The Wire

  • Alabama state Rep. Standridge on ‘In God We Trust’ legislation: ‘It’s a simple message, but I believe it’s a powerful message’

    Excerpt:

    Alabama state Rep. David Standridge (R-Hayden) was interviewed Tuesday on “Fox and Friends First,” where he discussed the state’s new law that allows “In God We Trust” to be displayed in public buildings.

    Standridge, who sponsored the legislation in the state legislature, explained that the idea came in part out of recent debate about school safety. He said he views displaying the national motto as a way to bring added comfort to students, teachers and staff while they are at school.

    Along the way, Standridge was shocked by the number of people who were afraid to touch the subject, due to what he views as a modern-day culture of hypersensitivity and “political correctness.”

    Media outlets like AL.com and the Associated Press reported that legal challenges are “expected,” but, like Alabama Attorney General Steve Marshall, Standridge does not see an issue with simply displaying the national motto – which he points out was passed by Congress and is featured on American currency.

    “It’s a simple message, but I believe it’s a powerful message,” Standridge said on “Fox and Friends First.”

  • Rep. Byrne: Illegal immigrants will not be housed in Baldwin County

    Excerpt:

    Tuesday, Congressman Bradley Byrne (AL-01) announced that illegal immigrants would not be housed at Navy airfields in Baldwin County.

    Congressman Byrne opposed the housing of 10,000 illegal immigrants at Naval Outlying Field Silverhill and Naval Outlying Field Wolf in south Baldwin County.

    Byrne, along with other members of the Alabama and Florida Congressional delegation, sent a letter to Secretary of Defense Mattis and Secretary of Homeland Security Nielson expressing their concerns with the proposal.

    Byrne released both a statement and a tweet on Tuesday regarding the decision of the proposal.

  • WATCH: University of Alabama Police Department completes lip sync battle featuring ‘Sweet Home Alabama’

    Excerpt:

    Monday, The University of Alabama posted a video of their campus police department participating in a lip sync battle against Clemson University.

    UAPD chose “Sweet Home Alabama” as their song and, afterward, challenged all other SEC schools to join in on the competition.

3 weeks ago

Is Alabama’s school sales tax holiday good policy?

(YHN/Pixabay)

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

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

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

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

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

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

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

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

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

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

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

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

4 weeks ago

Fire safety or compliance waste?

(Troy Fire Department)

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

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

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

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

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

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

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

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

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

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

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

1 month ago

Do DIY projects make economic sense?

(Pixabay)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1 month ago

Suing about Global Warming

(YHN/Pixabay)

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

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

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

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

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

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

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

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

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

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

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

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

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

2 months ago

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

(YHN/Pixabay)

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

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

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

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

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

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

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

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

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

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

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

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

2 months ago

Are we making the opioid problem worse?

(HHS/Flickr)

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

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

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

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

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

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

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

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

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

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

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

2 months ago

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

(CBS News/YouTube)

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

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

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

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

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

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

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

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

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

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

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

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

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

2 months ago

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

(W.Miller/YHN)

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

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

Honda car plant (Made in Alabama)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

Will student loan debt crush Alabama’s graduates?

(Pixabay)

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

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

Are sales taxes outdated for Alabama’s future economy?

(W.Miller/YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3 months ago

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

(Wikicommons,Pixabay)

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

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

But is it a good way to organize society?

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

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

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

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

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

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

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

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

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

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

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

4 months ago

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

(AAF/Facebook)

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

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

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

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

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

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

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

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

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

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

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

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4 months ago

Occupational licensing: A costly permission slip to work

(Pixabay)

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

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

(YHN/Pixabay)

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

Will artificial intelligence bring doom or progress?

(W.Miller/YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

4 months ago

Money and March Madness: Should college players be compensated?

(W.Miller/YHN)

March Madness just concluded with Villanova winning the title. Given the ongoing college basketball bribery investigation, the bigger question may be whether the Wildcats will eventually vacate the title.

The bribery case first broke last September with ten arrests, including four assistant coaches, based on an FBI investigation dating from 2015. The scandal has already claimed Louisville coach Rick Pitino, fired before this season. The extent of the bribery remains unclear. News reports have implicated twenty top programs as targets, and claimed that the FBI has hours of recorded phone calls. Of course, these reports may prove inaccurate.

Shoe manufacturer Adidas and sports agents funded the payments leading to September’s arrests. Adidas allegedly paid to lure top recruits to teams using their shoes and uniforms. The sports agents allegedly paid to get stars to commit to use them as agents when entering the NBA. The payments clearly violate NCAA rules, since college players are student-athletes, not professionals.

Of course, the NCAA basketball tournament is big business. March Madness earns over $1 billion annually in ticket sales, broadcast rights fees, and sponsorships. Universities and the NCAA market basketball and football like commercial properties.

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Some sports economists claim that the NCAA is a cartel. A cartel is a group of independent businesses which coordinate to act like a monopolist, restricting production to increase profits. OPEC, the Organization of Petroleum Exporting Countries, is probably the world’s best-known cartel.

OPEC sells a product to consumers, while the NCAA “employs” players. So the NCAA tries to suppress players’ “salaries.” Successful cartels must resist competitive pressures. Sellers of oil want to cut their price a little to sell more oil, while college teams want to pay top recruits to win more games and championships.

Economic theory highlights why cartels form and collapse. Being the only cheater on a cartel agreement is the best of all possible worlds for an oil exporter or basketball program. Consequently, a cartel tries to detect and punish cheating, but doesn’t always succeed.

The fear of cartels, or trusts, led to the passage of our anti-trust laws outlawing anti-competitive collusion. Research shows, however, that cartels are not terribly successful, except under certain circumstances. The diamond cartel, sustained by a small number of mines, is probably the most effective. Cartels also succeed by “capturing” government agencies tasked with regulating businesses. Railroads, trucking, and airlines in the U.S. used regulation to maintain cartels until deregulation in the late 1970s.

The NCAA has successfully argued that sports are an element of education. Indeed, sports certainly help student-athletes learn valuable life lessons. And athletes receive scholarships, room and board, tutoring help, and now cost of attendance as compensation.

Players clearly do not get paid a competitive share of the revenue they generate. Economics identifies the effects of not fairly compensating players. One is increased spending on other elements of sports programs, like coaches’ salaries and facilities. Another is the use of athletics revenue to pay for other university programs, like non-revenue sports and music (through marching bands).

Perhaps the most unfair element of college sports is preventing a talented three-point shooter or defensive lineman from pursuing a sports career if they cannot succeed in unrelated academic tasks like conjugating a verb or calculating the slope of a line. The NFL effectively makes playing college football a requirement by restricting draft eligibility to players three years out of high school. The NBA’s “one and done” draft rule has a similar impact. Still, few Americans get very angry about any injustice done to college athletes.

More serious harms connected to college sports, like sexual abuse or assault, represent the greatest cost of not paying players. The culture of secrecy which hides illicit payments to athletes seems to enable predators like Michigan State’s (and USA Gymnastics’) Dr. Larry Nassar and Penn State’s Jerry Sandusky. Athletes get paid to play and benefit, while the victims of sexual predators are scarred for life. The façade of amateurism in college sports would be farce if not for the real harms it shields.

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

5 months ago

Public Transit: Why gov’t is short-sighted to invest in a dying transportation form

(Pixabay)

The first driverless car pedestrian fatality occurred recently in Arizona, almost two years after the first fatal crash. These tragic fatalities signal the ongoing development of this technology. Cars and trucks with drivers killed 5,800 pedestrians in 2016, so a driverless car pedestrian fatality was probably inevitable.

Driverless cars will reshape our economy, as 2.8 million people currently work in transportation. One area of disruption which has flown under the radar is public transportation. A new Cato Institute study, “The Coming Transit Apocalypse,” highlights the looming wreck.

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How can we be sure that driverless vehicles will be on the road soon? Nothing is certain in life, but the Cato study notes that more than three dozen companies worldwide are experimenting with the technology, including auto makers, auto parts suppliers, and tech companies. Thus many companies believe that practical self-driving vehicles are within reach. Given that these companies are trying different approaches, it seems likely that at least one successful design will emerge.

Public transportation is already hemorrhaging riders, with a 3 percent decline in the first half of 2017 following a 4.4 percent decline between 2014 and 2016. Seven metro transit systems have seen ridership declines of at least 27 percent since 2009. Although lower gas prices partly explain this, ride sharing services like Uber and Lyft are also having an impact. Ride sharing offers greater convenience than transit with door-to-door, on-demand service, but is currently more expensive. Driverless, shared vehicles are projected to be price competitive with transit. Consequently, the Cato study contends that public transit will be “extinct” everywhere outside of New York City and perhaps a couple of other markets by 2030.

Mass transit has never been very popular since the widespread ownership of cars, and currently carries less than one percent of travelers in all but a few cities. One disadvantage of mass transit is geography: residents and jobs are too spread out in most American cities to generate high enough demand for either buses or trains on centralized routes. Culture also plays a factor, as many Americans simply prefer driving.

Low ridership rates are not due to a lack of government spending, which has exceeded $1 trillion (adjusted for inflation) since 1970. Fares cover only about 30 percent of expenditures. Americans will not use even highly subsidized public transport.

Many transit agencies have deferred maintenance on rail systems, which have a useful life of about 30 years before requiring substantial rebuilding. Washington’s Metro system turned 30 in 2006, and by 2013, incidents of smoke in tunnels were causing evacuations twice a month. Unreliable service makes transit less competitive with ride sharing going forward.

An end of public transport, however, will not end taxpayers’ costs. Many systems went into debt building or repairing subway or rail lines, while others have significant unfunded health care and pension liabilities. For example, the Cato study estimates that Boston’s transit system has $3.4 billion in unfunded liabilities, which represent a portion of employees’ compensation. Transit systems have spent lavishly on new rail lines instead of ensuring that promises to employees will be kept.

Regardless of exactly how quickly self-driving cars take over, further investments in transit infrastructure do seem dubious at this time. Nonetheless, Los Angeles County decided in 2016 to spend $120 billion, primarily on new light rail lines. The Cato study suggests that new rail lines being planned now will be obsolete before finished. Only government agencies spending our tax dollars can afford to be so short-sighted.

The potential transit apocalypse illustrates a recurrent problem. Once political support for spending coalesces, government finds adjusting to changing economic and societal conditions difficult. Mounting losses do not cause proponents to sour on mass transit. Economist Mancur Olson claimed that the entrenchment of programs under democracy produced stagnation.

Public transportation has helped many Americans, particularly those who could not afford cars. Changing conditions, however, require policy changes. I fear that we will still be building subways even after everyone has their own automated chauffer.

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

5 months ago

The economics of a military draft

(Marine Corp.)

Fifty years ago, protests and violence in opposition to the Vietnam War and the draft roiled college campuses.  The War appeared hopelessly deadlocked after the Tet Offensive.  Protestors burned draft cards, ransacked draft offices, and fled for Canada.  At the end of March 1968, President Johnson announced that he would not seek reelection.

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In January 1973, President Nixon ended the draft, delivering on a campaign promise.  Why did the policy change within just five years?  Dr. David Henderson, an economist and long-time professor at the Naval Postgraduate School, contends that economists played an important role.  The case illustrates how academic research can shape public policy, hopefully for the better.

Let’s first consider the economics of a military draft.  One argument for a draft is that it lowers the cost of the military.  This, however, is based on confusion.  A draft reduces the government’s budgetary cost.  The full cost of the military is the value of the resources used, including personnel.  Uncle Sam paid G.I.’s a monthly salary, but the amount did not have to adequately compensate the soldiers, who faced prison for refusing to serve.

Forcing service does not reduce and can even increase the full cost; persons creating great value in the economy may end up carrying a rifle.  During World War II, draft exemptions were granted for critical jobs in war industries.  And the military made effective use of talented individuals, including future Nobel Prize winners like economist Milton Friedman and physicist Richard Feynman (who was part of the Manhattan Project).  The military understood the full economic cost and sought to use personnel efficiently.

Research by economists in the 1960s speculatively estimated the supply of volunteers.  Individuals’ willingness to volunteer depends on many factors, including pay, the likelihood of war, an individual’s patriotism, and the conditions of service (e.g., the minimum term of enlistment).  This research showed critically that a sufficient number of volunteers could be secured.

Conscription involves concerns beyond economics, like justice.  Even on such questions, though, economics provides insight.  For instance, how should we allocate the burden of defending the nation, including the risk of being killed or wounded in service?  Some believe that a draft lottery distributes this burden more fairly, as all those eligible could be selected.  (The rules for deferments and exemptions certainly matter; the poor and minorities still did a disproportionate share of the fighting in Vietnam.) Economics shows how conscription is equivalent to a tax.  Draftees serve for less pay than they would require to volunteer; if they received $10,000 per year less, it is as if they were taxed this amount.  This “tax” was on top of the risks of combat.  A volunteer military’s higher salaries make taxpayers cover more of the cost, which arguably is fairer.

How did economists influence policy?  While proving the influence of specific ideas on specific changes is nearly impossible, Professor Henderson offers a strong argument.  The aforementioned research documented the costs of conscription and the feasibility of a volunteer military.  A conference at the University of Chicago in 1966 organized by Milton Friedman brought together four hundred professors, opinion leaders, and politicians, including Ted Kennedy and Donald Rumsfeld.  And President Nixon’s Advisory Commission on an All-Volunteer Force, chaired by former Defense Secretary Thomas Gates, included Professor Friedman and other prominent economists.  The Commission held hearings and their report provided the formal basis for ending conscription.

Perhaps most significantly, the participants at the University of Chicago conference and members of the Gates Commission included many supporters of the draft.  The economists’ arguments changed opinions, demonstrating their strength.  The Gates Commission conveyed this message to the public.

Although not widely read, economists’ research affects which policy proposals appear reasonable. Hopefully this leads to better government policies, like the all-volunteer military.

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

5 months ago

Tariffs and their impacts explained

(Pixabay)
(Pixabay)

President Trump announced last week that he would seek tariffs on imported steel and aluminum. What will the impacts of these tariffs be, and do they constitute wise policy?A tariff is a tax imposed on items imported to the U.S. The proposed 25 and 10 percent tariffs on steel and aluminum will make imported metals more expensive, increasing domestic production of these metals. President Trump will impose the tariffs via executive order, since Congress decades ago gave the president relatively broad discretion to impose tariffs for national or economic security. The Commerce Department determined in February that steel and aluminum imports threaten security, allowing this action.

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The president intends to boost domestic steel and aluminum production. The first element of good policy is accomplishing the intended goal. The tariffs do this.

Increased domestic production will come at a cost. Steel and aluminum are used to make consumer goods like cars, lawn mowers, and beverage cans. Furthermore, there are dozens of types and grades of steel. American companies are very good at making some types of steel, while foreign companies are quite good at making other types. No American companies currently make some types of steel.

Manufacturing is efficient when producers of cars, mowers, and cans can purchase the best product at the best price. The tariffs will increase the cost of manufacturing in the U.S., reducing output and employment in industries using these metals. Consumers will face higher prices as well.

The second and more significant element of wise policy is ensuring that the benefits exceed the costs. Is there a compelling reason to protect domestic metals production?

We might think that such protection could spur the labor market. Employment is currently less than 100,000 and 30,000 in aluminum. Based on current import penetration, eliminating all imports – which these tariffs will not do – might in time create 50,000 additional jobs. This total is modest relative to our economy’s 150 million total jobs and 60 million jobs filled annually, and would be at least partially offset by job losses in manufacturing. And January’s 4.1 percent unemployment rate signals a currently strong labor market.

President Trump has spoken often about economic dangers from China. China is only our 11th largest steel supplier; we import the most steel from Canada, South Korea, Brazil and Mexico. Regardless of whether trading less with China is desirable, these tariffs will not really achieve this goal.

The identity of our largest steel trading partners, I think, also allays national security fears. If we feared some security scenario requiring significantly greater domestic production, we could pay American companies to mothball recently closed plants. We do not need to punish automakers daily to prepare for a contingency which may never arise.

Competition from foreign producers receiving government assistance provides, I think, the strongest argument for ever protecting American industries. Government assistance violates the rules of the market, raising economic and justice concerns. Economic efficiency requires that the firms producing the best different steel and aluminum products win out. Export subsidies encourage production by firms which are not the most efficient. Plant closings devastate families and communities. This pain can be justified as like recuperation from surgery if the closings improve economic efficiency. Pain which does not improve the economy is hard to justify.

Are steel producers losing because of unfair trade? The World Trade Organization allows remedies in response to documented unfair trade practices. As of June 2017, American steelmakers had 149 remedies in place, including 24 against China. We had 18 remedies against South Korea (second most after China), yet only eight, six, and zero against Brazil, Mexico, and Canada. Competition in steel seems reasonably fair.

The response of our trading partners provides a final variable here. Our trading partners may impose tariffs against American products in retaliation. No one knows if President Trump’s tariffs will spark a trade war, but wars almost always injure many innocent parties.

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

6 months ago

School Shootings: An Alabama economics professor’s take


 
 

The recent tragedy at Florida’s Marjory Stoneman Douglas High has sadly raised this question again. The failure to prevent the loss of young lives reflects both an unpleasant reality and some problems of politics.

Preventing school shootings is very hard in a nation with millions of guns. Once someone decides to do evil, they can usually get guns and pick the time and place for their act. Law enforcement can only react, and mass shootings typically last just minutes. If deterrence, discouragement, and intervention (if possible) fail, protecting 100,000 schools is nearly impossible.

The impossibility of preventing shootings does not justify doing nothing. Economics emphasizes that we make choices on the margin. Can measures prevent, or reduce the harm from, school shootings without unacceptably abridging citizens’ gun rights?

The occasional failures of agencies administering gun laws provide one component of this difficulty. Convictions that should have prevented the perpetrator of the Sutherland Springs, Texas, church shooting from legally purchasing weapons were never entered into a national database. The FBI and local police did not act on threats made by Florida suspect Nikolas Cruz. And the sheriff’s deputy assigned to Stoneman High failed to engage the shooter.

Several elements of politics make this already challenging task even harder. One is short political attention spans, or what public choice economists call rational ignorance. Our actions have little impact on outcomes in a large democracy: one vote almost never decides a Federal election. So voting against our interests because of not paying attention to politics is almost costless.

Rational ignorance helps politicians appear to act decisively against societal evils like school shootings. If some politicians claim that banning bump stocks (which allow semi-automatic rifles to fire at higher rates) will prevent mass shootings, who could object?

Clever politicians know that easy solutions have little chance of working, and that voters will not hold them accountable for ineffective policy.

Defenders of gun rights seemingly fear that even the most innocuous restrictions will contain provisions somehow restricting gun rights. Such lack of trust may be understandable. Laws are difficult to repeal, as Republicans have discovered with the Affordable Care Act. This difficulty can encourage deceit and subterfuge; trick people into supporting a law they will eventually oppose and policy can be altered for years. In markets, deceit and subterfuge typically provide only temporary benefit. Suppose that a home security company offers an armed response against intruders, which turns out to be calling 911. Disappointed customers will cancel their contracts, and the company’s reputation could be harmed permanently.

One final relevant element of politics is what economist Bryan Caplan has labeled rational irrationality. Voters face few personal and direct consequences from inconsistent or incorrect beliefs, helping these beliefs persist.

What’s the rational irrationality on gun control? If government is for the people, citizens must have a right to reign in an overreaching government. And because a tyrant may not surrender power if citizens ask nicely, “reigning in” must mean armed resistance. But does gun ownership preserve freedom in the United States today, or is this just a libertarian fantasy? And even if an armed populace checked tyranny, would a waiting period necessarily undermine this check?

These are hard and troubling questions for libertarians like me. In politics, we can join the NRA and vow no compromise. In other contexts, gun owners might make tradeoffs. A libertarian gun owner with young children might decide that guns locked safely away can still prevent tyranny.

Unions and management are often as skeptical of each other’s motives and intentions as the two sides on gun control. And yet strikes are rare, because their cost provides an incentive to get past rhetoric and negotiate a mutually acceptable agreement. Politics features few personal costs and consequently lots of bluster, deceit, and fantasy. Should we be surprised then that we make little progress on really hard problems?

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

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6 months ago

Bitcoin and bubbles explained


 
 
Bitcoin has been on a wild ride, rocketing from $1,000 to nearly $20,000 last year. A recent slide to $7,300 brought claims that Bitcoin was a bubble. What exactly is a financial bubble, and does Bitcoin have a future?

Most commonly described as a cryptocurrency, Bitcoin joins together several innovations. It is first and foremost an electronic payment system, not unlike credit cards or mobile banking, using its own currency instead of dollars. Accounts and transactions are recorded on the Blockchain, contained on all the network computers worldwide. Instead of Visa or a bank keeping accounts, the Blockchain ledger is kept by everyone. Bitcoin owners use an electronic key to carry out transactions.

The Blockchain represents a major innovation itself, but that’s a topic for another day. There are now dozens of other cryptocurrencies. Ethereum and Litecoin appreciated by a factor of 100 in 2017.

What determines the value of Bitcoin? The market, meaning everyone willing to buy or sell Bitcoin. Why would anyone trade real money for electronic numbers?

One reason is for purchases, as mentioned. Bitcoin costs merchants less than the three percent credit cards charge and presents less risk of fraud as buyers cannot readily dispute charges for items they purchased. And cryptocurrencies provide millions of people access to global markets for the first time.

A second reason: Some people now use Bitcoin to hold wealth, like gold. For hundreds of years, gold has preserved wealth through wars, inflation, and financial crises. Should banks fail again like in the 1930s, many people believe gold will be safe. Increasingly people feel similarly about Bitcoin.

But gold is real, whereas Bitcoin is computer code. Couldn’t the operators create millions of Bitcoins with a few keystrokes, rendering those bought for thousands of dollars worthless? No, because the Blockchain governs the creation of new Bitcoin and caps the number at 21 million. Only a majority of users can modify the Blockchain, limiting the supply, as with gold.

A third reason to buy Bitcoin is to make a profit. The value of Bitcoin depends on how much people will pay for it. People will pay $10,000 Bitcoin if they think prices will hit $20,000, and $20,000 if it is going to $30,000! In 2017, many investors boarded the Bitcoin train.

When lots of investors buy an asset, the price will rise, making a boom a self-fulfilling prophecy. Prices can rise astronomically, but not forever; eventually, investors can’t afford even higher prices. Shattering the expectation of rising prices can set off an equally rapid price collapse. An asset price bubble is like a roller coaster.

Bubbles challenge economists like myself who think that markets work well. Why? We argue that market prices must guide businesses, investors, and consumers. If so, rising home prices before 2006 indicated a demand for more investment. But if rising prices were just a bubble, we built unneeded houses. Las Vegas’s newly built, never occupied houses and townhomes were wasted investments.

Frequent bubbles render market price signals as noisy as a third-grade class at recess. Some free market economists try to deny bubbles, but Nobel Prize-winning economist Vernon Smith, one of the most thoughtful market economists, believes differently. Professor Smith pioneered the use of experimental methods to test economic theories. He found that bubbles commonly occurred in financial assets experiments; indeed, he had to basically rig an experiment to prevent them. Pricing assets like stocks, gold, and now cryptocurrency involves projecting the future, and excessive optimism contributes to bubbles.

Do bubbles prevent markets from working? Market economies emerged about three hundred years ago, and over this period, standards of living have increased dramatically. Economic history clearly demonstrates that markets, even when occasionally beset by bubbles, produce prosperity. Markets limit the waste from bubbles because investors can sit out during a perceived bubble if they choose, or invest to profit when the bubble bursts.

Is Bitcoin a bubble? Perhaps, but cryptocurrencies offer significant potential. Bitcoin is creating value in the economy, and either it or some successor currency is likely to have a future.

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

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6 months ago

Should government be run like a business?

(Architect of the Capitol, Pixabay)

(Pixabay)

 

I recently wrote about some of the problems with civil asset forfeiture, under which our governments seize money or assets allegedly involved in criminal activity without securing a conviction. An Institute for Justice report detailing forfeiture abuses, “Policing for Profit,” suggests that there is an inconsistency between proper policing and profit. And yet politicians from Al Gore to Donald Trump have wanted to make government more business-like.

Is there a conflict between good government and profit?

The profit motive is enormously important in our economy. Profits are a residual, or what is left over after paying all the costs, and the owners get to keep any profit. Businesses typically must incur costs before selling and are never guaranteed a profit. Agriculture illustrates this: Farmers must buy or lease land and purchase seeds, fertilizer and tractors to grow a crop. If the crop is large enough and market prices high enough, revenue will exceed cost. The farmer keeps any residual, and bears the losses.

Business owners get to make decisions and keep the profit, so they should try to control costs. This marriage of decision-making authority and financial incentive drives the efficiency of business. The pursuit of profit does not mean keeping costs as low as possible, since building luxury cars and mansions can both be profitable. Car makers, though, should avoid waste in building both economy and luxury cars.

No one in government can earn profits. We lose a powerful incentive. But why would, say, policing for profit, lead to problems? For asset forfeiture, we probably only want criminals deprived of their ill-gotten gains. We are not authorizing forfeiture against innocent people (including ourselves). A profit motive might lead to the targeting of innocent people (the poor, minorities) unable to legally defend their assets.
Furthermore, we cannot easily tell when the police pursue forfeiture against an innocent person. The person who has $10,000 or more in cash seized from them might have just won a casino jackpot or sold a car for cash, or may be involved in the drug trade. The lack of clarity prevents us from holding the district attorney, mayor, or offending police officers accountable.

Consider some other potential instances where government could make profits. Illegally parked cars should sometimes be towed, but the danger should ideally be balanced against the owner’s cost and inconvenience. The pursuit of profit makes such balancing less likely. Speed traps and red-light cameras might be used to issue tickets for marginal violations or excessive fines. Private, for-profit prisons might cut spending on food and medical care, creating cruel and unusual conditions for inmates.

The lack of clarity is a common theme. Just how long was that car illegally parked? Did a prisoner given aspirin truly need surgery? We cannot tell when the lure of profit leads to excessive corner cutting.
Yet many business interactions also lack clarity. A delayed flight might be due to unexpected mechanical problems, or a lack of reasonable preparations. An unforeseen design flaw or intentional disregard of safety could both be responsible for auto accidents and safety recalls.

Why is profit-seeking by government a bigger problem? The answer, I think, is that our dealings with any business are voluntary, while our dealings with government are compelled. If I get sick after eating at a restaurant, I can choose never to eat there again. Voluntariness also enables competition, disciplining businesses in the pursuit of profit. Businesses can find shortchanging customers on quality and service very costly.

People cannot typically walk away from dealings with government, as is literally true for the person carrying cash stopped by law enforcement. Prisoners cannot boycott a private prison which they believe does not offer a humane level of care. The state officials administering a contract with a private prison are not “customers,” and may be more tolerant of poor conditions than if they were customers.
Does this mean we can never beneficially make government function more like a business? No, but we must proceed very cautiously. The profit motive is a great force for efficiency when constrained by choice and competition.

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

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6 months ago

Has Amazon improved our lives? 3 types of Gov’t help make it hard to tell

(Wikicommons & Saturnism/Flickr)
(Wikicommons & Saturnism/Flickr)

Shopping with Amazon Prime has made my life better. But has Amazon improved the U.S. economy? Several forms of government help may account for Amazon’s success. Ensuring that success constitutes progress becomes challenging when government and business are entangled.

Online retailing has clearly benefitted residents of America’s small towns and rural areas. Our shopping options now rival those of urbanites, which historically is unprecedented. And yet three types of government help render an assessment of Amazon’s contribution to progress for the economy problematic.

First, customers long avoided paying sales taxes. Online retailers were exempted from collecting sales taxes in states where they lacked a physical presence. Sales taxes typically run between 8 and 10 percent and are the largest revenue source for state and local governments.

Amazon now collects sales tax for most states. But how many customers were lured online initially to avoid sales tax? Economists have measured the impact as Amazon started collecting sales taxes. One study estimated that their sales fell almost 10 percent and brick-and-mortar retailers’ sales increased in states where Amazon began collecting taxes in 2013.

U. S. Postal Service shipping rates have further helped Amazon. The help here is via a cross-subsidy that may be as much as $1.46 per package. Regulated businesses and government enterprises typically charge some customers a price above cost and use these “profits” to subsidize sales below cost. Economists believe that the Postal Service uses its first class mail monopoly to cross-subsidize other activities. The $1.46 per box figure relies on many assumptions and may be too large. Whatever the exact figure, packages likely get favorable rates.

Finally, Amazon has received economic development incentives from numerous governments, including sales and property tax exemptions, business tax credits, and government-paid employee training and road improvements. Data from the subsidy watchdog group Good Jobs First shows that Amazon received over $600 million in incentives over a decade for building large warehouses, and another $240 million since 2015 to build order fulfillment centers. Amazon is currently choosing a location for a second headquarters, or HQ2, with twenty finalist cities offering up incentives in pursuit of the projected 50,000 new jobs. Maryland has offered a $5 billion package and still trails New Jersey’s $7 billion offer.

Government assistance raises both fairness and economic concerns. Traditional retailers have struggled to meet the challenge of online retailing. While we might observe that competition is often demanding, the rigors are often bearable because everyone plays by the same rules. Brick-and-mortar retailers’ complaints of unfair advantages for online retailers due to sales tax avoidance have merit.

The economic concern involves success. Successful businesses in the market must provide value to customers. Amazon’s free two-day shipping on thousands of items for Prime members requires a sophisticated inventory and delivery system. Amazon’s warehouses, fulfillment centers, and delivery vans are part of that system. Amazon is now experimenting with drone delivery, and hopes to offer same day delivery in major cities.

Such efforts serve customers but are also costly. Only a market test reveals if Prime membership creates value for the economy: Will people pay enough to make Amazon willing to offer the membership? We learn that e-commerce constitutes progress for our economy when it succeeds in competition with brick-and-mortar stores. Let everyone try their best, and let customers decide.

And yet if one competitor has the government pay some of their costs, they can succeed and not create value. Government assistance severs the link between success in the market and economic progress. Economists can then try to guess. For instance, the government incentives pale in comparison with Amazon’s 2017 sales of nearly $180 billion. But modest help may make all the difference given retail’s razor-thin margins. The market is far more reliable than economists’ guesses.

America’s economy has changed radically over the decades. We benefit, however, from progress and not just change. We need our governments to stop helping Amazon and other businesses so that we know that success means progress.

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

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