The Wire

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

    Excerpt:

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

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

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

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

    Excerpt:

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

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

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

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

    Excerpt:

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

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

11 hours ago

Are you afraid to answer the phone?

(Pixabay, YHN)

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

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

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

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

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

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

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

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

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

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

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

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

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

2 weeks ago

Can federalism help us today?

(W.Miller/YHN)

Alabama and other states have recently passed new laws restricting or criminalizing abortion to challenge the Supreme Court’s 1973 landmark decision in Roe v. Wade in the wake of Justice Kavanaugh’s appointment. America’s founders saw a role for federalism in managing disagreements. But recent abortion, same-sex marriage and transgender bathroom controversies raise doubts whether federalism can still help us today.

The U.S. Constitution established a federal republic, with multiple levels of government (the states and the national government) which are not entirely subordinate to the other. Constitutional provisions like selection of Senators by the state legislatures were intended to preserve the co-equal status of the states, while the 10th Amendment reserved powers not explicitly delegated to the national government for the states.

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Economists often discuss fiscal federalism, or the location of tax and spending policies within the federal structure. Local governments should make policies with primarily local effects, with wide-ranging policies reserved for the national government. Schools, streets, and parks primarily impact local communities, so local governments can decide spending and funding for these programs.

Federalism also enables the so-called “laboratory of the states,” letting states experiment with innovative new policies. This limits the costs of unsuccessful experiments and allows emulation of successful experiments. Plus, garnering enough political support for an experiment is more likely in one state than nationally.

Democracy involves non-violent resolution of political conflict. The losing politician, faction or party must “accept” election results, meaning not resorting to violence, intimidation, or coercion. Democracy also guarantees the opportunity to peacefully change policy through argument and election campaigns.

State policy variation on contentious issues facilitates this peace. If the U.S. has one policy on abortion or same-sex marriage, the disfavored side might get fighting mad. Geographic variation provides an alternative to a compromise policy acceptable to all Americans. And for persons on the losing side of an issue, changing policy only requires changing minds in one state, not the entire nation.

Fiscal federalism also in a sense manages political conflict. Alabama and Massachusetts, for example, can run different Medicaid programs instead of fighting to agree on one system.

I’m not a lawyer, but my understanding is that should the Supreme Court overturn Roe, it would be for a federalism solution, not to ban abortion nationally. Federalism helps because citizens disagree about moral values and the corresponding government policies. The correct view on abortion or same-sex marriage (my views, of course!) may be less important for democratic peace than how we deal with those who disagree. Others are likely just as convinced of the correctness and morality of their views.

I am unsure if Americans would accept federalism on divisive issues today. We increasingly see all moral issues as involving fundamental human rights. America was founded in liberty; the Constitution was designed to protect the fundamental rights of individuals, which should not be violated for any reason. Federalism is inappropriate to secure fundamental rights; the Civil Rights Act and Voting Rights Act rightly ended tolerance for discrimination by states based on race. Tolerating dissenting views requires that we afford others respect, and that the values questions do not involve fundamental rights.

Both conservatives and liberals might wish to set themselves up as moral dictators and make everyone live by their values. The idea of having a moral dictator of course becomes frightening if you may not be the dictator. But even if you are guaranteed to be the dictator, will those who disagree accept your dictates? Fighting to defend the fundamental rights essential to freedom is understandable; yet, are all moral questions worth fighting over?

Liberal democracy requires agreement among citizens on the value of freedom. And yet disagreements are inevitable. America’s Founders understood how federalism could keep our disagreements from escalating to prevent cooperation based on shared values. Today’s polarization suggests that liberals and conservatives may no longer respect each other enough for the Founders’ design to serve us.

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

3 weeks ago

The great truck driver shortage

(Pixabay)

The Alabama legislature lowered the minimum age for a truck driver’s (CDL) license to 18 for within-state transport (the minimum age remains 21 in interstate trucking) to help alleviate a driver shortage the American Trucking Associations (ATA) says has existed since 2005. Trucking has long been a major employer in Alabama and Pike County. What are the economics of this shortage and the future of trucking?

Trucking contributes enormously to our economy. Seventy percent of freight, over 10 billion tons annually, ships via trucks. Our modern economy could not exist without reliable truck transportation; any uncertainty would render just-in-time production impractical.

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News reports for years have noted trucking companies’ struggles to hire drivers. The most visible have been ads on tractor-trailers encouraging drivers to switch jobs for better pay and working conditions. Our economy shows few signs of a shortage of transport, as stores have remained stocked and factories operating.

About 1.7 million people drive “heavy” trucks requiring CDLs, while 1.3 million more drive light delivery trucks. About half of the heavy truck drivers work for trucking companies serving many customers. Most of the remaining drivers work for companies which ship a great deal of freight. Some drivers work as independent owner-operators.

According to the Bureau of Labor Statistics, heavy truck drivers earn $44,000 per year. But experienced CDL drivers earn more than $60,000 and team drivers over $70,000. These are solid salaries for “blue collar” jobs requiring only a high school degree.

Why then is there a shortage of truck drivers? As an economist, I find the ATA’s claim of a 15-year shortage noteworthy. Economists expect that prices or salaries will rise to quickly eliminate shortages and fall to eliminate surpluses. What’s going on?

Part of the answer may arise from different uses of the term shortage. A recent economic analysis finds that the market for heavy truck drivers has been tight but not in shortage. The ATA estimates the shortage at around 50,000 drivers, or just three percent of all heavy truck drivers. A trucking company can lose business if ever short on drivers and may perceive difficulty hiring as a serious shortage.

Truck driver salaries have risen, as we would expect in a shortage, 25 percent between 2005 and 2016, versus a 19 percent increase for all other blue collar jobs. Yet this is a modest increase relative to oil industry salaries during the shale boom. The 14 percent decline in employment during the 2008 recession shows that there were more drivers than loads during a portion of the driver shortage.

The training drivers require could potentially limit the supply. Aspiring truckers can learn driving by paying (or borrowing) up to $7,000 for a truck driving school or signing on for training from a trucking company paid for through a lower first-year salary. Access to training seems unlikely to significantly limit supply.

Long hours and extensive travel constitute a more significant limit. Days on the road make having a life, and particularly a family, difficult. Truckers must be paid extra to accept these undesirable working conditions. And factoring in the unpleasant conditions makes the good pay more apparent than real.

Truckers create tremendous value, but the demands of the job heavily burden people. Self-driving trucks might resolve this dilemma. Robot drivers will not miss being away from their family. Artificial intelligence will likely automate jobs people find particularly unpleasant.

Self-driving technology could be a boon to truckers. Experts suggest that the technology will be operational on rural interstates long before for urban driving. If so, trucks could drive autonomously between cities, with truckers driving across urban areas. A trucker driving rigs across Birmingham all day could go home every night. Autonomous trucks may not initially reduce the number of drivers, rather change driving arrangements.

Efficient, reliable truck transport has enabled America’s prosperity and lifted millions of families into the middle class. Yet the burdensome job conditions make finding drivers difficult. Automation could make both truckers and our economy better off and end the great truck driver shortage.

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

4 weeks ago

Can cleaning the ocean be marketed?

(4Ocean/Facebook)

Trillions of pieces of plastic are creating huge garbage patches in the world’s oceans. One company’s efforts to do something about this problem can lead us to rethink some perceived economic wisdom.

The National Oceanic and Atmospheric Administration estimates that two million tons of plastic enters the world’s oceans each year. Most of this waste results from irresponsible disposal. Ocean currents have created five major garbage patches. The most notable is the Great Pacific Garbage Patch between California and Hawaii, double the size of Texas and containing 1.8 trillion pieces of plastic. The patches are nuisances, can harm ocean life, and provide one rationale for banning plastic straws, silverware, and bags, although the wisdom of plastic bans is a topic for another day.

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Floridians Andrew Cooper and Alex Schulze witnessed the ocean trash problem while surfing in Bali and started 4Ocean in response. As the company’s website describes it, “Devastated by the amount of plastic in the ocean, they set out to find out why no one was doing anything about it.”
The problem was that no one could get paid to pick up the trash, and Mr. Cooper and Mr. Schulze hit upon an idea. For $20, customers can buy a 4Ocean bracelet made from recycled plastic and remove one pound of trash. To date, 4Ocean has removed more than 4.4 million pounds of plastic.
Can we trust that 4Ocean removes trash from the ocean? To assure customers, 4Ocean relies on Green Circle Certification. Green Circle provides third party certification of a variety of environmental claims, including recycled content in products, energy savings, and carbon footprint reduction. Companies like 4Ocean pay Green Circle to assess their operations. For certified claims, Green Circle lets the customer use their symbol and enters the product in their online database.

Certification seemingly faces a conflict of interest: Won’t Green Circle always certify the claims of paying customers? While this is a danger, ultimately a third party certifier really sells only its veracity. 4Ocean will only pay if Green Circle’s seal matters to potential customers. Green Circle, which has been in business since 2009, makes money over time only by being honest.

Third party certification has a long history. The case most studied by economists is Underwriters’ Laboratories, which tests consumer products for safety. The UL stamp assures insurers that lamps, toasters, and other products are not fire hazards.

How does this relate to government and environmental protection? Americans value protecting the environment, but conventional wisdom holds that business cannot make money protecting the environment. Any commercial venture must charge for its product or service, and normally does so by allowing only paying customers to get the product or service.

Yet allowing only paying customers to benefit from environmental protection is almost impossible: everyone benefits if the Great Pacific Garbage Pile is cleaned up. If businesses cannot market environmental protection, we will have to turn to government and taxes.

We have an incentive to let someone else clean up the ocean, but also like to contribute to good causes. 4Ocean taps into this sentiment, and their bracelet lets customers to show off their good deed. Environmental groups raise millions of dollars in a similar fashion. Charities do this too; Save the Children allows donors to learn the story of a child they “rescue.”

Proponents of government action will point with justification that the funds raised through markets to protect the environment are small relative to the scale of the problems. The 2,200 tons of plastic 4Ocean is just a drop in the bucket. Yet government efforts can be poorly funded, very costly, and of poor quality. The Government Accountability Office has repeatedly documented the flaws of the Energy Star labeling program.

Ultimately we must pay for environmental protection. Businesses and charities must deliver to continue being supported by their customers or patrons. Each success in marketing environmental protection enables a valuable alternative and should be celebrated.

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

1 month ago

Can we afford higher tax rates?

(Pixabay)

Several Democratic presidential candidates are proposing raising the top income tax rate to 70 percent. Proponents want tax hikes to stem worsening inequality and adequately fund the Federal government. Opponents contend that such high tax rates will significantly reduce economic growth.

Economists are famous for disagreeing, but we agree that if we tax anything, we will have less of it. Income taxes reduce the incentive to work and produce income. The extreme case of a 100 percent tax illustrates this. With a 100 percent income tax, a person working full time and earning $50,000 will have the same after tax income as if they did not work. Who will work for nothing?

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The Federal income tax is progressive, meaning that the marginal tax rate (the tax paid on the next $1,000 earned) increases with income. The highest current rate of 37 percent applies to income over $500,000. Marginal rates only apply to additional earnings. The tax rate on incomes over $1 million a year does not affect the taxes owed by Americans earning $100,000.

Diminishing marginal utility of income increases the disincentive of top rates. People value an extra $1,000 less when they have $500,000 than when they have $5,000. Millionaires can already pay for life’s necessities. A millionaire facing a 70 percent tax rate who could earn another million dollars might prefer to spend the money they have instead of working for $300,000 after taxes.

The 1980s tax cuts lowered top marginal tax rates from 70 to 28 percent to improve incentives, especially for the most productive earners. Elimination of loopholes made up for much of the revenue lost due to lower rates.

Evidence confirms the cost of high taxes. Internationally, higher tax rates are associated with slower economic growth. Domestically, people and income are migrating from high to low tax states. In 2016, New York lost $8 billion in personal income, while Florida added $17 billion.

Yet other evidence suggests that high taxes might not cost so much. First off, some billionaires continue to work. Anyone with more money than they could spend in a dozen lifetimes who continues to work must value something other than consuming more stuff. If so, will they work less in response to higher taxes? Indeed, despite a top tax rate of 90 percent until the Kennedy tax cuts in 1964, the 1950s and 1960s had the fastest economic growth of any decades since the end of World War II.

Creative economy workers frequently labor for modest monetary rewards. The Beatles complained in Taxman about Britain’s high taxes and yet created and performed their music. Digital copying has made making money from music difficult but has not killed off new music. Computer programmers contribute code for open source software for free.

The saying that money can’t buy happiness contains truth. We fill our closets, garages, and storage units with stuff (or junk). Netflix’s Tidying Up with Marie Kondo recommends throwing out anything not bringing us joy. Perhaps higher taxes will make us only buy things bringing joy.

After securing life’s necessities, many of the things people work for are positional goods. We value keeping up with (or ahead of) the Joneses, while billionaires try moving up the Forbes list of the 400 richest Americans. We cannot all acquire positional goods: everyone cannot have the nicest car. High tax rates might keep us from a fruitless pursuit of positional goods.

Can we integrate this conflicting evidence? For starters, the high-income tax rates of the 1950s were almost irrelevant due to loopholes. The interplay of monetary and nonmonetary motives is complicated, and people might react differently when high tax rates prevent earning extra income. And even if money cannot buy happiness, high taxes may make us quite unhappy.

Can we afford higher taxes? Yes, although taxes entail costs, and the costs rise with tax rates. We must decide whether we want the Federal government to play a large or small role in our economy and lives. A large role for Washington will require higher taxes, and these taxes will be costly.

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

1 month ago

Which Alabama city is the freest?

(Wikicommons)

Economic freedom is the freedom to engage in commerce and use our property as we see fit. Over the past 25 years, economists have developed measures of the economic freedom of nations and states. A new measure of the economic freedom of metropolitan areas (MSAs) allows us to answer which Alabama city has the most economic freedom?

Measuring economic freedom allows investigation of whether free markets deliver the benefits which economists like I promise. Dozens of papers now document how freer nations and states are richer, grow faster, have less inequality, and cleaner environments.

The Fraser Institute’s Economic Freedom of North America (EFNA) measures the freedom of U.S. and Mexican states and Canadian provinces. The EFNA’s lead author, Dr. Dean Stansel, has taken the state scores down to the MSA. This index will enable research on whether freer markets help explain the variation in prosperity within states.

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The index scores MSAs based on government spending, taxes, and labor market freedom. The ratings use the Census of Governments with data from America’s 90,000 governments, including cities, counties and school districts. Economic freedom is scored on a 0 to 10 scale, with 10 indicating the most freedom. The freest MSA is Naples, Florida, with a score of 8.55, while the least free is El Centro, California, at 4.22. Among MSAs with populations over one million, Houston is best at 8.00 and Riverside worst at 5.23.

Birmingham tops Alabama’s 12 MSAs with a score of 6.81, followed by Montgomery and Huntsville. Alabama’s least free metros are Dothan and Auburn-Opelika, with scores of just over 6.0, a relatively modest difference in freedom. If we dig deeper, Alabama’s metros have the best scores on the taxes component and the worst on labor market freedom.

Economic freedom seems to affect metropolitan income and growth. The freest cities have per capita income 6 percent above average, while the least free cities have income 5 percent below average. The freest MSAs also have significantly faster-growing populations.

I should point out that the index excludes zoning and land use regulation. Zoning makes construction of new housing almost impossible in some of America’s largest cities, preventing construction of higher density apartment buildings. An artificially limited supply increases housing cost.

MSA scores reflect the freedom rankings of their state. Cities from Florida and Texas, two of the freest states, dominate the top of the rankings while California and New York cities populate the bottom ranks. Alabama ranks near the middle of the states, and our MSAs reside in the middle of the national rankings. Among the 52 large MSAs, Birmingham ranks 26. Alabama’s other MSAs rank between 118 and 247 among the 330 MSAs with fewer than one million people.

Sizable differences in freedom exist among the cities of some states. MSA freedom exhibits a spread of 4.3 points across the nation. California, New Jersey, and Texas all have differences of over 2.2 points, or half the national spread. California is a relatively unfree state, but its freest MSA is San Jose, which has helped Silicon Valley’s growth.

Some within-state differences may result from scaling: many of the measures of freedom are scaled by income. This lowers the measured economic freedom of poorer MSAs. To see why, Alabama has no state minimum wage. The Federal minimum wage of $7.25 per hour is effective throughout the state. But when divided by MSA per capita income, measured freedom will be lower where income is lowest.

The differences within states illustrate something I call the Upstate New York Dilemma. Economic freedom is just one of many things people care about. Cities like New York, Los Angeles, San Francisco, and Seattle have lots going for them; people will tolerate high taxes and heavy-handed regulations to live in Manhattan. Many fewer people will accept burdensome government to live in snowy and cold Buffalo or Rochester.

No measure of economic freedom will be perfect. Yet once we measure something, we usually readily improve and refine the measurements. The early returns suggest that economic freedom affects the prosperity of Alabama’s cities.

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

2 months ago

Is climate policy debatable?

(G. Skidmore/Flickr)

President Trump is creating a Presidential Committee on Climate Security to scrutinize climate science. Princeton University physicist William Happer has been identified as a possible committee chair. Environmental groups consider Mr. Trump’s proposal heretical and label skeptics as climate change deniers. Nonetheless, I think that climate science, the environment, and our democracy will all benefit from this committee.

Why should we debate a settled question? Isn’t there “97 percent consensus” among scientists on climate change, and haven’t the Intergovernmental Panel on Climate Change (IPCC) and National Climate Assessment (NCA) already determined that we face a crisis?
Climate consensus studies rely on reviews of published papers or surveys of scientists. The relevant scientific question is not whether humanity’s use of fossil fuels raises global temperatures, but rather the magnitude of this impact. The consensus is illusory as agreement on the first question is billed as consensus on the second question.

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The IPCC produces two documents, literature reviews conducted by scientists, and a “Summary for Policymakers” dictated by politicians. The media frequently reports only the “Summary,” which is really an advocacy document for climate alarmism. Surveys of IPCC scientists reveal far less confidence in the conclusions the Summary offers.

The 2018 NCA report received much media coverage for its dire predictions, but commentators noted numerous flaws. Roger Pielke, Jr., concluded that the NCA’s authors “have given a big fat gift to anyone who wants to dismiss climate science and policy.”

A significant body of scientific evidence disputes claims of an impending climate catastrophe. Interested readers can check out the two editions of The Nongovernmental Panel on Climate Change’s Climate Change Reconsidered. Critically assessing the conflicting evidence is a task for the Presidential committee.

What constitutes an existential threat? The NCA projects that climate change might lower GDP by 10 percent, but that’s not the dire future depicted in Kevin Costner’s movie Waterworld. We can respond to a climate threat in multiple ways: mitigation, or reducing human-caused emissions of greenhouse gases; adaptation, or adjusting how we live to a warmer climate; and climate engineering, or reducing atmospheric carbon dioxide while still using fossil fuels. How to address climate change is an economic question. Exactly which questions does the “settled” climate science settle?

If climate change is an existential threat and we address it solely through mitigation, all nations will likely need to stop using fossil fuels within a few decades. This will require a significant expansion of government control over the economy. The impacts on our lives of ending the use of fossil fuels will be enormous.

In political discourse, is more government control over the economy a means of preventing cataclysmic climate change, or an end in itself? Proponents of markets and economic freedom will understandably demand better evidence to conclude that we face an existential threat than liberals.

Debating climate science today may also help protect the environment. Without widespread acceptance that we must bear the enormous costs of ending the use of fossil fuels, the required policies will prove politically unsustainable. President Obama did not submit the Paris Climate accord for Senate ratification and did not invite an open debate. This allowed President Trump to withdraw via executive order. Did avoiding debate help stem climate change in the long run?

Liberal democracy is based firmly on the belief that governments serve the interests of citizens. Americans can disagree on taxes, government spending, and regulation and maintain a liberal democracy in America as long as we accept the legitimacy of each other’s beliefs. Accepting the right to disagree means using words, ideas, and arguments to advance our favored positions and accept compromises when necessary.

The use of the term “climate change denier” is part of a trend which threatens liberal democracy. The term equates skepticism about hypothesized climate impacts decades in the future with denial of the Holocaust. This declares disagreement over climate policy illegitimate. We will not be able to preserve democracy if many Americans are not allowed to advocate for their favored policies through the political process.

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

2 months ago

Vaccines, reason and freedom

(Wikicommons, Pixabay)

The current measles outbreak has brought new criticism of parents who refuse to vaccinate their children over vaccine safety concerns. Measles was declared to be eradicated in the U.S. in 2000, and yet this year alone, 550 cases have occurred through the second week of April. Anti-vaccination attitudes, I think, reflect a decline in trust in government.

The research “anti-vaxxers” cite linking vaccines to autism, multiple sclerosis and other ailments, has been called “junk science.” The Centers for Disease Control and the Food and Drug Administration have pronounced vaccines safe. Physicians promoting the “danger” have faced professional censure. Despite this, I do not see the safety of vaccines as allowing us to dismiss the anti-vaccination position.

In a free nation, the government serves the people, not the other way around. Freedom means making decisions for ourselves based on our values, beliefs and assessment of risks. We do not have to justify our decisions to others, even experts. If so, then why should those of us who believe that vaccines are safe force our assessment on others?

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Parental rights differ from personal rights, as parents make decisions for their children. We recognize that parents who neglect or abuse their children should lose (at least temporarily) their parental rights. Parents should be afforded freedom to raise and protect their children as they see fit unless they abuse these rights.

Hard cases arise when parents choose faith healing and prayer over effective medical treatments. The dilemma stems from a conflict between personal and parental rights: the child hypothetically could wish to receive medical treatment. Respecting the child’s rights might require restricting parental choice.

Can we justify mandatory vaccination similarly? Several required vaccinations are for generally non-life-threatening illnesses like chickenpox, mumps, and even measles. People feared and dreaded polio before Dr. Salk’s vaccine; chickenpox was a two-week vacation from school. Preventing a brief absence from school is not grounds for trumping parental rights.

Immunization, of course, protects others besides the vaccinated. Economists call this a spillover or external benefit, which people may well ignore in vaccination decisions. An important spillover here is protecting persons with compromised immune systems who cannot be safely vaccinated.

Many economists believe that external benefits justify government mandates. I disagree, because the person immunized still benefits the most. If the person getting immunized (or the parent) believes that the cost exceeds the benefit, a small spillover benefit is unlikely to alter the balance.

Nobel prize-winning economist James Buchanan offered a better way to think about such cases. Politics, Buchanan contended, is an exchange constraint on ourselves: I agree to vaccinate my son in exchange for other parents vaccinating their children. A similar argument applies to taxes – I agree to pay taxes because you will be made to pay.

We will never all agree on any decision of significance. Government though involves the exchange of numerous constraints, and we may benefit from the package as a whole. For instance, all states require vaccination against eight viruses for school children. We might disagree with one or two of the requirements and still abide by the mandate.

Whether government constraints benefit us depends on whether we trust that politicians act in our best interest. Differences in state vaccination requirements highlight this tension. All states require vaccination against eight illnesses, typically through four shots. Beyond this, 43 and 13 states require immunization for Hepatitis B and Hepatitis A respectively. Connecticut requires nine shots; Alabama requires only four. If immunizations reflect a clear public health consensus, why do state requirements differ?

Politics and not just public health influences requirements. Debate over the relatively new HPV vaccine, which can prevent cervical cancer, reveals this. Two states and the District of Columbia require the vaccine, which costs over $200, and makers Merck and GlaxoSmithKline have lobbied lawmakers in other states for mandates. Political considerations and campaign contributions shape vaccine mandates.

Can we really trust that our politicians impose mandates on us based exclusively on our interests and sentiments? Unfortunately not. One consequence of this lack of trust is anti-vaccination skepticism.

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

2 months ago

Why the rise in socialism?

(El Borde/Youtube, G. Skidmore/Flickr)

Those of us old enough to remember the fall of the Berlin Wall and the breakup of the Soviet Union probably thought we had seen the last of socialism. The idea of government planning of an economy, once billed as “scientific socialism,” seemed consigned to the dustbin of history.

Times certainly have changed. Self-described socialist Bernie Sanders received over 40 percent of the votes in Democratic primaries in 2016. Candidates aligned with the Democratic Socialists of America did unexpectedly well in 2018, with Alexandria Ocasio-Cortez elected to Congress from New York. Polls show almost equal support for socialism and capitalism among persons under age 30. A recent New York magazine article asked, “When did everyone become socialist?”

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What has changed? To explore this question, the Johnson Center will sponsor a debate on “Capitalism vs. Socialism in America Today” on April 10. Debating will be Dr. Bryan Caplan, a professor of economics from George Mason University and Dr. John Marsh, a professor of English from Penn State University. I expect an informative and entertaining exchange.

The debate will focus on socialism today. Government planning went badly in the 20th Century in the Soviet Union, China, and Eastern Europe. But does this matter for socialism in America now? Proponents of capitalism see the horrors of communism and the continuing tragedies of North Korea and Venezuela as proof of socialism’s failure.

I suspect many of today’s socialists dismiss this history, and not without reason. Consider the Soviet Union. The Bolsheviks came to power via a revolution and almost immediately faced a civil war and an international invasion in which America participated. In addition to creating economic stress, the military threats arguably pushed the Soviet Union down an authoritarian path. Vladimir Lenin saw violence as a means to an end; Joseph Stalin was merciless. After Stalin’s terror famines, purges, and gulags, there was little chance for a functional regime.

Does socialism inevitably descend into tyranny? Economist Friedrich Hayek argued so in his influential book The Road to Serfdom. I agree with much of Hayek’s argument, and yet Britain demonstrates otherwise.

Beginning after World War II and through the 1970s, Britain under Labour party governments would qualify as socialist. Britain had (and still has) the National Health Service, the single-payer system inspiring Medicare-for-All. Government control went much further. Coal mines, steel mills, railroads, airlines, telephones and shipbuilding were all nationalized. Television and radio were dominated by the government-funded BBC. Even automakers Rolls Royce and British Leyland were government-controlled.

The election of Margaret Thatcher and the Tories in 1979 greatly changed Britain. Yet the “Thatcher Revolution” was only figuratively a revolution. The Labour Party never sent Mrs. Thatcher to a gulag. Britain’s economic performance in the 1970s can be debated, although I believe that 26 percent inflation, blackouts due to striking coal miners, and an International Monetary Fund bailout demonstrate malaise. That Britain remained democratic is not debatable, and Labour was eventually voted out of office peacefully. Socialist Francois Mitterand’s election as president did not end democracy in France either.

I believe that today’s proponents sincerely see socialism as advancing the well-being of Americans. This is a significant point because capitalists typically see socialism as essentially oppressive. As Margaret Thatcher put it, there are “only two ways of governing a country,” socialism where “what matters is not the people but the State,” and “a free economic system.” Capitalists dismiss leaders’ professions that socialism serves the people as propaganda.

I see this as perhaps the greatest point of contention today. If the alternatives are freedom or socialism, it’s hard to see how anyone could be attracted to socialism. Is it possible to keep a government powerful enough to restructure economic relations subordinate to the will of the people?

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University. For more information on the debate, email johnsoncenterevents@troy.edu.

3 months ago

Taxes, roads and limited government

(Luke AF Base)

The Alabama legislature kicked off its new term with a special session to increase the gas tax, a result which seemed foreordained. Nonetheless, the gas tax raises interesting economic and political considerations.

Our gas tax is currently just under 21 cents a gallon, which ranks 41st nationally according to the Tax Foundation, or 36th if we adjust for state hourly wages. Pennsylvania has the highest gas tax at nearly 59 cents a gallon, and eight other states have taxes in excess of 40 cents. The proposed 10 cent increase over three years would put our tax 23rd, 17th when adjusted for income.

Over eighty percent of Alabama’s tax revenues are earmarked for specific purposes, the most of any state. The gas tax is dedicated for highways, so the new revenues should go to road improvements. Revenue sharing will allow counties to repair their roads as well.

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Alabama has many roads and bridges needing repairs. According to the Federal Highway Administration, we had 1,200 structurally deficient bridges at the end of 2017. I can’t say exactly what this means, but structurally deficient doesn’t sound like a compliment.

An earmarked gas tax functions as a user fee, which implements the “benefit principle” of taxation. Citizens who benefit the most from roads will pay a larger share of the cost of repairs. The Tax Foundation, which generally opposes taxes, likes gas taxes: “Because they adhere to the benefit principle, gas taxes … are the revenue tools most suitable for generating the funds needed to maintain and repair public roads over time.”

Unfortunately, lower-income families spend relatively more on gas, making the gas tax regressive. This means that lower-income households pay a higher percentage of income in taxes. The gas tax does poorly on the ability to pay principle of taxation. This would not be as problematic if Alabama did not rely on regressive sales taxes for so much state and local tax revenue.

The failure to invest adequately in roads costs our state and nation. Twenty one percent of highways nationally have poor pavement condition, which costs Americans $120 billion annually in added repair costs, or over $500 per driver. Traffic congestion costs Americans another $160 billion in lost time and wasted gas. Forty percent of urban interstate highways are congested. Congestion is arguably due to a failure to expand road capacity.

Despite our low gas tax, Alabama’s roads and bridges are not, relatively speaking, in poor shape. Seven percent of our bridges are structurally deficient, which ranks 30th among states, and only two percent of our highways have poor pavement condition.

Is a tax increase truly necessary to maintain our roads? The general wastefulness of government, like the Pentagon spending $4.6 million in lobster and crab in one month for military contractors, probably gives many Alabamians pause. If Washington, Montgomery, and our cities and counties spent our tax dollars wisely, they’d probably have enough money to fix our roads.

While we should never tolerate government waste, waste is unavoidable because costs are very hard to assess. We also place many legal requirements on government contractors, increasing costs. Government waste does not change the reality that road maintenance requires resources. If we wait to eliminate all government waste before approving new taxes, our bridges and roads will likely have crumbled.

Unwillingness to pay taxes can lead states to seek alternative revenues. You’ve probably seen signs along roads warning of damaged guardrails. Tennessee bills drivers who damage guardrails in accidents to avoid spending tax dollars. This policy led to the family of a teenage girl killed in 2016 when her car hit a median guardrail being billed $3,000 for repairs. We may not like taxes, but alternatives can be more offensive.

Alabama has some of the lowest state and local taxes, so perhaps we shouldn’t complain about the gas tax hike. I would suggest that fiscal conservatives must also ask government to do less for us. Limited government does not mean big government on the cheap.

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

3 months ago

Is economic freedom killing people?

(Pixabay, AF Medical Service)

I frequently extol the virtues of economic freedom, which generally produces prosperity and rising standards of living. However, could economic freedom possibly be contributing to America’s opioid crisis and its tragic deaths?

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Fox News’ Tucker Carlson suggests so in his book Ship of Fools. The argument deserves a hearing, especially with proponents of free markets. The costs of today’s malaise are undeniable. As Mr. Carlson writes, “If you’re a middle-aged American man, you probably know at least one peer who has killed himself in recent years, and maybe more than one.” The statistics are grim: a 43 percent increase in suicides among middle-aged men, a quadrupling of opioid-related overdose deaths, ten percent of men between 25 and 54 out of the workforce. Suicides and overdoses are reducing life expectancy.

The loss of jobs in manufacturing and mining provides a plausible economic cause. Academic research links job loss with a loss of self-esteem, depression and family breakup. It is a short step to addiction, and the geographic concentration of job loss coincides with opioid addiction. The role of international trade, automation, and immigration specifically implicates economic freedom. Businesses have moved jobs overseas, automated jobs, and hired inexpensive immigrants, boosting profits while eliminating jobs supporting middle-class families.

Is economic freedom truly to blame? In one sense we must say no, because economic freedom enabled the factories which lifted families into the middle-class. The effect must be through interaction with other economic forces. As Mr. Carlson writes, “Someone needs to protect workers from the terrifying power of market forces, which tend to accelerate change to intolerable levels and crush the weak.” Globalization and automation may be occurring too fast for people to cope due to economic freedom.

Some economists would contend that displaced workers just need to learn new skills and find new jobs. Artificial intelligence will not end work and unemployment is at record lows. This may be the best time to ever have to switch careers. Yet I agree with Mr. Carlson that this response is lame. It’s like telling someone not to get depressed over the death of a family member. People inevitably have difficulty accepting that what they have done for years is no longer needed, and the new job almost surely won’t pay as much as the factory.

Something more fundamental seems to be happening. The failure of numerous manufacturers over the decades – like Studebaker, Packard and Pullman – never produced such dramatic consequences. What we are witnessing is the end of the need for thousands of jobs in steel or auto plants for decades. Smart robots will be doing any new job long before employers need to hire thousands of workers. Work will be fleeting.

This has, I think, broken down a long-standing informal deal. I’ve previously called this the “Allentown economy,” in honor of Billy Joel’s awesome and prescient 1982 song. One line went, “For the promises our teachers gave, If we worked hard, If we behaved.” Do as authority figures (teachers and later bosses) ask and life will be good. A middle-class standard of living was never gifted to workers; their work in factories helped make America prosperous.

The implicit deal’s breakdown explains the extent of today’s malaise and the inadequacy of retraining. People willing to follow direction and work hard are no longer so needed. The Allentown economy was not created as part of anyone’s grand design. The deal worked and so people went along.

Is there a solution to the breakdown of the deal? Unfortunately, the complex social problems rarely admit easy solutions. Our economy is much more complicated than, say, a derailed train. Any solution may excessively curtail market forces.

Economic freedom allows people to craft lives they want to live. America today almost surely has more prosperity and innovative ways to earn a living than ever. Yet millions of Americans cannot find a life worth living. This is a tragedy, whether attributable to economic freedom or not.

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

4 months ago

Amazon is not the king of Queens

(NBC News/YouTube)

Amazon announced last year that it would build part of its new second headquarters facility, dubbed HQ2, in Queens, New York. In February, Amazon abandoned these plans. The episode offers insights on government-business relations in America today.

The saga began in September 2017 when Amazon requested proposals from cities to host HQ2 and its expected 50,000 jobs. The 238 proposals were cut to twenty finalists in January 2018. In November Amazon announced a split of HQ2 between Long Island City and Arlington, Virginia.

Opposition in New York arose in part from the estimated $3 billion package of tax exemptions and targeted spending offered to Amazon. HQ2, for instance, would get its own heliport. Handing $3 billion in incentives to one of the world’s biggest companies and the world’s richest person, Jeff Bezos, understandably provoked anger.

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Targeted incentives for select businesses are commonplace in America today, even though I prefer lower taxes and regulation for all businesses. The New York tax exemptions, $2 billion of the $3 billion deal, must be viewed relative to the $27 billion in taxes the city and state were projected to collect from Amazon. This makes the exemptions look more like a loyal customer discount than a straight giveaway.

Neither the city nor state had approved the incentives as of November’s announcement. For that matter, Virginia lawmakers also still had to approve their incentive package, which they did. The appointment of State Senator Michael Gianario, an ardent foe of the deal whose district includes Long Island City, to New York’s Public Authorities Control Board, which could block the deal, signaled a potential roadblock.

HQ2 suggests that incentive packages may not be vital in business location decisions. Newark, New Jersey, offered Amazon a more generous deal ($7 billion) than New York. And Maryland also outbid Northern Virginia. Academic research fails to find clear links between incentives and location choices. Businesses might be playing cities to get a better deal where they plan to locate.

Amazon’s pullout also illustrates the consequences of secretly negotiated incentive deals. HQ2 was relatively public, as the media reported both the 20 finalist cities and many details of the incentive packages. Often, deal-making remains more hidden. Alabama cities use code names for businesses being recruited, like in a spy novel.

I understand businesses’ desire for secrecy, but incentives still rightfully require political approval. From a strategic point of view, secrecy likely forces the hand of politicians not participating in negotiations. The deal announcement creates perceptions of a fait accompli and gives opponents little time or opportunity to rally support.

That Amazon desires an HQ2 outside of Seattle also makes sense, given the city’s recent anti-business measures. Most notable was 2018’s (eventually repealed) “Amazon tax,” a $275 annual tax per employee on large businesses to fund low-income housing. Seattle has also enacted a special income tax on individuals earning over $250,000 a year and a $15 per hour minimum wage.

These policies could readily reflect West Coast liberal politics. Or politicians may be taking advantage of Amazon’s considerable costs of relocating. Amazon has 45,000 employees in Seattle, with families and lives making them reluctant to move. Businesses often bear burdensome taxes and regulation before moving, allowing politicians space to do things which they think will improve their city.

New York behaves similarly. The financial, banking, fashion, and art industries are unlikely to relocate, and the Big Apple offers a unique lifestyle. People accept the nation’s highest state and local taxes, laws preventing building which keeps apartments almost unaffordable, and burdens like their taxi regulations to live in New York. Why did Amazon think that life would be different in New York than Seattle?

After competing vigorously for HQ2, some in New York decided that the prize was not worth having. The bidding for businesses has been called an economic war between the states. Perhaps it is time to negotiate peace.

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

4 months ago

The house that survived the hurricane

(Sand Palace of Mexico Beach/Facebook)

Last October, Hurricane Michael slammed the Florida panhandle with 155 mile per hour (mph) winds. Mexico Beach was largely destroyed, except for one exceptional, and now much reported on, house called the Sand Palace. Does it offer a guide for building for the future?

Strengthening buildings to reduce damage from natural disasters is called mitigation, and is a topic I have researched. I can’t tell anyone how much they should spend to strengthen their home, but I can help you think about this question.

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Engineers can design buildings to pretty much withstand nature’s extremes. The Sand Palace was built to withstand 240 mph winds. It is built on 40-foot pilings with one foot thick concrete reinforced walls. Steel cables anchor the roof. Florida’s 2001 building code requires construction to withstand 120 mph winds, and existing homes were not required to be brought up to the code. The Sand Palace was built to survive a hurricane like Michael, while surrounding structures were not.

How much extra did the hurricane-proof design cost? Owners Lebron Lackey and Russell King of Tennessee think that it added 15 to 20 percent to the cost. Let’s round up and say 20 percent. The 20 percent is added “only” to the cost of the structure, not total property value. The home for a $700,000 listing might only cost $400,000, so the added cost would be $80,000.

The full cost of mitigation, though, exceeds $80,000. Hurricane-proofing altered the Sand Palace’s design, reducing the number of windows, scrapping a planned balcony, and only a small roof overhang. The design diminished the enjoyment provided by the residence and is part of the cost.

Still, spending $80,000 to prevent destruction of a $400,000 home (and protect the contents and residents) sounds like a good deal. Especially if we knew the home would be struck by 155 mph winds within a year of construction. Yet hurricanes as powerful as Michael, rated at the very top of Category 4 of the Saffir-Simpson hurricane wind intensity scale, are rare. Only three highest-rated Category 5 hurricanes have hit the continental United States since 1900, with only Camille striking the Gulf Coast.

The Sand Palace’s engineering primarily prevents destruction from a really powerful hurricane. Yet since World War II, only two parts of the Atlantic and Gulf coast have experienced winds stronger than Michael’s. Spending $80,000 to prevent a disaster likely to never happen is less attractive.

Timing also matters. While the return on the Sand Palace’s construction occurred within a year; the owners might have waited fifty years for a Michael-type storm to hit. Time is money. The money invested in mitigation, if invested in stocks or real estate, could easily have yielded enough money to replace the home after a monster hurricane fifty years in the future.

Valuing mitigation involves even more details. The design will likely reduce losses from weaker hurricanes, storm surge, and tornadoes. We would also need the exact cost of hurricane-proofing for homes of different sizes and designs plus hurricane landfall probabilities by Saffir-Simpson category.

The calculations can only tell if the investment is worthwhile given all the assumptions made. The value of mitigation depends on how we value protecting ourselves, our loved ones, and our possessions. Two people can reasonably disagree about whether a hurricane-proof design is worth the cost. Neither is wrong, because the values are personal.

This is why building codes, I think, provide a poor way to encourage natural hazards mitigation. Building codes don’t encourage; they force everyone to build to the specified level of wind resistance. Mr. Lackey and Mr. King decided that the Sand Palace’s resilience was worth the cost, and many others will likely follow their example. Yet Florida’s 120 mph building code likely already makes many homeowners spend more on mitigation than they desire.

Just because we can build homes to resist the strongest hurricanes does not mean that we should. No single level of protection is right for everyone when the values at stake are personal.

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

Gold, inflation and theft

(YHN, Pixabay)

President Trump is reportedly considering former Godfather’s Pizza CEO and one-time presidential candidate Herman Cain for the Federal Reserve Board of Governors. Mr. Cain’s potential selection caused a stir for at least three reasons: accusations of sexual harassment which surfaced during his presidential run, a lack of training as an economist, and his advocating a return to a gold standard in a Wall Street Journal op-ed. Gold standard proponents perplex monetary economists because, I think, they raise primarily moral rather than economic arguments.

Today most nations have government currencies managed by a central bank, like our Federal Reserve. Government monies are paper currencies, in contrast with the commodity or metallic monies of history. The dollar is money because the Federal government declares it to be. As each dollar states, “This note is legal tender for all debts, public and private.”

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Governments, though, did not invent money. Indeed, no one invented money; it emerged through the economic actions of people, particularly specialization in production and trade. A cobbler must trade the shoes she makes for food, clothing and other things. Without money, the cobbler must use barter, and find a farmer, blacksmith and clothier willing to take shoes for payment.

Trading is easier to carry out when everyone accepts the same item in exchange for shoes, clothes, food, and everything else. This is money’s role. A commodity becomes money when people who do not want it for their personal use accept it in trade. No one person hit upon this idea and ordered everyone to use gold or silver as money. People saw how money made life easier. Money is an institution created by human action but not the product of human design.

Money must maintain value to be useful in trading. If the money the cobbler accepts for her shoes disappeared or became worthless before she could buy food and clothes, she would get shortchanged.

Counterfeiting threatens money. Today counterfeiters try passing off fake dollars for real dollars. Counterfeit currency allows people to acquire valuable goods and services without giving up anything of value. A law-abiding person’s money, if not a gift, represents something of value not yet traded away, unspent earnings, or a person’s time and effort. Counterfeiters effectively steal from people who acquire money honestly.

Taking over supplying money allowed kings, and today governments, to create money not backed by production. No one could create commodity or metallic money out of nothing; alchemists tried in vain to turn lead into gold. Discoveries of gold or silver create riches, but still provide economic value – more gold to use as money.

Under the gold standard, dollars were convertible into gold at a fixed rate. When the dollar was convertible at $35 per ounce, the supply of dollars was limited to $70,000 for every ton of gold reserve. The U.S. eliminated the domestic convertibility of dollars in 1933 and abandoned the last vestiges of a gold standard in 1971.

Deliberate expansion of the money supply typically produces inflation and taxes everyone holding dollars. Modern monetary economists argue that the “tax” from inflation, or seigniorage, is typically very small, while control over the money supply can help stabilize the economy. Today the effective money supply exceeds the amount of currency in circulation, creating the potential for banking crises to destabilize the economy.

Economists recognize the potential for governments to create too much money. Inflation, for example was a significant problem in the 1970s. Central bank independence, however, can curb politicians’ control over the money supply: enlightened monetary economists running the Federal Reserve will manipulate the money supply to our nation’s benefit.

Monetary economists presume that whether governments should provide money was settled long ago and focus instead on managing our economy. Gold standard proponents want to relitigate this question, in large part to end the government’s ability to take wealth from citizens through inflation.

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

Should we tax greenhouse gases?

(401kcalculator.org)

A group of distinguished economists, including Nobel prize winners and past Council of Economic Advisors members, recently supported a carbon tax. While the economic case for such a tax is strong, I nonetheless think the policy is ill-advised. Today let’s consider the economics of a carbon tax.

A carbon tax would limit emissions of greenhouse gases, most notably carbon dioxide, due to their impact on global warming. The tax differs only subtly in effect from the “cap and trade” policy considered by Congress in 2010; I will not consider the differences here. A tax is probably the best way to limit greenhouse gases if we choose.

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The economists propose replacing regulations and other policies to limit fossil fuels or encourage alternative energy – from the Clean Power Plan to tax credits for electric cars – with the carbon tax. This makes perfect sense. The pollution problem arises because actions like burning gasoline in a car effectively use clean air without the driver or oil company having to pay for it. The price is too low, resulting in too much pollution.

Economist A. C. Pigou hit upon a solution almost a century ago. Tax the good, or better yet the pollution, the amount of damage to the environment. The tax gets reflected in the price, and we can then let prices coordinate economic activity and protect the environment.

Prices never prohibit any activity for which someone is willing and able to pay. This is a huge advantage relative to regulation. A carbon tax ensures that we can use fossil fuels for highly valued activities like powering jet planes or running generators for hospitals during blackouts. Regulations often prohibit highly valued uses, causing significant costs.

Quantifying environmental damage is always challenging, and the impacts of global warming will not occur for decades. Any tax we impose now must rely on climate models to estimate future impacts. Integrated Assessment Models pioneered by 2018 Nobel Prize-winning economist William Nordhaus show how to value the estimated climate impacts.

Economic analysis shows that the carbon tax should increase over time. Fossil fuels become more expensive in a predictable manner. These rising prices provide the incentive to invest in electric cars or solar or wind energy without direct subsidies.

A carbon tax would also hit “alternatives” to fossil fuels generating significant carbon dioxide emissions. Ethanol blends corn with gasoline and is subsidized as a clean fuel. Yet growing corn uses fossil fuels to power tractors, harvesters, and irrigation equipment. We can avoid wasting money on politically favored non-solutions.

Using pollution taxes to fund government offers another benefit. When we tax anything, we get less of it. Taxing income, investment, or employment leaves us with less of things which drive prosperity. Each dollar in taxes raised costs the economy more than a dollar. When we tax pollution, we get less of a bad thing.

The economists propose rebating carbon tax revenue to Americans as a climate dividend. This also makes sense. A carbon tax will increase energy prices and poor Americans spend more of their income on energy than others. A carbon tax would be regressive, falling more heavily on lower income families.

Each household’s climate dividend would be an equal share of the tax revenue. Poorer households spend a larger share of their income on energy, but high-income households consume more energy. Low-income households should receive a dividend larger than carbon tax paid.

Rebating the revenue might seem to just reverse the tax. Yet this is not true provided that the revenue is not refunded exactly as collected. If paying an extra $50 tax increases our climate dividend by exactly $50, then the refund cancels the tax. If I pay an extra $50 tax, it will be divided among more than 100 million households, so effectively I get none of it back.

A carbon tax makes economic sense, particularly if we eliminate other climate change regulations and alternative fuels subsidies. But the political process does not always employ policies as economists suggest. There’s more to this story than just economics, although the rest of the story will have to wait until next time.

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

5 months ago

Is anything an accident?

(CNN/YouTube)

California Attorney General Xavier Becerra has suggested charging Pacific Gas & Electric (PG&E) with murder in connection with last November’s Camp Fire. The deadliest wildfire in California history, Camp killed 86 people and destroyed the town of Paradise. A cause has not been officially determined, but evidence suggests that PG&E electric transmission wires may have started the blaze. The case illustrates a conundrum implied by the economics of accidents.

I do not wish to accuse PG&E of starting the Camp Fire; that is to be determined. But Mr. Becerra’s comments, numerous lawsuits already filed, and news reports of PG&E’s potential bankruptcy, I think, justify this discussion. I am not a lawyer and wish to focus on the economics, not the legal requirements of sustaining murder charges or winning a civil lawsuit.

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The fire was not deliberately started and so in this sense was an accident. But could it have been avoided? Quite likely. Better maintenance on transmission lines and towers could have prevented aging, sagging power lines from sparking. Trimming trees would make high winds less likely to bring down power lines.

PG&E could also have shut down parts of the electric grid on high fire risk days. The company formalized planned blackouts to prevent wildfires earlier in 2018 and shut off power to over 60,000 customers on a high risk day in October. Southern California utilities have also used blackouts to prevent wildfires.

Power lines, of course, are not the only cause of wildfires; lightning and other human actions and carelessness are also causes. All power line related fires, however, could be prevented through enough maintenance, tree-trimming, and blackouts. If the Camp Fire could have been prevented, was it truly an accident?

Diligence and safety can prevent most types of accidents. Workplace accidents claimed over 5,000 lives in 2017. The Occupational Safety and Health Administration has helped reduce workplace accidents significantly over the past fifty years. Still, more can always be done. Railings prevent falls; taller, sturdier railings make falls even less likely. Safety nets can help as well.

Auto accidents kill 35,000, injure millions, and cause billions in property damage each year. Most traffic accidents are due to driver error, mechanical failures, and unsafe roads and bridges and are preventable. Highway redesign could further reduce accidents. And driving very slowly – imagine a 25 mph national speed limit – would dramatically reduce accident severity.

Should we prevent all fires, workplace accidents, and highway crashes? Economics recommends balancing the benefits of preventing accidents against the costs. Such balancing will almost certainly involve accepting some accidents. Even if we think that human lives are infinitely valuable and should be saved whenever possible, accidents often involve fatal consequences either way. For instance, blacking out hospitals and nursing homes can cost lives. We will almost certainly choose a level of safety resulting in some accidents.

If we deliberately choose less than perfect safety, are the fires, workplace mishaps, and traffic crashes truly accidents? This is debatable. We know that drunk drivers do not intend to maim people, but we consider this act so reckless as to be criminal. Some commentators think that deaths from workplace accidents and product defects are best viewed as corporate murder.

Personally, I think that an important difference exists between mishaps occurring while pursuing a valuable and ethical goal and intentionally harming others. Still, many Americans find evaluating accident tradeoffs too explicitly discomforting.

This is costly. As Vanderbilt economist Kip Viscusi notes, corporate America lags behind in applying risk analysis. Jurors find it offensive when a business determines how much it would cost to prevent deaths due to product design flaws or workplace risks and still chooses not to eliminate the risk. Because risk analysis seems to trigger mega-verdicts, businesses forego the analysis. Yet a lack of analysis merely leads to bad decisions, not safety.

Economics suggests that perhaps nothing is an accident. But as humans, we can intuitively distinguish intentional harms and unfortunate events. However we resolve the conundrum, ignorance of risk analysis is definitely not bliss.

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

Controlling the price of drugs

(AF Medical Service)

Can the government lower the price of prescription drugs? The effects of price ceilings provide a cautionary warning, even though price controls appear to work in other countries. Unfettered competition generally provides a more effective way to keep prices in line with costs.

Several government efforts seek to lower drug prices. The Trump Administration has proposed basing Medicare Part B prices on international prices. The Department of Health and Human Services found that the U.S. had the highest average price for 27 drugs, almost double the international average. Forty six states are suing 15 generic drug makers for price fixing. Senator Elizabeth Warren wants the Federal government to manufacture generic drugs to eliminate profit-seeking.

Price ceilings demonstrate government’s rather limited ability to reduce prices and ensure adequate supplies. A price ceiling is a legal maximum price for a good. For instance, a law might set a maximum price for gasoline at say $2 a gallon and prosecute anyone selling for more. Would this ensure drivers reasonably priced gas?

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Not really. Market transactions require a willing buyer and seller. Businesses aren’t charities and will not operate at a loss. While occasionally businesses sell at a loss, they must normally expect to cover costs.

A price ceiling does not require any firm to sell. If the wholesale price of gasoline were $2.50, a station facing a $2 price ceiling will shut down. Price ceilings set below the market price produce shortages, meaning that some consumers will go without.

Price ceilings have long been popular with emperors and legislatures, as Forty Centuries of Wage and Price Controls details. Price controls were included in ancient Babylon’s Code of Hammurabi and contributed to the suffering of George Washington’s army at Valley Forge. A lower legal price appears to benefit consumers but does not make the good available.

Pharmaceutical companies charge more than $10,000 a month for some cancer drugs. To the extent that such prices reflect costs of research, development and manufacture, setting a $5,000 legal maximum price will reduce the quantity of drugs available. A shortage of life-saving drugs costs lives.

The development and approval process accounts for much of the cost of drugs. According to Tufts University’s Center for the Study of Drug Development, the development costs for drugs that reach the market are $2.6 billion. The cost of manufacturing many drugs is often low. Price controls may not prevent sales of already developed drugs, but rather reduce development of new drugs.

If price controls are generally ineffective, why do other countries pay less for prescription drugs than we do? Restrictions on importation allow the same drug to sell at different prices in different countries. If a company sells at a price covering most of the development cost on the U.S. market, it could accept a lower price in Europe. This makes price ceilings appear effective. Yet someone must pay for development costs. If we match other nations’ low prices, we may not have future wonder drugs.

Instead of resorting to price controls or litigation, I think we should try more competition. Let’s let pharmaceutical companies undercut each other’s prices in the pursuit of profit.

Two sets of policies currently limit competition. One is patents for medicines. Patents grant inventors a temporary monopoly to allow them to earn back the costs of research and development. The second is the Food and Drug Administration’s (FDA) approval, which requires demonstration of a new drug’s safety and effectiveness. Limiting competition facilitates price fixing as well.

Limited competition in generic drugs, whose patents have expired, illustrates the vulnerability of government rules to manipulation for profit. Generic drugs copy successful drugs and are clearly safe and effective, yet the FDA’s approval process limits the number of producers. Smart and greedy companies profit by manipulating the rules, like finding generics without approved alternative producers and raising the price.

More government regulation will not end the profitable manipulation of government rules, it will only create more rules to manipulate. Streamlining the patent and drug approval processes offers a better path to a steady supply of reasonably priced pharmaceuticals.

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

5 months ago

Are our highways less safe?

(YHN/Pixabay)

Highway fatalities have increased from under 33,000 in 2014 to 37,461 in 2016, before declining slightly in 2017. Many have speculated whether drivers distracted by smartphones have caused this increase. Before further restricting driving, we should examine the problem.

The recent increase in fatalities is unsettling because driving has become safer over time. Fifty years ago, over 50,000 Americans died annually on the highways; the worst year was 1972 with 54,589 deaths, according to the National Highway Traffic Safety Administration (NHTSA). Vehicle miles driven have increased dramatically as the death toll has fallen. Indeed, fatalities per mile driven have fallen by 80 percent since 1966. If we still had 1966’s fatality rate with today’s 3.2 trillion miles driven, we would have had 176,000 highway deaths in 2017.

Has driving truly become more deadly since 2014? The increase in fatalities might seem to answer this in the affirmative, but real world data never lies exactly on a smooth curve. Could the recent increases in fatalities just be random variation?

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The two largest year-to-year percentage increases in highway fatalities were in 2015 and 2016, a total 14 percent increase. And yet multi-year fatality increases have occurred since 1966, including four consecutive years in the late 1970s and five consecutive years in the 1990s. The 1970’s fatalities increase was 15 percent. The recent increase in fatalities is not entirely unprecedented.

Thankfully, a very small percentage of accidents produce fatalities. If roads are more dangerous, we should also see increases in injuries and accidents. NHTSA injury totals go back only to 1988 and are much less accurate than fatalities data. Still, reported injuries increased 34 percent, or 800,000, between 2014 and 2016, including a 28 percent increase in 2016. The largest previous one-year increase in injuries was only 6.5 percent. Reliable nationwide totals on accidents are not available.

Not all states have seen fatality increases. In Alabama fatalities rose 26 percent between 2014 and 2016. Rhode Island had a 63 percent increase in fatalities, and eight other states saw increases of 30 percent or more. Yet fatalities declined in three states and increased less than 5 percent in four more. Are cell phones more distracting in some states than others?

Substantial differences in fatality rates exist across states. Between 2014 and 2017, South Carolina’s rate was more than two and a half times higher than Massachusetts’. Factors like rural vs. urban driving, highway type, and speed limits explain much of this variation, but making driving in all states as safe as in the safest states could save thousands of lives annually.

The NHTSA also reports fatalities by vehicle type, which have increased by 12 and 13 percent for cars and light trucks. Motorcyclists and bicyclists (15 percent each) and pedestrians (22 percent) saw larger increases, even though drivers of cars and trucks seem more likely to be distracted by cell phones. The fatality increases for cyclists and pedestrians suggest another cause, or may combine drivers’ distractions and these individuals’ vulnerability.

Cell phone use and texting have been around longer than we perhaps remember; Washington state banned texting and driving in 2007. According to NHTSA statistics, drivers’ cell phone use has fallen over the past decade, and fatalities fell 20 percent nationally between 2007 and 2014. New phones provide more ways to distract drivers, but why did cell phones start increasing fatalities only in 2015?

Many scholars from different disciplines study highway safety, including yours truly. To date, published research has not really addressed the recent jump in fatalities. World events drive academic research, so research should soon start offering concrete insights.

Highway fatalities continue to impose a heavy toll on the U.S. Even though the fatality rate has fallen 80 percent since 1966, the modest increase in fatalities since 2014 should concern citizens and experts. Fortunately, fatalities fell three percent during the first half of 2018. Perhaps the increase from 2014 to 2016 was only a pause in the long-term improvement in highway safety.

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

The battle against inflation

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Inflation fears rose briefly during 2018, as the increase in the Consumer Price Index (CPI) approached three percent. In 1980, three percent annual inflation would have set off celebrations. Our success in reducing inflation provides a lesson about policy-making by elected officials.

To avoid confusion we should be clear about the meaning of inflation. Americans often mean the cost of living when they say inflation. Economists, by contrast, specifically mean an increase in the overall price level.

A pure five percent inflation would be exactly a five percent increase in every price. Salaries and wages are prices and would be included. Inflation should not reduce the ability of households to buy goods and services, as income and expenses both increase equally. Economists call an increase in the price of gasoline or housing a change in relative prices, not inflation, even though either raises living costs.

Housing costs more in New York or San Francisco than in Alabama. That the cost of living in Manhattan is more than double that in Montgomery matters for weighing job offers. Differences in living costs, however, are also not inflation.

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The CPI does not include wages and rises even for relative price increases, yet still measures inflation pretty well. The annual change in the CPI exceeded 10 percent in 1974 and 1979-1981, hitting 13.5 percent in 1980. By 1983, inflation was below 5 percent and has only topped this level once since.

The U.S. has not been the only nation to bring inflation under control. U.S. inflation fell from 8.5 to 1.7 percent over 1974-83 and 2008-17. Yet over these decades, inflation fell from 11.3 to 1.1 percent in France and from 16.7 to 1.1 percent in Italy and Spain. Even Latin America has experienced progress; inflation fell from 33 to four percent in Mexico and from 112 to 6 percent in Brazil.

International success argues against a uniquely American explanation for our decline in inflation. For instance, I might wish to credit Ronald Reagan for defeating inflation. While President Reagan undoubtedly deserves some credit, a “great person” story would require great leaders in many nations, which seems less likely.

During the 1970s, many blamed inflation on rising world oil prices. A decline in oil supply would raise oil prices and hike the CPI, but would be a relative price change, not inflation as defined by economists. And significant oil price increase last decade did not produce double-digit inflation.

One economist who never wavered about the cause of inflation during the 1970s was Milton Friedman, who insisted that “inflation is everywhere and always a monetary phenomenon.” Governments and their central banks, like our Federal Reserve, inflate the money supply, driving up prices. Behind the focus on oil, the Federal Reserve did indeed fuel the 1970s inflation with money supply growth. With Paul Volcker as Federal Reserve chair and Ronald Reagan in the White House, the brakes were put on the money creation and inflation fell accordingly. The economics profession now largely accepts that Professor Friedman was right on inflation.

Why then did so many nations cause themselves the pain of inflation? And what has changed? Monetary economists have identified central bank independence as a key. A central bank is like a bank for the nation’s banking system, and generally controls the money supply. Politicians find easy money and credit irresistible, particularly when running for reelection. If politicians have too much control, they will inevitably inflate the money supply.

The Federal Reserve has always had some political independence. When the Fed chair and governors want monetary stability, as Mr. Volcker and his successor Alan Greenspan did, they can often prevail over the president and Congress. Other nations increased their central banks’ independence, based on economists’ advice. The European Central Bank was modeled on Germany’s independent Bundesbank.

People are imperfect and face problems of self-control. Our elected officials are human, and the potential to shift blame in politics exacerbates self-control problems. The world’s success battling inflation shows that elections alone do not always ensure wise economic policy.

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

Heading for a fiscal cliff?

(YHN, Pixabay)

Is the Federal government spending us into financial ruin? The current numbers and budget projections suggest so. Yet I think that the scary numbers reflect an unresolved conflict over the role of government more than a threat of bankruptcy.

The national debt of the United States, the accumulated borrowing since the Republic’s founding, stands at $21.85 trillion. The deficit, or amount borrowed to cover spending in excess of tax revenues, for fiscal year 2018 was $780 billion.

A sense of magnitude is difficult to maintain once we get into the “illions” – meaning millions, billions, and trillions. A good way to size up Federal red ink is as a percentage of U.S. GDP, the value of all the goods and services produced in a year, which is currently $20.1 trillion. So 2018’s deficit and the national debt are 3.9 and 109 percent of GDP respectively.

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A second debt figure, the debt held by the public, confuses the matter. What is the difference? Some Federal government agencies hold debt, including Social Security and the military and civilian pension plans. As this debt is sometimes described as “owed to ourselves,” some experts focus on debt held by the public, which is currently $16 trillion (78 percent of GDP).

Which measure matters more? Debt held by the public is the amount the U.S. Treasury borrows in global credit markets. Interest rates are prices adjusting to bring demands for borrowing – by businesses and households in addition to government – into line with the supply of funds from savers and investors. Publicly-held debt potentially crowds out productive investment.

The intra-government debt is also real. The $800 billion the Treasury has borrowed from the Department of Defense’s pension program is supposed to pay retirement benefits, but was used for other Federal spending. If not repaid, military pensions would need to be paid out of current taxes.

Does the national debt spell inevitable bankruptcy? Warren Buffett has observed that the debt is not necessarily a problem because it was higher relative to GDP at the end of World War II. Mr. Buffett’s observation highlights the importance of budget projections. We borrowed to fight World War II, and investors expected spending to decline precipitously after the war. It did, and debt fell below 40 percent of GDP during the 1950s.

By contrast, spending is expected to increase significantly in the future. The most recent Congressional Budget Office (CBO) 30-year forecast projects Federal spending to increase from 20.6 to 27.9 percent of GDP. An aging population using more medical care will increase spending on Social Security, Medicare, and Medicaid. The CBO expects debt held by the public to reach 152 percent of GDP by 2048. This will be uncharted territory for the U.S. and could trigger a debt cycle through rising interest rates.

Will debt at 150 percent of GDP mean bankruptcy? Perhaps. Greece has teetered on the verge of bankruptcy with debt at 180 percent of GDP. But Japan remains sound despite debt at 220 percent of GDP.

Debate over insolvency obscures a common assumption that tax revenues will not rise significantly. The CBO, for instance, projects Federal revenues of 19.5 percent of GDP in the 2040s, only three percentage points higher than today. A Cato Institute analysis of fiscal imbalance kept tax revenue at current levels.

Potential Federal insolvency demonstrates that we cannot afford a European-style welfare state without European-style taxes. This tension, I think, goes back to Ronald Reagan, who pursued tax cuts even though his desired spending cuts proved politically unachievable. Reagan set Federal spending on a collision course with our distaste for taxes, likely hoping that his tax cuts would eventually force spending cuts. Maintaining Social Security and Medicare as they are given demographic changes will require paying more taxes.

I am not advocating for higher taxes and would prefer downsizing government. We cannot, however, afford a Cadillac on the payments for a Chevy and will soon have to decide whether we are truly willing to pay for big government.

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

Men, women, marriage and earnings

(Flaticon/YHN)

The #metoo movement has brought renewed focus on gender equity questions. Economics examines the pay gap between men and women, and a recent analysis from the Federal Reserve Bank of St. Louis links this gap to marriage, creating a puzzle for economics.

The gender pay gap is large: among workers with at least a high school diploma between ages 45 to 54, men earn almost 50 percent more than women, roughly $75,000 versus $50,000 annually. Is this evidence of discrimination against women we could address through comparable worth pay legislation? Perhaps, but first let’s dig deeper into the issue.

Labor economics explains wages and salaries based on productivity, or the extra output that a worker helps a business produce. Firms can afford to pay workers the value of this product and still make an adequate profit. Competition among firms to attract and retain good workers should drive salaries up to this level. If Alabama underpaid Nick Saban, other universities would happily compensate him fairly.

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Salary differences should then depend on differences in productivity. Economists would want to make more nuanced salary comparisons by gender in narrower job categories before concluding that women are paid less. Education and skills requirements differ way too much across jobs requiring a high school diploma to be conclusively informative.

The St. Louis Fed analysis provides a different perspective: the gender pay gap is really a gap between married men and everyone else. Single men, single women, and married women all make around $50,000 in the prime earning years of 45 to 54; married men make almost $90,000. Interestingly, no pay gap seems to exist between single men and single women.

Can we make sense of this? First off, marriage may not necessarily make men more productive. Men who are more productive – that is, have more education, training, and drive to succeed – may be more likely to be married. We need not believe that reciting the marriage vows increases men’s (but not women’s) productivity.

Marriage could also make men focus seriously on work and a career. We might recognize that at some point we became much more serious about work; for me, this occurred in grad school. Marriage may have this impact on many men. Seriousness and focus could explain higher earnings, and since economists can’t easily measure a person’s seriousness directly, in the data this will look like a marriage effect.

There’s another possible explanation. In many workplaces, bosses have discretion over giving out raises, and an employee might have to ask for a raise. Suppose married and single male employees both ask for raises. The boss might believe that the married man “needs” the raise more – to pay for his kids’ braces, or to help take care of his in-laws. While plausible, salaries based on need violate the labor economics theory.

And it undermines a potential argument against comparable worth pay legislation to narrow the gender pay gap. The argument maintains that businesses must be given the freedom to pay employees based on productivity. But if compensation based on perceived need does not ruin our economy, then raises for women surely won’t cause an economic train wreck.

All the above factors likely contribute to married men’s higher earnings. Businesses can deviate at least some from productivity in setting wages and salaries without going bankrupt. The greater consequence of comparable worth legislation is shifting salary determination ultimately from businesses to bureaucrats. In the long run as politics determines more salaries across the economy, economic performance may decline significantly.

Labor economics seeks to explain salaries across different jobs, but productivity theory is also gender (and color) blind. Although women may indeed not be paid according to their productivity by every employer, competition should prevent pay from getting too far out of line with productivity. Hopefully bosses will reward underpaid women employees, because #metoo has sadly shown that politicians are not always gender blind.

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

7 months ago

Treading water on economic freedom

(YHN)

Economic freedom means the ability of individuals and businesses to contract freely with each other. The Fraser Institute recently released its 2018 Economic Freedom of North America, which rates freedom in the states. Alabama’s economic freedom score remained virtually unchanged from 2017, ranking us 25th among the states.

The state freedom rankings have three equally weighted components, government spending, taxes, and labor market freedom, and complement Fraser’s ratings of the freedom of nations. The scores range from 0 to 10 (the most freedom), and states are graded on a curve for each of the various elements of policy.

Alabama’s score now stands at 6.22, vs. 6.25 in 2017. Florida has the top score in 2018 at 7.87, followed by New Hampshire and Texas; New York brought up the rear (at 3.90), with Kentucky and West Virginia next.

Alabama does best on taxes, thanks to our low income and property taxes, while we trail the national averages for spending and labor market regulation. This year, our score for labor market freedom improved, our spending score declined and taxes remained unchanged.

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Economic freedom indices were developed in response to a challenge by economist Milton Friedman about better measuring all the ways government impacts the economy. They have allowed economists to more thoroughly investigate whether markets deliver the benefits promised by some economists. Dozens of studies now document that economic freedom yields higher standards of living, faster economic growth, higher incomes for the poor, and better environmental quality. The strongest results are found internationally, as freedom varies more between nations than across the U.S. states. Still, the states with the most economic freedom have more entrepreneurs and attract more new residents.

And yet in recent years cities and states have enacted or considered laws curtailing economic freedom. For example, three states and Washington, DC, now have $15 per hour minimum wages. Seattle nearly passed a $275 annual tax per employee on large employers, dubbed the Amazon tax. A November ballot proposal in California nearly lifted a 1995 state prohibition on municipal rent control laws. If economic freedom spurs prosperity so significantly, why are so many states embracing freedom-restricting policies?

A first factor, I think, is our now nearly decade-long recovery. People are more willing to share when they feel prosperous. We see this in charitable contributions, and I think it carries over to politics and, specifically, policies intended to help less fortunate Americans. Forcing Amazon and Starbucks to subsidize housing for low-income Seattle families seems like less of an imposition when the companies are earning profits.

Second, the costs of policies restricting economic freedom are often hard to see. Consider the minimum wage. Businesses employ fewer workers in low skilled jobs when the minimum wage rises. But the job losses rarely come in the form of pink slips immediately following an increase. Instead, businesses change their staffing as they typically do, through attrition. Workers never being hired can often go unnoticed.

Finally, the tendency of free-market economists like myself to exaggerate the costs of rent control or the minimum wage contributes. We often claim that ill-advised policies will wreck the economy. Economists have warned that President Trump’s tariffs on imports from China will likely trigger a “crippling” trade war.

Why economists resort to extremes makes sense. News organizations which use alarming headlines to get people to watch or click are more likely to report dire predictions. And perhaps sound bites can only communicate extreme warnings. But dire predictions combined with largely hidden costs make the economy appear impervious to price controls, taxes, and subsidies.

So perhaps it is good news that economic freedom remained basically unchanged in Alabama in 2018. We are largely resisting the temptation to indulge in well-meaning but costly government assistance during a strong economy. When the next recession inevitably occurs, times will be tougher for states not exercising restraint now.

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

7 months ago

The cost of employees

(YHN/Flaticon)

Most Americans have to work for a living. We must trade for the goods and services we want to consume, and for most of us, we trade our labor. Conflict over two legal work classifications, employees and independent contractors, illustrate how government’s rules can imperil economic prosperity.

People must work for a living, but people who want a job done, must secure assistance voluntarily through compensation. Difficult, physically demanding, boring, and dangerous tasks will require extra compensation.

Regulation heavily burdens business. According to a U.S. Small Business Administration study, federal regulations cost small businesses over $10,000 per employee. The National Small Business Association found that small businesses face $83,000 in regulatory costs during their first year of operation when owners struggle just to survive. Around 30 percent of a business’ labor cost is for benefits and paperwork.

How much do government rules affect hiring? Rules affecting employees include the minimum wage, overtime pay, workplace safety rules, collective bargaining and the National Labor Relations Act, the Americans with Disabilities Act, the Civil Rights Act, immigration eligibility, worker’s compensation and unemployment compensation. Many regulatory rules do not apply to independent contractors. Furthermore, requirements imposed on larger businesses are generally based on employees, not contractors.

Consumers must eventually pay for a business’ costs of complying with state and federal laws and rules. And costs tied specifically to employment reduce hiring to do tasks which create value in our economy. Half of small businesses report having held off hiring due to regulation.

Why do politicians impose so many rules on employment? In part, because mandates cost the government little; politicians do not spend tax dollars to boost wages or pay insurance premiums. The complexity of employment relations also matters, helping sustain an illusion of significant benefits to workers.

Businesses care about the full cost of an employee, meaning the wage or salary plus the cost of benefits, training, required paperwork, and so forth. When government mandates better terms for employees on one item, businesses can trim back others to contain the cost. For instance, less on-the-job training or flexibility in scheduling can offset the cost of a higher minimum wage.

The adjustments can cancel out mandated benefits. A college student might consider an $8 per hour job with the flexibility to adjust work hours around exams equal to a $10/hour with no flexibility. Raising the minimum wage to $10/hour may lead employers to eliminate flexibility, leaving the college student no better off.

Such offsets of government policies often go unnoticed. Supporters celebrate a hike in the minimum wage, or mandatory overtime pay, or required health insurance. Adjustments like a loss of scheduling flexibility may never get linked back to the policy. The mandate appears like a better deal than in reality.

As rules increased the cost of employment, businesses have not surprisingly tried reclassifying employees as independent contractors. The IRS and state governments enforce rules regarding these classifications, but some employers clearly try to bend the law. Efforts by state and federal regulators to protect traditional employment, however, also frustrate Americans seeking new self-employment options.

Work flexibility will be crucial to realize the full potential of the sharing economy. Exploiting opportunities for sharing will require many people to perform small tasks. Scooter rental companies like Spin and Lime, for instance, need people to charge their electric vehicles left on city sidewalks. Power and gardening tools sit in garages most of the time and could be widely shared. Getting tools to paying users and back to their owners will require on-demand delivery service. Each rental is unlikely to generate enough surplus value to cover employees’ costly regulations.

A market economy enables voluntary action in pursuit of our goals. The labor market forces people to pay for tasks they want performed. Burdensome government rules should not prevent willing parties from agreeing to deals to get work done.

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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8 months ago

Fake news and the market for ideas

(YHN/Pixabay)

Traditional social media have been criticized recently for purveying fake news. California may form a commission to investigate stemming fake news, while Congressional hearings have implored Facebook and Twitter to act. Is the news market failing?

Classical liberals back to John Milton and John Stuart Mill have stressed freedom of speech and expression as crucial in allowing citizens to control government. Free expression is vital for two reasons. The first is the value of free inquiry in discovering the truth. The second is the potential for government power to regulate expression to stifle criticism.

The metaphor of a marketplace of ideas illustrates the truth-seeking argument. Just as competition supplies us with cars, clothes or soft drinks, competition will work for ideas. Let truth and falsehood compete, and truth will win out. This reasoning believes that most citizens can distinguish good from bad arguments.

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Yet, I find the marketplace of ideas metaphor slightly off. In my research on media bias, I emphasize how our evaluations of public policies draw on our personal values and information about the world. Is the $15 per hour minimum wage recently enacted by some cities wise policy? The answer depends in part on values – whether one believes that government should try to raise poorer households’ income. And also on information – the number of $9 an hour jobs eliminated by a $15 minimum wage.

News deals with the information element of policy assessment. Peoples’ values differ, but to paraphrase former Sen. Daniel Patrick Moynihan, we all face the same facts. The news media hopefully provides truthful information for readers or viewers.

Information differs from ideas. Assessing the truth of information requires significant resources and not just common sense; specifically, a news organization’s reporters and editors. Ideas combine information and values. Citizens have no capacity to verify a report claiming that the $15 minimum wage eliminated 10,000 jobs.

Media bias involves deliberate manipulation of information to advance political values, not inevitable reporting errors. A story might deliberately exaggerate the job losses from the $15 minimum wage to influence people’s policy evaluation.

We can only identify some relevant factors about when biased reporting will advance specific values. For example, the persons we trust most can most easily mislead us. Blatant propaganda is often recognized and consequently ineffective. Information advancing an organization’s values may be discounted. And bad news is frequently denied; President Trump dismisses any report suggesting that his policies are not working perfectly as fake news.

President Trump has seemingly used evidence of liberal bias to convince his supporters to dismiss all news from prestigious news organizations as fake. Convincing analyses find that liberal bias is typically nuanced and subtle, involving misleading headlines, a lack of perspective, or perhaps omissions, not outright falsification. Biased news still contains truth.

Charges of liberal bias are decades old, so what has changed? The more explicit branding of outlets as liberal or conservative, I think, encourages wholesale dismissal. Hosts like Sean Hannity or Rachel Maddow with conservative or liberal views organize most cable news content (This is not necessarily bad; contrasting takes on current events may be a good way to assess the truth). Editorials set a newspaper’s brand, even though the rules of objectivity still apply to the news content. And conservative outlets like Fox News and the Washington Times makes liberal branding of CNN and the Washington Post more plausible.

The most surprising aspect in our more partisan news market has been the lack of an outlet building an information-only brand trusted across the political spectrum. The New York Times and Washington Post may think they occupy this space, but conservatives’ dismissal demonstrates otherwise.

The marketplace of ideas is a powerful metaphor, but information is not ideas. Common sense cannot substitute for a network of trained, experienced reporters. Is the market for news hopelessly broken? Fortunately, a missing product creates a profit opportunity for a clever entrepreneur. Perhaps trusted news sources are evolving right now, obscured by the noise of current events.

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