*1. GAS STATION PRICES SHOW MARKETS AT WORK
2.The Flawless Fed By ARTHUR B. LAFFER WSJAugust
24, 2006; Page A10
3. GOOD FOR ALL AGES Younger workers may be the biggest
winners under the President's new pension legislation... WASHINGTON POST
*4. BIG BOX REBELLION
*5. Minimum wage requirements hurt poor people. Tom
Sowell and Walter Williams explain
6. Broadbandits By THOMAS W. HAZLETT
7. Reaganomics at 25
8. Key Inflation Index May Get Greater Precision
9. A glimmer of hope By Thomas Sowell
*10. CHICAGO'S MISGUIDED MANDATES
11. Car Wars
12. If Only Most Americans Understood
13. MEDICINE CAN BE CONSUMER-CENTRIC
14. The Red-Lining of Chicago
15. Cut the Minimum Wage With Ockham's Razor
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*16. Tyler Cowen Blog The minimum wage: theory
before history
17. SAVING HEALTH INSURANCE FROM THE MINIMUM WAGE
18. REAL ESTATE STATUS QUO
19. DYNAMIC ANALYSIS
*20. REGULATORY ROBBER BARRONS
21. RISING TIDE
*22. Running out of oil? By Walter E. Williams
23. The Big-Bang Story of U.S. Private Business The
economic power of lower-tax-rate incentives is once again working its magic.
24. CAN'T-DO BRITAIN
25. "Teddy" and Time By Thomas Sowell
*26. Changing Attack In Poverty Tactics, An Old Debate:
Who Is at Fault?
*27. Counting the Poor: Methods and Controversy By
DAVID WESSEL
*28. ORGAN DONATIONS FALL SHORT
29. Russian pair challenge UK expert over global warming
30. Give Your Cabdriver a Fat Tip!
31. Labor Lost
32. Don't Restrict Immigration, Tax It
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*33. HOW TO CREATE A COMPETITIVE INSURANCE MARKET
34. Where Would You Rather Be Sick?
35. The Wrath of Grapes
36. Ominous Neutrality By STEVE FORBES
37. Gabelli's Bidding
*38. America at Work By EDWARD P. LAZEAR and KATHERINE
BAICKER
39. The Negative Effects of the Minimum Wage Brief
Analysis
40. Tradeable Gasoline Rights By MARTIN FELDSTEIN
*41. Death and Taxes By EDWARD C. PRESCOTT
42. Economics of prices May 31, 2006 by Walter E.
Williams ( bio | archive | contact )
43. Mr. Paulson's Challenge By N. GREGORY MANKIW
44. Adios to a Phone Tax
*45. Mississippi has a place for heroes: jails by
John Stossel
*46. The Gas-Gouging Myth
47. Caring vs. uncaring
48. Costa Rican Poverty Fighter By MARY ANASTASIA
O'GRADY
1. GAS STATION PRICES SHOW MARKETS AT WORK
------------------------------------------------------------------------
Inexperienced institutional investors have been blamed
for driving up
oil futures prices, and spot prices along with them.
But in reality,
recent price gyrations show how financial markets and
commodity markets
interact, says Hal R. Varian, professor of business,
economics and
information management at the University of California,
Berkeley.
Recent editorials have posited that speculation in the
oil futures
market is driving up spot prices. But as long ago as
1953, Milton
Friedman argued that speculation normally helps to stabilize
prices
rather than destabilize them.
According to Friedman:
o If speculative trading tends
to push prices higher when they
are already high
and lower when they are already low, then
traders must be
buying high and selling low, meaning that
traders have to
lose money on average - which does not
seem very likely.
o In reality, speculative traders
try to buy low and sell high,
activities that
by their nature tend to push prices up when
they are too low
and down when they are too high.
o Ultimately, speculators who
bought high and sold low would be
driven out of business.
The real reason behind the quick price change is a phenomenon
known as
storage arbitrage, says Varian. This argument follows
that
anticipation of rising prices will cause people to store,
in order to
realize greater gains in the future. This reduces
supply which
will also drive up the current price.
However, if speculators start to worry that the price
of oil could soon
be significantly lower, some of that stored oil would
come back on the
market, pushing spot prices down, and offering welcome
relief to
consumers.
Whatever the result on the price may be, says Varian,
it is the product
of market forces, not inexperienced speculation.
Source: Hal R. Varian, "The Rapidly Changing Signs at
the Gas
Station Show Markets at Work," New York Times, August
24,
2006.
For text (subscription required):
http://www.nytimes.com/2006/08/24/business/24scene.html
For more on Energy Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=22
2.The Flawless Fed By ARTHUR B. LAFFER WSJAugust 24, 2006; Page A10
You'd have to dig pretty far down in the duffle bag of economists to find one who actually believes in the Philips Curve -- the idea that rapid growth causes inflation. In truth, rapid growth in conjunction with restrained monetary base growth is a surefire prescription for stable low inflation. The old saw that too much money chasing too few goods results in inflation couldn't be more accurate. But rapid growth does have predictable consequences on the relative prices of various products.
Prices of goods in fixed supply do tend to rise relative
to all prices as the global economy accelerates. In the short run, increases
in demand for products in relatively fixed supply result in higher prices
rather than more output. And, of course, those products that are typically
in fixed supply include commodities such as oil, gold, copper and agricultural
products. But to confuse an increase in commodity prices with general inflation
is a serious mistake, one which often seduces otherwise clear-thinking
economists.
[Chart]
The influence of rapid growth on the relative prices of goods in fixed supply can be magnified by an unrelated decline in the value of the U.S. dollar in the foreign exchanges. We have seen just such a decline in recent years, and it was dramatic. Those products whose prices are disproportionately affected by world growth are generally the same products whose relative prices are increased by currency depreciation. And the dollar's depreciation has occurred in this cycle at the same time when the world has enjoyed an unprecedented boom. This convergence has exaggerated the appearance of nascent inflation and encouraged faulty thinking.
Since its most recent January 2002 peak against the euro, the dollar has depreciated against the euro by 34%. This means that over this time period, dollar prices of globally traded products have risen by 34% above and beyond the increase in euro prices. This dollar decline-induced increase in commodity prices merely reflects the movings to and fro of the U.S. terms of trade in response to the relative attractiveness of U.S. capital markets.
With today's U.S. global capital surplus (i.e., trade deficit) equaling almost 6% of U.S. GDP -- an all-time high -- it's only natural that with improving economic conditions abroad, global investors would allocate more of their assets to foreign investments. Hence, the decline in the dollar. Over the years we've seen this type of currency move time and again. From 1978 to 1985, the foreign exchange value of the dollar doubled in response to the tax cuts and sound money of Ronald Reagan and Paul Volcker; then, from 1985 to 1993, with the end of the Reagan era and George Bush's and Bill Clinton's original tax increases, it halved back to about where it was in 1978; finally, from 1993 through 2002, the dollar once again appreciated back to its former highs because of the great economics of Presidents Bill Clinton and George W. Bush.
Whenever the dollar bottoms, it tends to bottom out at a value about where it is today. Likewise, when the dollar hits its highs, those highs are just about right in the range of the high the dollar achieved in 2002. But the recent dollar decline has doubled down on spot commodity price inflation. The global economic expansion and the sharp decline of the dollar account for all of the recent appearance of emerging inflation.
Fortunately, for the prospects for future dollar inflation, further declines in the dollar are not very likely and future world growth will taper off. But far more important for the future of inflation than these transitory phenomena is the absolutely stellar policy of the Federal Reserve in controlling the rate of growth of the monetary base. Fed policy couldn't be better.
The Fed's primary policy instrument is its control over the monetary base, which is comprised of currency in circulation and member bank reserves. The Fed creates a lot of hoopla making pronouncements about targeting the federal funds rate, but the long and the short of it is that the Fed is neither a borrower nor a lender in the federal funds market. In times past, the Fed did use the discount rate and loans through the discount window as a policy tool, but no longer. Changes in the federal funds target rate are basically a reaction to changes in the 91-day Treasury bill yield and not a signal of prospective policy. The monetary base, however, is the key to Fed policy and future inflation.
It is here where the Fed has deliberatively and purposively kept the reins on inflation during a rather turbulent time. The Fed not only avoided a massive financial catastrophe in the aftermath of the 9/11 attacks, but has also maintained tight control over the monetary base as the economy strengthened and the dollar fell. In the nearby chart is a plot of the log of the monetary base since early 2001. The spike in the monetary base circa Sept. 11, 2001, reflects the Fed's wisdom to discount freely in times of crisis and then remove that excess monetary base when the crisis is over to avoid inflation.
Post-9/11, the Fed has gradually lowered the growth rate of the monetary base to offset any tendencies for inflation to get a foothold as the dollar fell and world growth surged. The job the Fed has done has been flawless, nothing short of amazing. Walter Bagehot would have been impressed were he alive today. And the financial markets know it.
The bond market is the best place to look for overall expectations of inflation and nominal yields out into the future. Because of the creditworthiness of the U.S. Treasury, 10-year U.S. note yields reflect the market's risk-free expected nominal yield over the coming 10 years. The expected nominal yield is the expected real yield plus the expected rate of inflation.
Fortunately, the Treasury has over the recent past begun to issue an instrument called the Treasury Inflation-Protected Security (TIPS) in a wide range of maturities including a 10-year note. The yield on this TIPS note is for all practical purposes the expected real yield over the horizon of the maturity of the note. To calculate the market's expectations of inflation over the coming 10 years, one need only subtract the TIPS yield from the nominal yield. In the second nearby chart I've plotted all three -- the nominal yield, the TIPS yield and the expected rate of inflation. As is clear, over the past three years there has been no upswing in the market's expectations of inflation.
Markets aren't so dumb after all.
Mr. Laffer is founder and chairman of Laffer Associates.
3. GOOD FOR ALL AGES Younger workers may be the biggest
winners under the President's new pension legislation... WASHINGTON POST
------------------------------------------------------------------------
The pension legislation President Bush signed last week
will make the
most significant changes to U.S. retirement laws in three
decades,
affecting workers of every age, from graduates on their
first job to
employees who are about to retire, says the Washington
Post.
Younger workers may be the biggest winners under this
bill because they
will be in the workforce the longest and have the most
time to save,
according to the National Center for Policy Analysis.
Additionally:
o The new law encourages employers
to offer automatic
enrollment allows
for contributions to automatically increase
as pay increases,
and makes it possible to automatically
diversify holdings;
workers can elect to opt out -- a big
change from the
current system, in which they must opt in.
o The nonprofit Employee Benefit
Research Institute estimates
that automatic enrollment
will result in a 92 percent
participation rate,
compared with today's 66 percent.
Middle-aged workers will also benefit, says Day:
o Efforts to shore up traditional
pensions will help middle
aged workers the
most, because they are more likely than
younger workers
to be enrolled.
o They will find it easier to
save for college, as several
expiring laws that
promoted savings were made permanent; the
contributions to
retirement accounts will be permitted to rise
with inflation.
Lastly, the new legislation will help workers near retirement:
o Older workers will benefit
more than any other group from the
provisions on traditional
pensions, according to AARP.
o They should receive more information
from companies about the
health of their
pension plans.
o They should also see companies
put more money into
underfunded pensions.
o New protections against employers
that would promise
increased benefits,
even though a plan is funded, are also
expected to benefit
older workers most.
Source: Kathleen Day, "Generations Will Feel Pension Act
Differently." Washington Post, August 21, 2006
For text:
http://www.washingtonpost.com/wp-dyn/content/article/2006/08/19/AR2006081900120.html
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
4. BIG BOX REBELLION
------------------------------------------------------------------------
Chicago's City Council ruling requiring a super-minimum
wage is driving
big retailers out of the city, says the Wall Street Journal.
In response to the mandate that certain mostly non-union
"big-box" retailers pay a minimum of $13 in wage and
health
benefits by 2010, many retailers have decided that doing
business in
Chicago is not worth the cost:
o Target was the first big chain
to react, recently cancelling
plans to open a
new superstore in a run-down area on the
city's North side.
o Wal-Mart has also announced
that its plans to build 20 new
stores in the city
over the next five years are "on
hold" until the
wage issue is resolved.
However, the movement may yet be overcome by common sense,
says the
Journal.
o Mayor Richard Daley seems
intent on vetoing the bill, which
he says would result
in higher property taxes to compensate
for lost sales-tax
revenue once stores leave.
o And city Aldermen are beginning
to recognize their error, and
are reportedly now
open to giving Daley the votes he needs to
sustain his veto.
Chicago is the latest example of the "living-wage" movement,
in which upper-income politicians attack non-union companies
in the
name of helping the poor. But, in reality, it is
the working poor
who lose, says the Journal:
o They lose access to new retail
jobs that bigger retail stores
create.
o They lose access to low-cost
goods that only
"big-box" retailers
can afford to charge.
Source: Editorial, "Big Box Rebellion," the Wall Street
Journal, August 16, 2006
For text:
http://online.wsj.com/article/SB115568554869536712.html?mod=opinion_main_review_and_outlooks
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
Friday, August 11, 2006 ~ 8:12 a.m., Dan Mitchell Wrote:
5. Minimum wage requirements hurt poor people. Tom
Sowell and Walter Williams explain why politicians should not prevent
low-skilled people from getting jobs and climbing out of poverty – yet
that is precisely what they do every time they boost the minimum wage:
A survey has shown that
85 percent of the economists in Canada and 90 percent of the economists
in the United States say that minimum wage laws reduce employment. But
you don't need a Ph.D. in economics to know that jacking up prices leads
fewer people to buy. Those people include employers, who hire less labor
when labor is made artificially more expensive. It happens in France, it
happens in South Africa, it happens in New Zealand. How surprised should
we be when it happens in Chicago? The economic consequence of political
largess -- whether in the form of minimum wage laws or medical or other
benefits mandated to be paid for by employers -- is to make labor artificially
more expensive. Countries with generous employee benefits mandated by law
-- Germany and France, for example -- have chronically higher unemployment
rates than unemployment rates in the United States, where jobs are created
at a far higher rate than in Europe. There is no free lunch. Higher labor
costs mean fewer jobs.
http://www.townhall.com/columnists/ThomasSowell/2006/08/08/a_glimmer_o
f_hope
Place yourself in the position
of an employer and ask: If a worker costs me, say, $7 in wages, plus mandated
fringes such as Social Security, unemployment compensation, sick and vacation
leave, making the true hourly cost of hiring a worker $9 an hour, does
it pay me to hire a worker who's so unfortunate to have skills that enable
him to produce only $5 or $6 worth of value per hour? Most employers would
conclude that doing so would be a losing economic proposition.
http://www.townhall.com/columnists/WalterEWilliams/2006/08/09/the_minimu
m_wage_vision
6. Broadbandits By THOMAS W. HAZLETT
WSJ August 12, 2006; Page A9
We should be celebrating an anniversary this month: One year ago, in August, the Federal Communications Commission voted to deregulate residential broadband services. Never heard of it? Well, I'm not proposing a parade; but this victory for freer markets undermines the current proposal to re-regulate the Internet via "net neutrality."
First, the broadband situation. Under the "open access" mandate, the federal government used to be the ultimate arbiter of what telephone companies could charge independent broadband providers to use their own physical infrastructure, such as wires and cables and other network components. But reformers argued that depriving the telcos of the power to set prices and cut customized business deals meant they could not attract the investment they needed for critical but very costly improvements to these networks.
The deregulation debate was acrimonious: Critics complained that, left to market forces, households would be handcuffed and gouged by telcos pushing their own broadband services, excluding competitors and restricting access to Web content. After the vote was taken, FCC Commissioner Michael Copps challenged his colleagues: "I hope next year the commission will put its money where its mouth is to see if the assumptions yield the results. And if it doesn't, I hope it will admit that and take appropriate action. I'll be keeping tabs."
The results are in: DSL packages are cheaper, performance speeds are faster, and the number of subscribers is growing more quickly than under open access rules. According to Leichtman Research, for the nine months following deregulation (fourth-quarter results aren't posted), the number of households with DSL increased by 4.6 million -- some 31% above the previous period's growth. Meanwhile, the DSL competitors -- cable modem services -- have added 3.8 million subscribers.
The DSL experience provides a vital piece of evidence for resolving today's equally acrimonious debate over "network neutrality" (aka net neutrality). Though somewhat hazy in theory, net neutrality would likely involve the government prohibiting DSL or other broadband companies from charging content providers such as Google or Yahoo for reaching individual Internet users. It might also prohibit them from providing better service for its own bundled applications -- say, voice over Internet telephone service.
Net neutrality is another flavor of open access. Proponents understand this. The New Republic editorializes that net neutrality is needed precisely because "last August, George W. Bush's Federal Communications Commission (FCC) exempted telcos that provide Internet connections from [open-access] restrictions, dealing a blow to both entrepreneurship and political discourse." The argument is logical, but omits empirical evidence of regulatory effectiveness.
Here is the background. From the earliest days of broadband service, controversy raged over whether the physical networks used to transport data should be allowed to control content. Thus open access rules, which forced telcos to allow broadband company rivals to use their networks at regulated rates. Cable TV systems, meanwhile, also provided Internet connections via cable modems, but without any obligation to share their facilities. If an independent Internet Service Provider (ISP) like Covad or Earthlink wanted to connect customers via Comcast's lines, they could negotiate a deal but had no legal club -- as they did under open access.
There was a vigorous campaign to mandate open access on cable similar to DSL; regulators under both Presidents Clinton and Bush refused. The inevitable litigation ensued; but the Supreme Court set the matter to rest in FCC v. Brand X (2005). Its 6-3 decision upheld the FCC's classification of cable broadband as an "information service," placing it beyond the scope of common carrier regulation.
For a number of years, therefore, DSL service was subject to open access while cable was not. Unsurprisingly, DSL providers were blown away early in the race for market share. By the end of 2002, cable-modem subscribers numbered 11 million and DSL just 6.1 million, according to Leichtman Research.
Then DSL began its deregulatory trek. The first critical reform was a surprise FCC decision in February 2003 to end "line sharing" rules. This dramatically raised the prices which ISPs would have to pay to use phone company facilities to provide retail DSL service, dealing a severe blow to companies like Covad. Echoing conventional wisdom, the New York Times news story forecast a consumer defeat: "High-Speed Service May Cost More."
It hasn't. Average DSL rates, according to Kagan Research, dropped from $39.51 per month in 2002 to $34.72 in 2003. Telcos also expanded the scope, capacity and quality of advanced networks, even improving its endemic customer relations problems.
Consumers responded. DSL, holding just 35% market share in 2002, pulled even with cable among new subscribers in 2004. Leichtman Research reports that "DSL providers have added more broadband subscribers than cable providers in each of the last six quarters," and that overall, "the first quarter of 2006 was the best ever for both DSL and cable broadband providers." Unleashed from open access, DSL is attracting customers like never before -- and the overall growth of broadband subscribers (DSL and cable) is notably higher.
In September 2004 the FCC also eliminated network-sharing obligations for phone companies' fiber optic facilities, and deregulation appears to have triggered more investment. In the first quarter of 2006, about 100,000 of Verizon's 541,000 new "DSL" households actually received lightning fast fiber data connections. The bottom line: Since DSL began to shed its access obligations, users have flocked to the service. By the first quarter of 2006, DSL's subscribership has increased some 60% above its pre-2003 growth trend under access mandates.
Commissioner Copps was spot on in recommending a market test for deregulation of Internet access. If policy makers heed the results, they will reject the U-turn to Internet regulation via net neutrality.
Mr. Hazlett is professor of law and economics at George
Mason University, and a former chief economist of the FCC.
7. Reaganomics at 25
WSJ August 12, 2006; Page A8
Twenty-five years ago this weekend, Ronald Reagan signed the Economic Recovery Tax Act. The bill cut personal income tax rates by 25% across the board, indexed tax brackets for inflation and reduced the corporate income tax rate. The anniversary is worth commemorating as a seminal moment that continues to influence policy for the better in the U.S., and around the globe.
The achievement of Reaganomics can only be fully understood
by recalling the miserable state of affairs a quarter-century ago. Newsweek
summarized the national mood when it wrote in 1981 that Reagan "inherits
the most dangerous economic crisis since Franklin Roosevelt took office
48 years ago."
[Reagan]
That was no exaggeration. The economy was enduring a cycle of rising inflation with growing levels of unemployment. Remember 20% mortgage interest rates? Terms like "stagflation" and "misery index" entered the popular vocabulary, and declinists of various kinds were in the saddle. The perception of American economic weakness encouraged the Soviet empire to ever bolder adventures, as reflected by Soviet tanks in Kabul and Communists on the march in Nicaragua and Africa.
The reigning Keynesian policy consensus had no answer for this predicament, and so a new group of economic ideas came to the fore. Actually, they were old, classical economic ideas that were rediscovered via the likes of Milton Friedman and the Chicago School, Arthur Laffer, Robert Mundell, and such policy activists in Washington as Norman Ture and Jack Kemp, among others. These humble columns under our late editor, Robert Bartley, led the parade.
For every policy goal, you need a policy lever, Mr. Mundell likes to say. Monetary restraint was needed to break inflation, while cuts in marginal tax rates would restore the incentives to save and invest. With Paul Volcker at the Federal Reserve and Reagan at the White House, those two levers became the essence of the "supply-side" policy mix.
The results have been better than even some of its supporters hoped. The Dow Jones Industrial Average first broke 1,000 in 1972, but a decade later it was barely above 800 -- one of the worst and most enduring bear markets in history. In the 25 years since Reaganomics, however, the Dow has climbed to about 11,000, accounting for an increase in national wealth on the order of $25 trillion. To match that increase in percentage terms, the Dow would have to rise to some 150,000 in the next quarter century. American living standards have risen steadily, and U.S. businesses have created entire industries that didn't exist a generation ago.
Obviously, the economic policy path from 1981 to the present day has not been a straight line. The biggest detour occurred from 1990 through 1994, when George H. W. Bush and Bill Clinton forgot the Gipper's lesson and raised marginal income-tax rates; they suffered for it in the elections of 1992 and 1994. The arrival of the Gingrich Republicans in Congress stopped this slow-motion repeal of Reaganomics, however, and even helped to extend it at the margin with a cut in the capital-gains tax rate to 20% in 1997.
Adherents of Rubinomics -- after Clinton Treasury Secretary Robert Rubin -- are still not converts, arguing that tax increases are virtuous if they reduce the deficit. We've addressed that argument many times and will again. But even the Rubinites haven't dared to repeal indexing for inflation (which pushed taxpayers via "bracket creep" into ever-higher tax rates), and even the most ardent liberals don't propose to return to the top pre-Reagan income tax rate of 70%. They also now understand that, at some point along the Laffer Curve, high rates begin to yield less tax revenue. The bipartisan consensus in favor of sound money has also held.
Thus today, the top marginal personal and corporate tax rates are 35%, compared with 70% and 48% in 1981. In the late 1970s the tax on dividends was 70% and the capital gains rate was 50%; now they're both 15%. These reductions have increased the rate of return on capital, and hence some $3 trillion more was invested by foreigners in the U.S. between 1981 and 2005 than was invested by Americans abroad. One result: 40 million new jobs, more than the rest of the industrialized world combined.
The rest of the world, meanwhile, has followed the Gipper down the tax-cut curve. Daniel Mitchell of the Heritage Foundation finds that the average personal income tax rate in the industrialized world is now 43%, versus 67% in 1980. The average top corporate tax rate has fallen to 29% from 48%. This decline in global tax rates has been the economic counterpart to the fall of the Berlin Wall. Most of Eastern Europe has adopted flat tax rates of 25% or lower, and the Russians now have a flat income tax of 13%. In Old Europe, Ireland's corporate and personal income tax rate cuts have helped generate the swiftest economic growth in the EU.
Not bad for a President dismissed as a dreamy former actor. In his 1989 farewell address, Reagan said that "People say that I was a great communicator. It would be more accurate to say that I communicated great ideas." He was right, and a remarkable global prosperity has followed in his wake. The challenge for current and future political leaders is not to forget it.
8. Key Inflation Index May Get Greater Precision
By GREG IP
WSJ August 14, 2006; Page A2
WASHINGTON -- The Bureau of Labor Statistics is contemplating a change in the widely followed consumer-price index that could have a big impact on how markets and policy makers interpret the latest inflation data.
The agency, part of the Department of Labor, is considering publishing the index and its subindexes to three decimal places instead of one, an agency official said. Doing so would greatly reduce the frequency with which rounding produces a misleading inflation rate.
No decision has been announced. If it goes ahead, the change would probably take effect early next year.
The consumer-price index is currently one of the most closely watched economic statistics on Wall Street because it is critical in the Federal Reserve's interest-rate decisions.
In recent months, markets have moved considerably depending on whether the monthly change in the index was 0.2% or 0.3%. (Investors and the Fed focus most closely on the "core" index, which excludes the volatile food and energy components.) July's figure is due out on Wednesday.
Each month, the bureau surveys prices for about 80,000 items in 200 categories and converts the result to an index number. Component indexes are then combined into a variety of aggregates, such as the all-items and the core index. The change in the indexes is then calculated as the inflation rate. June's index, at 202.3, was up 0.2% from May's index reading of 201.9, and up 4.3% from the June 2005 index of 193.9. So the monthly inflation rate was 0.2%, and the 12-month inflation rate was 4.3%. (The index is equal to 100 in 1984.)
But because of rounding, these inflation figures can be misleading -- in two ways. One is that the percentage change is rounded. For example, an increase of 0.249% would be rounded down to 0.2%, while an increase of 0.251% would be rounded up to 0.3%. The difference between 0.2% and 0.3% seems large, but without rounding the difference is trivial. Economists, however, can adjust for that problem by calculating the percentage changes in the indexes themselves.
The second, more serious way the figures can be misleading results from the fact the BLS rounds the indexes as well before publishing them. Suppose the index for one month is 198.945, and then rounded down to 198.9, and the index for the next month is 199.355, and then rounded up to 199.4. The change in the rounded numbers is 0.251%, which rounds up to 0.3%, but the change in the unrounded numbers is only 0.206%, which rounds down to 0.2%.
The difference between 0.2% and 0.3% can have a huge impact on the market.
A working paper by Elliot Williams of the BLS notes the February 2005 consumer-price index released in March that year showed core monthly inflation at 0.3%, above economists' expected 0.2%. Bond prices tumbled and yields rose on the news. But Mr. Williams says the unrounded index would have shown a change of 0.2%, "and would have constituted essentially no news for inflation projections or bond prices."
Mr. Williams's paper found that between 1986 and 2005, using a seasonally adjusted index rounded to just one decimal place produced an inaccurate monthly overall inflation rate 24% of the time and an inaccurate core inflation rate 16% of the time. Using an index rounded to three decimal places reduces the incidence of errors to less than 1% of the time for both. "Increasing the precision of reported CPI levels would go a long way toward making the errors which arise from rounding error negligible," he wrote. (Staff papers don't represent official BLS views.)
Over time, rounding errors tend to offset each other and thus are less of a factor in annual inflation rates than monthly inflation rates.
Write to Greg Ip at greg.ip@wsj.com
9. A glimmer of hope By Thomas Sowell
Tuesday, August 8, 2006
Send an email to Thomas Sowell
http://www.townhall.com/columnists/column.aspx?UrlTitle=a_glimmer_of_hope&ns=ThomasSowell&dt=08/08/2006&page=full&comments=true
It was a common political move when Chicago's city council voted recently to impose a $10 an hour minimum wage on big-box retailers. There is nothing that politicians like better than handing out benefits to be paid for by someone else.
What was uncommon was the reaction. Chicago's Mayor Richard M. Daley denounced the bill as "redlining," since it would have the net effect of keeping much-needed stores and jobs out of black neighborhoods. Both Chicago newspapers also denounced the bill.
The crowning touch came when Andrew Young, former civil rights leader and former mayor of Atlanta, went to Chicago to criticize local black leaders who supported this bill.
While the $10 an hour minimum wage was politics as usual, the unusual backlash against it provides at least a glimmer of hope that more people are beginning to consider the economic consequences of such feel-good legislation.
A survey has shown that 85 percent of the economists in Canada and 90 percent of the economists in the United States say that minimum wage laws reduce employment. But you don't need a Ph.D. in economics to know that jacking up prices leads fewer people to buy. Those people include employers, who hire less labor when labor is made artificially more expensive.
It happens in France, it happens in South Africa, it happens in New Zealand. How surprised should we be when it happens in Chicago?
The economic consequence of political largess -- whether in the form of minimum wage laws or medical or other benefits mandated to be paid for by employers -- is to make labor artificially more expensive.
Countries with generous employee benefits mandated by law -- Germany and France, for example -- have chronically higher unemployment rates than unemployment rates in the United States, where jobs are created at a far higher rate than in Europe.
There is no free lunch. Higher labor costs mean fewer jobs.
Since all workers do not have the same skill or experience, minimum wage laws have more impact on some than on others. Young, inexperienced and unskilled workers are especially likely to find it harder to get a job when wage rates have been set higher than the value of their productivity.
In France, where the national unemployment rate is 10 percent, the unemployment rate among workers less than 26 years old is 23 percent. Among young people from the Muslim minority, the unemployment rate is even higher.
In the United States, the group hardest hit by minimum wage laws are black male teenagers. Those who refuse to admit that the minimum wage is the reason for high unemployment rates among young blacks blame racism, lack of education and whatever else occurs to them.
The hard facts say otherwise. Back in the 1940s, there was no less racism than today and black teenagers had no more education than today, but their unemployment rate was a fraction of what it is now -- and was no different from that of white teenagers.
What was different back then? Although there was a minimum wage law on the books, the inflation of that era had raised wage rates well above the specified minimum, which had remained unchanged for years.
For all practical purposes, there was no minimum wage law. Only after the minimum wage began to be raised, beginning in 1950, and escalating repeatedly in the years thereafter, did black teenage unemployment skyrocket.
Most studies show unemployment resulting from minimum wages. But a few studies that reach different conclusions are hailed as having "refuted" the "myth" that minimum wages cause unemployment.
Some of these latter studies involve surveying employers before and after a minimum wage increase. But you can only survey employers who are still in business. By surveying people who played Russian roulette and are still around, you could "refute" the "myth" that Russian roulette is dangerous.
Minimum wage laws play Russian roulette with people who
need jobs and the work experience that will enable them to rise to higher
pay levels. There is now a glimmer of hope that more people are beginning
to understand this, despite political demagoguery.
10. CHICAGO'S MISGUIDED MANDATES
------------------------------------------------------------------------
The Chicago City Council is requiring big-box stores such
as Wal-Mart
and Target to pay a minimum wage of $10 an hour and provide
$3-an-hour
worth of medical benefits by 2010. Essentially,
this creates a
$13-an-hour minimum wage, says John C. Goodman, president
at the
National Center for Policy Analysis.
The result of the mandates, explains Goodman, is likely
to be bad news
for both employees and customers.
o Businesses will relocate elsewhere,
taking jobs with them,
and denying Chicago
consumers the opportunity and convenience
of shopping at those
retailers without having to drive to
neighboring communities.
o Those businesses that stay
will employ fewer people.
Contrary to the image projected by proponents, minimum-wage
workers are
typically not primary wage earners, says Goodman.
In fact, a
minimum-wage hike will be particularly harsh for teenagers:
o A 10 percent increase in the
minimum wage reduces employment
of young workers
by 1 percent to 2 percent; a federal increase
from $5.15 to $7.25
would, for example, destroy 800,000 to 1.6
million jobs for
young people.
o In the longer term, even as
people reach their late 20s, they
will work for less
and earn less the longer they have been
exposed to a higher
minimum wage, especially as teenagers,
according to a 2004
National Bureau of Economic Research
study.
Minimum-wage jobs typically represent the first rung
on the employment
ladder, says Goodman. The experiences that workers
gain in such
simple skills as showing up on time, learning to follow
instructions
and how to interact with customers are critical to life
success.
The city of Chicago will be worse off if the increase
comes at the
expense of a thriving marketplace and the ability of
the city's youths
to learn the work skills important to lifelong success.
Source: John C. Goodman "Chicago's mandated wage hike
destined to
cut jobs, raise prices," Arizona Daily Star, August 7,
2006
For text:
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11. Car Wars Font Size:
By Max Borders : BIO| 01 Aug 2006
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By Max Borders : BIO| 01 Aug 2006
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What if I said you could save $1000-$2500 the next time you buy a car? What if I told you that you didn't have to haggle with a lot lizard in the process? In fact, you could use the Internet to shop around for a new car instead of driving from dealership to dealership, and then buy at your leisure.
Well, you can't. Know why?
What stands between you and these benefits is your state government. According to a panel recently hosted by the Mercatus Center in Arlington, Virginia, the primary reason for these regulations is collusion between "licensed" car dealers and state legislatures who mandate dealer licenses. Such is the case in all fifty states. Legal and economic scholars are trying to figure out how this happened and how to change it, for the sake of both economic freedom and benefit to customers.
Regulatory barriers to buying a car online are a textbook example of "rent-seeking" -- when an interest group hollers, stomps and lobbies the state until politicians cave. Car companies that might offer cars at a lower price -- with a better shopping experience -- are blocked from doing so.
A question from the audience helped me understand how this all could come to pass; it put me inside the mind of a regulator:
"If all of a sudden people are buying cars online, what will happen to people like my mother? Dealerships will go away. She won't know how to buy online and she won't be able to trust the product unless she meets a salesperson."
But if people really demand shopping for cars offline, dealerships have little to fear since they actually provide that service.
What dealers know full well is that entrepreneurs will find all sorts of ways to make the services dealerships offer redundant -- which will benefit you and me. Consider the question of how people will test drive cars in an Internet purchasing environment. We can imagine automakers offering smaller test-drive centers. And we can also imagine delivery and logistics networks for cars so that people can pick up their cars quickly once they buy them -- or have them delivered to their driveways.
What justifies dealership protection? This is what legal and economic scholars are currently looking into. The Supreme Court has held that, under the so-called "dormant" Commerce Clause, a state is prohibited from discriminating against interstate commerce by passing laws that treat in-state businesses more favorably than out-of-state businesses. Such treatment is permitted, however, if a state can convince the Court that the law advances a "legitimate state interest."
John Delacourt, a legal expert on interstate trade issues, explains it as follows:
"Where the businesses receiving disparate treatment are identical but for their geographic location (for example, a Virginia winery and a New York or Michigan winery), this [appeal to 'state interest'] generally is not possible. However, where there are real and demonstrable differences between the two businesses (for example, an automobile manufacturer and an automobile dealer), a discriminatory law may survive a Commerce Clause challenge. Indeed, in the 1978 case of Exxon v. Governor of Maryland, the Supreme Court expressly held that curbing the disproportionate market power of manufacturers vis-à-vis franchised dealers constitutes a legitimate state interest."
So, does the "state interest" argument for protecting middlemen boil down to the fact that smaller players may not be able to compete? OK. But when it comes to the interest of consumers, isn't that the idea?
We just happen to be living in a time when major US auto manufacturers are hamstrung by cannibalistic unions, stiff competition, and federal regulators. Obstacles to direct-to-consumer sales represent another hard hit against an ailing industry. But even if the US auto industry was doing swimmingly, why should states get in between you and your new car to the tune of a couple of thousand dollars?
Such an unnecessary financial burden to consumers, if relieved, could go towards filling our tanks. It may take a courageous state-level politician to make this a voting-day issue if we're ever going to do anything about it. That's because the only thing as stronger than special interests are voters and enlightened leaders -- the latter of which are so often in short supply. But if somebody has the guts to stand up to them, states may be able to do consumers a real service and win political capital at the same time.
Max Borders is TCS Daily Managing Editor.
12. If Only Most Americans Understood
By DAVID R. HENDERSON
WSJ August 1, 2006; Page A12
"The Right Minimum Wage: $0.00." So read an editorial headline in one of the most respected newspapers in America. The editorial stated: "There's a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market." Can you guess the newspaper? The Wall Street Journal, perhaps? Right city; wrong paper. This editorial appeared on Jan. 14, 1987, in the New York Times.
More recently, the Times has called for further increases in the minimum wage. At the federal level, many Democrats and some Republicans are pushing to raise the minimum wage from its current level of $5.15 an hour. Moreover, initiatives on the ballot in 10 states would increase the minimum wage.
Most people see the issue as a no-brainer. Wouldn't it be nice to raise the wages of the lowest-earning people? Even if they understand that this will cause them to pay higher prices on goods and services, they see that as a worthwhile price to pay. But economists of various political stripes tend to oppose the minimum wage. We understand that it will help only a subset of the people it is thought to help, and will help them only a little -- while hurting some of them a lot.
The reason goes back to the second sentence quoted in the above Times editorial. In raising the minimum wage, the government doesn't guarantee jobs. It guarantees only that those who get jobs will be paid at least that minimum. But precisely by requiring this, the government destroys jobs. Someone to whom an employer was willing to pay only the current minimum wage of $5.15 might not produce enough to be worth paying, say, $7.25.
It's not all or nothing. Some of the workers currently earning $5.15 would find their wages rising to $7.25. But the marginal tasks, the least important tasks in the workplace, would no longer be worth doing, thus costing jobs. In the longer run, employers will find more capital-intensive ways of doing these tasks.
Economists' consensus estimate is that a 10% increase in the minimum wage would destroy 1% to 2% of youths' jobs. A federal increase to $7.25 would, therefore, destroy about 800,000 to 1.6 million youths' jobs. Some older low-skilled workers would also suffer. And the hurt to youths isn't just short-term, according to economists David Neumark of the University of California, Irvine, and Olena Nizalova of Michigan State University. In a 2004 National Bureau of Economic Research study, they found that even as people reached their late 20s, they worked less and earned less the longer they had been exposed to a higher minimum wage, especially as teenagers.
These adverse longer-run effects, they found, were stronger for black teenagers. Their finding recalls the famous line from liberal economist Paul Samuelson's 1970 textbook, "Economics," about a proposal to raise the minimum to $2: "What good does it do a black youth to know that an employer must pay him $2.00 an hour if the fact that he must be paid that amount is what keeps him from getting a job?"
But couldn't a job loss of 1% to 2% be worth it, if the remaining 98% to 99% get a wage increase? This isn't the tradeoff, for two reasons. First and most important, the majority of youths are already earning more than the higher minimum that is typically proposed. For instance, in a study of a proposed minimum-wage increase in California from to $7.75 from $6.75, economist David A. Macpherson of Florida State University and Craig Garthwaite of the employer-funded Employment Policies Institute found that of 1.48 million California youths with jobs, 79% earned a wage higher than $7.75, and there's no guarantee that these workers would get an increase. Some, but probably not most, would get what are called "spillover benefits" because of the new pressure on the wage structure.
Second, because the minimum wage does not make employees automatically more productive, employers who must pay higher wages will look for other ways to compensate: by cutting non-wage benefits, by working the labor force harder, or by cutting training. Interestingly, the Economic Policy Institute (EPI), a union-funded organization in Washington that pushes for higher minimum wages, implicitly admits the last two of these three. On its Web site, EPI states, "employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale." How would an employer get higher productivity and decreased absenteeism? By working the employers harder and firing those who miss work. Lower training costs? By training less.
Nor is the minimum wage a well-targeted policy for reducing poverty. The usual stereotype is of a minimum-wage parent with no other family members working. But that's a small segment of minimum-wage workers. That same EPI Web site states that 14.9 million workers would benefit from an increase in the minimum wage to $7.25, 6.6 million of whom currently earn less than $7.25 -- they assume zero job loss -- and 8.3 million of whom earn more but, they claim, get a spillover. Yet EPI admits that only 1.4 million of the 14.9 million, less than 10%, are single parents with children.
The economists' consensus about the job-destroying aspect of the minimum wage is less strong than it used to be. In the late 1970s, 90% of economists surveyed agreed or partly agreed with the statement, "a minimum wage increases unemployment among young and unskilled workers." By 2003, this percentage had fallen to 73. Still a strong consensus, but a weaker one than previously. What happened?
The answer: One major study and a book by economists David Card, now at the University of California, Berkeley, and Alan Krueger of Princeton. In a 1994 study of the effect of a minimum wage increase in New Jersey, they found higher growth of jobs at fast-food restaurants in New Jersey than in Pennsylvania, whose state government had not increased the minimum wage. This study convinced a lot of people, including some economists. It was almost comical to see Sen. Edward Kennedy hype this study when he had never before mentioned any economic studies of the minimum wage.
Based on criticism of their data from David Neumark and economist William Wascher of the Federal Reserve Board, Messrs. Card and Krueger moderated their findings, later concluding that fast-food jobs grew no more slowly, rather than more quickly, in New Jersey than in Pennsylvania. But they never answered a more fundamental criticism, namely that the standard economists' minimum-wage analysis makes no predictions about narrowly defined industries. As Donald Deere and Finis Welch of Texas A&M University, and Kevin M. Murphy of the University of Chicago, pointed out, an increased minimum wage help expand jobs at franchised fast-food outlets by hobbling competition from local pizza places and sandwich shops. This could explain, in fact, why Messrs. Card and Krueger found fast food prices rising more quickly in New Jersey than in Pennsylvania, a fact that they were unable to explain.
Even many who favor increasing the minimum wage admit it would destroy jobs. In a recent New York Times op-ed favoring a minimum-wage increase, Michael Dukakis, the 1988 Democrat candidate for president, and Daniel Mitchell of UCLA's Graduate School of Management, write, "it's possible some low-end jobs may be lost." They claim that, somehow, those who lose jobs will disproportionately be illegal immigrants.
The focused support for the minimum wage comes mainly from labor unions, all of whose members earn more than the minimum. This isn't benevolence at work, but greed. Their leaders understand that the minimum wage prices out their low-wage competition: it acts like an internal tariff. If only most Americans understood.
Mr. Henderson is a research fellow at the Hoover Institution
and the co-author of "Making Great Decisions in Business and Life" (Chicago
Park Press, 2006).
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13. MEDICINE CAN BE CONSUMER-CENTRIC
------------------------------------------------------------------------
America's health care system is made up of a patchwork
of public and
private payers, which many Americans find complex and
confusing.
The issue is further distorted by claims that American
health care is
in crisis. However, there is no crisis of "care."
Rather, the United States has a crisis of "cost," say
Gregory
Dattilo and Dave Racer in their new book, "Your Health
Matters:
What You Need to Know about U.S. Health Care."
Health care is expensive, they say, because it is a scarce
resource. Virtually all goods and services in our
economy are
rationed through prices, but health care is different
from other areas
of the economy in three important ways:
o The sick and injured cannot
do without medical care.
o Those in need of care have
an unlimited demand for it,
especially if someone
else is paying the bill.
o Few people pay their own health
care bills directly; most are
paid by third-party
insurers or government.
Before 1940, health insurance was almost unheard of and
patients paid
most of their medical bills directly out of pocket.
Today,
slightly more than 10 percent of medical bills are paid
directly, and
many people consider health insurance coverage to be
synonymous with
health care.
Additionally, government intervention in the health care
market has
greatly boosted demand and distorted incentives.
Because of the
tax subsidy for employer-sponsored health coverage enacted
more than 50
years ago, obtaining health coverage through one's employer
has become
the norm. In 1965, the government created Medicare
for the
elderly and Medicaid for the poor. Once covered
by health
insurance, enrollees acquired a sense of entitlement
to whatever care
they wanted, the authors say.
Source: Devon Herrick, "Medicine Can Be Consumer-Centric,"
Heartland Institute, August 1, 2006; based upon: Gregory
Dattilo and
Dave Racer, "Your Health Matters: What You Need to Know
about U.S.
Health Care," Alethos Press, 2006.
For text:
http://www.heartland.org/Article.cfm?artId=19459
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14. The Red-Lining of Chicago
July 31, 2006; Page A10
Chicagoans are fond of telling the story that when the late "Boss" Richard Daley was Mayor, he sent one Democrat to Washington to be a Congressman because he was too dumb to be an alderman. Now Chicagoans are discovering that the collective brainpower among the current crop of aldermen has notably declined.
Last week the City Council voted 35-14 to impose a hyper-minimum
wage on "big-box" retail stores with more than $1 billion of sales. The
new law will require the likes of Wal-Mart, Target, Costco, and Home Depot
to pay every worker -- regardless of experience, education or skill --
a minimum wage of $13 an hour by 2010 ($10 in salary and $3 in health benefits).
At least another dozen cities, including Washington, D.C., are considering
copy-cat laws.
[Richard Daley]
This means major U.S. cities are preparing to require minimum wages more than double the national minimum of $5.15 an hour. Incredible. The very places with the highest unemployment and lowest skilled workers are enacting laws designed to destroy their pool of entry level jobs. Not so long ago, desperate cities were trying to lure businesses by declaring themselves low-tax and low-regulation enterprise zones. Now with these wage and benefit mandates, the cities are declaring themselves anti-enterprise zones.
The only issue is how many jobs Chicago will lose. When the minimum wage rose to $8.50 an hour in 2004 in Santa Fe, New Mexico, the rate of job creation fell, and workers with 12 years of education or less "suffered an extremely large and negative effect," according to a study by the Employment Policies Institute. Wal-Mart, Target and Lowe's Home Improvement are already threatening to stop expanding in the city if the Chicago law is enforced. They say they can't offer "every day low prices" and pay the city's mandatory wage hikes at the same time.
But losing these jobs and businesses appears to be the very intention of bill supporters. Left-wing activist groups such as Acorn are crowing that this hyper-minimum wage is so prohibitive it could keep out such corporate villains as Wal-Mart. Be gone you lousy $6-, $8- and $10-an-hour jobs!
Yet the workers of Chicago desperately want these jobs. When Wal-Mart opened a store in Evergreen Park, just outside Chicago last year, some 27,000 applied for the 325 jobs with starting pay of $7.25 an hour. The Wal-Mart that will open later this year in Chicago's West side already has 12,000 job applicants. Alderman Isaac Carothers told the Chicago Tribune that the law "will cost black people jobs. If I put out a notice that there were 500 jobs waiting in my ward -- what Wal-Mart was offering -- you'd see a line of people from my ward all the way to Mississippi. People want jobs."
No doubt none of this matters much to the union bosses who masterminded this City Council coup. The handful of "big box" retailers hit by the new law are mostly non-unionized, while their unionized competitors are exempt. So, for example, Jewel Foods is unionized and exempt even though its average pay is less than the average of $11 an hour at Wal-Mart and several other mega-retailers that will have to pay the higher wages even for starting workers. If there is a silver lining here, it is that most lawyers think the law will be struck down by the courts on equal protection grounds because of this discriminatory design.
If the law does hold up, the biggest losers will be the poor who will pay higher prices. A study by the economics firm Global Insight calculates that the presence of Wal-Mart and other low-price retailers saves working families on average more than $2,000 a year. MIT professor Jerry Hausman has found that, although Wal-Mart does slightly reduce wage rates in nearby areas, its lower prices swamp that effect. The biggest beneficiaries are families with incomes of less than $10,000 for whom "a super center makes a 30 percent difference in what they can buy."
What we have here is what liberals used to call the "red-lining" of poor neighborhoods, though this time by the left itself. Liberal advocates have long complained that banks, grocery stores and retailers charge higher prices or refuse to do business in inner cities. But now the very superstores that offer lower prices are being treated as unwelcome.
These policies come at a very heavy price to the city. When activists kept Wal-Mart out of Chicago's South side last year, the company opened the store in nearby Evergreen Park instead. Now that store collects an estimated $530 million a year in sales from Chicago residents without a penny of sales tax going to Chicago. The location where Wal-Mart was going to build remains an empty lot. Partly as a result of such anti-business policies, Chicagoans spend $5 billion a year shopping in the suburbs.
Liberals who dominate big-city politics talk endlessly
about economic justice and fairness, but what is just or fair about a law
that punishes the least affluent? Some lucky few workers earn more from
super-minimum wage laws, but the price is paid by those with low incomes
and skills who are the first to be priced out of the job market. Mayor
Richard Daley fumed this week that aldermen voted for the law because political
activists threatened to campaign against them. So we guess Chicago's politicians
really were voting to protect high-paying jobs in the city: their own.
15. Cut the Minimum Wage With Ockham's Razor
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By Donald Boudreaux : BIO| 28 Jul 2006
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Do we know with certainty what effect raising the minimum wage will have? Maybe not. But even if we don't, that doesn't mean we can't take a position on the matter.
Consider a recent post on the economics blog, Marginal Revolution, by my colleague Tyler Cowen. He weighed in on the debate over the merits of recent empirical studies of the effects of minimum-wage legislation:
"I'm willing to admit, unabashedly, that I form my judgments on this matter by theory more than 'raw evidence.' When the evidence is unclear, or points in multiple directions, I favor the most plausible explanation."
The evidence is indeed imprecise. Some empirical studies -- most famously one published in 1994 in the prestigious American Economic Review by David Card and Alan Krueger -- find that on at least some occasions raising the minimum wage might actually increase employment of low-skilled workers. Other studies -- for example, this 2004 one by David Neumark and Olena Nizalova -- find that the higher the real minimum wage, the worse are the employment prospects of low-skilled workers.
Empirical research in economics is notoriously difficult because wages, prices, unemployment rates, product qualities, and all other data of the social sciences are, as Friedrich Hayek said, "complex phenomena." Having so very much constantly going on in the real world, having no laboratory in which reliably to isolate more than a handful of these phenomena at any one time, and unable to read directly the minds of the many persons whose perceptions and choices combine to generate social outcomes, empirical researchers can easily overlook or misread important variables.
This situation distinguishes the social sciences from the physical sciences in two notable ways. First, a higher proportion of empirical research in the social sciences is subject to legitimate -- oftentimes irresolvable -- dispute. Second, as a consequence, in the social sciences theoretical considerations inevitably play a larger role in navigating around these disputes and in forming judgments about desirable public policies.
And so it is with the minimum wage. Almost any empirical study of this government mandate can be challenged for ignoring this variable, for mis-identifying that variable, for focusing on an inappropriate time period, or for countless other possible errors. Therefore, following Tyler Cowen, we are justified in being extraordinarily skeptical of empirical findings that are inconsistent with widely accepted theoretical foundations.
Minimum-wage studies that find no negative effects on the employment prospects of low-skilled workers are whoppingly inconsistent with basic economics -- a fact that means that they are probably inaccurate.
Basic economics tells us that the higher the cost of choosing X the less likely is X to be chosen. Economists call this relationship between cost and choice "the law of demand." Non-economists call it common sense. Does anyone really doubt that the law of demand is both true and robust? I think not -- even though persons who insist that a higher minimum wage is good for low-skilled workers carve out employer decisions on hiring workers as an inexplicable exception to this rule.
It's interesting to note what most people would likely say about other alleged possible exceptions to this rule. Suppose, for example, the government announces that it will slap high monetary penalties on any newspaper that it believes is reporting in ways that frustrate the government's war on terror. Would anyone doubt that this added cost of reporting on the government's conduct of its war on terror would reduce the quantity of such reports, or the quality of such reports, or both? If an empirical study were done showing, say, that the number of lines devoted to reporting on the war on terror actually increased following government's announcement of its policy, would sensible people scratch their heads and conclude "Hey, we were wrong. Government's threat to penalize unfavorable reporting on the war on terror increases newspapers' willingness to report on this war."
I think not.
So why do so many people doubt that employers' decisions conform to the law of demand? Businesses want to earn as much profit as possible, which means they seek to keep their costs of producing whatever it is they produce as low as possible. Such commercial decisions are especially unlikely to be influenced by emotional considerations or by psychological indifference to consequences. (Indeed, insofar as business people are the cold, calculating, mad-for-profit rascals that many on the left imagine them to be, decisions by business people will surely be the last to violate the law of demand.) Raise businesses' cost of hiring low-skilled workers and watch them creatively figure out ways to avoid -- or to compensate having to pay -- this higher cost.
The textbook explanation is that employers respond to a higher minimum wage by hiring fewer hours of low-skilled labor (which is usually taken to mean that fewer low-skilled workers find jobs). It is this textbook proposition that is empirically tested again and again without reaching any consensus today on the effect that minimum-wage legislation has on the unemployment rate of low-skilled workers.
But while hiring fewer hours of work from low-skilled workers is indeed one possible employer response to a hike in the minimum wage, it's not the only one. Another possible response is to extract more output per hour from each low-skilled employee -- for example, by increasing employees' work pace, by giving employees fewer breaks, or by being less-forgiving of employees who report to work late. And as difficult as it is to measure by how much an increase in the minimum wage reduces employment, it is vastly more difficult to measure these latter sorts of possible employer responses. (How do we quantify changes in employer strictness in dealing with employees who are late?)
We don't know exactly how, or exactly by how much, employers as a group respond to higher minimum wages -- but the theoretical case that they do respond in ways unfavorable to low-skilled employees is too powerful to dismiss.
Donald Boudreaux is Chair of the economics department
at George Mason University.
16. Tyler Cowen Blog The minimum wage: theory before history
Greg Mankiw and Brad DeLong are having some back and forth over the minimum wage. I'm willing to admit, unabashedly, that I form my judgments on this matter by theory more than "raw evidence." When the evidence is unclear, or points in multiple directions, I favor the most plausible explanation.
Unlike like most market-oriented economists, however, I am not obsessed with the story of the downward-sloping demand curve for labor, to the exclusion of all other possible mechanisms. I am more likely to see markets as extremely flexible and to look to the quality of job as a critical variable. If minimum wages go up, I expect some mix of two scenarios:
1. The employer restores the previous net wage by worsening working conditions.
2. The employer upgrades the quality of job and thus marginal products, to meet the new level of minimum wage.
Now #1 is not much of an argument for boosting the minimum wage. But is #2?
It sounds good but the employer had decided in the first place not to create those higher productivity jobs. So those jobs must cost more and we should expect a negative effect on employment, albeit perhaps a slight one.
It is also the case that those jobs will go to the "most easily upgradable" workers among the low-wage working set. I suspect those are the low-wage workers with relatively high human capital and high levels of adaptability. Among the class of low-wage workers, the effects are probably anti-egalitarian. That again does not make the minimum wage sound so great, even though the employment effects could be small or perhaps even zero. I might add this also explains why the most articulate low-wage workers probably, for reasons of self-interest, favor increases in the minimum wage.
I don't buy into the Card-Krueger monopsony scenario, at least not outside of rural Nebraska. If you wish to defend it (does anybody? -- even Krugman scorned it), comments are open.
I invite all participants to the debate to indicate the relative weights they place on "theory" vs. "history." I'll invent an imaginary, meaningless scale and opt in at "0.7" in favor of theory. If the evidence were clearer, of course, my weights would change.
Posted by Tyler Cowen on June 26, 2006 at 01:33 AM in
Economics | Permalink
Comments
I'm nearly 99% theory because the empirical data is so noisy. The simplest theory is that when the price goes up, the demand drops. Proponents counter with "Ahhhh, but the price/demand curve is vertical, so demand doesn't drop". Perhaps, but if demand didn't drop, then you wouldn't see capital investment substituting for labor. And yet you can see that everywhere and always whenever the price of labor goes up.
Even if the price/demand curve was vertical, the higher price for labor would attract discouraged low-wage laborers back into the job market. So in order to not create unemployment from these newly-added workers, the price/demand curve actually needs to slope backwards, so that as employers are forced to pay more, they voluntarily hire more workers.
So when you go looking in the marketplace for unemployment, you have trouble finding it. That's because minimum wage increases affect so few workers (currently only 3% in the US) and are small in magnitude. Plus you have methodology problems. An employer listens to the news as much as anyone, and they weigh the probability of a future minimum wage increase against their future need for employees. It's unlikely that unemployment will jump on the actual date of the change in the minimum wage.
And, the theory predicts that a discriminatory employer can discriminate at no cost to himself, so that the effect of a minimum wage law is to increase minority unemployment faster than majority group unemployment.
Posted by: Russell Nelson at Jun 26, 2006 3:02:45 AM
In ultra-expensive LA, fast food jobs at Jack-in-the-Box are being offered at $9/hr, so an increase in the federal minimum wage rate to, say, $7.25 would be mostly irrelevant.
So, one of the effects of a minimum wage increase is to
keep jobs from shifting from expensive to cheap parts of the country. If
you could cut pay from $9 to $5.25 by moving from LA to Podunksville, that
might be worth the stress of moving, but not if the pay cut was only from
$9 to $7.25. But it would be challenging to design a study that could detect
that kind of effect.
17. SAVING HEALTH INSURANCE FROM THE MINIMUM WAGE
------------------------------------------------------------------------
Besides causing more unemployment, a federal minimum-wage
hike would
also increase the number of Americans without health
insurance, say
John C. Goodman, president of the National Center for
Policy Analysis,
and Richard B. McKenzie, a professor in the Paul Merage
School of
Business at the University of California, Irvine.
Employers and employees will seek ways around the law,
by reducing
nonwage compensation:
o About one in every three employees
near the minimum wage has
access to such benefits
as vacation time, health insurance,
holiday pay, employee
discounts, uniforms and credit toward
college tuition.
o Overall, fringe benefits account
for up to 30 percent of
total employee compensation.
o Fringe benefits are not subject
to payroll and income taxes;
thus, after taxes,
$1 of fringe benefits can equal a $1.25 or
more of wages.
Employers can also reduce labor costs by spending less
on working
conditions or employee training. Employers may
also impose more
rigorous work requirements, insisting that employees
work faster or
work harder, say Goodman and McKenzie.
The net effect of these adjustments is to largely neutralize
the cost
impact of the minimum wage hike. For example, when
the minimum
wage increases by $1, the cost of labor may, on balance,
rise by only 5
cents. Workers who retain their jobs are unlikely
to be any
better off than before. They get more money, but
they also get
fewer benefits and have to work harder for their pay,
explain Goodman
and McKenzie.
Source: John C. Goodman and Richard B. McKenzie, "Saving
Health
Insurance from the Minimum Wage," National Center for
Policy
Analysis, Brief Analysis No. 565, July 28, 2006.
For text:
http://www.ncpa.org/pub/ba/ba565/
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
18. REAL ESTATE STATUS QUO
------------------------------------------------------------------------
Through a combination of industry rules and recently-enacted
state
laws, major real estate brokerage firms and the National
Association of
Realtors (NAR) are thwarting innovative, Internet-based
real estate
businesses that could bring real change to a business
that is
inefficient, anticompetitive and anticonsumer, says USA
Today.
In the past two years, industry lobbyists, the NAR and
local Realtor
boards have used their clout with state legislatures
to wall themselves
off from competition. Some of their increasingly
blatant tactics
include:
o Pushing for minimum service
requirements that essentially ban
no-frills brokerages
by mandating a long list of services that
agents must provide,
regardless of whether clients want them.
o Bans on buyer discounts that
bar discount brokers from
rebating some of
their commissions to their clients; some
start-up companies
have used this practice as a way to break
into a market.
o Attempting to prohibit discount
brokers from fully accessing
Multiple Listing
Service (MLS) listings, which pool the
listings of multiple
firms in a given area.
Some in the industry say restrictions are necessary to
protect
consumers from unscrupulous or incompetent Internet start-ups,
says USA
Today. And while it is true that some of the firms
that have come
and gone have been poorly conceived, undercapitalized
or downright
shady, that happens in every new industry and is no reason
to crush it.
Source: Editorial, "Real estate status quo seals raw deal
for
consumers," USA Today, July 26, 2006
For text (subscription required):
http://www.usatoday.com/printedition/news/20060726/edit26.art.htm
For more on Regulatory Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=38
19. DYNAMIC ANALYSIS
------------------------------------------------------------------------
Does tax relief mean more economic growth? Many
people believe
the answer is yes, and now they get strong support from
the staff of
the U.S. Treasury, say observers.
Over the past six months, the Treasury Department studied
the dynamic
effects of tax cuts on the economy. There are three
main lessons.
Lower tax rates lead to a more prosperous economy:
o According to the Treasury
analysis, a permanent extension of
the recent tax cuts
would lead to a long-run increase in the
capital stock of
2.3 percent, and a long-run increase in gross
domestic product
of 0.7 percent.
o In today's economy, such a
GDP expansion would mean an extra
$90 billion a year
that the nation could spend on consumer
goods to raise living
standards, or capital goods to maintain
prosperity.
o More than two-thirds of this
expansion would occur within 10
years.
Not all taxes are created equal for purposes of promoting
growth:
o The Treasury staff reports
particularly large
bang-for-the-buck
from the reductions in dividends and
capital-gains taxes.
o Even though these tax cuts
account for less than 20 percent
of the static revenue
loss from permanent tax relief, they
produce more than
half of the long-run growth.
How tax relief is financed is crucial for its economic
impact:
o The Treasury's main analysis
assumes that lower tax revenue
will over time be
accompanied by reduced spending on
government consumption.
o But the report also shows
what happens if spending cuts are
not forthcoming;
in this alternative scenario, a permanent
extension of recent
tax relief is assumed to lead to an
eventual increase
in income taxes.
o The results are strikingly
different -- instead of increasing
by 0.7 percent in
the long run, GDP would fall by 0.9 percent.
Source: Robert Carroll and N. Gregory Mankiw, "Dynamic
Analysis," Wall Street Journal, July 26, 2006; based
upon: "A
Dynamic analysis of Permanent Extension of the President's
Tax
Relief," Office of Tax Analysis U.S. Department of the
Treasury,
July 25, 2006.
For text (subscription required):
http://online.wsj.com/article/SB115387397157817247.html
For report text:
http://www.treas.gov/press/releases/reports/treasurydynamicanalysisreporjjuly252006.pdf
For more on Taxes:
http://www.ncpa.org/sub/dpd/?Article_Category=20
20. REGULATORY ROBBER BARRONS
Occupational licensing requirements harm would-be
practitioners and
consumers... COMPETITIVE ENTERPRISE
INSTITUTE
------------------------------------------------------------------------
Government regulation very often has the effect and even
the intention
of preserving the success of the incumbent businesses
by crowding out
smaller companies and erecting barriers to entry, according
to Tim
Carney's new book, "The Big Ripoff: How Big Business
and Big
Government Steal Your Money."
For example:
o In Pennsylvania, a state law
that keeps prices high for
hair-braiding.
Hair braiders must take a 1,250 hour
training course
in "cosmetology" before they can
legally braid hair
in Philadelphia or anywhere else in the
state.
o Louisiana florists can run
afoul of the law if they practice
floristry without
a license. The state requires any
would-be florist
to pass a licensing exam. Who are the
judges? They
are currently practicing florists.
The result: a majority
of applicants fail. In short, the
state has given
current florists the power to keep potential
competition out
of the market.
o In Arizona, it's illegal to
spray weeds if you are a renter,
but it's also illegal
for your landlord to spray.
Licensed gardeners
need 3,000 hours worth of experience
spraying weeds,
otherwise the Arizona Structural Pest Control
Commission (SPCC)
may come after you both.
Also:
o In Oklahoma and Tennessee,
casket sellers have a similar
cartel.
o In Florida, currently practicing
athlete's agents comprise
the athlete's agents
licensing board, which gets to decide who
can or can't represent
an athlete.
All of these "pro-consumer" license requirements not
only
hurt would-be florists, casket sellers, and agents, but
the consumers,
too, who pay higher prices in the squeezed market, says
Carney.
Source: Timothy Carney, "Regulatory Robber Barons,"
Competitive Enterprise Institute, July 10, 2006.
For text:
http://www.cei.org/gencon/019,05426.cfm
For more on Regulatory Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=38
21. RISING TIDE
------------------------------------------------------------------------
President Bush's personal income, capital gains and dividend
tax rate
reductions have created economic growth, significantly
increased
government tax receipts, and reduced the federal deficit
by nearly $130
billion. Though surprising to critics, the truth
is that when tax
rates go down, economic activity goes up, says Pete du
Pont, chairman
of the National Center for Policy Analysis.
Bush signed the most recent tax cuts into law in the
spring of
2003:
o In the past 33 months the
size of America's entire economy
has increased by
20 percent -- or, as National Review Online's
Larry Kudlow put
it, "In less than three years, the U.S.
economic pie has
expanded by $2.2 trillion, an output add-on
that is roughly
the same size as the total Chinese
economy."
o In the 2 1/4 years before
the 2003 tax cuts, economic growth
averaged 1.1 percent
annually; in the three years since it has
averaged 4 percent
per year, and in the first quarter of this
year it was 5.6
percent on an annualized basis;
inflation-adjusted
per capita gross domestic product (GDP) has
grown 7.8 percent
from 2003 through the first quarter of this
year.
o According to the government's
establishment survey, in the 36
months since the
tax cuts became law, 5.3 million new jobs
have been added
to the economy.
o According to its employment
survey, 288,000 jobs were added
in May and 387,000
in June.
o The unemployment rate dropped
from 6.1 percent when the bills
were signed to 5.4
percent at the end of 2004 and 4.6 percent
today, and the rate
has gone down for men, women, blacks and
Hispanics.
Tax cuts work, and work well, for individuals, employers
and even the
government, which sees its revenues increase dramatically
when tax cuts
are enacted and left in place over time, says du Pont.
Source: Pete du Pont, "Rising Tide: Tax cuts are good
for
everyone--and everyone knows it but Washington Democrats,"
OpinionJournal.com, July 25, 2006.
For text:
http://www.opinionjournal.com/columnists/pdupont/?id=110008699
For more on Taxes:
ttp://www.ncpa.org/sub/dpd/?Article_Category=20
22. Running out of oil? By Walter E. Williams
Wednesday, July 19, 2006
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"Proven" oil reserves, oil that's economically and technologically recoverable, are estimated to be more than 1.1 trillion barrels. That's enough oil, at current usage rates, to fuel the world's economy for 38 years, according to Leonardo Maugeri, vice president for the Italian energy company ENI. Mr. Maugeri provides a wealth of information about energy in "Two Cheers for Expensive Oil," published by Foreign Affairs (March/April 2006) and reprinted on the same date in Current.
There are an additional 2 trillion barrels of "recoverable" reserves. Mr. Maugeri says these oil reserves will probably meet the "proven" standard in a few years as technological improvement and increased sub-soil knowledge come online. Estimates of recoverable oil don't include the huge deposits of "unconventional" oil such as Canadian tar sands and U.S. shale oil, plus there are vast areas of our planet yet to be fully explored. For decades, alarmists have claimed we're running out of oil. In 1919, the U.S. Geological Survey predicted that world oil production would peak in nine years. During the 1970s, the Club of Rome report, "The Limits to Growth," said that, assuming no rise in consumption, all known oil reserves would be entirely consumed in just 31 years.
A worker checks the pipeline at an oil refinery in Lanzhou, capital of the Gansu province April 19, 2006. Record high crude oil prices above $70 a barrel could drive the United States and China -- the world's two biggest oil users -- to seek common ground on thorny energy issues when Chinese President Hu Jintao visits Washington this week. REUTERS/Stringer
There are several factors that explain today's high prices. There has been a huge surge in demand for oil as a result of rapid economic growth in China and India, as well as in the United States. Another factor is the under-exploration. Mr. Maugeri says Saudi Arabia has 260 billion barrels of proven reserves, accounting for 25 percent of the world's total, but only one-third of the oil known to lie below its surface. Russia's reserves are three times its proven reserves of 50 billion barrels. While high prices are beginning to stimulate investments in oil exploration, they've lagged for several decades out of fear of oil gluts and low prices. It's going to be 2010 before today's investments yield fruit.
A substantial increase in oil production alone cannot ease today's high prices because of weak refining capacity. Not a single refinery has been built in the United States for 30 years. Improvements to existing refineries failed to keep up with growing demand and tougher environmental regulations. We're the world's only industrialized country with a net deficit in refining capacity that comes to 20 percent of domestic demand. That makes us highly vulnerable to disasters like last year's hurricanes. Exacerbating weak refining capacity are regulations whereby gasoline produced for one state may not be sold in another. There are 18 mandated different types of gasoline sold in the United States.
The long-term outlook for oil is good. There's an increase in oil-drilling technology and exploration. Oil as a source of energy has been in decline. In 1980, oil was 45 percent of energy consumption; today, it's 34 percent, yielding ground to natural gas, coal and nuclear energy. Recently, the House of Representatives passed "The Deep Ocean Energy Resources Act of 2006," which now awaits a Senate vote. Offshore oil exploration has been banned since 1982, despite Department of the Interior estimates that suggest the presence of 19 billion barrels of oil and 84 trillion cubic feet of natural gas. The House of Representatives also passed the "Refinery Permit Process Schedule Act of 2006." Should these measures become law, our energy capacity will be enhanced significantly.
America stands alone in the world as the only nation that
has placed a substantial amount of its domestic oil and natural gas potential
off-limits. That reflects the awesome control that radical environmentalists
have over Congress. With high fuel prices, Americans might be ready to
put an end to that control.
23. The Big-Bang Story of U.S. Private Business The economic power of lower-tax-rate incentives is once again working its magic.
By Larry Kudlow http://article.nationalreview.com/?q=NTVlZWE2NDQ3ZDkyMDA3ODhkNzIzOTNmOGRkMmYyYjM=
Did you know that just over the past 11 quarters, dating back to the June 2003 Bush tax cuts, America has increased the size of its entire economy by 20 percent? In less than three years, the U.S. economic pie has expanded by $2.2 trillion, an output add-on that is roughly the same size as the total Chinese economy, and much larger than the total economic size of nations like India, Mexico, Ireland, and Belgium.
This is an extraordinary fact, although you may be reading it here first. Most in the mainstream media would rather tout the faults of American capitalism than sing its praises. And of course, the media will almost always discuss supply-side tax cuts in negative terms, such as big budget deficits and static revenue losses. But here’s another suppressed fact: Since the 2003 tax cuts, tax-revenue collections from the expanding economy have been surging at double-digit rates while the deficit is constantly being revised downward.
For those who bother to look, the economic power of lower-tax-rate incentives is once again working its magic. While most reporters obsess about a mild slowdown in housing, the big-bang story is a high-sizzle pick-up in private business investment, which is directly traceable to Bush’s tax reform. It was private investment that was hardest hit in the early-decade stock market plunge and the aftermath of the 9/11 terrorist bombings. So team Bush’s wise men correctly targeted investment in order to slash the after-tax cost of capital and rejuvenate investment incentives.
The move paid off. Investors now keep nearly 50 percent more of their after-tax capital returns — an enormous increase that has resulted in a remarkably profitable and highly productive business sector. While the overall economy has grown by one-fifth since mid-2003, private business investment has expanded by 37 percent.
The dirty little secret here is that record low tax rates on capital are leading to continued job and income gains as businesses continue to expand. “But,” you might respond, “I thought job gains were soft.” Well, the marquis employment report for June may have showed “only” 121,000 new nonfarm payroll jobs, below Wall Street expectations. But this leads to another factoid that the mainstream media largely ignores: The household survey of job creation has been booming at a much faster clip than headline corporate payrolls. This survey shows 387,000 new jobs in June, following 288,000 in May.
When this last happened in 2003-04 (remember the “jobless recovery” election-year rant of Democrats?), it was corporate payrolls that caught up to the more entrepreneurial household survey — which more accurately records job creation by small-business owner/operators. This is the source of the bulk of American job creation.
According to the U.S. Small Business Administration, firms with less than 500 employees created 88 percent of the net new jobs in the U.S. between 1990 and 2003 (the last year for Census Bureau data). During this fourteen-year period, the share of total jobs created by small businesses was never less than 50 percent and was sometimes double the employment total.
Large corporations are reluctant to hire because it is so expensive to do so. Think health care and pension costs as well as payroll add-ons for unemployment compensation and worker disability. The modern cost-cutting pressures of globalization also force large firms to take a highly cautious hiring approach.
But newly minted entrepreneurs don’t face all these costs — at least not initially. And that is why the household survey has become so important in the 21st century economy.
Wages are rising today, so we know domestic labor markets must be tightening, not softening. To wit, average hourly compensation has risen to 3.9 percent over the past year, while average weekly earnings have grown to 4.5 percent. In early 2004 these wage measures were only 1.5 percent.
The June Labor report also revealed a 2.3 percent annual
gain in aggregate hours worked — which is consistent with 3.7 percent real
GDP growth and a 6.6 percent gain in wages and salaries. These hefty numbers
will bolster consumer spending in the period ahead.
The U.S. Bureau of Labor Statistics is recognizing the importance of the small-business-driven household survey, and has suggested averaging household jobs with the corporate payroll survey to get a clearer jobs picture. Doing this yields a strong 186,000 new jobs per month over the past year, which is the key reason why the unemployment rate stands at a historically low 4.6 percent rate, with total employment not at a record high 144.5 million.
These data points hardly suggest a slumping economy. Instead they reveal a low-tax, durable, resilient, and flexible American market system that easily shifts from one sector (housing) to another (business investment). It is this American economic dynamism that separates our ongoing prosperity from the overtaxed and overregulated stutter-start stagnation of industrial economies in Western Europe and Japan.
Did someone say prosperity?
24. CAN'T-DO BRITAIN
------------------------------------------------------------------------
Rainy, cloudy, foggy England is under drought orders.
The
government has announced that London and southeast England
have less
water per person than Sudan. Yet this is a case
of economic,
rather than drought, says Rupert Darwall of the Center
for Policy
Studies in London.
The problem is the absence of prices. Consumers
are charged for
the pipes to their houses, but not for the water they
use.
Similarly, water companies do not pay for the amount
of water they draw
from rivers and boreholes. With no prices for water
going into
the system, and no prices when it comes out, the Economics
101 lesson
that there would be no incentive to increase supply turns
out to be
correct, says Darwall.
o Since the water industry was
privatized in 1989, not a
single new reservoir
has been built.
o Meanwhile, over the last two
decades, household water
consumption per
head in fast-growing London and the Southeast
has increased by
22 percent.
o The water companies' biggest
customers are leaks since an
estimated 30 percent
of London's water disappears through
holes in the network.
No one does anything about it, because
the lost water has
no automatic impact on profits.
But if the water companies have been privatized, how is
this a
state-caused problem? The lack of prices reflects
the industry's
public-sector origin. When it was privatized, water
metering was
recognized and encouraged as part of the answer.
Yet one of the
first actions of the Blair government was to curb its
spread, says
Darwall.
Source: Rupert Darwall, "Can't-Do Britain," Wall Street
Journal, July 5, 2006.
For text (subscription required):
http://online.wsj.com/article/SB115208966112698244.html
For more on Privatization:
http://www.ncpa.org/pd/private/priv.html
Can't-Do Britain
By RUPERT DARWALL
July 5, 2006 4:14 p.m.
Temporarily basking in a moderate heat wave, rainy, cloudy, foggy England is under drought orders. The government has announced that London and southeast England have less water per person than Sudan. People in the affected areas can't sprinkle their lawns or clean their cars with a hose. Yet this is a case of economic, rather than climate, failure. And it's a familiar one for a country that's still haunted by the ghosts of public-sector failures past and interventions present. "Can-do" Britain is slowly becoming a "can't-do" country once again.
The problem is the absence of prices. Consumers are charged for the pipes to their houses, but not for the water they use. Similarly, water companies do not pay for the amount of water they draw from rivers and boreholes. With no prices for water going into the system, and no prices when it comes out, the Economics 101 lesson that there would be no incentive to increase supply turns out to be correct. Since the water industry was privatized in 1989, not a single new reservoir has been built. Meanwhile, over the last two decades, household water consumption per head in fast-growing London and the Southeast has increased by 22%. The water companies' biggest customers are leaks: An estimated 30% of London's water disappears through holes in the network. No one does anything about it, because the lost water has no automatic impact on profits.
But if the water companies have been privatized, how is
this a state-caused problem? The lack of prices reflects the industry's
public-sector origin. When it was privatized, water metering was recognized
and encouraged as part of the answer. Yet one of the first actions of the
Blair government was to curb its spread. Having thrown away the economic
tools, government ministers are now scrambling to avoid the international
embarrassment of hosting the 2012 Olympics in a city without enough water.
This is a race that Britain could lose only with a public-sector handicap.
***
Similar constraints increasingly apply even to private-sector companies that have never been owned by the state. This is thanks to Britain's competition policies, which are becoming a means by which the public sector's static mentality colonizes the private sector and subverts its dynamism. The danger is growing in the U.K., with the authorities imposing price caps on some mobile-phone charges, the Yellow Pages and certain banking services. The doctrine seems to be: Where there is economic profit (that is, profit above a firm's cost of capital) there is a potential market failure. When the government's answer is to set prices, thereby reducing incentives for new entrants and innovation, competition policy is reduced to a form of quack medicine where the remedy is worse than the alleged ill.
Forty-five years ago, Alan Greenspan talked of "the grotesque contradiction of attempting to preserve the freedom of the market by government controls, i.e., to preserve the benefits of laissez-faire by abrogating it." It is not just the direct impact of competition regulation that can be damaging. In his book on turning around IBM, former CEO Lou Gerstner wrote of the 13-year threat of an antitrust suit as one of the factors that nearly destroyed IBM, changing its business behavior "in very real ways."
Businesses under threat of competition scrutiny can no longer focus all their efforts on competing to serve their customers better. They have to be managed with an eye to the possible reaction of the competition authorities. In effect the government becomes a company's biggest customer, albeit a nonpaying one.
Take the competition probe into the U.K. supermarket sector just launched by the Office of Fair Trading. The investigation's unspoken target is Tesco, one of Britain's best managed companies as evidenced by its 30% market share and the recent announcement that a unit of Warren Buffett's Berkshire Hathaway had bought a $200 million stake in it. In fact, this latest competition investigation will be the sector's third in eight years, one of which was an inquiry into a takeover bid.
In his critique, Mr. Greenspan argued that competition regulation was an attempt to remedy the economic distortions which prior government interventions had created. The OFT acknowledges that this is the case with the supermarket sector, as Britain's antiquated system of land-use planning constitutes a major barrier to entry. The answer is to redirect competition policy away from its self-defeating attempt to accommodate distortions caused by previous government action, and toward identifying the public rules and regulations that impede markets. It should then estimate their costs and put them in front of policy makers and the public.
In the privatized utilities, notably in the water and airport sectors, the approach should be to push for structural remedies. This has already been accomplished in the energy sector. Electricity was restructured before privatization and gas afterward, giving Britain one of the most competitive energy markets in Europe. To its great credit, the OFT announced on May 25 that it was examining the case for a review of the ownership structure of airports. Airports owner BAA, which is being acquired by Spain's Ferrovial, controls 92% of the air passenger market in London and the Southeast.
Draw up a list of what works in Britain and what doesn't, and on the success side there'd be private-sector business. In contrast to falling public-sector productivity, the private sector improves its performance year after year because it has to. The explanation lies not in people but in the superior capacity of the private sector to adapt to change, which is the fundamental driver of economic progress that transformed Britain into a "can-do" country. Misdirected competition policy is one way to force "can-do" Britain out of the race.
Mr. Darwall is author of a forthcoming study on tax credits
for the Center for Policy Studies in London
25. "Teddy" and Time By Thomas Sowell
Wednesday, July 5, 2006
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A special issue of Time magazine celebrates the historic career of Theodore Roosevelt and the implications of his presidency for the development of American society. In the phony familiarity of our times, where you call people by their first names when you have never even met them, the cover story in this issue is titled "Teddy."
Theodore Roosevelt was indeed a landmark figure in the development of American politics and government, but in a very different sense from the way he is portrayed in Time magazine. In fact, the way that Theodore Roosevelt has been celebrated by many in the media and among the intelligentsia tells us more about them than about the first President Roosevelt.
Theodore Roosevelt, the 26th president of the United States, is seen in this undated picture. (AP Photo)
It also tells us something about what has gone wrong with American society.
Aside from questions of flamboyant style and rhetoric, what did Theodore Roosevelt actually accomplish that would justify putting him on Mount Rushmore, alongside Washington, Jefferson and Lincoln?
According to Time magazine, TR believed that "government had the right to moderate the excesses of free enterprise." Just what were these excesses? According to Time, "poverty, child labor, dreadful factory conditions."
All these things were attributed to the growth of industrial capitalism -- without the slightest evidence that any of them was better before the growth of industrial capitalism. Nothing is easier than to imagine some ideal past or future society or to imagine that the net result of government intervention is bound to be a plus.
Theodore Roosevelt's own ideas went no deeper than Time magazine's today or of much of the intelligentsia in the years in between. Maybe that is why TR has been lionized. Both his thinking and his lack of thinking was so much like that of later "progressives."
Among the things that have endeared TR to later generations of "progressives" has been "the breakup of monopolies" cited by Time magazine. Just what specifically caused particular companies to be called "monopolies"? What specifically did they do? Who specifically did the "robber barons" actually rob?
Such questions remain as unanswered today as in Theodore Roosevelt's time. Indeed, they remain unasked among many of the intelligentsia and in the media.
Monopolies are much harder to find in the real world than in the world of political rhetoric. Monopolies raise prices but, in the big industries supposedly dominated by monopolies -- oil, steel, railroads -- prices were falling for years before Theodore Roosevelt entered the White House and started saving the country from "monopoly."
The average price of steel rails fell from $68 to $32 before TR became president. Standard Oil, the most hated of the "monopolies," had in fact innumerable competitors and its oil prices were not only lower than those of most of its competitors, but was also falling over the years. It was much the same story in other industries called "monopolies."
The anti-trust laws which Theodore Roosevelt so fiercely applied did not protect consumers from high prices. They protected high-cost producers from being driven out of business by lower cost producers. That has largely remained true in the many years since TR was president.
The long list of low-price businesses targeted by anti-trust laws range from Sears department stores and the A&P grocery chain in the 20th century to Microsoft today, prosecuted not for raising the price of Windows but for including new features without raising prices. Much of the rhetoric of anti-trust remains the opposite of the reality.
Jim Powell's soon to be published book, "Bully Boy," goes in detail into the specifics of President Theodore Roosevelt's many crusades and their often disastrous consequences. But who cares about consequences these days?
TR was a "progressive" and denounced "malefactors of great
wealth." What more could the intelligentsia and the media want?
Vote on this Article
26. Changing Attack In Poverty Tactics, An Old Debate: Who Is at Fault? Today, the Pendulum Swings Away From Government To Small-Scale Projects The Price of 'Dependency' By DAVID WESSEL June 15, 2006; Page A1
More than 40 years ago, Lyndon Johnson launched his War on Poverty with an ambitious declaration: "We know what must be done, and this nation of abundance can surely afford to do it."
Despite decades of economic growth and technological progress, tens of millions of Americans still live in poverty. Efforts to reduce the ranks of the poor persist, but they have moved underground. Today's War on Poverty isn't marked by lofty presidential rhetoric. It is a guerrilla war with platoons of idealistic crusaders and skeptical scholars, with dozens of small-scale experiments and local initiatives that largely escape public notice.
Sprawling government Great Society programs are out. And
it has been a full decade since Bill Clinton signed a Republican-backed
bill "to end welfare as we know it." Except for a flicker of attention
in the aftermath of Hurricane Katrina last year, poverty is neither in
the headlines nor on the lips of politicians. When President Bush refers
to it, he usually is referring to other countries. ("Free trade is the
only proven path out of poverty for developing nations," he says.)
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Counting the Poor: Methods and Controversy
Online Extras: Poverty data | Presidents' words
Yet to a surprising degree, an intense subterranean debate over what causes poverty and what to do about it continues, and it has echoes of a debate that has hardly changed for a century. In a 1894 treatise regarded as the first U.S. social-welfare textbook, Amos Griswold Warner wrote words that could easily have figured in the 1990s congressional debate over revamping welfare: "Nearly all the experiences in this country indicate" that welfare "is a source of corruption to politics, of expense to the community, and of degradation and increased pauperization to the poor," he said. "The more generous public relief, the more likely the poor will prefer it to working," argued Mr. Warner, a social-work pioneer and the District of Columbia's first superintendent of charities. (See more on Mr. Warner, right.)
"Either you blame the poor -- 'the poverty is in the people' -- or you blame the system," says James T. Patterson, a Brown University historian. "It is a constant divide." If the poor are primarily responsible for their plight, then government ought to prod them to change their ways. If poverty is primarily the consequence of economic and social forces largely beyond their control, then government ought to give them money and change the rules of the economy.
Among those who dominate American politics and poverty
policy today, the argument that government programs create dependency rather
than foster independence has stuck. There is little appetite among governing
Republicans for sweeping federal antipoverty initiatives, or even for fine-tuning
Mr. Clinton's 1996 law that limits the time any person can remain on welfare.
Eliminating poverty for all time isn't even a slogan anymore; the problem
is seen as far more intractable and complex. Republicans read the decline
in poverty during the boom of the 1990s as evidence that the best way to
fight poverty is to promote a growing economy, and they offer tax cuts
to that end.
[Rich and Poor]
So the pendulum has swung toward using tax credits, vouchers, rules and penalties to prod individuals to make choices that steer them away from lives of poverty, by getting and staying married, for instance, or taking even low-paid jobs to stay off welfare. In place of big government programs, boutique experiments proliferate. There are intensive community efforts to discourage teen pregnancy, widely seen as a precursor to a life of poverty, and experiments with offering frequent-flier style points to encourage public-housing residents to show up for work on time. All reflect a continuing struggle to find an effective combination of carrots and sticks to help the poverty-prone avoid the abyss of privation and reliance on government benefits.
Democrats fault the economy for creating too few good jobs and for inequitably distributing the fruits of economic growth. They say they would, if in power, raise the minimum wage, alter the tax code to take more from the rich and spend more on programs that appear successful. But even many of them -- the children and grandchildren of those who forged big-government antipoverty programs of Lyndon Johnson and Franklin Roosevelt -- embrace the notion that the government should make the poor take more responsibility for their circumstances.
Democrats say they have learned one lesson in political
reality: "If people believe your ideas about alleviating poverty are value-based
-- that you expect the poor to work, expect them to be responsible, to
keep their part of the bargain -- then people have a positive response,"
says John Edwards, the unsuccessful 2004 Democratic vice presidential candidate
who now heads a University of North Carolina center on poverty. "If they
believe it's just another government program that creates dependency, then
they won't," he says.
* * *
Eradicating poverty in the U.S. is an old goal. In the frothy days of 1928, Herbert Hoover said, "We shall soon, with the help of God, be in sight of the day when poverty will be banished in the nation." Incomes did rise sharply in the 1920s; the working class did better; life expectancy grew. But he was wrong about poverty.
When the prosperity of the 1920s gave way to the Great Depression, Franklin Roosevelt responded with programs that laid the foundation for generations of big government. "Government had to respond to rising expectations, and as government reacted, appetites were whetted still more, expanding...a bureaucracy whose business was to serve its customers," the people who got government benefits, Mr. Patterson writes in his history of 20th-century antipoverty efforts. "The early welfare state thereby acquired two assets that proved invaluable...an organized constituency and a bureaucratic momentum that could not easily be stopped."
Although the vigorous economy of the late 1940s and 1950s boosted living standards for many, poverty didn't vanish. Yet as a public concern, it was nearly invisible until activist Michael Harrington jolted the nation with a 1962 book that described "the other America," which he said was "populated by failures, by those driven from the land and bewildered by the city, by old people suddenly confronted with the torments of loneliness and poverty, and by minorities facing a wall of prejudice."
Just two years later, President Johnson launched his War on Poverty, declaring, "We cannot and need not wait for the gradual growth of the economy to lift this forgotten fifth of our nation above the poverty line." He wasn't nuts. His economic advisers were certain the economy would continue to grow as robustly as it had for decades and told him poverty was beatable.
But neither LBJ's determination, tens of billions of dollars nor the enthusiasm of poverty fighters in and out of government eliminated poverty. "I guess you could say: Poverty won the War," Ronald Reagan quipped famously in 1986. That isn't precisely true. The poverty rate fell more in the 1960s than in any decade since, and remains below the level confronted by the Kennedy-Johnson administration. Back in 1960, nearly one in every four elderly Americans was below the official poverty line; today, less than one in 10 is. In 1960, one in every six households lacked complete indoor-plumbing facilities; today, one in 166 do.
But at last count, according to the Census Bureau, there were 37 million Americans below the official, albeit flawed and controversial, poverty line. That is 12.7% of the population, about the same fraction as in 1968. Alternative measures that take account of tax credits, food stamps and other noncash government aid put many fewer Americans below the line, but most show a similar trend: ups and downs with the economy, but little sustained, significant progress in the past three decades. (See sidebar: Counting the Poor.)
The 1960s
In retrospect, the War on Poverty was "not a choice among policies so much as a collection of them," Daniel Patrick Moynihan, who was a Labor Department official in the 1960s, wrote years later. There was an attempt to avoid dependency-creating programs of the past by promoting "maximum feasible participation" of the poor themselves, a strategy that sowed the seeds of grass-roots activism in the years that followed. There was Mr. Johnson's prediction that "the days of the dole...are numbered."
But mostly the pendulum swung toward government doing
more. There were scores of federal programs, some of which endured. Head
Start now enrolls more than 900,000 low-income children in early childhood
education at a cost of close to $7 billion a year -- despite continuing
debates over its long-term benefits. The Job Corps, designed to put 16-
to 24-year-olds on the path to good jobs, is regarded as successful(?),
though costly.
[Who the Poor Are]
Even after 40 years, there is still debate over the War on Poverty's diagnosis and prescriptions. The effort rested on a widespread conviction that the U.S. had figured out how to avoid recessions and could afford to lick poverty. "We were extremely rich and extremely secure about our ability to continue getting richer," recalls Charles Murray, a conservative critic of the War on Poverty.
But it also reflected a Kennedy-Johnson view that economic growth alone wouldn't pull people out of poverty. "If the poor included many who did not gain from economic growth -- mostly people outside the labor market -- then they probably needed handouts of some sort," Mr. Patterson explains. Yet the notion of a permanent class of welfare recipients made planners and Congress so uncomfortable that the War on Poverty instead emphasized enhancing opportunity -- with education, training, health care, urban renewal. That suggested they believed that the economy would lift those who were properly equipped. Such programs offered "a hand, not a handout," as Mr. Johnson put it.
Some Johnson aides, sensing a contradiction, wanted a large government jobs program. But they wanted a cigarette tax to pay for it, and LBJ rejected that.
"The problem with the '60s programs is essentially we stopped before we finished," Peter Edelman, who was an aide to Robert Kennedy and to President Clinton, said at a recent University of North Carolina forum. "But we were especially weak on this question of helping people gain access to the job market...and on the question of concentrated poverty,"
Modern-day critics of the War on Poverty suggest that it sometimes made things worse. "They did induce dependency, they did not emphasize work nearly enough, and the watchword of the War on Poverty seemed to be spend more, demand less," says Ron Haskins, a former Republican congressional staffer now at the Brookings Institution think tank.
The 1970s
While fighting poverty often was politically popular, welfare wasn't. Created in the Depression to keep mothers of young children out of the work force, the program drew fire from a later generation of politicians. "The present welfare system has to be judged a colossal failure," Richard Nixon said in 1969. Between 1960 and 1974, welfare rolls more than tripled to 10.8 million people.
Inspired by such strange bedfellows as conservative Milton Friedman and liberal James Tobin, both later Nobel laureates in economics, Mr. Nixon advanced a proposal that would put him to the left of most Democrats today: a Family Assistance Program (FAP) that would have guaranteed every adult the equivalent of about $2,700 a year in today's dollars and every child $1,620.
Sometimes called a "negative income tax," it was a simple approach for curing poverty: Give money to those who don't have it, no strings attached. Mr. Friedman's notion was to use it to replace all other antipoverty programs, and eliminate the need for social workers and bureaucrats. Liberals saw it as a supplement to other safety-net programs. In any event, Congress rejected it. Liberals thought it too stingy; conservatives thought it an expensive way to coddle those who didn't work.
Congress did create a miniversion in 1972 that put a floor under the incomes of the old, blind and disabled. Dubbed the Supplemental Security Income, it now pays 7.2 million people an average of $450 a month. A few years later, Sen. Russell Long, a Democrat who chaired the Senate Finance Committee and detested the notion of paying people for not working, successfully crafted an alternative to the Nixon plan that was offered only to low-income people with jobs. Though few saw the potential when the Earned Income Tax Credit was born, the program has blossomed with bipartisan support into the largest federal antipoverty program outside of health care.
The U.S. economy weakened in the 1970s in ways that would be cruel to the working poor, restraining their wages. What economic growth did occur after 1979 was shared less evenly than it had been in previous decades; in a significant change, those at the top did better than those at the bottom.
Looking back, economists Sheldon Danziger and Peter Gottschalk cite the slower growth and widening of inequality as the primary reason that poverty fell much more slowly after 1970 than in preceding decades. Had "incomes grown as rapidly...as they had had during the economic 'golden age' after World War II," the poverty rate in 2002 would have been half what it actually was," they wrote in a 2005 book of essays published by the Russell Sage Foundation and Population Reference Bureau.
The 1980s and 1990s
The poverty rate was rising before Mr. Reagan took office. Inflation was eroding the spending power of welfare checks. Jimmy Carter had begun to put the brakes on spending. And then came the deep recession. By 1983, the official poverty rate had risen to where it had been in the late 1960s.
Mr. Reagan, decrying "welfare queens," pared spending on food stamps, unemployment compensation, child nutrition, vocational education, the Job Corps and welfare. The "goal of social policy in the Johnson (and even the Nixon) years had started with the question, 'How can we help the poor?' Reagan, in contrast, tended to ask 'How can we cut costs, and how can we get people to work?' " Mr. Patterson writes.
If liberal Michael Harrington's "The Other America" had been the defining text for the 1960s, then Mr. Murray's 1984 "Losing Ground" sought to play that role in the 1980s. Assailing the programs of the 1960s as failures, he argued that welfare gave poor people, particularly inner-city blacks, incentives to shun work and marriage.
By the 1990s, as the U.S. suffered another recession followed by another boom, there was no longer bold talk from the White House about eliminating poverty. The new slogans were Mr. Clinton's "end welfare as we know it" and Harvard University professor (and later Clinton adviser) David Ellwood's "If you play by the rules you shouldn't be poor." The decade represented another lurch toward pushing the poor to take responsibility for their circumstances, with an offer of government aid to reward those who did.
With loud dissents from liberals, Mr. Clinton joined Republicans
in 1996 to replace the old welfare program with a new Temporary Assistance
for Needy Families (TANF.) Among things, it required able-bodied recipients
to leave welfare for work after two years.
[Taxes]
Liberals were pleasantly surprised by the results. "That experiment with welfare reform has been far more successful than I certainly anticipated and than most people anticipated," says Isabel Sawhill, a former Clinton official who now oversees economic studies at Brookings. "We all remember Senator Moynihan saying children would be sleeping on grates. And although I'm sure there are some children who have not been helped and have, in fact, been harmed, I think that on average families have been better off -- helped by a strong economy, to be sure."
The welfare rolls have fallen from 3.9 million families in fiscal 1997 to 1.9 million in fiscal 2005, according to federal data. A growing fraction of unmarried women with children are working.
If government made it harder to stay on welfare, Mr. Clinton argued, it had to make sure that those who worked rose above poverty. "We will reward the work of working poor Americans by realizing the principle that if you work 40 hours a week, and you've got a child in the house, you will no longer be in poverty," he said in his first State of the Union address.
Raising the minimum wage in the 1990s from $3.35 an hour to $5.15 was one response. The other was a massive expansion of the Earned Income Tax Credit, which had already been sweetened by Presidents Reagan and George H.W. Bush. The federal government will spend more than $38 billion this year on the Earned Income Tax Credit -- both in reducing taxes owed by low-wage workers and, for those who don't owe taxes, giving them cash -- twice what it spends on Temporary Assistance for Needy Families. More than 22 million households, roughly one-fifth of the total, benefit.
The Clinton welfare overhaul came just as the economy roared and unemployment fell to the lowest level in more than a generation. Wages rose even at the very bottom of the economy for the first time in years -- and the poverty rate, by almost every measure, fell.
The 2000s
The end of the 1990s boom reversed some of the progress made against poverty in the late 1990s. And though Mr. Bush hasn't made reducing poverty central to his agenda, intellectual ferment over poverty continues. And so does the debate over whether it is the poor themselves or the economy that is primarily at fault.
One major plank in today's response to poverty is the promotion of marriage, a reaction to the perception that old-style welfare contributed to an unhealthy breakup of the family. "The contract we promulgated was very simple: You can to get access cash...so long as...you don't go to work and you don't marry someone who's working. And so what we got was a lot more out-of-wedlock childbearing and a lot less family formation; no great mystery, we told them don't do it," says Wade Horn, an assistant secretary of Health and Human Services, echoing Mr. Murray's 1984 argument. "What's extraordinary in the last five years or so is that we started to have a public conversation about the need for more-friendly public policy when it comes to family formation," he says.
Indeed, liberals such as Ms. Sawhill and former Sen. Edwards, who argue that those who play by the rules ought not to be poor, have expanded their working definition of what it means to play by the rules: "Perhaps it should...include such things as finishing school, at least high school; perhaps it should include delaying child-bearing until you're old enough to support a child, or at least make a good effort at supporting a child -- then maybe we link some new benefits to those new kinds of responsibility," Ms. Sawhill says. Dissenters say marriage, despite its economic advantages, is oversold as an antipoverty strategy.
Another concept drawing favor across the political spectrum is to help poor people build nest-eggs, an approach that fits with Mr. Bush's enthusiasm for an "ownership society." Prominent proponent Michael Sherraden of Washington University in St. Louis argues that a "small amount of wealth" in the hands of a poor family can be important if it "enables a family to move to a better neighborhood, or enables an investment in education or training that wouldn't happen otherwise, or enables a purchase of a home."
There is today, however, a different sense about the potency of any government response to poverty than when the War on Poverty was born. "There was a sense in those early...days that the possibilities were endless," Lisbeth Schorr, who worked in the Johnson White House, recalled at a recent retrospective sponsored by the Brookings Institution and Georgetown University. "Of course," she said, "nobody knows what would have happened if we had been able to continue and expand what we started."
Write to David Wessel at david.wessel@wsj.com
27. Counting the Poor: Methods and Controversy By DAVID
WESSEL
June 15, 2006; Page A10
Who are the poor?
By the official measure, there were 37 million people living below the poverty line in 2004. Most (55%) were between 18 and 64, and most (68%) were white. But the poor are disproportionately children and disproportionately black: While 12.7% of the total population was below the poverty line, 17.8% of children under 18 and 24.7% of blacks were.
What is the official poverty line?
Developed in the early 1960s by Mollie Orshansky of the Social Security Administration, it is three times the amount of money the Agriculture Department estimated it would cost to feed a family, adjusted for inflation using the consumer-price index. The poverty line varies by family size. For a single mother with one child, it was $13,461 in 2005; for a two-parent, two-child family, it was $19,806.
What income counts in determining whether a family is
above the official poverty line?
[Measuring Poverty]
All cash income before taxes, whether from wages or government benefits, counts. Capital gains, noncash government benefits such as Medicaid, food stamps or housing subsidies don't count, nor does the Earned Income Tax Credit.
Does that make sense?
No. But efforts to change the official poverty measure are mired in political controversy. There is even controversy over which alternatives to the official measure should be published by the Census Bureau. Until recently, it published 17 alternatives based on recommendations by a National Academy of Sciences panel. Most showed a poverty rate above the official number because they used a higher poverty line. Influenced by the arguments of Douglas Besharov, of the conservative American Enterprise Institute think tank, the Census Bureau this year adopted a new approach and published alternatives to the official measure that put poverty rates below the official one.
What do alternative measures show?
Almost anything you want. One Census Bureau calculation, based on the NAS recommendations, adds food stamps, housing subsidies, discount school lunches, capital gains and the Earned Income Tax Credit to family income, and then subtracts federal and state taxes and the cost of getting to work and caring for children. This would put 16% of Americans below the poverty line for 2003, well above the 12.5% official measure. One of the new Census Bureau approaches incorporates many of those changes to calculating income and adds an "imputed return of home equity" for those who own homes -- but doesn't adjust the poverty threshold. That approach brings the 2003 poverty rate down to 9%, relying on the consumer-price index to adjust Ms. Orshansky's numbers, and to 7.4% by applying what many economists say is a more accurate measure of inflation over time.
Do the alternatives show different trends?
No. Most measures show that poverty fell in the 1990s as a result of a booming economy and changes in government policies, such as an increase in the minimum wage. Most measures also show that poverty has risen since the end of the 1990s.
How do other countries measure poverty?
In contrast to the U.S. approach of setting an absolute threshold and adjusting it for inflation, Europeans tend to use a relative measure, adjusting the thresholds so they rise not just with inflation but with the incomes of typical families. Such an approach would produce a higher number of Americans living in poverty than the current official measure because the typical American family's income has risen far more than the poverty line has.
Write to David Wessel at david.wessel@wsj.com
28. ORGAN DONATIONS FALL SHORT
------------------------------------------------------------------------
In the more than 50 years since the first successful organ
transplant,
hundreds of thousands of patients have had their lives
extended because
of organ donations. Yet despite decades of campaigns
to persuade
Americans to donate organs after they die, the demand
increasingly
exceeds the supply, says USA Today.
It is a quiet crisis that argues for new approaches.
Several
ideas, although controversial, are under consideration
or already
underway. Among them:
o Under a "futures" contract,
the estate or family
of an adult who
agrees to donate organs might receive some
financial remuneration,
typically less than $10,000, for
funeral and other
expenses. Organs would go into the donor
system, not be sold
to individuals.
o LifeSharers is an existing
network of 4,500 donors. Members
agree to specify
that when they die, priority in getting their
organs should go
to other members, also registered as donors.
o More controversially, Arkansas,
Georgia, Iowa, Minnesota,
New Mexico, North
Dakota, Utah and Wisconsin allow tax
deductions of up
to $10,000 to compensate living donors for
travel, expenses
or lost income. This is legal because the
money comes from
the state. It also requires screening for
psychological fitness.
Providing financial incentives for donor participation
is an ethical
minefield, but in a measure of how severe the shortage
has become, the
American Medical Association, which had long opposed
payments to
donors, now favors limited experimentation.
With more than 6,000 patients dying each year while on
organ waiting
lists, limited financial incentives are worth trying.
They should
be confined for now to post-mortem donations, and organs
should be
distributed as they are, based on medical need and time
on the waiting
list -- not on ability to pay, says USA Today.
Source: Editorial, "Organ donations fall short; financial
incentives can help," USA Today, June 25, 2006
For text (subscription required):
http://www.usatoday.com/printedition/news/20060626/edit26.art.htm
For more on Health:
http://www.ncpa.org/iss/hea/
Climate change sceptics bet $10,000 on cooler world
29. Russian pair challenge UK expert over global warming
David Adam, science correspondent
Friday August 19, 2005
The Guardian
Two climate change sceptics, who believe the dangers of global warming are overstated, have put their money where their mouth is and bet $10,000 that the planet will cool over the next decade.
The Russian solar physicists Galina Mashnich and Vladimir Bashkirtsev have agreed the wager with a British climate expert, James Annan.
The pair, based in Irkutsk, at the Institute of Solar-Terrestrial Physics, believe that global temperatures are driven more by changes in the sun's activity than by the emission of greenhouse gases. They say the Earth warms and cools in response to changes in the number and size of sunspots. Most mainstream scientists dismiss the idea, but as the sun is expected to enter a less active phase over the next few decades the Russian duo are confident they will see a drop in global temperatures.
Dr Annan, who works on the Japanese Earth Simulator supercomputer, in Yokohama, said: "There isn't much money in climate science and I'm still looking for that gold watch at retirement. A pay-off would be a nice top-up to my pension."
To decide who wins the bet, the scientists have agreed to compare the average global surface temperature recorded by a US climate centre between 1998 and 2003, with temperatures they will record between 2012 and 2017.
If the temperature drops Dr Annan will stump up the $10,000 (now equivalent to about £5,800) in 2018. If the Earth continues to warm, the money will go the other way.
The bet is the latest in an increasingly popular field of scientific wagers, and comes after a string of climate change sceptics have refused challenges to back their controversial ideas with cash.
Dr Annan first challenged Richard Lindzen, a meteorologist at the Massachusetts Institute of Technology who is dubious about the extent of human activity influencing the climate. Professor Lindzen had been willing to bet that global temperatures would drop over the next 20 years.
No bet was agreed on that; Dr Annan said Prof Lindzen wanted odds of 50-1 against falling temperatures, so would win $10,000 if the Earth cooled but pay out only £200 if it warmed. Seven other prominent climate change sceptics also failed to agree betting terms.
In May, during BBC Radio 4's Today programme, the environmental activist and Guardian columnist George Monbiot challenged Myron Ebell, a climate sceptic at the Competitive Enterprise Institute, in Washington DC, to a £5,000 bet. Mr Ebell declined, saying he had four children to put through university and did not want to take risks.
Most climate change sceptics dispute the findings of the Intergovernmental Panel on Climate Change which suggest that human activity will drive global temperatures up by between 1.4C and 5.8C by the end of the century.
Others, such as the Danish economist Bjorn Lomborg, argue that, although global warming is real, there is little we can do to prevent it and that we would be better off trying to adapt to living in an altered climate.
Dr Annan said bets like the one he made with the Russian sceptics are one way to confront the ideas. He also suggests setting up a financial-style futures market to allow those with critical stakes in the outcome of climate change to gamble on predictions and hedge against future risk.
"Betting on sea level rise would have a very real relevance to Pacific islanders," he said. "By betting on rapid sea-level rise, they would either be able to stay in their homes at the cost of losing the bet if sea level rise was slow, or would win the bet and have money to pay for sea defences or relocation if sea level rise was rapid."
Similar agricultural commodity markets already allow farmers
to hedge against bad weather that ruins harvests.
30. Give Your Cabdriver a Fat Tip!
By MICHAEL A. SALINGER
June 24, 2006
Some home truths about "price gouging."
I have been director of the Bureau of Economics at the Federal Trade Commission over the past year. For a college professor, it's been a fascinating opportunity to confront how textbook theories match market reality, and to get an insider's view of how policy is made. The enduring uproar over gasoline prices provides a perfect case in point.
After two decades of about $1.00 per gallon gasoline prices in the United States, prices started to rise in 2002 and reached about $2.00 per gallon around Memorial Day last year. Then, during the summer, prices rose an additional 50 cents per gallon. In response, Congress mandated that the FTC study whether the increase was due to market manipulation.
At the end of the summer, Hurricane Katrina made land, followed a month later by Hurricane Rita. In addition to the tragic loss of life and personal property, both hurricanes damaged a substantial portion of U.S. crude oil and petroleum refining capacity. They also damaged two major pipelines that carry gasoline from the Gulf to the East Coast. Prices again rose, and Congress mandated that the FTC study post-hurricane price gouging.
Just before Memorial Day, the FTC submitted its report to Congress. While the investigation found some instances of price gouging as defined by Congress, the staff concluded that virtually all the cases meeting the statutory definition were the result of competitive market forces, not market manipulation. More generally, the FTC staff concluded that the market worked much as one would expect a competitive market to respond to a shortage.
One of the purposes of the report, which is available at www.ftc.gov, was to document objectively what happened in gasoline markets after the hurricanes. I hope that college economics professors will assign portions of the report to their classes, because it provides a real example of how markets respond to shocks. (When I return to Boston University, my students are going to have to read some of it.) Some will see in it Econ 101, pure and simple; but the report also documents a market reality that is more complex than textbook models.
Students will benefit from discussing whether the evidence is more consistent with the chapters on perfect competition, monopoly or oligopoly. They will also benefit from discussing the wisdom of government intervention in the marketplace. (I even have a recommended exam question. "Oil industry critics argue that lower inventory holdings have left the industry more susceptible to supply disruptions. How would 'price gouging' legislation affect the incentive to hold additional inventories to sell during shortages?")
I hope these discussions will occur in classrooms (high school as well as college) throughout the country. I doubt that many economists will disagree with the FTC's recommendation against federal price-gouging legislation. To anyone who witnessed the hostile questions from the Senate Commerce Committee to FTC Chairman Deborah Platt Majoras last month, however, it was clear that legislators are much more concerned with what the public thinks than what economists think.
Americans are plainly angry about gasoline prices. Polls indicate that they are. I try to ask as many people as I can about what they think about gasoline prices. It does not surprise me when taxi drivers are upset. They buy their own gas and price regulations prevent them from passing the higher cost on to their customers. I am more surprised by the vehemence of parents (many of whom drive very large SUVs) on the sidelines of soccer fields in affluent suburbs. Convinced that current prices reflect manipulation by "Big Oil," they are almost as angry as the taxi drivers. High profits reported by oil companies and the very large compensation package given former Exxon/Mobil CEO Lee Raymond have contributed to this perception. If the public is convinced that current gasoline prices reflect market manipulation, then I expect that Congress will pass some form of price gouging legislation.
If the public were to ask my advice on the wisdom of price gouging legislation, however, I would counsel against it. When disasters like Katrina and Rita occur, prices must go up.
The difficulty is that without knowing the details of a disaster, it is impossible to specify in advance how much prices need to rise. As result, price-gouging legislation -- particularly if penalties are severe and enforcement is aggressive -- will pose two distinct risks. One is that prices will not rise to market-clearing levels and gas stations will run out of gasoline. As unpleasant as high-priced gasoline is, running out will be even worse.
The other is that gas stations will shut down rather than risk an allegation of price gouging. In the wake of major market disruptions, it is always going to be possible in hindsight to identify companies that raised the price the most and to label them as "gougers." But gasoline stations do not set prices in hindsight. A vague definition of price gouging will make it difficult for gas station owners to know what price they can charge and stay within the law. Indeed, the FTC investigation uncovered examples of gas stations that shut down rather than risk a suit under a state price-gouging statute.
Professional economists are, of course, accustomed to giving unheeded advice. In a way, that is liberating, so I will offer one further piece of unsolicited advice. When you take a taxi and if you can afford it, give the driver a bigger tip than you usually would. As much as higher gasoline prices are hurting you, they are hurting the taxi drivers more.
Mr. Salinger is director of the Bureau of Economics at
the Federal Trade Commission and is on leave from the Boston University
School of Management, where he is professor of economics.
31. Labor Lost
WSJ une 23, 2006; Page W11
If raising the minimum wage becomes an election issue in November, it won't be because most supporters of doing so expect to personally gain from it. Only a tiny fraction of Americans -- perhaps 3%-5% -- get paid the current minimum of $5.15 an hour. Politicians and unions aside, minimum-raise sympathizers are responding mainly to guilty unease: "Gee, I'm doing OK, so why shouldn't poor people get another $2 an hour?"
The main flaw in such thinking is that no one has ever demonstrated that raising the minimum wage reduces poverty. How can that be? Well, partly it's because the vast majority of minimum-wage earners are not, in fact, poor. Of an estimated 87% who are not, many live in households where two or more people work and where combined incomes may be two or three times the poverty level. Then there are young people and teenagers, who are more likely to earn the minimum wage than any other group. A significant number of them have high-income parents.
With the economy booming, more young people are finding work, including summer jobs. But economists have long known that when minimum wages go up, the number of jobs for kids tends to go down. Even experts who cling to the belief that raising the minimum wage has no net negative effect on the economy generally agree that such wage-hikes price many unskilled workers out of the market. Since no group has fewer skills than youngsters, they will be the first fired, or not hired, as employers react to the higher cost of labor.
It won't happen to everyone, and some businesses will adjust to the new labor costs. Yet the record is clear, and understandable. Why pay four kids, an employer may well reason, when for the same, now higher, minimum salary I may be able to attract three adults with a bit more experience?
The implications are especially profound for poor and inner-city black kids. Starting at a disadvantage, they have the most to gain from an introduction to the world of work skills. They also face the most predictably bleak future if they miss this foothold.
David Neumark, an economist at the University of California at Irvine, points to other pitfalls. For one, he told us, research suggests that when minimum wages go up, kids get less training on the job from their employers, since that extra attention also adds to the cost of hiring them. There is also ample evidence, he notes, that raising the minimum wage tempts some kids to drop out of high school. While most Americans move up from a minimum-wage job, dropouts are most likely to be stuck in one forever.
And what about the broader "poor" that Senator Ted Kennedy talks about helping with a minimum-wage raise? In truth, his proposed rate of $7.25 an hour won't lift many poor families out of poverty because as many as 64% of the earners in these families already get paid more than $7.25. New research by Joseph Sabia at the University of Georgia and Cornell's Richard Burkhauser indicates that factors other than wages -- such as working fewer hours and supporting large families -- are holding them down.
As painful as it is to think of such people working hard and not getting ahead, at least they are on a payroll and can hope to improve their skills and prospects. It's those unskilled young people, Mr. Burkhauser notes, who are "the most vulnerable part of the population."
And while we can still debate how best to help them, one thing is clear: "What we are doing with a minimum-wage increase," Mr. Burkhauser says, is making sure "that for the folks who don't have the skills to be worth $7.25, they are not going to have a job."
32. Don't Restrict Immigration, Tax It
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By Nathan Smith : BIO| 20 Jun 2006
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The goal of this article is to outline an open borders policy that achieves "Pareto-improvement." Sounds boring, I know. But bear with me. Pareto-improvement, a term from economics, means that some people are made better off while no one is made worse off. In a complex world, it is impossible for a policy literally to make no one worse off. But policies can be designed that, while many benefit, no social group can be identified that is systematically harmed.
Simple freedom of migration, like simple free trade, does not satisfy the Pareto-improvement criterion. While the theory of comparative advantage proves that when Country A opens its markets to goods from Country B, Country A as a whole will be better off, within Country A there will be "winners," such as workers and capital owners in the industries which can penetrate new export markets, and "losers," such as import-competing industries.
Likewise, if Country A opens its borders to immigration from Country B, the native-born population of Country A as a whole will be better off -- by "a fraction of 1%" in Americans' case, according to one estimate -- but there will be some losers -- US high-school dropouts may be earning as much as 8% less than they would be absent immigration.
Whether this kind of policy is a good thing depends on the social welfare function, that is, on how much policymakers should value the well-being of different people. Many critiques of immigration assume that the government should emphasize the well-being of low-skilled native-born Americans, discount the well-being of American-born employers and skilled workers who benefit from complementarities with immigrants, and ignore the well-being of immigrants themselves. Stated baldly, this doesn't sound very moral. And one tactic of immigration advocates is simply to make it explicit. "Are low-skilled Americans the master race?" asks economist-blogger Bryan Caplan. (Some call this patriotism, but they are confusing love of country, a virtue, with non-love of people from other countries, a vice.)
To make the argument that underlies Caplan's rhetorical salvo, we would have to venture outside economics into moral philosophy. We might invoke Rawls' "veil of ignorance" device. If you had to design a world order from behind a veil of ignorance as to your position in it, would you (be honest now) design one in which you had a 42 percent chance of being born into a country with under $1,000 GDP per capita, and forced to stay there, not by distance or natural obstacles, but by man-made visa regimes and border controls -- all in order to protect the wages of people at least 10-20 times better off than yourself? However, it's my belief that however incontrovertible the case for it may be from the perspective of reason and justice, before advocating a course of action that one foresees is likely to harm real people, one should pause and see if there's a better way.
Fortunately there is. Economists have already solved the problem in the context of trade theory. To make free trade, or freedom of migration, Pareto-improving, it may be necessary to tax the winners and compensate the losers.
To apply this approach to migration is actually easier than with trade, because the biggest group of winners -- the immigrants themselves -- is an easily identifiable group, with distinct legal status. As for the losers, while there is no conclusive evidence about who (if anyone) is harmed by immigration, we could err on the generous side by providing immigration adjustment assistance to the American-born working poor generally.
How to Tax Immigration
The reason that open borders can lead to Pareto-improvement is because, aside from being unfair, border restrictions are also hugely inefficient. A whole lot of people who would be far more productive in America are forced to stay somewhere else. Since immigration makes the pie much bigger, everyone can get a bigger piece. Here's how.
* First, an open borders policy must be resolute in denying welfare and taxpayer-funded social services to (most) immigrants, because any social safety net provided in the US will represent a higher standard of living than what prevails in many countries.
* So, as an alternative "social safety net" for immigrants, every immigrant -- or guest worker -- should deposit at a US consulate (or at private firms authorized by the US government to administer this transaction) an amount equal to the cost of deporting them. Having made this deposit, the guest worker should be deported at his or her own pre-paid expense if he becomes unable to support him- or herself.
Second, one interest that is typically ignored in US policy discussions is the source countries. The effect of emigration on poor countries is ambiguous. Emigration may alleviate unemployment. Emigrants send home remittances. Emigrants may boost the economy when they return with skills and savings. But poor countries can also suffer from "brain drain," losing their best and brightest, including skilled workers in crucial fields such as health care. To offset possible negative effects of brain drain, we can increase the incentive of guest workers to return home through a forced savings program. When a guest worker is issued a visa, a special savings account would be created for him. When he gets a job, a certain percentage of each paycheck would automatically be deposited in this account. Guest workers will not be allowed to withdraw money from the account, except in their home countries. Or they can stay, accumulate a certain amount -- a citizenship threshold -- in their guest-worker savings account, and become citizens, at the cost of forfeiting the savings accounts. Forfeited savings accounts could be distributed equally among all US citizens, on an annual basis.
Finally, a surtax will be charged to guest workers, the proceeds of which will be paid out either to all American workers, or targeted to the working poor, ensuring that American-born workers will have a higher standard of living than guest workers who earn the same market wage.
In a recent article -- "A Right to Migrate" -- I suggested that the surtax could be set at 12.4% (i.e., the Social Security payroll tax), the mandatory savings rate at 20%, and the citizenship threshold at $50,000. But the important thing is that these are variables. By manipulating the levels of these variables, Congress could achieve a wide range of policy objectives. The policy is compatible with a moderately restrictionist approach to immigration, if the citizenship threshold, as well as the surtax and/or the mandatory savings rate, were raised to very high levels. Or, if we wanted to maximize revenue, we keep the surtax and the citizenship threshold at a moderately high level, low enough to attract a large number of immigrants and guest workers, high enough to glean substantial revenues from them. Or, if our top priority is foreign aid, we would set the citizenship threshold and the mandatory savings rate high, but the surtax very low.
Given the technical complexity of managing immigration by means of these policy instruments, Congress might be wise to delegate immigration policy to an independent agency, similar to the Federal Reserve, which would be given a broad mandate, such as: "Maximize the foreign aid effect of migration, subject to the constraint that the poorest 30% of American workers are compensated for any migration-related welfare losses, while keeping the total number of guest workers at or below 15% of the US resident population." This agency would then continuously study patterns of migration and their effect on labor markets, source countries, and the American-born working poor, and then adjust its three policy instruments periodically.
But it would never set quotas or caps. Migration taxes would monetize, and force potential migrants to internalize, the perceived negative externalities of immigration. But the government would abdicate the discretion (except on national security grounds) to admit or reject particular immigrants. The migration decision would be left where it should be, in the hands of the immigrant, who has the best information of all about just how badly he or she wants to come to America.
Who Would Use the Guest-Worker Visa?
I hasten to say -- my Pareto-improvement criterion requires it -- that current (legal) immigrants would not be affected by the new policy, nor would future immigrants coming through currently available legal channels. Our entire immigration apparatus would exist, at least for a while, while a new channel of immigration opened up alongside it. Immigrants through traditional channels would become a special set of immigrants exempted from the extra taxes other immigrants had to pay. Which raises the question: why would anyone want to use the new guest-worker visa at all?
One reason is that many people -- indeed, most people in this world -- are, in effect, permanently excluded from America by our border regime. Since immigration became a hot topic, I have been surprised to see, not only how many ordinary people, but how many leading opinion-makers don't understand this. For example, Duncan Currie in the Weekly Standard, in arguing that a US-Mexico border fence is not the moral equivalent of the Berlin Wall, wrote this:
"Despite... elite skepticism, polls show that most Americans support security fencing along the Mexican border. Unless they are all nostalgic for Walter Ulbricht and Erich Honecker's East Germany, these Americans seem to reject the 'Berlin Wall' sneers. They must appreciate the stark difference between a totalitarian regime that treated its own citizens as prisoners and a liberal democracy that merely wishes to drive illegal aliens into the proper immigration channels." (my italics)
What Currie and others fail to appreciate is that only 10,000 visas are available to unskilled immigrants on an annual basis, compared to tens of millions who would like to come. "Proper immigration channels" were never available to the vast majority of the 12 million illegals who work here on farms, in shops, offices, and homes. If they admired America, if they loved America, if they wanted to be part of America, illegality was their only option.
Politicians like to say that illegal immigrants will go to "the back of the line." This is nonsense, because it suggests that while there is a long line to get into the US, illegal immigrants could have waited and gotten to the front eventually. Our immigration system permanently shuts out most of humanity based on their place of birth.
In addition to the low-skilled laborers that our current border regime does not admit legally, the guest-worker visa outlined above would no doubt be attractive to tourists and students, who, not intending to work, would not be affected by extra taxes on earnings. But if my experience is any guide, many people who could come to the US through normal channels might nonetheless opt for the guest-worker visa.
My wife, a Russian national, recently received her Green Card. The process took two years -- a few months to get a fiancée visa to the US, which was our longest-ever separation, and then a year-and-a-half after her arrival before her permanent residency was authorized. During that time she was not allowed to work. The waiting and uncertainty, the separations, and the forced unemployment, were traumatic and depressing. And I would estimate her lost earnings and other costs associated with the process at about $50,000. It would have been more morally satisfying for us to have earned that $50,000 and paid it in taxes, knowing that it was being channeled to less fortunate Americans to help them adjust to the marginal labor-market impact of my wife's immigration.
Creating a new channel of immigration can't make guest workers worse off. If surtaxes and mandatory savings are too big a burden, they simply won't come, and they'll be in the same position as before. You can never harm a person by giving him one more option.
Hobbes, Locke and Border Enforcement
Since there's been persistent divergence between de jure and de facto US policy on immigration, any new policy proposal needs to come with a comment on enforceability. Here, too, taxing rather than restricting immigration has its advantages.
There's a widespread belief that the federal government is willfully refusing to enforce our immigration laws. I doubt it. Consider the following back-of-the-envelope calculation: "The INS inspects approximately 300 to 350 million foreign nationals each year for admission to the United States," according to the testimony of one Mark A. Mancini before the Judiciary Committee in 1999. Subtracting 24 million who actually do come, let's round that off to 300 million would-be visitors or migrants. Pew Research Center estimates that 500,000 cross the southern border each year. Another 100,000 may overstay their visas. This implies that -- if applicants for US visas are a reasonable proxy for the number who wish to come -- our border regime deters or prevents 99.8% of unauthorized would-be entrants to the United States. That's not an "open system of non-borders," as Victor Davis Hanson has described it. The US border regime must be one of the most effective systems of mass coercion in human history. Yet it still falls short.
A year ago I wrote an article called "Hobbes, Locke, and the Bush Doctrine," which began with the words: "A struggle is underway between two ideas: liberal democracy and sovereignty... It goes back to 17th-century England, where the respective proponents of the two views were John Locke and Thomas Hobbes."
I used this conceptual framework to discuss the Iraq War, but Locke and Hobbes are equally applicable to immigration. Locke believed that government is based on a social contract. A contract implies consent. When Jefferson and the Founding Fathers affirmed, in the Declaration of Independence, that "governments... derive their just powers from the consent of the governed," they were channeling Locke. Foreigners are not part of our social contract. With respect to them, we are in a state of nature. To Locke, the moral law is binding in the state of nature, so they cannot justly do, or threaten, violence to our persons or property, nor vice versa. Hence, in the Lockean framework, our government does not have the "just power" to prevent the entry of (peaceful) foreigners through coercion. Historian Paul Johnson describes immigration to America in 1815, when the American polity was closer to its Lockean roots:
"It was an astonishing moment of freedom in the world's history. An Englishman, without passport or papers, health certificate or any other documentation -- without luggage for that matter -- could plunk down £10 at a shipping counter in Liverpool and go aboard. He got nothing but water on board and had to provide for his own food. He might go down to the bottom but, if lucky, in due course he went ashore in New York, no one asking him who he was or where he was going. He then vanished into the entrails of the new society." (The Birth of the Modern, p. 204)
Hobbes believed in a social contract, too, but "consent" could be exacted by force. For Hobbes, in the absence of a social contract, the moral law is not binding. So, since illegal immigrants are not part of our social contract, we can do anything we want to them, shut them out, deport them, kill them, whatever.
Our border policies can be justified in Hobbesian terms but not in Lockean terms. Of course, we are free to be eclectic in our appropriation of 17th-century philosophers' ideas. The problem is that our polity is generally a Lockean one, and as such it is not good at enforcing Hobbesian laws. We regard illegal immigrants, in Lockean fashion, as human beings with rights and dignity. This attitude is not consistent with the creation of effective deterrents to illegal immigration. Since illegal immigrants are hard to catch, and their economic payoff is huge, punishment adequate to deter them would have to be very severe. Probably nothing short of regular pogroms would work. A Hobbesian would have no objections to that ("the Soveraigne is judge of what is necessary for the Peace and Defence of his Subjects") but we do.
Unlike immigration restrictions, immigration taxes are compatible with the principle of consent of the governed. A foreigner who comes to America with a guest-worker visa would thereby consent to pay the associated taxes. A foreigner who comes here without a visa would be guilty, not so much of illegal entry as of a form of tax evasion, and the state would respond, not by deporting him, but by confiscating his property. Enforcement would still be a challenge and require political will, but it would be possible, as it is not now, to get incentives right within the constraints of our ideas of justice.
A Paradigm Shift
In principle, since taxing rather than restricting immigration is in the interests of the median voter, a majoritarian democracy should be willing to pass it. Yet the idea of using immigration as a revenue source to offset perceived negative externalities has hardly been mentioned in the immigration debate. I don't think doubts about its feasibility are the reason. Rather, there's an ethical hang-up: people think it's discriminatory to make immigrants pay higher taxes, yet somehow it's not discriminatory to keep them out altogether, which hurts them much more.
Still, I think taxing immigration is an idea with a future, simply because it's the "rational middle ground" for which everyone is looking.
Nathan Smith is a TCS contributing writer.
Brooklyn Man Puts Tree House Up For Rent http://www.wnbc.com/news/9380962/detail.html
POSTED: 8:39 am EDT June 16, 2006
UPDATED: 9:58 am EDT June 16, 2006
Email This Story | Print This Story
NEW YORK -- Looking for a comfy abode in Brooklyn for
a price unthinkable in New York City's red-hot real estate market? Adam
Dougherty may be your man.
The Williamsburg sculptor put his backyard tree house up for rent as a gag on the Craigslist Web site; asking price $150.
Since last Saturday, the posting has drawn more than 30 prospective buyers, renters and vacationers.
Dougherty said he has no intention of getting into property
transactions, but said he is taken by the sincerity of the people who have
contacted him about the tree house.
33. HOW TO CREATE A COMPETITIVE INSURANCE MARKET
------------------------------------------------------------------------
Rep. John Shadegg (R-Ariz.) has introduced the Health
Care Choice Act
(H.R. 2355), which would increase access to individual
health coverage
by allowing insurers licensed to sell policies in one
state to offer
them to residents of any other state. If enacted, the
law would create
a more competitive, nationwide health insurance market,
says Devon M.
Herrick, a senior fellow with the National Center for
Policy Analysis.
Currently, the cost of individual health insurance varies
widely
from state to state. The Commonwealth Fund and e-HealthInsurance.com
compared the prices of policies in seven states with
varying degrees of
regulation. The policies had similar coverage and a deductible
of
about $500.
o A 25-year old male in
good health could purchase a policy
for $960 a
year in Kentucky. That policy would cost
about $5,880
in New Jersey.
o A similar policy available
in Kansas for about $1,548 costs
$5,172 in
New York State.
o A policy priced at $1,692
in Iowa and $2,664 in Washington
State would
cost $4,032 in Massachusetts.
The difference in premiums is mainly due to state regulations
rather than variation in health care costs, says Herrick.
The Health Care Choice Act would allow consumers to shop
for
individual insurance on the Internet, over the telephone
or through a
local agent. Residents of any state would be free to
choose among
policies from any insurer that offers them. The policies
would be
regulated by the insurer's home state. Thus, if consumers
do not want
expensive "Cadillac" health plans that pay for acupuncture,
fertility
treatments or hairpieces, they could buy from insurers
in states that
do not mandate such benefits. Consumers would be more
likely to find a
policy that fits their budget -- giving more people access
to
affordable insurance, says Herrick.
Source: Devon M. Herrick, "How to Create a Competitive
Insurance
Market," National Center for Policy Analysis, Brief Analysis
No. 558,
June 15, 2006.
For text:
http://www.ncpa.org/pub/ba/ba558/
For more on Health:
http://www.ncpa.org/iss/hea/
34. Where Would You Rather Be Sick?
By DAVID GRATZER
WSJ June 15, 2006; Page A14
Is socialized medicine the prescription for better health? A recent study comparing Americans and Canadians, widely reported in the press, seems to suggest just that. But there is much less here than meets the eye.
The study, based on a telephone survey of 3,500 Canadians and 5,200 Americans (conducted by Statistics Canada and the U.S. National Center for Health Statistics), was released by the American Journal of Public Health. According to it, Canadians are healthier and have better access to health care than Americans, and at lower overall cost. So is the Canadian system, where the government pays for and manages the health-care system, superior? "Our study," says co-author Dr. Steffie Woolhandler, "is a terrible indictment of the U.S. health-care system. Universal coverage under a national health insurance system is key to improving health."
It is not so clear that the survey data back up these claims. Consider access. According to the survey, Canadians are more likely to have a regular physician, to have seen a doctor in the past year, and to be able to afford medications. But the data are ambiguous; Americans are more likely to have received a pap test and mammogram, as well as treatment for high blood pressure. Moreover, Americans are generally more satisfied with their health care. (The survey did not ask about access to specialist care or diagnostic imaging.)
The survey's most trumpeted conclusion was that Canadians are healthier than Americans. According to co-author Dr. David Himmelstein, "We pay almost twice what Canada does for care, more than $6,000 for every American, yet Canadians are healthier, and live two to three years longer." The survey says Americans have higher rates of diabetes (6.7% vs. 4.7%), arthritis (17.9% vs. 16.0%) and high blood pressure (18.3% vs. 13.9%). Americans are also more likely to be obese and lead a sedentary lifestyle. It's damning stuff. But we shouldn't confuse problems in public health with flaws in health-care systems. Americans may be heavier than Canadians, but this speaks more to genetics, diet, exercise and culture than to the accessibility or inaccessibility of health services. The remedy for obese Americans will be found in less fast food and more gym memberships.
So how does American health care actually measure up? If we look at how well it serves its sick citizens, American medicine excels. Prostate cancer is a case in point. The mortality rate from prostate cancer among American men is 19%. In contrast, mortality rates are somewhat higher in Canada (25%) and much higher in Europe (up to 57% in the U.K.). And comparisons in cardiac care -- such as the recent Heart and Stroke Foundation of Canada study on post-heart-attack quality of life -- find that American patients fare far better in morbidity. Say what you want about the problems of American health care: For those stricken with serious disease, there's no better place to be than in the U.S.
Socialized health-care systems fall short in these critical cases because governments strictly ration care in order to reduce the explosive growth of health spending. As a result, patients have less access to specialists, diagnostic equipment and pharmaceuticals. Economist David Henderson, who grew up in Canada, once remarked that it has the best health-care system in the world -- if you have only a cold and you're willing to wait in your family doctor's office for three hours. But some patients have more than a simple cold -- and the long waits they must endure before they get access to various diagnostic tests and medical procedures have been documented for years. Montreal businessman George Zeliotis, for example, faced a year-long wait for a hip replacement. He sued and, as the co-plaintiff in a recent, landmark case, got the Supreme Court of Canada to strike down two major Quebec laws that banned private health insurance.
Dr. Karen Lasser, the study's third author, says that "Based on our findings, if I had to choose between the two systems for my patients, I would choose the Canadian system hands down." Perhaps she would. But as a physician licensed in both countries, I'd disagree.
Dr. Gratzer is a senior fellow at the Manhattan Institute.
35. The Wrath of Grapes Font Size:
By Stephen Bainbridge : BIO| 12 Jun 2006
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wine-drinking http://www.tcsdaily.com/article.aspx?id=061206B
Almost exactly one year ago, oenophiles received the Supreme Court's decision in Granholm v. Heald with glee and anticipation. Today, however, the harsh reality is that many of our hopes have been dashed.
In today's remarkable economy, with just a few minutes online, you can buy almost any product imaginable from almost anywhere in the world and have it delivered to your front door. Except wine.
The history books teach us that one of our Founding Fathers' primary motives for ditching the Articles of Confederation in favor of the U.S. Constitution was fear of economic Balkanization.
"[A] central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation." (Hughes v. Oklahoma, 441 U.S. 322, 325-326 (1979))
In order to prevent any such Balkanization, the Commerce Clause gave Congress plenary power to regulate commerce among the states and with foreign countries. In addition, the courts have interpreted the so-called "dormant" Commerce Clause as prohibiting states from discriminating against out-of-state producers or unduly burdening interstate commerce.
The drafters of the 21st Amendment to the Constitution, which repealed Prohibition, however, gave states considerable power to regulate alcohol by providing that:
"Section 2. The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."
In most states, regulations passed pursuant to the powers thus granted by Section 2 of the 21st Amendment created an elaborate three tier system for distributing alcohol: Producers sell to wholesalers who sell to retailers who sell to consumers. Unlike most products, which consumers can buy directly from producers, in many states the three tier alcohol distribution system is rigidly enforced by laws banning direct-to-consumer sales by producers (or, for that matter, wholesalers).
As interest in wine grew, and especially as the wine regions of California became major tourist destinations, consumers began looking for ways to ship wine home when they visited Napa or Sonoma on vacation. Wine enthusiasts around the country also began looking for ways to buy boutique and cult wines sold only by mail order. Once the Internet age began, consumer demand for interstate wine shipping rights soared.
A number of states, especially those with growing wine industries of their own, liberalized their Prohibition-era distribution laws to allow direct-to-consumer sales. In many states, however, the vested interest of liquor wholesalers and retailers in preserving the existing three tier system prevailed. State legislatures effectively controlled by those interest groups blocked reform efforts.
We thus ended up with precisely the sort of economic Balkanization the Constitution was intended to prevent. Some states allowed interstate direct-to-consumer sales freely, others allowed such sales but subject to conditions and requirements that varied widely from state to state, others allowed intra- but not interstate direct-to-consumer sales, and some still banned all direct-to-consumer sales. From the consumer perspective, whether you could order wine online thus depended on where you lived. From the producer perspective, the maze of state laws made it hard for small wineries that depend on direct-to-consumer sales to compete with the major brands.
In Granholm, the Supreme Court by a 5-4 vote struck down New York's and Michigan's bans on direct-to-consumer wine sales. Unfortunately, the court did so on the narrowest possible grounds, holding those bans violated the Commerce Clause because they were discriminatory and protectionist:
"States may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses."
Accordingly, Granholm did nothing to protect consumers from state laws banning direct-to-consumer sales by both in- and out-of-state wineries.
According to FreeTheGrapes.org, 17 states have such bans in place. In many of the other 33 states, direct-to-consumer sales are allowed but remain subject to a confusing welter of often inconsistent regulations. In all but 12 states, moreover, interstate shipment of wine by retailers is prohibited. In short, we're no closer to a true national wine market; instead, both producers and consumers are still mired in the economic Balkans.
Interestingly, however, a new line of attack has been launched against the three tier system. Costco has sued the State of Washington, arguing that Washington's especially strict version of the three tier system violates the Sherman Antitrust Act. Last month, U.S. District Judge Marsha Pechman agreed with Costco.
There is no doubt that the three tier system is anti-competitive. As Ken Starr has explained:
"Who could possibly support these discriminatory laws? Those who have the most to lose from repeal: the liquor distributors, known in the trade as the "booze boys." These distributors exact massive, and in many areas oligopolistic, profits from wineries as a price for distributing their products to retail stores -- and in some cases, refuse to distribute wine from smaller wineries at all. Like pirates exacting a ransom, they add no value. But they have a powerful incentive to keep the current system in place."
The impact on consumers is clearly negative, as demonstrated by a study of Virginia's direct-to-consumer sales ban, which found that the "ban reduces the varieties of wine available to consumers and prevents consumers from purchasing some premium wines at lower prices online."
The Costco decision is now up on appeal, raising very difficult questions about the relationship between the 21st Amendment and the antitrust laws. Even if Costco prevails, moreover, the present suit deals not with direct-to-consumer sales but rather direct producer-to-retailer sales. In addition, Washington's version of the three tier system is especially draconian, eliminating almost all market forces so as to keep prices high.
Yet, the Costco suit gives oenophiles hope for several reasons. First, given the clear evidence that state regulation is anti-competitive, the case for antitrust relief is overwhelming provided the 21st Amendment obstacle can be cleared. Second, Costco has a strong incentive to shake up the three tier system. Savvy wine buyers know that Costco has become a major player, offering very high quality wine - such as first growth Bordeaux and even some California cult wines - at bargain basement prices. At the moment, Costco ships wine only to California, Idaho, Illinois, New Mexico, Oregon and West Virginia addresses. And, it's not just Costco. Even Amazon is getting into the mix, through a partnership with Wine.com.
A year after Granholm, the fight to free the grapes goes on. Many battles will still have to be fought before we have a true national wine market. Finally, however, consumers have some deep-pocketed interests on our side.
Steve Bainbridge is a Professor of Law at UCLA. He writes
two popular blogs: ProfessorBainbridge.com and ProfessorBainbridgeOnWine.com.
36. Ominous Neutrality By STEVE FORBES
WSJ June 12, 2006; Page A12
If Washington followed Hollywood's lead and gave an academy award for the best political sound bite of the year, "Net Neutrality" would win in a walk for 2006.
Net Neutrality has everything a good sound-bite needs. It's short, alliterative, easy to remember and so elastic in meaning that anybody can define it according to their own agenda.
That's exactly what's happening in Congress right now, where well-financed lobbyists are pushing for Net Neutrality legislation. According to their benign-sounding definition of Net Neutrality, it simply means that Internet network operators like the phone and cable companies would have to give equal treatment to all traffic on their networks, without giving anybody's content preference in handling.
But scratch the surface of what the Net Neutrality crowd is really asking for and Net Neutrality shifts from benign to ominous. The Net Neutrality lobbyists want Congress to pass innovation-stifling restrictions on what companies like Verizon and AT&T can do with the new high-speed broadband networks that these companies haven't even finished building yet.
These networks are the superhighways for transporting Internet content and services. They will also permit Verizon and AT&T to offer Internet-based cable TV programming in competition with the cable companies, which are already competing in telecom services. Slapping these networks with premature, unnecessary regulations would be an inexcusable barrier to the tradition of innovation at the heart of the Internet.
Phone companies are investing billions of dollars in network innovation. They need to earn a return on their investment. One logical way is to use a tiered pricing system that charges a premium price for premium services -- which means super-high-speed services that gobble extra bandwidth on the network. Those who are happy with standard broadband speeds would continue to pay the same prices they pay now.
This is the same concept as mail service. If you want to send a letter from New York to Los Angeles and delivery in four days to a week is OK, you can do it for the price of a 39-cent postage stamp. But if you want the letter delivered without fail by 10 a.m. the next morning, you upgrade to FedEx and pay for the extra service you need.
Applying this principle to the Internet sounds like the free market at work to me. But the Net Neutralizers have responded with manufactured indignation, claiming that it's discrimination and somehow tramples on the egalitarian spirit of the Internet.
Surprisingly Google, E-Bay and other high-tech companies have become big supporters of this flavor of Net Neutrality; they supposedly fear discrimination from Internet providers. But they have no real evidence to back-up such fears. If problems do arise, then these can be dealt with specifically.
Passing Network Neutrality legislation would be a re-run of the disastrous Telecom Act of 1996 which forced telecom companies to provide network access to competitors at below market prices. That certainly put a chill on network innovation. After years of wasteful lawsuits and regulatory infighting, the network access monster has gone away. But it was a big factor in letting America slip into the high-tech Stone Age, with consumer broadband services lagging far behind what's available in countries like Japan or South Korea.
Members of Congress are on the verge of updating the Telecom Act to bring it into sync with a communications industry that's been transformed by Internet technology. As they do that, we can only hope they don't compromise the future of this vital industry by falling for the rhetoric of Net Neutrality. After all, what network operator would be silly enough to keep investing billions in network innovations if the fruits of its innovation had to be given away at below cost?
Mr. Forbes is president & CEO of Forbes, Inc. and editor-in-chief of Forbes magazine.
37. Gabelli's Bidding
WSJ June 12, 2006; Page A12
The Justice Department settled its spat with money manager Mario Gabelli over cellphone licenses last week, but that's not all, folks. The story behind this story is a government process of auctioning telecom spectrum that invites the kind of political gamesmanship that tripped up Mr. Gabelli.
We've written before about the infrequency of the government's spectrum auctions, which leads to a shortage of licenses for wireless carriers and helps retard U.S. broadband deployment. It also means consumers pay higher prices for cell phone use, and advanced services are delayed. Later this summer, the Federal Communications Commission says it will finally accept bids for so-called third-generation, or 3G, spectrum licenses that are used for high-speed Internet connections and video. It's about time; Europe auctioned off 3G licenses way back in 2000 and 2001.
Separate from the government hoarding spectrum, however, is the bizarre way it conducts the auctions. An auction with true competitive bidding doesn't play favorites. But the FCC is under orders from Congress to discriminate against any bidder with enough assets to make productive use of the spectrum.
Enter Mr. Gabelli, whom Justice accused of setting up front companies to benefit from auction discounts he couldn't receive otherwise. As the Journal has reported, when the FCC first began auctioning cellphone licenses in 1994, "Congress told it to grant preferences for small business, women, minority and rural firms. Some got bidding discounts as deep as 45%." Following the 1995 Supreme Court Adarand decision imposing a stricter standard for affirmative action programs, the FCC dropped the race and sex preferences. But it continues to rig the auctions in favor of small business and rural firms.
This policy introduces all manner of inefficiencies. To qualify as a small business under the FCC auction rules, you can't have substantial assets. Yet building and maintaining a nationwide network is not a mom-and-pop venture; the wireless industry has very high fixed costs. It would be helpful if the FCC's auction rules started reflecting this reality instead of encouraging undercapitalized "small businesses" to participate in multibillion dollar airwave auctions.
Congress pushes these FCC set-asides in the name of pleasing certain political constituencies, but the goal should be to get the spectrum in the hands of bidders who have the means to get it to market. Steering spectrum toward individuals who can't afford to do anything productive with it isn't serving consumers.
You'd think the government would have learned its lesson from the 1996 auction debacle, when the FCC extended business and financial credits to small-business participants. Companies like NextWave won licenses they couldn't afford and ultimately were forced to declare bankruptcy. Some of these companies then hid those licenses in bankruptcy protection, keeping valuable spectrum off the market for nearly a decade before it finally was sold to the major carriers that could afford to utilize it.
The Gabelli fiasco is another byproduct of these sham auctions. Mr. Gabelli was accused of buying stakes in companies that qualified for cut-rate licenses and then selling those licenses for a profit. Put another way, he found a niche created by government-engineered inefficiencies in the spectrum allocation process and exploited it.
News reports say Justice has agreed to drop the civil-fraud
charges in return for a fine of more than $100 million, though Mr. Gabelli
insists that he played fair and has characterized the lawsuit as "extortion."
In April, the FCC approved new rules aimed at closing the loopholes that
allowed large and small companies to team up for discount licenses. But
policy makers would be better off simply allowing these auctions to proceed
without interference. And so would consumers.
38. America at Work By EDWARD P. LAZEAR and KATHERINE
BAICKER
WSJ June 5, 2006 May 8, 2006; Page A18
WASHINGTON -- There is no question that the U.S. is experiencing strong economic gains, with GDP growing at an impressive annual rate of 4.8% in the last quarter. The economy created about two million jobs last year, and Friday's jobs report for April showed that we are on track to add more than two million new jobs this year.
This job growth is undeniable, but some have questioned whether workers' wages are growing as well. Friday's report brings good news on this front, too, showing that average hourly earnings rose this year at the fastest rate in nearly five years. In recent months, hourly compensation grew at an impressive annual rate of 5.7%. Per capita personal disposable income, a good measure of Americans' spending power, has grown over 8%, or $2,100, since 2001. Consumer behavior is further evidence of this economic well-being: Markets are strong, and investment and consumption are robust.
Still, some claim that the benefits of this economic boom are being enjoyed only by the relatively well-off, and that we have left the rest of our workforce behind. Is this true? Over the last 25 years, the wages of the skilled have continued to grow faster than the wages of the less skilled. For example, the wages of the college-educated have grown by 22% since 1980, while the wages of high-school drop-outs has fallen by 3%.
This does not mean, however, that the rich are benefiting at the expense of the poor. Instead, it means that the return to investing in education and training continues to grow. Most economists believe that the increased divergence between the wages of the skilled and the unskilled reflects technological advancements that make workers' skills more valuable. Having an economy that places a greater value on skills and education is a good thing. Our economy can grow more quickly when the returns to investment are high, and human capital investment is the most important form of investment.
This presents us with opportunities and challenges. We have the opportunity to increase our standard of living as our workers reap the benefits of the skills that they have acquired. We face the challenge of ensuring that all Americans have access to the education and training that the modern economy values so highly.
The data show that it is this greater return to investing in education that is driving the long-run widening of the income distribution. The cause is not increases in immigration or international trade, as some have alleged. First, wages for less-skilled workers have not declined with growing trade, even in sectors of the economy with the greatest import competition. Second, some of the groups that have experienced the highest wage growth have also seen increased immigration swelling their ranks. Silicon Valley is full of highly paid immigrants and native-born Americans who work side-by-side, earning very high salaries in the high-tech sectors of our economy. For less-skilled workers, studies suggest that immigration has only a modest effect on wages of the native-born. Third, those who have examined the data systematically find that trade and immigration can account for at most a small proportion of the increased wage spread that has occurred over the past 25 years.
To make sure that the gains from technology are enjoyed by all, we must be vigilant in providing training and educational opportunity for all. Programs such as the No Child Left Behind education reform and American Competitiveness Initiative are vital steps in that direction. Perhaps even more important are steps that families can take to provide the environment and encouragement that is so helpful in producing an educated population. The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings.
Through education, hard work and entrepreneurship, there is great opportunity for Americans to improve their economic circumstances over their lifetimes. Half of those who are in poverty escape that status within three years. One-fifth of those in the bottom quarter of the income distribution move up within a year. Most Americans' income rises substantially the longer they are in the labor force. The average worker who was between 25 and 34 years old in 1994 earned 52% more in real terms in 2004. Those who invest in education increase dramatically the likelihood that they will enjoy these improvements in their standard of living.
The labor market is strong. Job growth has been impressive, and unemployment is at a very low 4.7%. Productivity is increasing at more than 3% per year. This strong economy means that we can look forward to even higher wages and living standards in the future. We should continue to strive to ensure that all Americans are able to obtain the skills that will enable them to share in this prosperity.
Mr. Lazear is chairman, and Ms. Baicker a member, of the President's Council of Economic Advisers.
Friday, June 2, 2006 ~ 12:09 p.m., Sven Larson Wrote:
Higher minimum wages mean higher unemployment. Politicians
love stunts that appear to put quick bucks in voters' pockets, and raising
the minimum wage is a good example. But as David Henderson of the National
Center for Policy Analysis explains, a higher minimum wage destroys jobs:
Various state legislators
and interest groups around the United States are pushing for increases
in the minimum wage. In California, for example, even Republican Gov. Arnold
Schwarzenegger now advocates raising the state minimum wage from its current
$6.75 an hour to $7.75 by July 2007. But when the minimum wage law confronts
the law of demand, the law of demand wins every time. And the real losers
are the most marginal workers - the ones who will be out of a job. ...The
law of demand says that at a higher price, less is demanded, and it applies
to grapefruit, cars, movie tickets and, yes, labor. Because a legislated
increase in the price of labor does not increase workers' productivity,
some workers will lose their jobs. Which ones? Those who are the least
productive. Minimum wage laws mostly harm teenagers and young adults because
they typically have little work experience and take jobs that require fewer
skills. That's why economists looking for the effect of the minimum wage
on employment don't look at data on educated 45-year-old men; rather, they
focus on teenagers and young adults, especially black teenagers.
http://www.ncpa.org/pub/ba/ba550/
39. The Negative Effects of the Minimum Wage Brief Analysis
No. 550
Thursday, May 4, 2006 Get Adobe Acrobat ReaderRead
Article as PDF | Get Adobe Reader
http://www.ncpa.org/pub/ba/ba550/
by David R. Henderson
Various state legislators and interest groups around the
United States are pushing for increases in the minimum wage. In California,
for example, even Republican Gov. Arnold Schwarzenegger now advocates raising
the state minimum wage from its current $6.75 an hour to $7.75 by July
2007. But when the minimum wage law confronts the law of demand, the law
of demand wins every time. And the real losers are the most marginal workers
— the ones who will be out of a job. [See the figure.]
Effects of Minimum Wage Increase on the Demand for Unskilled
Young Workers
Creates Unemployment. In a free labor market, wage rates reflect the willingness of workers to work (supply) and the willingness of employers to hire them (demand). Worker productivity is the main determinant of what employers are willing to pay. Most working people are not directly affected by the minimum wage because their productivity and, hence, their pay, is already well above it.
The law of demand says that at a higher price, less is demanded, and it applies to grapefruit, cars, movie tickets and, yes, labor. Because a legislated increase in the price of labor does not increase workers' productivity, some workers will lose their jobs. Which ones? Those who are the least productive.
Minimum wage laws mostly harm teenagers and young adults because they typically have little work experience and take jobs that require fewer skills. That's why economists looking for the effect of the minimum wage on employment don't look at data on educated 45-year-old men; rather, they focus on teenagers and young adults, especially black teenagers. Paul Samuelson, the first American winner of the Nobel Prize in economics, put it succinctly back in 1970. Analyzing a proposal to raise the minimum wage to $2 an hour in his famous textbook, Economics , he wrote, "What good does it do a black youth to know that an employer must pay him $2 an hour if the fact that he must be paid that amount is what keeps him from getting a job?"
A comprehensive survey of minimum wage studies found that a 10 percent increase in the minimum wage reduces employment of young workers by 1 percent to 2 percent. To put that into perspective:
* Gov. Schwarzenegger's proposed 15
percent increase in the state minimum wage would destroy about 35,000 to
70,000 unskilled jobs — putting 1.5 to 3 percent of young Californians
out of work.
* Overall, the proposed minimum wage
increase in California would eliminate about 70,000 to 140,000 jobs.
* A 15 percent increase in the minimum
wage nationwide would destroy about 290,000 to 590,000 young people's jobs,
and about 400,000 to 800,000 jobs overall.
Fortunately, and to his credit, Gov. Schwarzenegger wants to avoid indexing the minimum wage to either the consumer price index or a wage index, as the French government did in 1970. Indexing the minimum wage makes it much harder to get the inflation-adjusted minimum wage down and makes it permanently harder for the least-skilled workers to find jobs. The rising minimum wage in France since then has added to the country's youth-unemployment woes.
Encourages Teenagers to Drop Out. Some minimum wage advocates argue that teenagers should be in high school or college anyway — not working — and therefore the loss of jobs for young workers is somehow not very harmful. Ironically, though, economic studies have shown that a higher minimum wage entices some teenage students to drop out. With fewer jobs to go around and a greater number of dropouts, some newer dropouts take jobs from the less-educated and lower-productivity teens who had already left school.
Even worse, the failure to find work early in their lives harms young people later in their work lives. For example, economists David Neumark of the Public Policy Institute of California and Olena Nizalova of Michigan State University found that even people in their late 20s worked less and earned less the longer they were exposed to a high minimum wage, presumably because the minimum wage destroyed job opportunities early in their work life.
Hurts the Poor. Proponents of a higher minimum wage often argue that that it's difficult to support a family when the only breadwinner earns the current minimum wage. This claim is flawed, for three reasons.
First, for a minimum-wage increase to help a single breadwinner earn money for his or her family, the worker must have a job and keep it at this higher wage. A job at $5.15 an hour, the current federal minimum, is much better than no job at $6.00 an hour.
Second, increases in the minimum wage actually redistribute income among poor families by giving some higher wages and putting others out of work. A 1997 National Bureau of Economic Research study estimated that the federal minimum-wage hike of 1996 and 1997 actually increased the number of poor families by 4.5 percent.
Third, a relatively small percentage of the workers directly affected are the sole breadwinner in a family with children. A study by the Employment Policies Institute shows that in California, for example, only 20 percent of the workers who would have been directly affected by a proposed 2004 minimum-wage increase were supporting a family on a single, minimum-wage income. The other 80 percent were teenagers or adult children living with their parents, adults living alone, or dual earners in a married couple.
Reduces Other Job Benefits. Even when minimum-wage increases don't put low-wage workers out of work, they don't necessarily help them either. The reason: Employers respond to forced higher wages by adjusting other components of employee compensation, such as health insurance or other benefits. Although few minimum wage workers have employer-provided health insurance, employers have found other ways to adjust, such as cutting on-the-job training. In their study of changes in the minimum wage laws between 1981 and 1991, Neumark and Federal Reserve Board member and economist William Wascher concluded, "[M]inimum wages reduce training aimed at improving skills on the current job, especially formal training."
Reduces Competition. The main proponents of the minimum wage are labor union officials who use substantial resources to lobby and testify for higher minimum wages. But they have a self-interested motive: hobbling the competition. Almost all union members make well above the minimum wage, but by getting the minimum wage increased, they can reduce competition from less-skilled workers who would receive lower wages. Similarly, large employers who pay more than the minimum, Wal-Mart being the most recent example, also push for higher minimum wages, presumably to make things more difficult for their low-wage competitors.
In addition to labor unions and major corporations, some
politicians also like to advocate a higher minimum wage. Politicians in
the Northeast, for example, have traditionally favored high federal minimum
wages to stem the flow of jobs from the North to the lower-wage South.
Indeed, in 1957, Massachusetts Sen. John Kennedy argued for a higher minimum
on the grounds that it would make low-wage black workers in the South less
competitive with the higher-wage white workers whom he represented.
Imposes an Employer Mandate. Although economists generally
focus on the negative effects of the minimum wage on vulnerable workers,
there is another group that also deserves to be considered: employers.
How can we justify forcing employers, the very people who are taking risks
to provide jobs in the first place, to pay a higher wage? If "society"
decides that unskilled people should be paid more, why single out employers
rather than, say, taxpayers in general, as the people to pay them?
David R. Henderson is a research fellow with the Hoover
Institution and an economics professor at the Naval Postgraduate School.
He is coauthor of Making Great Decisions in Business and Life (Chicago
Park, Calif.: Chicago Park Press, 2006).
40. Tradeable Gasoline Rights By MARTIN FELDSTEIN
WSJ June 5, 2006; Page A10
The rapid rise in the price of gasoline has produced calls for tougher fuel economy standards on new cars and trucks. Although reduced gasoline consumption would be good for the environment and for national security, such a regulatory change would be a mistake. A far better approach would be a system of tradeable gasoline rights, or TGRs. These could be distributed in a way that actually raises the income of a majority of households while giving everyone an incentive to reduce gasoline consumption.
In a system of tradeable gasoline rights, the government would give each adult a TGR debit card. The gasoline pumps at service stations that now read credit cards and debit cards would be modified to read these new TGR debit cards as well. Buying a gallon of gasoline would require using up one tradeable gasoline right as well as paying money.
The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. To keep that total unchanged in 2007, the government would distribute 110 billion TGRs. To reduce total gasoline consumption by 5%, it would cut the number of TGRs to 104.5 billion.
The government could distribute TGRs to reflect geographic differences in driving patterns. Additional TGRs would be distributed to each debit account at the end of each month to avoid problems of expiring rights. Businesses that use trucks would also get TGRs.
A key feature of these gasoline rights is that they are tradeable. Individuals with more TGRs than they need could sell the excess, while those who want to use more gallons than their allocation would have to buy extra TGRs. The gasoline companies could act as clearing houses for these trades, using their gasoline pumps to sell TGRs in the same way that they sell gasoline or to buy TGRs in exchange for the cash needed to purchase gasoline. Other institutions like banks could also trade TGRs for cash. And individuals could of course buy and sell TGRs among themselves by letting others use their card.
The market price of a TGR would depend on the number of TGRs that the government distributed relative to the number of gallons that households would buy if there were no TGR system. The smaller the number of TGRs, the greater would be the price per TGR; the exact price would be determined in the market for these tradeable rights. The money price of gasoline would continue to reflect the world price of oil and the local cost of refining and distribution.
If the price of a TGR turned out to be 50 cents, an individual who buys an extra 20 gallons of gasoline would use up $10 worth of TGRs. If he avoids the purchase -- by driving less, driving at speeds that use less gas, or driving a more fuel-efficient car -- he could sell the 20 TGRs for $10.
The 50 cent price of the TGR would have the same incentive effect as a 50 cent gasoline tax. But while a gasoline tax lowers everyone's real income, the TGR system creates winners as well as losers. Someone who receives 800 TGRs for a year but only needs 500 would pocket $150 by selling his unwanted TGRs. But even such individuals would still face the right incentive: Every extra gallon consumed would reduce their net cash by 50 cents.
Advocates of a gasoline tax argue that it would produce extra revenue that could be used to reduce the budget deficit or to finance equally large cuts in personal taxes. My own guess is that the increased revenue from a higher gasoline tax would be more likely to finance additional government spending, just as it does in Europe. In any case, it is hard to believe that Congress would now respond to the public's unhappiness over high gasoline prices by enacting a gasoline tax that would raise the price even more.
That aversion to a higher gasoline tax is why tougher mileage standards for new cars is back on the legislative table. They would, however, do virtually nothing to lower the price of gasoline. And if individuals want to economize on gasoline by driving smaller or more fuel-efficient cars, they can do so now without government action. Experience shows that car companies would quickly change the mix of cars that they produce if buyers show an interest in more fuel-efficient vehicles.
Although reducing U.S. gasoline demand could cause some fall in the world oil price, the effect would be quite small. Since U.S. gasoline consumption accounts for only about 15% of total world-wide oil consumption, even a very large 20% reduction in U.S. gasoline consumption would reduce global oil demand by only 3%. Whether this would have any effect at all on the global oil price and therefore on U.S. gasoline prices would depend on whether the oil producing nations cut back on their production. A 3% production fall could leave oil and gasoline prices unchanged.
Higher gas mileage standards would reduce gasoline demand in a very inefficient way by focusing exclusively on the rated mileage of new cars. Separate fuel efficiency standards for each type of vehicle -- one of the options now being considered -- would be even worse because it would provide no incentive to switch to more fuel-efficient cars.
Requiring higher mileage standards on new cars would do very little to reduce total gasoline consumption in the near term because each year's new cars are only about 10% of the total cars on the road. Unlike the system of TGRs that raises the effective cost per gallon, the new car standard would do nothing to change the behavior of owners of existing cars. But the TGR system would cause owners to economize on gasoline by driving fewer miles, driving at speeds that use less gasoline, using tires that improve miles per gallon, and servicing their engines to maintain fuel efficiency. And of course the higher effective cost of gasoline would also cause new car buyers to prefer more fuel-efficient vehicles.
In short, a system of tradeable gasoline rights would be better than either higher taxes or tougher new car regulations. That a majority of households could benefit from the TGR system while all households would have an increased incentive to economize on gasoline is both an economic and a political advantage. It would be an efficient way to reduce gasoline that Congress could actually pass.
Mr. Feldstein, professor of economics at Harvard, is a
member of The Wall Street Journal's Board of Contributors.
41. Death and Taxes By EDWARD C. PRESCOTT
WSJ June 1, 2006; Page A14
You can't take it with you. Too bad, because it would sure be convenient to set up an eternal rollover account for financial assets. Just think of all the time and resources that would be saved if people didn't have to hire expensive lawyers and clever accountants to get around the government's attempt to grab a share of their earthly bounty. Not to mention the better use of those accountants' and lawyers' time.
And while we're at it, our public employees have better things to do than construct estate tax codes, design Web sites with FAQs and answer phones to explain how those taxes work, and then penalize those who unwittingly or otherwise skirt the law. Those costs are real and must be part of the equation when considering the efficacy of estate taxes.
These and other issues loom large as Congress grapples with how to deal with coming changes in estate tax law. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax is slated to expire in 2010 -- for one year -- and return in 2011 with personal exclusion rates that are below current levels. Today, Americans can transfer $2 million to beneficiaries federal tax free, with that rate increasing to $3.5 million in 2009 before the big switch in 2010. The House has already passed a bill to make the repeal of estate taxes permanent and the ball is now in the Senate's court.
Putting aside the inefficiencies of such inconsistent rule making, the point remains that people cannot take their IRAs with them, and the fundamental question is this: Who gets it? It's a simple question that deserves a simple answer, but when a certain little word -- tax -- gets involved, things are never very easy.
Economists like simplicity. It's one of our most endearing traits. As soon as you complicate things by getting between a man and his intentions you create all sorts of distortions that are often suboptimal (and are the devil to model). Taxes excel at these shenanigans. And those distortions don't end when the grim reaper comes calling. Ashes to ashes, dust to trust.
In the end, though, all those opportunity costs -- both private and public -- would be worth absorbing if we were really getting a good return on our estate taxes. From what I can tell, there are two main arguments in favor of an estate tax: the increased revenue that government receives to go about the people's business; and the desire to somehow balance life's unfairness by limiting the amount of capital assets that "the rich" can leave their kids.
On the second point, there is little to say except that what's fair for one is often penalty for another. What is fair, for example, about telling someone that he will be unable to distribute his hard-earned money, which has already been taxed once, to his heirs as he sees fit? Such a person has zero incentive to accept an estate tax for which he sees no justification. He will do his best to try to avoid this tax through every legal means necessary, after which he may be inclined to consume more than he otherwise would, or just quit working sooner than otherwise. And while there's nothing wrong with consuming one's assets, if such consumption comes at the expense of capital that would otherwise be put to better use, such consumption is suboptimal. Recent empirical work on the disincentive effects of estate taxes has proven these phenomena true.
And that gets to our first point about the supposed budgetary benefits of such a tax. Since an estate tax is really just another name for a tax on capital income, then there is certainly no justification for such a tax. I, and others, have written before in these pages about the inefficiency of capital income taxes, and there's no need to revive those arguments here, except to say that we can only grip the neck of our vibrant economic goose so tightly before it eventually dies and quits laying those golden eggs. And many of those golden eggs come in the form of capital that allows descendents to keep family businesses intact, or to begin new businesses that fuel our economy.
Besides, even if estate taxes were not inefficient and could be construed as fair, they would still do little to address the budget deficit. In 2003, net estate taxes accounted for $20.7 billion, a drop in the bucket of an $11 trillion economy. Clearly, we are not going to balance the budget by grave robbing.
Yet what about all the money that is left in bequests to fund university alumni buildings, art museum wings and public broadcasting? If we abolish the death tax, won't charitable organizations be hurt? I admit to a soft spot for this argument, but the fact is that people will still give to charity. In 2003, charitable contributions reported on 1040 income tax forms totaled $145 billion, which is roughly 10 times the $14.6 billion charitable contributions reported on the estate tax forms. This indicates that people are motivated to give to their favorite causes for a variety of reasons and will not cease such philanthropy if estate taxes are abolished; also, fundraisers will not lose their incentives.
The old maxim says that there are only two things in life that we can't avoid, death and taxes, but why pile on by combining the two? The Senate should join the House in permanently repealing the estate tax.
Mr. Prescott, senior monetary adviser to the Federal Reserve
Bank of Minneapolis and professor of economics at the W.P. Carey School
of Business at Arizona State University, is a co-recipient of the 2004
Nobel Prize in economics.
42. Economics of prices May 31, 2006 by Walter E. Williams ( bio | archive | contact )
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Here's what one reader wrote: "Williams, I can understand
how the destruction of Hurricane Katrina and Middle East political uncertainty
can jack up gasoline prices. But it's price-gouging for the oil companies
to raise the price of all the gasoline already bought and stored before
the crisis." Several other readers made similar allegations. Such allegations
reflect a misunderstanding of how prices are determined.
Let's start off with an example. Say you owned a small
10-pound inventory of coffee that you purchased for $3 a pound. Each week
you'd sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half
of its coffee crop, causing the world price of coffee to immediately rise
to $5 a pound. You still have coffee that you purchased before the jump
in prices. When I stop by to buy another pound of coffee from you, how
much will you charge me? I'm betting that you're going to charge me at
least $5 a pound. Why? Because that's today's cost to replace your inventory.
Historical costs do not determine prices; what economists call opportunity costs do. Of course, you'd have every right not to be a "price-gouger" and continue to charge me $3.25 a pound. I'd buy your entire inventory and sell it at today's price of $5 a pound and make a killing.
If you were really enthusiastic about not being a "price-gouger," I'd have another proposition. You might own a house that you purchased for $55,000 in 1960 that you put on the market for a half-million dollars. I'd simply accuse you of price-gouging and demand that you sell me the house for what you paid for it, maybe adding on a bit for inflation since 1960. I'm betting you'd say, "Williams, if I sold you my house for what I paid for it in 1960, how will I be able to pay today's prices for a house to live in?"
If there's any conspiracy involved in today's high gasoline prices, it's a conspiracy of cowardice and stupidity by the U.S. Congress. Opening a tiny portion of the coastal plain of the Arctic National Wildlife Refuge in Alaska to oil and gas production, according to the U.S. Geological Survey's mean estimate, would increase our proven domestic oil reserves by approximately 50 percent. The Pacific, Atlantic and eastern Gulf of Mexico offshore areas have enormous reserves of oil and natural gas, but like the Alaska reserves, they have been put off limits by Congress. Plus, the U.S. Office of Naval Petroleum and Oil Shale Reserves estimates the world supply of oil shale at 1.6 trillion barrels, of which 1.2 trillion barrels are in the United States.
Because of costly regulations and political restrictions, U.S. nuclear energy production is a fraction of what it might be. Nuclear power creates 75 percent of France's electricity, nearly 50 percent of Sweden's and only 20 percent of ours. Nuclear energy is very safe. That's something to keep in mind when we hear of tragic deaths of coal miners. There would be fewer mining deaths if we used less coal and more nuclear power for electricity generation.
You say, "What about the effect on prices of all those oil company profits and CEO pay and retirement benefits?" If Congress mandated that CEOs work for zero pay, gasoline prices would fall by less than a penny. If Congress mandated that oil companies earn zero profit, gasoline prices might fall by 10 cents; of course, we'd have to worry about gasoline availability next year.
CEOs tend to be cowards when dealing with politicians and environmental extremists, but I have a recommendation that requires only a modicum of courage. At each gasoline station they should put up photos, perhaps videos, of penguins, caribou, polar bears and other critters frolicking along Alaska's coastal plain. Then have a voice-over or caption reading:
Don't be selfish. Your paying $3, $4 and $5 a gallon for gas keeps these critters happy and their play space clear of oil rigs.
Dr. Williams serves on the faculty of George Mason University
in Fairfax, VA as John M. Olin Distinguished Professor of Economics
43. Mr. Paulson's Challenge By N. GREGORY MANKIW
May 31, 2006; Page A12
When Hank Paulson replaces John Snow as Treasury secretary, he will be taking stewardship of an economy that is enjoying low unemployment and brisk growth. But while Mr. Snow helped steer the economy through a recessionary storm, he leaves for Mr. Paulson a more daunting task -- getting the long-term fiscal numbers to add up.
To understand the challenge that Mr. Paulson faces, let's start with a fact about which every serious policy analyst agrees: The government budget is on an unsustainable path. Americans are living longer and having fewer children. Together with advances in medical technology that are driving up health-care costs, this demographic shift means that a budget crunch is coming when the baby-boom generation retires. The promises made to my generation for Social Security, Medicare and Medicaid are just not affordable, given the projected path of tax revenue.
Policy analysts diverge, however, on what to do about it. Those on the political left want to raise taxes to fund all those promises. Some want to go even further by expanding entitlements, such as providing taxpayer-financed national health insurance for all Americans. That is a feasible choice, as many European nations demonstrate, but it is not advisable. As we economics professors never tire of explaining, market economies allocate resources efficiently (with a few exceptions, which I will return to in a moment). Taxes distort incentives and debase market outcomes. In technical terms, they cause "deadweight losses." In less formal terms, taxes shrink the size of the economic pie, leaving most people with a smaller serving of prosperity.
Some supply-siders like to claim that the distortionary effect of taxes is so large that increasing tax rates reduces tax revenue. Like most economists, I don't find that conclusion credible for most tax hikes, and I doubt Mr. Paulson does either. Yet the supply-siders are right about one thing: Because higher tax rates reduce the size of the tax base, raising taxes generates less revenue that the "static" revenue estimates assumed in Washington would suggest.
One of Mr. Paulson's first briefings from the Treasury staff should be about what high taxes have done to the economies of Europe. According to research by Nobel laureate Edward Prescott and by economists Steven Davis and Magnus Henrekson, the high tax rates in Europe have reduced work effort and distorted the industrial mix. The Davis-Henrekson study reports that a tax increase of 12.8 percentage points (a change of one standard deviation) reduces work for an average adult by 122 hours per year. It also reduces the employment-population ratio by 4.9 percentage points and increases underground economy by 3.8% of GDP. As Mr. Paulson works to resolve the fiscal imbalance, he should keep the European experience firmly in mind.
President Bush confirmed his commitment to low taxes when he announced Mr. Paulson's nomination: "One of Hank's most important responsibilities," he said, "will be to build on this success by working with Congress to maintain a pro-growth, low-tax environment." Avoiding tax hikes, however, does not mean avoiding hard choices. The only alternative to large tax hikes is large spending cuts. Politically, this option may be even harder, but it should be the focus of public debate and Mr. Paulson's attention.
Many economists, including myself, would recommend that the nation consider a gradual but substantial increase in the age at which people become eligible for taxpayer-financed benefits for the elderly, including both Social Security and Medicare. We face three options: raising taxes on those who are still working; reducing benefits for the very old; or reducing benefits for the relatively young old. I would rule out the first option on grounds of economic efficiency, the second on the grounds of social compassion, leaving the third as the best of a bad lot. If we raise the age of eligibility for retirement benefits, people could still retire early, but they would do so on their own nickel, rather than the taxpayer's.
The fiscal problem we now face arises largely because the age of eligibility bears little relation to demographic reality. When Franklin Roosevelt established Social Security, he set a fixed age of retirement; when Lyndon Johnson established Medicare, he followed suit. Imagine if, instead, Roosevelt and Johnson had set up an entitlement system in which the youngest 90% of the population agreed to support the oldest 10% -- and those percentages were fixed over time. Such a system would have been better able to withstand the changes in demography that have occurred over time.
There is still time to correct their mistake, taking an approach adopted in a small way in Ronald Reagan's 1983 Social Security reform. Congress could pass a law increasing the age of eligibility by, say, two months every year. That increase would continue until the Trustees for Social Security and Medicare (a group that includes the Treasury secretary) declared the programs in long-term fiscal balance. Those already retired or near retirement would not be affected, but those of us now middle-aged would have to work longer or save to finance our own early retirement. The beneficiaries of such a reform would be our children, who would not have to inherit European-style tax rates.
Although the fiscal gap could be completely closed with reduced spending, a realistic political compromise will likely include higher revenues as well. Even here, however, rather than consider a reversal of the Bush tax cuts, the new Treasury secretary should look for more efficient revenue sources.
Economists have long noted that while most taxes distort incentives and shrink the size of the economic pie, others improve incentives and enlarge it. A higher tax on gasoline, for example, is better than CAFE standards as a policy to improve the fuel efficiency of the American car fleet. It would also encourage people to drive less by, for instance, living closer to where they work. A tax on carbon is the best way to deal with global warming. These are called Pigovian taxes, after the British economist Arthur Pigou, an early advocate of using taxes to correct market imperfections.
Similarly, economists have increasingly viewed "sin taxes" as a good way to raise revenue. While Pigovian taxes aim to protect innocent bystanders from the actions of others, sin taxes aim to protect people from themselves. To the extent that people have problems with self-control, sin taxes can be welfare-enhancing. Economists Jonathan Gruber and Sendhil Mullainathan report evidence that smokers are happier when cigarette taxes are higher. Of course, non-smokers won't object to shifting the tax burden to others. Maybe we should consider higher taxes on smoking, drinking, gambling and other activities about which people lack self-control.
Finally, even if the income tax is to be used to increase revenue, we should broaden the base rather than raise rates. Last November, the President's Advisory Panel on Federal Tax Reform offered several good suggestions when it handed its report to John Snow. Mr. Paulson should continue talking about tax reform and insist that these ideas get more attention from Congress than they have gotten so far. For example, the panel proposed eliminating the deductibility of state and local taxes. This makes sense. Under current law, if one town enacts high local taxes to finance a municipal pool while a neighboring town does not, the first town gets a federal subsidy at the expense of the second. That outcome is neither efficient nor equitable.
The President's Advisory Panel also proposed scaling back the mortgage-interest deduction. The federal tax system now tilts the playing field toward residential capital at the expense of corporate capital, which in turn reduces productivity and real wages. Even if one believes that policy should promote homeownership over renting (a debatable claim), there is no reason to encourage people to buy ever larger homes. Let's lower the cap on subsidized mortgages well below its present $1 million level.
There are many options for dealing with the long-term fiscal imbalance while keeping tax rates low. The main reason the problem is not yet resolved is that the American people have not put enough pressure on their elected representatives to take the issue seriously. The sooner they do, the better. If Hank Paulson wants to leave the nation's finances in better shape than he found them, his main job will be to focus attention on the problem.
Mr. Mankiw, a professor at Harvard, is a former chairman
of President Bush's Council of Economic Advisers.
44. Adios to a Phone Tax
May 30, 2006; Page A14
The Spanish-American War was fought in 1898 and lasted less than eight months, but Americans still pay an excise tax on phone service that was imposed to finance it. Last week, a mere 108 years after the end of that conflict, the Bush Administration moved to terminate the levy. Its duration is something to keep in mind the next time you hear a politician call for a "temporary" tax.
Treasury Secretary John Snow said the Internal Revenue Service will no longer collect the 3% federal excise tax on long-distance phone calls and will offer refunds for the past three years. We'd like to think the Administration was acting out of principle. But the reality is that the courts -- most recently the Second Circuit Court of Appeals in a decision last month -- have forced its hand with repeated rulings that the tax on long-distance is illegal in a telecom world in which calls are no longer priced based on distance. The IRS will continue to collect the tax on local calls, but Mr. Snow to his credit did express support for the idea of Congress passing legislation to repeal the tax entirely.
That would be the best outcome, and not just because a future administration might opt to begin collecting the tax again and restart the court battles. Another argument for full repeal is that so long as the tax exists, so will the political temptation to expand its scope and turn it into yet another revenue stream for the federal till. A Joint Tax Committee report issued last year suggested extending the excise tax to "all data communication services," including cable modems, cellular and DSL Internet connections.
Like the alternative minimum tax, the federal excise tax
was intended to target "the rich," who at the time were the only ones who
could afford a telephone. Yet our tax code still considers phones "luxury"
items today. The last time Congress came close to ending this charade was
2000, when majorities in both the House and the Senate voted for repeal,
which President Clinton vetoed. The Republican Congress, which may not
be Republican much longer, might consider giving it another shot before
November.
45. Mississippi has a place for heroes: jails by John Stossel ( bio | archive ) http://www.townhall.com/opinion/columns/JohnStossel/2006/05/24/198573.html
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John Sheperson is a hero. When Hurricane Katrina struck, he turned on the news and learned that people in Mississippi had lost electric power. They desperately needed generators. He decided to help them, while helping himself.
He borrowed money, bought 19 generators, rented a U-Haul and drove it 600 miles to Mississippi, where he offered to sell the generators for twice what he paid for them. Eager buyers surrounded his truck. "People were excited," he said.
So did the generators go to hospitals? To nursing homes? Did they save lives? Did Mississippi officials give Sheperson a medal?
Nope. Instead, they locked him up -- and his generators, too.
"Nobody got any use out of them," said Sheperson.
After Katrina, Jim Hood, Mississippi's attorney general, launched a crusade against "price gouging." "For people to take advantage of those in need," he said, "violates every biblical standard of morals that I'm aware of."
The Bible does say, "Give to him that asketh," and if Sheperson had donated those 19 generators and had hauled them down to Mississippi as an act of charity, it would have been fine with Jim Hood. But the attorney general considers making a profit by selling to the desperate at so-called "gouging" prices immoral and illegal.
But making money isn't evil, it's good. Modern life is made possible by people working to make money. And making a profit by "taking advantage" of people in need by meeting their needs is even better.
Today we hear about "gouging" at the gas pump. But it's simple supply and demand. Those "greedy" oil companies don't search for oil and drill for it out of the kindness of their hearts. They do it to make money, just like John Sheperson. The hope of fat profits is what motivates them to take risks to find new sources of oil to meet our energy needs. If companies think the government will "cap" prices to keep profits "fair," they would have little incentive to take the risk.
"Gouging" prices are made possible by extraordinary need -- by times when people decide that it's so important to get a generator that they're willing to pay twice the normal price. This free trade makes both parties better off, or they wouldn't agree to it: Taking advantage of someone's extreme need means meeting someone's extreme need and getting fairly compensated for the unusual effort you had to make in order to do it.
George Mason University economist Russ Roberts points out that if sellers don't raise prices after a disaster, supplies vanish. Anxious buyers often buy more than they need, just in case. Those not at the front of the line may get nothing. "How do you solve that problem? And how do you find out who should get those scarce items?"
One way is rationing -- have the government decide who gets what. Another way is to make people wait in long lines and let patience and luck determine who gets the goods.
But the best way is to give the items to those who are willing to pay higher prices. It's best because it directs supplies to those who need them most and because it inspires more people to take the risks John Sheperson took, or invest in finding new sources of (or replacements for) oil. "High prices are good because what they do is they give people -- and companies -- the incentive to bring supply in ... and help people in the time of crisis. Without that price increase, who has the incentive to bear the risk of stocking up to take care of people?" said economist Roberts.
You may not believe me or Roberts when we say "gouging" is good, but will you believe three Nobel Prize-winning economists? Nobel Laureate (1992) Gary Becker says "gouging" is the "fairest and best" way to get supplies to those who need them the most. "That's a good thing," added Vernon Smith (2002). And Milton Friedman (1976)?
"The 'gougers' deserve a medal."
46. The Gas-Gouging Myth
May 24, 2006; Page A14
We're beginning to wonder how many times Congress is going to call for an investigation into gasoline "price gouging" -- and how many times the Federal Trade Commission is going to report none exists -- before that august body begins to grasp the basics of supply and demand.
Yesterday FTC Chairman Deborah Platt Majoras testified to the Senate about her agency's latest non-findings of price manipulation. The report came in response to two Congressional requests for investigations, one part of last summer's energy bill, and another post-Katrina.
Ms. Majoras noted her staff had investigated every possible form of chicanery -- whether refiners were running their plants below full capacity to restrict supply, making less gasoline or diverting fuel outside the U.S. Whether pipeline operators had purposely chose to not expand capacity, if oil companies had reduced inventory, or if firms used published bulk spot prices to manipulate the market. The answer was no, no, no, no, no and . . . no. Most of the gas price hikes before Katrina were the result of the rising global price of crude oil.
Ms. Majoras did say that in the few months after Katrina several refiners, wholesalers and retailers had fallen under Congress's hastily manufactured definition of price-gouging -- which it included in its request for a Katrina investigation. But she was quick to point out that "local or regional market trends, however, seemed to explain the price increases in all but one case." One case? Some conspiracy.
None of this truth-telling was what Congress wanted to
hear, eager as it is to shift its failed energy policies onto the industry
in an election year. Senators on both sides of the aisle responded to the
FTC's lack of price-gouging evidence by promising . . . anti-gouging legislation.
This despite Ms. Majoras's warning that such a law could encourage suppliers
to keep prices artificially low, resulting in shortages. Congress may be
one loopy piece of legislation away from recreating 1970s gas lines.
47. Caring vs. uncaring
May 10, 2006
by Walter E. Williams ( bio | archive | contact ) http://www.townhall.com/opinion/columns/walterwilliams/2006/05/10/196682.html
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George Orwell admonished, "Sometimes the first duty of
intelligent men is the restatement of the obvious." That's what I want
to do -- talk about the obvious, starting with the question: What human
motivation leads to the most wonderful things getting done?
How about the charity and selflessness we've seen from
people like Mother Teresa? What about the ceaseless and laudable work of
organizations like the Red Cross, Habitat for Humanity and Salvation Army?
What about the charitable donations of rich Americans, to use the silly
phrase, who've given something back?
While the actions of these people and their organizations are laudable, results motivated by charity and selflessness pale in comparison to other motives behind getting good things done. Let's look at it.
In December 1999, Stephen Moore and Julian L. Simon wrote an article titled "The Greatest Century That Ever Was," published by the Washington, D.C.-based Cato Institute. In it they report: Over the course of the 20th century, life expectancy increased by 30 years; annual deaths from major killer diseases such as tuberculosis, polio, typhoid, whooping cough and pneumonia fell from 700 to fewer than 50 per 100,000 of the population; agricultural workers fell from 41 to 2.5 percent of the workforce; household auto ownership rose from one to 91 percent; household electrification rose from 8 to 99 percent; controlling for inflation, household assets rose from $6 trillion to $41 trillion between 1945 and 1998. These are but a few of the wonderful things that have occurred during the 20th century.
Returning to my initial question: What human motivation accounts for the accomplishment of these and many other wonderful things? The answer should be obvious. It was not accomplished by people's concern for others but by people's concern for themselves. In other words, it's people seeking more for themselves that has produced a better life for all Americans.
Take a minor example. I think it's wonderful that Idaho potato farmers get up early in the morning to toil in the fields, which results in Walter Williams in Pennsylvania enjoying potatoes. Does anyone think they make that sacrifice because they care about me? They might hate me, but they make sure that I enjoy potatoes because they care about and want more things for themselves.
What about all those people who've invented and marketed machines that do everything from diagnosing illnesses to controlling air flight? Were they basically motivated by a concern for others, or were they mostly concerned with their own well-being?
One of the wonderful things about free markets is that the path to greater wealth comes not from looting, plundering and enslaving one's fellow man, as it has throughout most of human history, but by serving and pleasing him. Many of the wonderful achievements of the 20th century were the result of the pursuit of profits. Unfortunately, demagoguery has led to profits becoming a dirty word. Nonprofit is seen as more righteous, particularly when people pompously stand before us and declare, "We're a nonprofit organization."
Profit is cast in a poor light because people don't understand
the role of profits. Profit is a payment to entrepreneurs just as wages
are payments to labor, interest to capital and rent to land. In order to
earn profits in free markets, entrepreneurs must identify and satisfy human
wants in a way that economizes on society's scarce resources.
Here's a little test. Which entities produce greater
consumer satisfaction: for-profit enterprises such as supermarkets, computer
makers and clothing stores, or nonprofit entities such as public schools,
post offices and motor vehicle departments? I'm guessing you'll answer
the former. Their survival depends on pleasing ordinary people, as opposed
to the latter, whose survival is not so strictly tied to pleasing people.
Don't get me wrong. I'm not arguing that self-interest and the free market system produce perfect outcomes, but they're the closest we'll come to perfection here on Earth.
Since 1980, Dr. Williams has served on the faculty of George Mason University in Fairfax, VA as John M. Olin Distinguished Professor of Economics.
48. Costa Rican Poverty Fighter By MARY ANASTASIA O'GRADY
May 5, 2006; Page A17
Immediately after President-elect Oscar Arias takes office in Costa Rica on Monday, he will have an historic opportunity to help bring his country into 21st-century competitiveness. The choice? Whether to adopt a national flat tax on corporate and individual income.
Mr. Arias is a seasoned social democrat who earned an international reputation for his work on Central American peace, for which he won a Nobel Peace Prize in 1987. He has already served one term as president from 1986-1990.
Yet despite his reputation as a man of the left, Mr. Arias is also a practical socialist, blessed with common sense and not averse to leading on controversial issues. He has pledged to fight for the ratification of the Central American Free Trade Agreement even though the country's labor unions are militantly opposed to it.
On the flat tax, Mr. Arias is already sending encouraging
signals. Last week his National Liberation Party made an agreement with
the Libertarian Movement in Congress to seriously explore the idea. Together
the two parties would have enough votes to make it a reality.
[Flat Tax Models]
The concept is anathema to Costa Rica's hard left, which is crying foul on grounds that a single, low rate is unjust: Under a flat tax the rich don't pay their fair share and it leads to profits -- a dirty word to Latin socialists -- for business.
Yet the flat tax has already proved an effective way to fight poverty in a host of developing countries. (See nearby table.) For individuals, tax evasion goes down and tax collection goes up because of better compliance. Low corporate rates attract capital, spurring economic growth and job creation. That means there is more money in government coffers to help the needy. Without a laundry list of tax exemptions and loopholes, corruption is thwarted.
If anyone can sell these concepts to Costa Ricans, it's Mr. Arias. He has the confidence of many Costa Ricans who tend to distrust the private sector, thanks in part to the systematic indoctrination of young minds by the left-wing national teachers' union.
In this sense, Mr. Arias is not unlike Chile's former Socialist President Ricardo Lagos, Brazil's former President Fernando Henrique Cardoso or Britain's Labor Prime Minister Tony Blair. Like Messrs. Lagos, Cardoso and Blair, Mr. Arias seems to be actually interested in good ideas and in creating a legacy that leaves behind a better nation.
The bad news for the new president is that there is not enough money in the budget to fund his campaign promises of more social spending on education, health care and housing. With 80% of the revenues already committed to wages, pensions, debt service and higher education, the only way to offer more is to ensure that the pie gets bigger. There is also fiscal pressure to enhance law enforcement funding, which has not kept up with modern crime, and to address a national epidemic of potholes in the dilapidated highway system.
The traditional Latin American method of curing the condition known as scarce resources is to raise taxes. But one reason the budget is already strained is that Costa Rica's steeply progressive income tax rates for individuals have provoked skyrocketing evasion. Government estimates say 70% of taxes owed are not paid.
On the corporate side, the current rate of 30% already discourages investment. And Costa Rica's special tax-free zones for exporters need to be phased out by 2009 if the country is to remain compliant with World Trade Organization rules. Thus there are strong incentives to create a new flat tax for both individuals, to boost compliance, and for corporations, to regain competitiveness.
Introducing a flat tax is analogous to hanging out a sign that says: Open for business. Just ask Slovakia, which in 2004 adopted a flat tax for corporations and individuals of 19%. Since then it has been drawing in large amounts of capital from Western Europe and its economy is growing rapidly. After Russia implemented a 13% flat rate for individuals, evasion went down and revenues rose sharply.
Mr. Arias already understands the connection between lower corporate taxes, investment and rising living standards. He has mentioned Ireland, with its 12.5% corporate rate, as a model for Costa Rica. The Costa Rican daily La Nación reported last month that he was considering special corporate tax zones with rates below 10%. Referring to a 15% rate under discussion in Congress, La Nación reported that "Dr. Arias asserted that one cannot fool himself thinking that anyone can compete at that high tax."
That's a promising start for the debate but to be competitive Costa Rica will have to avoid a policy of limiting low flat rates to special economic zones since other flat-tax countries don't attach strings. Moreover, as Chris Edwards of the Cato Institute points out, "Carving out special tax rates and incentives for particular industries and regions is not only inefficient, it is an open invitation for corruption."
There is growing support for a flat tax from some of Costa Rica's opinion makers. An April 10 editorial in La Nación supported the idea and an important former central bank president has come out in favor of it. If Costa Rica introduces a flat tax now, it could get a jump on its Cafta neighbors in attracting investment. With its highly literate population, a flat-tax Costa Rica could easily become a prime destination for multinational investment.
A recent KPMG survey reported that the average corporate
rate for the Latin American region is over 28%. That means that any Latin
country that adopts a simple, low rate for the entire nation will instantaneously
grant itself a vast comparative advantage. Over to you, Mr. Arias.