The Wire

  • New tunnel, premium RV section at Talladega Superspeedway on schedule despite weather

    Excerpt:

    Construction of a new oversized vehicle tunnel and premium RV infield parking section at Talladega Superspeedway is still on schedule to be completed in time for the April NASCAR race, despite large amounts of rainfall and unusual groundwater conditions underneath the track.

    Track Chairman Grant Lynch, during a news conference Wednesday at the track, said he’s amazed the general contractor, Taylor Corporation of Oxford, has been able to keep the project on schedule.

    “The amount of water they have pumped out of that and the extra engineering they did from the original design, basically to keep that tunnel from floating up out of the earth, was remarkable,” Lynch said.

  • Alabama workers built 1.6M engines in 2018 to add auto horsepower

    Excerpt:

    Alabama’s auto workers built nearly 1.6 million engines last year, as the state industry continues to carve out a place in global markets with innovative, high-performance parts, systems and finished vehicles.

    Last year also saw major new developments in engine manufacturing among the state’s key players, and more advanced infrastructure is on the way in the coming year.

    Hyundai expects to complete a key addition to its engine operations in Montgomery during the first half of 2019, while Honda continues to reap the benefits of a cutting-edge Alabama engine line installed several years ago.

  • Groundbreaking on Alabama’s newest aerospace plant made possible through key partnerships

    Excerpt:

    Political and business leaders gathered for a groundbreaking at Alabama’s newest aerospace plant gave credit to the formation of the many key partnerships that made it possible.

    Governor Kay Ivey and several other federal, state and local officials attended the event which celebrated the construction of rocket engine builder Blue Origin’s facility in Huntsville.

2 weeks ago

Economic consequences of the pandemic

(Pixabay, YHN)

Our lives and economy have been disrupted on an unprecedented scale by COVID-19. How do we calculate the societal impact? Costs are tricky because they involve actions not chosen. Economics helps bring the consequences of the pandemic into focus.

The full costs involve much more than just monetary impacts. Economics and life are about human satisfaction or happiness; economics calls this utility. Eating food, watching sports on TV, socializing with friends and visiting relatives all generate utility. Money is valuable only because it enables the purchase of goods, services and experiences.

Our purchases typically generate benefits in excess of the price paid. A weekend family trip might cost $500, yet we might judge that the trip, which could produce lifetime memories, generates more than $500 in value. Let’s say we judge the trip as worth $1,200. The difference between the value of the trip and what we pay for it, in this case $700, is called consumer surplus. The cost of COVID-19 must include lost consumer surplus.

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Identifying costs requires careful thinking about the alternative, both for our daily life activities and business. Many factories, hotels, casinos and museums have closed. We are losing their production and services, some of which can be offset. Overtime can make up for lost production at a factory; vacations can be taken later. People are impatient so the delay generates a real cost.

The potential to shift production and vacations illustrates an economic law: we live in a world of increasing costs. The cost per week of extreme social distancing will increase with each passing week. One month’s production from a factory might be made up; one year’s lost output is largely gone forever.

The cost is the difference in value created by the new ways relative to the normal. The cost of working from home is the reduction in workers’ productivity. For college classes shifted online, the cost is the reduction in learning. We must also note any offsetting savings; working from home, for example, saves commuting costs.

A couple of patterns, I think, can be observed. First, many disrupted activities have high ratios of consumer surplus to consumer expenditures. Consider the NCAA basketball tournament and the Summer Olympics. Few people attend these events, but millions (or billions) watch them on TV. The value of sports and entertainment far exceed their contribution to GDP.

Second, COVID-19 impacts have been very unequally distributed. For many, the disruption has been relatively minor, perhaps not chatting with coworkers about the March Madness tournament. By contrast, entrepreneurs have had businesses they poured their life, energy, and savings into building ordered closed indefinitely. College basketball players who trained and practiced for months missed out on March Madness.

Can the government offset the economic impact of the pandemic through a bailout? The answer is yes and no.

The proposed Federal coronavirus stimulus can soften the impact on hard-hit businesses and workers. Closed hotels, restaurants and airlines might be kept out of bankruptcy; their employees can continue to get paid and know they will have jobs when life resumes.

Paid sick leave during this emergency measure is also likely beneficial. A person with mild COVID-19 symptoms might decide to work to avoid missing a paycheck. Paid sick leave could let such persons stay home and slow the virus’ transmission.

The best hope for the stimulus is containing the economic impact. If hotels and restaurants go into bankruptcy, the banks which lent to them might be in trouble. Bankruptcies and layoffs could produce a collapse requiring years to recover from.

Yet a real limit to government assistance exists. Giving shuttered businesses and idled workers money does not help produce the goods and services which ultimately generate utility. Getting a check from the government does not make toilet paper available.

Economics teaches us that life involves tradeoffs. COVID-19 significantly threatens public health, while shuttering large parts of our incredibly complicated market economy threatens our prosperity. We need to soberly evaluate these tradeoffs to minimize the impact of the coronavirus.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

2 weeks ago

Sports cancellations explained by economics

(Pixabay, YHN)

Our world has changed almost unimaginably recently. The cancellation of the NCAA basketball championships brought us, in my son’s words, “March Sadness.” Why has our nation responded so dramatically and differently to COVID-19 than earlier pandemics, including H1N1 just 11 years ago? Economics offers a couple insights.

Things are certainly different. In 1919, hockey’s Stanley Cup was canceled due to the Spanish Flu. Not weeks ahead, however, but hours before Montreal and Seattle were to play Game 6. Montreal’s coach and five players had the flu; star Joe Hall died just days later.

The last global pandemic was H1N1. Schools and colleges remained open, and sports and entertainment did not halt. I remember the pandemic’s start and how the danger never seemingly materialized, but that wasn’t entirely accurate. The CDC estimates that the U.S. experienced 13,000 deaths, 275,000 hospitalizations, and 60 million cases; worldwide deaths may have exceeded 500,000.

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Sports leagues certainly made no effort to soldier through COVID-19. Why the change? For one, we are wealthier than ever, and safety is a luxury good. In economics, a luxury good is one where its percentage of consumer spending increases as income goes up. Items like jewelry and vacation travel fit this description.

I use safety here because dozens of choices we make create risks to our life and health. Travel, diet and exercise, leisure activities, and work all matter. As people get richer, they are less willing in these choices to put themselves and their families at risk. Differences in attitudes toward risk can obscure this. Some rich people enjoy dangerous activities like skiing and flying a plane, while not all hypochondriacs are wealthy.

Because safety is a luxury, our actions during a pandemic will change. I would not expect a sports league to play until the players were dying, and we will close schools and cancel festivals more quickly than before. Furthermore, our greater knowledge of diseases affects our choices. Death tolls that were “acceptable” in the past are no longer so.

But more than just changing preferences are at work here. The economics of capacity constraints also matter.

We live in a world of scarcity, so we cannot get everything we want. We must produce the goods and services we value with limited resources. Production takes time and uses tools like factories, assembly lines and bulldozers which themselves take time to make. We cannot ramp up production as quickly as we might want.

The capacity constraints for COVID-19 are in the health care system: hospital beds, beds in intensive care units, ventilators, and supplies of drugs and antibiotics. According to the American Hospital Association, there are 925,000 staffed beds nationwide, with about 100,000 in intensive care. We might wish we had more beds, but capacity is costly; imagine maintaining hospitals solely for use in a pandemic.

This is why social distancing, canceling sporting events and festivals, and working from home are so important. Epidemiologists refer to this as leveling the curve, meaning the curve you get when plotting the number of new cases per day. In a pandemic, this curve can grow fast; enough growth in cases will overwhelm any capacity constraint.

Germany’s Chancellor Angela Merkel recently said that two out of three Germans may get COVID-19. Let’s suppose that proportion applies here. The timing of the cases determines whether capacity will be exceeded. If they occur over one or two years as opposed to one or two months, every patient who develops pneumonia can get the very best care possible today.

The dynamics are in a way similar to the seasonal flu. Healthy young adults face little risk from the flu. A flu shot helps them relatively little, but can keep them from giving their grandparents the flu. We would be wise not to be excessively brave in the face of what for some of us might be little danger.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

3 weeks ago

Socialism and the horrors of communism

Senator Bernie Sanders (I-VT)

Bernie Sanders’ pursuit of the Democratic presidential nomination continues to bring popular attention to socialism. Polls continue to reveal socialism’s considerable appeal to many Americans. Opponents of socialism often offer up the horrors of 20th Century Communism as a rebuttal. Is this history relevant today?

Received wisdom holds that young Americans know no history. So here’s the history lesson: communist regimes in the 20th Century produced over 100 million deaths, numerous famines, gulags, purges, and mass arrests. The Berlin Wall and Iron Curtain turned Eastern Europe into a virtual prison to keep citizens from fleeing.

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Whether such brutality was an inevitable feature of communism is debatable. The Russian and Chinese revolutions occurred by force, not peaceful means. An international coalition, including the U.S., invaded the Soviet Union after World War I and helped foment civil war. External forces arguably pushed communist nations down a violent path.

Yet are Josef Stalin’s atrocities relevant for the Sanders campaign? I do not think so, and this strikes me as a poor rebuttal.

So why bring up this history? The answer lies, I think, in F.A. Hayek’s argument about “Why the Worst Get on Top” in The Road to Serfdom. Hayek was a distinguished economist (he won a Nobel Prize) who also had significant impact outside the academy. Britain’s Margaret Thatcher was strongly influenced by Hayek’s writings, and George H.W. Bush awarded him the Presidential Medal of Freedom.

Even socialist movements starting with a democratic tradition, Hayek argued, would be pushed to extremes. He had previously argued, along with Ludwig von Mises, that socialist economic planning would seriously founder. Socialists would need almost dictatorial powers to implement their economic plans. Once possessing such powers, leaders would face a choice “between disregard of ordinary morals and failure.”

If the initial socialist leaders would not use power to achieve their goals, they would lose out to less scrupulous rivals. As Hayek put it, “The old socialist parties are inhibited by their democratic ideals; they did not possess the ruthlessness required for the performance of their chosen task.”

Furthermore, Hayek thought that socialism must inherently be nationalistic, especially in a wealthy country; otherwise, all transfers would go to the world’s poor. Indeed, Mr. Sanders intends free college, Medicare for all, and government-guaranteed employment for Americans. Group demarcation is significant: thanks to centuries of living in small groups, humans often accept that the ends justify the means when advancing our group’s interests.

History shows, however, that Hayek’s argument was not totally correct. Great Britain was basically socialist under the Labor Party between 1946 and 1979. Free elections continued though, and eventually, Lady Thatcher was elected Prime Minister. France elected socialist Francios Mitterrand as President and Sweden serves as Mr. Sanders’ favorite example of socialism and neither descended into tyranny.

Liberalism distinguished European socialism from communism. As developed in England and exported to its American colonies, liberalism viewed individuals as the source of value in society. Previously people served kings and emperors; liberalism held that governments serve the people. Russia, China, and North Korea had no liberal tradition.

America’s democratic socialists, I think, accept that government exists to serve the people. They believe that Mr. Sanders’ economic programs would better enable all Americans to thrive, not just billionaires and millionaires. I strongly disagree with their economics, but accept their commitment to individuals as the standard of value, which implies that government cannot violate citizens’ fundamental rights.

I see Hayek’s tale as cautionary, not prophetic. Conservatives and libertarians who largely accept this story are deeply suspicious of the chain of events a socialist government would set in motion. We fear that when push comes to shove, democratic socialists will sacrifice individual rights.

Anecdotes like the following do not calm our fears. Philosopher Jason Brennan writes in Why Not Capitalism?: “A prominent Marxist philosopher was once asked how many people he would be willing to kill, during the Revolution, to bring about his favored goals. He responded, without blinking, ‘10%.’”

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

1 month ago

Billionaires and the good society

(El Borde/Youtube, G. Skidmore/Flickr)

Democratic presidential candidate Bernie Sanders contends we should not allow billionaires. His view produced interesting debate exchanges with Michael Bloomberg, who has a net worth of $53 billion. Are billionaires good for America?

A first consideration is the source of the riches. Were they earned from a successful business, or by stealing from or swindling others? Bank robbers and con artists do not benefit our economy. For those who inherited their wealth, we should consider the original source of the fortune.

The voluntary nature of purchases means that wealth accumulated through business is earned. A customer buying financial information from Mr. Bloomberg’s company or a book from Amazon, whose founder Jeff Bezos tops the Forbes Richest Americans list (net worth: $116 billion), receives value equal at least to the purchase price. You should only buy a book on Amazon for $15 if it is worth at least $15 to you.

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Mr. Bezos, of course, does not keep the $15. Amazon likely bought the book from a publisher, and must also pay its employees. Only part of the $15 is profit for Amazon, and only a portion of this goes to Mr. Bezos.

Companies sell goods and services at the prices they do because they also benefit. Market transactions make both buyers and sellers better off. Billionaire entrepreneurs become rich by taking a small slice of the value created by a large volume of economic activity.

Did Mr. Bezos and Mr. Bloomberg make their billions at the expense of their workers? No, although their businesses needed the efforts of many employees to succeed. In a market economy, not even the world’s richest person can force anyone to work for them. All employment is voluntary. Every Amazon and Bloomberg Business employee chose to work for the wage or salary offered. The employees presumably found these jobs attractive relative to their alternative options.

Economics shows that workers get paid based on their productivity. Competition between businesses bids up wages to this level. An employee paid less than their contribution can be hired away by other businesses.

Consumers typically value what they buy more than the price paid. For instance, that $15 book you bought from Amazon might be worth $25 to you. The extra $10 is called consumer surplus and is our share of economic prosperity. In a sense, billionaire entrepreneurs get rich by providing us consumer surplus.

Research shows that billionaire entrepreneurs get very little of the value they create. Nobel-prize winning economist William Nordhaus found that firms capture just over two percent of the total value of their inventions. The rest goes to consumers mostly, but also to employees and suppliers. The two percent is for the business, not just the founder. Amazon’s value created for society must be in the tens of trillions of dollars.

Billionaire entrepreneurs make our modern world enormously more prosperous and have done nothing legally or morally wrong. Still, a billion dollars is more than anyone could spend responsibly in a dozen lifetimes. Couldn’t we tax their wealth, as Mr. Sanders has proposed?

A wealth tax may not have the dire consequences some predict. Money cannot really be motivating the super-rich who continue to work hard. Mr. Bloomberg was already a multimillionaire when he was crawling under desks to hook up his information boxes for clients. Perhaps their motive is intrinsic, that they simply desire business success. Or they may care about relative standing, say moving up the Forbes list.

Both of these motives suggest that reasonably high taxes may not deter the rich from working hard. Does this make a wealth tax good policy? Not necessarily. America’s billionaires might move to nations with lower taxes. And billionaires’ wealth helps fund new innovations by their companies and risky startup ventures by others, as Forbes columnist John Tamny emphasizes.

Billionaire entrepreneurs benefit America. They become super-rich by making our lives better, not by taking from us. Mr. Bloomberg may not win the Democratic presidential nomination, but he need not apologize for the wealth he has helped create.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

1 month ago

Is health care a right?

(Pixabay, YHN)

The debate over government’s role in health care and “Medicare for All” frequently revolves around whether health care is a human right. We establish government to secure our rights, so government should not deny Americans’ right to health care.

Health care is one of several economic rights, like rights to food, shelter and education. Arguments concerning health care generally apply to other economic rights.

The U.S. Constitution and Bill of Rights do not recognize economic rights, which run against our founders’ political philosophy. The American Revolution was fought to secure “negative” rights, like life, liberty and property. Negative rights can be enjoyed by preventing actions to violate them, like assault or theft. If you observe the non-initiation of force rule, you are unlikely to violate negative rights.

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Negative rights though do not ensure that people have the things needed to achieve happiness. A person unable to eat, obtain an education, or receive medical care will not have a high-quality life. The world would be better if everyone enjoyed a minimal standard of living. Does this imply that people have economic rights? The United Nations’ Universal Declaration of Human Rights affirms this.

A problem arises with economic rights. Health care must be produced, so some people must be obligated to provide this. An unchosen obligation undermines the voluntary basis of social interaction. To avoid forcing doctors to treat patients, government must pay
the bills.

Opponents of economic rights see these obligations as problematic. The U.N. Declaration says that “all human beings are born free and equal in dignity and rights.” The obligation of some to provide health care for others seems to produce unequal rights.

Another problem concerns the level of care people are entitled to. Surely emergency medical care and treatments for life-threatening diseases should be covered, though probably not fertility treatments. Yet parenthood is a huge component of happiness. Plastic surgery seems excessive, but what about persons disfigured by accidents?

Are people obligated to live to minimize the burden they impose on taxpayers? Should people face dietary restrictions and exercise requirements? Should we ban dangerous recreational activities like skiing and softball? Such restrictions compromise the pursuit of happiness.

We need not make health care a right to provide coverage. Insurance already helps with this. Few Americans could afford $1 million in medical care themselves, but insurance can cover this, and through voluntary contracts and not taxes. Americans today are not denied emergency medical care due to an inability to pay.

Americans’ willingness to help those in need makes charity an alternative in providing medical care. Voluntary assistance provided a safety net before the modern welfare state, as documented by University of Alabama historian David Beito. In addition to numerous charities, today individuals can make appeals on GoFundMe.

I will leave the question of whether voluntary assistance could provide health care for another time. Instead, let’s consider two troublesome aspects of voluntary assistance.

Even with a diverse array of charitable assistance, people might fail to meet eligibility criteria. If churches provided charity medicine, for instance, low-income Americans who were not religious could go uncovered. Of course, people slip through the cracks of our government safety net: not everyone eligible for Medicaid enrolls. The gaps appear to be a fixable flaw of a government safety net but a feature of charity.

Proponents of government assistance feel that asking for charity is demeaning. I agree that many people find asking others for help unpleasant. A right to health care keeps people from having to beg for help.

Health care is a component of modern prosperity, which must be continually created. A poor society, like America at the time of our founding, can enforce negative rights to life and property. We can better ensure that every American has health care and other economic necessities through public policies designed to allow prosperity than by enshrining economic rights.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

1 month ago

The freedom to pump gas

(Luke AF Base)

Illinois State Representative Camille Lilly recently sponsored a bill to restrict self-service gasoline stations. New Jersey and Oregon already ban self-service gas, although Oregon exempts rural counties. Would creating jobs for gas station attendants be good economics?

There are many tasks we can either do ourselves or pay to have done. Consider food preparation. We can buy and cook food, pay someone to prepare food in our house, purchase cooked food from a restaurant or consume a meal at a restaurant.

Two factors affect our food preparation choices. First, hiring someone allows the use of specialized knowledge. A chef has likely been to culinary school, while a cook has training and experience. Of course, we probably won’t be hiring Emeril Lagasse to cook for us, and cooking at fast-food restaurants does not involve great culinary talent. Still, we can potentially hire skill we do not possess.

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Second, having someone cook changes our cost. Cooking for ourselves takes our time, which is valuable. But we must pay someone to cook for us, whether at to a restaurant or a chef willing to come to our house.

To succeed in hiring someone, we will want potential workers to find our position desirable. Many people aspire to be chefs and have their own cooking show; many fewer want a career flipping burgers. How much we enjoy cooking ourselves is also relevant.

Similar factors affect the pumping of gas. Although little expertise is involved, carelessness can cause spills and fire risk. According to the National Fire Protection Association, 3,000 vehicle fires at gas stations caused an average one death and $8 million in damage annually between 2004 and 2008. Properly trained and attentive attendants could prevent some of these fires. A 46% decline in gas station fires since 1980 demonstrates that self-service has not fueled a crisis.

The price of gas will have to increase to pay attendants, and even more if states pass a $15 per hour minimum wage. Stations will need attendants on duty whenever open, and attendants will often be idle. Gas stations with lots of pumps will need to hire several attendants to use all the pumps simultaneously. Delays waiting for an attendant will increase our time cost of filling up.

We already know how most consumers weigh the inconvenience of pumping gas versus the costs of attendants. Full-service gas stations are not prohibited but almost all have been driven out of business. Drivers preferred the convenience and savings of self-service, even before the advent of pay-at-the-pump technology in the 1980s.

But wouldn’t jobs for attendants boost the economy? Illinois’ Representative Lilly thinks so. Desirability matters when considering creating or bringing back a class of jobs. How many people really want to pump gas all day in the snow and cold of Illinois or the heat of Alabama?

More significantly, labor is a scarce resource. Our economy is more prosperous when we produce goods and services using less labor. Pumping gas involves substituting our unpaid labor for paid attendants. Still, the money drivers save pumping their own gas will be spent on other things, perhaps food at convenience stores. This spending then creates jobs and provides things people value more.

Americans might have changed since the 1970s when self-service conquered the market. Today, many Americans would not try changing a tire, preferring to wait on and pay for roadside assistance. Podcaster Adam Corolla has humorously decried this trend. As an economist, I try to avoid judging the choices people make.

If people no longer want to pump their own gas, entrepreneurs can open new full-service gas stations. Or think outside the box and offer fuel-delivery service like the Birmingham startup company FuelFox. Balancing cost and convenience challenges all of us. The freedom to pump our own gas is one part of a prosperity-enhancing balancing.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

2 months ago

Death, taxes and prosperity

(Pixabay, YHN)

The only two sure things in life, according to the saying, are death and taxes. Should businesses profit when one of their employees dies? They can avoid taxes, and this reduces our prosperity.

I first read about “Janitors Insurance” or “Dead Peasants Insurance” in Harvard Professor Michael Sandel’s What Money Can’t Buy. Professor Sandel used the case to criticize how this affected businesses’ view of workers: “Creating conditions where workers are worth more dead than alive objectifies them; it treats them as commodity futures rather than as employees whose value to the company lies in the work they do.”

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Corporations have legitimate reasons to take out insurance on top executives. A good CEO has a vision and strategy for a company, which subordinates may not fully grasp. The sudden and unexpected death of a leader can cost a company. The insurance industry creates value by covering such losses.

By contrast, firms’ financial interest in most employees is more modest. Employees are certainly worth more than their salary, because they know and are good at their jobs. Hiring and training a replacement takes time and money. The stake, however, is small relative to the insurance policies companies take out, like a $250,000 policy for a convenience store clerk. And companies keep the policies after employees quit or retire, so they are not protecting against losses from separation.

Janitors (and executives) Insurance policies are not for the employees’ benefit; they are “company-owned,” meaning that the business pays the premiums and is the beneficiary. Many businesses do offer life insurance as an employee benefit. Employees and their families are the beneficiaries of these policies.

Although Professor Sandel refers in the above quote to an employee being worth more dead than alive, no one accuses businesses of hastening employees’ deaths to collect Janitors Insurance.

Our tax code incentivizes businesses to purchase Janitors Insurance. Life insurance is an investment yielding a return on the premiums paid. The insurance company invests the premiums and shares some of the returns through a more generous benefit to make life insurance more attractive to potential customers.

Significantly for our story, life insurance death benefits are generally tax-free. This allows businesses tax-free investment income.

We might want to blame corporations for trying to pay less in taxes, but this would be misplaced. Public finance economics distinguishes between tax avoidance and tax evasion. Avoidance legally reduces taxes owed, while evasion involves lawbreaking. Economists assume that individuals and businesses will engage in avoidance. Indeed, numerous ads during income tax season encourage us to avoid paying too much. We control tax evasion through legal and moral sanctions.

Efforts like Janitors Insurance to avoid taxes divert businesses’ effort away from earning profits. The time and effort managers use devising new tax dodges cannot be spent making new or improved goods and services or lowering costs, activities which make our economy more prosperous. Avoiding taxes merely makes someone else pay for government. When businesses find avoiding taxes more profitable than producing goods and services, our economy grows more slowly.

Considerable investment went into developing Janitors Insurance. Corporations lobbied states during the 1980s for laws allowing the insuring of all employees, not just executives. And explaining the legality and wisdom of Janitors Insurance to top management must have taken many meetings.

We like taxing businesses because they appear rich. Yet the question of who truly pays business taxes is very complicated. Taxes can reduce worker pay, while many working Americans own stocks through a pension or IRA.

Because of these uncertainties and the enormous cost of making tax avoidance more profitable than production, many economists support lower business taxes. The Tax Cuts and Job Act of 2017 indeed cut the corporate tax rate from 35 to 21%. Time will tell, but this tax cut should reduce businesses’ use of Janitors Insurance.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

2 months ago

So you want to start a business

(W.Miller/YHN)

Economic freedom allows people to buy, sell, invest and use their property to pursue life goals. Many Americans aspire to exercise this freedom to start a business. Where someone wants to open this new business makes a big difference for the burden of government licenses, regulations and taxes.

The Center for the Study of Economic Liberty at Arizona State University’s Doing Business in North America report sheds light on this. The study extends the World Bank’s Doing Business project. The ASU study measures things like the number of approvals necessary to open a business and restrictions on hiring or firing workers.

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The study focuses on barriers facing small and medium businesses, the types of firms which entrepreneurs start and try to grow. Most of these government rules are well-intended and likely beneficial. Still, failure to get proper permissions could at least temporarily shut down a new business.

The study tracks 63 different provisions for 115 cities across the U.S., Canada and Mexico, including Birmingham for Alabama. The World Bank project includes only New York and Los Angeles in the U.S. For economists studying economic freedom, Doing Business North America explores how business regulation varies across states.

The index includes six categories: starting a business, employing workers, getting electricity, registering property, paying taxes, and resolving uncertainty. Bankruptcy is as important as starting a business or hiring because many new businesses fail. Indeed, many eventually successful entrepreneurs initially fail, like Henry Ford. If entrepreneurs cannot get a fresh start, they may never put the lessons learned from failure to use.

Cities’ scores range from 0 (worst) and 100 (best). A city with the best policy on each component would get a score of 100, while a city with the worst policy on each would score 0. A score of 60 is roughly 60% of the best policies.

The U.S. and Canada are two of the world’s freest economies according to the Fraser Institute, while Mexico ranks 76th. Not surprisingly then, the 39 Mexican cities rated occupy the lowest ranks. Although the U.S. and Canada have similar national economic freedom scores, the top American cities outrank Canadian cities; Canada’s top city, Halifax, ranks 53rd.

Across America, Oklahoma City ranks first with a score of 85, or about 15% off the best policies on average. Arlington, Virginia, Sioux Falls, Boise and Atlanta round out the top five. San Francisco is America’s lowest ranked city (77th) with a score of 59.

Birmingham places 22nd with a score of nearly 80. Birmingham’s business environment is much closer to Oklahoma City’s than San Francisco’s. Its highest ranks are in the bankruptcy (tied with many cities for 1st), employment, and taxes categories, with its lowest ranks in starting a business and electricity. How do other Alabama cities compare to Birmingham? The Johnson Center is working with the Center for the Study of Economic Liberty on this.

The impact of legal and regulatory burdens likely depends on an entrepreneur’s background. Many Americans can navigate rules; we know that things like building permits and business licenses exist and how to get them. We know how to hire a lawyer or accountant if needed. Americans with lower incomes and less formal education are often unfamiliar with legal compliance. Even reasonable rules restrict their economic opportunities and possibly deprive us of their innovative ideas.

The biggest limitation in measuring economic and business freedom, I think, involves uncertainty about obtaining permission. Some permits require significant paperwork and processing time but will eventually be issued. Permits for things like liquor licenses and new construction are granted by public boards subject to citizen pressure. Political pushback can be hard to predict. The difficulty of quantifying such uncertainty about securing permission limits measuring the full burden on entrepreneurs.

Entrepreneurs create the new products, services and innovations that increase our prosperity. Thankfully, freedom to start a business and succeed or fail based on your merits still exists in much of America.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

2 months ago

Pandemics and quarantines

(Pixabay)

A coronavirus outbreak in China has sparked fears of a global pandemic, as communicable diseases do not respect national borders. Governments use quarantines and isolation to limit such threats, measures which libertarians find objectionable. Property rights offer helpful guidance here.

The 2019 Novel Coronavirus appeared last year in China’s Hubei province. The new coronavirus originated in animals but is now being transmitted from person to person. At the beginning of this week, there were over 1,000 confirmed cases and 80 deaths. Researchers learn more about the virus every day, and Centers for Disease Control’s website provides updates.

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History tells of numerous deadly pandemics. The Black Death killed an estimated 30-60% of Europe’s population between 1347 and 1351. Cholera outbreaks in 19th Century America caused the evacuation of cities. The 1918-1919 influenza outbreak killed 50 million persons worldwide, including over 600,000 Americans.

The current outbreak demonstrates our need for medical research capacity. With all the vaccines and wonder drugs now available, we might think that our health challenge is providing the available medicine to all Americans. But new diseases must be researched.

If we had no further need for research, an economic case could be made for making drug companies sell at their production cost. This would make drugs much more affordable. But the loss of profits on successful drugs would effectively end privately funded medical research.

The current outbreak also reminds us of the value of effective public health services, typically a task for government. China, for instance, is trying to restrict travel for over 50 million people. George Mason University economist Tyler Cowen recently suggested that libertarians must embrace the need for government capacity to act decisively when needed. I agree wholeheartedly; limited government should be effective. We should ask government to perform only important tasks we cannot do ourselves. We benefit from government being good at these tasks.

Quarantines and isolation seemingly protect the group at the expense of individuals, which troubles libertarians. Libertarians see individuals as morally valuable; individuals should not be sacrificed for the group. Quarantines and isolation restrict the freedom to protect oneself during a pandemic.

Property rights, I think, provide perspective. Economists frequently describe property rights as giving people an incentive to use their possessions productively. Property rights also provide a formula for making decisions in an orderly, peaceful society.

Property is frequently privately owned but can be jointly owned. Property owned by a government is often public, but privately-owned spaces can also be public, like shopping malls. A space becomes “public” when opened to everyone without specific permission. A person does not trespass when entering a public place.

Our society and economy require public spaces. We could not travel as we do or produce and trade goods and services without movement through public spaces. Property owners must willingly allow access to their property; owners can always refuse entry. Although we might consider travel a fundamental freedom, it must be limited by property rights.

The quarantine power comes from owners’ freedom to condition access to their property. Owners can restrict persons suspected of having a contagious illness from entering their property. Governments, which own many public spaces on our behalf, can also restrict access.

A quarantine option helps keep public spaces open. To see why, suppose no restrictions on access to space opened for public use were allowed. Very few public spaces would likely exist.

Should possibly exaggerated pandemic fears prompt travel restrictions? Travel restrictions during the 2002-2003 SARS outbreak cost Asian economies an estimated $40 billion. Unfortunately, we do not know in real time which pandemic scares will prove overblown. Furthermore, fears are real even when danger never materializes. We respect people when we respect their fears and concerns.

The openness of public spaces enables our prosperous society. Property rights help harmonize our various and sometimes divergent interests. Quarantines represent the exercise of property rights, not a sacrifice of individuals for the good of society.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

2 months ago

Could an asteroid destroy our economy?

(NASA/Contributed, Pixabay, YHN)

An asteroid could wipe out all life on Earth, so yes. But what if we mined and brought an asteroid’s valuable metals to Earth? NASA’s plan to send a probe to an asteroid generated some out-of-this-world economic claims.

The asteroid belt between Mars and Jupiter may be the remnants of a proto-planet that broke up long ago. NASA plans to visit 16 Psyche, a heavy metal asteroid, which astronomers believe is mostly nickel and iron, but may contain precious metals like gold and platinum. The reported $10 quintillion (a 1 with eighteen zeros behind it) market value for Psyche’s metals seems to have been pulled out of thin air, or the vacuum of space.

Would the metals in 16 Psyche make everyone on Earth become a billionaire? Or would metals markets crash and somehow destroy the world economy? Economics suggests neither extreme.

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We live in a world of scarcity, meaning that our desire for goods and services exceeds our ability to produce them. Production requires raw materials and, more importantly, know-how. Knowledge lies behind technology, from agriculture to supercomputers; discovering productive uses for nature’s bounty creates natural resources. The heavy metal asteroids have existed since before the first humans but will only become resources if we learn how to make space mining a reality.

Resource availability frequently constrains production. We cannot make metals or petroleum out of nothing. The harder we must toil to acquire resources, the greater their cost because everyone must be compensated for their hard work.

If technologically and economically feasible, space mining will increase the supply of metals and lower their prices. This will enable production of more goods at lower prices. Our standard of living will unambiguously rise.

But might a collapse of gold and precious metals prices bankrupt investors and cause a depression? Gold prices would likely tank, making investors holding gold suffer losses. At a price of $1,500 an ounce, all of the gold ever been mined is worth about $10 trillion. This is a lot of money, but Credit Suisse Research Institute estimates total world wealth at $360 trillion. Even a 90% drop in gold prices will not impoverish investors as a group.

The minerals from 16 Psyche would make some people wealthy, particularly the owners of Psyche’s minerals. Lower prices for cars, buildings, spaceships and other goods will increase investors’ effective wealth. The world’s economy will be more productive and investors (overall) more prosperous.

Furthermore, a decline in gold prices should not surprise investors. Expectations about demand and supply in the future influence commodity prices today. Market prices would fall as space mining becomes a reality.

Resource price adjustments also explain why 16 Psyche will not make everyone a billionaire. The news stories have a sliver of truth: $10 quintillion is over $1 billion for each of the world’s 7.5 billion persons. Yet if 16 Psyche has ten times more gold than currently in the world, gold’s price will be far below $1500 per ounce. As another way of considering this, no one has $10 quintillion to pay for Psyche’s resources.

Will space mining prove feasible? The scientific and engineering questions are well beyond my expertise. Two recently founded space mining companies, Planetary Resources and Deep Space Industries, have some highly respected scientists and smart investors involved. If Google’s Larry Page and Erich Schmidt are investing in a venture, it probably has some chance of success.

Perhaps space mining’s biggest contribution is illustrating the innumerable possibilities of the future. The potential that we will run out of resources remains highly persuasive, even though objective measures like the Cato Institute’s Simon Abundance Index demonstrate otherwise. Ultimately knowledge and discovery create the resources we use and new inventions which improve our lives. Undiscovered discoveries, however, are inherently hard to foresee. To envision the enormous potential for future innovation, just remember asteroids and space mining.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

3 months ago

Animal welfare and economics

(American Kennel Club/Twitter)

Dog owners in Canberra, Australia, must now walk their companions daily or face a $2,700 fine, due to a 2019 animal welfare law recognizing dogs as sentient beings. Does requiring the humane treatment of animals restrict the property rights of humans and the functioning of economies?

I will not let rain, sleet, snow or dark of night deter me from walking my dogs. Dogs’ unbridled enthusiasm for a walk is so marvelous that I never want to let them down. I will confess, though, that I’ve violated Canberra’s new law.

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Political philosophers’ theories of rights describe how humans should treat each other. Humans have the capacity for rational, deliberative action. Furthermore, political rights establish the conditions for the exercise of our rational capacities. Although beyond my professional expertise, based on my understanding, I would be reluctant to say that animals have rights.

Nonetheless, I think animals should be treated humanely and ethically, even though people disagree about what exactly constitutes humane treatment. And standards for humane treatment have changed over time. In the 1800s, owners could beat horses or mules for failing to do work.

Some critics dismiss animal rights when proponents do not extend rights to insects. An advocate willing to swat mosquitos rejects what critics see as the logical extension of animal rights. I think humans can hold ourselves to whatever standards of treatment we want. We can have inconsistent standards across species and decide to treat cute animals better. And we need not compromise our health and safety; we can, for instance, spray mosquitos.

The most relevant animal treatment issues today involve hunting and eating meat. My personal opinion here is irrelevant. But standards of care for animals have increased over time, so I can imagine hunting and eating meat being banned someday.

Do requirements for humane treatment compromise the property rights that provide the basis for our economy? As a free-market economist, I normally defend peoples’ economic freedom to use their property as they wish. Shouldn’t economic freedom include the freedom to organize dog fights?

Perhaps I am rationalizing, but I do not believe so. Property rights are ultimately rights to use things we own in certain ways. Ownership of animals may entail fewer rights than ownership of, say, furniture. Parents have more limited decision rights for their children than for themselves and can lose parental rights for abuse or neglect. Since standards of humane treatment can be inconsistent, we may decide that killing pigs or cattle but not dogs or horses for food is OK.

Would the banning of meat decimate agriculture? The impacts would be significant; the U.S. has over 90 million cattle, 70 million hogs and 230,000 poultry farms. The 2.3 million Americans working in agriculture will likely continue to do so, probably growing crops instead of raising animals. We have already seen a more radical transformation, however, as 80% of Americans worked in agriculture in 1800.

Banning meat would cause ranchers losses on the poultry and livestock they owned. However, meat is unlikely to be banned until many more Americans first become vegetarians. Fewer meat-eaters would reduce livestock populations and prices, reducing the losses from an eventual ban.

Animals, though, may not benefit from vegetarianism. The vast majority of America’s 70 million hogs are alive today because they are being raised for market. Most farm animals would not exist if we did not eat meat.

Is it better for an animal never to be born than born and raised to be eaten? Population ethics wrestles with a version of this question. China’s one child policy controlled population growth, but millions of children were never born. Does a higher quality of life for those lucky enough to be born offset the lives that never were?

Humanity is arguably making moral progress: slavery has been abolished, war is becoming rarer and we insist on humane treatment of animals. Ownership, limited by norms of humane treatment, leads humans to care for animals. Evolving standards of humane treatment need never cause economic calamity.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

3 months ago

Prosperity and inequality

(Pixabay)

The world has achieved an unprecedented level of prosperity. Economist Deirdre McCloskey has labeled this the Great Enrichment. For the first time in human history, standards of living for ordinary people – as opposed to emperors or kings – have risen above subsistence.

Historical estimates of Gross Domestic Product (GDP) per capita, economists’ preferred measure of living standards, dramatically document the Great Enrichment. Economist Angus Maddison began this project, now continued at the University of Groningen Growth and Development Centre. The dollar figures mentioned here are in 1990 dollars, adjusted for inflation, and comparable across countries.

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Professor Maddison estimated world GDP per capita in 1 AD to be $445. One thousand years later, it was $436, meaning complete stagnation for a millennium. Slow progress then began, with GDP rising to $566 in 1500 and $667 in 1820 before really taking off, reaching $875 in 1870, $1,525 in 1950 and $6,049 in 2001.

This represents an incredible improvement in the quality of billions of human lives. The World Bank defines extreme poverty as GDP per person of $2 per day or less. Essentially the world was poor until the middle of the 19th Century. And little progress was occurring. In most countries, over a century there would likely be no meaningful improvement in living standards.

The Great Enrichment began in Great Britain and the Netherlands around 1700. Britain and Holland remained the two leading world economies until the U.S. caught up in 1870 and became the world’s leading economy before World War I.

Over the past 50 years, prosperity has extended across the globe. China and India have received the most attention. Living standards have increased by factors of nine in China since 1976 and four in India since 1990. Prosperity in the world’s two most populous nations has really boosted global GDP.

Africa missed out on growth during the 20th Century. But numerous African nations are now becoming significantly richer. Since 2000, living standards have increased by 50% in Kenya, over 100 percent in Namibia, Sudan and Tanzania and 600% in Angola.

The Great Enrichment provides perspective on America’s current concern with income inequality. Enormous differences in wealth certainly exist. Jeff Bezos is worth over $100 billion, while the average household is worth $97,000. Several Democratic presidential hopefuls propose ambitious plans to reduce inequality.

Redistributionist policies take the existence of wealth as given. Economist John Kenneth Galbraith argued in The Affluent Society that since we had become a prosperous nation, we could now afford to address societal ills. This reasoning has become received wisdom.

Economic history, by contrast, shows that today’s wealth is the exceptional condition. America has billionaires, and a billion dollars is more money than one could spend in several lifetimes without wasting it. Yet, even America’s poor households enjoy a standard of living that kings and emperors of the past would envy.

The Great Enrichment has made the average person become wealthy for the first time. Unfortunately, prosperity has not been equally shared. Perhaps human society cannot produce wealth without inequality. Wake Forest University philosopher James Otteson offers this perspective:

What presents us with an uncomfortable dilemma is that the clear lesson from human economic history seems to be that the only way we have ever discovered to enable substantial numbers of people to rise out of poverty is a set of political-economic and cultural institutions that also engender inequality.

Many Americans believe in American exceptionalism, that our nation is somehow better than others. America helped drive the Great Enrichment and was the first nation founded on the principle of freedom. Yet some of America’s founders owned slaves. I’ll let others debate if we’re exceptional.

America’s accomplishments are due to our laws and constitution. I do not believe that America is immune from the forces shaping social interaction among humans. The American flag and the Pledge of Allegiance do not guarantee prosperity.

Just as freedom must be protected by every generation, prosperity must continue to be produced. If a quest to address income inequality compromises the conditions necessary for prosperity, we might once again find ourselves all equally poor.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

3 months ago

How much does government assist the poor?

(PIxabay, YHN)

Americans care about assisting the less fortunate, and over 100 government programs carry out this task. A closer examination, however, reveals that much of this funding goes to other purposes. This raises questions about how best to assist Americans needing help.

I will focus on two programs, Temporary Assistance for Needy Families (TANF) and Medicaid. Other programs experience similar diversions. For instance, subsidized college loans often help students from well-to-do families attend elite schools.

TANF provides cash assistance to America’s poor. It was created by the 1996 Personal Responsibility and Work Opportunity Reconciliation Act to replace Aid to Families with Dependent Children. TANF is what most people probably think of as government welfare.

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In 2017, Alabama spent $202 million on TANF, or $220 for every poor Alabamian. Much of this was not cash assistance. For instance, Alabama spent $5 million on education, training and work programs that year. This makes sense, given the emphasis of the 1996 reforms on work requirements and training to end long-term dependence. Yet TANF also funds child care, pre-kindergarten, child welfare services, home visitation programs, and programs to encourage two-parent family formation and prevent out-of-wedlock births. Administration costs amount to 7 percent of TANF spending nationally, and distressingly almost 13 percent in Alabama. Cash assistance totaled just 23 percent of total TANF spending.

Medicaid covers disabled Americans as well as the poor, as established in the 1965 legislation. Care for the disabled is expensive, consuming over one-third of program spending. But Medicaid also covers nursing home care for the non-disabled elderly, which accounts for 21% of spending.

Why does this happen? As many observers note, poor Americans are not an influential interest group. They do not vote at a high rate and cannot afford the most powerful lobbyists in Washington or Montgomery. By contrast, senior citizens possess significant political clout. Diversion of Medicaid dollars to nursing home care should perhaps not surprise anyone.

The political problem seems intractable: more political influence for the poor would fix the problem but is also the source of the problem. Except I think we can push this further.

If the poor are so politically weak, why do so many programs assist the poor? Wouldn’t politically influential seniors find it easier to just get politicians to pay for nursing home care than redirecting Medicaid funds?

Americans’ desire to help their fellow citizens in need explains politicians’ appropriations for Medicaid and TANF. Political influence is necessary, however, to prevent diversion to other purposes. Government is like a game played on two levels. The visible, surface game involves legislation and appropriations by Congress or the states. The game beneath the surface involves regulations and rulings which determine how the money gets spent.

Americans’ desire to help ensures appropriations to programs like TANF and Medicaid. But because the poor lack the political resources to shape the detailed rules, funds do not get spent as intended. Helping the poor through government is challenging.

We might accept diversion of funds as a cost, like shipping costs. We may simply have to spend $2 to get $1 to TANF and Medicaid beneficiaries. But I think that private philanthropy offers a more effective alternative.

The charitable sector has costs. Bogus “charities” have basically siphoned off donations through ridiculous salaries paid to officers and staff. Today watchdog groups like Charity Navigator and GuideStar can readily identify fake charities. With a responsible charity, donated funds get used for the intended purpose.

America has a range of charities pursuing alternative ways of helping persons in need. We donate over $400 billion to charity annually, even with scores of government programs assisting the poor. Tax cuts tied to a walk-back of government assistance would, I believe, significantly increase charitable giving. Medicaid is so poorly funded that patients in many states struggle to find doctors willing to treat them. Philanthropy offers much more potential to assist Americans.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

4 months ago

Will the best team win?

(PIxabay, YHN)

The field is set for the college football playoff. Good sportsmanship often involves wishing, “May the best team win!” But the best team does not always win, which illustrates an important element of economics.

Either LSU, Ohio State, Clemson or Oklahoma will be crowned champion on January 13. I will not prognosticate about the winner. Football fans know that many small things affect a game’s outcome. The football can take funny bounces. Passes can get deflected or dropped. A player can slip. Officials can miss a call.

How much do small, seemingly random things matter? Players can lose concentration and focus, leading to self-doubt and tentative play. Coaches can panic and make bad decisions. Small things can snowball.

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Yet the games must be played to determine the best players and teams. Saying that things will be decided on the field means that experts’ judgments do not rule. LSU quarterback Joe Burrow was a 200-1 longshot to win the Heisman Trophy before the season. A stellar season on the field matters, not the prognostications.

The randomness I mean here is not necessarily a roulette wheel determining outcomes. Rather, I mean that if, say, Clemson and Ohio State could hypothetically play 10 times, each team might win five games. We could think of the outcome of their game as like flipping a coin.

Small factors also affect economic outcomes. The decisions and actions of people across the globe also influence economic actions. No one can know everything relevant for the success of a business. The many unknowable factors add to the appearance of randomness.

Contemplating a random world can be troubling. We might accept that the football could have bounced differently. But was luck as opposed to hard work and smart decisions really responsible for Amazon’s success? Has Warren Buffet just been amazingly lucky? We might want to say no, but being in the right place at the right time often matters.

The structure of sports contests suggests that bad breaks might impact business less. A dropped fourth-down pass in the final minute might decide a football game. A business has time to respond to unfortunate events like a fire at their factory. Furthermore, momentum seems more significant in sports. Bad luck in the first quarter could break a team’s spirit; a salesperson seems more capable of bouncing back from a couple fruitless calls.

Economists must learn to think of the world in terms of probabilities, especially because of the effects of relevant but dispersed information. With enough information we perhaps would have predicted Amazon’s success in 1997; a wise investor was probably thinking in probabilities.

Randomness complicates analysis and learning. For instance, the winner of a football game is not necessarily the better team. Underdogs sometimes win, and good teams can play poorly. If Ohio State vs. Clemson is like a coin flip, the teams would remain evenly matched regardless of who won a close game.

But dismissing game outcomes as coin flips runs the risk of allowing expert opinion determine the results. If Oklahoma defeats LSU, experts might still consider LSU the better team. Should LSU then play for the title despite losing?

Suppose that a new tech startup is losing money after three years, while a new concept restaurant is amazingly successful. Should the plug be pulled on the tech company and the restaurant expanded into a national chain? Economists like to say that profit and loss answers such questions, but profit also depends on luck.

The challenge is assigning importance to today’s events relative to the past. Mathematics offers a precise formula, Bayes’ Rule, for the world of math problems. We learn that we must revise our beliefs based on today’s events, although exactly how much is often unclear. Alabama finally missed the college football playoff this year; should we then dismiss them as contenders next year? I suspect not.

Fans say that football is life, but it can also illustrate economics. The best team doesn’t always win. This insight helps us to see the world probabilistically, which is indispensable for sound economic thinking.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

4 months ago

Are we running out of resources?

(BOEM/Flickr)

Thanksgiving began as a celebration of nature’s bounty. Nature’s bounty includes natural resources. Despite reports to the contrary, Cato Institute research demonstrates that we still have plenty of natural resources. Human ingenuity and nature’s generosity explain why.

That we must run out of oil, natural gas, and other resources seems obvious. Since we cannot manufacture deposits of oil, copper, zinc or other resources, these must surely get used up one day, right?

News stories repeat this refrain. Fifteen years ago, news abounded of the end of cheap oil. We appeared to be running out of oil and natural gas during the energy shortages of the 1970s. Oil reserves were supposed to be gone by 2013.

Yet we still have plenty of energy and minerals; U.S. oil production hit an all-time high in 2018. What happened? I’ll consider two factors.

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Reported resource reserves are proven reserves, or deposits of a known location, size, and quality. Dividing proven reserves by annual use gives the number of years of oil, copper, or whatever remaining. We have an estimated 53 and 46 years of oil and copper left.

Proving the location and quality of reserves takes work. As economist M. A. Adelman emphasized, proven reserves are produced. Investing in proving reserves not needed for 100 years will lose money. We have found only a tiny fraction of the resources estimated to be in the Earth’s crust. New reserves will be found as existing ones are used. We might have 50 years of reserves remaining for decades.

New and better methods of extraction increase effective reserves. Horizontal drilling and hydraulic fracturing have unlocked shale oil deposits. Earlier steam injection increased production from existing fields.

Second, things only become resources when people figure out how to use them to produce goods and services. Saudi Arabia’s oil deposits generated no wealth for centuries. Knowledge is the ultimate source of value in our economy, and the mind is the source of knowledge. As economist Julian Simon put it, humans are the “ultimate resource.”

Usually, more than one formula or process can produce a good. When we are cooking, we can usually substitute for a missing ingredient and produce a tasty dish. We can use less of a resource if needed, or substitute something else; in the 1800s, people switched from whale oil to kerosene for lighting homes. We need not run out of resources because we can use alternatives if s specific mineral or fossil fuel runs out.

Because reserves poorly measure resource availability, Cato’s index uses prices instead. Economic theory tells us that prices should reflect the best guesses concerning future discoveries, improvements in extraction, and emerging substitutes. If we are truly running out of something, its price should increase sharply.

This was the basis for Julian Simon’s bet with Stanford University biologist Paul Ehrlich. In 1980, Simon let Ehrlich pick five resources that he thought were most likely to become depleted. Ehrlich selected chromium, copper, nickel, tin and tungsten; by September 1990, the prices had fallen and Simon won.

The new Cato measure is accordingly called the Simon Abundance Index and uses fifty commodity and resource prices. Price comparisons over time require adjustment, most importantly for inflation. But since earnings rise in a growing economy, the Index also adjusts for income. This puts commodity prices in terms of time, say the number of hours of work required to buy ten gallons of gas.

Simon Index prices fell 65% between 1980 and 2017 adjusting for inflation and earnings. When adjusting only for inflation, prices fell 36%. Over these years, world population increased by more than three billion persons. Markets found enough new reserves to accommodate population growth.

Limits exist to nature’s bounty, our ability to harvest this bounty and for substitutes for resources. And we must consider fossil fuels’ impacts on pollution and climate change. Still, the Simon Index shows that we are not running out of resources. Because knowledge creates natural resources, we can potentially maintain a growing economy for generations to come.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

5 months ago

When the impossible happens

(DoD/Contributed, YHN)

The Berlin Wall, the most visible manifestation of Communist oppression, came down thirty years ago. This totally unexpected event was a triumph of hope and the human spirit. How can social scientists explain a seemingly impossible event?

The Wall isolated West Berlin, part of democratic West Germany, almost 100 miles inside communist East Germany. The Wall and the Iron Curtain appeared to permanently divide Europe. The Wall was built in August 1961 to halt an East German exodus, including 30,000 persons in July 1961. The Wall symbolized the human tragedy of European communism: an existence so bleak that nations had to be turned into virtual prisons.

The Wall did not seem to be going anywhere. The East German regime was well-entrenched and supported by its ruthlessly efficient secret police, the Stasi. And military intervention by the Soviet Union, as in Hungary in 1956 and Czechoslovakia in 1968, loomed should a Warsaw Pact nation abandon communism.

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Change, though, was brewing. Mikhail Gorbachev had initiated glasnost and perestroika in the Soviet Union, and in Poland, the Solidarity labor movement was sharing power. Eastern Europe’s planned economy was in shambles. High oil prices had propped up this woefully inefficient system, which workers described aptly as “We pretend to work, and they pretend to pay us.” Tumbling oil prices in the 1980s brought ruin to European communism.

Events unfolded quickly. In June 1989, Mr. Gorbachev announced that the Soviet Union would no longer intervene to prevent regime change in eastern Europe. Peaceful Monday evening protests began in Leipzig, which the East German regime chose not to violently crush. The soldiers and leaders, I think, realized they were no longer building or defending a worker’s paradise; maintaining a bankrupt regime was just not worth bloodshed. Protests spread to East Berlin and other cities and East Germans began migrating west through Hungary. After the Wall fell, Germany peacefully reunited in 1990.

How can we explain such rapid and unexpected change? Public choice economists study government decision-making, most frequently within democracy. Following the lead of Gordon Tullock, some public choice economists, myself included, have also studied authoritarian politics. Duke University economist Timur Kuran’s research on preference falsification provides an excellent explanation.

How does this work? The stability of any regime, democratic but particularly authoritarian, depends on public attitudes and statements by citizens, soldiers, bureaucrats, and other government officials. People also have personal beliefs about the regime or leader.

Publicly expressed beliefs can differ from personal beliefs, the possible falsification. Authoritarian leaders typically punish dissent, providing one reason for people to lie. The incentive is greatest when almost everyone publicly supports the government.

A successful dictator needs widespread expressions of support, which can be sustained, or coerced, even when most everyone despises the regime. The public support can keep people from learning that almost everyone dislikes the regime. An unpopular dictator can maintain control and yet still be highly vulnerable. A few sparks can suddenly and unexpectedly bring the Berlin Wall crashing down.

Is preference falsification relevant for America today? I think so, in two ways. Many supporters of President Trump face social pressures and sanctions. Game show host Chuck Woolery, for instance, recently said he thought that supporting Mr. Trump ruined his career. Whether true or not, Mr. Woolery’s sentiments reflect the views of many Trump supporters, who may well choose to remain quiet.

Republican politicians have also faced a significant backlash from Republican voters for criticizing Mr. Trump. South Carolina’s Mark Sanford, for one, lost a 2018 primary challenge. Other Republicans have surely stayed silent even when disagreeing with the President’s actions and tweets.

Widespread preference falsification allows rapid and unexpected change. Many observers think that the Republican-controlled Senate would never remove President Trump if he were impeached; preference falsification suggests not so fast. And public opinion polls will almost certainly underestimate Mr. Trump’s support among voters, as in 2016. We may just need to expect the unexpected.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

5 months ago

The good and bad economics of plea bargains

(YHN)

Plea bargains let persons accused of crimes plead guilty and receive reduced charges or a reduced sentence. Although some people find the reduced criminal incentives offensive, this bargaining makes economic sense. But our mass incarceration illustrates a limit of the economic argument.

Our criminal justice system extensively employs pleas; 97% of criminal convictions result from such bargains. Although TV dramas focus on jury trials (and particularly defense lawyers like Matlock or Perry Mason), trials are rare.

Plea bargains make economic sense because trials are costly. Trials require courtrooms, lawyers, judges, court reporters, bailiffs and juries. Witnesses must come to court to testify. A guilty plea saves these costs.

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Why should defendants ever plead guilty and willingly agree to go to prison and waive their right to an appeal? A plea deal must offer defendants a better deal than conviction at trial. In a murder case, for example, prosecutors might agree not to seek the death penalty. A plea-bargained conviction ensures at least some punishment for a crime and helps deter crime overall.

This bargaining situation parallels labor strikes. Strikes are costly: workers miss paychecks, factories lie idle and businesses might permanently lose customers. Both labor and management are worse off than if they agreed to the same contract with no strike. Strikes represent bargaining failures.

The economic model of bargaining predicts that plea deals should reflect the strength of the evidence. The prosecution will not give much with an open-and-shut case, but the defense attorney should recognize this and counsel shaving a few years off the sentence. If important evidence gets suppressed or a witness recants their testimony, the shaky case makes prosecutors agree to a reduced charge.

Actual guilt or innocence is secondary in the bargaining model to the likelihood of conviction at trial. While we might hope that innocent defendants always get acquitted, wrongful convictions happen, especially with overworked and underfunded public defenders. An innocent person should consider a deal if they look guilty enough. Emotions, not logic, might explain an innocent person’s refusal to plead guilty. We must move past the fantasy that only a guilty person would ever plead guilty.

Building criminal justice almost exclusively around plea bargaining has negative consequences. These highlight the limits of the economic focus on trial costs. Plea bargains enable incarceration on the American scale, with over 2.3 million persons behind bars as of 2016. Whether you think our current incarceration rate is repressive or responsible for the significant drop in crime over the past three decades, mass incarceration could not happen without low-cost plea bargains. The constitutional right to a speedy trial would be violated without guilty pleas. Conversely, speedy adjudication would require many more judges, trial lawyers, and courtrooms.

Another negative of plea bargaining is adding charges to encourage a deal. This is largely necessary. Suppose that the fair sentence for a crime is ten years. If this is the max sentence at trial, a defendant will only accept a plea for a shorter sentence. Prosecutors need to threaten twenty years to induce a plea to ten years. This practice has received attention in the ongoing college admissions bribery case. Actress Lori Loughlin and the other parents refusing plea deals were recently hit with additional bribery and conspiracy charges.

Finally, pervasive plea bargaining might undermine the quality of criminal evidence generally. Cross-examination uncovers mistakes, lies, and bogus theories, but only at trial. If over 90% of convictions come from pleas, the evidence need only be strong enough to induce a deal, not to withstand cross-examination. Sloppy and faked drug tests in two different Massachusetts crime labs recently led to 47,000 convictions being thrown out. Weak evidence also increases the likelihood of innocent people being accused and forced to plead guilty.

We may wish to blame “the system” for plea bargaining’s problems, but ultimately we fail to provide sufficient resources for more trials. This makes prosecutors coerce pleas, inevitably producing miscarriages of justice. Economists contribute too, by overemphasizing the immediate cost savings from plea bargaining.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

5 months ago

Did we win the trade war?

(Pixabay, YHN)

President Trump recently announced a partial trade settlement with China. Does this mean we have won the trade war?

Details remain sparse, and the present deal may merely forestall further tariff hikes. It may be a truce rather than a peace treaty. Nonetheless, avoiding escalation of the trade war is good news.

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To think about trade with China or other nations, we should not view nations as trading. Individuals and businesses trade through buying. As consumers, we face a range of options for cars, clothes, phones and so forth. Sometimes a “foreign” product better serves us or offers comparable value at a better price. Businesses similarly consider who can best supply the inputs they use. Today’s global supply chains make the difference between foreign and domestic manufacturers a matter of degree.

Viewing trade as individual action helps us recognize that trade makes consumers better off. Overseas sales boost American firms’ revenues and make their customers across the globe better off too. Voluntary trade in markets benefits all involved, even when they live in different countries.

All nations’ governments limit their citizens’ freedom to trade internationally. This is unfortunate; a world economy with everyone participating would be more prosperous. And governments use their tax dollars to help their companies sell in foreign markets. These export subsidies hurt the world economy by making products artificially attractive to consumers.

What can we do if other nations keep their citizens from buying American products? As a rule, I think we should engage in trade to the extent possible. Limited trade still produces benefits.

The charitable interpretation sees President Trump’s trade war as trying to make China open their markets. Tariffs on Chinese imports threaten the profits Chinese companies earn selling here. A trade war tries leveraging this pressure for a better deal. If successful, the costly trade war would yield future benefits.

Yet pressuring governments on trade is problematic. A government that restricts imports demonstrates relatively little concern for their citizens’ well-being. For many years Japan limited rice imports, an important staple of their national diet. If Japanese rice growers were so important that politicians were willing to make households (who could vote against the politicians in elections) pay more for rice, could we possibly have enough leverage to force a policy change?

The dispute with China also involves allegations of unfair trade. One element of unfairness is government assistance to companies exporting to the U.S. Another component is currency manipulation, or keeping the value of China’s currency, the yuan, low to make exports artificially cheap. (Intellectual property and technology transfer are also concerns but these issues are sufficiently involved to warrant separate treatment.)

Government export assistance raises fairness concerns and harms the world economy. We might accept it when American companies lose out in fair competition against companies from Canada, Europe or Asia. Export subsidies inflict pain on Americans with no gains for the world economy. Why should we let American companies go out of business and American workers lose their jobs due to government-assisted exporters?

Yet establishing the unfairness and even existence of specific forms of assistance when governments are extensively involved in the economy is exceedingly difficult. Are the tax breaks and worker training provided by Alabama and other states unfair assistance in international trade? International finance economists do not agree whether China is currently manipulating the yuan to aid exports. Absent some way to clearly identify unfair assistance, every American company facing international competition will seek protection.

The details on this agreement and any follow up agreements will tell us if President Trump’s trade war has increased the freedom of Americans and Chinese to trade. Wars sometimes result in bloody stalemates, with leaders then peddling a deal restoring the status quo ante as victory. The cost of trade wars and shooting wars makes peace with honor, if possible, an attractive alternative.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

6 months ago

The persistent problem of hazing

(Pixabay, YHN)

Two Troy University fraternities were recently suspended for hazing, which is a recurring problem at our nation’s colleges. According to Wikipedia, 20 college students have died in hazing incidents this decade. Economics can offer insight into how initiation rituals help build groups and why hazing persists.

In addition to fraternities and sororities, bands, sports teams, firefighters, and military units have all had abusive initiations exposed. Economists would hope that our insights will apply across different groups.

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Economics distinguishes between positive and normative analysis. Positive analysis focuses on factual questions, cause and effect, and how things work. Normative economics deals with questions about what should be.

My discussion is positive. Personally I did not join a fraternity and consider initiation rituals ridiculous. Economists focus on understanding practices in society without imposing personal biases. We should understand what rituals do before we possibly ban hazing.

Enduring initiation signals a new member’s commitment to a group’s cause or purpose. Initiation differs from training. Training develops skills used in group tasks; initiation generally does not. Demanding training can cause many applicants to drop out, similar to initiation.

What types of groups benefit from making prospective members signal commitment? Ones where the group experience or its performance depends on members’ actions and effort, and where the valued types of effort are difficult to describe. Fires and coworkers’ carelessness can put firefighters in grave danger. Firefighters need to have each other’s backs, and in ways that go beyond training protocols. Initiation signals this willingness.

Initiation screens prospective members. Sometimes a group can enroll all applicants and boot those failing to perform. Natural limits on group size make signaling more valuable. Only eleven players play football at once, only so many firefighters ride on a truck, and an exclusive fraternity or sorority cannot admit everyone.

Signaling also generates value when other ways of screening fail to identify high quality applicants. The inability of resumes, interviews, and background checks to identify the best potential members makes signaling more important.

An action works as a signal when only outstanding potential members willingly take the action. That is, a good signal separates the prospective great members from others. Many things serve as signals in life; I recently wrote about Professor Bryan Caplan’s book on higher education as a signal.

Economic models of signaling reveal an unpleasant truth: a signal is valuable because it is costly. Initiation rituals consequently must be unpleasant or humiliating. A pleasurable initiation would not deter any would-be members.

Initiation likely persists because it helps sustain cohesive groups. Yet even if hazing “works,” alternatives may exist. Perhaps a less costly signal could still separate the prospective good and bad members. The initiation could be less demeaning and dangerous – and not cross the line into hazing – and still help a fraternity or fire department function effectively.

Human emotions can make initiations unnecessarily dangerous or persist when no longer needed. Turnabout may not be fair play, but is a natural reaction after we undergo a trial. Rituals may not be precise and are carried out by members with imperfect memories. Members may believe they endured worse abuse than occurred and unintentionally push exercise and drinking into hazing.

Economics also suggests that preventing hazing will be difficult. A cooperative victim greatly facilitates criminal prosecutions. Normally crime victims want their attacker punished. Prosecuting “victimless crimes” like drugs or gambling is difficult because all parties voluntarily participate; few gamblers want their bookie arrested and put out of business.

Young men and women choose to join fraternities and sororities and undergo initiation. Pledges will be reluctant to report hazing, even with websites and hazing hotlines. And illegality serves as a further barrier to reporting; a fraternity member risks punishment when reporting an initiation that went too far.

Should initiations be done away with as a relic of the past? Perhaps, but we should recognize that they play a role in building valued groups in society. We should constantly assess if safer initiations can serve the signaling function.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

6 months ago

Is it payday for college athletes?

(Pixabay, YHN)

California recently passed a law allowing college athletes to receive compensation. This stokes anew the debate about paying college athletes and may provide an example of competition between governments producing legal change.

Whether college athletes should be paid provokes strong responses.

On the one hand, student-athletes already receive numerous benefits, including a scholarship and tutoring assistance in addition to recognition and fame from playing on television and in front of huge crowds. Do they really need more?

On the other hand, FBS football and Division I men’s basketball together generate billions in revenue. The fans pay to watch the players, not the university’s faculty or administrators. Why shouldn’t the persons doing the hard work and bearing the risk of injury get a share of the pie?

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The bill was passed by the California legislature and signed by Governor Gavin Newsome in September. The law has sometimes been described as paying student-athletes, but this is not accurate. Athletes will be able to make money off their name and image, basically by legalizing endorsement deals. Athletic departments would not pay student-athletes. This arrangement would be good for universities because the payments will not come from athletics department budgets, but raises equity issues.

How many college athletes have marketing potential? Tua Tagovailoa certainly, but even most Alabama football scholarship players are pretty anonymous and largely interchangeable from an endorsement perspective. Teams could have stars with six-figure endorsement deals playing alongside others earning nothing. The seemingly limited potential endorsements for women athletes also raise Title IX gender equity concerns.

Economics provides a reason to downplay the pay disparities. In the market, the money to pay employees (or spokespersons) must come from their employer’s revenues. With sufficient competition for their services, workers get paid the value of what they produce for a business. Economists are very used to thinking in these terms. We see no problem with Men’s World Cup soccer players getting paid ten times more than Women’s World Cup players because the men’s tournament generates so much more revenue. Nonetheless, pay disparities trouble many people.

Competition between governments hastens social and legal change, and we may get to see competition in action. For example, 15 states gave women the right to vote before passage of the 19th Amendment. Research shows that Western states and territories enacted women’s suffrage to attract residents.

Let’s consider competition between states more closely. Politicians will balance the benefits of allowing player compensation against the costs. California’s legalization of payments changes the balance of benefits and costs for others. Universities now face a competitive disadvantage recruiting the best players, making other states more likely to legalize payments.

Florida legislators have already introduced a bill to follow California’s lead. Other states will likely join. Alabama legislators never enacted a lottery. I make few predictions here, but I suspect that our lawmakers will legalize these payments to keep Alabama and Auburn football competitive nationally.

Competition may not play out in this fashion. The NCAA may bar California schools from competing. If the NCAA carries through with this threat, then legalizing payments would keep a state’s universities from participating in the College Football Playoff or March Madness. This should deter competition between states. Congress could also preempt state-by-state legalization by legalizing the payments nationwide.

Whether the NCAA will kick out California schools is uncertain. It would be hard to imagine college football without USC or basketball without UCLA. An NCAA hardline would invite creation of a rival athletics association if just a few states legalized paying college athletes. The top talent would almost certainly gravitate to a rival allowing compensation.

California has acted to enable college athletes to receive compensation for generating billions in revenue. Even should the NCAA parry this thrust, California or other states might take other steps in pursuit of this goal. However the drama unfolds, college athletes seem closer than ever to being paid to play.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

6 months ago

Is Greenland for sale?

(WH/Flickr, Wikicommons, YHN)

President Trump recently suggested that the United States buy Greenland. Denmark emphasized that the world’s largest island is not for sale. Regardless of whether buying Greenland offers value, Mr. Trump’s proposal represents progress in international relations and raises interesting questions regarding property and markets.

This is not the first time we have inquired whether Denmark might sell Greenland; President Harry Truman asked in 1946. Land purchases clearly have precedent in American history: the Louisiana Purchase from France in 1803, the Alaska Purchase from Russia in 1867 and the Gadsden Purchase from Mexico in 1854.

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Some commentators who engaged with President Trump’s proposal raised the question of an appropriate sale price. We would be purchasing the sovereignty of the territory, not each piece of property. Greenland would become a U.S. territory and the current property owners (presumably) could maintain ownership. (However, land claims under Mexican law in parts of Texas were ignored after Texas joined the Union.)

Throughout human history, kings, emperors and nations have taken land via military conquest, with payment in blood. America has also expanded via war, acquiring the future states of California, Arizona, Nevada, Utah and parts of Colorado and New Mexico from Mexico and Puerto Rico from Spain. The American Revolution resulted in our first land acquisition, independence from England.

Wars have frequently redrawn the map of Europe. Germany seized the French provinces of Alsace and Lorraine after the Franco-Prussian War. France’s desire to reclaim these provinces helped ignite World War I.

Economic freedom begins with secure property rights. If you own something, others can only acquire with your voluntary consent. This produces the buying and selling of markets. Nations should deal with each other similarly, as opposed to through force and conquest.

Unfortunately, individuals and nations have often tried taking territory and other possessions by force (or by enslaving others). Might makes right has too often been the guiding principle.

Underestimation and discounting of the costs of war have encouraged nations to pursue conquest. Psychologists have documented the pervasive nature of overconfidence bias. The combatants in wars have often expected quick and easy victory, making conquest appear inexpensive. And the leaders who decide on war rarely do the fighting and dying.

Psychology also complicates the selling of land. People form sentimental attachments to family homes or farms and possess patriotic and nationalistic feelings. Sentimental attachments likely contribute to the use of eminent domain by governments to force sales. And Greenlanders do not want to lose their national identity as part of Denmark.

Selling land I think also touches fundamental views about how to live life. For thousands of years, people, tribes and nations have tried forcibly to take others’ land and possessions. People have long had to protect their possessions. We are likely hard-wired to stand our ground and protect what we own. And we also may perceive our self-interest as requiring fighting to protect what is ours.

Market exchange has arisen only recently in human history. A real estate developer’s offer to buy our land is not the same as a bully’s or bandit’s threats. Yet the deep connection many people feel to their land may make the offer sound like a threat. Sentimental attachments and perceived self-interest combine to make the price of purchasing land very high, when people are even willing to sell. People who want to use land for valuable purposes may rationalize using force to take it. Today this primarily occurs through eminent domain, which is far less disruptive for society than bloodshed.

Economic freedom requires secure ownership. Landowners can rightfully refuse even a very generous offer, and for any reason. Yet markets require that owners willingly sell land. That the world’s most powerful nation considers buying instead of conquering a territory is a testament to human progress. President Trump’s offer for Greenland may not be generous enough, but it certainly is not preposterous.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

6 months ago

Is Alabama a poor state?

(PIxabay, YHN)

By most measures of income, yes, Alabama is a poor state, but income does not account for the cost of living. Does a low cost of living offset lower income in Alabama? And is a low cost of living necessarily good?

Based on Census data, Alabama currently ranks in the bottom five states for both median household and per capita income. Alabama has been in the bottom ten states on these measures for years.

In 2018 Alabama ranked 46th, with less than half the cost of living in Hawaii, the highest cost of living state. Annual of income of $50,000 certainly goes further in Alabama than in Hawaii or New York. When adjusting income for cost of living, Alabama ranks in the thirties among states.

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Do cost of living measures truly account for differences across states? This is an intriguing question. The measured cost of living overstates and understates the full cost in some ways.

Cost of living measures overstate differences in living costs due to substitution. People will buy similar goods when one increases in price relative to the others. Suppose that the price of Coke doubles while the price of Pepsi remains unchanged. Many people consider Coke and Pepsi interchangeable, or what economists call close substitutes, and will just buy Pepsi and be little affected by the price increase.

Substitution applies with most goods. Consider housing, one of the biggest factors in cost of living differences. A person might rent a one bedroom apartment if they lived in New York City versus a townhouse if they lived in Montgomery. A price index must measure the prices of the same market basket of goods for an apples-to-apples comparison. Yet price differences lead consumers to substitute.

Perhaps the bigger difference between high and low cost states is the difference in availability of goods and services in expensive cities like New York or San Francisco versus Alabama. For instance, a major city has a much wider variety of restaurants, including very expensive ones. Is the cost dining out higher? Yes, but dining involves eating food that is closer to your tastes.

Here’s another way of considering this point. The cost of dining at one of America’s finest restaurants if you live in Alabama likely includes airfare. The cost of dining out in Alabama does not reflect prices at many fancy restaurants, giving Alabama a low cost of dining.

Availability applies to museums, art galleries, and shopping in addition to restaurants. The cost of living is lower but fails to include certain options at all. Differences in availability do not impact everyone the same however. An Alabamian who does not value fancy restaurants, avant garde art, or $25 cups of coffee will not miss out. Economic statistics cannot control for such differences in tastes.

Technology and innovation, specifically the internet, Walmart and Amazon, have increased rural America’s consumption opportunities relative to large cities. Alabamians and New Yorker can both now find their favorite music, books and movies online.

Economic theory tells us that real estate prices should reflect all the good and bad things about a place. Anything making a community a more desirable place to live – including nice weather, recreation, and natural beauty in addition to consumption opportunities – increases the demand for housing and thus real estate prices. Things that people dislike lead to lower prices. Because not everyone agrees on the desirability of each item, real estate prices must reflect average or typical preferences. Government land use and zoning policies, however, reduce housing supply and increase prices, so price differences do not reflect desirability exclusively.

On average, house prices will be lower in places where fewer people prefer to live. Economists consequently recognize the limited appeal of inexpensive housing in recruiting job candidates. Differences in the availability of goods, services and opportunities offset lower prices for common items. As a result, whether you find Alabama to be a poor state is to some degree a matter of taste.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

7 months ago

What is the responsibility of business?

(This Morning/YouTube, Wikicommons, YHN)

The Business Roundtable (BR), a group of chief executive officers (CEOs) of some of America’s largest corporations, recently released a statement claiming that businesses have a broader purpose than simply making profit. By contrast, in a famous essay economist Milton Friedman argued that the social responsibility of business was to increase its profit. The BR statement may perhaps be pure public relations. Still, should we regard profit as less important than other potential business goals?

Answering this depends on the nature of profits. In the market, all transactions are voluntary. No business, however large, can compel anyone to buy their product, work for them, or loan them money. Profit must be earned by producing valuable goods or services. Customers will only buy a product that delivers more value than comparably priced goods, or similar value for a lower price. Workers will only work if the pay and conditions compare favorably to other jobs.

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In a market economy, profit cannot be made through exploitation. Some people, unfortunately, do not have very good alternatives. Many Americans do not consider a minimum wage job attractive; the person willing to work for $7.25 an hour is better off, given their other options. We might lament the lack of better alternatives but any better opportunity is an improvement.

Should corporations lower prices or pay workers more instead of earning profits? Not necessarily. Profit is the reward for investors who enable investment, the hiring of workers, and production. Profit also enables charity. America’s great philanthropic foundations – like the Ford, Rockefeller, and Gates Foundations – were built off enormously successful and profitable businesses. If Microsoft were not so profitable, Bill Gates could not be so charitable today.

Why will stockholders want businesses to earn profits? Millions of Americans own stock, either directly or through their pension plans. They invest for many different reasons: for retirement, to provide for their children or grandchildren, or to enable donations to charitable causes. Money allows the stockholders to pursue these distinct goals. Absent specific evidence otherwise, we should presume that stockholders want profit.

The BR statement says that corporations have commitments to other stakeholders: they should deliver value to customers, treat and compensate employees fairly, and deal ethically with suppliers. I see no real divergence here from Professor Friedman, who insisted that increases in profit had to be achieved within society’s legal and ethical bounds.

This might seem surprising, as corporations appear to many to shortchange customers and take advantage of employees. Yet markets are entirely voluntary. Providing a shoddy product and ignoring customer complaints may reduce costs and increase profit in the near term. But dissatisfied customers will turn elsewhere and damages a company’s reputation.

Corporations rely on their employees, as the owners do not do all the work themselves. The workers know how to make a business’ products. Dissatisfied workers can quit, taking their training and skills with them. Stiffing workers on overtime or benefits may save a little money, but losing skilled workers is very costly.

Treating people the right way – especially customers, employees and suppliers – is arguably how to increase profits. It may be difficult to quantify how much this adds to the bottom line and so may appear to be an item of faith. Still, the BR statement here just seems like good business.

One of Professor Friedman’s concerns remains relevant today. CEOs make decisions, give speeches, and receive media attention but ultimately do not own corporations. Owners ultimately get to make the decisions; the CEO works for the stockholders, represented by the board of directors.

A CEO may choose to support trendy social causes to build a reputation as an enlightened executive. It is easy to be charitable with other people’s money. Hold your applause when businesses support broader social causes. CEOs ultimately should heed the stockholders and not grab the spotlight to boost their egos.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

7 months ago

Before you blame the coach

(Pixabay, YHN)

If you are a football fan, you’ll know this frustration. Your team faces third and one. Instead of handing off, the quarterback throws a pass that falls incomplete and the punt team comes on. You scream, “Just run the ball and get the first down!” Game theory suggests that your anger may be misplaced.

Often in life, our decision will depend on actions by others. Most games we play for fun fit this bill, like chess, checkers, and monopoly. Business also offers these interactions. For example, automakers consider rivals’ plans when deciding which new models of cars to develop. Decisions like which side of the road to drive on also exhibit this strategic element.

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Economists, mathematicians, and other scientists use game theory to analyze strategic social situations. While interactions between firms, members of a group, or nations are not games per se, we borrow the term from of games of strategy. Game theorists typically analyze pretty simple games to allow us to think through all the complications.

One question economists have studied is how calculating persons will play games. Pondering strategic considerations can appear overwhelming, as Vizzini and Westley’s discussion of which chalice contains the poison in The Princess Bride illustrates. We impose structure to avoid a muddle.

Game theorists have won numerous Nobel prizes in economics. John Nash, profiled in the 2001 movie A Beautiful Mind, shared the 1994 prize for helping deduce how people will play games against rational players. Nash’s idea was that players will adjust until one would want to change their action even if they knew the actions other players were taking.

Football illustrates a challenge for this adjustment. Let’s simplify the offense to a run and a pass and let the defense defend either the run or the pass. If the two teams are comparable in talent, the defense should be able to stop the play they are trying to defend but be vulnerable to the other play. Seemingly the teams here won’t be able to adjust their actions to each other: if the offense runs, the defense will defend the run, making the offense pass, and the defense then defend the pass, and so on.

Professor Nash surmounted this problem by viewing each player’s choice in probability terms. We could describe an offensive strategy as a 60 to 40 percent balance in favor of passing. And the defense might blitz on a given percentage of plays. Thinking of strategies in probabilistic terms, or what are called mixed strategies, allows mutual adjustment. If the offense passes say 20 percent of the time on third and short, the defense can’t sell out to stop the run.

Thinking about strategic choices as probabilities reinforces and challenges our intuition. One the one hand, we readily recognize the danger of being too predictable. Yet running on every third and short makes a team too predictable. So don’t criticize that pass on third and short.

Even when varying our choices, we can still be predictable. If a team alternates run then pass on third and one, opponents can guess what is coming. Flipping a coin on the sideline to decide run or pass could make sense.

Most of us will never coach a football team, but mixed strategies can help in business. For example, a branch manager did not necessarily make a mistake by choosing a weak option. It may be part of a mixed strategy yielding better performance over the long run.

Game theory is also applied to international relations. Still, I find it troubling to think of the President, with access to nuclear weapons, acting unpredictably just for strategic advantage. If unpredictability is truly valuable, President Trump should be ready to accomplish some strokes of diplomatic genius.

It is difficult for fans to validly criticize a coach’s play calls. After all, a brilliant play call can blow up due to poor execution. And that third and one pass could constitute an optimal mixing of plays. My advice is to just sit back and enjoy the season!

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.