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Posts Tagged ‘Economics’

I don’t like tax increases, but I like having additional evidence that higher tax rates change behavior. So when my leftist friends “win” by imposing tax hikes, I try to make lemonade out of lemons by pointing out “supply-side” effects.

I’m hoping that if leftists see how tax hikes are “successful” in discouraging things that they think are bad (such as consumers buying sugary soda or foreigners buying property), then maybe they’ll realize it’s not such a good idea to tax – and therefore discourage – things that everyone presumably agrees are desirable (such as work, saving, investment, and entrepreneurship).

Though I sometimes worry that they actually do understand that taxes impact pro-growth behavior and simply don’t care.

But one thing that clearly is true is that they get very worried if tax increases threaten their political viability.

This is why Becket Adams, in a column for the Washington Examiner, is rather amused that Mayor Kenney of Philadelphia has been caught with his hand in the tax cookie jar.

Philadelphia Mayor Jim Kenney fought hard to pass a new tax on soda and other sugary drinks. He won, and the 1.5-cents-per-ounce tax is now in place, affecting both merchants and consumers, because that’s how taxes work. Businesses pay the levies, and they offset the cost by charging higher prices. That is as basic as it gets. The only person who doesn’t seem to understand this is Kenney, who is now accusing business owners of extortion. “They’re gouging their own customers,” the mayor said.

Yes, consumers are being extorted and gouged, but the Mayor isn’t actually upset about that.

He’s irked because people are learning that it’s his fault.

Philadelphians are obviously outraged by the skyrocketing cost of things as simple as a soda, which has prompted some businesses to post signs explaining why the drinks are now do damned expensive. Kenney said that this effort by businesses to explain the rising cost is “wrong” and “misleading.” The mayor apparently thought the city council could impose a major new tax on businesses, and that customers somehow wouldn’t be affected.

In other words, it’s probably safe to say that Mayor Kenney has no regrets about the soda tax. He’s just not pleased that he can’t blame merchants for the price increase.

The International Monetary Fund, by contrast, may actually have learned a real lesson that higher taxes aren’t always a good idea. That bureaucracy is infamous for blindly supporting tax increases, but if we can believe this story from the Wall Street Journal, even those bureaucrats don’t think additional tax hikes in Greece would be a good idea.

IMF officials have said Greece’s economy is already overtaxed. New taxes that came into affect on Jan. 1 are squeezing household incomes further. Economists say even-higher income taxes—in the form of lower tax-free income allowances—could add to a mountain of unpaid taxes. Greeks currently owe the state €94 billion ($99 billion), equivalent to 54% of gross domestic product, and rising, in taxes that they can’t pay.

Here are some stories to illustrate the onerous tax system in Greece, starting with a retired couple that will probably lose their house because of a new property tax.

…the 87-year-old former economist and his 81-year-old wife are unable to repay the property tax imposed on their 70-year old house, a family inheritance. The annual tax is around ‎€33,000, but Mr. Kokkalis’s pension—already cut by half—is €28,000 a year. The couple borrowed money when the tax was imposed, initially as a temporary austerity measure in 2011. But they are already behind on nearly €200,000 of tax payments and can’t borrow more. Mr. Kokkalis says the state is calculating tax based on outdated property prices that have since collapsed, and that if he tried to sell the house now, nobody would be interested. “They impose taxes on an imaginary value,” Mr. Kokkalis says. “This is confiscation.”

I’ve already written about this punitive property tax. The good news is that property taxes generally are transparent, so people know how much they’re paying.

The bad news is that the tax in Greece is far too onerous.

And I’ve also noted that small businesses are being wiped out in Greece as well. The WSJ has a new example.

Tax increases under previous rounds of austerity have put a middle-class lifestyle beyond reach for many. “Our only goal now is survival,” says arts teacher Mimi Bonanou. Until recent years she also made a living as a practicing artist, selling her works in Greece and abroad. But increasingly heavy taxes that self-employed Greeks must pay at the start of each year, based on the state’s often-ambitious forecast of their incomes, have forced her to rely on teaching alone.

All things considered, Greece is a painful example that a country can’t tax its way to prosperity (though some politicians never learned that lesson).

Moreover, it’s nice to have further evidence that even the IMF recognizes that Greece is on the wrong side of the Laffer Curve.

And if a left-leaning bureaucracy is now willing to admit that excessive taxation can lead to less revenue, maybe eventually the Republicans on Capitol Hill will install people at the Joint Committee on Taxation who also understand this elementary insight.

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President Obama gave his farewell speech last night, orating for more than 50 minutes. As noted by the Washington Examiner, his remarks were “longer than the good-bye speeches of Ronald Reagan, Bill Clinton and George W. Bush combined.”

But this wasn’t because he had a lengthy list of accomplishments.

Unless, of course, you count the bad things that happened. And there are three things on my list, if you want to know Obama’s legacy for domestic policy.

And those three things, combined with his other policies, produced dismal results.

In other words, Obama’s legacy will be failed statism.

Writing for the Orange County Register, Joel Kotkin is not impressed by Obama’s overall record.

Like a child star who reached his peak at age 15, Barack Obama could never fulfill the inflated expectations that accompanied his election. …The greatest accomplishment of the Obama presidency turned out to be his election as the first African American president. This should always be seen as a great step forward. Yet, the Obama presidency failed to accomplish the great things promised by his election: racial healing, a stronger economy, greater global influence and, perhaps most critically, the fundamental progressive “transformation” of American politics. …Eight years after his election, more Americans now consider race relations to be getting worse, and we are more ethnically divided than in any time in recent history. …if there was indeed a recovery, it was a modest one, marked by falling productivity and low levels of labor participation. We continue to see the decline of the middle class.

And Seth Lipsky writes in the New York Post that Obama’s economic legacy leaves a lot to be desired.

Obama’s is the only modern presidency that failed to show a single year of growth above 3 percent… Plus, the Obama economy failed to prosper even though the Federal Reserve had its pedal to the metal. Its quantitative easing, $2 trillion balance-sheet expansion and zero-interest-rate policy all produced zilch. …The recent declines in the unemployment rate are due less to the uptick in employed persons than to an increasing number of persons leaving the labor force.

All these accusation are very relevant, and I would add another charge to the indictment. Median household income has been stagnant during the Obama years. And the data for Obamanomics is especially grim when you compare recent years to what happened under Reagan.

By the way, the bad news isn’t limited to economic policy.

Here’s what Tim Carney of the Washington Examiner wrote about Obama’s cavalier treatment of the Bill of Rights.

The Bill of Rights is a barricade protecting Americans from their government. Part of President Obama’s legacy will be that he inflicted damage on that barricade, eroding freedom of speech, free exercise of religion, the right to bear arms and the right to due process. Through his political arguments, executive actions and political leadership, Obama has taken some of the holes punched by previous presidents and made them broader or more permanent. This means that after Obama leaves office, people will be more easily silenced, killed or disarmed by their own government.

Tim extensively documents all these transgressions in his article. The entire thing is worth reading.

To be sure, there are people who defend Obama’s legacy.

From the left, Dylan Matthews wants readers of Vox to believe that Obama has been a memorable President. And he means that in a positive sense.

Barack Obama is one of the most consequential presidents in American history — and that he will be a particularly towering figure in the history of American progressivism. He got surprisingly tough reforms to Wall Street passed as well, not to mention a stimulus package that both blunted the recession and transformed education and energy policy.

A “towering figure”? That might be an accurate description of Woodrow Wilson, the despicable person who gave us both the income tax and the federal reserve. Or Franklin Roosevelt, who doubled the size of the federal government and wanted radical collectivism. Or Lyndon Johnson, the big spender who gave us Medicare and Medicaid.

All of those presidents changed America in very substantial (and very bad) ways.

Obama, by contrast, wanted to “fundamentally transform” America but instead turned out to be an incremental statist. Sort of like Bush.

And I can’t help but laugh at the assertion that Obama got “tough reforms to Wall Street” Dodd-Frank was supported by Goldman-Sachs and the other big players!

Let’s get back to the Matthews’ article. His strongest praise is reserved for Obamacare.

He signed into law a comprehensive national health insurance bill, a goal that had eluded progressive presidents for a century. …it established, for the first time in history, that it was the responsibility of the United States government to provide health insurance to nearly all Americans, and it expanded Medicaid and offered hundreds of billions of dollars in insurance subsidies to fulfill that responsibility.

I’ll agree that this is Obama’s biggest left-wing accomplishment. I’ve even noted that it may be a long-term victory for the left even though Republicans now control the House and Senate in large part because of that law (and it may not even be that if GOPers get their act together and actually repeal the law).

But I hardly think it was a game-changing reform, even if it isn’t repealed. Government was already deeply enmeshed in the healthcare sector before Obama took office. Obamacare simply moved the needle a bit further in the wrong direction.

Again, that was a victory for the left, just as Bush’s Medicare expansion was a victory for the left. But it didn’t “fundamentally transform” anything.

And here’s his conclusion.

You can generally divide American presidents into two camps: the mildly good or bad but ultimately forgettable (Clinton, Carter, Taft, Harrison), and the hugely consequential for good or ill (FDR, Lincoln, Nixon, Andrew Johnson). Whether you love or hate his record, there’s no question Obama’s domestic and foreign achievements place him firmly in the latter camp.

I strongly suspect that Obama will wind up in the former camp. He was bad, but largely forgettable. At least if the metric is policy.

Let’s close with a couple of observation on the political side.

I’m amused, for instance, that Obama’s bitter that he couldn’t rally the nation behind has anti-gun ideology.

President Obama said his biggest policy disappointment as president was not passing gun control laws, according to an interview CNN aired… Obama was unable to convince Congress to pass legislation that would change those policies, including enhancing background checks and not selling firearms at gun shows and other venues.

And I’m also amused that he believes the American people would have reelected him if he was on the ballot.

Arguing that Americans still subscribe to his vision of progressive change, President Barack Obama asserted in an interview recently he could have succeeded in this year’s election if he was eligible to run.

To be sure, he may be right. He definitely has better political skills than Hillary Clinton, and I’ll be the first to acknowledge that he was better at campaigning rather than governing.

But his victories in 2008 and 2012 were against very weak Republican candidates. And it’s interesting that a hypothetical poll showed him and Trump in a statistical dead heat. Given Trump’s low approval rating, that doesn’t exactly translate into a vote of confidence for Obama.

More important, I shared some hypothetical polling data back in 2013 which showed that Reagan would have defeated Obama in a landslide.

Once again, that’s hardly a sign of Obama being a memorable or transformative President.

And I imagine Reagan would have an even bigger lead if there was a new version of the poll.

For what it’s worth, I think the most insightful analysis of Obama’s legacy comes from Philip Klein. He notes that Obama wanted Americans to believe in big government. But he failed. Miserably.

President Obama entered office in 2009 with the twin goals of expanding the role that government plays in the lives of individuals and businesses and proving to Americans that the government could be trusted to achieve big things. He was only half successful. …the gulf between his promises and the reality of what was implemented dramatically hardened public skepticism about government. …As the Obama epoch wanes, trust in government has reached historic lows. A Pew poll last fall found that just 19 percent of Americans said they could trust the government to do the right thing most of the time — a lower percentage than during Watergate, Vietnam or the Iraq War. …Obama saw himself as the liberal answer to Reagan who could succeed where Clinton failed, putting an optimistic face on government expansion, passing historic legislation and getting Americans believing in government again. …Obama’s failure to repair the image of the federal government as a bungling institution — think of the DMV, just on a much bigger scale — will create enormous challenges for any Democratic successors trying to sell the public on the next wave of ambitious government programs.

This is spot on. I joked several years ago that the Libertarian Party should have named Obama “Man of the Year.”

But given how his bad policies have made people even more hostile to big government, he might deserve “Man of the Century.”

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All things considered, I like small businesses more than big businesses.

Not because I’m against large companies, per se, but rather because big businesses often use their political influence to seek unearned and undeserved wealth. If you don’t believe me, just look at the big corporations lobbying for bad policies such as the Export-Import Bank, Dodd-Frank, Obamacare, bailouts, and the green-energy scam.

It’s almost as if cronyism is a business model.

By contrast, the only bad policy associated with modest-sized firms is the Small Business Administration. And I suspect the majority of little firms wouldn’t even notice or care if that silly bit of intervention was shut down.

Rather than seeking handouts, small businesses generally are more focused on fighting back against excessive government.

That’s because taxes and red tape can be a death sentence for a mom-and-pop firm. Literally, not just figuratively.

The Daily News reports on the sad closing of popular restaurant in New York City.

For 25 years, China Fun was renowned…the restaurant’s sudden Jan. 3 closing, blamed by management on suffocating government demands. …“The state and municipal governments, with their punishing rules and regulations, seems to believe that we should be their cash machine to pay for all that ails us in society.” …Albert Wu, whose parents Dorothea and Felix owned the eatery, said the endless paperwork and constant regulation that forced the shutdown accumulated over the years. …Wu cited one regulation where the restaurant was required to provide an on-site break room for workers despite its limited space. And he blamed the amount of paperwork now required — an increasingly difficult task for a non-chain businesses. “In a one-restaurant operation like ours, you’re spending more time on paperwork than you are trying to run your business,” he griped. Increases in the minimum wage, health insurance and insurance added to a list of 10 issues provided by Wu. “And I haven’t even gone into the Health Department rules and regulations,” he added. …“For smaller businesses like China Fun, each little thing that occurs makes it harder,” said Malpass. “Each regulation, each tax — you put it all together and it’s just a hostile business environment.”

This is rather unfortunate, but perhaps it is a “teachable moment.”

There are two things that came to mind as I read this story.

  • First, at some point a camel’s back is broken by too much straw. Politicians often claim that a particular tax or regulation imposes a very small burden. Perhaps that is true, but when you have dozens of taxes and hundreds of regulations, those various and sundry small burdens become very onerous. I’ve made the point before that you don’t need perfect policy for the economy to function. You just need “breathing room.” Well, China Fun ran out of breathing room. A casualty of big government, though it remains to be seen if anyone learns from this experience.
  • Second, complicated taxes and regulations are a much bigger burden for small companies compared to big corporations. Every large firm has teams of lawyers and accountants to deal with tax and regulatory compliance. That’s expensive and inefficient, of course, but such costs nonetheless consume only a very small fraction of total revenue. For small businesses, by contrast, those costs consume an enormous percentage of time, energy, and resources for owners. For all intents and purposes, bad government policy creates a competitive advantage for big firms over small firms.

The moral of the story is that we should have smaller government. Not just lower taxes (and simpler taxes), but also less regulation and red tape.

Not just because such policies are good for overall economic performance, but also because small businesses shouldn’t be disadvantaged.

P.S. Since we’re on the topic of how government tilts the playing field in favor of big companies (at least the corrupt big companies), let’s enjoy some humor on that topic.

Starting with Uncle Sam’s universal bailout application form. And we also have the fancy new vehicle from Government Motors.

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For the next four years, I suspect I’m going to suffer a lot of whiplash as I yank myself back and forth, acting as both a critic and supporter of Donald Trump’s policy.

This happened a lot during the campaign, as Trump would say very good things one day and then say very bad things the next day.

And now that he’s President-Elect Trump, that pattern is continuing. Consider his approach to American businesses. In the space of just a few minutes, he manages to be a Reaganesque tax cutter and an Obamaesque cronyist.

I discussed this bizarre mix in a recent interview with Dana Loesch.

I guess the only way to make sense of Trump’s policy is that it’s a random collection of carrots and sticks. The carrots are policies to encourage companies to create jobs in America, and Trump is proposing both good carrots such as a much lower corporate tax rate and bad carrots such as special Solyndra-style handouts (except, instead of loot for green energy, firms get loot for maintaining production in America).

And the sticks are all bad, ranging for public shaming to explicit protectionism.

As I said during the interview, Trump is probably scoring political points, but what we should really care about is whether policy is moving in the right direction.

The Wall Street Journal is rather skeptical, opining that Republican-backed cronyism will be just as bad as Democrat-backed cronyism.

A giant flaw in President Obama’s economic policy has been the politicized allocation of capital, from green energy to housing. Donald Trump suffers from a similar industrial-policy temptation, as we’ve seen…with his arm-twisting of Carrier to change its decision to move a plant to Mexico from Indiana. …A mercantilist Trump trade policy that jeopardized those exports would throw far more Americans out of work than the relatively low-paying jobs he’s preserved for now in Indianapolis. Mr. Trump’s Carrier squeeze might even cost more U.S. jobs if it makes CEOs more reluctant to build plants in the U.S. because it would be politically difficult to close them. Mr. Trump has now muscled his way into at least two corporate decisions about where and how to do business. But who would you rather have making a decision about where to make furnaces or cars? A company whose profitability depends on making good decisions, or a branding executive turned politician who wants to claim political credit? The larger point is that America won’t become more prosperous by forcing companies to make noneconomic investments.

Here’s some of what Tyler Cowen wrote about Trump’s approach.

One of Donald Trump’s most consistent campaign promises has been to prevent U.S. businesses from moving good jobs to Mexico… Economists might regard this as a misguided form of protectionism, but in fact, it’s worse than that: If instituted, it could prove a major step toward imposing capital controls on the American economy and politicizing many business decisions. …Using the law to forbid factory closures would have serious negative consequences. For one thing, those factories may be losing money and end up going bankrupt. For another, stopping the closure of old plants would lock the U.S. into earlier technologies and modes of production, limiting progress and economic advancement. An alternative policy would prohibit companies from cutting American production and expanding in Mexico… The end result would be that Asian, European and Mexican investors would gain at the expense of U.S. companies. …Furthermore, if we limit the export of American capital to Mexico, the biggest winner would be China, as one of its most significant low-wage competitors — Mexico — suddenly would be hobbled.

Those are all very practical and sensible arguments against protectionism.

But Tyler points out that Trump’s agenda could lead to something even worse.

…a policy limiting the ability of American companies to move funds outside of the U.S. would create a dangerous new set of government powers. Imagine giving an administration the potential to rule whether a given transfer of funds would endanger job creation or job maintenance in the United States. That’s not exactly an objective standard, and so every capital transfer decision would be subject to the arbitrary diktats of politicians and bureaucrats. It’s not hard to imagine a Trump administration using such regulations to reward supportive businesses and to punish opponents. Even in the absence of explicit favoritism, companies wouldn’t know the rules of the game in advance, and they would be reluctant to speak out in ways that anger the powers that be. …It also could bring the kind of crony capitalist nightmare scenarios described by Ayn Rand in her novel “Atlas Shrugged,” a book many Republican legislators would be well advised to now read or reread.

Tyler’s best-case scenario is that Trump doesn’t try to change policy and instead just uses the bully pulpit to…well, be a bully.

…public jawboning  also would be an unfortunate form of politicizing the economy, but at least there wouldn’t be new laws or regulations to back it up in a systematic way.

Though I’ll close by noting that this best-case scenario is still a very bad case.

The mere fact that politicians think they have the right to interfere with the internal decisions of companies is a dangerous development.

It’s cronyism on steroids.

And even if Trump somehow restrains himself (how likely is that?!?), sooner or later that bad mentality will lead to bad policy.

Yes, I’m making a slippery-slope argument. But not just because I’m a libertarian who is paranoid about government power.

My fear is based on lots of real-world evidence. It turns out that slippery slopes are very slippery.

The bottom line is that politicians don’t even do a good job of running the government. Let’s not allow them to run private companies as well. And that’s true whether they have an R after their names or a D after their names.

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Last year, I shared some remarkable research from the Organization for Economic Cooperation and Development about the negative relationship between government spending and economic performance.

The economists at the Paris-based bureaucracy looked at data from its member nations (primarily Europe, North America, and the Pacific Rim), discovered that the countries with bigger government experienced less growth, and concluded that there would be much more prosperity if those nations merely reduced government modestly.

So you can imagine what sort of numbers that study would have generated if a few jurisdictions with genuinely modest-sized government, such as Hong Kong and Singapore, were part of the data.

But that’s a separate issue. Today’s topic is about a study from another international bureaucracy. The European Central Bank has new research looking at the impact specifically of excessive pay for government bureaucrats. Here are the key findings from the nontechnical summary at the beginning of the paper.

…there are benefits from government wage bill reform that go beyond the objective of fiscal consolidation. …a rationalisation of government wages and employment policies can generate favourable labour market effects in the medium to longer term through competitiveness and efficiency gains. Competitiveness gains materialise through the spillovers effects of public wage moderation on the determination of private sector wages. …An important aspect of the debate on public wage bill restraint concerns how long such policies can be sustained over time. …Additional margins of short-term adjustment include the moderation of still high public-to-private wages gaps, or a possible continuation of the downsizing trend in public employment, depending on the country-specific situation. …Finally, the paper argues that reforms affecting public sector personnel are most effective and have more sustained effects when the measures implemented are of a structural nature… Some examples are…measures to streamline the size and scope of government.

Wow, an international bureaucracy writing about the economic benefits that accrue if policy makers “streamline the size and scope of government.” Be still, my beating heart!

If you’re a policy wonk, you’ll like the fact that the study is filled with lots of interesting data and charts.

…aggregate data show that the euro area government wage differential with respect to the private sector increased from 20% in 2007 to 25% in 2009, and subsequently fell to 23% in 2014.

Here’s the relevant chart. The blue line, which links to the left axis, shows the degree to which bureaucrats are overpaid compared to the private sector. For the past 10 years, the “pay premium” has been in the 20 percent-25 percent range.

This problem of excessive pay for the bureaucracy has been a growing problem.

…general government compensation of employees grew faster than nominal GDP over the whole 2007-2014 crisis period

Though once the “austerity” era began about 2010, there was a bit of reform to bureaucrat compensation (in Europe, “fiscal consolidation” mostly meant higher taxes, but some spending restraint), particularly in nations that were forced to make changes because investors were becoming increasingly reluctant to lend them more money..

Here’s a chart showing bureaucrat pay as a share of GDP, with the blue bar showing the amount of economic output consumed by government workers in 2010 and the yellow dots showing the level in 2014. Some countries increased the relative burden of bureaucrat compensation and others reduced it, but what strikes me as noteworthy is that Germany and the Czech Republic deserve praise for keeping the burden low (honorable mention for Luxembourg and Slovakia) while Denmark stands out for being absurdly extravagant.

For a longer-term perspective, at least with regards to the size of the bureaucracy, here’s a table showing the share of the population getting a paycheck from government. Fascinating data. I especially like the columns on the right, which show that Ireland, the Netherlands, and the United Kingdom deserve credit for reducing over time the amount of bureaucrats relative to the private sector. The nations that have moved farthest in the wrong direction, by contrast, are Greece (gee, what a surprise), Spain, Portugal, and Finland.

Now let’s get to the meat of the study, which looks at the economic impact of less bureaucracy.

The authors cite some of the existing academic research, much of which focuses on the degree to which excessive pay for the public sector causes economy-wide distortions that make nations less competitive and result in slower growth. Basically, excessive pay for bureaucrats forces private employers to increase pay as well, but in ways that aren’t sustainable based on underlying levels of productivity.

A seminal work Alesina et al. (2002) found that reducing public wage expenditure generates reductions in private wages per employee, which improves competitiveness, increasing profits, investment, and economic growth. …A key argument is that public wage restraint may set in motion a labour market adjustment through the inter-linkages with private wages. …The literature has found robust evidence of significant interrelations between public and private sector wages per employee. A wealth of recent empirical papers provides evidence of a direct causal relationship between these variables. …The empirical literature tends to find that public employment crowds-out private sector employment.

But when fiscal pressures force politicians to cut back on the excessive pay for government employees, this enables the private sector to have pay levels that are consistent with sustainable long-run growth.

The authors share some of their new findings.

…the recent consolidation period has contributed to some competitiveness gains in the euro area, in view of the evidence provided on the partial correction of the public-private wage premium. …Overall, the restraint in public wages directly reduced unit labour cost (ULC) growth in the euro area during the 2010-2014 period. …The existence of distortions in public-private wage gaps…can be particularly harmful for competitiveness given that public sector activities are concentrated in non-tradable sectors, which are less exposed to international competition. …There is evidence that the recent public wage restraint has driven the partial correction of the existing positive public-private wage premium in the euro area.

The authors close by discussing some policy implications.

Well-designed government wages and employment policies and reforms may generate overall economy competitiveness gains and increase the efficiency of the labour market. …public employment adjustments can affect GDP and total economy employment positively if there are large inefficiencies in the government sector… In addition, if a public pay gap exists, the latter positive effect of public wage restraint becomes amplified as labour market inefficiencies are also reduced.

This is helpful research. It’s not often that a government bureaucracy releases a study showing that overpaid bureaucrats hinder overall economic performance.

Though I hasten to add that the study only looked at the macroeconomic effect of excessive pay. As I argue near the end of this video I narrated for the Center for Freedom and Prosperity, the additional problem is that various bureaucracies are engaging in activities that are economically harmful. In the case of the United States, the Department of Agriculture, Department of Education, and Department of Housing and Urban Development would be just a few examples of agencies where programmatic spending surely is more damaging that bureaucrat compensation.

The good news is that the ECB study also recognizes the need for structural reform. That’s why there was a reference to the need to “streamline the size and scope of government.”

The bad news is that politicians don’t care about this consensus.

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It’s time to channel the wisdom of Frederic Bastiat.

There are many well-meaning people who understandably want to help workers by protecting them from bad outcomes such as pay reductions, layoffs and discrimination.

My normal response is to remind them that the best thing for workers is a vibrant and growing economy. That’s the kind of environment that produces tight labor markets and more investment, both of which then lead to higher pay.

Even statists sort of understand that this is true, but it’s sometimes difficult to get them to grasp the implications. They oftentimes are drawn to specific forms of government intervention, even if you explain that there are adverse unintended consequences.

Let’s explore this issue further.

In a column for the New York Times, Megan McGrath writes about a big new mining project in a remote part of Australia that “has the potential to create 10,000 jobs.” While that’s obviously good news, she worries that the company “will repeat the mistakes made by companies during the last mining boom by using workplace practices that hurt workers and their families.”

And what are these mistaken “workplace practices”? Apparently she thinks it is terrible that workers don’t want to move to the outback and instead prefer to continue living in cities and suburbs. So she think it is bad that they fly in for multi-week shifts, stay in temporary housing, and then fly back (at company expense) to their homes.

Employees…fly to remote mines from major cities to work weeks at a time, and fly home for several days off before starting the cycle again. These so-called fly-in, fly-out jobs, which offer hefty pay, are widely known here as “fifo.” At the peak of the boom in 2012, …more than 100,000 of these held fifo positions.

Though it seems these workers are making very rational decisions on how to maximize the net benefits of these positions.

…fifo workers in the last boom were young, undereducated men lured by salaries that far surpassed what they could earn for similar work outside the industry — up to $100,000 a year to shift earth and drive trucks. The average full-time mining employee in 2016 earned $1,000 more per week than other Australians.

So what’s the downside? Why are workers supposedly being exploited by these lucrative jobs?

According to McGrath, the mining camps don’t have a lot of amenities.

…fifo life comes at a steep price. The management in many mines controls the transient workers’ schedules — setting times for meals, showers and sleep. The workers often can’t visit nearby towns and recreational facilities such as gyms and swimming pools because of a lack of transportation. Many employees have to share beds. They work 12-hour shifts, seven days a week, up to three weeks at a time.

That doesn’t sound great, but this also explains why the mining companies have to pay a boatload of money to attract workers. This is a well-established pattern that is familiar to labor economists. If working conditions are unpalatable, then employers have to compensate with more remuneration.

But Ms. McGrath doesn’t think workers should get extra cash. She would rather the mining company compensate workers indirectly.

A lot can be done to improve life in the camps. Shorter swings would help workers maintain bonds with their families. More stable living situations, with less sharing of living spaces, would increase a sense of value and belonging. Workers should be encouraged to visit nearby towns to reduce their isolation. The Adani megamine could be in operation for 60 years, experts say. Roads for the mine and the region should be improved so employees can move with their families to existing townships and drive to work.

Of course, she doesn’t admit that she wants workers to get less cash compensation, but that would be the real-world impact of her proposed policies.

She says that the mining companies should “put people ahead of profits.” But that’s a vacuous statement. Projects like this new mine only exist because investors expect to earn a return. Otherwise, they wouldn’t take the enormous risk of sinking so much capital into such endeavors.

All this new investment is good news for unemployed or under-employed Australians since they’ll now have an opportunity to compete for jobs that pay very well, particularly for workers without a lot of education.

By the way, if workers really valued all the things that are on Ms. McGrath’s list, the company would offer those fringe benefits instead of higher wages. But that’s obviously not the case. The market has spoken.

By the way, I can’t resist pointing out that she also does not understand tax policy. In a sensible system, companies calculate their taxable profit by adding up their total revenue and then subtracting all their costs. What’s left is profit, a slice of which is then grabbed by government.

But that’s not enough for Ms. McGrath. She apparently believes that mining companies shouldn’t be allowed to subtract many of the costs associated with so-called fifo workers when calculating their annual profit. I’m not joking.

Mining companies are encouraged through tax incentives to use the transient workers. Some costs associated with a fifo worker — meals, transportation and airline tickets — can be claimed as production expenses, helping to lower a company’s tax bill.

I hope the Australian government isn’t dumb enough to buy this argument. Allowing a firm to subtract costs when calculating profit is simply common sense. And if doesn’t matter if those costs reflect fifo costs, investment expenditures, luxury travel, or band costumes.

For what it’s worth, if the government does get pressured into forcing companies to pay tax on these various business expenses, one very safe prediction is that the net effect will be to lower the wages offered to workers. Or, if the mandates, taxes, and regulations reach a certain level, the business will simply close down or new projects will be abandoned.

And those options obviously are not good news for workers.

Let’s now shift from the specific example of fifo workers to the broader issue of labor regulation. What happens if governments listen to people like Ms. McGrath and impose all sorts of rules that prevent flexible labor markets? According to recent scholarly research from three European economists, the consequence is more unemployment.

They start by pointing out that European nations with mandates and red tape have a lot more unemployment (particularly when the economy is weak) than countries with lightly regulated labor markets.

The Great Recession has brought a substantial increase in unemployment in Europe. Overall, unemployment rate in the euro area has grown from 8 percent in 2008 to 12 percent in 2014. The change in unemployment has been very heterogenous. In northern Europe, unemployment did not grow substantially or even fell: in Germany, for example, unemployment rate has actually declined from 7 to 5 percent. At the same time, in Greece unemployment has grown from 8 to 26 percent, in Spain — from 8 to 24 percent, and in Italy — from 6 to 13 percent. Why has unemployment dynamics been so different in European countries? The most common explanation is the difference in labor market institutions that prevents wages from adjusting downward. If wages cannot decline, negative aggregate demand shocks (such as the Great Recession) result in growth of unemployment.

The three economists wanted some way to test the impact of regulation, so they looked at the labor market for immigrants in Italy since some of them work in the formal (regulated) economy and some of them work in the shadow (unregulated) economy.

While this argument is straightforward, it is not easy to test empirically. Cross-country studies of labor markets are subject to comparability concerns. The same problems arise in comparing labor markets in different industries within the same country. In order to construct a convincing counterfactual for a regulated labor market, one needs to study a non-regulated labor market in the same sector within the same country. This is precisely what we do in this paper through comparing formal and informal markets in Italy over the course of 2004-12. We use a unique dataset, a large annual survey of immigrants working in Lombardy carried out by ISMU Foundation since 2004. …Our data cover 4000 full-time workers every year; one fifth of them works in the informal sector. The dataset is therefore sufficiently large to allow us comparing the evolution of wages in the formal and in the informal sector controlling for occupation, skills and other individual characteristics.

And what did they find?

In the absence of regulation, labor markets can adjust. The bad news for workers is that they get less pay. But the good news is that they’re more likely to still have jobs.

Our main result is presented in Figure 1. We do find that the wage differential between formal and informal sector has increased after 2008. Moreover, while the wages in the informal sector decreased by about 20 percent in 2008-12, the wages in the formal sector virtually did not fall at all. This is consistent with the view that there is substantial downward stickiness of wages in the regulated labor markets. …we find that both before and during the crisis, undocumented immigrants (those without a regular residence permit) are 9 percentage points more likely than documented immigrants to be in the labor force

Here’s the relevant chart from the study.

And here are some concluding thoughts from the study.

…despite the substantial growth of unemployment in 2008-12, the wages in the formal labor market have not adjusted. In the meanwhile, the wages in the unregulated informal labor market have declined substantially. The wage differential between formal and informal market that has been constant in 2004-08 has grown rapidly in 2008-12 from 18 to 35 percentage points. …These results are consistent with the view that regulation is responsible for lack of wage adjustment and increase in unemployment during the recessions.

For what it’s worth (and this is an important point), this helps explain why the Great Depression was so awful. Hoover and Roosevelt engaged in all sorts of interventions designed  to “help” workers. But the net effect of these policies was to prevent markets from adjusting. So what presumably would have been a typical recession turned into a decade-long depression.

So what’s the moral of the story? Good intentions aren’t good if they lead to bad results. Which brings me back to my original point about helping workers by minimizing government intervention.

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At the risk of sounding like a broken record (or like Donald Sutherland in Animal House), I’m going to repeat myself for the umpteenth time and state that the United States has a big long-run problem.

To be specific, the burden of government spending will inexorably climb in the absence of big reforms. This isn’t just my speculation. It’s a built-in mathematical result of poorly designed entitlement programs combined with demographic changes.

I wrote about these issues in a column for The Hill.

…there is a big reason to worry about the slowdown in population growth in the U.S. Many of our entitlement programs were created based on the assumption that we would always have an expanding population, as represented by a population pyramid. …however, we’ve seen major changes in demographic trends, including longer lifespans and falling birthrates. The combination of these two factors means that our population pyramid is slowly, but surely, turning into a population cylinder. …this looming shift in America’s population profile means massive amounts of red ink as the baby boom generation moves into full retirement.

To back up my claim, I then cited grim numbers from the Congressional Budget Office, and also linked to very sobering data about America’s long-run fiscal position from the Bank for International Settlements, the International Monetary Fund, and the Organization for Economic Cooperation and Development.

Simply stated, the United States will become a failed welfare state if we don’t make changes in the near future.

But I point out that we can save ourselves from that fate. And it’s not complicated. Just make sure government spending grows slower than the private economy, which will only be possible in the long run if lawmakers reform entitlements, particularly Medicare and Medicaid.

…it’s also possible that Washington will get serious about genuine entitlement reform. …if Congress adopted the structural reforms that have been in House budgets in recent years, much of our long-run spending problem would disappear. …the real goal is to make sure that government spending grows slower than the private sector.

That’s the good news.

But here’s the bad news. Based on his campaign rhetoric, Donald Trump isn’t a fan of entitlement reform.

And if he says no, it isn’t going to happen. Writing for National Review, Michael Barone explains that Trump’s opposition is a death knell.

The election of Donald Trump has put the kibosh on…the entitlement reform sought by conservative elites… Trump…has made plain that he’s opposed to significant changes in entitlements… It’s hard to see how Republicans in Congress will go to the trouble of addressing entitlements if their efforts can’t succeed.

As a matter of political prognostication, I agree. Republicans on Capitol Hill are not going to push reform without a receptive White House.

It doesn’t matter that they’re right.

Conservative elites’ concern about entitlements is based on solider numbers… There’s a strong case for making adjustments now… The longer we wait, the more expensive and painful adjustments will be. …Conservative…elites may have superior long-range vision. But they’re not going to get the policies they want for the next four years.

But this doesn’t mean reform is a lost cause.

I explained last month that there are three reasons why Trump might push for good policy even though he said “I’m not going to cut Medicare or Medicaid.”

  • First, politicians oftentimes say things they don’t mean (remember Obama’s pledge that people could keep their doctors and their health plans if Obamacare was enacted?).
  • Second, the plans to fix Social Security, Medicare, and Medicaid don’t involve any cuts. Instead, reformers are proposing changes that will slow the growth of outlays.
  • Third, if Trump is even slightly serious about pushing through his big tax cut, he’ll need to have some plan to restrain overall spending to make his agenda politically viable.

And maybe Trump has reached the same conclusion. At least to some degree.

Here’s what is being reported by The Hill.

Medicaid has grown in size in recent years, with ObamaCare extending coverage to millions of low-income people who hadn’t qualified before. But Republicans warn of the program’s growing costs and have pushed to provide that money to states in the form of block grants — an idea President-elect Donald Trump endorsed during the campaign. Vice President-elect Mike Pence signaled in an interview with ABC this month that the incoming administration planned to keep Medicare as it is, while looking at ways to change Medicaid. …Block grants would mean limiting federal Medicaid funds to a set amount given to the states, rather than the current federal commitment, which is more open-ended. …Gail Wilensky, who was head of the Centers for Medicare and Medicaid Services…argued that…If federal money for the program were fixed, “states would have much greater incentives to use it as efficiently as possible,” she said.

The policy argument for Medicaid reform is very strong.

The real question is whether Trump ultimately decides to expend political capital on a much-needed reform. Because he would need to do some heavy lifting. If GOPers push for block grants, well-heeled medical providers such as hospitals will lobby fiercely to maintain the status quo (after all what’s is waste and fraud to us is money in the bank for them). Trump would have to be willing to push back and make a populist argument for federalism and fiscal responsibility rather than a populist argument for dependency.

I guess we’ll see what happens.

P.S. For what it’s worth, if Trump is going to fix just one entitlement program, Medicaid is a good choice.

P.P.S. In an ideal world, Medicare and Social Security also should be fixed.

P.P.P.S. That being said, if the major fiscal change of a Trump Administration is Medicaid reform, I’ll be relatively happy. I’ve been operating on the assumption (based in part of what he said during the campaign) that Trump is a big-government Republican. Sort of like Bush. I will be very happy if it turns out I was wrong.

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