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.

3 days ago

Animal welfare and economics

(American Kennel Club/Twitter)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1 week ago

Prosperity and inequality

(Pixabay)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2 weeks ago

How much does government assist the poor?

(PIxabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1 month ago

Will the best team win?

(PIxabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1 month ago

Are we running out of resources?

(BOEM/Flickr)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2 months ago

When the impossible happens

(DoD/Contributed, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

2 months ago

The good and bad economics of plea bargains

(YHN)

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

Did we win the trade war?

(Pixabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

The persistent problem of hazing

(Pixabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

Is it payday for college athletes?

(Pixabay, YHN)

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

Whether college athletes should be paid provokes strong responses.

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

Is Greenland for sale?

(WH/Flickr, Wikicommons, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

Is Alabama a poor state?

(PIxabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

What is the responsibility of business?

(This Morning/YouTube, Wikicommons, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

Before you blame the coach

(Pixabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

5 months ago

History comes to Troy

(Troy University/Contributed)

Troy University will host an exhibition from The Remnant Trust from September through the end of November. The artifacts and books included afford an opportunity for Alabamians to see some history.

Founded in 1999, The Remnant Trust is a foundation dedicated to preserving items important to the history of individual freedom and human dignity. Partnered with Texas Tech University since 2014, the Trust has a collection of over 1,400 documents for research and exhibitions like the one coming to Troy University. The Troy exhibit will include items from ancient Greece and the Middle East, early editions of Shakespeare, Newton and Tocqueville, and documents like the Magna Carta, Declaration of Independence and Emancipation Proclamation.

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The exhibition also features some classic economics books. To help understand their significance and contemporary relevance, the Johnson Center is pleased to bring two nationally-renowned scholars to Troy.

Our first scholar, visiting on September 24, is Dr. James Otteson of Wake Forest University. Dr. Otteson is an expert on Adam Smith and author of What Adam Smith Knew. Adam Smith, the founder of economics, wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, expounding on (among other topics) the source of prosperity and the nature of the market economy.

When Smith wrote, the Mercantilists dominated policy in England and France. The Mercantilists viewed gold as wealth and colonial empires as the way to build national gold stocks. By exporting more than importing (running a trade surplus), a nation could accumulate gold. Europeans would pay for English goods with gold, increasing England’s gold holdings. Colonies allowed the mother country to avoid importing raw materials.

As Smith explained, a nation is prosperous because its citizens enjoy a high standard of living, not because it has the most gold. Ultimately production and consumption matter. President Trump seemingly holds Mercantilist ideas regarding a trade surplus.

Furthermore, Smith showed how market institutions are the products of human action but not human design, or spontaneous orders. Smith’s metaphor of an invisible hand guiding people’s actions describes this beautifully. People act in their self-interest in impossibly complicated ways.

Spontaneous order explains why economists or government officials cannot plan or control our economy. Politicians who think, mistakenly, that someone designed our entire financial system will think that they can restructure it with no adverse consequences.

On November 12, we will host Dr. Daniel Jacobson of the University of Michigan, a scholar of 19th Century British political economist John Stuart Mill. Mill’s On Liberty provides a classic case for freedom of speech and inquiry. The souring of so many political and intellectual figures on free speech makes Mill’s arguments important today.

Mill offered two arguments for free speech. The first was the importance of free inquiry as a means of learning the truth, or the idea of a marketplace of ideas. The second was the potential for abuse of restrictions on speech. Free inquiry will always upset government leaders, who never like being told they are wrong. Furthermore, criticism can spark defiance of political authority.

Some commentators might dismiss The Remnant Trust project as Western cultural hegemony. I do not find the Trust’s mission to preserve our heritage of “individual liberty and human dignity” ethnocentric. The Troy University exhibit includes the Torah, the Quran, and the Morals of Confucius.

More significantly, I have met persons from across the globe in my years as a student and faculty member. People generally want better lives for themselves and their families; the dignity and value of individuals are human, not Western, values. Unfortunately, human history also abounds with oppression by rulers. Today’s freedom and prosperity did start in Western Europe with the Enlightenment and the Industrial Revolution. Yet I see this as more of an accident than a consequence of culture. Diffusion of these values shows the universal appeal of freedom and dignity.

The Remnant Trust exhibit will be on display at the Troy University library. Hopefully, many of you will come out and see these items.

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

Celebrating labor

(PIxabay, YHN)

Labor Day was established as a national holiday 125 years ago, championed by labor unions. Despite unions’ recent decline, we should still celebrate work. The market for labor is an important element of the liberal society, and peoples’ willingness to work for a living makes our economy function.

The decline of unions in America has been remarkable. Over 30% of workers were unionized in the 1950s, versus 10% in 2018. The private sector unionization rate is only 6.4% – about one out of 16 workers. A number of factors explain this change, like the decline in manufacturing employment; America still manufactures as much as ever, just with fewer workers due to automation. The shift of jobs to Southern right-to-work states has also contributed.

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Less remarked is a more conciliatory approach to labor relations by management. The U.S. labor movement was always more about job conditions than politics. Americans formed unions over specific grievances; when management stopped offending workers, the demand for unionization declined.

The existence of a market for labor is significant, regardless of whether unions represent workers. Liberalism, in both its classical and modern forms, views individuals as possessing moral value, not means to other peoples’ ends. Liberalism transformed politics, from people serving the emperor, king, or dictator, to government for the people.

Throughout most of human history, some people have forced others to work for them as slaves, serfs, or conscripts. Forced labor implies unequal moral worth; Egypt’s pharaohs could make thousands of people build pyramids. Slavery persisted in the United States (and other nations) until the 19th Century. Twentieth Century authoritarian governments forced citizens to do their bidding.

The labor market assumes that everyone is free. The rich and powerful cannot force others to work for them; instead they must offer enough compensation to secure willing assistance. An unpleasant or dangerous task will require greater compensation. And people can leave one job for a better one.

Markets ensure that commercial interactions are based on mutual agreement. We need food, clothing and shelter to survive, and want more than the necessities of life. In the market, the suppliers of goods and services cannot be forced to produce for us. We must trade for the things we want, and for most of us, what we have to trade is money earned from a job.

The functioning of a market economy requires that people accept working for a living. We face a lifetime of working to afford the things we need. Accepting the need to work is a moral choice, to live through production and exchange as opposed to begging, borrowing, or stealing. One beneficial trend over the past fifty years has been the emergence of jobs resembling play more than work, like freelance writers, college football recruiting gurus, and YouTubers. But for millions of Americans, work is hard, exhausting, stressful, boring, and dangerous.

Widespread acceptance of the work imperative may be eroding. One sign of erosion is the decline in labor force participation for men aged 25 to 54. Anecdotes of college graduates living with their parents and not working are also troubling. And interest in a Universal Basic Income for all Americans reflects, I think, a hope that work may soon be optional.

Working for a living entails many costs: being away from family during the day, commuting to and from work, and being tired after work. It means relegating many enjoyable activities to weekends and vacations. Of course, work can also be a source of challenge and accomplishment as well as where we meet new friends. But it is called work for a reason.

Erosion of the work imperative makes our economy less productive and may undermine the freedom underlying the labor market. Our nation has relied on an all-volunteer military, the appropriate way to defend a free nation, since 1973. The willingness of enough volunteers is crucial here; failing to meet recruiting targets would likely produce pressure to reinstate a draft. The same dynamic could be in play in the larger economy. This is another reason to celebrate work this Labor Day.

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

5 months ago

Is a renewable electric grid a mirage?

(PIxabay, YHN)

Reducing greenhouse gas emissions to curb climate change will require enormous sacrifice. The enormity of the required sacrifice suggests that we should have consensus on the goal before acting. Recent discussions of the Green New Deal have highlighted some of the required sacrifices, but I suspect that the full implications of an all-renewable power electric grid remain obscure.

The Green New Deal was sponsored by New York Congresswoman Alexandria Ocasio-Cortez and Massachusetts Senator Edward Markey. The proposal highlighted measures like a renewable energy electric grid, eliminating greenhouse gas emissions in transportation (including phasing out air travel), and creating a smart electric grid. Limiting atmospheric carbon dioxide to 440 ppm, the European Union’s goal, will require these changes and then some. Assessing whether aggressive mitigation of climate change is worthwhile requires recognizing the full cost.

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An all-renewable energy electric grid appears feasible. Over 30 states already require a minimum portion of electricity generation from renewable sources; Hawaii will require 100 percent renewables by 2040. Renewable fuels are certainly costly, but the consequences go way beyond cost.

Wind and solar power and batteries are the components of a zero-emissions grid. Yet wind and solar generate power only about 30% of the time. Currently, utilities rely on fossil-fuel-powered plants to provide backup; a zero-emissions grid will require batteries. The Manhattan Institute report, “The ‘New Energy Economy’: An Exercise in Magical Thinking,” demonstrates the flaws of such an approach.

One concern involves simply building enough wind farms and solar panels to meet electricity demand. In 2018, the U.S. had 1.1 million megawatts of electricity generation capacity, 62% from natural gas and coal. Due to intermittent production, we would need perhaps 3 million megawatts of wind or solar capacity for the grid. If we used only wind turbines, we would need a wind farm larger than Texas. We would need perhaps 1.5 million turbines, each requiring 150 acres for an undisturbed flow of air, or 350,000 square miles.

Even this is almost surely an underestimate. Wind energy potential maps have already allowed use of the best wind farm sites. Electricity demand has been steadily rising and would jump further to charge the electric cars, trucks, and trains and eliminate gas and diesel-powered vehicles.

The battery numbers are also troubling. One year’s production of batteries from Tesla’s “Gigafactory” can store enough power for the U.S. grid for three minutes. The “New Energy Economy” report contends that 1,000 years of “Gigafactory” production would be needed to store just two days of power.

Producing such quantities of turbines, solar panels, and batteries will use enormous quantities of fossil fuels. A standard wind turbine requires an estimated 900 tons of materials, including concrete and metal. The lithium, cobalt, nickel and other needed chemicals for solar panels and batteries must be mined and transported. In addition, turbines, panels and batteries will need replacing periodically.

The power grid has long operated on adding capacity to meet demand. Millions of decisions have been made based on this principle. We assume we can power our air conditioners, refrigerators, and computers, and soon charge electric cars in a timely fashion. Gas-powered generators provide backup as needed.

A zero-emissions grid will not just involve much more expensive electricity. The supply of electricity will be insufficient to meet the demand. “Smart” appliances will ration electricity by running only when electricity is available. After ensuring hospitals and fire stations have power, we may be unable to charge our cell phones and electric cars.

The ripple effects will be enormous. How do we get to work if our electric car didn’t charge overnight? How will we heat and cool our homes? Could global supply chains still operate? The Green New Deal has highlighted some of the dramatic changes required to aggressively combat climate change. But I doubt that Americans understand the consequences of ending on-demand electricity.

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

Why go to college?

(PIxabay, YHN)

More than three million students will begin college this year, many pursuing degrees needed for high paying jobs. Amazingly, bachelor’s degrees open economic doors despite little evidence of significant learning in college. How can students who retain so little knowledge make so much money?

A college degree can identify people who employers want to hire. A recent book by George Mason University economist Bryan Caplan provocatively titled The Case Against Education argues that this signaling explains much of the college earnings premium.

The college earnings premium is real. According to the Bureau of Labor Statistics, in 2018 college grads earned 64% more than high school grads who never attended college, and 39% more than associate’s degree holders. College grads are also less likely to be unemployed, with a 2.2% unemployment rate, versus 4.1% for high school grads. The earnings and unemployment differentials have both persisted for years.

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Businesses require bachelor’s degrees for many jobs. Every time a business chooses college grads, they pay more. Profit-hungry businesses should not hire more expensive workers unless they create more value.

Economics offers two theories for education’s value. The first, called human capital, contends that learning makes workers more productive. In the human capital story, the college curriculum must be directly valuable to employers. High paying degrees, like economics, must teach skills businesses value more.

Alternatively, college degrees might allow students to signal characteristics which businesses desire; the content of degrees may be largely irrelevant. Life offers many examples of signaling. Romance and courting involve numerous signals, like engagement rings. A diamond is of little practical value, but signals the willingness to make a life-long commitment.

What does college signal? Professor Caplan argues three main traits: intelligence, conscientiousness, and conformity. Businesses desire workers who are smart, able to learn challenging material, and willing to follow rules. Conformity is probably becoming more important, as businesses can no longer afford workers who tell off-color jokes or express racial, religious or sexual intolerance.

Intelligence and ability to learn are valuable because the details of jobs differ greatly across employers. Employers must train workers to do a job their way. Employees must be willing to turn off their cell phones and pay attention.

How important is human capital versus signaling? Discussions of higher education policy generally presume human capital theory. Yet Professor Caplan contends that the college premium is about 80% signaling and 20% human capital. The content of education clearly has some relevance; engineering firms will not hire inexpensive social work majors over expensive engineers because they prefer graduates already familiar with engineering.

Professor Caplan presents a wealth of statistical evidence in support of signaling. Yet several puzzles demonstrate signaling’s importance. Perhaps most telling is the one mentioned above, the lack of evidence on long-term learning. Knowledge forgotten – of Shakespeare, calculus, or supply and demand – cannot be generating productivity. Furthermore, a student who is one or two classes short of a degree has acquired perhaps 95 percent of a degree’s human capital, but will face a significant salary penalty. And attending classes allows acquisition of knowledge without earning college credit, and has essentially no market value.

Signaling creates value for the economy even if course content is largely irrelevant. College helps employers find the workers they want. Yes, four years of college is costly, but everyone wants high paying jobs and would likely lie during an interview. Whether higher education provides efficient signaling depends on whether an alternative can separate high and low-quality potential workers at a lower cost.

The potential exists for excessive and wasteful signaling. Completing high school used to separate one from the crowd. Arguably we now use college degrees as a signal instead of high school diplomas. Credential inflation is potentially costly.

For parents of college students, signaling offers some solace. Even if Sally or Johnny seem to forget everything after the semester ends, passing forgettable classes can readily signal employers their willingness to learn a boring job.

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

5 months ago

The economic value of national unity

(Pixabay, YHN)

The Edmund Burke Foundation recently hosted the National Conservatism Conference which explored, among other questions, the meaning and importance of patriotic national unity. Conference organizer Yoram Hazony argued that conservatives need to break away from the libertarian and classical liberal idea of the “individual … as the only thing that matters in politics.” Politics is about citizens pursuing their common interests, and the bonds formed in this pursuit are important for the economy as well.

America’s founders were liberals, or the classical liberals mentioned by Mr. Hazony. Liberalism maintained that governments were supposed to serve people, not the other way around. This idea was radical at the time, and had been established slowly in England over centuries.

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England’s “constitution” was never written down or formally adopted. In the 1770s, King George III was pushing for more royal prerogative. Our founders’ decided to create a country based on an idea, not ethnicity or military conquest. And the idea was freedom.
Founding a nation based on agreement among citizens follows naturally from the political theory of liberals like Hobbes, Locke and Montesquieu. The consent of the governed legitimates government, and the Declaration of Independence, the Constitution, and the Bill of Rights made this explicit.

A nation can only have one set of institutions. Politicians will either have limited or unlimited power. Property rights and economic freedom will either be respected or not. Either people will be free to live, or must get permission to move, work, or worship. America’s institutions – limited government, markets, and personal freedom – achieve the founders’ values.

Institutions significantly impact economic performance and prosperity. Physical capital (factories, mines, and farms) produces our goods and services, but secure property rights encourage people to make these investments. Limited government secured through representative democracy establishes the rule of law.

The citizens of a nation must accept its institutions, and by implication, the values the institutions embody. Acceptance based on genuine agreement binds people together. Even if everyone agreed on fundamental values like life, liberty, and the pursuit of happiness, disagreements will arise on specifics or the form of government to best secure these values. No one gets exactly what they want. We agree to respect our differences and not let them tear us apart.

Libertarians emphasize the universal nature of human rights. The Declaration of Independence’s rights to life, liberty, and the pursuit of happiness apply to all people, even when ignored by a dictator. Many libertarians’ internationalism, I think, offends conservatives’ strong sense of nationalism.

Yet I think there should be common ground here. Not all people agree on fundamental human rights. People who believe in freedom can found a country based on this. A foundation in freedom has enabled America to accommodate so many immigrants historically. Americans’ shared values more than offset racial, religious and linguistic differences.

The citizens of a free nation effectively bond together to protect these values and the institutions which secure them. This is how politics is about more than just individuals. And it must be because many people and nations which do not accept freedom will act in criminal and imperial ways. Freedom isn’t free, and citizens must protect each other’s freedom.

Shared values and the commitment to defend each other also produce trust, or a widespread belief that fellow citizens are not trying to take advantage of them. Research demonstrates the economic value of trust, even when controlling for institutions like the rule of law and economic freedom. Markets function better when employers trust employees, businesses trust customers, investors trust financial institutions, and so on.

Politics is about more than individuals. In a free country, politics involves a shared commitment to protect our fellow citizens’ freedom. And freedom allows individuals to pursue their happiness in many different ways.

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

How far should we take equal pay?

(U.S. Soccer, Los Angeles Lakers/Facebook, YHN)

Whether the U.S. Women’s Soccer team should be paid the same as (or more than) the U.S. Men’s team is one part of gender pay equity. The debate highlights how determinants of pay in markets do not align with our notions of fairness and equity.

In the labor market, supply and demand set wages and salaries. Potential employers (the demanders of labor) make offers to potential workers (the suppliers). The two sides must reach mutually agreeable terms. Economists recognize that factors like the number of people with a given talent or the ability to learn a craft and the potential for machines to replace workers affect wages. Many of these factors, however, do not seemingly justify people earning different amounts of money.

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For instance, LeBron James’s and Steph Curry’s unique basketball talents allow them to earn over $30 million a year. More people watch the Men’s World Cup than the Women’s World Cup, resulting in prize pools of $400 million and $30 million for the most recent tournaments. But we consider hard work, conscientiousness, and honesty as reasons why one person should earn more than another.

Do women make less than men? One widely reported statistic is that women make only 77% as much as men. Yet, economists know that earnings depend on education, experience, and hours worked among other factors. Controlling for these factors eliminates most of the pay gap.

Yet the absence of a pay gap does not leave us without concerns. Differences in educational attainment by gender, particularly in science and technology, may reflect biases. And women are less likely to leave the labor force to have and raise children, which may reflect stereotypes.

The interpretation of pay gaps, when they exist, is also complicated. The determinants of supply include personal values and decisions. The American Enterprise Institute’s Mark Perry and Andrew Biggs note that men hold 94% of jobs in the 20 professions with the highest on-the-job fatality rates. These dangerous jobs pay higher wages to compensate workers. Is it gender bias if women are less willing than men, on average, to take dangerous jobs?

The absence of a pay gap when controlling for relevant factors may seem surprising, but the profit motive can explain this. Suppose that airlines preferred hiring men over women as pilots. If pilots earned $150,000 a year, equally skilled female pilots shut out of the market might be willing to work for only $100,000 a year. A high-minded airline might break the gender barrier and hire women. But so would a greedy airline, to save $50,000 per pilot. Until the pay gap disappears, profit-seeking businesses should prefer hiring women.

What if bias affected access to education and training? Consider medicine, where arguably women were steered (or forced) into nursing, while men were encouraged (or allowed) to go to medical school. A nurse does not have all the skills of a doctor, but if not for bias, many women nurses would have become doctors.

Comparable worth laws mandate equal pay for jobs requiring comparable skill and responsibility. Some free-market economists worry that firms cannot afford the mandated higher pay for women. Yet married men’s earnings premium demonstrates that employers typically have some discretion on pay. They can give a raise to a married man to help support his family instead of a single man looking to buy a fancier car.

A bigger problem, I think, is that comparable worth changes the salary setting process. The labor market balances supply and demand; no one person or entity sets pay. Any gender pay gaps result from decisions by thousands of people. Enacting comparable worth requires a government expert to determine which professions deserve equal pay. Once the government decides some wages, any group of workers can demand that the government boost their pay.

Women have faced discrimination and restriction of their right to earn a living. This is unfortunate. Gender bias is, I think, disappearing, and where pay gaps still exist, greed in the market will help equalize pay.

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

Battling on and off the field

(FOX Soccer/YouTube)

The U.S. Women’s soccer team is fighting two battles this year. On the field in France, they successfully defended their World Cup title. In March, team members sued the U.S. Soccer Federation for gender discrimination. The case highlights gender pay equity and potential discrimination by sports fans.

Determining compensation is trickier than you might think, due to differences in numbers of games and whether either team is playing a World Cup. Court filings suggest that for an equivalent schedule, women are paid 62 percent less than men. If this is true, is it fair?

If you think pay should depend on performance, the U.S. women should make much more than our men. The women have won four World Cup titles and Olympic Gold medals each; the Men have never won either and failed to qualify for the 2018 World Cup.

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If you think pay should depend on effort and hard work, equal pay probably seems fair. The members of both teams undoubtedly train and play extremely hard.

Economists would focus on revenue generation by each team. Total player compensation across major professional sports leagues is generally 50 to 60 percent of revenue. Economics would find the pay differential fair if based on a revenue difference.

Economics explains how athletes’ compensation depends on revenue, but is this fair? We can offer a fairness defense as follows. Participation on the national soccer teams, like all market activity, is voluntary. And fans choose voluntarily to attend games, watch on TV and purchase merchandise. Voluntary participation means that events like the Women’s World Cup make the world a better place than otherwise. And pay differentials provide people an incentive to supply more labor, if possible.

Sports economics also suggests why unequal pay may persist even with equal revenue. Competition between employers in labor markets drives salaries up to the value a worker generates. Competition in sports is less intense than other professions because athletes make so much more in their sport than other work. Salary caps and other measures can further limit bidding for players. U.S. Soccer could potentially indulge prejudices regarding gender and pay if desired.

Whether the soccer pay gap is due to revenue is unclear. Gate revenue from women’s and men’s matches has been equal since 2015, but the gate is only one component of overall revenue. Litigation will likely reveal the truth.

Let’s turn then to a more challenging question: do revenue differences reflect fan prejudice against women’s sports? The prize pool for the Women’s World Cup was $30 million, versus $400 million for the 2018 Men’s World Cup. Huge earnings differences also exist in professional basketball. In 2017-18, the average WNBA salary was $72,000, compared with a minimum NBA salary of $838,000. These enormous pay gaps are primarily due to differences in revenue. Do sports fans just not like watching women play?

Economists have tested for racial discrimination using sports data, particularly focusing on salaries from within the same sport. Different sports leagues, to my mind, represent different products. Economists generally attach little moral significance to people’s preferences across products. Americans like football more than soccer, but so what? Such differences in preferences simply make the world more interesting.
Differences in fan interest though may well be due to gender stereotypes and consequently be disturbing. Even so, separating gender stereotyping from other, less problematic, preferences would be difficult. Should we try to mandate equality in fan attendance and spending for the NBA and WNBA? Should companies have to sponsor both the men’s and women’s national soccer teams for the same amount?

The long run provides reason for optimism. Women’s sports are relatively new – the WNBA is 21 years old and the first Women’s World Cup was held in 1991 – and sports loyalties are often formed young. As gender stereotypes break down, fewer fans will be biased. The 2019 World Cup’s record TV audiences worldwide demonstrate progress. When the revenue gap between men’s and women’s soccer disappears, if it still exists, equality in pay should follow.

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

7 months ago

Not in my backyard: How zoning restrictions create construction gridlock

(Pixabay)

Zoning and land use regulation has largely choked off housing construction in many American cities. This is an unintended but predictable consequence of requiring government permission for building.

Understanding why requires starting with the why of zoning. Some land uses interfere with the use and enjoyment of nearby property. These nuisances include noise, smells, vibrations, and smoke, and often have a very limited range of impact. Consequently physically separating conflicting uses can address the problem. Zoning typically establishes residential, commercial, and industrial zones.

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Zoning requires government control over building. A planning board exercises this control. Some boards are elected, and others appointed by the city council or mayor. Importantly, we have government permission and electoral control.

Zoning protects against a factory being built next to a house. The factory lowers home values, and moving does not make back this loss. People will naturally seek to protect what is for many families their largest investment.

Building homes or apartments nearby typically imposes costs on homeowners. The building is noisy. The homes or apartments, once occupied, increase traffic, make parking scarcer, lead to longer lines at local grocery stores, and create more noise problems. Adding housing also burdens local government services, like water and sewer, although impact fees on developers and the property taxes paid by new construction can cover these costs. Building smaller homes on smaller lots can also lower property values. So zoning often specifies minimum lot and home sizes.

People will want to use the government permission process to protect their neighborhood. Residents frequently rally to the NIMBY cause (Not in My Backyard). NIMBYism dominates in local politics. Why? Aren’t planning boards supposed to make land use decisions in the best interest of the entire community?

Consider, however, the position of an elected local official. Most citizens will not follow most of the actions of the planning commission. The neighbors of a proposed subdivision or apartment complex will be aware and attend the planning commission meeting. They might well take revenge on commissioners in the next election. Approving building typically looks like a losing electoral proposition: you lose the neighbors’ votes and win few others (except perhaps from the developer’s).

Repetition of the NIMBY refrain significantly restricts housing supply. High housing prices and rents limit growth in some of America’s most productive cities, as I discussed last time. Economists Chang-Tai Hsieh and Enrico Moretti estimate that zoning and land use restrictions lower income nationally by $4,000 annually.

The restricted supply benefits home and apartment owners and hurts lower-income families who rent who have difficulty finding affordable and decent housing. Nonetheless, I see high house prices as a by-product of NIMBY. Homeowners turn out at planning commission meetings to oppose building in their neighborhood, not to boost home prices city-wide.

Requiring government permission to build is the root of the problem. Proponents might say zoning will be used to rationally plan cities, but elected officials will listen to the people who participate in the political process. And this produces NIMBY and gridlock.

Government permission is not necessary to coordinate land use in cities. Houston has never enacted zoning, and McAllen, Texas, where I previously lived, had almost no zoning. Our realtor cautioned us when we were house-hunting to buy in a planned community with a neighborhood association. Otherwise, a neighbor might start raising goats or put six old trailers on their property.

Neighborhood associations and the legal covenants behind them allow homeowners to control nuisances within their neighborhood. But developers can build homes on lots without covenants. Without the requirement for government permission, neighbors can only limit building as specified by the covenants.

People will understandably want to protect the value of their homes. Zoning can avoid conflicting land uses, but permission to build will be given as electoral forces dictate. The predictable result is no building in anyone’s backyard.

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

7 months ago

The high cost of zoning

(PIxabay, YHN)

The state legislature gave Alabama’s public school teachers a 4 percent raise this year. Relaxing zoning and land use laws in America’s most productive cities could give us all a similar raise. Zoning illustrates the costs of a permission-based economy.

How do land use regulations in New York or San Francisco affect America? Businesses with new products or new technology can create value for our economy but need to hire workers. While virtual offices are now a possibility, workers still generally need to be on the premises.

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A growing economy needs people to move to new jobs. The auto industry’s growth in the 20th Century illustrates this. Thousands of families moved to Michigan from states as far away as Alabama and Mississippi. The good paying jobs lifted these families into the middle class, and the workers helped the industry reach its full potential.

The families that moved to the jobs were better off, while affordable cars improved life for Americans. The migration also benefitted those who stayed behind. The departure of some workers to Michigan increased wages for the people remaining in Alabama or Kentucky.

Yet people can move to jobs only if housing is available where industry is thriving. Michigan built homes and apartments to accommodate new workers. Over the past 40 years, zoning and land use regulations have largely choked off building in East and West coast cities with thriving industries like finance and high tech. As Harvard University economist Edward Glaeser puts it, the “most productive parts of America [have] stopped adding population” due to regulatory barriers.

Productive industries will pay high salaries to attract people to their jobs. Economic theory tells us that with residential construction limited, house prices and rents will rise to offset high salaries. People choose not to move to the high paying jobs because of high housing costs. Thriving businesses cannot hire all the needed workers, making our economy poorer.

How much poorer? Economists Chang-Tai Hsieh and Enrico Moretti offer an estimate. To do so they use estimates of available land and the stringency of regulatory barriers on construction in 220 U.S. metro areas. They particularly focus on New York, San Francisco, and San Jose. Between 1964 and 2009, productivity increased dramatically in these cities, indicating the potential to add high paying jobs, and salaries rose. Employment, however, did not increase relative to the economy, and housing prices spiked. Hsieh and Moretti estimate that restrictions on building reduced growth nationally by 36 percent between 1964 and 2009, leading GDP to be 4 percent lower today than otherwise.

News reports put a human face on the housing shortage. Since 1990, California’s average household size has increased while declining nationally. High rents – median rent is $2,500 a month in Los Angeles – force people to share space. Adults rent rooms, sleep in bunk beds, and use dividing walls or curtains to break up rooms. One fortunate company, RoomDividersNow, is riding the crest of this “boom.”

Unfortunately, many Californians now want government rent control. Legally limiting the maximum rent landlords can charge does nothing to increase the supply of apartments, but that is a topic for another day.

The effects of restricting housing in America’s cities are enormous. Thousands of young people have not moved to highly productive cities, arguably reducing opportunities for upward mobility. The inability of people to move to the coasts has depressed salaries in Southern cities like Atlanta, Dallas, and Houston which have built housing to accommodate new residents. The young professionals priced out of New York or San Francisco must compete for jobs in these cities.

How did America arrive at this situation? It is a complicated tale involving largely unintended consequences. Zoning regulates land uses that might cause conflict and nuisance but effectively requires permission from current residents for new construction. Further details will have to wait until next time.

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

7 months ago

Are you afraid to answer the phone?

(Pixabay, YHN)

Millions of Americans fear answering their phone due to a plague of billions of robocalls. These calls have made a mockery of the national Do Not Call Registry and touch on several public policy questions.

We had seemingly ended the problem of unwanted telemarketing calls. Congress authorized the Do Not Call Registry in 2003 after more than a decade of calls disrupting the peace and quiet of our homes. Fines of $11,000 per violation largely put telemarketing companies, with hundreds of thousands of employees, out of business.

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Why have unwanted calls returned? VOIP technology (voice over internet protocol) allowed anyone with a computer and an internet connection to make thousands of calls. A handful of responses can make thousands of calls worthwhile when the cost is almost zero. Furthermore, technology makes robocallers mobile and elusive.

By contrast, telemarketing firms employed hundreds of people at call centers. The authorities could find and fine telemarketers. Firms had to comply with the Do Not Call registry, even if forced out of business.

Technology further frustrates the control of robocalls. Spoofing makes a call appear to be from a different number. Spoofing a local number increases the chance of someone answering, defeats caller ID, and makes identifying the calls’ source difficult.

By contrast, technology allowed the elimination of spam email. It’s easy to forget that fifteen years ago spam threatened the viability of email. Email providers connected accounts to IP addresses and eventually identified and blocked spammers. Google estimates that spam is less than 0.1 percent of Gmail users’ emails.

The Federal Trade Commission (FTC) banned almost all robocalls in 2009 (political campaigns and schools were excepted). Yet the volume of calls and complaints from the public rise every year. And the “quality” of the solicitations is lower: legitimate businesses employed telemarketers, while most robocalls seem to be scams.

Telephone companies and entrepreneurs are deploying apps and services to block robocalls. The robocallers then respond, producing a technological arms race. The technology of this arms race, however, is beyond me.

I’d rather consider some issues robocalls raise. The root of the problem is some people’s willingness to swindle others. Although we all know there are some bad people in the world, free market economists typically emphasize the costs and consequences of government regulations over the cheats and frauds who create the public’s demand for regulation. People can disagree whether a level of fraud warrants regulation, but free marketers should not dismiss the fear of swindlers.

Robocalls also highlight the enormous inefficiency of theft. Thieves typically get 25 cents on the dollar (or less) when selling stolen goods. Getting $1,000 via theft requires stealing goods worth $4,000 or more. In addition, thieves invest time and effort planning and carrying out crimes, while we invest millions in locks, safes, burglar alarms, and police departments to protect our property. America would be much richer if we did not have to protect against thieves or robocallers.

Finally, having the government declare something illegal does not necessarily solve a problem. Our politicians like to pass a law or regulation and announce, “problem solved.” Identifying and punishing robocallers is difficult; the FTC had only brought 33 cases in nearly ten years. And less than ten percent of the over $300 million in fines and relief for consumers levied against robocallers had been collected. Government has no pixie dust which magically solves hard problems.

The difficulty of enforcing a law or regulation does not necessarily imply we should not act. The Federal Communications Commission, for instance, recently approved letting phone companies block unwanted calls by default, and perhaps this will prove effective. We should weigh the costs of laws and regulations against a realistic projection of benefits and laws failing to solve problems as promised should be revised or repealed.
Still, a law that accomplishes little can have value. Cursing robocalls accomplishes little yet can be cathartic. A law that costs little might provide us satisfaction until technology solves the problem.

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.