Saturday, May 12, 2007

Public Suffers From Anti-Market Bias

From today's WSJ, an excellent article by George Mason economist Bryan Caplan, who explains why special interest legislation is so popular even though it makes us worse off:

"Behind every policy that does more harm than good, there's a special interest that favors it anyway. The steel tariff was bad for consumers, steel-using industries and foreign steel producers, but the steel lobby still pushed for it. Farm subsidies are bad for both taxpayers and unsubsidized farmers, but in 2002 the American farm lobby got a 70% increase in government support. The minimum wage is bad for consumers, employers and low-skill workers who get priced out of their jobs, but unions are hard at work to raise it again.

An yet "special-interest" legislation is popular and special interests so often get their way. They do not have to force their policies down the public's throat, or sneak them through Congress unnoticed. To succeed, special interests only need to persuade politicians to swim with the current of public opinion.

Why would the majority favor policies that hurt the majority? There is a good reason. The majority favors these policies because the average person underestimates the social benefits of the free market, especially for international and labor markets. In a phrase, the public suffers from anti-market bias."

Low Jobless Rates, Czechs Find Work in Montana

Billings, Montana and Logan, Utah, tied for first place as cities with the lowest unemployment rates in the nation, at just 2%, according to the BLS's report on metro area jobless rates for March. Billings is facing a labor shortage as demand for workers increases for summer employment, and employers are hiring workers from as far away as the Czech Repbulic!

From today's Billings Gazette: Bonnie Ples, who manages the Red Lodge Pizza Co. says her restaurant is counting on Czech guest workers.

"Yeah, it's hard to find workers, so we are hiring eight Czech Republic workers for the summer," she said.

Czech workers might also find employment opportunities in Australia, where the unemployment rate just fell to a 32-year low of 4.4%, according to the Australian Bureau of Statistics.

Michigan Public School Pyramid Scheme

In Michigan, it's not just the Big 3 automakers who are burdened with the rising legacy costs of providing pensions and lifetime health benefits to a rising number of retirees - Michigan public schools are facing the same financial crisis.

Michigan is the only state that makes its public schools bear the entire burden of retiree pensions and health care. This year's bill -- an estimated $1,015 per student -- is more than schools spend on books, buses, computer technology and building maintenance combined (see top graph above). And it's going to get worse.

The retirement assessment -- set by the state but paid by individual school districts -- is now at a record high of 17.74% of each district's payroll. That rate is expected to jump to 30% by 2020 -- a level that all sides agree would break the backs of Michigan schools (see bottom graph above).

In many ways, the financial straits of Michigan's public schools mirror the plight of the Big Three. Detroit's automakers and the schools both have offered generous retirement benefits to retirees for decades. As retirees live longer and health care bills rise, retirement costs have skyrocketed. Most organizations that offer retiree health care are dealing with rising bills.

Read more here in the Detroit News.

Friday, May 11, 2007

Too Much Credit or Not Enough?

Years ago, there was concern that the poor didn't have enough access to credit, and were denied access to the American dream of homeownerhsip. Now there is concern that there is too much credit available.

Easy access to the world's most efficient and well-developed mortgage markets helped increase homeownerships rates significantly over the last 40 years. In 1965, the homeownership rate was just less than 63% according to the Census Bureau. A few years ago in 2005, it hit an historical high of 69.1% partly due to subprime lending, and has fallen to 68.4% in 2007, due to recent foreclosures of marginal borrowers.

Reason Magazine, "In a sane world, we’d say this is a market behaving as it should, and marvel at an economy where so many people who were once locked into the renters market have gotten a chance at homeownership. Some of them have blown their chance by exhibiting the same kind of behavior that made them bad credit risks in the first place. But most have not. In fact, about nine out of every 10 sub-prime borrowers are still making their payments."

Is there too much credit or not enough? Like all important decisions, let's let the market decide through a trial-and-error discovery process what the optimal amount and distribution of credit should be.

HT: Bill Hood

Let's Abolish the World Bank

George Will writes in his column this week that the World Bank faces much bigger problems than the situtation with Paul Wolfowitz and his girlfriend. In fact, Will says that the rationale for the World Bank was never strong, and has now evaporated, especially because of the waste and corruption of the political yet unaccountable distribution of many billions of World Bank dollars.

What cures poverty is economic growth, and the prerequisite for growth is free markets allocating private capital to efficient uses, not the World Bank's intrusive government actions on behalf of fashionable causes.

According to Will, "It is difficult to demonstrate that World Bank loans have produced growth, let alone as much growth as private capital would have produced."

Local News Reporting Outsourced to India

From today's LA Times, an article about outsourcing local news reporting to India, where you can apparently hire UC-Berkeley grads for $7,000 per year on Craigslist.

When is local journalism not really local? When it's about Pasadena and written by someone in India.

James Macpherson, editor and publisher of the
Pasadena Now website, hired two reporters last weekend to cover the Pasadena City Council. One lives in Mumbai and will be paid $12,000 a year. The other will work in Bangalore for $7,200.

The council broadcasts its meetings on the Web. From nearly 9,000 miles away, the outsourced journalists plan to watch, then write their stories while their boss sleeps — India is 12.5 hours ahead of Pacific Standard Time.

"A lot of the routine stuff we do can be done by really talented people in another time zone at much lower wages," said Macpherson.

On India's Craigslist, he posted an ad that said, "We do not believe that geographic distance between California and India will present unsurmountable problems, and that working together with you will result in your development of a keen working knowledge of this city's affairs."

Dozens replied. One of the two chosen had attended the UC Berkeley Graduate School of Journalism. Rob Gunnison, the director of school affairs there, is dismayed. "It just seems so fundamental to journalism to be there," Gunnison said. "I still can't quite believe it's not a hoax."

Here are a few current ads on Bangalore's Craigslist for writers, click here, and here, and here (this ad says that female writers are preferred?).

Here is the link to the NY Times article about this story.

Thursday, May 10, 2007

Who's Preying on Whom?

Robert Samuelson in yesterday's Washington Post:

"It is not "protectionist" (I am a long-standing free-trader) to complain about policies that are predatory; China's are just that."

Let's see. China sells American consumers and businesses cheap goods, often subsidized by the citizens/taxpayers of China with export subsidies, at prices lower than we could produce those goods ourselves. They also invest about $200 billion each year in our economy buying our financial assets (stocks and bonds).

Here's where I might agree with Samuelson: those results are "predatory," but "predatory" in the sense we are taking advantage of the Chinese, not that they are taking advantage of us. We take advantage of both their cheap goods and their capital investment in the U.S. economy.

Q: What if the China agreed to send us all of their production for free as a gift of foreign aid, would Samuelson still complain about "predatory" trade practices?

Wednesday, May 09, 2007

Instant Translation: Babel Fish

The website "Babel Fish Translation" will instantly translate a block of text or an entire website from English into a dozen different languages including Russian and Chinese (see above), Korean, French, German, Portugese, Italian, Dutch, etc., and vice-versa.

The name of the website Babel Fish comes from a fictional species of fish in the book "The Hitchhiker's Guide to the Galaxy" that can instantly translate any language to any other language.

Government Orders Station to RAISE Gas Prices

Given all of the recent media coverage, I thought most people were worried about HIGH gas prices. Well, apparently not the state of Wisconsin, which is worried about LOW gas prices.

A service station in Wisconsin has been ordered by the state to RAISE its prices, see the story here.

According to the government, any price can be illegal. Too low, it's predatory pricing; too high, it's price gouging (or ticket scalping); too close to the price of your rivals, its collusion or price-fixing.

April Revenue Shower: What Tax Cut?

I wrote a few days ago about the surge in tax revenues. In today's WSJ, there is a related article titled April Revenue Shower, here are some excerpts:

Here's the "surge" you aren't reading about: the continuing flood of tax revenue into the federal Treasury. Tax receipts for April were $70 billion above the same month in 2006, and April 24 marked the single biggest day of tax collections in U.S. history, at $48.7 billion, according to the latest Treasury report.

There's no denying that Americans are sending more money than ever to Washington: Revenues for the first seven months of fiscal 2007 are up 11.3 percent or $153 billion (see chart above).

This Beltway bonanza has helped to slash the projected federal budget deficit by more than half from the same point last year. Across the past three Aprils, federal red ink has sunk by nearly $300 billion. The deficit this year could tumble to $150 billion, or an economically trivial 1% of GDP.

This revenue boom certainly casts doubt on the political wails about tax loopholes for the rich: So far this year, the taxes paid on so-called nonwithheld income, which are dollars that don't come from normal wages and salaries, have climbed by nearly 30%. This is income largely derived from capital gains, dividends and other investment sources - that is, the tax rates that were cut in 2003.

Individual income taxes are also up by 17.5% (see chart above) -- a handsome fiscal dividend from rising wages and low unemployment.

Tragedy of the Commons

A group of Swedish and Malagasy researchers led by Thomas Elmqvist of Stockholm University decided to try to correlate changes in Madagascar’s forest cover with local population densities and customary laws.

The difference between two sparsely populated regions was that in the west, where forest cover has dwindled, neither formal nor customary tenure was enforced. In the north—only about 20km away—land rights were well defined and forest cover increased. As with ocean fisheries, so with tropical forests, everybody’s business is nobody’s business.

Read more here.

Tuesday, May 08, 2007

Annual Spring Gas Price Increases

From Reason Magazine, an explanation of how EPA requirements contribute to an annual spring increase in gasoline prices:

Let's consider the effect of EPA vapor pressure mandates on the price of gasoline. Energy Security Analysis Inc. senior consultant Mark Routt analogizes vapor pressure in gasoline to fizziness in soda pop. In the winter more fizziness (high vapor pressure) means that when you turn the ignition on a cold morning it sparks the gasoline and your car starts. However, in the summer you want "flatter" gasoline (less vapor pressure) because fizzier gasoline evaporates on hot days and contributes to smog. While EPA regulations help reduce smog, they also make it more costly to produce gasoline with lower vapor pressure. Lundberg estimates that summer blends can cost between 3 to 15 cents more to make than winter blends, depending on the exact formulation, time and place.

In addition, Routt pointed out that the regulations have produced several distribution bottlenecks that temporarily boost prices in the spring. "Everybody jams the exit at the same time," explains Routt. What he means is that gas station owners have essentially one week to switch from a winter blend to a summer blend. So in order to get their supplies in a timely manner they end up paying a premium of 8 to 12 cents per gallon to distributors and tank truckers.

In contrast, in the fall, retailers can switch over a period of weeks from a summer blend to a winter blend and so price spikes don't typically occur in the fall. Routt suggests that the EPA relax its vapor pressure regulations allowing retailers to more slowly switch to summer blends. However, he doubts that this policy could ever be adopted since it would characterized by activists as "an attack on the environment."

MP: Notice in the price chart above that there was an increase in gasoline prices last year about the same time as the price increase this year.

Monday, May 07, 2007

Investment in Education: The Upside of Inequality

Much of the increase in income inequality over time reflects the rising wage premium for a college education, which is beneficial and desirabe according to Nobel economist Gary Becker and his co-author Kevin Murphy in their article "The Upside of Income Inequality Excerpts:

To show the importance to inequality of the increased return to human capital, consider the top chart above, which shows the link between earn­ings and education by displaying the wage premium received by college-educated workers compared with high school graduates. In 1980, an American with a college degree earned about 30% more than an American who stopped education at high school. But, in recent years, a person with a college educa­tion earned roughly 70% more. Meanwhile, the premium for having a graduate degree increased from roughly 50% in 1980 to well over 100% today. The labor market is placing a greater emphasis on education, dispensing rapidly rising rewards to those who stay in school the longest.

This trend has contributed significantly to the growth in overall earnings inequality in the United States.

When calculating the returns to education, we look at the costs of education as well. And even accounting for the rise in university tuition (it more than doubled, on average, in constant dol­lars between 1980 and 2005), overall returns to college and graduate study have increased substan­tially. Indeed, it appears that the increases in tuition were partly induced by the greater return to col­lege education. (See bottom chart above that shows the increase in enrollment closely following the increase in the wage premium for a college education.)

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to invest­ments in education and other human capital. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by dis­couraging investments in its most productive and precious form of capital—human capital.

Killing the Golden Goose That Gives Us New Drugs

From a scene on the TV show West Wing about protecting pharmaceutical patents. One guy says: "Those pills cost them only 4 cents to produce." The other guy says: "That's not true. The second pill costs them 4 cents, the first pill costs them $800 million dollars."'

From an excellent editorial in today's WSJ by Cato's Roger Pilon about the Senate passing a drug reimportation bill:

Given FDA safety and efficacy standards, it takes on average 12 to 15 years and over $800 million for a company (and most are American) to develop a new drug. But only the U.S. market is free. Abroad, pharmaceutical companies must negotiate prices with socialized medical systems. As a result, foreigners usually pay far less than Americans for their patented drugs. Americans bear the lion's share of R&D costs, subsidizing socialized medical systems in the process, while foreigners are classic "free riders."

There's no question that Congress is responding here to popular will. But the long-term implications are palpable. If companies are forced by the U.S. government to continue supplying cheap drugs to countries from which they are then reimported to the U.S. -- crowding out the higher-priced domestic supply of drugs -- it's only a matter of time until profits are insufficient to support the enormous costs of R&D for future drugs. No one wants to kill that golden goose, but there it is.

Sunday, May 06, 2007

Fuzzy Math An Insult to Working Women

I wrote before about how the AAUW got it wrong, that there really is no pay gap once you control for all factors that affect earnings. Here is some more on the same topic:

"This year the gender victimologists came armed with a new report from the American Association of University Women, Behind the Pay Gap, which purports to show that one year after graduation, women are paid 80% of what men earn.

But beyond the claims of sex discrimination, Behind the Pay Gap contains a put-down to all working women. That message reads, Ladies, you are unwilling to accept the financial consequences of your decision to work shorter hours and in less lucrative occupations.

That’s patronizing and insulting to the women who don’t believe they need a government mandate or gender quota to get ahead in life. Hopefully this time around not so many will be taken in by the AAUW’s creative calculations."

Read more here.

Cartoon of the Day

Via Cafe Hayek.

Freakonomics: The $140 Scarf

Isn’t it puzzling that so many middle-aged Americans are spending so much of their time and money performing menial labors when they don’t have to?

Just as the radio and phonograph proved to be powerful substitutes for the piano, the forces of technology and capitalism have greatly eased the burden of feeding and clothing ourselves. So what’s with all the knitting, gardening and “cooking for fun”?

Why do some forms of menial labor survive as hobbies while others have been killed off? (For instance, we can’t think of a single person who, since the invention of the washing machine, practices “laundry for fun.”)

Why do knitting devotees buy $40 worth of yarn for a single scarf and then spend 10 hours knitting it? Even if her labor is valued at only $10 an hour, the scarf costs at least $140 — or roughly $100 more than a similar machine-made scarf might cost.

Read more here of the Freakonomics column in today's NY Times.