Wednesday, December 31, 2014

Government spending: What's the right amount?

Most pundits who talk about government spending do so as a percentage of gross domestic product (GDP). The long term average is roughly 20%, meaning that the amount of government spending in a year is equal to 20% of that year's nominal GDP. But it is not clear to me that government officials should be targeting that long term average as the "normal" level. Take a look at the graph below.


The red line is total federal government spending as a percentage of total GDP and is plotted using the right axis. As you can see it has fluctuated around 18 - 20% since the 1950's. The large spike is World War II. When people talk about maintaining a constant level of government spending they are usually referring to the relatively flat red line.

But why should government spending track productivity? A flat red line means that if GDP increases by 3% government spending increases by 3%. But GDP is a measure of the country's productivity; it does not measure the country's need for government. In fact, I can't think of a compelling reason why the government should spend a constant percentage of GDP.

This brings me to the blue line in the graph. The blue line is plotted using the left axis and it measures the per capita amount of government spending in inflation adjusted dollars. As shown in the graph, it has been increasing steadily from about $2,000 per person in 1950 to $10,000 per person in 2014. So the government spends five times more per person today than it did in 1950. By 1950 we already had the traditional public goods and services that most people think a government should provide: an army, parks, a tax collecting service, the post office and public education to name some of the most common things. Many of the regulatory agencies were also created and funded as well by that time, including the FDA and SEC. In fact, many government services such as national defense, drug and food testing, and parks experience economies of scale. So what have we gotten for this increase in spending?

Since 1950 the government has built and funded the interstate highway system, created the department of education, the EPA, and the Bureau of Alcohol, Tobacco, and Firearms to help fight the war on drugs. Even if you think all of these things should be funded by the government, it only took the government about $5,600 per person in 1980 to do so, about $4,400 less than the government is spending today.


The chart above shows what government spending would be as a percentage of GDP if it had maintained the 1980 per capita level of $5,663. The last row shows that government spending would only be 11.2% of GDP today at that level instead of 20.2%. Maintaining that level of spending would have drastically lowered the national debt, and in my opinion there would have been no reduction in the government services that many people (but not me) think that the government should provide. Looking at these numbers makes one really wonder what the government is spending that extra $4,400 per person on. (Remember, I am not arguing for a constant level of spending. I am arguing for pegging spending to population growth rather than output growth.)

As a country I think we would be better off maintaining a constant blue line at 1980 levels rather than a constant red line. Hopefully when the new Republican congress takes office they implement real spending cuts that bring the blue line down.


Saturday, December 13, 2014

Funding professional stadiums with public money

The Tampa Bay Rays are threatening to leave the city if a new stadium isn't built. This happens all the time throughout professional sports. Teams use the threat of re-location to get taxpayers to fork over some or all of the money required for a new stadium. But should taxpayers fund stadiums?

Some of the arguments made by government officials in support of funding a new stadium include increased attendance and tourism, new jobs, revitalizing downtown areas, and civic pride. There is little evidence that the first 3 reasons ever materialize. It is important to remember that the true cost of anything must include the opportunity cost, which is the value of the next best alternative. So if a government spends $240 million dollars on a stadium, which is what state and local government spent on the Arizona Diamondbacks stadium, the cost is not only the $240 million, but also whatever net benefits the next best use of those funds would have created. So if the next best alternative was better public schools, the true cost was $240 million plus the benefits residents would have gotten from having better public schools (or new museums, a new university, better parks, etc.). When the opportunity cost is included projects that look profitable on paper can turn out to be net losers.

When it comes to attendance, most new stadiums see a temporary bump that quickly dissipates. As an example, according to The Economics of Sports by Michael Leeds and Peter von Allmen when Miller Park in Milwaukee first opened in 2001 attendance for Brewer's games increased from 19,427 to 34,704 per game. By 2003 attendance had declined to 20,992 per game, nearly the same level as in the old ballpark. This trend is seen in other places as well. Shiny new stadiums provide a temporary attendance bump, but if the team fails to achieve success fans will quit going once the novelty of the experience wears off.

The creation of jobs is usually lackluster as well. The aforementioned $240 million dollar investment in Arizona led to 340 full time jobs. The is a cost of $706,000 per job. The Maryland Department of Business and Economic Development calculated that the Baltimore Ravens stadium created jobs at a cost of $127,000 to $331,000 each depending on the estimates. While this is cheaper than Arizona, it is much more expensive than other job creating programs. For example, Maryland's Sunny Day Fund for economic development created 5,200 jobs at a cost of $6,250 per job in the same time period (Leeds & von Allmen). (A more subtle point but one that I think is important is to remember that jobs are a cost, not a benefit, and thus any project that is promoted based on the jobs it will create should be viewed with suspicion.)

As for revitalizing downtown, there are many projects that can do that. If a new stadium is built it often crowds out spending that would occur at other places. Most of the people who attend sporting events are local citizens who would spend their time and money doing other things within the city if the stadium was not there. It is incorrect to attribute all of the spending that occurs at new stadiums as a net benefit, since much of that spending would have taken place at other areas within the city. The increased business that occurs in and around new stadiums is usually accompanied by decreased business in other areas of the city.

There are also many different ways to fund a stadium with public money. In the article above about Tampa Bay, local officials are thinking about using a tourism development tax. The reason for this is that it pushes the cost of the new stadium on to tourists rather than locals and thus it is easier for government officials to justify. The problem with this is that tourism taxes crucially rely on the number of tourists. The Ramsey rule of taxation says that higher taxes should be applied to goods that have relatively more inelastic demand. One of the main things that affect demand elasticity is the availability of substitutes. It seems to me that there are a lot of good substitutes for vacationing in the Tampa Bay area, including other areas of Florida, South Carolina, Georgia, southern California, etc. This means that the elasticity of demand for vacations in the Tampa bay area is probably relatively elastic and that a tax will have a relatively large, negative effect on the amount of tourists. Thus any tax revenue projections that ignore this effect will be overstated. Local officials may project that an increase in the tourism tax will lead to enough money to fund the stadium, but if they ignore or under-estimate the effect that higher prices have on quantity their projections could be wildly off, leaving local taxpayers to make up the difference.

Perhaps the best argument for publicly funding sports stadiums is that it increases civic pride. This means that sports teams act like a public good. So while there may be no monetary benefits, there is a utility benefit that accrues to local residents. People rally around their sports teams during difficult times and take great pride in them when they are doing well. Look at the Saints after hurricane Katrina. That is probably why when most sports fans talk about their team they use the pronoun "we". Fans feel as if they are part of the team, and this is worth something to them. If that is the case I can see why citizens fund some portion of stadiums. But they should probably ignore the other promises.

Sunday, December 7, 2014

How will technology affect cities?

The declining costs and quality advancements of video conferencing over the last several years, and information transmission costs in general, has stimulated more talk about the decline of cities. Other technologies such as the phone, email, and multi-line/conference calling led to similar statements. Yet the city remains.

In 1977, urban geographer Jean Gottman wrote that:

"The telephone provides, when needed, quasi-immediate verbal communication between all the interdependent units at minimum costs...It would have been very difficult for all these complex and integrated networks (in cities) to work in unison without the telephone, which made possible the constant and efficient coordination of all the systems of the large modern city. The telephone helped to make cities bigger and more exciting."

When I read this I wondered if new advancements in transmitting information will have a similar effect. Instead of making cities obsolete, cities will get larger and more complex. Video conferencing will make non-verbal communication quasi-immediate. Many people think that this will eliminate the need for workers to be near each other, but what if it has the opposite effect? I am not sure what form this would take, but if history is a guide it is a possibility.

As information becomes more readily available, people will be able to make decisions quicker and more accurately. User ratings will help us decide immediately who deserves our business and who doesn't; there will be little need to personally know any entrepreneur you interact with in order to build a rapport. City traffic will be alleviated by self-driving cars and smart traffic systems that can adjust on the fly. All of the urban amenities will be available with much lower congestion costs. Of course, if traffic into the city is also reduced it will allow people to liver further away while having similar commuting times, which would have the opposite effect.

I am inclined to believe that cities will continue to thrive along with advancements in technology. Technology has been advancing continuously and at a rapid rate for nearly 300 years and cities continue to grow. It will be interesting to see if this continues in the future.

Tuesday, November 18, 2014

Subsidizing city farms is not a good use of resources

This past weekend I attended the 2014 North American Regional Science Conference in Bethesda, MD. At the conference one attendee presented some research they had done on local and state urban farming policy. Apparently many states and municipalities are subsidizing urban farms, gardens, and farmers markets in an effort to get more healthy food to city residents. Cleveland is one city that is taking part in this trend and getting subsidies from the federal and state government.

I am all for allowing people to use their land how they see fit. I think that if neighborhoods want to start gardens and local farms on unused lots they should not be prevented from doing so by any rules or regulations. However, I don't think that those lots should be specially zoned for farming or that people who want to use them for farming should get any special treatment. Getting rid of silly rules that prevent farming from occurring is a good thing, but promoting farming over other productive uses is wasteful.

The reason it is wasteful is because of comparative advantage. Having a comparative advantage means that you can produce something at a lower opportunity cost than someone else. In the case of farming, rural areas have a comparative advantage over cities because the land used for farming in a city usually has a more productive use than it does in a rural area. For example, let's compare Franklin county Ohio, where Columbus is located, to a nearby rural county, Logan county. Below are the production possibility frontiers (PPF) for both areas. F stands for financial services and the dollar value produced per hour is on the Y axis. A stands for agricultural output and the dollar value produced per hour is on the X axis.



Notice that Franklin county can produce $300/hr of financial services compared to $50/hr in Logan county. Franklin county has an absolute advantage in financial services. If you have ever been to Columbus this make sense. Cities often have agglomeration economies in white collar work due to the lower cost of transferring ideas and information, which makes workers more productive than they are in rural areas. Columbus has several major banks located in it's borders and this makes financial service workers more productive. Both Franklin and Logan can produce $100/hr in agricultural production, so neither has a comparative advantage in A (I could have chose a higher number for Logan but the analysis would be unchanged). 

The opportunity cost of producing another dollar of A in Columbus is $3 of F ($300F = $100A reduces to $3F = $1A). The opportunity cost of producing another dollar of A in Logan is only $0.50 (50F = 100A so 0.5F = 1A) This means that Logan has a comparative advantage in A since they give up less F to produce another dollar of A. Franklin has a comparative advantage in F (1F = 0.33A vs. 1F = 2A). Franklin gives up less A to produce another dollar of F. In this case Logan should specialize in A and Franklin should specialize in F and the two economies should trade with one another. Specialization and trade maximizes production due to the different comparative advantages.

For example, one terms of trade could be $1A = $2F. Franklin, who is specializing in F, would agree with this because if they want to produce another A on their own (called autarky) they have to give up 3 F. With trade they only give up 2. Logan, who is specializing in A, would agree with this because if they wanted 2 more F on their own they would have to give up 4 A. With trade they only give up 1. So both countries can get the good that they don't specialize in cheaper with trade. This is how trade creates value and makes us all better off.

Now suppose the politicians in Ohio decide to subsidize A in Franklin county so that they can be "self sufficient" and "understand where food comes from" and "eat healthier". They do this by taxing another region, like Greene county, and then using those tax dollars (i.e. resources) to subsidize the production of A in Franklin county. If they subsidize it enough, they can eliminate the gains from trade. For example, suppose the subsidies allow Franklin county to increase their production of A to $600/hr. Their new PPF is:


Now the opportunity cost of A is the same in both Franklin and Logan county. The gains from trade between the two have been eliminated. Franklin county can grow their own food, hurrah! But remember that to do this Franklin county needed a subsidy, which can only be raised by taxing some other area. So resources have to be moved from one area to another by the government tax apparatus to make Franklin county as efficient as Logan county in A.

That is what urban farming policy does; it attempts to increase the productivity of urban farms so that it makes economic sense to grow their own food rather than import it from rural areas. This is a waste of resources. Specialization and trade make us rich. The government should not try to create industries or pick winners and losers. If an abandoned lot in Cleveland is put to its highest valued use as a farm then so be it. But if its highest valued use is as a bank, or convenience store, or bar, or bicycle shop then that is what it should be. Government subsidies distort markets and lead to inefficient allocations of resources. Urban farm policy is just one example of this activity that occurs far too often.

Monday, November 10, 2014

How will education impact location choices?

Women have been outpacing men in degrees earned for several years now. As the graphs below show, women earn more bachelor's degrees, master's degrees, and doctorates than men do (click on graphs to enlarge).




It will be interesting to see what impact this has on the labor force, child bearing, and location choices in the future. Married couples in which both individuals have a bachelor's degree or more are called "power couples" in the economics literature and there is strong evidence that power couples are more likely than other couples to locate in the largest and most educated cities. As power couple formation increases will these effects hold up? Or will they diminish as more and more power couples are formed? 

Even though women are outpacing men when it comes to degrees earned, both groups are getting more educated over time. My research shows that a bachelor's or advanced degree increases the probability that a person will locate in a central city within a metropolitan statistical area. As more people earn degrees it could mean more city living. Or perhaps the effect dissipates as more people earn degrees. There is evidence that a bachelor's or advanced degree has a causal effect on locating in a city, which means the effect of education is unlikely to disappear over time. If that is true it means that we should see a larger proportion of people living in cities in the future, all else equal. I am looking forward to seeing whether or not this is true as the data becomes available.

Friday, November 7, 2014

More evidence that the minimum wage harms low skilled workers

In a new NBER working paper analyzing the minimum wage, economists David Neumark, J.M. Ian Salas, and William Wascher conclude that " the best evidence still points to job loss from minimum wages for very low-skilled workers - in particular, for teens." You can find a link to the paper as well as more analysis here.

Even if you think that the minimum wage is too low, it still makes little sense to raise it at the national level. Costs of living vary dramatically by region, state, and city. A national minimum wage set at $10/hr without adjusting for the cost of living will have a larger effect on employment in a low cost place like Easley, SC than it will in San Francisco, CA, where it may not even be binding in many industries.

I am against any minimum wage, but the best bad policy would be to let local voters decide what the minimum wage should be rather than a top down solution from Washington that unevenly harms low skilled workers in low cost areas.


Tuesday, November 4, 2014

The least productive Congress in history?

Several articles have been written about how the current 113th Congress is on track to be the least productive in history. But what does this really mean?

The articles and funny men like John Oliver lament this lack of productivity. It appears that they think that Congress is only useful if it is passing laws that restrict somebody from doing something, because that is what most laws do. Sure every once in a while Congress will repeal a law that is no longer necessary (if it ever was...) but that kind of legislation is rare. If you think that the objective function of Congress is to maximize legislation then I am glad to see an unproductive Congress. Most of the laws enacted today benefit some people at the expense of others. They do not promote a competent or efficient justice system, help provide basic infrastructure, or protect us from foreign enemies. Instead they micro-manage our everyday affairs, waste taxpayer money on special interests, and start wars we have little reason to be engaged in (oh wait, Obama doesn't need legislation for that)

Unfortunately I think that the lack of enacted legislation does not mean that there are less restrictions on individuals. I have not researched this thoroughly but it would not surprise me if the legislation that is passed today is larger and more complex than legislation in the past. For example, the Dodd-Frank financial reform bill is 3,200 pages long and regulators are still writing the rules even though the law was passed in 2010. Obamacare has approximately 10,000 pages of regulations associated with it and counting. Even though these are only two enacted bills, the amount of actual regulation associated with them is enormous. If some people are worried that the 113th Congress is not doing enough to restrict our freedom, please don't worry so much. This Congress is following its predecessor's footsteps nicely. Here is a useful website created by some scholars at the Mercatus Center that shows the amount of regulations passed by various government agencies.

But again, I have to go back to the way news organizations judge a Congress' productivity. The purpose of the legislature is to improve the country, not to simply pass bills. If the standard is legislation that improves the country as opposed to legislation that results from rent-seeking behavior then almost all Congress's have been unproductive. Counting the number of laws enacted is a naive, uninformative way of gauging the productivity of Congress and the people who spout this nonsense should be ignored.

Reasonable people will disagree as to what improves the country, but I think that it is simple laws that create a competent and efficient justice system, protect our borders, and provide some basic infrastructure. Other than that, Congress should leave people alone and let them voluntarily interact with one another. The great Adam Smith stated this in The Wealth of Nations:

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things."

Tuesday, October 21, 2014

Worker's compensation has tracked productivity

Economic theory predicts that worker's compensation should reflect their productivity. Many charts find that this has not been the case for the last 30 years or so, but these studies are flawed. Scott Winship from Economics 21 corrects for the flaws of other studies and shows that compensation has tracked productivity quite well. A good read and very informative.

Monday, October 6, 2014

Declining unemployment rate obscures real problems

I received this sunny message from the White House yesterday glamorizing September's unemployment rate of 5.9%.

But even though the unemployment rate is falling there are still real problems in the economy. The graph below shows the year over year September unemployment rate, employment population ratio, and labor force participation rate from 2006 - 2014. (click on graphs to enlarge)


The unemployment rate is plotted on the left vertical axis and the labor force participation rate and employment/population ratio are on the right vertical axis. While it is true that the unemployment rate is down, the labor force participation rate also continues to fall, from 66.1% in 2006 to 62.7% in 2014. A lower percentage of the population is working and paying taxes than at anytime in the last 8 years and it shows no signs of recovering. I am no fan of taxes, but with the way our government spends money you would think that they would want more people to contribute. Instead people are choosing home production or are working in the underground economy. Too much regulation and uncertainty is making firms reluctant to hire and is preventing a robust recovery.

The employment/population ratio tells the same story, as it is down from 63.1% to 59%. It has leveled off and appears to be rising slightly, but there is a long way to go before it is back to its previous level. The Obama administration is doing nothing to solve these fundamental problems.

And in case someone wants to attribute the falling labor force participation rate to retiring baby boomers, the graph below shows the labor force participation rate for the same time period but for people aged 25 - 54 i.e. the prime working years.


The labor force participation rate for people in their prime working years has also been steadily declining, from 90.4% to 88%.  A lower unemployment rate in light of these numbers simply means that people are leaving the labor force, not that they are getting jobs.

The Obama administration can spin the numbers, but the fact is there are relatively less people working today than before the recession and there are no signs of a real recovery in sight.

Saturday, September 27, 2014

Wage inequality vs. compensation inequality

Some of my fellow grad students at Clemson are doing research on wage inequality. At a seminar yesterday one of them stated that wage inequality between high skilled workers and low skilled workers, where skill is measured by educational attainment with a bachelor's or more being considered high skilled, is still increasing but since the 1990's is doing so at a declining rate. The diagram below shows what this looks like:


The Y axis is the ratio of a high skilled person's wage to a low skilled person's wage. The X axis is time. Two things could be happening to cause this trend; either the high skilled wage could be decreasing over time or the low skilled wage could be increasing over time.

My criticism of wage inequality is that it measures the wrong thing. No economic actor, neither workers nor firms, cares about wages. Firms care about the total cost of hiring a worker and workers care about the total compensation they receive for their labor. Any analysis that ignores other forms of compensation such as health insurance, paid vacation, paid sick leave, paid maternity leave, and other pecuniary and non-pecuniary benefits is incomplete and could be very misleading.

For example, let's just look at compensation as the sum of the wage and the portion of a worker's health insurance premium that is paid by the employer, W + H. Also, let's assume that the insurance premium is not correlated with skill type, but instead only varies by the personal health and family characteristics of the worker. What this means is that a firm will pay the same health insurance premium for a high skilled male who is 50 years old, makes $150K/yr, doesn't smoke, and has 2 teenage children living at home as it will for a lower skilled male in the same circumstances except the low skilled person only makes $45K/yr. I think this is a reasonable assumption, as risk pooling is done based on the risk factors of the individual, not their degree or IQ (of course if IQ is strongly correlated with healthy living this may not be true, but I don't think that is the case).

The wage inequality between these two workers, 150/45, is 3.33. If we set the portion of health care paid by the employer at H = $8K/yr, which appears to be on the low side, then the compensation ratio is 158/53 =  2.98. The addition of a fixed cost to each worker that does not depend on their wage or value added to the firm makes the low skilled worker relatively more expensive than the high skilled worker and decreases the inequality measure that real people actually care about. If health insurance costs to the firm are increasing over time, as the Forbes article linked to above shows, then over time we would expect to see inequality decreasing when total compensation is used instead of wages.

What this means is that inequality may not be as high as people think. The addition of other forms of compensation that stay relatively constant across skill levels decreases the real inequality of the two skill levels.

Some people are probably thinking that most "low skilled" people e.g. high school graduates do not get insurance, paid vacation, sick days, etc. and this is true. So let's think about adding a third category, medium skilled. These are white collar or high skilled blue collar workers who have technical degrees, associates degrees, or bachelor's degrees but are not on an executive management track and earn between $35K/yr and $80K/yr with little prospect of ever earning above the high end of that scale. They are solidly in the middle class and often receive health insurance, paid vacation, etc.

Let's use the $150K for the high skilled worker, $60K for the medium skilled worker, and $30K for the low skilled worker. Let's assume that only the high skilled and the middle skilled receive compensation other than wages. So the high skilled/medium skilled wage ratio is 150/60 = 2.5 and the medium skilled/low skilled wage ratio is 60/30 = 2.

Now let's add insurance and calculate the compensation ratios. The high skilled/medium skilled is 158/68 = 2.32 and the medium skilled/low skilled is 68/30 = 2.27. So when insurance is included the medium skilled worker has become more expensive relative to both the high skilled worker AND the low skilled worker. The addition of other forms of compensation makes medium skilled workers the most expensive workers of the firm from a value added perspective.

If this is happening it can help explain the hollowing out of middle income jobs. Middle income jobs have not recovered since the recession but both low and high skilled have. Employers may have been waiting for an opportunity to reduce their middle income workforce because of the compensation dynamics I just described above and the recession presented the opportunity to do so. Now they are reluctant to create those jobs again because they are relatively more expensive than both high and low skilled jobs due to the fixed forms of compensation that stay relatively constant across skill level.

I am not claiming that this is precisely what happened but it is one story. I would like to see some more evidence but unfortunately there is not much data available on total compensation which is why nearly all of the inequality studies use wage. But that is an incomplete measure and ignores the story I just told.

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 be 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 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.
-------------------------------------------------------------------------------------



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.

Tuesday, July 29, 2014

Speaking of the drug war....

From the Washington Post. Just another mistaken identity that resulted in the beating of an innocent bystander.
"Josue Gonzalez, 27, fled from police away from Loop 410 along the Highway 151 access road before he exited at Westover Hills and ditched his car in the parking lot of a restaurant. The restaurant is a few hundred feet from where Carlos was standing.
“All three of them started beating me on the head,” said Carlos, who still showed visible signs of the beating when he spoke with KENS 5 weeks after the incident.
“It was unbelievable. I couldn’t believe it was happening to me.”
Carlos said he was struck about 50 times, even though he complied with the officers’ instructions and did not fight back.
Shortly after being handcuffed and explaining to officers that he owned the property, a fourth officer approached and said the suspect was in custody nearby."
And here is an important website from the Cato Institute that tracks police misconduct nationwide.

Discouraging drug use: prohibition or taxes?

Marijuana has been legalized in several states in the U.S. recently, including Colorado and Washington. So fare there have been no major problems with drug use and Colorado officials project to take in $30.6 million in revenue for the first fiscal year. This is not as much as previously projected, however, and one possible reason mentioned in the article is that medical marijuana is a cheaper alternative due to the insurance subsidies and thus people who should be buying retail are getting prescriptions instead. But that is a separate issue that does not change the fact that the Colorado government is making money taxing marijuana.

In my opinion the result in Colorado from legalizing marijuana would hold for harder drugs as well, and I will explain why. Let's take heroin for example. Many heroin uses are addicted to the drug or at the very least really enjoy the effects the drug has on them. If that is true, this means that their demand for the drug is price inelastic, meaning that if the price rises they will not drastically reduce their consumption of the good. Below is a diagram portraying a market for a drug like heroin. Price is on the vertical axis, quantity is on the horizontal axis.


The demand curve is relatively vertical, which portrays the inelastic demand for a drug like heroin. The point Q1*, P1*, where supply curve S1 intersects demand curve D, is the initial equilibrium quantity and price for heroin. The U.S.'s current method for decreasing drug use is largely based on attacking the supply side; the DEA goes after large drug dealers and tries to prevent drugs from crossing the border. They also raid poppy fields in places like Afghanistan to reduce the supply. This can be shown in the graph by shifting supply from S1 back to S2. When this happens the equilibrium quantity decreases from Q1* to Q2* and the price rises from P1* to P2*.

What the diagram shows is that the equilibrium price for heroin increases by more than the equilibrium quantity for heroin decreases. If that is the case, total revenue from selling heroin will actually increase when the supply is reduced from S1 to S2. This is because the increase in the price more than offsets the decrease in the quantity, and since total revenue is price times quantity the total revenue will increase. Depending on a dealers cost structure, their risk aversion, and the penalties for being caught, it is possible that the higher price makes dealing heroin even more lucrative than before the reduction in supply. A relatively high price would induce more dealers to enter the heroin market. In fact, there is evidence that drugs like heroin are more available than ever. The article also claims the drugs are cheaper too, which could happen if the government is unable to reduce supply (shift back to S2) as fast as the dealers increase it (shift S1 to the right), either by expanding existing capacity or from new dealers entering the market.

So if the war on drugs isn't working, what is an alternative? One option is to treat drugs such as heroin like cigarettes and marijuana; legalize them, tax them and regulate them. Below is a graph similar to the one above, only it portrays what an excise tax on heroin would look like.


In this scenario, instead of targeting the supply side governments would tax the demand side. An excise tax would be placed on heroin, like the tax on cigarettes or marijuana. This would shift the demand curve left from D1 to D2. Consumers would pay the high price labeled Pc* and producers of heroin would receive the low price Ps*. The gap between them, the tax, would go to the government.

This policy has some advantages over the first scenario. First, it lowers the price producers receive instead of raising it. Second, governments take in tax revenue equal to the TAX times Q2*. This revenue can be used to fund rehabilitation and education programs for heroin users. Third, the money used to fund the DEA and to care for prisoners convicted of non-violent drug offenses could be used on other things society values, such as infrastructure, education, etc.

The analysis presented here is certainly not complete; some details and dynamics were omitted. But as a first approximation I think it makes a case for legalizing, regulating, and taxing drugs instead of criminalizing them.

Thursday, July 24, 2014

The worker shortage myth leads to crony capitalism

In my inbox on July 22nd was an email from VP Joe Biden. The title is "Good for business, good for workers, good for the economy". In the email he talks about the importance of job training programs:

"During his State of the Union address, the President asked me to lead an across-the-board review of our nation's job-training programs.
It's a top priority for the President, and it is absolutely critical to our economy's success."

The VP states in the email that businesses have told him they can't find workers:

"We’ve heard from businesses that many jobs in today's brightest sectors go unfilled because there simply aren't enough people with the skills to do them. " 

But as I explained in an earlier post, a shortage of workers only exists at a non-equilibrium price. If firms want more workers all they have to do is increase the wage they are willing to pay them. We don't need to use taxpayer money to subsidize worker training for firms. But that is what VP Biden wants to do:

"Some of our country's businesses, community colleges, and state and local training programs -- often supported with federal dollars -- have found ways to successfully prepare Americans for these jobs. " 

The worker shortage myth has led to taxpayers footing some of the bill to train workers for profitable firms. This is crony capitalism, or as John Stossel calls it, crapitalism. Job training programs may be good for businesses and good for the workers who get trained, but they are not good for the economy as a whole and certainly not good for the taxpayers.
 

Wednesday, July 23, 2014

Joe Biden on rebuilding America

Here is a video just released by the White House of VP Joe Biden trying to convince Americans that it is necessary to rebuild our crumbling infrastructure. But as I pointed out in an earlier post the Obama administration is not interested in maximizing the taxpayer's investment, so why should we trust the government with our money?


Tuesday, July 22, 2014

You can't maximize costs and profit

In the principles of microeconomics class I am currently teaching we just covered the perfect competition and monopoly models. In the beginning of the lecture I explain to them that the goal of a firm is to make a profit. Profit is defined as total revenue minus total costs i.e. Profit = TR - TC. This is pretty basic stuff. After all, a firm won't be in business for long if their total costs exceed their total revenue on a regular basis.

The idea of maximizing profit is common sense for any business owner, yet the federal government has convinced many people that the goal of a government program is to maximize costs, not profit or net benefit. For example, in February of 2014 President Obama signed an executive order mandating that federal contractors be paid no less than $10.10 per hour. This is consistent with his repeated (and misguided) call for an increase in the federal minimum wage to $10.10 per hour.

Also in February, the Obama administration announced new TIGER grants for transportation projects. This program aligns with one of his other often repeated goals of creating jobs via infrastructure spending. From whitehouse.gov:

The President explained that "one of the fastest and best ways to create good jobs is by rebuilding America’s infrastructure -- our roads, our bridges, our rails, our ports, our airports, our schools, our power grids. We’ve got a lot of work to do out there, and we’ve got to put folks to work."

These programs make it clear that Obama stands firmly behind paying government workers more and creating jobs. And this also means that Obama is not interested in maximizing the profit, or net benefit, of these government initiatives for the taxpayers who are funding them. Remember, Profit = TR - TC. Paying workers more and paying more workers are both COSTS. If you increase costs and total revenue does not change profit must be going down, not up.

One of the things I tell my students and one concept that you learn in economics training is that MAXIMIZING PROFITS and MINIMIZING COSTS for a given level of output are the SAME THING. So when Obama raises costs by creating jobs (hiring more workers) and then paying each worker more than the market rate he is necessarily lowering the net benefit of the project to the taxpayer. What would a private sector employer say if she was shown a cost benefit analysis with the labor costs on the benefits side? Hopefully she would fire that worker and hire another one who is competent. Yet somehow the national dialogue has become such that creating jobs and paying workers more is a good thing for the taxpayer i.e. it is a benefit.

One of the fundamental objectives of economics as a science is to come up with the most efficient way to allocate scarce resources. Yet many on the left, including some economists, and even some on the right have come to the absurd conclusion that using more resources than necessary to create a given level of output makes society better off. If increasing costs and wasting scarce resources can really make us better off than there is little reason for economics as a discipline to exist. It does not take specialized training to learn how to waste stuff.