The Wire

  • Effort underway to have Alabama inmates vote this election cycle

    Excerpt:

    As reported first by the Troy Messenger, an effort is underway by the Pike County NAACP to have eligible inmates vote in Alabama’s upcoming November 6 general election.

    Only inmates convicted of “crimes of moral turpitude” are disqualified from voting, however being in prison obviously bars inmates from heading to the polls on Election Day. This is where absentee voting comes in; yet, incarceration is not currently available as an option on the state’s absentee ballot request forms.

    “There’s nowhere on the absentee ballot application that lists being incarcerated as a reason you can vote absentee,” Jamie Scarbrough, Pike County absentee election manager, explained. “You have to be out of the county, have a physical impairment, a work conflict, a member of the armed forces or a student in another county.”

  • Governor Ivey criticizes ‘Lying Liberal Walt Maddox’

    Excerpt:

    After Democratic gubernatorial nominee and Tuscaloosa Mayor Walt Maddox on Thursday held a press conference to spread unsubstantiated allegations about Governor Kay Ivey’s health and accuse her of a coverup 19 days before Election Day, the governor’s campaign responded by giving the Democrat a new moniker – “Lying Liberal Walt Maddox.”

    “Apparently Walt Maddox isn’t just a liberal. He’s a lying liberal,” Ivey’s campaign said in a statement. “The people of Alabama will see this for what it is – a desperate false attack from a shameless politician who will say or do anything to get elected.”

    Ivey has repeatedly denied the allegations about her health since last year, and her doctor even refuted them this week, providing a detailed letter to back up the conclusion that Ivey is in good health.

    Besides the allegations regarding the governor’s health, the Maddox camp is alleging that then-Lieutenant Governor Ivey had a member of her protective detail demoted and transferred over her 2015 hospitalization in Colorado.

    Ivey’s campaign said, “As it relates to the officer, that’s another Maddox whopper. News outlets reported last year that the officer actually received a promotion and raise in late 2015.”

  • Byrne: Odds better than 50/50 GOP keeps House — ‘There is truly a Kavanaugh effect going on here’

    Excerpt:

    FAIRHOPE – What a difference a month can make for Republican lawmakers in Washington, D.C.

    Heading into the summer, most political watchers anticipated that the GOP was set to lose at least the House of Representatives in the upcoming midterms. By mid-August, some Republicans thought losing the Senate was even a possibility.

    However, the confirmation hearings of Supreme Court associate justice nominee Brett Kavanaugh appeared to have been a game-changer for Republicans, and according to Rep. Bradley Byrne (R-Fairhope), the public’s reaction to the Kavanaugh confirmation hearings could be enough for Republicans to hold on to both the House and the Senate.

6 days ago

Rental scooters and innovation

(KPIX CBS SF Bay Area/YouTube)

Rental bikes and scooters came to Troy University this fall, courtesy of the rental company Spin. Similar efforts by Spin, Bird, and Lime across the country, however, have been met with controversy. The so-called “Scooter Wars” reflect how government permission affects innovation and growth.

Technology makes such rentals, long available in resort locales, economical. The companies use GPS tracking and electronic billing, and rentals can be unlocked by scanning a driver’s license. People leave the bike or scooter at their destination and an app directs customers looking for a ride to the nearest rental.

The companies use public spaces like sidewalks to “store” their rental units. This makes the rentals convenient for customers, as walking several blocks to and from rental locations would offset most of the time savings on short trips. Yet bikes and scooters clogging sidewalks have contributed to hostile reactions.

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Numerous cities have banned the scooter companies, including Miami (which banned Bird and Lime within weeks), Seattle, Boston, Nashville and St. Paul. The bans have occurred in part because the companies entered some cities by just dropping off bikes and scooters on the streets for use. And Miami’s ban may not be permanent; Denver, Portland and Salt Lake City all eventually permitted scooter rentals after initial bans.

The government permission of relevance is more than simple business licenses, which are generally issued upon completion of required paperwork and payment of relevant fees. Instead, the permission requested here can be denied altogether. And this alters the prospects for innovation in our economy.

Should scooter companies need permission slips from cities? This is where the “Scooter Wars” highlight an important tension. Are people free to do whatever the law does not prohibit? Or do we need permission from government to start new businesses, offer new products and services, or use our property as we wish?

Rentals undoubtedly raise some valid concerns. Increased bike and scooter use can affect traffic safety. The rentals take up space on sidewalks, interfering with pedestrians. They could obstruct building entrances. Wouldn’t it be wise for city officials to evaluate the tradeoffs involved and impose rules to reduce potential problems?

Yes, but unfortunately requiring government permission does not produce only wise and benign oversight. Government permission empowers a NIMBY, or Not in My Backyard, society. NIMBY becomes the default response when people can object to a new venture for any reason, good, bad, or imagined. Do you find scooters unsightly, annoying, or threatening? Then pressure city officials to ban them.

Requiring government permission also allows economic interests to block competition. Economist Joseph Schumpeter described capitalism as a process of creative destruction: automobiles, cell phones, and email rendered horse-drawn buggies, landlines, and traditional mail largely obsolete. Existing businesses, often long-standing pillars of local economies and politics, have an interest in preventing innovation. If local governments must give permission, people’s natural NIMBY reaction and existing business’ interests create biases against innovation.

The scooter companies resorted to surprise deployments as a means, I think, of counteracting government’s status quo bias. Miamians took 30,000 trips on Lime scooters while they were available, and these users also spoke to city officials. Ridesharing company Uber similarly sought to develop loyal local customers to fend off local political efforts to ban ridesharing.

Progress requires innovation, even though the new and different can be frightening. Unfortunately, the need to get government permission becomes a formula for stasis, as Tyler Cowen examines in The Complacent Class. And dynamic innovation doesn’t mix well with permission. Computers and technology have been leading sources of innovation in recent decades in part because innovation here often still doesn’t require permission.

Personally, I’m too uncoordinated to try to use an electric scooter. So don’t expect to see me on a Spin scooter soon. But regardless of your age or coordination level, the Scooter Wars’ clash between NIMBY and innovation matters for us all.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

2 weeks ago

Is Facebook really like Ma Bell?

(Pixabay)

Some commentators and politicians have proposed regulating Facebook, Twitter and Google as public utilities.

To make sense of this proposal, let’s consider the economic role of public utilities.

Today’s social media giants might meet the popular definition of monopoly, namely having a very large market share. Economists, however, use a much stricter definition, and public utility regulation is applied only to the specific type known as a “natural” monopoly. Natural monopoly refers to industries where the cost per unit produced or customer served falls due to a very high first unit cost and a very low cost of serving extra customers.

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Consider the electric grid. Establishing the grid requires generation plants, transmission lines, substations, and finally the power wires in our communities. Once built, the cost of connecting one more home or business to the grid is very low. The same dynamic applies to water and sewer systems, landline telephones and roads and streets.

One large firm will likely dominate such industries. Why? Competition drives price down to the cost of production. Here, the largest firm has a cost advantage and can profitably charge lower prices than its rivals. Smaller firms can either match the leader’s price and lose money or maintain a profitable price and likely lose customers. After the smaller guys go bankrupt, the large firm can raise its price and earn big profits.

We frequently use anti-trust laws to prevent the establishment of or to break up existing monopolies. But breaking up a natural monopoly is unlikely to produce competition for long. The largest firm’s cost advantage doesn’t go away.

What are the alternatives? One is government ownership of the utility, which we rely on for water, sewers, roads, and electricity in communities like Troy. Cooperative ownership by customers – electric and natural gas co-ops – prevents managers from trying to profit at customers’ expense.

Public utilities regulation gives a private, for-profit company an exclusive service territory, albeit with restrictions. Government regulators, in Alabama the Public Service Commission, set prices and other terms of service. And the utility is a common carrier who must provide service to all customers willing to pay the regulated price. Economists and lawyers developed the public utilities doctrine around 1900.

Another way to think about a public utility is that competition between profit-seeking businesses normally best serves customers. But the enormous cost of power grids renders multiple systems and competition unattractive. Perhaps having one grid and economists deliver the benefits of competition through rules makes more sense.

Whether the public utilities doctrine served America well during the 20th Century is a question for another day. How about applying this model to social media today?

Facebook and Google meet the popular definition of monopoly – they dominate their markets. Twitter dominates its unique product, but alternatives exist to push out messages. None of the three has a massive, critical physical infrastructure creating declining cost per customer.

The social media giants do possess an advantage resembling natural monopoly. They have coordination value: the value of being on Facebook increases with the number of other users. Economists call this a network effect. Although many economists fear that network effects might lock us into inferior technology, in practice entrepreneurs can get consumers to switch: we do not still watch VHS movies and listen to cassettes.

The social media companies serve their customers very well. For instance, YouTube’s advertising allows performers to earn money, with some stars earning millions per year. Facebook has offered users innovative features and an easy interface. Market domination due to better service benefits consumers.

Alternatives to Facebook currently exist, like LinkedIn and even MySpace. More significantly, a new rival would not have to duplicate a massively costly physical infrastructure. The economic case for regulating the fast-changing digital world with a model designed for the physical world is weak. Today’s social media giants will likely have a much shorter time on our economic stage than phone and electric utilities unless we cement their positions via regulation.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

3 weeks ago

Should we exercise the freedom to bet on sports?

(W.Miller from C. Karl/Flickr)

Four states have already legalized sports betting in the wake of last May’s Supreme Court decision. While many Alabamians have moral objections to gambling, economics also provides a reason not to bet on sports, namely that betting will prove unprofitable. And this illustrates an important aspect of financial markets in general.

To understand the likely unprofitability of betting, let’s consider the most common football bet, one against the point spread. One team is favored by a given number of points and must win by this number to win a bet; the underdog wins by winning or losing by less than the spread. Bets against the spread should be fair, meaning that the favorite and underdog should be equally likely to win. Bets are not quite fair because sportsbooks deduct a fee so they can make money.

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Despite the fees, sports bettors who pick all winners will make handsome profits. And if you think you know football, you might think you can pick winners for at least some games. But sports’ entertaining unpredictability also makes picking just winners impossible. And because of the betting lines, you cannot profit by just betting on the Alabama Crimson Tide, who win almost every game.

If point spreads are accurate, bettors will not be able to pick enough winners to profit. Accuracy does not mean that the spread exactly predicts each game, but is better at forecasting outcomes than any other method.

Is this really true? Dozens of published papers have found that sports betting lines accurately predict outcomes. Alternatively, economists try to find profitable betting strategies given the sportsbooks’ fees; the published research yields few winning formulas.

Accurate point spreads yield a surprising implication: experts should not do any better than amateurs or luck in picking winners. Flipping a coin to decide who to bet should be as reliable as a super handicapper’s “lock of the year.”

This theory of efficient financial markets was first developed for the stock market. The price of a company’s stock should be our best forecast of its future performance. Some stocks clearly deliver tremendous returns: a $1,000 investment in Amazon or Netflix in 2007 would have been worth $12,000 and $51,000 respectively a decade later. But who knew to invest in Amazon in 1997, Apple in 1978 or General Motors in 1920? Warren Buffet passed on investing early in Amazon.

How do financial markets accomplish this? Once markets exist for stocks, bonds, sports bets, gold, Bitcoin, or anything else, millions of investors can invest where they see value. If you think that Amazon’s stock is still underpriced, then buy now. Of course, someone will only sell to you because they do not think Amazon is undervalued at today’s price. Stocks, gold, and football point spreads must all be priced to balance the number of buyers and sellers most of the time.

One guiding principle for financial research has been that it cannot be easy to get rich. If it were easy to get rich and remained so over time, then everyone would be rich. A satisfactory theory of financial markets must reflect this reality. Prices generally quickly incorporate news affecting a company’s or team’s prospects.

Why then bet on sports? Some people enjoy having action on games and sweating their bets. Betting on your favorite team can also signal your loyalty. Finally, some people, I think, like the challenge of trying to beat the market by finding some heretofore unrecognized pattern. Market efficiency does not mean that nothing remains to be learned about teams’ performance.

The potential to make money in stock, bond, futures and foreign currency markets motivates similar efforts by analysts on Wall Street and across the world. This research further improves financial markets.

Even should Alabama legalize sports betting, I won’t be placing many bets. I would be denying the power of markets if I did. Studying economics pays off, sometimes just by avoiding unprofitable decisions.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

4 weeks ago

Should Alabama bet on sports betting?

(YHN/Flaticon)

The U.S. Supreme Court ruled last May that states could legalize sports betting. New Jersey, Delaware, West Virginia and Mississippi have joined Nevada in offering legal sports betting, and about twenty other states have taken steps toward legalization.

Should Alabama join this crowd?

The size of the sports betting market is one argument in the affirmative. We lack accurate statistics on the current largely illegal U.S. sports betting market. A 1999 Congressional study estimated that Americans bet between $80 and $380 billion annually, while pro and college football betting has recently been estimated at $100 billion. A study by Oxford Economics for the American Gaming Association estimated that nationwide legalization and mobile betting could result in a $300 billion a year market.

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Most of the bets are paid out to the winning gamblers, but bookmakers keep some for expenses and profits. Legalization brings this gaming revenue out of the black market or back from offshore casinos to support jobs in states legalizing betting. Oxford Economics projects that nationwide legalization could create 90,000 jobs and annual tax revenue of $8 billion, through taxes on gambling and taxes paid by now legal employees.

Without legalization, Alabama will not share in these jobs and tax revenues. Alabama sports bettors’ money will support businesses and government services in other states.

While jobs and tax revenue are nice, prosperity ultimately involves providing goods, services, and activities people want. Jobs from value-creating businesses – those providing the most desired goods and services – create economically thriving communities. Alabama will miss out on a value-creating industry by not legalizing sports betting.

But does sports betting truly generate value? A skeptic could point out that gambling is a zero-sum game (the losses cancel out wins) and creates no products. Yet millions of people value having action on games and get satisfaction from their winning bets. People willingly place bets they know they might lose. Economists call such satisfaction utility. All economic activity beyond sustenance and survival is about generating utility by providing people with things they want.

Why do people enjoy betting? Economists leave such questions to psychologists. The exclusively voluntary nature of market activities excludes predatory activities from value creation. Everyone must either want to participate (place bets) or be compensated to participate – say cleaning up the sportsbook at night. Sports betting passes the voluntary participation test.

Sports betting’s biggest negative is the problem gamblers who lose more than they can afford, resulting in bankruptcy and often devastating their families. This is most unfortunate, but are problem gamblers better off with prohibition? People have long been able to bet illegally, with online betting only making access easier. Prohibition, however, makes problem gambler’s difficulties worse. Legal sportsbooks will not break legs to collect debts; indeed, it will not be profitable to let gamblers make bets they cannot pay off. Regulations on legal betting can help protect problem gamblers from themselves and ensure help is available when wanted.

The increased betting volume from legalization increases the risk of gamblers paying players to fix games. This is a real threat: the “Black Sox” scandal nearly ruined Major League Baseball, and college players who will never play professionally might find gamblers’ dollars very tempting. NBA Commissioner Adam Silver proposed that an integrity fee on all bets, with leagues using the proceeds to guard against illicit deals.

Sportsbooks, though, already have a strong incentive to protect the integrity of games. A $300 billion a year betting market will generate significant profits for years to come provided the public does not view the contests as rigged. Sportsbooks also will not want to pay off rigged bets. Suspicious betting patterns and statistical analysis can help identify rigged contests. Scandals will undoubtedly occur, but cooperation between sportsbooks, the leagues and law enforcement should keep the contests legitimate.

Jobs, taxes and losing both to neighboring states are all worthwhile considerations. But I think that the most compelling argument is the freedom to engage legally in an activity many Alabamians value. Despite the benefits, I wouldn’t bet on Alabama legalizing sports betting anytime soon.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

1 month ago

Paying for checked bags

(Pixabay)

United and Jet Blue recently increased their checked bag fee to $30. Nobody likes paying for things we didn’t pay for in the past, like checked luggage. A bill in the U.S. Senate would limit airlines’ checked bag and other fees, which topped $7 billion in 2016. But economics suggests that bag fees can make air travel more efficient, not merely extract money from travelers.

American was the major airline to charge for checked bags in 2008. The fee rose from $15 initially to $25, and almost all airlines except Southwest use this fee, while some regional airlines even charge for carry-on bags. Airline credit cards and frequent flier programs often allow free bags.

It is tempting but inaccurate to say that until 2008 passengers did not pay for checked bags. Carrying luggage is costly: airlines need larger planes with cargo space and must hire baggage handlers, while extra weight requires extra jet fuel. U.S. airlines are businesses and cannot lose money for too long. Revenue must at least cover costs, with or without bag fees.

Prior to 2008, the price of tickets covered the cost of carrying bags, averaged across all fliers. If passengers checked on average one bag each, perhaps $25 of the ticket price would have covered baggage costs. Fliers with many bags would prefer paying a ticket price covering the average number of checked bags, while passengers without bags effectively paid for others’ luggage.

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Travelers now must pay for checked luggage. This should make air travel more efficient overall. Previously passengers might have checked a bag with contents providing only $10 or $20 of value to them. If the $25 bag fee approximately equals the airlines’ cost of transporting bags, a bag valued at $10 will no longer fly, which is good because it was not worth the cost.

My points about bags apply to other airline services like meals and beverages. If airlines do not charge for alcoholic beverages or meals, ticket prices must cover these costs. First class passengers still receive such “freebies” but their expensive tickets certainly cover the costs.

Should airlines then charge for everything, including the reading light or the lavatory? Two factors limit charging for everything. One is the cost of restricting access and collecting money from willing users. Electronic payments make collecting fees easier, but lavatories would need to be accessible only after paying. Negative reactions from passengers also matter. People do not like being nickel-and-dimed for every little thing; losing a frequent flyer due to a $3 fee is bad business. Social media now amplifies customer complaints.

Until 1978, the Civil Aeronautics Board (CAB) regulated U.S. airlines, including the routes airlines could fly and fares. Forty years of deregulation have reduced fares by 50 percent in exchange for few extra services. Today, most Americans can fly at least occasionally; under government regulation, flying was primarily for business travelers and the well-to-do.

Senators Markey of Massachusetts and Blumenthal of Connecticut have introduced the Forbid Airlines from Imposing Ridiculous Fees, or FAIR, Act to limit fees of any sort, including for changes or cancellation. Rebooking fees run from $75 to $300 plus the difference in price of the flights. Cancellations can result in seats going unused on high demand flights and thus cost airlines. While these fees seem high to me, airlines know much more about their operations and costs than I do.

Competition between airlines for passengers is a better way to keep fees reasonable, fares low, and service quality high. Southwest advertises that bags fly free, and airlines seeking competitive advantage will undercut any excessive fees. If the Senators want to assist the flying public, they should address access to gates at our nation’s airports, a factor which economists find limits competition.

Travelers will pay for checked luggage, either through fees for each bag or higher ticket prices. While it is nice when someone pays for us, air travel is more efficient when we each pay our own way.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

1 month ago

Economics and Aaron Rodgers’ new contract

(M. Morbeck/Flickr)

The Green Bay Packers’ Aaron Rodgers just signed a contract extension making him the NFL’s highest-paid player. Can economics make sense of athletes’ enormous salaries? And are such salaries justified?

Top athletes now make eight-figure salaries; Mr. Rodgers’ four-year contract extension will pay at least $134 million, including $67 million before the end of this year. Top earners in other sports make even more. Clayton Kershaw of the Los Angeles Dodgers tops baseball at $33 million per season, while the Los Angeles Lakers will pay LeBron James $38 million a year. And Mr. James makes more annually in endorsements than salary. Boxer Floyd Mayweather topped Forbes’ list of top-earning athletes (which includes endorsements) with $285 million in 2018.

To focus on explaining athletes’ compensation, let’s temporarily set aside any notions of fairness. Economists use demand and supply to explain prices and salaries. Teams demand athletes’ services. The NFL generates about $10 billion in annual revenue, funding a 2018 salary cap of $177 million per team. Quarterbacks get the largest slice of this pie.

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Many quarterbacks would happily work for a fraction of the $33 million per season Green Bay will pay Mr. Rodgers. And yet the Packers and their fans do not necessarily want a less expensive quarterback. Rodgers possesses an amazing combination of physical skills, the intelligence to read defenses, and the capacity to make correct split-second decisions in the face of a pass rush.

Top athletes’ skills cannot be duplicated simply because they are valued by teams. Buyers of unique items must outbid other potential buyers. Prices must get very high to determine the winning bidder for top quarterbacks, beach-front property in Malibu, or famous works of art.

The nature of sports contests boosts demand. Only one quarterback leads the final drive, only one pitcher starts the seventh game of the World Series, and only one player attempts a game-winning shot. And only one team wins the championship each year. Fans can value a season even if their favorite team doesn’t win the title but winning also matters. Having the best quarterback, pitcher, or shooter provides your team a huge advantage. Economist Sherwin Rosen found that the top performers in such “superstars” markets will earn substantially more than the next best players despite typically a small difference in skills.

This explains the why of athletes’ salaries. Fairness depends on values and not just economics. Economics shows that the revenues paying athletes’ salaries come (mostly) from voluntary transactions. Fans choose to buy tickets, TV packages, and team merchandise. Advertising spending, which enables TV networks to pay billions for broadcast rights, may appear less clear. But advertising enables modern commerce, businesses want their ads to reach viewers, and sports attract audiences. Ad revenues ultimately derive from fans’ decisions to watch the contests.

Taxpayer subsidies for stadiums provide the one arguably involuntary revenue source. Letting teams pay less for stadiums or arenas increases the revenue available to pay salaries. Whether an expenditure of taxes approved by politicians is involuntary is a topic for another day.

Still, it seems disturbing that athletes get paid tens of millions of dollars for playing games while police officers and firefighters earn far less doing perform dangerous and arguably more important jobs. And we cannot defend the salaries as necessary to get athletes to play; Aaron Rodgers would likely still suit up even if top quarterbacks made “only” $3 million per year.

The salaries of athletes, firefighters and teachers are not set based on anyone’s assessment of moral worth. The market determines salaries, which ultimately means the spending choices of millions of people like you and me. If we disapprove of some market salaries, we could let the government set earnings, either directly by capping compensation or indirectly through high-income taxes. Yet are the decisions of politicians necessarily fairer than the spending decisions of millions?

I will gladly watch the NFL this season and not be mad at Aaron Rodgers for how much he makes. I will reserve my anger for when he beats the Detroit Lions again.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

2 months ago

New challenges for Alabama’s old rules

(YHN/Pixabay)

Like many cities, Troy is trying to figure out how Airbnb rentals fit into the existing legal and regulatory environment. Technology offers new ways to organize our economy to improve our lives.

Hopefully, our laws and regulations will accommodate such new ventures.

Airbnb is an online home-sharing platform launched in 2008. People can rent out their home while on vacation or even an extra room while they are home. Airbnb does not own properties. Instead, it connects renters with hosts and provides trustworthy information about both parties.

A growing economy must create new things and new ways of doing old things. The new sometimes renders the old obsolete, and legacy businesses unable to keep up may go bankrupt. This process, labeled creative destruction by economist Joseph Schumpeter, ends up making us better off. But new things can disrupt old ways, including the categories of our laws, regulations and contracts. Airbnb rentals create issues for Troy’s business licensure and zoning laws.

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New or unforeseen circumstances challenge our existing agreements. Law and economics teach that business contracts cannot spell out exactly what the parties must do in every possible circumstance. For example, suppose that a stream serves as the boundary between two farms. If a flood alters the stream bed, does the property line change too?

Laws are similarly incomplete. People in the early 20th Century wrestled with whether flying an airplane over someone’s property without permission was trespassing. Today, we face a similar question with drones. The common law in England and America tended to evolve to handle new situations. Judges would make a ruling, but the precedent was not completely binding. A decision which proved too costly could be adjusted through trial and error. Planes were determined to not be trespassing, and modern aviation developed.

The U.S. Supreme Court arguably applied an adjustment process this year. The decision in South Dakota v. Wayfair allows collection of sales taxes from online retailers lacking a physical presence in a state. The Court overturned its decision in Quill v. North Dakota from 1992, which increasingly seemed inappropriate for an age of online commerce.

Airbnb similarly challenges Troy and other cities. A business license is not needed to rent your house or sublease your apartment. But many properties listed on Airbnb are exclusive short-term rentals and function equivalently to hotels. Perhaps cities will make Airbnb get a business license in each community where it has a host.

Zoning laws try to limit costs arising from conflicting uses of nearby properties. People do not typically like to live next door to factories, so residential, commercial and industrial zones locate factories away from homes. Similarly, homeowners do not want the house next door becoming a party pad for a procession of visitors who may not fear offending strangers.

Covenants adopted and administered by homeowners’ or neighborhood associations provide an alternative to government zoning. Many homeowners’ association agreements did not foresee the emergence of a short-term home rental market. Airbnb hosts have seen their neighborhood associations limited short-term rentals after they listed their homes on the site.

Some libertarians celebrate disruptive technologies like Airbnb and ride-sharing services Uber and Lyft as ways to repeal in practice excessively restrictive taxi and zoning laws. I sympathize with this argument; New York City’s limits on cabs left many residents without legal taxi service, while zoning has often enforced racial segregation. Zoning is one of the tools Americans use to prevent any change. The “Not in My Back Yard,” or NIMBY, syndrome dominates in much of American today with significant negative consequences, as economist Tyler Cowen details in his The Complacent Class. Nonetheless, ill-advised laws are better repealed, as we risk creating legal questions over technologies which should make our lives better.

Cities enact laws to make our lives better. We can demand that business license laws and zoning not be used to crush innovations that should improve our lives. Our regulations should adjust with the economy, just like our contracts and laws.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

2 months ago

Have Alabama schools found free lunches?

(Amanda Mills/Pixnio.com)

Several dozen Alabama school districts are offering free lunches to all students this year. Economists have long claimed that “There’s no such thing as a free lunch!” Although I don’t think that Alabama schools have proven economists wrong, this case illustrates a challenge of limiting government.

School systems offering free lunches this year, according to the Alabama Department of Education, include Birmingham and Tuscaloosa city schools, and Mobile, Montgomery, Barbour and Crenshaw county schools. More than 4,000 schools nationally take advantage of the Community Eligibility Provision (CEP) of the Healthy, Hunger-Free Kids Act of 2010, funded by the U.S. Department of Agriculture (USDA). The CEP provides free lunches and breakfasts, long available to children from low income households, to all children in qualifying low-income schools regardless of family income.

Economists’ skepticism about free lunches flows from the most fundamental economic fact of our world, scarcity. Scarcity means that our wants and desires exceed our ability to satisfy them, or that we can’t have everything we want. Resources used for lunch cannot be used for other things.

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Alabama’s school lunches are not free; they cost us as Federal taxpayers. They are better described as zero priced, as USDA funds let schools charge students a price of zero. The government cannot provide lunches or breakfasts – or college, healthcare, or any other good – for free, they can only pay the bill.

Even if not free, is the CEP good policy? Answering this involves two separate questions. The first is the wisdom of free lunches for children from low-income families. The second is whether extending this to all students in low-income schools makes sense.

Poor children have long received free school lunches. Educators (and citizens) realize that hungry children will learn less, defeating the purpose of public schooling. Charities and school PTAs began providing lunches in the early 1900s. States and the Federal government helped during the Great Depression. Congress passed the National School Lunch program in 1946.

School lunch programs also encourage healthy eating. One out of three American children today is overweight. Lunch programs let children eat at least one reasonably healthy meal each day.

But what about feeding children from well-to-do families? I can afford to feed my son, even though he attends a school which may be eligible for the CEP. Surely this is a waste of our tax dollars.

College football season is rapidly approaching, so I will borrow a “Not So Fast!” from Lee Corso. Providing free lunches for all students in low-income schools offers some advantages. Parents must sign their children up for free or reduced-price lunches. The CEP keeps children from slipping through a crack and going hungry. Schools save the money reviewing applications and verifying income eligibility.

Furthermore, children who do not pay for lunch may be stigmatized. Whether recipients of government assistance should be stigmatized is a very divisive question. We can debate whether adults should be held accountable for their choices that perhaps contributed to being on government assistance. But stigmatizing children for the (potential) sins of their parents seems cruel.

Collecting money from children who still must pay is costly and problematic for schools. Should children without lunch or lunch money go hungry? If allowed to eat, the district may never collect the money owed. Aggressive collection efforts, like pinning notes to parents on the child’s school uniform, again impacts children far more than parents. But it’s hard to blame school administrators either. Paying for lunches for children whose parents can afford to pay strains tight budgets.

Fiscal conservatives sometimes suggest that government can be easily kept in check by cutting waste. The late William Niskanen, the long-time President of the Cato Institute, remarked that in all his decades in Washington, he never saw any budget line labeled “waste, fraud, and abuse.” Not paying for lunches for well-to-do kids might seem like a no-brainer. But controlling government spending almost always requires difficult choices.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

3 months ago

Is Alabama’s school sales tax holiday good policy?

(YHN/Pixabay)

Last weekend was Alabama’s annual back-to-school sales tax holiday. If you have a child in school, I hope you were able to take advantage. Tax holidays provide an example of using tax policy to shape peoples’ decisions and raise questions about the role and even size of our government.

Alabama was the first of sixteen states with school sales tax holidays in 2018. Alabamians could avoid sales tax on over $900 in school-related purchases, including clothes, books, and computers. A family could save over $80 in taxes.

Tax exemptions encourage spending which we judge worthwhile. School supplies certainly qualify as worthy. Millions of children nationwide may not have the supplies they need for school, a gap that our teachers generously help fill. A recent survey found that 94 percent of teachers spend their own money on supplies for students, averaging almost $500 over two years. Letting a lack of supplies compromise a $12,000 annual per pupil expenditure on public schools would be a tremendous waste.

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Still, targeted tax exemptions and deductions are controversial. Some critics label these exemptions “tax expenditures” to highlight an equivalence to government spending. Consider our sales tax holiday. Alabama alternatively could have collected the sales tax as normal and purchased supplies for children. Tax expenditures are not identical to spending tax dollars, as no family is required to buy school supplies. But a resemblance exists.

The individual and corporate income taxes contain America’s most significant tax expenditures. The ones most familiar are the mortgage interest and charitable contributions deductions. Deductions lower the cost of the designated activity, resulting in more people owning homes and more dollars going to charities.

The Tax Foundation estimates that Federal tax expenditures in 2015 totaled $1.2 trillion and $130 billion for individual and corporate taxes. That amounted to almost 80 cents in tax expenditures for every dollar of individual income tax revenue, and over 50 cents per dollar of corporate tax revenue.

Viewing taxes not collected as spending increases the size of the Federal government. Washington spent $4 trillion in 2017, or 21 percent of GDP. Adding tax expenditures brings this to almost 28 percent of GDP. Tax expenditures probably shouldn’t count equally to spending, because people would have bought school supplies and homes without tax breaks. But spending alone understates the impact of government.

How one views reducing Americans’ taxes via deductions likely depends on how one views the relationship between government and citizens. Believers in limited government probably view citizens as entitled to keep the money they earn. And if government answers to the people as the Declaration of Independence proclaims, government shouldn’t tell us how to spend our money. People who believe that government should address pressing societal needs might view the loss of tax revenue as limiting the good government can do.

Economists raise two points about tax expenditures. The first involves the impact on economic growth. A tax code with many deductions requires higher tax rates to collect the same amount of revenue. High tax rates reduce growth. Taxing all income at lower rates should increase economic growth without reducing government spending.

The second point involves the consequences of government dispensing tax breaks as it chooses. A healthy, growing economy requires investment in promising businesses which provide new and better products and services and earn profits, not merely avoid paying taxes. Lobbying Congress for tax exemptions can become more profitable than expanding a successful business. The House of Representatives recently passed a Health Savings Accounts reform including tax breaks for gym memberships. Passage of this tax break increased the value of Planet Fitness’ stock by four percent.

Nobody likes paying taxes, so giving people a break for good deeds seems reasonable. Yet exempting good causes, like school supplies, induces others to pursue tax breaks for themselves. When the dust clears, keeping tax rates low and making everyone pay for school supplies might look like a better plan.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

3 months ago

Fire safety or compliance waste?

(Troy Fire Department)

Troy’s fire department rating will improve this October, which should lower our insurance rates. Fire protection ratings show how markets can ensure the quality of our services. They also provide an example of value creation as opposed to compliance-driven documentation.

The Insurance Services Office’s (ISO) Fire Suppression Rating Schedule dates back to 1909. Insurance companies wanted reliable information on the quality of cities’ firefighting services. Entire city blocks of tightly bunched wooden buildings could burn without effective firefighting response. Insurers wanted to know where poor fire protection created a risk of devastating losses.

The ratings range from 10 (worst) to 1 (best). Troy’s rating will improve from 3 to 2. Only three percent of over 43,000 departments have a rating of 2; just 305 departments nationally (0.7 percent) have a score of 1. Twenty percent of departments have scores of 9 or 10, so ISO is not like a teacher who gives only A’s and B’s. The rating formula assigns points for a fire department’s equipment and training, water resources, and communications.

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The ratings cannot tell a community how good of a fire department they should have because quality is costly. For instance, opening a third fire station helped drive Troy’s improved rating. The third fire station improves response times, which could save lives or contain damage in a fire. The money for the station, however, could have been spent on the police force, street repairs or lowering taxes.

Are the benefits worth the cost? That’s for cities across the country to decide. Fire suppression ratings assist us as citizens in making such decisions. The city of Troy has been spending money upgrading our fire department for several years. The ISO score signals that our investment is paying off.

And yet can we really be sure that a better ISO rating means better protection? This is a significant question. The ratings are based on many factors. If the factors do not improve protection, a better rating does not make us safer. Public schools can provide lots of documentation of the attainment of performance criteria without noticeable improvement. Could a similar dynamic be at work in firefighting?

We can trust the ratings because insurance companies continue to offer premium discounts for them. An insurer offering discounts will write more policies in communities like Troy. Lower premiums bring in less money per insured home or business; if fire losses are not lower, the insurance company will lose money. Insurers can verify reduced fire losses using their loss data.

Trial, error and adjustment are all crucial here. Sending three fire engines on structure fire calls instead of two to earns the Troy fire department ISO rating points. This seems prudent, but may not necessarily reduce losses. If dispatching an extra engine does not reduce losses, insurers will not want to offer an additional discount and communities will not want to bear this extra cost. ISO drops factors from its formula which fail to reduce fire losses.

Research by economists finds that quality verification works better when voluntary. Making all insurance companies give discounts for ISO ratings might seem to make sense. Instead, insurers do not have to use and must pay for access to the ratings. Insurers will only pay if the ratings provide value. ISO must ensure that the criteria correlate with lower fire losses and not impose costly and ineffective requirements. If insurers had to use the ratings, ISO could sell access regardless of usefulness and would have little reason to refine the criteria over time.

Economic activity increasingly involves documenting compliance with company policies or government regulations. We now have a saying that if you haven’t documented it, you haven’t done it. Yet, fire-fighting demonstrates the weak connection between documentation and value creation: people can be rescued from a burning building without the rescue being documented. Fire suppression demonstrates the potential relevance of performance measures and allows Troy residents to sleep better knowing we are safer.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

3 months ago

Do DIY projects make economic sense?

(Pixabay)

Millions of Americans engage in do it yourself (DIY) home improvements. Each summer I choose a project, and about half of the time I actually do it. This year’s project is painting our house’s exterior windows and trim. And yet DIY produces professional angst for me as an economist, because core economic principles imply that I should hire someone for home projects.

About two thirds of American homeowners typically report planning a DIY improvement task. The more than 4,000 Lowe’s and Home Depot stores nationwide largely cater to DIYers. Cable TV channels, magazines, blogs, and YouTube videos assist aspiring DIYers.

DIY, however, ignores the principle of comparative advantage. What does this mean? Suppose that I could have hired a professional for my painting project for $1,000, plus the cost of paint. Paying someone would have taken me less time than doing it myself. This might seem trivial, since I could just watch if I paid someone, but holds even considering raising the money to pay for the job.

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Why? I can earn $1,000 working as an economist faster than I can paint. Alternatively, I could earn more than $1,000 in the time I’ll spend painting. I am skilled as an economist (although some of my students might disagree), while painters are better at painting. Comparative advantage shows that we will both be better off by focusing on what we’re good at. Teaching a summer class is a faster way for me to paint my house.

Comparative advantage applies for other projects – decks or landscaping the yard – and other professionals – doctors, plumbers, basically everyone. Much of our modern prosperity is due to specialization based on comparative advantage and buying what we need and want.

Closely related to specialization is another fundamental economic principle, the division of knowledge. A pro knows more about painting than I do; they will have and know how to use all the latest tools. A DIYer is more likely to waste wood building a deck due to mistakes a pro will avoid.

DIY could even make us poorer. If twenty families in Troy decided to build decks themselves this summer, they would likely waste a lot of wood and other materials making the similar mistakes. One specialized company could more quickly and efficiently build all twenty decks.

And yet I am probably painting as you read this. Am I crazy? Perhaps, but let’s not go there. My depiction of comparative advantage, however, does omit several things.

Many people cannot work extra hours (for pay at least) to earn the cash needed to pay for home improvement projects. Opportunities for overtime may not come when you want to do a project. DIY purchases a deck or fire pit we otherwise couldn’t afford using our spare time.

Having workers come into your house is also inconvenient. Hiring a painter or contractor is a hassle. Good contractors are often referred by friends, so you may end up with an unreliable one. (Many free-market economists have contractor horror stories, which should perhaps make us rethink how well markets work.)

Emotional considerations also factor in. DIY was part of life in the Sutter home growing up. We did things like put a new roof on the garage and build a deck, and we helped friends with such projects. I learned DIY before economics, and maybe some lessons are hard to unlearn. Many people enjoy working on their home, which factors into consideration.

Specialization leads to the creation of so much new knowledge that it limits our ability to DIY. YouTube videos level the playing field some, but only help someone who is already handy. The ability to DIY is valuable, even when we choose to pay others to do our tasks. The growing percentage of Americans not confident about changing a flat tire will be dependent on road service.

Good luck with your summer projects DIYers. You probably don’t have to worry while working about failing to apply basic principles you teach students. Perhaps painting my house makes me a bad economist; if so, I’m glad I have tenure!

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

4 months ago

Suing about Global Warming

(YHN/Pixabay)

Federal judge William Alsup recently dismissed a lawsuit by Oakland and San Francisco against oil companies for costs related to global warming. The decision is wise, regardless of whether global warming threatens humanity’s future.

The lawsuit sought billions for the cities’ future costs from the use of fossil fuels, specifically infrastructure to protect against rising sea levels. Neither Oakland nor San Francisco sought damages incurred to date.

I do not wish to dwell on legal details of the case, like what constitutes a public nuisance. I see the suit as using litigation to do what has not been done legislatively. Congress failed to pass “cap and trade” for greenhouse gases in 2010. President Obama enacted regulations and signed the Paris Climate accord, but President Trump has largely undone these acts.

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Environmental groups noted that Judge Alsup “accepted” global warming science. Such a claim is disingenuous. All parties to the suit accepted that the burning of fossil fuels produces carbon dioxide, which is a greenhouse gas. The relevant questions – how much warming will occur, whether the associated climate changes pose a dire threat, and what to do to stop or adjust to climate change – offer plenty of scope for debate.

Lawsuits constitute a poor way to address global warming, for three reasons. First, oil companies have merely supplied fossil fuels we demanded. Judge Alsup’s ruling states, “Our industrial revolution and the development of our modern world has literally been fueled by oil and coal. … All of us have benefitted.” All of us are responsible, including Oakland and San Francisco, with gas-powered city vehicles and climate controlled city offices.

And we will all be affected if we curtail the use of fossil fuels. If we hope to stabilize atmospheric carbon dioxide at levels environmentalists recommend, all nations must stop using fossil fuels within the next 30 years or so. I am not advocating this, but the math of atmospheric carbon dioxide is clear.

Halting the use of fossil fuels would profoundly change life, which is a second argument against global warming litigation. If we wish to restructure society by banning fossil fuels, we should have to act through our elected representatives. Judge Alsup recognized that the judiciary should defer to the political branches of government on such decisions.

This leads to the third reason against litigation, that government suing corporations does not seem to advance citizen interests. Governments should be able to sue to recover losses due to negligent acts, like if a driver crashes a tractor-trailer into city hall. Lawsuits involving government policies are problematic.

Take the first major case of legislation through litigation, the 1998 tobacco settlement. States sued to recover Medicaid costs for smoking-related illnesses. Research clearly linked smoking to cancer and other illnesses, making a much stronger factual base for claims than in California’s oil lawsuit. Yet when we establish Medicaid, we should realize that our actions as citizens affect the cost. If we are unwilling to pay for the resulting costs through taxes, we should not create the program.

The nearly $250 billion tobacco settlement has seemingly just augmented states’ revenues. Relatively little has been spent on smoking cessation programs, and smokers received no compensation. Lawyers received billions in fees, although they clearly earned generous fees for devising a legal strategy compelling tobacco companies to settle.

Perhaps states and cities anticipate a more lucrative settlement with big oil. The tobacco settlement netted about $10 billion per year; global warming might plausibly yield $100 billion a year. Oil companies, though, will need to continue selling oil to pay such a settlement, which is bad news if fossil fuel use must end to avert a global warming catastrophe.

The California case is likely just one skirmish in a longer legal fight, as suits by other states are ongoing. Judge Alsup’s opinion suggests that higher courts would have thrown out a ruling allowing Oakland’s suit to proceed. If he’s right, Congress will (rightly) have to act, which is appropriate if we are going to totally reshape our economy.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

4 months ago

Alabama already has ‘Right To Try’ medicine law, but here’s why federal law is important

(YHN/Pixabay)

Congress recently passed national “right to try” legislation giving terminally ill patients freedom to try experimental drugs. Perhaps this will inspire an overhaul of drug regulation to enhance patient freedom.

The Food, Drug, and Cosmetic Act of 1938 gave the Food and Drug Administration (FDA) authority to ban unsafe medicines. The 1962 Kefauver-Harris Amendments added the requirement that drugs be proven effective in their intended use. The FDA also controls the drug testing process.

Some terminal illnesses, unfortunately, have no cure. Sometimes an experimental drug in the testing phase offers promise. Terminally ill patients could not take these drugs since they were not yet FDA approved. The long wait for formal approval was often a death sentence.

Right to try establishes that Americans and not bureaucrats decide about trying a potentially life-saving drug. The federal law is largely symbolic now, as 38 states (including Alabama) already have right to try laws. And since 2005, the FDA has liberalized access to clinical trials for terminally ill patients. Still, I think that the principle is important.

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Indeed, why should the Federal government decide how we treat insomnia, incontinence, pain, and other ailments? Having the FDA determine only safety and relaxing prescription control would yield significant economic, health, and personal benefits.

Such a reform should lower the cost of drugs. A Tufts University study put the average cost of a new drug approval at $2.6 billion, and demonstrating effectiveness is the largest part of this cost. Furthermore, the FDA exhibits a conservative bias in drug approvals, seemingly avoiding ever approving a drug that proves harmful. Drugs are often available in Europe months or years sooner than here. These delays have resulted in hundreds of thousands of deaths over the last 50 years. Eliminating proof of effectiveness would hasten approval of generic drugs.

Doctors’ prescribing behavior reveals that FDA certification of effectiveness is unnecessary. Many prescriptions today are for “off-label” uses which never received FDA approval. Doctors often discover that drugs introduced to treat one illness will often work on other conditions. The best known “off-label” use is probably aspirin’s prevention of heart attacks. Today oncologists increasingly use genetic information about a person’s cancer to select chemotherapy drugs, often a mix that was never clinically tested. Doctors are willing to prescribe and insurance companies are willing to pay for such uses even without FDA assurances of effectiveness.

Would a free-for-all ensue if all safe drugs were available without a prescription? One hundred years ago, before FDA regulation, many “patent” medicines with very little medicinal value were marketed. While drug makers selling the modern equivalents of snake oil is a reasonable fear, it ignores the impact of many players besides patients, starting obviously with doctors. Hospitals, insurance companies, and Medicare and Medicaid also assure quality, through their formularies, or lists of drugs approved for use.

Economist Sam Peltzman’s pioneering research in the 1970s highlighted how these forces effectively policed drug companies’ effectiveness claims. You or I may not remember which company made an overhyped dud drug, but doctors, hospitals, and insurers will. Insurers will demand evidence of effectiveness before paying thousands of dollars for treatments.

If all safe drugs were available over the counter, prescriptions would still be necessary for insurance payment, and rightly so. I favor marijuana liberalization, but I do not wish to pay for other peoples’ recreational drug use. A two-part market would likely evolve, one with medically justified prescriptions covered by insurance, and one with consumer purchase out-of-pocket. The best pain meds, sleep aids, and other drugs would be available without government approval. Out-of-pocket consumer purchases might also discipline drug pricing. An insurance company will balk at paying $500 for a drug sold to consumers for $50.

Right to try is worth celebrating. The principle is that we should get to make decisions about our health care. Further reforms letting Americans decide how to treat our life-threatening and everyday ailments will, I think, make us wealthier, healthier, and happier.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

4 months ago

Are we making the opioid problem worse?

(HHS/Flickr)

Opioid abuse is taking a tremendous toll on America, with 42,000 opioid-related deaths in 2016 and 343 in Alabama.  The problem involves both prescription opioid-based painkillers and illegal heroin and fentanyl.  Might our public policy response be worsening this terrible problem?

Economists have analyzed prohibition, both alcohol in the 1920s and illegal drugs more recently.  We evaluate prohibition, or any other government policy, by comparing the world with and without the policy in question.  This necessarily involves a state of the world which does not exist.  We will never see the toll opioids would have taken in 2018 if we had significantly different policies in place.  We must construct an alternative.

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Rules govern the construction of alternatives to produce meaningful comparisons. One key is allowing only the policy to vary, not other factors, so differences can be attributed to alternative policy.  For example, prohibition does not automatically stop people from taking a substance.  Some potential users will be deterred because of illegality, but others won’t, as we saw with alcohol in the 1920s.

Economic analysis distinguishes harm from the substance itself and those due to prohibition.  Drug violence, for example, is almost entirely due to prohibition.  Dealers’ cash and drugs are vulnerable to theft, and these thefts will not be reported to the police.  Dealers will use violence to protect, steal or retrieve drugs and money. Walgreens and CVS do not have gun battles to control the OxyContin market.

Prescription painkillers provide a distinctive twist to the opioid crisis.  Introduction of opioid painkillers in the 1990s opened new options for millions of American pain sufferers.  Prescription drugs occupy a middle ground in prohibition, legal under government-approved conditions and illegal otherwise.

Perhaps the major controversy for policy and lawsuits brought by dozens of states and cities against drug companies is the addictiveness of opioid painkillers. Studies in leading medical journals show that perhaps one or two percent of patients using the drugs as prescribed become dependent.  Many of the Americans addicted to painkillers obtained them on the black market or through a bogus prescription.

In 2010, the Food and Drug Administration reformulated OxyContin to make the pills harder to crush and make into more potent opioids.  Other restrictions on prescribing followed, and pill mills have been shut down.  In Alabama, opioid prescriptions declined 17 percent between 2013 and 2015.  Yet the crisis has become much deadlier since 2010, with heroin- and fentanyl-related deaths increasing by factors of five and six respectively, with only a slight decline in prescription-related deaths. (Overdose victims often used more than one narcotic, so deaths are described only as related to a drug.)

Heroin, especially when laced with fentanyl, is far deadlier than prescription opioids.  It is tragic when people fall into substance abuse, which often happens after traumatic life events.  Rehab is often not effective until people decide to change their lives.  Unfortunately, public policy may only be able to limit the harm during a dark period in people’s lives, and ensure the availability of help when requested.  Forcing people to turn to heroin by restricting access to painkillers increases harm.

Restricting access to prescription opioids is costly.  Many people can no longer successfully manage their chronic pain, with tragic consequences.  In some documented cases, patients have committed suicide after being denied painkillers.  Any policy limiting access for people who do not “need” painkillers will deny some patients in pain needed help because pain is subjective; no doctor or nurse can know if it is tolerable.  And a strong argument exists that American adults should be able to decide how to treat their pain without the government’s approval.  Libertarian psychiatrist Thomas Szasz argued that free people have a right to drugs.

The concentration of the opioid deaths in regions with dwindling manufacturing and mining jobs suggests a significant economic element to the crisis. And this, to me, is the crisis’ most disturbing element.  America today boasts tremendous prosperity and opportunity.  Given the high overall quality of life today, why is the economy seemingly leading so many Americans to addiction?

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

4 months ago

Stealthy gov’t policies: What Alabama can learn from Hawaiian volcano eruption

(CBS News/YouTube)

Kilauea on the island of Hawaii began erupting on May 3, and has to date destroyed about 600 homes. The terrifying pictures led me to wonder why anyone would build a home on one of the world’s most active volcanoes. Hawaii’s regulation of property insurance provides part of the explanation, and Kilauea’s eruption offers a lesson for Alabama.

Geologists know a lot about volcanoes and lava. The Hawaii Volcano Observatory has mapped over 500 lava vents on Mauna Loa. Hawaii’s volcanoes produce two types of lava, with very different textures and flow speeds. The risk of lava flows varies widely across the island of Hawaii. Geologists divide the island into nine lava flow risk zones, based on the location of the most active vents and the mountains’ contours.

The Grassroot Institute of Hawaii, a public policy think tank, has detailed the insurance story.

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In the 1990s, insurance companies stopped covering homes in the two highest risk lava zones. With insurance unavailable, banks would not write mortgages, and builders could not build homes. The state government created the Hawaii Property Insurance Association (HPIA) to sell low priced insurance. Many homes destroyed in the eruption were built due to HPIA.

Hawaii used an insurance pool to subsidize building on Kilauea. Alabama uses an insurance pool, the Alabama Insurance Underwriting Association, for hurricane coverage along the Gulf Coast. Insurance pools offer “affordable” coverage, meaning priced in line with what people want to pay, not the rate sufficient to allow insurers to cover losses after the next eruption or hurricane. HPIA’s low rates virtually guarantee losses.

Why would insurers join HPIA then? Because they had to. No, Hawaii did not have The Godfather to make insurance companies an offer they couldn’t refuse. Rather, insurers must receive permission from state regulators to operate. Regulators made joining HPIA a condition for operating in Hawaii.

What happens when an insurance pool suffers losses they cannot pay in a future eruption (or hurricane)? They impose assessments, which are essentially taxes, on other state insurance policies. Hawaiians who live on Oahu might have to pay for the destroyed homes.

Insurance pools represent a stealth government policy, one likely to fly under the radar until disaster happens. Hawaii could have let insurance companies charge rates high enough to cover future claims and used taxes to pay part of homeowners’ premiums. For example, insurers could have been allowed to charge $20,000 a year to cover a house on Kilauea, with legislators covering $15,000 of the price using taxes. Instead, HPIA let homeowners just pay say $5,000, and relied on imposing taxes after the eruption.

Subsidizing building in risky areas is poor policy, but I think that transparency makes direct subsidies a better option. Citizens are more likely to reach an informed decision when legislators must spend our taxes. Stealth might produce programs that citizens do not truly want.

Humorist P. J. O’Rourke has said, “Giving money and power to government is like giving whiskey and car keys to teenage boys.” Mr. O’Rourke believes that government will spend our taxes on boondoggles, and often he’s right. Insurance pools suggest though that state legislators are probably subsidizing through insurance some things they would never dare spend our tax dollars on.

Defenders often argue that development would not occur in some risky areas without insurance pools. The point is valid. Yet the risk posed by lava – or hurricanes – is real, and development is more costly as a result. People should only live or work in high risk areas if doing so creates enough value to cover the higher cost. High insurance premiums ask people, “are you sure you want to build a home here?”

Geographer Gilbert White, a pioneer of natural hazards research, argued that disasters were never merely acts of God; our choices contributed to the outcome as well. Whether volcanoes and hurricanes produce disasters will depend on whether government encourages risky decisions.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

4 months ago

Fascinating ways blockchain will change your life, even if Bitcoin turns out to be a bubble

(W.Miller/YHN)

Bitcoin’s price gyrations over the past year have attracted widespread attention. Even if we do not become Bitcoin billionaires, the blockchain technology behind Bitcoin will likely affect our lives by rendering some of government’s functions unnecessary. My Johnson Center colleague Malavika Nair and I explore these possibilities in a new paper we published in The Independent Review.

Bitcoin is a crypto- or digital currency, meaning that instead of currencies they are entries on a computer. The blockchain is the ledger, containing the complete record of Bitcoin transactions. The ledger is updated every few minutes and stored on all of the computers running the system.

The innovation can be understood even if you never managed to program a VCR.

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The blockchain is a distributed ledger, which contrasts with the centralized ledger of accounts used by banks, credit card companies and businesses. Centralized ledgers can be falsified or otherwise manipulated by whoever keeps the ledger. Fudging bank records, for example, can let someone spend the money in their account two or more times. We typically rely on third parties, like a bank to keep the ledger, or accountants to audit and verify the books. Every one of the computers running Bitcoin keeps the blockchain’s record of all transactions. Transactions are verified every few minutes, and there is no account keeper who can potentially falsify the record.

What does this mean for government? America was founded on the principle that the government is supposed to work for us. Abraham Lincoln stated this succinctly: “The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves – in their separate, individual capacities.” Economists, political scientists, and political philosophers have subsequently elaborated on this approach.

The blockchain allows individuals, businesses, and charitable organizations to do many things far more effectively on our own than before. Some of the things we have had government do through taxation and regulation we will now be able to do ourselves using the blockchain. This big picture takeaway should not be lost in almost daily news about new blockchain applications.

Consider the case of corporations. Managers have been able to use their control over the transaction ledger to embezzle resources contributed by investors. We have relied on government regulators, like the Securities and Exchange Commission, to ensure corporations and their accountants keep the ledgers accurately.

A corporation could now be built on the blockchain. Investors could readily scrutinize both the stock trades and other transactions for irregularities. No longer will unscrupulous managers be able to hide their misdeeds, reducing the need for government regulation.

Smart contracts could allow citizens to fund projects where we have had to use government taxes. Crowd funding platforms like GoFundMe and Kickstarter provide a glimpse of the possibilities. The blockchain could execute large-scale contracts where thousands of people agree to pay for bridge repairs or to widen a road. The contract could be automatically executed using cryptocurrency when enough people sign. Meanwhile, a new application called GiveTrack uses blockchain technology to increase the transparency of crowd funded charitable donations.

The blockchain provides a new way to record property titles. Americans currently pay for a search of legal documents for outstanding liens or claims against a property’s title every time we buy a home. Titles on the blockchain could be instantly examined. In developing countries, on the other hand, even establishing who owns land is often challenging. Blockchain titles will provide clarity, and allow property to be used as collateral, which is an important contributing factor to economic development.

Bitcoin may or may not survive, but the blockchain is here to stay. The opportunities being created are just now coming into focus. This is typical because no inventor can know all of the uses possible for a new invention. The blockchain will change your life, even if Bitcoin turns out to be a bubble.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

5 months ago

The future of jobs and how Billy Joel’s ‘Allentown’ was remarkably prescient

Honda car plant (Made in Alabama)

Over 35 years ago during the 1981-82 recession, Billy Joel released “Allentown” about the plight of this Pennsylvania town. The song resonated across the Midwest during the worst economic downturn since the Great Depression. It also anticipated, I think, an important change in our economy and society.

I was in high school in suburban Detroit when “Allentown,” and Mr. Joel could easily have been singing about our troubles. Unemployment in Pennsylvania topped out at 12.7 percent in the recession, while Michigan hit 16.4 percent. Something seemed fundamentally wrong.

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Fortunately, the U.S. economy recovered, and growth exceeded 7 percent in 1984. President Reagan’s reelection slogan, “It’s morning in America” suggested that the dark days were behind us. His tax cuts and low inflation were beginning to unleash the Reagan-Clinton prosperity.

Prosperity never brought back all the auto, steel, or coal jobs. The causes were many, but the largest was automation. America manufactures as much as ever, just with many fewer workers than in the 1970s. Now artificial intelligence (AI) may automate 800 million jobs worldwide.

Sources of long term, stable employment are vanishing, and AI will accelerate the automation of routinized tasks. In the future, tasks may be automated before hundreds of thousands of workers are hired to do them.

This does not mean the end of work, because our wants and desires for goods and services exceed our productive capacity, and always will. Our households and businesses inevitably have tasks that we’d like done. Humans will be useful, only our jobs will be more fleeting.

“Allentown” foreshadows the social impact of these changes. The lyrics state: “For the Pennsylvania we never found, For the promises our teachers gave, If we worked hard, If we behaved.” These words reflect an implicit deal: follow directions from teachers (and I would add parents and bosses), and you will be taken care of.

I shouldn’t really say taken care of, because the lyrics also mention hard work. Hard work in coal mines, steel mills, and auto plants and helped create the prosperity which workers shared. The middle class, post-War America lifestyle wasn’t a gift from employers, unions, or the government, but a share of the wealth created.

This deal worked because many jobs required on-the-job training but little specific expertise. The skills of a high school graduate sufficed, if people followed the boss’ directions. The gig economy and freelance writer epitomize today’s workplace, and now more people must manage their “careers.” Americans waiting to be told where to go to work hard are struggling in a changing world.

Is anyone responsible for this change? Not really, just as no one designed the prior deal. Economist Adam Smith recognized the existence of spontaneous order in society; our institutions are often the product of human action but not design. The Industrial Revolution’s factories, railroads, and other industries needed workers, and economic and political freedom in England and America meant that people could not be forced into this work. A deal where owners and managers designed the workplaces and marketed the products while employees followed directions made all involved better off.

The old deal is not being shut down by law, and traditional employment will never disappear entirely. One consequence of the ongoing spontaneous change is no official announcement that the old deal is no longer in effect. This probably worsens disillusionment and pain, as a long-successful way of approaching life just isn’t very successful anymore.

President Trump’s proposed tariffs on steel and other imports are a response, I think, to this larger change. We can expect other actions as well, perhaps regulations to slow the introduction of self-driving vehicles to protect jobs. Tariffs and regulations, however, will likely be merely delaying actions.

The good news is that automation will allow us to produce the goods and services we now have, plus many more. And many Americans are embracing freelance careers, perhaps because obeying the boss is often frustrating. The future is bright but will be different, and we must recognize the differences.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

5 months ago

Will student loan debt crush Alabama’s graduates?

(Pixabay)

Many of Alabama’s 2018 high school graduates will start college this fall. Unfortunately, many recent college graduates report putting off buying cars or homes, saving for retirement, or marriage due to student loan debt. Will Alabama’s new grads face this fate?

Student loans now total almost $1.5 trillion, with 2016 graduates averaging $28,000 in debt. With over 10 percent of loans in default, taxpayers may eventually pay much of that $1.5 trillion. A closer look at the numbers, however, offers hope for grads and suggestions for ensuring access to college without excessively burdening students or taxpayers.

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The $28,000 loan average is only for grads with debt; 30 percent of grads managed to complete college without borrowing. Students burdened with six figure loans, often featured in news stories, inflate this average and have frequently borrowed for graduate or professional degrees, or to attend expensive private or out-of-state universities.

Attending a public university and paying in-state tuition allows pursuit of a degree with little debt. High schoolers can also earn college credit through dual enrollment and advanced placement courses. Two-year colleges provide a low cost way to begin studies, particularly for students with marginal test scores and grades. College graduates earn 60 to 70 percent more than high school grads, but students who never earn degrees struggle to pay back loans.

Some students will never pay their big loan balances thanks to forgiveness programs. Although student loans are very difficult to discharge in bankruptcy, the Public Service Loan Forgiveness plan cancels remaining balances for government or not-for-profit sector workers after ten years of payments. The plan makes some sense: why collect extra taxes to pay government workers to pay back government loans?

The program, however, lets students planning on public service careers take on debt they will almost surely never repay. Georgetown University used this plan to offer free law school for aspiring public interest lawyers.

Mortgage-sized debts raise the question of why exactly the Federal government is in the student loan business. An economic argument arises from the nature of lending: unlike cars or homes, college degrees cannot readily be repossessed (and indentured servitude is illegal). Students may be unable to borrow for college if they or their parents lack collateral, despite the value of degrees. A market would exist in the absence of Federal student loans, in all likelihood using test scores, college grades, and choice of major in decisions.

I believe that equality of opportunity explains the student loan program, not the economics of lending. The earnings premium shows that for many, college is the gate to the middle class. Americans like everyone to have an opportunity to succeed through hard work. Some nations ration access to college using standardized tests, with a teenager’s poor test performance limiting college options. Americans like people whom experts and bankers think will fail to still have a chance.

Markets generally outperform government programs, but I’m okay with government loans for college. Why? Arthur Brooks of the American Enterprise Institute contends that about two thirds of Americans support markets, in principle if not always in the details. Furthermore, this support correlates with the perception that America is a land of opportunity. Maintaining support for markets may require loans to some marginally qualified students.

Access to college as part of an opportunity society suggests focusing loans on undergraduate students. The Urban Institute, however, found that 38 percent of loans now go to graduate students. And the Government Accountability Office found that 30 percent of outstanding loans would likely be forgiven under various programs.

We should rely on market loans for graduate and professional schools. While this may limit some students’ pursuit of advanced degrees, college graduates already earn 30 percent higher salaries than the national average. Why should taxpayers pay for college-educated Americans to pursue even higher salaries?

Alabama’s college-bound 2018 high school graduates need not end up with mortgage-sized student debt. And Federal student loans can provide opportunity for Americans without overly burdening taxpayers.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

5 months ago

Are sales taxes outdated for Alabama’s future economy?

(W.Miller/YHN)

Presidential tweets and a Supreme Court case have reignited the question of taxing internet sales. The Court in April heard arguments in South Dakota v. Wayfair regarding whether a retailer must have physical presence in a state to have to remit sales taxes. The physical presence rule goes back to 1967 and mail order catalogs.

E-commerce has been costing state and local governments tax revenue, as South Dakota argued in the case. But instead of trying to collect sales taxes online, perhaps we should abandon a 20th Century economy tax.

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General sales taxes produced 23 percent of state and local tax revenues nationally in 2015, while “selective sales taxes” on gas, tobacco, and alcohol contributed another 11 percent. Alabama raises 48 percent of our tax revenue from these taxes. Abandoning sales taxes would open a chasm in Alabama government budgets.

Economics shows that we will have less of anything which we tax. Taxes affect our behavior, creating a cost beyond the revenue raised for the government. “Optimal tax theory” examines keeping this extra cost as low as possible while raising needed government revenue. Efficiency is not, of course, the only factor for evaluating taxes, as most of us also care about fairness.

First widely used in the 1930s, sales taxes readily funded local governments when most people shopped at stores near home. The local sales taxes Alabamians paid went to their city or county government. Times have changed.

Sales taxes have always had drawbacks. For one, they are regressive, meaning that taxes as a percentage of family income falls as income rises. Although economists disagree about how progressive taxes should be (with a progressive tax, payments as a percentage of income increase with income), few view regressive taxes as fair.

Beyond regressivity, services have also proven hard to tax. Malls and big box stores avoided a local sales tax by locating beyond the city limits. Consumer use taxes, enacted for purchases made without paying sales taxes, have proven cumbersome. High taxes on cigarettes have led to cross-border shopping and smuggling.

Online retailing worsened collection problems. Although Amazon now generally collects sales tax, universal collection will be neither easy nor cheap. Differential tax treatment of online and brick-and-mortar sellers raises economic and fairness concerns. Avoiding sales taxes helps keep inefficient online retailers in business. And brick-and-mortar retailers face unfair competition when consumers can avoid sales taxes online.

Internet shopping has improved life for shoppers and entrepreneurs. Shoppers can choose from sellers world-wide without leaving the house. Makers of unique products no longer need to rely on mail order catalogs, and social media groups promote the products to interested consumers. The cost of collecting sales taxes for small businesses, however, is substantial: 13 percent of tax revenues for small retailers, versus 2 percent for large retailers.

Public service ads today encourage people to shop local retailers to fund local government. But optimal tax theory says we should not let taxes distort economic activity too much. Should we potentially halt the evolution of e-commerce, and all the benefits this may bring, simply because local governments can more easily collect sales taxes from local stores?

Our city and county government provide valuable services like police and fire protection, streets, schools, and garbage collection. These services should be adequately funded. I also believe in federalism and want local governments to impose their own taxes. Having Washington collect more taxes and then fund local governments undermines federalism.

Alternatives exist for sales tax revenues. In Alabama, our lowest in the nation property taxes represent an alternative. We might want to try pollution taxes, which promise sound environmental policy and could fund government.

Should we substantially revamp our tax system? If sales tax collection does not stifle e-commerce, my concern becomes moot. Ultimately government in the United States is supposed to serve our interests. Perhaps sales taxes are as outdated as Sears, Toys-R-Us, and the famous retailers who collected them.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

5 months ago

Karl Marx’s noble ideas that don’t work in an economy

(Wikicommons,Pixabay)

May 5th was the 200th birthday of Karl Marx, the economist who devised socialism. Last November was the 100th anniversary of the Russian Revolution, the first attempt to implement Marx’s ideas. During the 20th Century, millions of revolutionaries fought for communism, and today polls show that perhaps half of Millennials identify as socialists.

What is the enduring appeal of Marx’s ideas? I think this is best seen in his famous slogan, “From each according to his ability, to each according to his needs.” This sentiment is quite reasonable, and is how healthy families operate: parents support their young children, and then children care for aging parents.

But is it a good way to organize society?

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Society is thousands of times more complicated, and extends far beyond familial bounds. Questions immediately arise: Who determines need and ability? How much must the able contribute? And, How much will the needy receive? A socialist government answers these questions.

Consequently, socialism must intrude on individuals. Determining whether an operation is truly necessary or if diet and exercise could suffice, for example, requires a medical and personal history. Must a would-be artist become an engineer because a test revealed their aptitude and society needs engineers? Such details make Marx’s slogan seem less appealing.

Another tension emerges when people fail to live up to Marx’s slogan. A person with great ability, for example, would have to contribute more, with rewards based only on their need. Working 80 or 100 hours a week as a doctor for the same standard of living as a person working 40 hours a week might not seem like a great deal.

Historian Robert Conquest in his book Harvest of Sorrow about famine in Ukraine under Stalin describes what happens when people fail the doctrine. Communist party officials, angry when output fell with the collectivization of agriculture, blamed wealthy farmers, known as kulaks, for hoarding and wrecking collectivization. With the power of government at their disposal, anger toward the kulaks turned violent.

Many nations adopting communism experienced mass state-sponsored violence. The Victims of Communism Foundation memorializes the more than 100 million victims of these regimes. The vast majority of these deaths were due to power-hungry leaders; socialism was tried to varying degrees in Britain, France, and India without government murder. But violence against persons seen as thwarting a noble plan can easily be justified as a means to an end.

Another famous economist, Adam Smith, offered a different take on society. Smith understood the power of voluntary cooperation through markets and observed, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard of their own interest.” Markets harness self-interest to serve peoples’ needs.

Many consider Smith’s vision as morally inferior to Marx’s, perhaps because it relies on self-interest instead of sacrifice. This, I think, is unfortunate. Viewing other people as means to our own ends has, unfortunately, been far too common in human history. The Pharaohs of Egypt built the pyramids using other humans as slaves, showing them as much respect as the stones used in construction. Government planners, Professor Smith noted, often view people as just pieces to be moved around a chess board at will.

Markets make people deal with others voluntarily. We cannot treat the butcher, brewer, or baker as means to our ends. Instead, we must recognize them as humans, and offer them something they value for their assistance.

Self-interest has proven a more effective basis for organizing an economy than sacrifice. Economic freedom in England and the Netherlands enabled the Industrial Revolution and modern prosperity. When people stop enslaving each other, we unleash the unbelievable power of mutual self-interest. Communist nations, by contrast, stagnated; China’s economic takeoff occurred with the introduction of private property.

Socialism is making a comeback. Organizing the economy to meet peoples’ needs seems noble and wise. Humanity’s needs, however, can be more successfully and sustainably met through voluntary agreement among people.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

6 months ago

Pro football in the Spring again — and the big economic challenge the AAF represents

(AAF/Facebook)

Spring professional football returns in 2019 with the Alliance of American Football (AAF). I am very excited about this and think that the league has an excellent chance to be successful. The AAF’s potential also illustrates one of economics’ most difficult challenges.

The Alliance’s eight teams will play a ten game season beginning after the Super Bowl. The AAF’s founders have great sports backgrounds: Charlie Ebersol is the son of long-time NBC Sports President Dick Ebersol, while Bill Polian was General Manager of three NFL teams. The Alliance will offer a partnership with the players and features former NFL players Troy Polamalu, Hines Ward, and Jared Allen in executive positions.

The Alliance will feature some innovative rules, like only two point conversions after touchdowns. In place of dangerous kickoffs, teams will take possession on their own 25-yard line. Instead of on-sides kicks, a team can take the ball with fourth and ten on their own 35-yard line. Fantasy football will be promoted extensively. Steve Spurrier and Brad Childress will coach the teams in Orlando and Atlanta.

The league will own the teams, which should allow maintenance of salaries consistent with projected revenue. Salaries will be well below the NFL’s average of $1.9 million. But attracting players should not be a problem; Canadian Football League fills its rosters with an average salary of around $80,000. As only about 2 percent of college players make the NFL, many recognizable players will be available.

Many football fans find themselves in withdrawal after the Super Bowl, with the next games seven months away. Add in fantasy players and sports bettors, and the market seems available. The Alliance gives football junkies something to talk about, but what does this have to do with economics? It illustrates a critical and controversial element of economic performance.

Spring pro football sounds like a great and profitable idea. But if spring football is such a great idea, why hasn’t it been tried since the United States Football League’s last spring season nearly 35 years ago? If I am right about the AAF’s prospects, then investors have been missing out on profits, fans on entertainment, and players on opportunity. In other words, the market has failed to deliver something of value.

The fundamental question in economics is whether free markets or activist government provides the better path to prosperity. And the potential inefficiency in markets arises from products and services not available. The items businesses provide every day almost certainly create value, because customers will only repeatedly buy products they find worth the price, while firms won’t continue to sell at a loss. But would products and services which are not available provide value for the economy?

Establishing conclusively that any product not available would make us better off is extremely hard. To see why, consider spring football. The idea must have occurred to investors, since the USFL, Arena Football, and Vince McMahon’s XFL all played spring and summer games. Investors may have explored the idea and identified challenges I do not see. I have never started a business, so professional investors should be more likely to see potential problems than me. Given the potential challenges, the AAF’s success may be far less certain than I think.

Everybody probably has an idea for a new product or service that would make a fortune. As criticisms of the market, most of these claims are really like Monday morning quarterbacking. Further, the claims also invite a challenge: if I were sure that spring football was a “can’t miss” deal, I could invest in the AAF. Yet this well-founded skepticism of great products not available easily bleeds into ideological certainty that markets always provide all valuable new products.

Spring football is returning. As a football fan, I am bullish on the Alliance’s prospects, but the economist in me remains cautious. If the league is successful, then we should ask why this didn’t happen years ago. And that will be an important economic question.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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6 months ago

Occupational licensing: A costly permission slip to work

(Pixabay)

All states license many occupations. Licensing, essentially a government permission slip to work, emerged in the early 20th Century and is now more extensive than ever. A new report by the Alabama Policy Institute and Johnson Center, “The Costs of Occupational Licensing in Alabama,” provides an evaluation of the current extent and costs of licensing in our state.

Occupational licensing protects consumers from the consequences of high-cost information. We hire expert doctors, architects, and electricians to do things we cannot. Our lack of expertise means that we also have difficulty distinguishing knowledgeable experts from quacks and charlatans. And the consequences can be deadly: a treatable illness becomes life-threatening, or faulty wiring causes fires.

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Under occupational licensing, a state-appointed board sets fees, training, experience, and exam requirements for each profession. Individuals not meeting the standards cannot legally practice the trade. Driving out quacks and charlatans ensures consumers that all chiropractors or massage therapists are knowledgeable professionals. More than 800 jobs are now licensed in at least one state, covering about 30 percent of the national labor force, compared with 6 percent in 1950.

Today licensing extends to professions not connected to safety, like florists, barbers, and interior designers. A bad haircut might be disappointing, but hardly represents the harm caused by incompetent architects.

The authors of our new study, led by Dan Smith and Courtney Michaluk Joslin of the Johnson Center combed through Alabama’s laws and regulations. Alabama currently licenses 151 professions, covering 430,000 workers, or 21 percent of our labor force. Initial fees, which average more than $300, reach $1,565 for interior designers, and licensees pay additional annual fees. Currently licensed Alabama professionals paid an estimated $122 million in initial fees, plus another $45 million annually.

Education and training requirements can include college and graduate or professional school (e.g., medical school). Education has explicit costs (tuition, books, materials), and less visible costs (salary not earned while attending school). Using the lowest cost training or college available in Alabama, Smith and Joslin estimate the cost of initial training for current professionals at $65 billion; continuing education costs another $243 million annually.

Much of this training and education is undoubtedly necessary. No one wants to be treated by a “doctor” who merely stayed at a Holiday Inn Express. Rapidly expanding professional knowledge increases needed training and continuing education. To create value, however, each element of training must be worth the cost. This is where occupational licensing fails.

The voluntary market offers many forms of training and product testing, which economists have found quite effective. Examples include Underwriters’ Laboratories for products and the American Meteorological Society’s Certified Broadcast Meteorologist program. The crucial factor for quality in markets is voluntariness.

This seems backward. Shouldn’t valuable training be mandatory, so people can’t avoid it? While plausible, mandates lead professionals to merely satisfy the requirements, or check all the boxes. No one asks: Is this worth the time and cost?
By contrast, professionals and the firms who employ them will only pay for voluntary training which is worth the time and cost. Market feedback is not instantaneous and exact, but typically someone will halt voluntary training which is not creating value. Low-value training persists under legal mandates.

Increased training and education requirements reduce the number of licensed professionals, resulting in higher rates and benefitting current professionals. Economists’ research consistently finds that licensing raises prices for consumers. And continuing education in some fields is little more than a racket, as continuing legal education illustrates. The lawyers giving talks at continuing education seminars are themselves earning credit, and are not paid much for their time. Lawyers pay a lot and spend their valuable time in boring seminars teaching little of value.

Occupational licensing addresses a real problem – assuring the quality of expert services. But like much of our legal and regulatory system, it has evolved into elaborate box checking, which does not create prosperity. Licensing costs Alabamians billions, and yet is poorly designed for delivering high-quality services.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

6 months ago

How many people does the IRS actually audit? Lessons from Tax Day

(YHN/Pixabay)

Income taxes were just due, and I hope that filing this year wasn’t too painful. Despite the Internal Revenue Service’s (IRS) fearsome reputation, our tax system relies extensively on voluntary compliance. Tax Day thus reminds us why it is important for Americans to believe that our government serves our interests, an impression which seems endangered today.

It may seem odd to think that we voluntarily pay taxes. Few Americans fill out tax forms for fun, and many pay professionals to avoid the stress. We file because the IRS makes us, right? Well, yes and no.

Filing a tax return is legally required, which is the yes part. But what are the consequences of filing a less than truthful return? An IRS audit could reveal your tax evasion or underpayment of taxes. But the likelihood of an audit is less than you probably think: half of one percent of individual income tax returns annually. Audit rates differ based on a taxpayer’s reported amount and nature of income. The IRS examines (their euphemism for audit) only one in five hundred taxpayers making less than $200,000 with no business income.

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More than just our individual income tax system relies on voluntary compliance. About one percent of corporate income tax returns are audited, and the sales tax relies on retailers accurately reporting sales. Environmental, workplace safety, and other government regulations depend on accurate reporting of information by businesses.

Voluntarily paying taxes improves our standard of living. The cost of auditing even a quarter of tax returns would be staggering: a huge increase in IRS agents, and enormous monetary, time, and emotional costs for taxpayers. Social science research suggests that treating people like lawbreakers can undermine respect for the law. If so, then having the IRS audit more taxpayers might conceivably increase tax avoidance, especially if some ways to hide or shelter income always exist.

We pay taxes voluntarily because they fund activities we want government to perform. The American Revolution established that in America, government would serve citizens. By contrast, throughout most of human history, people served kings or emperors.

Libertarians like to say that taxes are theft, and this contains a kernel of truth. Ultimately armed federal agents will seize property for unpaid taxes; armed robbers similarly take property, and injure owners if they resist. Taxes are not theft because, and only because, we approve of what government does with our money. Not each and every dollar spent, obviously, but the package as a whole.

Many Americans express a willingness to pay taxes. In 2017, 88 percent of Comprehensive Taxpayer Attitude Survey respondents agreed that cheating on taxes was not acceptable, while 95 percent agreed that paying taxes is a civic duty. Americans seemingly accept that taxes are the price we pay for civilization.

Today perhaps more than ever, however, Americans seem to view government as out of control. President Trump’s campaign promise to “Drain the Swamp” seemed to resonate with millions of Americans. (Whether the President is engaged in swamp draining is a different question.) Many young Bernie Sanders voters also seemed alienated from mainstream politicians. Such attitudes bode ill for a system based on voluntary compliance.

To be fair, perceptions of a disconnect with government are hardly new. Thomas Jefferson viewed his election victory over John Adams in 1800 as a second American revolution, which implies that President Adams was emulating Britain’s King George III. The student protests and urban riots of the 1960s left some political scientists wondering if America was ungovernable. Ronald Reagan claimed that Washington was the problem, not the solution. Conservatives’ concern today about a liberal deep state conspiracy against President Trump may just be old wine in new bottles.

Taxes are not theft because we believe that government ultimately serves us. Tax Day reminds us that if Americans stop believing that government reflects our values and interests, our tax system will no longer function as it has. And the resulting changes will almost certainly be for the worse.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

6 months ago

Will artificial intelligence bring doom or progress?

(W.Miller/YHN)

Renowned physicist Stephen Hawking’s recent death brought new attention to his dire predictions about artificial intelligence (AI). Professor Hawking feared the loss of jobs, rising inequality, and the potential for malevolent AI to threaten human existence. Does a disaster loom? If we remain in control, I think that AI will bring progress.

Robots already do millions of jobs humans used to, and AI could automate countless more. Self-driving vehicles are on the horizon. But AI will automate knowledge-based service jobs in journalism (AI-written news stories) and the law (generating many legal documents).

Will AI mean an end of jobs for humans? No, because AI will not abolish the basic economic fact of scarcity. Our basically unlimited desires for more and better goods and services exceed what we can produce using available resources and current (or imaginable) technology. We will never run out of things to do.

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What will humans do as AI develops? Automatic teller machines (ATMs), a primitive form of AI, provide a possible preview. U.S. banks have around 400,000 ATMs, and yet employ more people than when the first ATM debuted in 1969. Intelligent technology reduced the number of human tellers required in a branch, yet banks increased the number of branches.

The automation of good paying jobs in law and journalism may appear likely to increase inequality. We could end up with a few high paying jobs working with the robots or AI, with most workers pushed into low paying jobs. But automating routine bank transactions let employees handle more complicated transactions and offer new services. Furthermore, automation lowers the cost of traditional goods and services. A lower cost of living allows a modest salary to sustain a middle-class standard of living.

The prospects are rosy as long as we remain in control of AI. But what about malevolent machines seeking to enslave or destroy their makers? Others share Professor Hawking’s fear. The Bulletin of the Atomic Scientists’ annual “Doomsday Clock” calculation recently began listing potential automated, intelligent killing machines as a doomsday threat. The theme has been a staple of science fiction movies and literature, from the Terminator and Matrix series back to Frankenstein.

As an economist who struggles to use a smart phone, I can’t offer much insight on computer science and machine learning. Economics, though, can offer some perspective.

Good decisions balance benefits and costs, factoring in probabilities when outcomes are not sure things. We further need to express all benefits and costs in dollar amounts. What would be the “cost” of the destruction of civilization? To provide perspective, world GDP was $78 trillion in 2017, and world population exceeds seven billion. An appropriate figure would have many, many zeros.

With this staggering cost, no type of AI research with even a tiny chance of unleashing malevolent machines could seemingly pass a benefit-cost test. This is the economic logic behind the Precautionary Principle, which places the burden of proof to demonstrate safety on developers of potentially dangerous technology.

The problem, however, is identifying the exact types of AI research, if any, which might produce the rise of the machines. If we have no skill in this task, we cannot ban only truly dangerous research. The Precautionary Principle might require shutting down wide swaths of research on computers and automation, which becomes incredibly costly. And we still might fail to prevent the seemingly harmless application which spells doom.

One final consideration comes from the development of atomic weapons by the U.S. While some libertarians view military research critically, I see the Manhattan Project as demonstrating that the leaders of a freedom-loving nation could have good reasons for developing apocalyptic weapons. We may deliberately undertake the fateful AI research.

Artificial intelligence should contribute to progress as long as it remains under our control, improving our decisions in addition to increasing productivity. But if there is a risk of malevolent AI, we simply may not know enough to avoid the danger.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.