The Wire

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

    Excerpt:

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

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

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

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

    Excerpt:

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

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

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

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

    Excerpt:

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

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

6 days ago

The economics of paying ransom

(Pixabay)

The cyberattack on the Colonial Pipeline by the hacker group DarkSide disrupted gasoline supplies across the Southeast. The company caused a stir by paying a 75 Bitcoin ransom to DarkSide. America historically has been opposed to paying evildoers, as reflected in the slogan, “Millions for defense, but not one cent in tribute,” and President Jefferson sending the Navy and Marines to fight the Barbary Pirates.

Ransomware raises many economic issues. A first question is, do hackers ever give the data back if paid? DarkSide provided Colonial Pipeline a key to decrypt their data. According to Proofpoint, this is the norm: 70% of ransom payers got their data back, 20% never got their data back and 10% received a second ransom demand.

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From an economic perspective, this is not surprising. About two dozen groups, identifying themselves by name and known to insurance companies, carry out most of the sophisticated attacks. Insurers would never recommend payment in the future to a group which has reneged. The hackers must deliver as promised to make money.

Some have suggested making payment of ransom for cyberattacks illegal. If no one ever paid ransom, the hackers could not make money. Refusing to pay ransom though faces two significant economic challenges.

The first is time consistency. Kidnapping illustrates this concept. Before an event, the incentive exists to say, “We will never pay ransom.” If the bad guys believe this, they will never invest the time, effort and expense to stage a kidnapping. Once they hold hostages, however, our incentive changes; negotiating just this one time now makes sense. Our policy to never pay ransom is not credible.

Collective action poses the second challenge. Businesses collectively have an interest in not rewarding cybercrime, yet individual businesses suffer these attacks. A business which does not pay ransom benefits other businesses, creating the challenge. Why should Continental Pipeline suffer losses to make other businesses less likely to be attacked?

Why do businesses pay ransom? Reports mention several factors. A business may face a closure of unknown length and cost. Customers’ personal information will be sold if ransom is not paid, leading to fines and bad publicity. And the hackers might sell proprietary information to competitors.

Good economists know better than to second guess business managers’ decisions. Decisions to pay ransom often involve the business’ executives, its insurance carrier and tech security experts. They know the options and likely costs and should make a good decision, despite the pressure of a crisis.

Insurance companies and government regulations reduce organizations’ vulnerability to hackers, which is good. But what about channeling President Jefferson and going after the hackers? Most of the hacker groups operate in Russia, which provides Safe Haven as long as the hackers do not target Russian companies. Some law enforcement options may exist. Federal prosecutors apparently recovered most of the Bitcoins paid to DarkSide.

Crime is a very costly way to transfer wealth. Stolen merchandise typically sells for one-third (or less) of market value. A criminal might have to steal thousands in property to net $1,000. Ransomware appears much more wasteful than traditional theft. Consider just the value of the time Americans spent searching for gas during the disruption. Remember then that the ransom was about $4.4 million.

Cybercrime makes us poorer. The hackers and defenders at tech security companies are highly skilled computer programmers. But instead of making new apps or games, they are hacking or defending existing computer systems. Add to this the service disruption during cyberattacks, the reduced use of technology for fear of being hacked and the time spent on security training. The costs may be $1 trillion annually, or one percent of global GDP.

We must guard here against comparing the real world to an imagined utopia. We cannot costlessly protect our property from thieves or our computers from malware, or make people no longer willing to steal from others. Economics teaches that there are no perfect solutions in life, only tradeoffs. Vigilance, antivirus programs and backup are the tradeoffs we face with cybercrime.

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

2 weeks ago

Is inflation finally here?

(YHN/Pixabay)

The 12-month change in the Consumer Price Index (CPI) exceeded 4% in April for the first time since 2008. Many economists have been predicting inflation following a 25% increase in the money supply in spring 2020. Has inflation finally arrived?

Inflation was a major issue in the 1970s and early 1980s. We experienced double-digit inflation between 1974 and 1981, hitting 14% in 1980. The U.S. has dramatically reduced inflation since then.

Economists distinguish between inflation, an increase in the prices of most goods and services, and changes in relative prices, where selected goods become more expensive. A “pure” inflation would be a nearly simultaneous equal percentage increase in all prices (including wages).

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Inflation is costly and avoidable while relative price changes signal changes in demand or supply. Consider lumber, which has experienced a significant price increase. Lumber production capacity fell after the housing boom ended in 2007 and the pandemic temporarily disrupted production. Demand increased due to DIY projects during the shutdown and new housing construction.

Lumber’s high price is painful but useful. The market is telling people to use less lumber until production increases. Efficient markets require changes in relative prices.

COVID-19 and government responses have produced numerous economic dislocations. For example, online school instruction increased demand for computer chips for laptops. Meat packing plants were virus hotspots. And tariffs from the trade war with China have boosted some prices.

Inflation is very different; as economist Milton Friedman observed: “Inflation is everywhere and always a monetary phenomenon.” In the U.S., the Federal Reserve generates inflation.

The Quantity Theory of Money holds that under certain conditions, the money supply and the price level change proportionally. A doubling of the money supply doubles prices. This explains why many economists think 2020’s money supply increase must portend inflation.

Except the Federal Reserve doubled the monetary base, which ends up determining the money supply, during the Financial Crisis in 2008 (the monetary base increased 50% in 2020). Free market and Austrian economists predicted significant inflation. Austrian economist Robert Murphy of the Contra Krugman podcast bet economist David Henderson in 2008 that inflation would top 10% in 2013 (and lost). An enormous monetary supply increase never produced inflation.

Why? For one, banks began holding excess reserves instead of loaning out all available funds. The Federal Reserve started paying interest on banks’ reserves in 2008, which coincides with banks holding excess reserves. Yet the interest paid on reserves has been very low, so other factors may be driving excess reserves.

Personally, I think the bigger story than inflation over the past year is the emergence of a shortage economy. From cars to chlorine to dog food, many things are not available for purchase.

We are suffering shortages instead of price hikes. General Motors could raise the prices of new Blazers and Corvettes, two models on significant backorder, to bring the number of buyers in line with this year’s reduced production, or “clear” such markets. Price increases to clear markets would have driven the CPI much higher.

When economist refer to prices, we mean market-clearing prices. Market-clearing prices ensure the availability of goods for purchase today if needed, albeit at high prices. Prices which do not clear markets are not meaningful, as an old debating trick illustrates.

In the 1980s, socialists argued that essential consumer goods were more affordable in the Soviet Union than the U.S. But the comparison was bogus. The Soviets had government-set prices, with goods frequently not available at official prices. U.S. stores were brimming with goods for purchase at market-clearing prices.

The current hike in the CPI may be due to COVID-19 economic dislocations and not a general inflation. Yet the price increases we have not experienced are a bigger story. The CPI is misleading when the items you want to buy are always “temporarily out of stock.”

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

3 weeks ago

Discovery, COVID and policy

(Markus Winkler, engin akyurt, Brian McGowan, Hakan Nural/Unsplash, YHN)

In early April the Centers for Disease Control (CDC) changed its guidance on surface transmission of the SARS-CoV-2 virus. After more than a year of cleaning and disinfecting, the CDC now believes surface transmission is relatively infrequent. This case illustrates the role of discovery in public policy.

The CDC says, “surface transmission is not the main route by which SARS-CoV-2 spreads, and the risk is considered low.” Most transmission occurs through respiratory droplets in poorly ventilated, indoor spaces. (Outdoor transmission is also rare.) Contact with a surface contaminated with the virus has “less than a 1 in 10,000 chance of causing an infection.”

We normally think of discovery as something which occurs in science, but all human knowledge must be discovered. The emergence of SARS-CoV-2 highlights the role of discovery in public policy. As a new virus, experts initially knew nothing about it with certainty. Such a position of complete ignorance is rare but illustrating.

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The fields of virology and epidemiology provided most discoveries about SARS-CoV-2. But economic knowledge must also be discovered and is more problematic than scientific knowledge. Economic knowledge generally depends on consumer preferences. The best car or computer can only be judged by users. Economists refer to this type of knowledge as subjective.

Economic knowledge also depends on time and place, as economist Friedrich Hayek noted. The best, meaning here most profitable, way to produce things varies over time and at different places today. Auto factories used to employ thousands on assembly lines. Now robots do most of the work. Grocery stores pay workers to bag customers’ groceries where wages are low but use only self-checkout lanes in high wage cities.

Any society hoping to progress must discover new knowledge. Yet, discovery provides a special challenge for a system where government experts’ recommendations get codified into binding rules. The argument for such paternalism is that the experts’ rules will lead us to make better decisions than we would ourselves. Government paternalism is controversial but ultimately only justified if it makes us the citizens better off.

Let’s now consider details of COVID-19 and surface transmission. SARS-CoV-2 was novel, but virologists began with knowledge acquired from studying other viruses, including coronaviruses. Viruses and bacteria can survive on surfaces and “fomite” transmission does occur. Scientists discovered that SARS-CoV-2 does not persist on surfaces as well as other viruses. Discovery did occur.

Yet, the rarity of surface transmission was discovered well before April; the new guidance cites research published in 2020. The CDC took months to change its message. Businesses have spent billions of dollars on cleaning supplies, employees’ time spent cleaning and disinfecting, and reduced hours of operation to allow cleaning. Paternalistic guidance needs to change as we learn, but government is frequently slow to change its rules.

Discovery undermines the rationale for a system of paternalistic experts. Depending on the volume and frequency of discovery, the experts may not know much more than the rest of us. Of course, experts naturally downplay this and contend that they know enough to tell us what we should do.

Trial-and-error is our most effective means of learning. Yet experiments generally require freedom, specifically permissionless and decentralized decision-making. Because countries like Sweden never closed their elementary and middle schools and states like Alabama reopened schools last fall, we learned that schools could reopen safely. We would not have learned if all schools stayed closed.

In principle paternalistic government expert systems can experiment, but in practice little experimentation occurs. In part this is due to experts’ overestimating how much they know. And many successful experiments in science and business were dismissed as hopeless. Nobody gives permission to conduct crazy experiments.

We have repeatedly heard the refrain, “Follow the science!” Good scientists know that the discovery of new knowledge is imperative. And science requires freedom to experiment and question everything we think we know.

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

4 weeks ago

Is this the start of government-guaranteed income?

(Pixabay, YHN)

The federal government has issued three rounds of COVID “stimulus” checks and boosted unemployment benefits, first by $600 and now $300 per month. Is this the piecemeal start of a Universal Basic Income (UBI)?

Under a UBI (also called a basic income guarantee), the government pays all Americans every month, say $1,000. Many would more than pay this back through taxes.

Although I am a small government libertarian, a UBI is attractive as a replacement for all current government assistance programs. Michael Tanner of the Cato Institute counts over 120 means-tested programs spending around $1 trillion, or over $20,000 for every American below the poverty line. The assistance our current system delivers costs a lot.

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The bureaucracies administering these 120+ programs contribute to this cost. Dispensing checks requires less labor than verifying recipients’ eligibility for housing assistance, energy assistance, food stamps, and other programs. Monitoring work requirements, which often amount to merely attending job training programs, is also costly. With a UBI, we could tax all income earned at a uniform rate. This would eliminate welfare cliffs, income levels where say a $1,000 increase in earnings reduces benefits by more than $1,000; welfare cliffs provide massive work disincentives.

A UBI would treat recipients with more respect. Many programs involve paternalistic elements, like restrictions on spending food stamps. Parents or guardians receiving a minor child’s UBI would be responsible for caring for children.

Would enacting a UBI lead to elimination of all abolishing all current welfare programs? Some liberals view a UBI as a generous supplement to the current array of programs. I do not like to prognosticate but see promise for a UBI only if it becomes our safety net.

The major drawback of a UBI is its likely impact on work. Numerous observers fear that super-charged unemployment benefits are undermining the work ethic. I view this slightly differently. A market economy requires that people accept the necessity of working for a living; everyone need not work extremely hard. Those choosing to surf most of the time must accept their relative poverty.

People accept working because they learn from childhood that this is how the world works. Children begin by learning that they must go to school every day. College lets young people delay joining the workforce.

Work contributes to a meaningful life in addition to providing access to material necessities and luxuries. Psychologists recognize humans’ need earned success. Arthur Brooks stresses work as an important source of earned accomplishment; he argues that accomplishment drives happiness more than money.

Additionally, economic progress, the division of labor, and automation create jobs that are rewarding. John Tamny writes, “the greatest gift of prosperity, beyond freedom from material want, is work that is engaging, absorbing, fulfilling – work that doesn’t feel like work.”

But let’s also be honest. Work often sucks. Work involves following the boss’s orders; you cannot always tell the boss to “Take This Job and Shove It.” (There’s a reason this song was a #1 hit.) Beyond annoyance, many jobs are physically demanding, noisy, stressful and dangerous. Women have faced sexual harassment on the job.

Economic analysis shows that learning how to hold a job – e.g., not tell off your boss – is an important job skill. Employers can train workers, once they can hold a job, for more complicated and higher paying positions.

Yet our society emphasizes personal satisfaction, so the necessity of working for a living creates a tension. Consumer society prioritizes us getting the things we want. And yet the need to work relegates the most enjoyable life activities – golf, tennis, hunting, fishing, traveling – to weekends, vacations and retirement.

A UBI offers the prospect of life without the necessity of work. I suspect that even a modest guaranteed income will prove highly attractive to many. Government checks for all may be a Genie we will not easily get back into its bottle.

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

1 month ago

Can we afford this spending?

(W.Miller/YHN)

Washington borrowed $4 trillion in 2021 and national debt as a percentage of GDP is higher than at the end of World War II. And the Biden administration is proposing spending trillions on infrastructure and families bills. Are our politicians bankrupting America?

Economists Jason Furman and Lawrence Summers argue no. These prominent economists – Summers was Treasury Secretary under President Clinton and Furman head of the Council of Economic Advisors under President Obama – contend that the national debt, appropriately scaled, is not at an all-time high due to today’s historically low interest rates.

Their paper covers a lot of ground. I will start with interest rates and borrowing. Lower interest rates allow home buyers to get larger mortgages. Lenders compare the monthly payment and a borrower’s income. With lower interest rates more of the monthly payment can go toward principal.

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The debt-to-GDP ratio does not consider the interest rate. Furman and Summers argue that interest-to-GDP ratio (preferably adjusted for inflation) is a better measure, akin to monthly mortgage payment relative to income. The interest-to-GDP ratio is not historically high because of low interest rates.

Can interest rates possibly remain so low? To evaluate this, remember that real interest rates (meaning adjusted for inflation) are more relevant than the official rate. And the risk of a loan not being repaid in full, or default risk, must be priced into the real interest rate. Loans with high default risk, like payday loans, face high real interest rates.

Economists refer to the risk-free real interest rate, what lenders would charge on a loan sure to be repaid. The risk-free real interest rate has been zero and real interest rates have been trending downward since the 1980s across all major industrial economies. Furman and Summers argue that this must be due to fundamental economic factors.

Might the Federal Reserve be keeping interest rates artificially low? As a matter of principle almost all economists believe that money must be “neutral” in the long run. Neutrality means relative to production, which depends on real factors, things like labor, machines, raw materials and technology. Dollars are ultimately green pieces of paper which cannot magically transform into cars or houses. Any impacts of money on production must be short term.

A 30-year trend qualifies as the long run. Furman and Summers observer further that long-term interest rates are not anticipating an increase. Interest rates are market determined prices based on the interplay of the demand for borrowing and the supply of savings. Markets are forward-looking and smarter than any one expert.

Furman and Summers believe that at current interest rates, federal debt of 400% of GDP (over $80 trillion) is sustainable.

Economists who believe that markets work well, like me, must accept the market’s judgment on low risk-free interest rates. But although Treasury securities have always been the quintessential risk-free investment, Uncle Sam may not always qualify for this interest rate.

Loans are voluntary transactions between willing borrowers and willing lenders. Lenders who think that politicians are bankrupting America can choose not to purchase Treasury securities at the risk-free rate.

Furthermore, because our debt is always refinanced, investors must sell in Treasury securities to get out of the investment. Investors must believe that Uncle Sam is a good risk and that future investors will as well. The risk-free status of federal debt depends on investor sentiment, not just economic fundamentals.

Because markets are forward looking, long-term interest rates on Treasury securities should start rising as soon as investors think the national debt is excessive. Markets show no sign of this, as Furman and Summers note. Political talk can be cheap; pundits predicting an impending federal bankruptcy may still be invested in Treasury securities.

Investors lend on favorable terms to the U.S. government because of its ability to tax us. Despite recent record deficits, investors still think that we are good for Washington’s borrowing. But investor sentiment can change far quicker than economic fundamentals.

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

1 month ago

Reforming occupational licensing

(Pixabay)

Occupational licensing involves government-imposed requirements for practitioners in different professions, or what critics call government permission slips to work. Despite a lack of evidence of benefits to consumers, licensing has been proliferating across Alabama and America, with the percentage of workers covered rising from 5% to over 20%.

A new report from the Alabama Policy Institute and the Archbridge Institute offers some potential reforms. Not-So Sweet Home Alabama: How Licensing Holds Back the Yellowhammer State is written by Dr. Edward Timmons and Conor Norris of Saint Francis University. Dr. Timmons has extensively researched licensing, including a 2019 case study of Alabama barbers.

The economic argument for licensing is consumers’ difficulty verifying expertise. Does a person claiming to be an electrician truly know this job? If you knew the trade, you could quiz or test them. Yet our economy is built on the division of labor, which is really a division of knowledge. Instead of learning how to repair a car, you hire someone who knows how.

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Markets can assure consumers of experts’ expertise. Reputation in various forms – including references, positive word-of-mouth, Yelp ratings, and brand names – accomplish this. Insurance also helps. An insurance company will only offer medical malpractice coverage to med school graduates.

Yet skepticism about how well markets work leads to calls for licensing. A state licensing law establishes a board of experts to set education, training, and testing requirements. The board verifies applicants’ qualifications and working without a license becomes illegal. Revoking licenses for professional misconduct weeds out bad apples.

Research finds that licensing increases prices for consumers and incomes for professionals without improving the quality of services. Education and training requirements must produce higher prices to let doctors, plumbers and hair stylists recoup their training and education costs.
The lack of quality improvement implies no gains for consumers to compensate for higher prices. Licensing boards may enact unnecessary requirements to artificially restrict the number of practitioners and boost earnings. Enriching some citizens at the expense of others is not, however, a legitimate task of government.

Public choice economics helps explain the proliferation of licensing. The return on political action to support or oppose a bill depends on the amount one has at stake. Licensing can boost practitioners’ incomes by thousands of dollars a year, while consumers pay a little extra when using a service, with the extra hidden in the overall price. Only professionals seeking licensing vote or make campaign contributions based on passage of the bill.

Timmons and Norris offer two reform proposals. The first is for Alabama to accept other states’ licenses, or reciprocity. Licensing reduces mobility because once licensed, a professional might have to incur significant costs to get licensed in another state.

This imposes a heavy burden on some people, particularly military spouses. The spouse of a service member who gets stationed in Alabama may lose the freedom to work in their profession without incurring costs to obtain an Alabama license. Some licensed professions already have reciprocity agreements; this proposal would require all to do so.

A second reform is sunrise review of new licensing proposals. Sunrise review is a variation of the sunset reviews required in Alabama and other states. Sunset review involves a study by a designated agency recommending either renewal or termination of a program, after which legislators must vote to reauthorize the program. Sunrise review requires an evaluation before establishing licensing.

As Timmons and Norris explain, licensing is the most extensive way government can regulate a profession; less intrusive forms of regulation include certification, registration, and insurance requirements. An objective review of the evidence makes sense; extensive regulation should only be employed for serious market problems.

Occupational licensing may improve the performance of some professional services markets. But licensing’s extensive application is likely due to the nature of legislative politics. We should seriously consider Not-So Sweet Home Alabama’s proposed reforms.

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

2 months ago

Gambling, revenue and freedom

(Aidan Howe/Unsplash, YHN)

Like Jason from the Friday the 13th movies, the proposed lottery for Alabama is back from the dead. By the time you read this, however, Alabama’s Jason might have been killed again. If so, I suspect he will return for another sequel soon.

A bill allowing a lottery, casinos and sports betting failed in March to pass the Senate by the required three-fifths majority. A subsequent lottery-only bill passed after being amended to include casinos and sports. If the House approves, state residents will vote on a constitutional amendment.

Why should gambling be illegal? Remember, government prohibition is not about whether you wish to engage because legalization will not make anyone buy lottery tickets or make bets. Prohibition is about using government force against willing participants.

Unlike assault, burglary or murder, gambling does not physically harm others – or violate persons or property rights – and is thus a “victimless crime.” Without a victim to report the crime, enforcement difficulties allow illegal gambling to persist.

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Although some commit crimes to get gambling money, the potential for purchase with stolen money provides is a bad reason to prohibit activities. Desperate people will steal for food or to buy Christmas gifts for their children.

Governments have long criminalized vices. Yet, dislike by others would allow any unpopular activity to be banned. “Live and let live” offers, I think, a better way to organize society because we do not have to spend our time, effort and money fighting to keep our favorite activities from being banned.

Even if once considered a vice, changing societal attitudes are shrinking support for gambling prohibition. And while laws can signal official disapproval, the moral force is very limited when so many states have legalized some gambling.

The strongest argument for prohibition, I think, is the potential for problem gamblers to harm themselves and their loved ones. Prohibition here serves as a form of self-constraint. Increasing the cost of gambling means fewer people starting and then developing an addiction.

Addiction’s harms should never be dismissed, especially the harm to gamblers’ children. Yet, prohibition primarily drives gambling underground and illegality often worsens societal harm.

We can regulate public companies running legal gambling to limit the harm problem gamblers can do to themselves until they are ready to get help. We cannot make illegal bookmakers and loan sharks be kind to those who owe them money. The risk of prosecution from participation in an illegal activity also keeps problem gamblers from seeking help.

Prohibition’s costs are significant, beginning with inconveniencing Alabama’s many responsible gamblers. It also disadvantages Alabama businesses. How much more attractive might Mobile be as a convention destination with a nearby casino? And businesses can have difficulty recruiting workers who enjoy recreational gambling. Plus, the state loses revenue when Alabamians spend gambling dollars in Florida or Mississippi.

AL.com columnist Cameron Smith raises an intriguing problem with funding government on gaming revenues. Gambling as a tax is paid disproportionately by lower income households. Big lottery jackpots offer a false hope of instant riches. Mr. Smith observes, “For as inept as government can be, it must not knowingly harm citizens.”

Although sounding paternalistic, this really is a question about political philosophy. Should the state pay for ads designed to make heads of cash-strapped households buy more lottery tickets? Alabamians who believe that the state needs additional revenue should feel very uncomfortable about a tax which relies on questionable decisions by fellow citizens. Mr. Smith proposes taxing private lotteries to keep government out of the gaming business.

Many Alabamians enjoy spending some of their time and money on various forms of gambling. Legalization should be about the freedom to gamble, with regulations to limit the harm to problem gamblers. The ensuing revenue is then from a reputable leisure time activity, not the wages of sin.

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

2 months ago

Congress versus contractors

(Wikicommons, Thought Catalog/Unsplash, YHN)

A 2019 California law reclassified drivers for ridesharing companies Uber and Lyft as employees instead of contractors. California voters overturned this law via referendum in November 2020. Congress is now considering imposing similar definitions on the entire country.

At issue is the classification of workers as either employees or as independent contractors. Economists focus on decision rights, or who gets to make decisions, when analyzing how we organize economic activity. While employment is generally longer-term (an employee knows to continue showing up), decision-making is also involved. Bosses make decisions about the use of an employee’s skills and time; contractors do a specified task for a price.

The legal distinction between employee and contractor reflects this. According to IRS rules, a business decides what, when, and how an employee does. Contractors decide how and when they do tasks.

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The federal and state governments heavily regulate the employer-employee relationship. Employees must be paid the minimum wage and overtime pay and receive unemployment and worker’s compensation; large employers must offer health insurance.

Political mandates give businesses an incentive to classify workers as contractors. Mandates are particularly burdensome for low paying jobs; health insurance is a significant add-on benefit for workers making $12/hour.

California legislators claimed that Uber and Lyft classified drivers as contractors to profit from paying them less. This is wrong on the facts and the theory. On the facts, it ignores Uber’s notorious losses.

On the theory side, work done by employees or contractors is voluntary. Businesses can pay up to the value created by workers; competition for workers then drives pay up to this level. Competition applies regardless of legal classification. Uber cannot make anyone drive for them or keep someone from driving for Lyft instead. Contractors simply receive more compensation in cash rather than politically mandated benefits.

Contracting gives workers more freedom than employment. By writing for numerous magazines or websites, freelancers can choose topics better than as an employee of one publication. And contractors do not have to follow a boss’s orders.

Contractor-drivers for Uber and Lyft choose when and how many hours to work. Drivers get paid by the ride, or gig, not for waiting for a trip. Yes, some people drive 40 or more hours per week for Uber and resemble employees. But driving full time is still their choice.

Employment arguably was the 20th Century way to organize work. Factories, mines, hotels and newspapers operated from fixed locations for decades. Businesses valued long-term commitments with workers. Future jobs will arguably be more fleeting, in part because artificial intelligence and robotics will automate tasks done repeatedly by thousands of workers.

The tasks needed by businesses will more frequently be short term gigs, which explains references to a “gig economy.” Adopting to change requires flexibility, which employees saddled with mandates do not offer.

The pandemic further demonstrates the value of flexibility. Many retailers and restaurants pivoted to delivery, relying on businesses like Instacart and DoorDash. The flexibility offered by contractors benefits us all.

Why do politicians want to preserve employment? Public choice theory offers an explanation. Politicians gain support by giving things to people and lose support by making others pay for these goodies. Contracts spanning several dimensions, like employment, help politicians maximize support. Employment involves many items, including salary, fringe benefits and shift flexibility. Businesses care about the total cost, not the components. When politicians mandate a new benefit, businesses can cut back on other margins.

Politicians then claim credit for “giving” workers the mandated benefit. Businesses save on other margins and do not vehemently oppose the mandate. Workers who end up with less flexible hours or go without a raise may not connect this to the new benefit.

I find it telling that politicians in California or Congress do not respond to the hiring of contractors by reducing their mandates for employees. Regardless of whether employment is still the best way to structure work, politicians do not want to lose the opportunity to give workers “gifts” at no cost to themselves.

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

2 months ago

The freedom to use fossil fuels

(Heiko Janowski/Unsplash)

The Biden administration seems intent on renewing the war against fossil fuels to combat global warming. Before going down this path, I hope Americans will consider Alex Epstein’s argument in The Moral Case for Fossil Fuels.

A moral argument requires a standard of value, and Mr. Epstein’s is human life. As he explains, “I think that our fossil fuel use so far has been a moral choice because it has enabled billions of people to live longer and more fulfilling lives.”

Many environmentalists do not share this standard. Mr. Epstein describes their standard as minimizing human impact on the environment. Environmentalist Bill McKibben desires a world where, “Human happiness would be of secondary importance.” David Graber hopes, “Until such time as Homo sapiens should decide to rejoin nature, some of us can only hope for the right virus to come along.”

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Human life and well-being is a holistic standard embracing all people, not just an elite. It means far more than enriching oil and gas companies and demands considering benefits and costs, including pollution.

The Industrial Revolution unleashed what economist Deirdre McCloskey calls the Great Enrichment, the enormous increase in standards of living and life expectancy of the past 250 years. Energy has powered the Industrial Revolution’s tractors, steamships, factories and railroads.

Fossil fuels specifically give humans low cost energy, which is crucial. A tractor allows us to save time planting compared with working by hand. But we are not better off if obtaining fuel takes all the time saved. Fossil fuels also provide the energy to build machines and buildings.

Electric power grids and natural gas systems also improve the quality of life. Previously people burned coal, wood or animal dung in their homes, creating indoor air pollution and smog. Energy allows modern, sanitary water and sewer systems to deliver safe water to and remove dangerous waste from homes.

Energy makes our planet more livable. Mr. Epstein notes that nature, “attacks us with bacteria-filled water, excessive heat, lack of rainfall, too much rainfall, powerful storms, decay, disease-carrying insects and animals, and a large assortment of predators.” Technology protects us from nature’s hazards.

Hundreds of millions of people in Africa and Asia still lack electricity, clean water and sanitation. Modern medicine also requires energy. A lack of affordable energy kills 3 to 4 million people each year.

Mr. Epstein puts a human face on these statistics. He observed the impact on medicine of unreliable electricity visiting Africa: “A full-term infant was born weighing only 3.5 pounds. In the U.S. the solution would have been obvious and effective: incubation. But without reliable electricity … [t]his seemingly simple solution was not available to this newborn girl, and she perished needlessly.”

Pollution harms human life and well-being and should be avoided if possible. Mr. Epstein suggests viewing pollution is as a by-product. We use fossil fuels to power factories and cars and then recognize that this causes air pollution.

What do we do? Use human ingenuity to reduce the by-products. Inventing and installing pollution control technology on cars and factories yields prosperity and environmental quality.

Global warming represents a similar by-product, although the harm is speculative and occurs primarily in the future. Banning fossil fuels is not the only way to address global warming. Alternatively, we could continue to use fossil fuels to make the world wealthier than today. With continued economic growth, world GDP per capita could easily increase by a factor of four by 2100. Even if global warming reduced world GDP by 25% in 2100 (a rather extreme estimate), the world would still be three times richer than today.

The economic freedom and empowerment, including the freedom to use fossil fuels, has produced modern prosperity. Using more of this energy could soon extend this prosperity to billions more. If we care about human life, climate policy must acknowledge the enormous human value of fossil fuels.

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

3 months ago

The hero treatment?

(Kroger/Facebook, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

New perspectives on inequality

(Pixabay, YHN)

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

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

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

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

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

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

Over the past 300 years, free markets have allowed humanity to prosper. But as philosopher James Otteson puts it, “the only way we have ever discovered to enable substantial numbers of people to rise out of poverty is a set of political-economic and cultural institutions that also engender inequality.” Market salaries also strike many as unfair. Mr. Mahomes is lucky to have been born with a talent that allows him to excel in a very popular sport but as a result now has a $500 million contract.

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

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

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

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

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

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

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

3 months ago

Will life return to normal?

(Pixabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

Has Washington’s stimulus measures saved our economy?

(Wikicommons, Unsplash, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

How much did GDP decline?

(NeONBRAND, Jess Bailey/UnSplash, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

Dr. Daniel Sutter: Dealing with scammers

(Pixabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

In case of emergency

(Pixabay, Wikicommons, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

GameStop madness

(Wikicommons, Pixabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5 months ago

Is America now a class-based society?

(Pixabay)

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

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

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

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

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

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

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

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

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

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

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

5 months ago

College football overcomes the pandemic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5 months ago

Will student loans be forgiven?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5 months ago

Voting on economic policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

6 months ago

Public health mandates are political

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

6 months ago

Who gets vaccinated first?

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

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

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

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

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

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

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

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

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

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

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

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

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

6 months ago

Are we paying twice for COVID medicines?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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