of the Hoover Institution reinforces the point that the welfare state provides lots of money in ways that stifle personal initiative.

Inequality is not an issue that policy should address. …Society, however, should care about creating economic opportunities for the lowest earners. …a family of four at the poverty level has about $22,300 per year of pre-tax income. Consumption for that same family of four on average, however, is about $44,000 per year, which means that their consumption level is about twice as high as their income. …We’re certainly providing many more resources to low-earning families today. But on the other hand, we have policies in place that either limit economic opportunities for low earners or distort the incentives for those earners to achieve prosperity.

I’ve been citing lots of articles, which might be tedious, so let’s take a break with a video about the welfare state from the American Enterprise Institute.

And if you like videos, here’s my favorite video about the adverse effects of the welfare state.

By the way, it isn’t just libertarians and conservatives who recognize the problem.

Coming from a left-of-center perspective, Catherine Rampell explains in the Washington Post how welfare programs discourage work.

…today’s social safety net discourages poor people from working, or at least from earning more money. …you might qualify for some welfare programs, such as food stamps, housing vouchers, child-care subsidies and Medicaid. But if you get a promotion, or longer hours, or a second job, or otherwise start making more, these benefits will start to evaporate — and sometimes quite abruptly. You can think about this loss of benefits as a kind of extra tax on low-income people. …Americans at or just above the poverty line typically face marginal tax rates of 34 percent. That is, for every additional dollar they earn, they keep only 66 cents. …One in 10 families with earnings close to the poverty line faces a marginal tax rate of at least 65 percent, the CBO found. …You don’t need to be a hardcore conservative to see how this system might make working longer hours, or getting a better job, less attractive than it might otherwise be.

To understand what this means, the Illinois Policy Institute calculated how poor people in the state are trapped in dependency.

The potential sum of welfare benefits can reach $47,894 annually for single-parent households and $41,237 for two-parent households. Welfare benefits will be available to some households earning as much as $74,880 annually. …A single mom has the most resources available to her family when she works full time at a wage of $8.25 to $12 an hour. Disturbingly, taking a pay increase to $18 an hour can leave her with about one-third fewer total resources (net income and government benefits). In order to make work “pay” again, she would need an hourly wage of $38 to mitigate the impact of lost benefits and higher taxes.

Agreeing that there’s a problem does not imply agreement about a solution.

Folks on the left think the solution to high implicit tax rates (i.e., the dependency trap) is to make benefits more widely available. In other words, don’t reduce handouts as income increases.

The other alternative is to make benefits less generous, which will simultaneously reduce implicit tax rates and encourage more work.

I’m sympathetic to the latter approach, but my view is that welfare programs should be designed and financed by state and local governments. We’re far more likely to see innovation as policy makers in different areas experiment with the best ways of preventing serious deprivation while also encouraging self-sufficiency.

I think we’ll find out that benefits should be lower, but maybe we’ll learn in certain cases that benefits should be expanded. But we won’t learn anything so long as there is a one-size-fits-all approach from Washington.

Let’s close with a political observation. A columnist for the New York Times is frustrated that many low-income voters are supporting Republicans because they see how their neighbors are being harmed by dependency.

Parts of the country that depend on the safety-net programs supported by Democrats are increasingly voting for Republicans who favor shredding that net. …The people in these communities who are voting Republican in larger proportions are those who are a notch or two up the economic ladder — the sheriff’s deputy, the teacher, the highway worker, the motel clerk, the gas station owner and the coal miner. And their growing allegiance to the Republicans is, in part, a reaction against what they perceive, among those below them on the economic ladder, as a growing dependency on the safety net, the most visible manifestation of downward mobility in their declining towns. …I’ve heard variations on this theme all over the country: people railing against the guy across the street who is collecting disability payments but is well enough to go fishing, the families using their food assistance to indulge in steaks.

It’s not my role to pontificate about politics, so I won’t address that part of the column. But I will say that I’ve also found that hostility to welfare is strongest among those who have first-hand knowledge of how dependency hurts people.

P.S. If you want evidence for why Washington should get out of the business of income redistribution, check out this visual depiction of the welfare state.

P.S. The Canadians can teach us some good lessons about welfare reform.

P.P.S. The Nordic nations also provide valuable lessons, at least from the don’t-do-this perspective.

P.P.P.S. Last but not least, there’s a Laffer-type relationship between welfare spending and poverty.

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I explained last year that there is an inverse relationship between government efficiency and the size of government.

And Mark Steyn made the same point, using humor, back in 2012.

Interestingly, we have some unexpected allies.

In a recently released study, two economists for the World Bank decided to investigate the effectiveness of government spending.

Governments of developing countries typically spend resources equivalent to between 15 and 30 percent of GDP. Hence, small changes in the efficiency of public spending could have a significant impact on GDP and on the attainment of the government’s objectives. The first challenge faced by stakeholders is measuring efficiency. This paper attempts such quantification and verifies empirical regularities in the cross country-variation in the efficiency scores.

So they calculated how much different governments were spending and the results that were being achieved.

Using two different methodologies, here’s what they found for health spending and life expectancy.

The goal, of course, is to get good results (to be higher on the vertical axis) without having to spend a lot of money (in other words, try to be farther left on the horizontal axis).

And here are the numbers for education quality and education spending.

The economist then crunched all the numbers to determine the relationship between spending and outcomes.

The results may surprise some people.

Government expenditure (GOVEXP) is negatively associated with efficiency scores in education (Tables 14 a and b). This result is robust to changes in the output indicator selected. In the output efficiency case, the impact is ambiguous specially when the PISA Math and Science scores are the output indicators (Table 14 b). In health (Tables 15 a and b), the negative association is present in both input and output efficiency. In infrastructure, the expenditure variables (GOVEXP and PUBGFC10PC) are negative in the six output indicators that are used (Table 16a).23 There is a robust trade-off between size of expenditure and efficiency. …The share of public financing within the total (sum of public and private) is robustly associated with lower efficiency scores.

But here’s another surprise.

These World Bank results are not an outlier.

The European Central Bank has two separate studies (here and here) that conclude smaller government is more effective.

And the International Monetary Fund found that decentralized government is more efficient.

P.S. Don’t forget that this competency argument for small government is augmented by the economic argument for small government.

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Back in 2012, I shared a chart showing that workplace deaths declined substantially after the creation of the Occupational Safety and Health Administration.

But I then shared a second chart showing that workplace deaths declined just as much before OSHA was created.

The moral of my story was quite simple. Deaths primarily fell because America become much more prosperous. And there’s a lot of evidence that wealthier is healthier.

Today, let’s look at a similar example.

A study published by the National Bureau of Economic Research looks at the impact of public health measures in the early 1900s. They start by sharing some good news.

Since the mid-19th century, mortality rates in the Western world have plummeted and life expectancy has risen dramatically. Sometimes referred to as the mortality transition, this development is widely recognized as one of the most significant in the history of human welfare (Fogel 2004). Two features characterize the mortality transition. First, it was driven by reductions in infectious diseases and diseases of infancy and childhood (Omran 2005; Costa 2015). Second, it was concentrated in urban areas.

Do government policies deserve the credit?

There’s some evidence for that hypothesis.

…recent reviews of the literature emphasize the role of public health efforts, especially those aimed at purifying the water supply. For instance, Cutler et al. (2006) argue that public health efforts drove the dramatic reductions in food- and water-borne diseases at the turn of the 20th century. Similarly, Costa (2015) argues that clean-water technologies such as filtration and chlorination were “the biggest contributor[s] to the decline in infant mortality”

To be sure, there were huge public projects in the first several decades of last century. Here’s the data on sewage treatment facilities.

And here’s some data on milk purification efforts.

And the study has data on other aspects of public health as well.

The key question is whether all these efforts were successful. The three authors decided to investigate.

Using data on 25 major American cities for the years 1900-1940, the current study revisits the causes of the urban mortality decline at the turn of the 20th century. Specifically, we conduct a statistical horse race that attempts to distinguish the effects of ambitious, often extraordinarily expensive (Costa 2015, p. 554), public health interventions aimed at controlling mortality from food-and-water-borne diseases. Following previous researchers (Troesken 2004; Cutler and Miller 2005; Beach et al. 2016; Knutsson 2018), we explore the extent to which filtering and chlorinating drinking water contributed to the decline in typhoid mortality observed during the period under study and, more generally, to the observed declines in total and infant mortality. In addition, we explore the effects several other municipal-level efforts that were, at the time, viewed as critical in the fight against typhoid and other food- and water-borne diseases (Meckel 1990; Levitt et al. 2007; Melosi 2008) but have not received nearly as much attention from modern-day researchers. These interventions include: the treatment of sewage before its discharge into lakes, rivers and streams; projects designed to deliver clean water from further afield such as aqueducts and water cribs; requirements that milk sold within city limits meet strict bacteriological standards; and requirements that milk come from tuberculin-tested cows. Because the urban mortality transition was characterized by substantial reductions in infant and childhood mortality (Omran 2005) and because exclusive breastfeeding was not the norm during the period under study (Wolf 2001, 2003), improvements in milk quality seem a particularly promising avenue to explore.

But here’s the surprising result.

They did not find much evidence that public health efforts made a difference.

…our results suggest that the building of a water filtration plant cut the typhoid mortality rate by nearly 40 percent. More generally, however, our results are not consistent with the argument that public health interventions drove the extraordinary reductions in infant and total mortality observed between 1900 and 1940. Specifically, we find that efforts to purify milk had no appreciable effect on infant mortality and no effect on mortality from non-pulmonary tuberculosis (TB), which was often transmitted through infected milk. Likewise, neither chlorinating the water supply nor constructing sewage treatment plants appears to have been effective. …Our results point to other factors such as better living conditions and improved nutrition as being responsible for the sharp decline in urban mortality at the turn of the 20th century.

Here’s the chart showing that infant mortality consistently declined, largely independent of public health efforts.

I’m not suggesting, by the way, that public health spending is bad. Nor am I asserting that it’s a waste of money.

Notwithstanding some of the jokes that target libertarians, the goal isn’t to abolish every regulation or program governing safety and health. Maybe I’m a bad libertarian, but I’d pick a city with sewage treatment over one without.

But my main point is that I don’t need to make that choice. Nobody does.

The data strongly suggests that economic growth and rising levels of prosperity are the real drivers of improved health outcomes. Market-driven prosperity is what generates the wealth needed to improve public health, whether the actual delivery takes place via public or private action.

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