Minor Thoughts from me to you

Kevin Hassett Aparna Mathur, writing in the Wall Street Journal.

Today we hear that the gains from economic growth accrue to the highest-income earners while the standard of living of the poor and middle America stagnates and the gap between the richest and the poorest grows ever wider. That portrait of the country is wrong.

In the first place, studies that measure income inequality largely focus on pretax incomes while ignoring the transfer payments and spending from unemployment insurance, food stamps, Medicaid and other safety-net programs. Politicians who rest their demands for more redistribution on studies of income inequality but leave out the existing safety net are putting their thumb on the scale.

... From 2000 to 2010, consumption has climbed 14% for individuals in the bottom fifth of households, 6% for individuals in the middle fifth, and 14.3% for individuals in the top fifth when we account for changes in U.S. population and the size of households. This despite the dire economy at the end of the decade.

The data suggest the following picture. Over time, Americans have constructed a vast safety net that has adequately served the poor and helped them—as well as the middle class—to maintain significant consumption growth despite the apparent stagnation of cash incomes. The notion that a society that has accomplished such a feat is rigged or fundamentally unjust is ludicrous.

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Here's a new entry in Tyler Cowen's always interesting "markets in everything" series. This is a fantastic idea.

Here is a new service:

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Garett Jones on an alternative to either bailing out the banks or letting them fail spectacularly.

But all corporate bankruptcy means (again, to an economist, not a lawyer) is that some of the bondholders get turned into shareholders: Instead of getting the $10,000 you were owed, you get shares that will probably be worth much less.  In the simplest case, the shareholders get nothing (they had their chance to run the firm and blew it), the bondholders become the new shareholders, and the firm keeps right on running.  Seems like something you could do over a weekend.  

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Tyler Cowen, on the slow improvements in agriculture and the difficulties that Africa faces.

Consider Africa, which is often considered to have turned a corner and to be headed toward steady growth. The expansion of the African middle class and the decline in child mortality rates are both quite real, but the advances have not been balanced — and agriculture lags behind.

In a recent address, Michael Lipton, an economist and research professor at Sussex University in Britain, offered a sobering look at Africa’s agricultural productivity. He suggests that Rwanda and Ghana are gaining, but that most of the continent is not. Production and calorie intake per capita don’t seem to be higher today than they were in the early 1960s. It remains an issue how Africa’s growing population will be fed.

... On top of all that, many African nations have unhelpful policies toward agriculture. Malawi, for instance, subjects corn to periodic export and import restrictions as well as to price controls, all of which thwart development of a well-functioning market. When market speculators save corn in anticipation of greater scarcity, they may be punished by law. These restrictions of market incentives exacerbate the basic supply problems.

What can we do about these problems?

... the United States government should stop subsidizing its own corn-based biofuels, mainly ethanol. Today, about 40 percent of America’s field corn goes into biofuels, thanks to a subsidy and regulatory policy dating from 2005. With virtual unanimity, experts condemn these subsidies as driving up food prices, damaging land use and costing the taxpayers money. Once the energy costs of producing the biofuels are taken into account, it doesn’t even appear that this policy helps slow climate change. It has become a form of crony capitalism, at great global expense.

Perhaps Christians should take up the elimination of ethanol subsidies as a "social justice" issue. Is it just to funnel money to American farmers at the expense of hungry, poor people worldwide?

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The Department of Justice is interested in racial quotas. It doesn't really care if meeting those quotas requires banks to blow up the economy.

In a complaint filed Wednesday and settled the same day, Justice claimed that California-based Luther Burbank Savings violated the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act by setting a policy that had a "disparate impact" on minorities. Between 2006 and mid-2011, 5.2% of Luther's single-family residential mortgage loans went to African-Americans and Hispanics, compared to an average of 41.7% for other lenders in the area. The complaint doesn't cite evidence of intentional discrimination because there wasn't any.

Luther Burbank wasn't a fly-by-night operator that marketed those loans to any and all. The bank insisted on a minimum $400,000 loan amount and made loans with an average 680 FICO score and 67% loan-to-value. Over the period that Justice examined, Luther Burbank foreclosed on a mere 11 borrowers out of 629 loans outstanding—a loss ratio of 1.75%. In a normal world, Luther Burbank would get a medal from regulators for its risk management, having chosen borrowers even at the height of the housing mania who could meet their monthly payments.

But Assistant Attorney General for Civil Rights Thomas Perez has a different priority: He wants banks to meet lending quotas to minorities—regardless of whether those borrowers can afford the loans. Many minority borrowers have low incomes that make them riskier lending bets. Is that a bank's fault?

To be fair, Congress passed the laws that the DoJ is enforcing. Is there any chance, at all, that we can repeal those laws without having the entirety of the liberal and progressive world scream "racist!"?

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Dan Pallotta argues, in the Wall Street Journal, for treating charity more like a business and letting charitable organizations spend more, to do more.

Business can't solve all of the world's problems. Capitalism can—but only if it is permitted in the nonprofit sector. If we free the nonprofit sector to hire the best talent in the world, take fundraising risks, use marketing to build demand and invest capital for new revenue-generating efforts, we could bring private ingenuity to bear on those problems and would not need to look to government to fill the gaps.

I'm game for it.

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The Tax Foundation runs the numbers on Romney's tax plan.

The debate over Mitt Romney’s tax plan has largely revolved around the short term concerns of who gets what and how much, rather than the more long term concerns of economic growth, job creation, deficit reduction, and tax reform. This is unfortunate, especially in a time of record unemployment and debt levels. These serious issues have been put aside to focus particularly on the results of a single study by the Tax Policy Center (TPC), which finds Romney’s tax plan would require raising taxes on low- and middle-income earners to pay for tax cuts for high-income earners. However, to get there, TPC assumes that tax rates do not matter for economic growth, i.e., Romney’s plan to cut income tax rates by 20 percent across the board will have no effect on labor supply or saving and investment decisions. Only among Washington score keepers does such an assumption make sense, but it certainly has no credibility among academic economists.

So, what will be the effect of Romney's tax plan?

The results are considerably different from TPC’s. We find that fully 60 percent of the static revenue loss from Romney’s plan is recovered when the dynamic effects of economic growth are taken into account. We find that while the cuts in the individual income tax rates do not “pay for themselves,” they do grow the economy 1.8 percent over the long run. The biggest boost to the economy comes from the 10 point cut in the corporate rate, which grows GDP by 2.3 percent, the capital stock by 6.3 percent, and the wage rate by 1.9 percent. The corporate rate cut is so economically beneficial that it does pay for itself, when all federal revenue effects are considered. So does the elimination of taxes on capital gains and dividends for middle-income earners and the estate tax.

These benefits are widely shared. Every income group experiences at least a 7 percent increase in after-tax income.

That's reform I can get behind.

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Matt Yglesias, not known as a Republican booster, defends Mitt Romney's tax rate.

The main reason Romney's effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income. That's something that strikes many people as unfair on its face, and particularly unfair since it often means very low rates for extremely rich people like Romney. And Romney himself as a rich guy who's also a member of the political party seen as favoring the rich, and who's been recorded as whining that the working poor are undertaxed is perhaps not an ideal messenger for a defense of this policy.

But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.

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I am totally keeping this in my back pocket. I'll pull it out the next time some hyperprotective parent tells me that I should force my daughters to wear bicycle helmets. (A local school administrator wouldn't even let them ride tricycles without a helmet. Ridiculous.)

In the United States the notion that bike helmets promote health and safety by preventing head injuries is taken as pretty near God’s truth. Un-helmeted cyclists are regarded as irresponsible, like people who smoke. Cities are aggressive in helmet promotion.

But many European health experts have taken a very different view: Yes, there are studies that show that if you fall off a bicycle at a certain speed and hit your head, a helmet can reduce your risk of serious head injury. But such falls off bikes are rare — exceedingly so in mature urban cycling systems.

On the other hand, many researchers say, if you force or pressure people to wear helmets, you discourage them from riding bicycles. That means more obesity, heart disease and diabetes. And — Catch-22 — a result is fewer ordinary cyclists on the road, which makes it harder to develop a safe bicycling network. The safest biking cities are places like Amsterdam and Copenhagen, where middle-aged commuters are mainstay riders and the fraction of adults in helmets is minuscule.

“Pushing helmets really kills cycling and bike-sharing in particular because it promotes a sense of danger that just isn’t justified — in fact, cycling has many health benefits,” says Piet de Jong, a professor in the department of applied finance and actuarial studies at Macquarie University in Sydney. He studied the issue with mathematical modeling, and concludes that the benefits may outweigh the risks by 20 to 1.

He adds: “Statistically, if we wear helmets for cycling, maybe we should wear helmets when we climb ladders or get into a bath, because there are lots more injuries during those activities.” The European Cyclists’ Federation says that bicyclists in its domain have the same risk of serious injury as pedestrians per mile traveled.

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U.S. economic growth is dangerously slow. I’ve frequently written about research from the Fed which finds that since 1947, when two-quarter annualized real GDP growth falls below 2%, recession follows within a year 48% of the time. And when year-over-year real GDP growth falls below 2%, recession follows within a year 70% of the time.

Citigroup has also taken a shot at determining the stall speed: “Specifically, when U.S. growth has cut below 1½ percent on a rolling four-quarter basis, it has tended to fall by nearly 3 percentage points over the following four quarters, and the economy has typically entered recession.

Bottom line: Growth the past two quarters has averaged about 1.6%. Not only does this mean the economy is growing more slowly than last year’s 1.8%, it is also slow enough to signal about a 50% chance of a recession within a year. And the third quarter also looks weak.

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This may be interesting reading, if you're tempted to place a lot of weight on what "Nobel prize winning economist" Paul Krugman has to say.

We have made a complete review of Krugman’s New York Times columns 1997 through 2006—in all, 654 columns. The pattern of policy positions and arguments do not square with his purported concern for general prosperity and the interests of the poor. Some of the evidence lies in statements made. But the more important evidence lies in patterns of statements not made. Because Krugman assumes the role of addressing the most important things, because our account is comprehensive, and because the omissions are flagrant, we may treat omissions as evidence of Krugman’s ideological character and sensibilities. Krugman is best interpreted as a committed social democrat and Democratic partisan. Our main contention is that his social-democratic bent sometimes trumps people’s interests, notably poor people’s interests.

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Wisconsin's own Christian Schneider talks about the forces that drove GM to close the plant in Janesville, WI.

While plant closings are always complex issues, two main issues (both somewhat embarrassing to the Left) played a large role: the heavy burden of organized labor and misplaced government intervention in the automotive marketplace.

As George Will wrote at the time, by 2005, GM had essentially become a health-care company that also happened to make automobiles.

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Marginal Revolution University. If I can make the time, I'll be signing up for some classes.

We think education should be better, cheaper, and easier to access. So we decided to take matters into our own hands and create a new online education platform toward those ends. We have decided to do more to communicate our personal vision of economics to you and to the broader world.

You can visit www.MRUniversity.com here. There you can sign up for information about our first course, Development Economics, which is described by Alex.

Here are a few of the principles behind MR University:

1. The product is free (like this blog), and we offer more material in less time.

2. Most of our videos are short, so you can view and listen between tasks, rather than needing to schedule time for them. The average video is five minutes, twenty-eight seconds long. When needed, more videos are used to explain complex topics.

3. No talking heads and no long, boring lectures. We have tried to reconceptualize every aspect of the educational experience to be friendly to the on-line world.

4. It is low bandwidth and mobile-friendly. No ads.

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The Tax Foundation just posted a ton of super-informative, myth-dispelling charts on the U.S. tax system. Here are a few that popped out at me, but there are plenty more at the Tax Foundation website.

1. The U.S. income tax code is very progressive.
2. And it is more progressive than what it used to be.
3. Even with tax breaks, the system is progressive.
4. The rich pay twice as high a tax rate.
5. Want to tax millionaires and and billionaires? Better be quick about it.
6. Income inequality? This explains some of it.
7. Also, the aging of America skews income distribution.
8. Education also plays a huge role in income inequality.
9. Oh, by the way, tax hikes on the rich are also tax hikes on business.
10. Taxing the rich won’t solve the debt problem.

Those charts are very interesting.

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This is an interesting study, from the Tax Foundation.

The record growth in the percentage of Americans who pay no federal income taxes because of the generosity of the credits and deductions in the tax code has received much attention recently.

We find that the growth of nonpayers is strongly associated with increases in transfer payments and the national debt. Indeed, the twenty-year growth in nonpayers is associated with more than $213 billion in increased transfer spending and a 14 percentage point increase in the debt-to-GDP ratio in 2010 alone. These findings imply that when voters perceive the cost of government to be cheaper than it really is, they demand ever more government benefits because they either don’t feel the cost directly or believe that others will be paying those costs.

Our results indicate that the dire fiscal straits we are now in, and which much of Europe is struggling with as well, can only be responsibly addressed through a more balanced tax burden. In particular, so long as income taxes fund the largest part of government spending, exempting half the population from income taxes is not a sustainable fiscal model. Debt accumulation and eventual default await those democracies that fail to connect a majority of voters to the cost of government spending.

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Far from being gloomy, perhaps there’s a positive story here. A story that over the last forty years there has been significant movement by income category among American adults, as would be expected in a dynamic economy, with movement going in both directions. But on net, the changing income dynamics have been positive overall, with about 150 Americans moving up for every 100 Americans who moved down.

There seems to be a lot of effort expended to paint the last 40 years as a period of bleakness and despair. That's not really that true. For a lot of people, it has been a period of upward mobility.

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It is really unfortunate that President Bush’s 2003 tax cuts were not followed by serious spending cuts. I do believe that well-designed tax cuts have a very positive impact on the economy. However, no tax cuts can compensate for the damage caused by the dramatic increase in spending that we experienced during the Bush years (a 60 percent increase in spending above inflation over eight years, compared to Clinton’s 12.5 percent; two Keynesian stimuli in 2001 and 2008; bailouts; and more.)

And if spending is mainly responsible for our current deficit, it should play a large role in addressing the problem — there aren’t many other ways to go about it.

Truth. Veronique de Rugy also mentions that the Washington Post’s Glenn Kessler gave President Obama four Pinocchios for his claim that he was only responsible for 10% of the deficit. According to the data, President Obama was responsible for nearly 40% of the budget deficit. "It was President Bush's fault" is an excuse that's wearing very thin.

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If you had asked an 11-year-old Jeff Bezos to let his imagination run wild and think of the stuff that he would most dream to have as an adult, he might have said:

The world's biggest bookstore! Maybe even a bookstore that can beam any book directly to your hand in an instant (and movies and music, too!).

A giant sky computer that can imitate human intelligence. 

A spaceship.

...And maybe even a robot army. 

Of course any adult would have smiled slightly condescendingly, patted him on the head and helpfully explained that these things aren't possible. 

This is so great. I love what Jeff Bezos has done for the world.

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I mentioned last week that the recent rise in gasoline prices was most likely linked to the recent sanctions on Iran. Apparently, the sanctions were expressly designed to avoid an increase in gas prices.

U.S. sanctions, set out in Section 1245 of the National Defense Authorisation Act for Fiscal 2012 (HR 1540), apply only if the president determines “the price and supply of petroleum and petroleum products produced in countries other than Iran is sufficient to permit purchasers . . . to reduce significantly in volume their purchases from Iran”.

Sanctions do not apply if the president determines an importer has “significantly reduced” its volume of crude purchases from Iran, and the president can waive them altogether if it is in the national interest.

The law mandates experts at the Energy Information Administration (EIA), in conjunction with the departments of Treasury and State and the head of the intelligence community, to review the availability of alternative supplies every 60 days. [Emphasis added.]

So, what went wrong? Here's Sheldon Richman, with two of my favorite economics quotes.

The “experts” don’t know what they’re doing. They may think they do. They surely want us to think that. But they’ve got a problem: The matter they are grappling with does not permit the kind of knowledge they would need to design a plan calibrated to produce the results they seek. They’re up to their eyebrows in data, but what they need more than data they haven’t got, and there’s no way to get it.

The Problem Is People

Rube Goldberg had it easy. He had only to arrange a series of inanimate objects and an occasional parrot to create his problem-solving devices. The expert who tries to calibrate sanctions to harm only Iran, but not oil consumers, have to deal with people. He seems, Adam Smith wrote in The Theory of Moral Sentiments,

to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chose to impress upon it.

F. A. Hayek had something similar in mind in his 1974 Nobel lecture, [“The Pretence of Knowledge”][4]: “[I]n the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process . . . will hardly ever be fully known or measurable.”

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Sensing a theme? Wealth is merely the ability to get things that we want. Since most of us are not independently wealthy, we have to work to create things that other people want in order to get what we want. The most common way to do this since the dawn of the industrial revolution has been to work for someone who needs human labor to accomplish some end–an end that is valued by consumers.

... The point is, our goal should never be to “create jobs”. Our goal should be to enable people to contribute something valued by other people. The value is the point, not the work. If someone finds a way to provide value to hundreds of millions of people and it requires no more effort from them than batting their eyelashes, that would be a win.

... the forward march of technology has made it very difficult for people who have traditionally had low-skill or even middle-skill occupations to contribute value.

Words have meaning, so let's sure we use the right ones. We need to find more ways for more low-skill and medium-skill workers to contribute value. We don't just need jobs.

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