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.

1 week ago

The hero treatment?

(Kroger/Facebook, YHN)

West Coast cities have passed “Hero Pay” ordinances increasing grocery store workers’ pay by up to $5 per hour. Numerous stores have closed in response, putting the heroes out of a job. Such poor economic policies produce avoidable harm.

Cities passing “Hero Pay” ordinances include Los Angeles, San Francisco, Oakland and Seattle. The laws apply (in most cases) to large chain-owned stores and have mandated $4 or $5 per hour temporary pay increases (frequently for 120 days) due to workers’ exposure to COVID-19. Proponents point to grocery chains’ profits during the pandemic as evidence that they can afford the extra pay.

Kroger is one chain which has closed stores after Hero Pay ordinances. The California Grocers’ Association, which is challenging the laws in court, claims that the pay hikes will increase labor costs by 20% and overall costs by 5%.

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While many Americans have worked from home during the pandemic, millions in retail, agriculture, transportation, and health care have had to work in person. Their willingness to work in the face of uncertain risk is courageous and has kept us fed and the lights on. We did not initially know exactly lethality of COVID-19, its risk profile, or whether precautions like distancing and plexiglass would work.

Do grocery workers deserve extra pay for their exposure to COVID-19? Quite likely. And the labor market has already addressed this.

Employment is entirely voluntary. No business can make anyone work for them. Businesses must pay enough to recruit and retain workers willing to
stock shelves and operate cash registers. When comparing jobs, people will consider job characteristics in addition to pay. Inherently interesting jobs require less pay, while physically demanding, boring, or dangerous jobs require more pay.

The pandemic made on-site jobs less attractive. Grocery workers must interact with both coworkers and customers, increasing their risk. Many workers would demand extra compensation to risk exposure. Businesses will not want to lose experienced and reliable workers, so companies like Amazon, Walmart, Target and Safeway increased pay last spring.

What is wrong with the ordinances if companies were already offering some Hero Pay? Workers earn their pay by helping businesses produce goods and services and competition for workers results in pay based on productivity. Grocery stores have very thin profit margins, and an extra $5 per hour could turn profit into loss, leading to store closures or reduce hours.

How many city council members have managed grocery stores? Should we take then their assurances that stores can afford the extra pay seriously? Will these generous politicians reach into their own pockets to pay grocery workers who might lose their jobs? We do not honor heroes by possibly pushing them into unemployment.

Leaving aside job losses, Hero Pay will hurt many of these politicians’ other constituents. When Kroger and Safeway close stores, Californians unable to afford delivery must drive farther to shop and likely pay higher prices for groceries.

Political observers contend that city councils are courting favor with grocery unions here. Perhaps, but there may be more involved. Government policies during COVID-19 have had sharply divergent class impacts. Many high-income earners shifted to remote working and locked themselves safely in their homes to await a vaccine, relying on others to deliver groceries and keep the internet working.

Government policy has arguably imposed the “Zoom Privilege” class’s response on everyone. I suspect Hero Pay laws reflect guilt over the burden of lockdown policies on those who must work in person. San Francisco’s Hero Pay ordinance specifically mentions a need extra pay for childcare with schools closed for in-person instruction.

The workers who showed up for work during the pandemic exhibited bravery and deserve our recognition. But Californians might prefer if their politicians had merely designated a week to honor grocery workers.

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

New perspectives on inequality

(Pixabay, YHN)

Inequality is one of America’s most contentious issues. According to a popular narrative, higher taxes on the rich are needed to control growing inequality. New research from the Johnson Center offers a different perspective.

My colleagues G.P. Manish and Steve Miller have edited a new book titled “Capitalism and Inequality: The Role of State and Market.” The volume features contributions from leading economists on thinking about and measuring inequality and government policies making inequality worse.

We can start with the provocative question of whether equality is the proper standard for our economy. Poverty, not wealth, is the norm in human history. Wealth must be created. Why do we think that wealth will be created equally across the economy?

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For a century, economists explained the value of goods based on the labor required to make them. The labor theory of value implies a relatively equal wealth distribution because most people worked long hours. The labor theory was the basis of Karl Marx’s critique that capitalists expropriated value created by the workers.

Yet the labor theory was wrong. The marginalist revolution identified that value depends on the last unit of a good available, not all value in total. Water is much more valuable than diamonds but is available in abundance while diamonds are rare. Engagement rings consequently cost far more than a case of Aquafina.

The theory also shows that labor and other factors used in production will be paid based on its marginal contribution. Although teachers make a more valuable contribution to society than professional athletes, athletes get paid far more. Many people can teach elementary school; few can throw a football like Patrick Mahomes.

Over the past 300 years, free markets have allowed humanity to prosper. But as philosopher James Otteson puts it, “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.” Market salaries also strike many as unfair. Mr. Mahomes is lucky to have been born with a talent that allows him to excel in a very popular sport but as a result now has a $500 million contract.

The authors contend that we should worry more about how inequality comes about than unequal outcomes per se. Did someone get rich by capturing a portion of value they create in the market? This does not harm anyone because the value created makes everyone better off.

“Capitalism and Inequality” also examines the measurement of inequality. Economists Thomas Piketty and Emmanuel Saez have measured income inequality using tax returns. The research, popularized in Piketty’s book “Capital in the Twenty-First Century,” argues that the U.S. experienced modest inequality after World War II but worsening inequality since the 1980s. Furthermore, high Federal income tax rates (90% until the 1960s and 70% until the 1980s) contained inequality.

Taxable income proves unreliable with the Reagan tax cuts. The reform sought to lower the high tax rates which made avoiding taxes more remunerative than earning income. Lower tax rates would produce less income sheltering and faster growth.

Tax return measured inequality jumps significantly in 1987, after the Tax Reform Act of 1986 lowered the top tax rate to 28%. No fundamental economic change could have created such an immediate spike in inequality. This is the predicted reporting of previously sheltered income.

The top income tax rate, furthermore, does not necessarily reveal the burden on high earners, or its progressivity. Economists have constructed comprehensive measures of tax progressivity based on households’ shares of taxes paid and income earned. These measures show that the Federal income tax is more progressive now than during the 1950s and 1960s. So much for the income tax holding inequality in check.

In economics and other social sciences, our approach can affect how we interpret what we observe. “Capitalism and Inequality” seriously challenges the narrative of worsening that inequality requiring punitive taxes on our economy’s great wealth creators.

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 weeks ago

Will life return to normal?

(Pixabay, YHN)

The University of Alabama System recently announced a return to normal activities for 2021-22, including full attendance at Crimson Tide football games this fall. I do not try predicting politicians’ decisions but contend that life should return to normal when we the people want it to.

Vaccinations have ramped up and the nationwide seven-day averages of new COVID-19 cases, hospitalizations, and deaths are down 49, 67 and 77 percent from their January highs. President Biden recently announced that enough vaccines should be available for all adults by the end of May. These developments are changing state policies. The governors of Texas and Mississippi have ended their state COVID-19 restrictions.

On the other hand, some public health officials want restrictions on life continued. Dr. Anthony Fauci foresees people still wearing masks in 2022. The Centers for Disease Control (CDC) wants fully vaccinated persons to wear masks and not interact with persons not from their household.

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Reasonable people can disagree over when to ease COVID-19 policies and whether the policies were on the net beneficial. They were clearly unprecedented; Supreme Court Justice Samuel Alito described them as “previously unimaginable restrictions on individual liberty.”

We need to distinguish our personal protective behavior and government restrictions on freedom to slow transmission. The pandemic involves a fundamental life tradeoff: protecting oneself and one’s family versus living in the face of risk. We should respect peoples’ differing choices. No one is less worthy for wanting to avoid exposure or being willing to attend church (or football games). The freedom to make such choices is a core element of personal autonomy and dignity.

Government orders limiting autonomy consequently require, I believe, a strong rationale. Ultimately, we the people must decide if we will sacrifice our freedom to slow transmission of an illness.

The strongest argument for government action has been the potential overwhelming of our health care system. Avoidable deaths occur if the sick receive less than the best medical care. A lack of capacity could affect medical care for accidents or other illnesses, endangering those at low-risk from COVID-19.

The potential for overcrowded hospitals is rapidly vanishing. Based on the CDC’s estimate of the infection fatality rate, at least 80 million Americans have already had the virus. The Moderna and Pfizer vaccines are over 95 percent effective in reducing hospitalization and the highest risk Americans are getting vaccinated.

A duty to protect the high-risk COVID-19 population provides another argument for restricting freedom. Vaccination also weakens this argument. Getting vaccinated should, I think, fulfill low-risk persons’ obligation (if any) to avoid infecting others.

Another rationale was delaying infections to allow doctors and researchers to learn about the new virus. The likelihood of death for newly hospitalized patients fell by over half during the spring and summer, even absent a “cure.” And we now have three highly effective vaccines. We have learned about containing SARS-CoV-2.

Our nation has taken on the feel of a dictatorship during the pandemic, with public health bureaucrats controlling every aspect of our lives. State emergency powers laws have allowed governors to declare an emergency and rule by command and should be reform after the pandemic. And we must remember that doctors and public health experts only offer us advice. We should be free to reject a doctor’s advice or CDC recommendations.

Many politicians seemingly “never want a serious crisis to go to waste,” as President Obama’s Chief of Staff Rahm Emanuel put it. Economic historian Robert Higgs has shown how powers initially assumed by Washington during emergencies have become permanent. Will business closures and stay-at-home orders become standard operating procedures going forward?

I see the research on crises as offering a warning about what may happen, not an inevitability. The phrase “Freedom Isn’t Free” normally reminds us of sacrifices made defending America. Many Americans have willingly sacrificed to try to contain COVID-19. We should soon demand a full and complete restoration of our freedom.

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

Has Washington’s stimulus measures saved our economy?

(Wikicommons, Unsplash, YHN)

Congress is expected to soon pass President Biden’s $1.9 trillion COVID-19 stimulus package, the fourth major response to the pandemic. Did these measures save our economy from a protracted recession?

Our initial response might be yes because of last spring’s economic free-fall. The stock market declined 20%. Unemployment jumped from 3.5% in February to 14.8% in April, the highest level since the Great Depression. GDP fell 10% in the second quarter.

The economy stopped collapsing and began regaining ground. The stock market hit new record highs. Unemployment fell to 6.3% in January and inflation-adjusted GDP in the fourth quarter of 2020 was within 2% of the 2019 level. Post hoc ergo prompter hoc, however, is a logical fallacy.

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Macroeconomists disagree over whether government spending can lift an economy out of recession. Keynesians, following John Maynard Keynes’ analysis of the Great Depression, see a role for government stabilization. Austrians in the tradition of Ludwig von Mises and Friedrich Hayek argue that government often causes recessions. New classical analysis has blown many holes in Keynesian theories.

Regardless of the efficacy of a fiscal stimulus, our economy may not have faced a recession in 2020. The COVID-19 slump arguably resembled an off-season shutdown in a resort community more than a recession. Except that the pandemic shutdown was unexpected while seasonal closures are planned.

The economy could have been expected to bounce back on its own if the business closure and stay-at-home orders did not last too long. And this seemingly happened during the summer and fall.

How can we assess the stimulus spending? The Payroll Protection Plan and augmented unemployment likely kept some persons employed and softened the financial blow for idled workers. These programs could also be viewed as compensation owed by the government for business closure orders, not a stimulus. Personal saving has risen sharply, so many households’ stimulus checks produced little spending.

Unemployment programs have been beset by fraud. The Foundation for Government Accountability estimates that fraudulent schemes siphoned off $36 billion, more than the $26 billion in unemployment compensation paid out in all of 2019. Do Keynesians think fraud is a fiscal stimulus?

One trillion stimulus dollars were unspent as of January 2021. While some Republicans argued that we should spend this money before approving President Biden’s proposal, the unspent money was in the process of being spent. Still, money not yet spent did not stimulate the economy in 2020.

Proponents of fiscal stimulus warned that the economy would sputter without a fall stimulus. One forecast warned of a five percentage point increase in unemployment and 5% decline in GDP. The House and Senate did not agree on an encore to the CARES Act until December. And yet unemployment fell and GDP grew in the fourth quarter.

Even if some spending helped in 2020, the current stimulus package is almost certainly unnecessary. The Congressional Budget Office was already expecting growth to recover “rapidly,” with GDP surpassing the pre-pandemic level by mid-year and unemployment returning to its prior level by early 2022. For comparison, after the Great Recession unemployment did not reach its 2007 level until 2016.

President Biden’s package includes $500 billion to stabilize state budgets. States operate under balanced budget rules, so revenue declines due to the pandemic would trigger spending cuts potentially slowing the recovery. The $500 billion was based on an 8% decline in state revenues; the Wall Street Journal reports that revenues will be down only 1.6%.

Whatever the verdict on the stimulus spending, it worsened the national debt by about $3 trillion. The long-term debt impact may easily offset any short-term boost to the recovery.

The economic case that government spending can prevent or end a recession is weak. Fortunately, the COVID-19 shutdowns did not trigger a prolonged recession. While we might say, “Better safe than sorry,” the cost of the stimulus will be with us for years 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.

1 month ago

How much did GDP decline?

(NeONBRAND, Jess Bailey/UnSplash, YHN)

The COVID-19 pandemic reduced gross domestic product (GDP) by about 4% in 2020. The virus also disrupted public education, with many schools still virtual. The tabulation of GDP has missed the economic impact of the school disruption meaning that our 2020 economic performance was worse than the statistics show.

GDP is the “market value of all final goods and services produced within a country during a specific time period.” Market prices enable comparison of apples, oranges and cars and provide evidence of the value of each good. A round of golf which contributes $60 toward GDP generates at least this much value because someone willingly paid $60 to play. Consumer purchases must pass a “market test.”

Government services – from police protection to national defense to public schools – are not priced and cannot be valued in this manner. GDP values government purchases at the amount of expenditure.

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The political test which government services must pass is more indirect than the market test. A majority of state house and senate members must vote for and the governor must sign Alabama’s annual budget. Each of these elected officials could lose their next election over this spending. Public spending must satisfy some voters.

But the state budget consists of hundreds of items. Frequently representatives vote for spending benefitting other districts in exchange for support for spending for their district. Each voter does not judge the spending to be worth more than the taxes paid.

Much government spending likely produces significant value. For instance, roads and highways enable travel and commerce while the police protect the property rights necessary for economic investment. But some spending is questionable; private schools produce similar measurable learning outcomes as government schools at a much lower cost per student on average.

Private sector consumption also produces value in excess of the price paid thanks to consumer surplus. A golfer who would have paid $100 for that $60 round of golf receives $40 of consumer surplus. The value of U.S. production surely exceeds GDP by a wide margin.

Now let’s consider the impact of school disruption. Estimates suggest that only 20 to 30% of students nationally are now in school full time. Some additional students attend a couple days per week with hybrid learning.

Current measures indicate sharply reduced learning with virtual schooling. Younger children, special needs students and students from low income households have been most affected. These students need the personal attention and (relatively) distraction-free environment of the classroom. Yet, spending on public schools has not gone down; most teachers and staff are still drawing full salaries.

Public schools supervise students during the day in addition to teaching. Some disparagingly refer to this as free babysitting. Economists would say that schools jointly produce learning and supervision. The loss of daytime supervision has burdened parents, and particularly mothers. In January, the labor force participation rate for women hit a 33-year low.

How much does the school disruption matter? GDP was about $800 billion (4%) lower in 2020 than in 2019. Spending on public schools nationally was $740 billion in 2016-17 according to the U.S. Department of Education. If we adjust this up to $800 billion for 2020, public schools’ contribution to GDP basically equals the 2020 reduction.

I have not seen an estimate of reduced value production for schools. But all schools were out of class for about a quarter (and many students were virtual for three quarters) of the normal school year. If half the total value – meaning learning plus supervision – normally created was lost, this is an extra $400 billion hit to GDP. COVID-19’s economic impact might have been 6% of GDP, not 4%.

We should not charge for government services just to facilitate the calculation of GDP. But valuing government production at cost has limitations. Due to virtual schooling, the effective decline in GDP in 2020 was likely greater than measured.

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

Dr. Daniel Sutter: Dealing with scammers

(Pixabay, YHN)

Every society must protect against those who would use violence to steal from others. After controlling criminals, swindlers become a major fear and motivates many government regulations. Yet regulations against fraud allow far worse swindling than markets.

Swindling is always wrong, but most people learn to avoid pedestrian scams like the email from an exiled prince seeking to transfer millions of dollars. Many scams violate customs and laws and the courts will help victims if possible.

Smart and clever people can perpetrate more serious swindles. Consider how Tom Sawyer convinced the neighborhood boys to whitewash Aunt Polly’s fence for him. The 1967 movie “The Producers” offers another example, with Zero Mostel and Gene Wilder soliciting investments in a play sure to flop.

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Such “deals” often do not violate custom or law. Indeed, the other boys happily did Tom’s chores. People who are smart enough to trick us and hurtful enough to not give us our money back threaten commerce.

Asking government, which protects us from criminals, to police cheaters seems quite reasonable. Except that when tailored properly by smart, mean people, laws and regulations ostensibly protecting us can allow us to be taken advantage of.

Why? In the market, we are free to not deal with anyone for any reason. Refusing to do business may seem like a pea shooter response compared to government’s ability to fine or jail. Yet, aggregated over millions of consumers, walking away comprises the power of the market, which can humble any firm.

If you doubt the power of the market, look up 1957’s Fortune 500. Readers younger than me will recognize few of the companies. Economist Mark Perry found that only 12% of companies from 1957 still make the list. If large businesses were more powerful than the market, Sears would still be America’s leading retailer.

Honest people can do more, however, than just refuse to play after being cheated. We devise procedures for honest dealing and exclude those who break our rules.

For example, under the “Merchant Law” in medieval Europe, merchants had to submit disputes to a hearing by another merchant. Merchants not accepting a judgment were barred from future trading fairs.

Stock exchanges were formed by people recognizing the enormous potential for benefits and fraud offered by stocks. Companies wanting their stock traded had to demonstrate they were not a swindle while brokers had to trade honestly to remain members of the exchange.

By contrast, laws and regulations are coercive. The Affordable Care Act required uninsured Americans to buy qualifying policies. Laws must be spelled out in detail and remain in effect until changed. Smart, mean people can shape the details to force us into disadvantageous deals, or essentially legal extortion.

As an example, consider patents, which perform the economically valuable function of rewarding inventors for creating great new devices or medicines. Drug companies though create loopholes to extend their patents. Others take out patents not to protect a new product but rather sue others for patent infringement. “Patent trolls” epitomize the legal swindle.

In a democracy we think that we the people control the laws, including the details. Yet members of Congress boast about not reading the bills they pass. Even if we ensure the integrity of bills, they frequently call for hundreds of pages of regulations which can be gamed. And then come interpretations of the regulations. Like when playing chess with an opponent always two or three moves ahead, we will lose.

Refusing to trade is ultimately far more effective in controlling misconduct. Not only can honest people protect themselves, smart cheaters realize that cheating does not pay. Economists Ross Levine and Yona Rubinstein found that entrepreneurs incorporating new businesses were “smart and illicit:” they broke rules when young but learned that honest business was more profitable.

No one deserves to be conned out of their money. The sentiment to right such wrongs is noble. Unfortunately, laws and regulations outlawing against misbehavior enable even worse scams.

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

In case of emergency

(Pixabay, Wikicommons, YHN)

Governments have taken numerous extraordinary actions to contain COVID-19. Once the pandemic is over, we can and should revisit the emergency powers laws guiding these policy decisions.

How extraordinary have the activities been? Supreme Court Justice Samuel Alito described them as “previously unimaginable restrictions on individual liberty.” Confinement of the non-sick through stay-at-home orders and open-ended “nonessential” business closures are unprecedented. A recent scholarly paper contends that COVID has set off an “authoritarian pandemic.”

America was founded on the belief that government serves citizens, not the other way around. Our founders created a limited government with the Constitution delegating only specifically enumerated powers to the Federal government. Washington was prohibited from doing anything not specifically authorized.

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The exercise of new powers without specific authorization should consequently concern proponents of freedom. One concern arises because we do not know precisely when a government may become too strong to remain limited. Beyond this, emergencies have provided the rationale (or excuse) for many expansions of power, as economic historian Robert Higgs documented in “Crisis and Leviathan.” Liberty-minded scholars acutely fear the threat posed by crises.

One of the 20th century’s greatest economists was Friedrich Hayek. In “Law, Legislation, and Liberty,” he discusses how markets and the common law enable peaceful cooperation and the role for government in a free society. Hayek also proposed protecting freedom by separating the declaration of an emergency from the exercise of these powers. Separation would thwart limit a would-be tyrant wanting to rule by emergency decree.

States’ emergency powers laws differ, but Alabama’s illustrates the typical lack of separation. While the governor and state legislature can both declare an emergency, the governor exercises the emergency powers. The law allows a state of emergency for only 60 days, but the governor can just issue a new declaration. I believe Governor Ivey has exercised these powers responsibly, but some governors have abused this dual power.

How might we separate these powers? If the governor is going to exercise emergency power, then someone else must declare the emergency. Within the current structure of government, the state legislature and Supreme Court are options. But we could also create a new board to declare public health emergencies.

A new board could incorporate relevant expertise. Legislators come from all walks of life and judges are trained in law. A board without independent experts as members would likely be dependent on the state’s experts. Yet since the Alabama Department of Public Health would likely formulate pandemic policies, we would not have full separation.

Expertise should not be exclusively from the field of public health. Vanderbilt economist Kip Viscusi has extensively studied risk regulation and observes that government agencies charged with managing one type of risk exhibit excessive focus on “their” risk. The Environmental Protection Agency, for instance, minimizes environmental risks, resulting in enormous expenditures on trivial risks.

Tunnel vision becomes worse when regulatory agencies overlap with academic disciplines, as with public health. The vastness of accumulated human knowledge requires that scholarly expertise be extremely narrow.

This provides perspective, I think, on COVID-19 policy mistakes. We have focused excessively on the virus, with the CDC even preventing evictions to stem COVID-19. Even other elements of healthcare have been sacrificed, with cancer screenings down over 20% and childhood vaccination programs disrupted. And this is before weighing the enormous mental health, economic and educational impacts of pandemic policies. Expertise from other areas of health as well as business and economics should help declare an emergency.

COVID-19 is not the last pandemic humanity will face. And because (as I have discussed previously) health and safety are luxury goods, the old ways, namely letting pandemics run their course, will never seem appropriate again. We need a better governance structure for public health emergencies to safeguard our health and freedom in the future.

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

GameStop madness

(Wikicommons, Pixabay, YHN)

A $10,000 investment in GameStop last August would have been worth a million dollars last week. How does the stock of a struggling retailer go from under $5 to nearly $500? And does this tell us about the stock market?

Founded in 1984, GameStop operates 5,500 stores across the U.S. and the world. The company has been struggling, posting a $673 million loss in its last full fiscal year before the pandemic. The ability to download Xbox, PlayStation and Nintendo games undercut GameStop’s retail business.

The stock market lets investors from across the globe argue with each other about companies’ futures. Except investors do not just argue, they put money behind their words.

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What is a stock worth? Two answers are possible. One uses the value expected from owning the stock – a slice of the corporation’s profits – for many years. A profitable company will be worth more. Events making a company more (or less) profitable should boost (lower) its stock price.

Alternatively, price can depend on what others will pay. I might pay more than I think a company is worth to resell the stock for even more. Asset prices can temporarily deviate from their value based on profitability, what is called a price bubble. A bubble can push a stock price sky-high, as GameStop illustrates.

How did this happen? A couple hedge funds thought GameStop was doomed and would go out of business. To profit from a stock price decline you short the stock. Shorting involves borrowing and selling the stock and buying it later to repay the loan. If you borrowed and sold GameStop shares for $5 and repaid the loan with shares bought for $1, you could profit.

Now came a twist in the story. Investors on the Reddit forum r/wallstreetbets started talking about saving GameStop from the hedge funds. The stock started rising. The short sellers bought the stock to repay their loans and limit their losses, driving up the price further. The resulting “short squeeze” set off a bubble.

A bubble is unsustainable. Once the price stops rising, investors will sell to take their profit and this drives down the price. One million dollars can turn into $10,000.

Some Reddit forum posts suggested that the buying spree saved GameStop from bankruptcy due to short selling. The idea that short sellers bankrupt firms is inaccurate.

Short sellers did not create GameStop’s problems, they are just delivering bad news. These investors do not think the company can be turned around. The short sellers may be wrong, and if so, they will lose money.

To survive, GameStop must devise a new to create value. In September, the former CEO of Chewy.com Ryan Cohen invested in GameStop and was given a seat on the board of directors. If Mr. Cohen helps GameStop thrive online, this might save the company.

Through the chaos, the stock market helps direct resources in our economy. Our prosperity depends on resources being used to create value. Is GameStop putting its 5,500 stores and employees to good use? If not, these resources should be used in other ways. For instance, we can build fewer strip malls and more houses.

Stock prices deliver the market’s verdict like the scoreboard at a football game. Low stock prices and short selling can force changes even when management does not want to admit mistakes.

Some economists see asset price bubbles as financial market inefficiency. But this assumes we know the information stock markets generate, namely the value of firms. Bubbles start because investors realize a company might be worth more than they think. A rising price temporarily makes resale value more relevant than long-term value.

The stock market motivates investors to search out all potentially relevant information on corporations and risk their own money on their hunches. Some investors will lose money and may even go broke. Together they enable the productive use of resources and the prosperity we all enjoy.

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

Is America now a class-based society?

(Pixabay)

Americans have always been able to achieve based their talents and efforts. Yet several conservatives now argue that liberal policies have entrenched an elite class. The COVID-19 policy response provides some support for this argument.

I have always found economic class analyses unhelpful. Class theorists see society composed of groups, not individuals. Modern economics begins analysis with the individual. We explain group action based on the beliefs, incentives, and actions of individual members.

Karl Marx assumed that one’s place in the economy determined one’s views and goals. Yet this ignores the differences amongst people. Any given workplace will include persons at different points in life with different backgrounds and life goals. They are unlikely to all think the same. Even “capitalists” differ significantly and include “limousine liberals” advocating for more taxes and spending.

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What is the conservative argument that America now has a class elite? F.H. Buckley offers one argument in Republican Workers’ Party concerning a highly educated liberal “new class.” The dominant class goes to the best schools, obtaining the best credentials. Professor Buckley writes, “The New Class isn’t composed of the super-wealthy, the top 0.1  percent of earners … Rather, it’s the rest of the top 10 percent, the professionals earning more than $200,000 a year, whose toast always falls butter side up and who pass on their advantages to their children. They are adept in the hyper-technical rules and ever-changing Newspeak employed to exclude the backward, the eccentric, the politically incorrect.”

America has long exhibited cultural differences, and as Charles Murray observes in “Coming Apart,” the differences are growing. Yet for differences to harden into a distinct governing class, there must be barriers to joining. I am unconvinced. Consider J.D. Vance, author of “Hillbilly Elegy,” which describes the personal element of social relations. Mr. Vance escaped his upbringing and went to Yale Law School.

COVID-19 policy responses have seemingly reflected these alleged class distinctions. Urbanized blue states New York, Massachusetts, Illinois and California instituted the most punishing lockdowns and have yet to fully reopen. Rural red states like North and South Dakota never issued stay-at-home orders. Higher-paying jobs have been more likely to allow remote working while lower-income jobs require in-person work or have been lost with business closures.

A recent survey from Morning Consult documents this disparate impact. Participants were asked in December 2020 if they were better or worse off than in 2019 on seven dimensions: mental health, personal finances, job security, take-home pay, physical health, personal life and work-life balance. A score was tallied by subtracting the percentage reporting worse from the percentage reporting better. Positive scores signal improvement, negative scores deterioration.

Overall, Americans are worse off on all seven dimensions, with women faring worse than men on each dimension. Impacts by education and income are most revealing. Americans without a college degree had negative scores on each component, while persons with post-graduate degrees had positive scores on each. Persons with incomes less than $50,000 are worse off across the board while those earning over $100,000 improved on every dimension except mental health.

I have personally been struck by the disparities since last March when the nation’s most prestigious universities were the first to move classes online. Online education requires a functioning power grid. Elite professors planned to protect themselves while relying on other Americans to face exposure to operate power plants, pick up the garbage, and deliver goods ordered online.

Our personal response to COVID-19 depends on fundamental life values like self-preservation and facing life’s risks. I respect people and would never denigrate anyone’s choices. Lockdowns, however, have imposed some persons’ most desired course of action (Professor Buckley’s “New Class”) on all of us, harming millions. It certainly raises the possibility of a governing elite class.

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

College football overcomes the pandemic

(Pixabay, YHN)

Last year was unlike any other. January 2021, however, offered a familiar sight: Alabama won its sixth national title under coach Nick Saban. The 2020 Crimson Tide featured Heisman Trophy winner Devonta Smith, many other award winners, and rank among the greatest teams in history.

Before we debate history and look forward to next season, we should celebrate the tremendous sacrifices required of players to play through COVID-19. Coaches and staff also went beyond the call of duty but were getting paid. Most players will never play professionally and deserve a big “Thank You.”

College football is always demanding, but in 2020, players faced impositions like repeated testing, contact tracing and quarantine rules. They had to navigate virtual meetings, social distancing and masks on the sidelines. Many programs basically isolated players in the athletic dorms upon their return to campus in June. Marshall’s players only left Huntington for road games; Army’s players did not see their parents after the start of June.

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In 2020, each conference decided how many games to play and four FBS conferences initially canceled their seasons. The SEC opted for a 10-game, conference-only schedule; the ACC and Big 12 allowed one nonconference game. Independents faced a nightmare, leading Notre Dame to play in a conference for the first time in the program’s history.

Game postponements due to COVID-19 began immediately. Troy’s season opener on Labor Day weekend was one of the first contests postponed. The chaos extended to television; Alabama’s November 14 primetime game on CBS against LSU was postponed.

Postponements led to scheduling on the fly. California and UCLA played on November 15 (a Sunday) after their games that week were called off. BYU agreed on Thursday to play a nationally televised game at Coastal Carolina two days later. The ensuing battle of unbeatens was one of the year’s best games.

Athletics departments reduced seating, when local governments allowed fans at all. Concessions and stadium entrances were reconfigured for social distancing. The adjustments reduced revenue and increased costs.

The 2020 season offers valuable economic and life lessons. Perhaps the greatest is the virtue of flexibility. Perhaps nobody exhibited this more than Alabama’s coach Saban, known for trying to control everything around his program. As the coach said, “I’ve spent my whole life trying to keep everything in some kind of a controlled mechanism,” but he realized that, “this year that hasn’t been possible.”

People make life plans involving a career and where to live, but our economy does not always accommodate. Our market economy creates the enormous prosperity we enjoy today. We find a way to contribute within the division of labor and then invest in education and training. Yet businesses sometimes fail and new technology can eliminate the jobs we’ve trained for. A willingness to adapt serves us and the economy well.

Conferences and not the NCAA control FBS football. Each conference decided whether to play, as opposed to one decision by the NCAA. When six conferences showed by example football could be played safely, the others launched abbreviated seasons.

Federalism similarly decentralizes decision-making across the states. Georgia and Colorado showed economies could reopen safely; Alabama and others showed that students could safely attend school. Dr. Anthony Fauci and other public health officials have criticized America’s federalism. We should be glad that Washington could not shut our entire nation down.

Universities faced enormous criticism for playing this season. As Alan Dowd points out in a recent piece for the American Institute for Economic Research, challenges and uncertainty can be viewed in two ways: as obstacles to be overcome, or as reasons to quit. College football gave us an example of the former. Similarly, gyms, restaurants and retailers figured out how to operate safely when politicians allowed.

Entrepreneurs starting new businesses face long odds and innumerable obstacles requiring hard work, ingenuity, and courage. College football showed us that even a pandemic can be overcome.

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

Will student loans be forgiven?

(Pixabay, YHN)

November’s elections imply we will likely see some Federal student loans forgiven. Current student debt levels reflect the morphing of a reasonable program. Loan forgiveness may produce significant changes for higher education.

President-elect Joe Biden has indicated a willingness to forgive $10,000 in loans per borrower via executive order. A Democratic Senate will likely result in congressional action; Senators Charles Schumer and Elizabeth Warren want $50,000 in loans forgiven. Cancellation of all loans may now be a possibility.

Before considering the consequences of loan forgiveness, let’s consider why government should make student loans. America has long been described as the “Land of Opportunity,” and as Arthur Brooks argues, Americans accept unequal economic outcomes more readily than Europeans. Many accept unequal outcomes because they believe people have a chance to succeed based on their own efforts.

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Free enterprise has generated enormous prosperity but also wealth disparities. A rising tide does lift all boats. The Fraser Institute’s Economic Freedom of the World finds that the incomes of the poorest 10% are eight times higher in the most economically free nations than in the least economically free nations. Free markets also produce billionaires.

Inequality has become a topic of intense debate. Resentment of the rich could lead to high income and wealth taxes which would significantly reduce economic freedom. Widespread belief in equality of opportunity short-circuits the politics of envy.

Education, including college, has long been an element of American opportunity. College is seen as a gateway to the middle class. The Bureau of Labor Statistics reports that persons with bachelor’s degrees earn 65% more than those with only a high school diploma, a lifetime difference of $1 million.

This difference in earnings explains why financial institutions would make college loans without government guarantees. Market-based loans would favor students: with stronger academic credentials; pursuing higher-paying degrees; and with assets for collateral (e.g., well-off parents).

Libertarian professors might contend that a market for loans provides opportunity, while liberal professors might judge America inherently unfair. The perceptions of an opportunity society that matter politically are those of Americans, not professors.

To dig into these perceptions, imagine we could design an unbiased test predicting success in college very well. Suppose we administered this test to high school juniors one time and banned anyone scoring below a given threshold from attending college.

Does this sound fair? Such a system, I suspect, would strike many of us as somehow un-American. We celebrate the rags-to-riches stories or the football walk-on who ends up being an All-American. We value the opportunity to try even when the experts tell us we will fail.

Market-based loans must offer reasonable returns to attract investors. Yet, ensuring opportunity involves giving students who are likely to fail an opportunity. Maintaining an opportunity society probably requires some bad loans to marginal students. Government guarantees enable such loans, and I consider investing in maintaining equality of opportunity worthwhile.

Unfortunately, the student loan program pays for tuition at expensive private colleges and for graduate and professional degrees. This goes well beyond ensuring basic opportunity and means loan forgiveness will benefit the well-off. Households in the top 20% of the income distribution hold $3 of loans for every $1 held by the bottom 20%. A quarter of students graduate college without debt, often because they worked or started at a community college.

Forgiving outstanding loans might make current students expect their loans to be forgiven too. This would essentially usher in free college.

Yet even government money is not free, and programs typically have mechanisms containing spending. For instance, the U.S. Department of Agriculture supports selected crop prices but limits the eligible acreage. Washington’s financial support of higher education has to date involved few cost-control measures; loan forgiveness may provoke such controls.

Student loans reflect a familiar pattern. A reasonable rationale for a limited program provides cover for profligate spending. The problems caused by not limiting access to government-subsidized loans may now cost taxpayers, and especially responsible student borrowers, billions.

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

Voting on economic policy

(Pixabay, YHN)

Every general election, voters decide ballot initiatives on social and economic policy. These often produce inconsistent results. Last November, Californians voted in favor of economic freedom while Florida voters increased the state’s minimum wage.

California consistently sits near the bottom of the Fraser Institute’s state economic freedom rankings (47th in 2020). Its economic policies have been driving out-migration. Land use and zoning restrictions render housing construction very difficult in California’s most popular cities, resulting in sky-high rents and home prices. According to Business Insider, average monthly rent for one-bedroom apartments in 2019 was $2,400 per month in Los Angeles and $3,600 in San Francisco.

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Some California cities have responded with rent control. Yet, high rents are merely a symptom of the government-created shortage. In November, California voters approved Proposition 21, rolling back many communities’ rent control powers.

California voters also gave ridesharing companies Uber and Lyft a reprieve. A 2019 state law required reclassification of independent contractors as employees. Uber and Lyft consider their drivers as contractors, in part to avoid costly mandated benefits for employees. The companies threatened to leave California and launched Proposition 22 to overturn the law.

Florida ranks second in Fraser’s 2020 state index, trailing only New Hampshire. Its minimum wage is currently $8.56 per hour, slightly above the federal minimum wage of $7.25. The initiative amended the state’s constitution to raise the minimum wage to $15 by 2026.

Voters in these cases bucked state lawmaking. This illustrates the influence of interest groups in representative democracy. Liberal interests dominate California’s legislature, while Florida’s state government is regarded as business friendly. Dominant interest groups can control the legislative agenda, passing or blocking laws contrary to voter preferences.

Would greater reliance on ballot initiatives improve economic policy then? Not necessarily, due to voters’ incentives. Economic policy referenda provide examples, I think, of what Geoffrey Brennan and Loren Lomasky term “expressive voting.”

A fundamental challenge public choice economics identifies for democracy is the small impact one person has on political outcomes. An individual casts one vote or speaks with one voice to elected officials. In a community of thousands (or a nation of millions), one vote or voice must statistically be unlikely to determine policy outcomes. Seventy-four million Americans voted for President Trump in November, yet Joe Biden will be their president.

By contrast, our marketplace choices are almost always decisive. If you go to McDonald’s and not Subway and then order a Big Mac, this is what you get. We decide which job to take and where to live.

The disconnect between political actions and outcomes has consequences. One is reducing turnout – why take the time to vote if it will not change an election’s outcome? Another is reducing voters’ incentive to learn about candidates or issues, what is called rational ignorance. Professors Brennan and Lomasky contend that people frequently vote to express their feelings. People might demonstrate their environmental concern by voting for recycling. Whether recycling truly improves environmental quality is a complicated question. But since one vote will likely not decide the referendum, expressing oneself costs very little.

Florida’s minimum wage hike looks very much like expressive voting. The economic effects of a minimum wage follow from how markets determine wages. Employee compensation depends on the value of production, or what is called the value of the marginal product. A business cannot to afford to pay a worker generating $10 an hour more than that. Competition for employees then pushes wages and salaries up to this level: a clinic paying nurses half the prevailing salary will have difficulty hiring.

Living on $10 an hour (or less) is undoubtedly challenging. Yet the problem is a lack of marketable job skills. Education, training and work experience can build job skills; raising the minimum wage improves no one’s skills.

Voting works best when citizens face clear alternatives. Elections are not good for soliciting feedback on complex questions. Inconsistent referendum outcomes should not be a surprise, and we should never read too much into the results.

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

Public health mandates are political

(Pixabay, YHN)

Governments across the country have imposed numerous public health policies to control COVID-19. A prominent one has been requiring the wearing of masks in public; Alabama has been under a mask order since July. Americans have largely embraced masks. A recent Harris poll found that 93% of respondents at least sometimes (always) wore masks.

Nonetheless, Dr. Don Williamson of the Alabama Hospital Association recently expressed frustration over some Alabamians’ unwillingness to wear masks. He observed, “The election’s over. It should no longer be political.” Mask mandates apply the coercive power of government and politics consists of peoples’ actions to control government. Consequently, public health mandates are political.

The pandemic could have been addressed non-politically through voluntary responses. Consideration of this alternative highlights some effects of government mandates.

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Social interactions outside the spheres of politics and crime involve voluntary participation. Everyone who works or dines at a restaurant chooses to do so. Families choose to gather for the holidays. (The pressure we might feel to attend is not truly coercive, appearances notwithstanding.)

Gatherings for commerce or entertainment must happen somewhere. Property rights provide the source of voluntary response to a communicable illness. Property owners get to make decisions about its use.

Owners of the gathering spaces can and will put conditions on entry. Sports fans can be expelled from an arena for intoxication, throwing debris, or verbally abusing players or officials. The arena owners can also require mask-wearing.

Business owners want customers to continue patronizing their establishments and employees to continue working. Customers who do not feel safe will stay away. Fewer customers mean less revenue and ultimately less profit or rent for the owners.

When allowed to stay open by politicians, businesses have worked to protect their customers. Retailers reduced hours of operation to allow for extensive cleaning. Grocery stores disinfected shopping carts. Restaurants offered outdoor dining, takeout, and delivery. Some businesses tested their employees and required temperature checks and masks for customers.

Ticketmaster recently unveiled plans for concerts in the COVID-19 world. Fans will need either a vaccination or a negative test 24 to 72 hours prior to the event. Fans will have vaccination or test result forwarded to a third-party medical information provider. This third-party will verify a fan’s health eligibility to Ticketmaster, activating a digital ticket.

Not all businesses’ plans will work effectively, but each has an incentive to continually evaluate each element of their plan. Overall, we can be confident that businesses will choose wisely, as Forbes columnist John Tamny has emphasized repeatedly: “In a free society, there’s no such thing as a ‘do nothing’ response to anything that has the potential to kill.”

Some commentators fear that without a government plan we will have chaos in the market. Yet as economist Ludwig von Mises noted, markets offer a multitude of plans. Business owners will tailor their plan to their unique circumstances.

Each protection measure is costly, like turning away potential customers to keep an empty table between tables of diners. And customers might regard some protection measures as overly burdensome. Businesses have the incentive to protect and assure customers in the least costly way possible.

This process is not political because no one can coerce others for not complying with their requests. Businesses are free to adopt any protective measures they want. When one business discovers a way to protect customers and employees more effectively or at a lower cost, others can emulate this.

We would likely see a wide range of voluntary responses. Given the enormous difference in risk posed by COVID-19 across individuals – fatality risk differs by a factor of one thousand – some businesses and their customers will likely accept a high risk of exposure. Those most fearful would need to take more personal protective action without government coercion.

Wearing a mask to protect from COVID-19 is not political. Requesting guest to wear a mask is not political. But government public health mandates are political, regardless of whether issued by a Democrat or Republican.

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

Who gets vaccinated first?

(Pixabay, YHN)

Vaccines from Moderna and BioNTech/Pfizer are nearing approval by the Food and Drug Administration (FDA). Politicians will now decide who will get vaccinated first. The Centers for Disease Control’s Advisory Committee on Immunization Practices has prioritized vaccination of medical personnel and nursing home residents. The rest of us will have to wait. Prices offer an alternative to political determination of access.

However distributed, ramping up vaccine production presents an enormous challenge. The BioNTech and Moderna vaccines both require two doses, so vaccinating all Americans would require over 600 million doses. Production must go from zero to tens of millions of doses per month while maintaining quality. The capacity constraint means that everyone cannot be vaccinated immediately.

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FDA approval represents a major element of political control. Congress has decided that Americans can only access medicines or vaccines deemed safe and effective by the FDA. Approval moves on bureaucratic time. Britain approved the BioNTech vaccine on December 1; the FDA’s review committee will not meet until December 10. Bureaucrats will not speed up even with over 1,500 Americans dying daily from COVID-19.

Markets would have no legal effectiveness requirement. We could seek out any vaccine or medicine for protection against COVID-19. Liability for unsafe medicines would make drug companies demonstrate safety. Drug companies would cover litigation costs using insurance and no insurer would cover sales without evidence of safety, something resembling the Phase I testing of two vaccines in April and May.

With a market, Americans could have gotten vaccinated back in June. Without evidence of effectiveness, initial purchases would likely have been paid out-of-pocket. Vaccinations would have cost “whatever the market will bear;” let’s say $10,000. Drug makers may have offered the first customers a money-back guarantee: test positive for COVID-19 within six months and get a refund.

The first persons vaccinated would then be tracked for evidence of effectiveness. Health insurers and employers (like hospitals) would require evidence, possibly including randomized control trials like those performed this fall, to pay for vaccinations. Insurers would likely require independent collection and examination of the evidence.

Once convinced of effectiveness, insurers would pay for vaccinations to save money, to avoid paying for policyholders’ COVID-19 care. Hospitals and nursing homes might vaccinate their employees to assure their customers.

Some might decry the wealthy getting vaccinated first, but they would provide a service to the rest of us. The price paid provides drug companies an incentive to ramp up production. They also serve as “volunteers” for testing effectiveness. And once we have evidence of effectiveness, insurers and employers will begin paying. Insurers and hospitals might pay a lot for vaccination — to keep high-risk policyholders healthy or protect high-risk nurses and doctors.

High market prices encourage production as quickly as possible without sacrificing quality. A person willing to pay $2,000 in January might only pay $500 for vaccination next July. Vaccine doses delivered sooner will be worth more.

The federal government will purchase at least 100 million doses of each vaccine. These payments will motivate production, yet government projects are often late and over budget. The president and Congress will scream if drug makers fail to deliver on schedule, but will this ensure timely delivery?

The United States is not the only country seeking vaccines. Political control means that our politicians could make Americans wait until healthcare workers across the globe are vaccinated. With markets, we must outbid others for vaccination priority. As a wealthy nation, we might seem advantaged in bidding, but rich persons across the globe will pay a lot too.

Neither prices nor politics involve magic, so producing the needed doses will take time. Would politics or prices be more effective at producing vaccines as quickly and safely as possible? Politics ultimately involves government bureaucrats procuring vaccines for us. While businesses do not always receive orders on time, bureaucrats will likely keep their jobs even if vaccines are delivered months late.

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 paying twice for COVID medicines?

(Pixabay, YHN)

Two vaccines appear highly effective against SARS-CoV-2, and remdesivir is helping doctors treat severe COVID cases. These products raise challenging questions regarding patents and government funding of research. If taxpayers fund a medical breakthrough, should we then have to pay for the medicine?

Consider Gilead Science’s remdesivir, which effectively treated COVID in a clinical trial. The National Institutes of Health (NIH) and the Defense Department funded the drug’s development. Public Citizen estimates that public funding totals at least $70 million. They argue that remdesivir should be priced at cost because taxpayers “should not have to pay twice” for it.

Before addressing this question, let’s consider the rationale for patents. Patents help ensure the funding of research producing knowledge. Medicines and vaccines are ultimately knowledge that a given combination of chemicals keeps us from getting sick or restores our health.

Research must be performed to generate new knowledge and is highly uncertain; experiments do not always yield breakthroughs. The prices of successful medicines and vaccines must cover the cost of all this research.

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Knowledge is challenging to market. Imagine trying to sell some new fact which nobody else knows. The first person buying this new fact can then sell it to others, undercutting the price you need to charge to recover your research costs. For a medicine, a chemist can analyze a sample to determine the formula, while scientists can reverse-engineer new products.

Patents provide inventors exclusive rights to their inventions for a limited number of years. The patent prohibits copying of the invention. Ideally the patent should be only long enough to encourage research, but calculations cannot be made with precision.

Both businesses and the Federal government fund research. The NIH spends $40 billion a year on medical research. Successful medical researchers typically must win NIH grants.

The public-private division of research is in principle along the line between basic and applied research. Business funding typically becomes available when knowledge is close to yielding a marketable product; this is applied research, or the development part of R&D. Basic research advances knowledge for knowledge’s sake. Although as fundamental breakthroughs percolate through society, people begin to recognize the practical applications, the commercial value of basic research is frequently too remote to attract investors.

We can see how taxpayers could “pay twice” for new medicines. If a new medicine were developed almost entirely through government funding, the company marketing the drug need profits to recover its negligible research expenses.

Most medicines though – and new products generally – require a mix of research and development. Even if the Federal government funds the basic research, a lot of work remains to yield a commercially valuable product.

The Moderna and BioNTech SARS-CoV-2 vaccines illustrate this. Both use messenger RNA vaccines, and the NIH funded the basic research on m-RNA. The breakthrough has offered enormous promise for 25 years but prior to 2020 no medicines on the market. Turning m-RNA into medicine involved further breakthroughs to encase bioengineered proteins in lipid nanoparticles. Moderna and BioNTech have done much of this last portion of the research.

What about the estimated $10 billion in Federal spending on COVID vaccines through Operation Warp Speed? This has covered the testing and production of vaccines. Manufacturing is distinct from the knowledge contained in a candidate vaccine, and patents reward knowledge creation.

Knowledge drives our prosperity. More important than the mix of public versus private sector research is the discovery of new knowledge. COVID-19 has revealed a very healthy global biomedical research industry. Remdesivir and other treatments have reduced the fatality rate among hospitalized patients by an estimated 70 percent since March. And researchers formulated two seemingly highly effective vaccines within weeks of the identification of the novel virus’ DNA.

Taxpayers should not have to pay twice for the same medicine. Yet politicians have protected health at enormous cost during the pandemic. Overpaying for effective vaccines or medicines is frustrating but preferable to going without.

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

Dr. Daniel Sutter: Harvesting and selling votes

(Pixabay, YHN)

Joe Biden has won the presidential election, although President Trump alleges fraud. Mr. Trump, however, has not yet offered credible evidence of fraud. The current controversy involves “vote harvesting” and raises questions about the effect of selling votes.

Vote harvesting involves individuals collecting mail-in ballots from voters. Clearly, persons with limited mobility should receive assistance in voting, which relatives, legal guardians and election officials can generally provide. Harvesting involves other persons – including party officials – collecting ballots.

Harvesting creates a potential for misconduct. Altering or deliberately destroying ballots clearly constitutes fraud. Ensuring that legal voters cast ballots is not, however, fraud.

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Let’s assume that harvesting only enables registered voters to cast unaltered ballots. A harvester will likely learn which candidate a person voted for, effectively eliminating a secret ballot. How might this matter?

Introduction of the secret ballot reduced vote-buying by thwarting contracting for votes. If Candidate X wants to buy Jane’s vote, he will want to ensure that Jane does vote for him. A secret ballot prevents Jane from demonstrating that she voted for X, making X less willing to buy her vote.

Who is hurt if Jane willingly votes for Candidate X in exchange for $100? Not Candidate X, who happily pays for the vote, nor Jane, for whom $100 is worth more than the cost of voting for X. X’s opponent is harmed, but similarly to the harm suffered by Pepsi when someone buys Coke; we normally dismiss such “harm” from market competition. With a legal vote market, X’s opponent could also try to buy Jane’s vote.

People could also trade votes among themselves. As a resident of Troy, Alabama, I get to vote for local, state, and national offices. If I cared the most about local elections, I could trade my votes in national races for extra votes in city elections.

Elected representatives regularly “sell” their votes on bills. Vote trading among legislators is called logrolling. A representative from an agricultural state may trade her vote on an urban transportation bill for votes on a farm bill. Rural state residents might prefer that only the farm bill pass but accept the farm and transportation bills together as better than neither passing. Logrolling enables the building of coalitions.

We might object to political candidates buying our votes. But candidates already try to “buy” our votes, through campaign promises or ads on television and social media. The cost of ads makes candidates eager to make deals with campaign contributors. Negative ads often more effectively sway voters while slowly poisoning our political climate. Letting politicians pay for votes at least provides the voter a tangible benefit from political campaigns.

Vote-buying might involve contracts spelling out a candidate’s promises. Contracts could alert voters to inconsistent promises, like if a candidate signs deals to support and oppose gun control. Voters might have a legal remedy against candidates who renege on promises. Imagine if politicians had to pay us for breaking campaign promises.

What harm results from eliminating the secret ballot? Candidates and parties could use negative incentives – the loss of a job or government benefits and violence – in addition to buying votes. Furthermore, a political machine could refuse to prosecute their thugs while terrorizing their opponents.

I find a market for votes worth considering but do not favor eliminating secret ballots. I also believe that vote harvesting will be a temporary issue. Technology should soon allow electronic voting with biometric security at least as good as online banking. Only duly registered voters will cast ballots, and likely from home.

Improved voting technology could allow citizens to vote for ourselves as opposed to relying on representatives. States already rely on ballot referenda to enact or repeal legislation. Technology could let citizens vote to pass bills. Exploring the consequences of direct legislation will have to wait for a future day.

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 future of the American project

(Pixabay, YHN)

Former Vice President Joe Biden has won a narrow victory in the presidential election. President Trump, however, claims the election was stolen through fraud. In 2016, Hillary Clinton blamed her loss on Russian interference. The lack of legitimacy accorded to these election winners raises a question: Do Americans still want to be part of the same nation?

To answer, let’s consider what constitutes a nation. A nation is a set of institutions or rules, like the just completed election campaign. The rules also spell out the fundamental rights of citizens.

Citizens agree to live by a nation’s rules. Yoram Hazony writes in The Virtue of Nationalism, “Each institution teaches, persuades or coerces its members to act according to these fixed purposes and forms, abiding by accepted general rules and procedures, so that they can reliably act as a body, without each time having to be persuaded or coerced anew.”

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An institution or nation is strong when “the individuals identify the interests and aims of the institution as their own.” People will feel loyalty toward other citizens who embrace the rules. This means, as Mr. Hazony continues, experiencing the hardship and happiness of fellow citizens “as if it were [our] own.”

Today, liberals and conservatives view each other as “ignorant” and “evil.” Many supporters of Mr. Trump and Mr. Biden believe that election of the other would permanently harm America. The bonds of loyalty Mr. Hazony describes are dissolving, if they have not already dissolved.

Perhaps this should not surprise us.

Liberalism (or classical liberalism), as embraced by America’s founders, holds that government exists to serve citizens. America’s great contribution to the liberal experiment was founding a nation on the idea of freedom. Other nations had enjoyed freedom – England and the Netherlands during the 1700s and Athens, Rome and Venice previously – but were not founded on freedom.

The American idea was powerful enough to overcome our founding’s contradictions. The words Thomas Jefferson wrote – while owning slaves – were so profound that freedom was eventually extended to all.

The idea of freedom was relatively new in 1776. America’s founders carefully studied history and liberalism. They knew that freedom involved throwing off King George’s yoke and strictly limiting government power.

Over the past 250 years, at least two distinct visions of human freedom have emerged. One sees people as capable of self-governance. With rights of property, contract, association and speech – what are now termed “negative rights” – people, communities, and commerce will flourish.

A second vision views negative rights as insufficient. True human freedom requires liberation from the economic need, because otherwise, market forces dominate peoples’ lives. Positive or economic rights to healthcare, education, or a high paying job as fundamental.

Asking “Which vision is correct?” is unhelpful. For decades thinkers have detailed the arguments for these visions. Yet significant disagreement still exists and is likely to persist for the foreseeable future.

Without agreement on one vision, our government produces compromise. Democrats expand government marginally and Republicans trim back a little. But compromise produces a muddle, and I think a lack of progress toward their preferred vision drives much of today’s bitter polarization.

Ramming the policies to achieve one vision through provides one alternative to compromise. Yet without genuine consensus, this just fuels conflict. And it violates our liberal values. Liberalism began by recognizing that all lives matter, not just rulers’ lives. Forcing a vision of freedom on someone is absurd.

Religious freedom embodies the liberal ideal. Separation of church and state allows Americans to worship as they choose. We recognize that forcing someone to renounce or not practice their religion denies them their dignity.

Yet the rules necessary to achieve different visions of freedom are incompatible. People cannot have a right to own guns or to healthcare only when Congress assents. We either have rights or we do not.

When political theorists had one vision of freedom, one nation founded on the principle of liberty was enough. Fulfilling the American project with multiple visions require multiple sets of rules.

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 best way to fight COVID?

(The Great Barrington Declaration/Facebook, Pixabay, YHN)

Governments have used nonpharmaceutical interventions (NPI), or lockdowns, to contain COVID-19. But do NPI protect public health overall? A group of medical experts recently put forth “The Great Barrington Declaration” (named for the town where they met) advocating an end to society-wide lockdowns. Over 40,000 public health and medical professionals have signed onto the Declaration.

Lockdowns have enormous economic costs. The Declaration contends further that the net effect of lockdowns on public health is negative, as harms exceed COVID-19 illnesses avoided. The adverse health effects include “lower childhood vaccination rates, worsening cardiovascular disease outcomes, fewer cancer screenings and deteriorating mental health – leading to greater excess mortality in years to come.” Extending or reimposing lockdowns until a vaccine or cure is available “will cause irreparable damage, with the underprivileged disproportionately harmed.”

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The Declaration instead calls for “focused protection” for persons most vulnerable to COVID-19: “We know that vulnerability to death from COVID-19 is more than a thousand-fold higher in the old and infirm than the young.” Focused protection could limit COVID deaths while avoiding the lockdowns’ harms: “Those who are not vulnerable should immediately be allowed to resume life as normal.”

The effectiveness of NPI for COVID-19 is a question for medical doctors and epidemiologists. How can we make sense of experts’ disagreements?

We should first check the dissidents’ expertise. The economic and personal freedom costs of lockdowns make me predisposed to agree with anyone saying we can avoid a second lockdown, even a quack. The Great Barrington Declaration’s three authors credentials are as follows. Jay Bhattacharya is a professor at Stanford Medical School with an M.D. and a Ph.D. in economics from Stanford and research expertise on aging and vulnerable populations. Sunetra Gupta is a professor of theoretical epidemiology at Oxford with a Ph.D. from Imperial College whose research examines transmission of infectious diseases. Martin Kulldorff is a Harvard Medical School professor with a Ph.D. in operations research who works on monitoring disease outbreaks and the effectiveness of drugs and vaccines.

Citations also measure the quality of a scientist’s research. Important papers will influence subsequent research and be frequently cited. The Declaration’s authors’ Google Scholar citation counts are 9,600, 19,200 and 24,400 respectively. How do these totals stack up? They all outpace my 2,700 citations, a minimum qualification I would apply for expertise. Neil Ferguson, the lead author of numerous influential studies on COVID-19, has 33,600.

Credentials and citations are never a substitute for arguments, data, and analysis. But opponents of lockdowns have been dismissed as anti-science. The Great Barrington authors are very good scientists with relevant expertise.

Other health professionals have expressed skepticism about lockdowns. Sweden’s top public health officials doubted the value of NPI and never ordered a lockdown. Dr. Michael Ryan, director of the World Health Organization’s (WHO) Health Emergencies Programme, has praised Sweden’s handing of COVID. WHO COVID-19 special envoy Andrew Nabarro stated that lockdowns should not be the “primary means of control of this virus,” and were only justified as a temporary measure. A 2019 review of the effectiveness of NPI for the WHO concluded that “the overall quality of evidence was very low for most interventions.”

Expert disagreement is not a counsel for inaction. We often must act in the face of conflicting recommendations. Regardless of the policies ultimately decided on, we should respect disagreements over the desirability of using NPI for COVID-19.

We should be suspicious of anyone arguing that “science” tells us what we must do. As physicist Richard Feynman once said, “When someone says, ‘Science teaches such and such,’ he is using the word incorrectly.” Good scientists never seek to muzzle debate. As Professor Feynman said, “Science is the belief in the ignorance of experts.”

Economics counsels consider all the dimensions of life’s tradeoffs. Medical science should inform but not dictate our choices. We should vigorously debate whether lockdowns represent our most preferred course for dealing with COVID-19.

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

Dr. Daniel Sutter: A critical election

(Pixabay, YHN)

Americans face a crucial choice during and after this November’s presidential election. Perhaps more significant than the contest between Donald Trump and Joe Biden is whether we still believe in democracy. Americans increasingly see their political opponents as ignorant and evil.

Opinion polls mirror social media vitriol. An Axios poll found that about half of Democrats and Republicans described members of the other party as ignorant, with one in five labeling the others as evil. Sixty-one percent of Democrats described the GOP as “racist/bigoted/sexist.”

Fair, thoughtful and kind polled in single digits with each group. About one-third of Axios respondents – including half of liberal Democrats – would be “disappointed” if a close family member married someone of a different political affiliation.

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What we believe about others shapes our reaction to our differences. Do we respect or dismiss differences in food, sports, jobs, religion or politics? Do we recognize others as deserving to pursue their life goals? This perspective affects our social interactions.

Judging others as inferior underlies prejudice and hatred. Humans have too frequently viewed those of other races, religions, ethnicity, or sexual orientation as inferior or deficient. America’s major divide today is seemingly political. Seeing others not as persons but exclusively as part of an “inferior” group makes conflict more likely.

Two elements of societal interaction further encourage conflict. The first is the anonymity of the group. Social scientists and psychologists have long noted that people are more likely to hurt others when part of a crowd.

The second factor is a lack of interaction with persons from the other group. If groups sort themselves, people never have encounters which might undermine prejudices. Desegregating the military, schools, and universities allowed mixing and helped Americans recognize our common humanity.

Many observers have noted America’s enormous political sorting over the past several decades. The sorting has been both physical and informational. Conservatives and liberals increasing work at different jobs and live in different communities. And they get news and opinion from different sources with little constructive exchange between the viewpoints.

Both markets and democracy require tolerance and acceptance. Activity in markets is exclusively voluntary; others can always refuse our offers. We must accept someone’s choice to not do business with us.

In democracy, everyone, even those of the “inferior” group, can vote. The political and economic rights of all persons must be respected even after “we” win an election. We must tolerate criticism of our views. Everyone must remain free to participate in the next election campaign.

America’s growing political division is undermining tolerance. Polls reveal that about one-third of Republicans and Democrats believe it would be “at least a little justified for their side to use violence in advancing their goals” up sharply from 2017. Persons identifying as “very liberal” or “very conservative” are more likely to see “a great deal” of justification for violence after a loss this November.

Public choice economists like myself have identified many weaknesses of elections and representative democracy. We expect elections to carry too much weight in our political system. Public choice largely sympathizes with Winston Churchill’s famous observation that “democracy is the worst form of Government except for all those other forms that have been tried.” Elections help ensure that government serves the people instead of people serving the rulers. Voting deescalates political conflict; competing factions agree to settle their disputes with ballots, not bullets.

Today many Americans talk about crushing those they disagree with and imposing their political agenda. Perhaps people are merely talking smack as when playing sports or video games. If so, polls may overstate Americans’ mutual animosity.

The late Harvard political scientist Samuel Huntington observed that democracy has never collapsed in a wealthy nation. Yet researchers do not understand exactly how a peaceful and civilized nation descends into violence. Our biggest choice after November 3 may be whether we will test Professor Huntington’s thesis.

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

Renewable fuels and ice cream

(Ben & Jerry's/Facebook, Pixabay, YHN)

Recently a group of businesses, including Ben & Jerry’s Ice Cream, called on insurance companies to stop supporting fossil fuels. Some state insurance commissioners are similarly pressuring the companies they regulate to cut ties. The immense consequences of ending fossil fuel use mean that this should require the unambiguous consent of the governed and not be imposed through some backdoor channel.

Insurance companies interact with energy in two ways. The first is through investments in oil, natural gas, and coal companies. The global insurance industry has $7 trillion in assets which they invest to help pay claims on insurance policies. Many financial firms face calls to divest from fossil fuels.

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Energy companies also require insurance. Investors will not invest in drilling, mining, shipping or refining fossil fuels unless operators are insured. A lack of coverage could halt the production of fossil fuels.

I believe in a voluntary society in which people enjoy freedom. People should be free to invest, including passing up lucrative opportunities they find objectionable. And we are free to can offer unsolicited advice to businesses, which they are free to ignore.

Freedom also means we can work for things not in our best interest. We should not have to justify our choices – in markets or the voting booth – to experts who overrule our choices if unimpressed with our rationale. People should be free to choose between values and financial self-interest.

The executives running Ben & Jerry’s can advocate for whatever they want. I suspect, however, that they have not realized that ending fossil fuel use would effectively end the ice cream business.

This might seem extreme as we could still have electricity for freezers from clean energy sources like wind and solar. Except that we could not. Producing wind turbines and solar panels uses lots of fossil fuels, as two reports from the Manhattan Institute detail.

Consider a 100-megawatt wind farm to replace a typical natural gas-powered generating plant. The wind farm uses 30,000 tons of iron ore, 50,000 tons of concrete and 900 tons of plastics for the turbine blades. Plastics are made from oil, and fossil fuels enable the mining of iron ore and production of concrete. Solar panels use rare earth minerals mined using fossil fuels.

Wind and solar only produce electricity when the wind blows or the sun shines; they are not “dispatchable.” Yet on the electric grid, power supplied must continually equal customer demands. We use fossil fuels as backup for wind and solar to keep our freezers full of ice cream running.

Wind farms must be located at favorable wind sites, often far from cities. Building transmission lines to get power from wind and solar farms to our grids also uses fossil fuels.

Theoretically battery farms storing wind and solar power could eliminate fossil fuel backup generation. Companies like Tesla are currently innovating with such batteries. Yet producing batteries also requires fossil fuels; a battery capable of storing the energy in one barrel of oil requires 100 barrels of oil.

We will not have electricity powering freezers if we stop using fossil fuels entirely. With unreliable refrigeration, ice cream will melt between the dairy and our homes. The Green New Deal is either pointless or an enormous bait-and-switch. If the future resembles today with wind, solar and batteries, we will still be generating greenhouse gas emissions and allegedly catastrophic global warming. Alternatively, clean energy is a mirage luring us into a dark future.

People made ice cream using natural ice before electric freezers, so we may still occasionally have homemade ice cream. In the 1800s, an extensive industry harvested from northern ponds for storage in ice houses and shipment to the south in the 1800s. Maybe we will revive the ice trade.

Life and prosperity require energy. Ending the use of fossil fuels will dramatically change every aspect of modern life. Ben & Jerry’s should carefully consider what they wish for.

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 pandemic or the lockdown: Which has been worse?

(Pixabay, YHN)

COVID-19 has killed over 200,000 Americans while policies to stem the virus’ spread have caused enormous economic and societal harm. Any comparison must use a common metric, and economics uses dollars, even for human lives. No one can avoid placing a dollar value on saving lives; always choosing safety just places an infinite dollar value on life. Our only option is whether to evaluate tradeoffs.

Economists use the value of a statistical life (VSL) for policies regulating risk. The method uses the many choices people make in markets involving risks, like taking risky jobs. The VSL ensures that government decisions resemble our personal decisions.

Statistical lives are when the identity of the persons whose lives may be saved is unknown. Or as Nobel prize-winning economist Thomas Schelling wrote, when “The life you save may be your own.” An estimated 90 million Americans are in COVID-19 high-risk categories, so the pandemic involves statistical risk.

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A standard value for a statistical life, based on dozens of economic studies, is $10 million. People never make trades involving millions of dollars because the risks examined are small.

We can use years of life when the people at risk are younger or older than average. This approach uses expected years of life remaining at different ages. For example, life expectation is 69.2 years at age 10 and 9.2 years at 80, so the death of a child, which many people find particularly tragic, contributes more years of life lost. A standard value for a year of life is $300,000.

The COVID Tracker website reports 201,000 deaths through October 4 for a value of $2 trillion using the VSL. If instead we use statistical years of life (over 75% of deaths are among persons over age 65), the deaths have cost 2.7 million years of life, valued at $800 billion. We may wish to reduce this further due to COVID-19 co-morbidities. Many persons dying from COVID are already in poor health; for instance, an 80-year-old COVID-19 victim might only have three years of life remaining, not the average of nine years.

COVID-19 has resulted in over 400,000 hospitalizations. Estimates of the cost of hospitalizations range from $14,000 to $72,000. The higher figure yields a hospitalization cost of $30 billion. Illnesses not involving hospitalization have modest medical costs. For these plus the millions quarantining due to contact with COVID patients, the major cost is missed work time.

Now, let’s consider the policy measures. Government policies have led to the sharpest contraction on record. Unemployment reached almost 15 percent in April and is still more than double February’s rate and we have lost $650 billion in GDP.

The economic impact exceeds lost GDP because of consumer surplus, or the value people receive from consumption beyond the amount paid. Sports, entertainment, and recreation, all badly disrupted by the lockdown, generate high ratios of consumer surplus to expenditure. Lost consumer surplus almost certainly exceeds $200 billion.

For most children, the 2019-20 school year ended in March and many schools offered little online instruction. Working parents had to accommodate children not in school, increasing this impact. Expenditures for the lost quarter of the year provide one way to value the school disruption. Public schools enroll 50 million children and spend over $12,000 per student nationally, for a $150 billion loss from education.

Americans’ mental health has suffered enormously in 2020. Anxiety, depression and calls to suicide help lines are up sharply. News reports attribute numerous suicides and overdoses to COVID stress. The virus and the pandemic together, I think, have produced the mental health costs.

The costs of the pandemic and lockdown almost surely each exceed $1 trillion. What does this imply for a potential second lockdown? Our initial policy response was almost surely excessive; masks and social distancing have allowed businesses to reopen without overwhelming hospitals. We can contain the virus without the enormous costs to date.

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

COVID insurance litigation madness

(Pixabay, YHN

The United States has witnessed unprecedented economic disruption due to COVID-19. State and local governments closed thousands of “nonessential” businesses. Now, businesses have filed over 1,000 lawsuits against their insurance companies to collect for COVID losses. What should we make of this litigation?

The businesses suing insurers include the NBA’s Houston Rockets, Minor League Baseball, clothes maker Ralph Lauren, the Century 21 retail companies and celebrity chef Wolfgang Puck. The suits seek coverage of lost revenue while closed from business interruption loss policies.

Business interruption coverage is generally a wise investment. Property insurance will cover tornado damage to the building and contents. Yet while closed, the business still must pay its loans. Interruption coverage is an important element of continuity planning.

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Insurance contracts cover many potential losses. Economists understand that contracts are often incomplete, meaning they will not cover every possible contingency. A failure to envision a circumstance is one reason contracts are incomplete. And sometimes the parties will decide that writing a provision for a very unlikely event is too costly.

A market economy needs a court system to resolve such contract disputes. Once a loss happens, insurance disputes are particularly likely. The policyholder will naturally read the contract as providing coverage while the insurance company will want to deny coverage.

Two factors suggest that insurance companies did not intend interruption policies to cover pandemic losses. First, insurers could never afford to cover every business loss. Interruption loss coverage usually requires physical damage, as this distinguishes tornadoes or fires from poor planning by the business. Second, after the SARS outbreak, the Insurance Services Office crafted a “virus and bacteria” exclusion for business interruption loss policies. Not all insurers adopted this language, but it suggests intent to not cover pandemic losses.

Numerous suits against insurers have already been dismissed, although courts in Missouri and New Jersey have allowed cases to go forward. Several state legislatures considered measures this year forcing insurers to cover COVID losses, suggesting that the exclusion was recognized. We can empathize with business owners who thought they were covered, but the exclusion seems valid.

Perhaps you might think that insurance companies should be less greedy and cover COVID-19 losses. Payment could help businesses suffering through no fault of their own stay open.

Such generosity would itself cause significant financial harm. The potential losses to insurers have been described as comparable to a Hurricane Katrina each month. Forcing insurance companies into bankruptcy to cover businesses’ losses might deepen the recession. Beyond this, a responsible insurance company must ensure it can pay customers’ potential claims.

The exclusion of certain categories of losses is common in insurance. Small risks are typically covered under “all hazards” coverage, but when a loss category becomes too large, insurers frequently exclude it from basic coverage. Policyholders can still get coverage by paying an extra premium.

Some industry experts have speculated that insurers may not wish to cover “virus and bacteria” interruption losses at all. This seems prudent. Insurance companies are businesses, not charities, and are ultimately in the trust business. We pay premiums every month and trust the company will have the resources to pay our claims. A company betrays this trust by writing additional coverage without charging adequate premiums.

Actuaries attempt to determine an adequate premium. Determining the adequate rate for pandemic losses seems particularly daunting given the governmental response to COVID-19. Insurers must answer: What is the probability of another pandemic like COVID-19? And will governments respond similarly to the next pandemic? This is as much an exercise in political prognostication as number crunching.

Several experts argue that the Federal government will have to offer pandemic insurance. This is a topic for another day. Given the poor job Washington has done with the National Flood Insurance Program, I am not enthusiastic about Federal intervention. But forcing insurance companies to risk bankruptcy by writing coverage on charity terms might be worse.

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

Socialism and economic education

(Pixabay, YHN)

Opinion polls consistently find that young Americans view socialism favorably. For example, in a recent Gallup poll, 49% of millennials and Gen Z’ers held a favorable view of socialism versus 32% of Baby Boomers. Does support for socialism indicate a need for more economic education in America’s high schools and colleges?

As an economics professor, I would certainly like more college students to take economics! States could emulate Texas’ requirement of a high school class in economics teaching the benefits of free enterprise.

Does learning about economics and markets necessarily reduce support for socialism? Or would economic education about markets just amount to indoctrination?

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Our views on most public policy questions mix information and values. By information, I mean facts about the world and testable predictions about cause-and-effect. Values refer to ethical evaluation of outcomes in the world.

Economics education should improve the information content of peoples’ policy views. I can use electricity without understanding electrical engineering and people can use markets without understanding how they work. The amazing coordination that occurs through markets, what economists call the “invisible hand,” should inform policy view. Markets allow people enormous freedom while delivering a rising standard of living.

Understanding how markets work does not require acceptance of the values of capitalism. Two people might agree on the effects of the minimum wage (reduced jobs and higher pay) and disagree on the policy’s desirability due to differing values.

Economic education could also teach young people what socialism meant historically. A hundred years ago socialism meant government ownership of the means of production (e.g., factories). Today politicians like Bernie Sanders and Alexandria Ocasio-Cortez primarily advocate a generous welfare state. They point to Scandinavian countries, not the Soviet Union, as examples of socialism that works.

In the 1930s and 1940s, economists debated whether bureaucrats could coordinate an economy as effectively as markets. Potentially bureaucrats could mimic markets by setting the same prices. In practice, political influence over price setting and the lack of a profit motive leads to inferior performance.

The position of modern socialists, I think, reflects this learning. The gains from substituting bureaucratic commands for prices are nonexistent and the U.S. Postal Service shows the limits of government production. Taxing a prosperous market economy to fund government spending better achieves socialist goals.

Scandinavian countries employ this approach, as the 2020 edition of the Fraser Institute’s Economic Freedom of the World Index demonstrates. Countries are score between 0 and 10 in five areas, with 10 representing more freedom, and the components to generate a country’s score. The U.S. ranks 6th with a score of 8.22; Hong Kong ranks first at 8.94. (The data do not reflect COVID-related spending and restrictions.)

Denmark, Finland, Norway, and Sweden rank from 11th to 46th, with scores ranging from 8.10 to 7.58. Venezuela, a more traditional socialist country, ranks last with a score of 3.34. Clearly, the Scandinavian countries resemble the U.S. far more than Venezuela.

Their reliance on markets is even greater than this. The Scandinavians lag the U.S. in the size of government component because they choose more government spending and higher taxes. On the other four areas – property rights, money and inflation, international trade, and regulation – the Scandinavians match the U.S., with Denmark averaging one third of a point higher on the other areas. The nations where socialism “works” are largely market economies.

If market forces and not politics determine prices, wages, and salaries, an economy can continue to prosper. High taxes will reduce prosperity some; when the government taxes away half (or more) of incomes, people will work less hard. Exactly how much high taxes and government-paid health care, college, and housing reduce prosperity is an empirical question.

Socialism today does not mean what it did a century ago. This is fine and arguably reflects economic education. Economic education may additionally ensure that young Americans know that the countries so many socialists admire rely on prosperity generated by market economies.

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

Cheating, trust and prosperity

(MLB Network/YouTube, YHN)

The Houston Astros played at the Los Angeles Dodgers last weekend for the first time since the revelation of Houston’s sign-stealing during their 2017 championship season. The biggest offseason story led to the firing of Astros manager A.J. Hinch and general manager Jeff Luhnow and two other managers. Yet, according to a saying, “If you aren’t cheating, you aren’t trying.” When does the pursuit of self-interest imperil trust and prosperity?

During 2017, Houston used electronic surveillance to view the catcher’s signs and signaled the batter by banging on a trash can. The Astros defeated the Dodgers that year in the World Series. The Dodgers and their fans have not taken the news of cheating kindly. Earlier this season, Dodgers pitcher Joe Kelly was ejected and suspended for throwing at Astros batters. Fans with trash cans (who can’t attend games this year) greeted the Astros’ bus at Dodger Stadium, and a plane circled the stadium with a banner.

Major League Baseball’s response though is somewhat puzzling. Pitchers and catchers use complicated signs to keep a runner on second base from stealing signs. Coaches and players cover their mouths to guard against lip reading. Some actions to gain competitive advantage are part of the sport.

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Standards regarding conduct to gain advantage have changed over time. In the 1970s and earlier, pitchers would throw at batters who “got too comfortable” at the plate. After back-to-back homers, the next batter would likely be brushed back.

When does the pursuit of competitive advantage become cheating, and how does this matter for business and economics? Is there any reason to expect people to follow rules except when in their self-interest?

Economics assumes that people act in their self-interest. As Adam Smith put it, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love.”

Professor Smith, though, also understood that people can follow rules due to moral and legal force, and even in conflict with narrow self-interest. Most of us do not shoplift because we believe this is wrong. We do not pay for merchandise only after we determine we could not get away with stealing.

Voluntary rule-following is enormously valuable. Still, we generally use a mix of prevention and voluntary rule-following. Stores take measures to combat shoplifting but do not strip search all customers. Shoplifting costs retailers around $20 billion annually, a significant but manageable total.

Business dealings employ a similar approach. Contracts give parties an incentive to perform as specified. But business is also conducted on a handshake basis. Parties expect each other to resolve problems, not merely rely on the exact terms of a contract.

Crime can be viewed as a type of cheating with enormous costs. America employs one million police officers and 750,000 security guards to control crime and incarcerates 2.3 million persons for their misdeeds. Expenditures on security devices like cameras, bars, and alarms increase the cost further. The costs of crime would be enormously lower if more people would never steal.

The flip side of cheating is trust. Trust that others in business will not cheat or steal is enormously important for prosperity. Business loans will not exist if investors fear that every new business is a scam. Lending occurs only within families in low-trust societies, which generally remain poor.

Good rules for games and laws for business benefit all parties and broadly align rule-following with self-interest. In games, good rules produce challenging competitions exhibiting skill which players and fans enjoy. In business, good laws support value-creating economic activity. Punishing rule-breakers reinforces the self-interest in following the rules.

Playing by the rules or following the law is enormously valuable. I cannot explain why Major League Baseball tolerates normal sign-stealing yet punished the Astros so harshly. Yet wherever we draw the line, crossing the line erodes the trust on which our prosperity depends.

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.