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Monday, September 15, 2014

The productivity of French vs. U.S. workers

This past weekend I attended the rethinking economics conference in New York City. On Friday Sept. 12th Paul Krugman was part of a panel. I have rarely, if ever, agreed with Paul Krugman about anything but he did occasionally defend neo-classical economics against some of the more radical views and I found myself nodding in agreement. But alas the point of this post is to highlight another disagreement.

During one of his comments Mr. Krugman mentioned that French workers were just as productive as U.S. workers and used this statement as a reason for why people in the U.S. could work less without affecting our quality of life. I am not sure what he meant by this since as far as I know there is no law anywhere that mandates how many hours people have to work and thus if people want to work less they are free to do so. But aside from Krugman being Krugman and using a non sequitur to make a point, I was curious as to what he meant when he said that French workers are just as productive as U.S. workers. So I did a little research and came across some articles talking about GDP per hour worked rather than GDP per capita.

GDP per capita in the U.S. was $53,143 in 2013; in France it was $34,140 in 2013. So clearly American workers are more productive when using this measure. But workers also work a lot less in France than in the U.S. According to this article in Fortune, GDP per hour worked was $60 in the U.S. in 2011 and $57 in France. There are other articles that make a similar point. So once hours are taken into account there is not much of a difference between American and French worker productivity. At least that is what it looks like.

What the per hour productivity measures do not take into account as far as I can tell is unemployment and this is a problem. Assuming that unemployed workers are the least productive workers (which is why they are unemployed) a higher unemployment rate will increase the average productivity number because the least productive workers will not being bringing the average down.

For example, suppose both the U.S. and France have 5 workers producing $10, $20, $30, $40, and $50 worth of output per hour respectively. The average for each country is $150/5 = $30 of GDP/worker/hour. Now suppose the least productive workers become unemployed. Suppose 20% of the U.S. workers lose their job (which is 1 worker in this small example) and 40% of the French workers lose their job (which is 2 workers). The U.S. average is now $140/4 = $35 since the $10 worker lost their job and the French average is $120/3 = $40 since both the $10 and the $20 worker lost their job. Thus a higher unemployment rate biases the GDP/worker/hour number up by removing the least productive workers from the labor market and thus the official statistics.

So what were the unemployment rates in France and the U.S.? The overall unemployment rate in the U.S. in Dec. 2011 was 8.5% in the U.S. and 9.4% in France. The youth unemployment rate for France was nearly 23% in Dec. 2011 and was roughly 16.5% in the U.S. The youth unemployment gap is the largest and perhaps the most important since youth are usually relatively unskilled and in low output jobs. Eliminating a relatively large amount of youth from the official statistics is going to make the average larger.

It is always a good idea to take any statistic with a grain of salt before knowing how it was calculated. It might be the case that an official unemployment adjusted statistic of worker output per hour might not affect the average number too much, but the gap would certainly be larger. This makes the number cited in that Fortune article and likely the one Paul Krugman was alluding to essentially meaningless.


Tuesday, September 9, 2014

Local officials in South Carolina are squashing uberX

Below is my most recent article for The Tiger News reprinted.
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Innovation and productive entrepreneurship are crucial for economic growth, which increases the standard of living for people around the world. Unfortunately, regulators at all levels of government often stifle innovative new companies with burdensome rules and regulations that serve the interests of already established companies by keeping competition out. An example of this is happening right now in South Carolina with uberX. 
UberX is a ride sharing service that uses a mobile app to connect drivers to passengers. It recently began operating in South Carolina cities Charleston, Greenville, Columbia, and Myrtle Beach. People who want to be drivers have to pass a background check, a driver history check, and ongoing quality controls in order to be associated with the uberX app. Consumers who want to use the service simply download the app to their smartphone and then when they want a ride somewhere they can pull up the app, designate their pick up spot, and a car will arrive to take them where they want to go. Often uberX is a cheaper alternative to cabs. For example, some sample fares in South Carolina are: $29 from GSP airport to downtown Greenville, $15 from King Street to North Charleston, and $7 from USC to Williams-Brice Stadium.
Of course like any business uberX has its supporters and detractors. In South Carolina the biggest detractors so far are state and city officials. In July 2014 the Office of Regulatory Staff (ORS) filed a petition with the state’s Public Service Commission stating that uber cannot legally operate in South Carolina. Uber drivers in Greenville have reported being stopped by ORS officials who have told them that what they are doing is illegal and that they are subject to fines or even jail time. Myrtle Beach officials have said that uber is not licensed to work in the city and that they plan to cite uber drivers for operating without a business license. The common theme throughout the government crackdown is that uber drivers need the same licenses and certificates as taxi drivers.
An often stated reason for why uber should follow the same rules as taxi companies is customer safety. According to Yellow Cab of Charleston Vice President Jerry CrosbyWe still don’t know what type of report Uber does on drivers. We’re only told they do background checks, but there’s no transparency about exactly what those are.” Eastside Transportation Service President Louie Chemell adds “If you’re operating illegally and you don’t pay those fees, sure it’s going to be a whole lot cheaper”, but “there’s a lot of protection for the customer that is going to be lost.” Messrs. Crosby and Chemell may be genuinely concerned about customer safety, but that is probably not their only motive for wanting uber drivers to be forced to obtain the same licenses as taxi companies. Greenville City Attorney Bob Coler has said that if uber was to be considered a taxi company by the state they would be required to secure a certificate of necessity. This means that the Greenville city manager, not the market, would get to determine whether Greenville needed an additional transportation company. Certificates of necessity preempt the market from deciding whether a good or service is needed by preventing competition. Established companies can tell city officials that an additional company would harm their business and thus is unnecessary. If this sounds like a process that can be abused, it’s because it is just that. In 2009 Otman Benouis was denied a certificate of necessity for his taxi company after John Bacot of Yellow Cab wrote a letter to city manager James Bourey that implied that “expanding service in the area would flood the street with unsafe drivers”.
If living standards are going to continue to increase in this country innovation and the competition it creates are necessary. Competition is what sorts out the good ideas from the bad and helps society decide where to allocate scarce resources. Regulations that stifle productive entrepreneurship and market competition do not help society at large. Instead these regulations enable already established companies to maintain a government created advantage over their competition. Governor Nikki Haley, a Clemson alumna, often promotes her record on job creation. If she truly cares about jobs and expanding opportunities for South Carolinians she will use her position to bring attention to the onerous regulations in South Carolina and call for reform at the local level.

Thursday, September 4, 2014

A living wage will not help the least skilled workers

Nationwide fast food strikes over a "living" wage are back in the news. But as I wrote last year when this was occurring, a higher minimum wage hurts the poorest and least skilled workers. There are better ways to alleviate poverty and those solutions are what we should be focusing on.

Tuesday, August 19, 2014

Some facts about Ferguson, Missouri

Ferguson, MO is the site of a recent police shooting that has drawn national attention. I have been reading some statistics in the news about Ferguson and I wanted to check them out for myself and compare them to St. Louis county as a whole. Ferguson is located within St. Louis county.

Below is a chart that lists statistics for Ferguson and St. Louis county so that readers can see how Ferguson compares to its surroundings. (click on the chart to enlarge)


As noted in the news, Ferguson residents are primarily black, much more than St. Louis county as a whole. Residents of Ferguson are also poorer, less educated, and more likely to be unemployed on average than the county as a whole. Ferguson is a slightly younger city. Ferguson residents also have a lower home-ownership rate than the county, though it is not much lower than the national average of approximately 65%

Many economists, including Thomas Sowell and Walter Williams (see here, here, and here), often point out that the unemployment rate for black youth is much higher than that for white youth and the statistics here support that. The unemployment rate for people aged 16 - 24 is 35.24% in Ferguson, which is primarily black, and only 23.08% in St. Louis county, which is primarily white. Employment is a good way for young people to learn about responsibility, how to interact with others, punctuality, etc. 

Michael Brown, the person who was shot and killed, was 18. I am not sure if he was employed or not, but based on these statistics I would not be surprised if he was not. I am not taking a stance on the justification of the shooting until all of the facts are out, but I feel confident in saying that if there were more job opportunities for youth in Ferguson, MO then the chances of a deadly interaction between teenagers and police would decrease simply because time is scarce and people at work are not walking in the middle of the street. It is my opinion based on my experiences that idle youth of any skin color tend to get in more trouble than employed youth, but this is just my observation and not intended to be a statement of causality. Regardless, the high unemployment rate of black youths and inner city youth in general is a tragedy.

Another thing worth pointing out is that even when controlling for education, which is done in the bottom most portion of the chart, Ferguson residents have lower median earnings. Median earnings of a person with a bachelor's degree in Ferguson are only $38,757 vs. $50,545 in St. Louis county. The gap is even wider for a graduate or professional degree, $51,916 vs. $67,949. Of course the type of degree earned, occupation type, and the actual ability of the individuals are not controlled for in this simple statistic, but it is still interesting in my opinion.

Sunday, August 17, 2014

Corporate inversions are a good thing

Recently politicians on the left have been up in arms over corporate inversions. A corporate inversion is when a company, for example Walgreens, buys a company located in another country in order to lower their tax burden by reincorporating in that country. Many people view this practice as "unpatriotic" including AFL-CIO president Richard Trumka, Senator Elizabeth Warren, and President Obama among others.

Let me first say that in my opinion there is nothing patriotic about paying taxes. Company executives have a duty to maximize value for their shareholders. A lower tax burden means that companies will have more money to either distribute to shareholders as dividends or to reinvest in the business. This is a good thing, not a bad thing. Almost everyone today owns stock in some large, international companies, either in an account that they actively monitor and trade on or in an investment like a Roth IRA or 401 K.

Despite what politicians on the left say it is not at all clear that sending corporate profits to Washington D.C. via taxes is better than keeping that money in the hands of shareholders or reinvesting in the business. In fact, I find it hard to believe that anyone who monitors D.C. spending habits with an unbiased eye would argue that the government spends money in a value maximizing way. It is important to remember that the primary opportunity cost of tax dollars is the purchase that would have been made had the person taxed been able to spend that money as they desired. Even if one believes that the government spends tax dollars on goods and services that people want, this does not mean that the purchases the government makes maximize the utility of the individuals that the money was taken from. A person may want the government to hire a new IRS call center worker, but they may way want a new car more.

In addition to the commonly made opportunity cost argument, the problem with labeling corporate inversions unpatriotic and trying to stop them is that it stifles cross jurisdiction competition for scarce resources. Why shouldn't Ireland or Estonia be able to compete with the U.S. for scarce tax dollars? If another country offers Walgreens a better overall deal than the U.S. then the U.S. should counter with an even better offer, not use force to eliminate the first offer.

Inter-country tax competition ensures that countries stay vigilant about attracting scarce resources rather than become complacent behind nationalistic walls. Like competition at all levels, tax competition and varying corporate rules and regulations allow policy makers to see what systems work best and maximize real value to shareholders, consumers, and workers. It is just like inter-state and inter-city competition within the U.S. If it is not a good idea to put all states under one corporate tax and regulation umbrella why would it be a good idea to put all countries under one? But in effect that is exactly what stopping corporate inversion would be doing. There would be no incentive for countries to implement the most economically efficient corporate tax structure if company movement was forbidden.

Far too often politicians resort to force to stop something they don't like rather than view it as an opportunity to learn about what people want. Competition sorts out the good ideas from the bad and restricting competition will ensure that bad ideas stay around much longer than necessary.

Thursday, August 14, 2014

Immigration and inductive reasoning

Immigration reform is a hot topic and has been for at least the last 10 years, which covers the time that I have been paying attention to it. One of the things I have noticed when I discuss immigration with other people is their desire to make general statements about immigrants, particularly immigrants from Mexico, based on their own experiences. This type of reasoning is inductive reasoning as opposed to deductive reasoning.

Inductive reasoning can be useful. Drawing on personal experiences when discussing larger topics is something that we all do and often is useful for moving a discussion forward. But inductive reasoning does not establish truth. It can only provide evidence that the more general statement that follows from the premise is possible with varying degrees of certainty. The degree of certainty depends on the strength of the premise and other evidence.

In the context of immigration, an inductive argument I hear a lot is of the type:

"All illegal Mexican immigrants I have heard of or have interacted with are only in the U.S. to mooch off of our social safety net. Therefore, all illegal Mexican immigrants are probably here to mooch off of our safety net rather than work."

The premise, that Mexican immigrants are in the U.S. to take advantage of our welfare programs, is based on a limited sample size, namely what the person has read about or seen. The conclusion, that all Mexican immigrants are probably identical to the sample in the premise, extrapolates what the person has experienced into a general statement about an entire group of people. Note that the conclusion may or may not be true; the argument itself does not establish truth.

Deductive reasoning starts from a principle that has been established as truth (or is at least widely believed to be true) and then logically works towards a second truth. A conclusion based on a correctly specified and coherent deductive argument is necessarily true.

For example, a deductive reasoning example of thinking about Mexican immigrants could be:

"People want to obtain the things that they desire at the least possible cost, where costs include not only pecuniary costs but also time, effort, and hardship. Therefore, illegal Mexican immigrants that come to the U.S. and take advantage of our welfare program will only do so if it is the least costly way of obtaining the goods and services that they desire."

Rather than assume that Mexican immigrants are here to mooch off of U.S. taxpayers, the argument above assumes that they respond to incentives, which is more certain. When the argument is presented this way it is more clear where solutions to the welfare problem may be found.

If we raise the relative cost or lower the benefit of being on welfare, less Mexican immigrants would see it as the solution to their economic problem. One way to do this is to make it easier to obtain a green card so that more immigrants can work legally. This lowers the cost of work relative to that of hiding out illegally and mooching off the system. If illegal Mexican immigrants could come out of the shadow economy and get legal permission to work they would be more likely do so. As it stands now, to the extent that they mooch of the system, it is because it is less costly for them to hide underground, draining local resources such as public schools, local hospitals, food banks, churches, local welfare programs, etc. without contributing any tax dollars or donations to the upkeep of such services.

I try to avoid inductive reasoning when possible but like anyone I rely on my own experiences and observations to make sense of the world. Inductive reasoning is not bad, but when a person uses it they should be sure to acknowledge to both themselves and others that their conclusion is only a possibility rather than a certainty. If it is truth that is being sought, deductive reasoning is the only way to get there. And even if the truth proves difficult to get at, deductive reasoning often provides a better framework for analyzing the situation.

Friday, August 1, 2014

Greenville's and Dayton's housing stock

A blog post on a blog I read, Urbanophile, analyzed the housing stock of some Midwestern cities. The author pointed out the uniqueness of Detroit's housing stock, particularly its relatively high amount of older units and detached single family homes. The author argues that older homes are more difficult to renovate and that having a large proportion of single family detached homes in a city limits the ability of developers to construct newer housing that meets the preferences of today's would be city dwellers e.g. areas zoned for single family detached housing make it difficult to construct lofts, apartments, etc.

With this in mind I decided to analyze the housing stocks of Dayton and Greenville. Below is a chart showing occupied housing units grouped by the age they were built for both cities. This data is at the city level, not the MSA level.


As the graph shows Dayton has a much older housing stock than Greenville. This is not surprising considering the Greenville MSA's population, which includes the city itself, has been growing since 1970 while Dayton's has declined. A growing population means new housing has to be built, while a declining or stagnant population means that old houses built in the past when the population was larger are still around.

Roughly 90% of Dayton's housing was built prior to 1979, compared to approximately 67% for Greenville. The real difference is in the amount of housing built prior to 1950; roughly 50% for Dayton compared to only 21% for Greenville. If older housing is truly more difficult and thus costly to renovate or rebuild, Dayton has a larger financial hurdle to clear than Greenville in the coming years.

Below is a graph showing they types of housing units in each city.


Greenville actually has relatively more 1 unit detached housing units occupied than Dayton. Dayton has relatively more occupied large housing complexes consisting of 5 to 20 or more units. I was a little surprised to see that Dayton has a larger percentage of large housing complexes. Having walked around Greenville quite a bit over the last 4 years, especially the downtown,  they appear to have a lot of large complexes compared to Dayton's downtown, though I admit my familiarity with Dayton's downtown is not particularly high.

Based on the criteria laid out in the blog post it appears that the outlook for Dayton is mixed. On the one hand they have a relatively large amount of older housing; on the other hand they also have a relatively good mix of unit types. It is worth mentioning that the numbers used for these charts are occupied housing units, which means Dayton could have a lot of newer unoccupied housing (if developers over built) or a lot of empty 1 unit detached homes (people have left and no one has bought the property). Both of those scenarios seem more likely to be the case in Dayton relative to Greenville, and both would be bad signs for Dayton.

When I have more time I might try to get data on total housing units by age and type. This data was easy to grab so I started here. Here is a link to the tool I used to get the data. It is fairly easy to use and has a lot of data on various geographies, including cities, counties, census tracts, and blocks.