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Published: Wed, 29 Mar 2017 00:00:00 -0400

Last Build Date: Wed, 29 Mar 2017 11:00:12 -0400


Philadelphia Says Soda Tax Revenue Exceeded Projections in February, While Pepsi Stops Offering Two Liter Bottles, Six-Packs

Thu, 23 Mar 2017 15:30:00 -0400

Philadelphia's Department of Revenue says it collected $6.4 million from the city's new soda tax in February, and says that's more than the $5.9 million it projected. Last year the city collected $5.9 million on a projection of $2.3 million. City officials said their projections were conservative because they weren't sure how long it would take for various businesses to comply with the tax, which is required to be paid at the distributor level. While the city was still optimistic last month that it would meet its annual projection of $91 million, that would require monthly revenue of $7.87 million for the remainder of the year. Mayor Jim Kenney initially claimed the tax could bring in $400 million over five years when he proposed a three cent an ounce tax. The tax that passed was half as large, at one and half cents an ounce, although at $91 million for the first year the projections haven't been cut in half. The projections seem particularly unrealistic given long term trends in soda sales, which have been down for more than a decade, hitting a 30-year-low in 2016. Soda companies, which are challenging the Philadelphia tax in court, also say sales are down in the city, which anyone living here should be able to confirm. Pepsi said this week it would stop distributing two-liter bottles and six packs to stores in Philadelphia because of the effect the tax has had on sales. "Because of the Philly Beverage Tax, people are buying far fewer taxed beverages," Pepsi wrote in a letter to store owners, as ABC 6 reported, "particularly those in larger package sizes because they now cost so much more." Pepsi previously laid off dozens of workers in Philadelphia-area plants due to the tax. The city uses Pepsi's opposition to a tax that obviously harms it as a reason to dismiss any of the company's complaints. "Pepsi's reasoning for their layoffs and for no longer distributing certain beverage sizes is all self-reported by a company that is actively fighting to overturn the beverage tax in court," a city spokesperson said according to ABC 6. Pepsi says its sales are down 40 percent in the city and up 10 to 15 percent outside the city. Kinney credited his ability to get a soda tax passed when his predecessor, as well as mayors in other cities, failed to do so, by framing it as an effort to raise revenue for specific proposals (public funding for things like universal pre-K and parks in particular) as opposed to an effort to incentivize healthier choices, as it had often been framed previously. That framing just adds another level of deception. While vice taxes are loathsome tools of social control, at least their nature as taxes whose revenue declines in the long term as consumers alter habits to avoid the tax, is incorporated into the proposal—it's the whole point. Not so here, where the city promises to fund all kinds of things with the new tax, without taking into account that revenues will by design decline, and in fact denying that reality all together. The city wants to get around the problem by borrowing $300 million before the revenue is in to fund the projects it insisted the soda tax would pay for, and blames the ongoing lawsuit, set to go to trial next month and to which state representatives from both major parties have signed on with amicus briefs, for slowing down that process of borrowing money based on rosy revenue projections.[...]

OPEC Cracks?

Tue, 14 Mar 2017 15:05:00 -0400

(image) One of my go-to analysts on oil production is former Italian oilman Leonardo Maugeri, who now works at the Belfer Center at Harvard University. In my book, The End of Doom, I cited his 2012 analysis Oil: The Next Revolution published when oil prices hovered around $100 per barrel in which he correctly predicted that they would drop steeply in the middle of current decade. Why? "Oil is not in short supply. From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no 'peak-oil' in sight," he argued. Maugeri was right: WTI oil fell below $30 per barrel in early 2016.

Last fall, the Organization of Petroleum Exporting Countries (OPEC) and Russia agreed to restrain their production (create a shortage) in order to boost prices. The Saudi Arabians had let their own production rip for the last couple of years in the hope of pushing down oil prices so low that they would bankrupt U.S. shale oil producers. Many rigs did stop drilling, but U.S. producers became much more efficient and many successfully competed with OPEC oil even at the lower prices. The recently higher prices over $50 per barrel spurred by OPEC's supposed production restraint has been a gift to U.S. oil producers who have ramped production back up to over 9 million barrels per day.

In his latest analysis, Maugeri suggests that OPEC's production numbers are fishy and notes that global oil demand is less than anticipated. As if right on cue, the price of WTI crude fell $50 per barrel on the day Maugeri released his new report. From Maugeri:

[W]e still need more data and elements in order to make a sound assessment of what will actually happen on global oil markets in 2017. But it's not too early to raise a red flag: there is something wrong in the numbers that circulate globally about oil supplies. And one thing is for sure: OPEC and non-OPEC cuts are not enough to re-absorb the world's excess supply. So, unless oil demand growth rebounds to record levels in 2017, oil prices could head for another substantial fall.

Peak oil indeed.

In any case, Maugeri does believe that era of cheap oil—sustained prices below $30 per barrel—is over, but thinks that prices will bounce between $50 and $70 until the end of this decade at least.

The Complacent Class, Sex Robots, and Deathbed Regrets: A Conversation with Tyler Cowen

Tue, 14 Mar 2017 14:00:00 -0400

Last week, I sat down with economist Tyler Cowen, of Marginal Revolution and Ethnic Dining Guide fame to talk about his brand-spanking-new book, The Complacent Class: The Self-Defeating Quest for the American Dream on his home turf at the Mercatus Center at George Mason University.

Cowen posits that "restlessness, ambition, and innovation are key American traits. But today, Americans are working harder than ever to avoid change" and notes that Americans are less inclined to pick up stakes and move, less likely to start a business, more likely to marry someone very similar to themselves, and increasingly focused on minimizing exposure to new, challenging, or different experiences. "As a result, we could see a version of America that is more segregated, more unequal, and no longer the leader of tomorrow's greatest achievements."

This chat covers a lot of territory, but if you only have a couple of minutes to listen, skip to 49:45 to hear Tyler go full economist on his hopes for his final moments.

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President Trump: Pharmaceutical Price Controls Are a Bad Idea

Fri, 10 Mar 2017 13:30:00 -0500

At his first post-election press conference, Donald Trump declared that pharmaceutical companies are "getting away with murder" by pricing their drugs too high. "Pharma has a lot of lobbies, a lot of lobbyists, and a lot of power. And there's very little bidding on drugs," Trump said in January. "We're the largest buyer of drugs in the world, and yet we don't bid properly." At a meeting with pharmaceutical company executives later in January, Trump stated, "The U.S. drug companies have produced extraordinary results for our country, but the pricing has been astronomical for our country." He added, "For Medicare, for Medicaid, we have to get the prices way down." Trump was characteristically vague about just how he would lower pharmaceutical prices, but let's assume that Medicare was legally mandated to negotiate prices with drug companies. In this case, "negotiate" amounts to creating price controls since pharmaceutical manufacturers would largely have to take whatever price the government wanted to offer, much like what already occurs in the case of the Veterans Affairs Department. Most companies would likely agree to the government price controls because they would still make money from their existing drugs because marginal costs of each additional pill are so low. What would happen? A new study in Forum for Health Economics & Policy by a team of researchers led by Jeffrey Sullivan at the consultancy Precision Health Economics finds that price controls would indeed reduce the cost of drugs to Medicare Part D participants.* But the unintended consequences to Americans' lives and health in the future would be substantial and bad. The researchers sought to analyze what would happen if Veterans Affairs drug pricing and formulary policies were applied to Medicare Part D—the federal program that subsidizes the costs of prescription drugs for senior citizens. More than 41 million Americans are enrolled in it, and estimated benefits will total $94 billion, representing 15.6 percent of net Medicare outlays in 2017. Without going into great detail, the Veterans Affairs Department sets the federal ceiling price it will pay for drugs at 24 percent below the average price a pharmaceutical company gets from wholesalers. In addition, the VA keeps overall spending down by restricting the drugs to which veterans have access. For example, the Avalere consultancy reported in 2015 that the VA's formulary does not offer access to nearly a fifth of the top 200 most commonly prescribed Medicare Part D drugs. So what would happen if Medicare adopted VA-style price controls? Cutting prices would save Medicare money. The researchers cite a 2013 study by Dean Baker, co-director of the Center for Economic and Policy Research, that calculated that drug price controls could save Medicare between $24.8 and $58.3 billion annually. On the other hand, less revenue to pharmaceutical companies means less money devoted to research and development. A separate study, published in Managerial and Decision Economics in 2007, estimated that cutting prices by 40 to 50 percent in the U.S. will lead to between 30 and 60 percent fewer R&D projects being undertaken. Reduced investments in pharmaceutical R&D consequently results in reduced numbers of new drugs becoming available to patients. A 2009 study in Health Affairs calculated that as a result of fewer innovative pharmaceuticals being developed, average American life expectancy in 2060 would be around 2 years lower than it would otherwise have been. Aiming to calculate the effect of drug price controls on future Medicare savings, Sullivan and his colleagues input these data and estimates into an econometric model that aims to track cohorts of people over the age of 50 and to project their health and economic outcomes. They estimate how both VA-style price controls and formulary restrictions would reduce Medicare drug expenditures, along with their effects on future drug development by pharmaceutical companies between 2010 and 20[...]

Why Trade Can Still Thrive Under a Protectionist Like Donald Trump

Fri, 03 Mar 2017 12:30:00 -0500

Hostility to free trade is now a bipartisan feature of American politics. Donald Trump won last year's election in part by promising to pull out of trade agreements, impose trade tariffs, and preserve jobs in dying industries at all costs. On the left, Bernie Sanders campaigned on protectionism and portrayed the sometimes trade-friendly Hillary Clinton as a tool of big business who had no real sympathy for the plight of blue collar workers. But free trade antagonists like Trump and Sanders tend to paint overly simplistic pictures of how trade actually works, and the ways in which our economy increasingly depends on, and benefits from, a complex web of national and international production. That's what makes Pietra Rivoli's 2005 book The Travels of a T-Shirt in the Global Economy: An Ecomonist Examines the Markets, Power, and Politics of World Trade so valuable. In the book, Rivoli, a Georgetown University international business and finance professor, writes of buying a tourist t-shirt in Fort Lauderdale, Florida, and then meticulously investigates the the economic and political factors of every stage of its production and ultimate sale to the author for $5.99. Rivoli's t-shirt odyssey led her to travel all over the United States and the world—speaking with, among others, cotton farmers in Texas, factory workers in China, and used clothing entrepreneurs in Africa—examining the production and trade of each of the shirt's many components, the political factors that determined the location of each stage of production, and even the economic ramifications of discarded clothing that often ends up in the Third World. The book is a valuable primer on how political considerations affect everything we buy and sell, and how even with both major political parties lurching towards increased hostility to trade, there are always opportunities for innovation. Reason spoke with Rivoli over the phone earler this week. Reason: Your book does a great job of explaining the mechanics of trade, the human costs and benefits, and the political factors that inform every aspect of production. Now that we have a president who is focused on building physical barriers as well as economic barriers, what do you think will be the results say one year, or even five years down the road as a result of President Trump's trade policies? Rivoli: There's a theory in economics called the "mercantilistic approach," which basically said that exports are good and imports are bad. President Trump has talked about our trading relationships with different countries essentially as you might look at a perfect income statement, saying we are losing when we have a trade deficit with country X or country Y. Losing is bad, so we want to try to make trade relations more balanced. But you don't want to look at a trading relationship as an income statement. A trade deficit is not equivalent to a business loss and we don't measure the health or progress of economy using that metric. There are better and more standard metrics, such as job creation or economic growth or standards of living. What crosses borders today are not final goods, what's dominating is trade in tasks, and certain things done in certain places. If you look at a t-shirt, you have all kinds of trade embedded in this t-shirt that does not show up when you just look at the final product. In the case I wrote about [in the book], you have a trade flow when the t-shirt enters the United States and that's what you see in the trade data and statistics when you look at the tag in the back of the shirt. But actually behind that trade flow is lots of other trade that is represented in the global value chain (GVC)—the cotton might have started out in the United States or the yarn might have started out somewhere else. This trade behind the trade is what we call intermediate trade and today constitutes about half or more of global trade flows. This is where you have to be really careful from a policy perspec[...]

Donald Trump Is Wrong about Manufacturing and Economic Patriotism

Fri, 20 Jan 2017 13:40:00 -0500

How misinformed—delusional, even—is Donald Trump's understanding of the economy? Totally. Here's a key passage from his inauguration speech (full transcript after the jump): We've made other countries rich while the wealth, strength and confidence of our country has dissipated over the horizon. One by one, the factories shuttered and left our shores with not even a thought about the millions and millions of American workers that were left behind. The wealth of our middle class has been ripped from their homes and then redistributed all across the world. Let's be clear: Manufacturing jobs (factory jobs) peaked as a percentage of the workforce in 1943 at around 40 percent, during the mobilization efforts for World War II. Since then, they have declined at a perfectly steady rate (red line below). In terms of raw numbers, manufacturing jobs peaked in 1979. The United States produces more stuff with fewer workers. Not only are these jobs never coming back, they disappeared from our shores decades ago. Only people who are wilfully naive or mendacious about basic economic reality and history can continue to assert that declines in manufacturing employment are recent or a major part of contemporary economic dislocation. FFS, I lived in Buffalo from 1990 to 1993 and even then people were saying the factories and the mills had just shut down, even though the big declines were already 20 and more years in the past. Of course, Donald Trump is not alone in constantly talking about bring factory jobs back to America. Bernie Sanders never stops talking about and it was a regular line in Hillary Clinton's stump speech, too. In his early years in the White House, especially while selling the stimulus, Barack Obama also pushed that line, along with a very Trumpian "buy American" provision in the stimulus. To paraphrase Bob Dylan paraphrasing Samuel Johnson, economic patriotism is the last refuge to which a scoundrel clings. In today's global economy—a system that has not only lifted billions of horribly poor people out of extreme poverty but has delivered increasingly improved living standards for Americans—there simply is no such thing as "made in America." Or perhaps a bit less categorically, nothing good will come of increasing the price of imports, whether we're talking about finished goods or raw materials (such as steel). If Donald Trump thinks the "strength and confidence of our country has dissipated over the horizon" due to, say, NAFTA, which increased the amount of U.S. good sold in Mexico, just wait until you have to buy a car built with steel only sourced from western Pennsylvania or made more expensive due to tariffs. One more point: The industrial Midwest (also known as the Rust Belt) was key to Donald Trump's victory. The region remains mired in a decades-long slump; states such as Ohio and Michigan have for years been at or near the top when it comes to job loss and population declines in percentage terms. They don't need less trade with foreign countries, they need more; they also need more in-migration from other states. Whether U.S.-born or foreign-born, an influx of people is a sign of a thriving economy. These states need to create better, cheaper business climates by reducing taxes and regulation if they want to have any chance of competing with parts of the country that have better weather and lower start-up costs. When Reason TV and Drew Carey looked at ways to save Cleveland and other once-great American cities, the comparisons between the Mistake on the Lake and Houston were incredibly telling. Cleveland had dozens of different types of business zones, for instance, while Houston had essentially zero. The paperwork to start a business in Houston took an afternoon, while in Cleveland it stretched on for weeks. These are the fixes that should be discussed and implemented, not cynical and utterly unrealistic appeals to xenophobia and trade wars. Here's a 2009 Reason TV v[...]

How Obama Killed Economic Growth - And Why Trump May Be Even Worse! [Reason Podcast]

Fri, 13 Jan 2017 11:45:00 -0500

As Barack Obama leaves the White House, his supporters point to low unemployment rates and low inflation as proof that his economic policies were a smashing success that saved the United States from another great depression. Gene Epstein, columnist at Barron's and the author of Econospinning: How To Read Between the Lines when the Media Manipulate the Numbers, is having none of it. Pointing to historically low economic growth for the entirety of the 21st century, Epstein says, "I believe what explains the slowdown in economic growth since the year 2000—that is, under George W. Bush and Barack Obama—has been the fairly steady decline in the economic freedom index in the U.S. The bipartisan story in the '70s, '80s, and '90s is that economic freedom...generally rose. And those were eras of generally strong growth." Since 2000, he stresses, Democrats and Republicans have "layered on" all sorts of restrictions on and interventions in economic activity, from major regulations such as Sarbanes-Oxley and Dodd-Frank to TARP bailouts (where bondholders were stiffed at the expense of labor unions) to massive borrowing. Every time the government intervenes or restricts economic freedom, says Epstein, market forces are dampened or frozen, resulting in less activity and innovation. As the United States drops in freedom (as defined by the Fraser Institute), it's no mystery why economic growth is shriveling up. In a new Reason podcast, Epstein tells Nick Gillespie that he doesn't think Donald Trump will be much better, either. Despite deregulatory gestures in some areas (such as energy policy and finance), Trump is full-square in favor of trade protectionism and keeping immigrants out of the country. Free trade and a growing population, especially of immigrants who are ready, willing, and able to work and take economic risks, are vital to a flourishing economy, says Epstein. As important, he explains his (and Barron's) "prescription for U.S. economic growth" is built around cutting almost $9 trillion in planned government spending on the next decade. Born in 1944 and raised in the New York area, Epstein talks about his early years as a socialist who worked for progressive economist Robert Heilbroner at The New School before encounters with the work of Noam Chomsky and Murray Rothbard turned him toward libertarian thinking on economic, foreign, and social policy. Epstein also runs The Soho Forum, a monthly debate that meets in Manhattan's East Village. The next event takes place on January 17 and features Reason's Matt Welch debating Obama's presidential legacy with New York magazine's Jonathan Chait. For details, go here. In November, I debated economist Walter Block about whether libertarians should vote for Donald Trump (go here for a podcast of that). Produced by Ian Keyser. Subscribe to the Reason Podcast at iTunes and never miss an epsiode. Click below to listen now via SoundCloud. src="" width="100%" height="450" frameborder="0"> Follow us at Soundcloud. Subscribe to our YouTube channel. Like us on Facebook. Follow us on Twitter. Subscribe to Reason magazine for just $15 a year![...]

911 Emergency Response System Significantly Reduced U.S. Murder Rate, Says Study

Wed, 11 Jan 2017 12:45:00 -0500

The U.S. homicide rate peaked in 1980 at 10.2 per 100,000 Americans and the number of annual homicides rose to 24,703 in 1991. Since then U.S. homicide rates have been falling and reached 4.5 per 100,000 in 2014 (a rate not seen since the 1950s) and an annual toll of 14,249. Both the rate and number of murders ticked up in 2015 to 5 per 100,000 and 15,809 respectively. Lots of research has been devoted to trying to figure out why homicide rates fell over the past couple of decades. Some researchers focused on higher incarceration rates; others on more effective policing; still others cited the aging population; and some attributed lower homicide rates to better emergency medicine. Given the fact that the data on criminally inflicted gunshot injuries is not collected comprehensively, this this latter claim has been challenged. A fascinating new working paper, "Dial 911 for Murder," by George Mason University economists Thomas Stratmann and David Chandler Thomas argue that advances in the 911 emergency response system over time, combined with the advent of cell phones have contributed significantly to the lower U.S. murder rate because victims are receiving emergency medical care ever more speedily. The argument is that victims of violent gun firearms attacks are increasingly likely to be saved from death thus converting what would have been homicides into aggravated assaults. In addition, they find the establishment of 911 systems initially increased reporting of aggravated assaults and that the subsequent proliferation of cell phones seems to have had a deterrent effect on such assaults. The initial 911 system devised in 1968 connected to an operator who then transferred the call to the police, fire, and ambulance services as appropriate. In the late 1970s, dedicated 911 call centers were established with monitors that displayed the home number and address of callers and from which emergency services were dispatched by trained personnel. Now GPS 911 is rolling out enabling dispatchers to pinpoint callers and dispatch services to people using cell phones. The researchers suggest that "when potential violent street offenders know that cell phone users have a quick way to reach the police, via GPS 911, their incentive to commit a crime decreases." The researchers account for the lethality of weapons over time, socioeconomic changes, improvements in trauma care, and so forth. Once they've parsed the data, they report: While the level of violent crimes, measured as aggravated assaults, is 219 percentage points higher in 2014 than in 1964, homicides in 2014 are eight percentage points lower than in 1964. In this paper, we find support for the hypothesis that the introduction of 911 services explains much of the decrease in homicide rates. Moreover, the introduction of 911 provides an explanation for the divergence between aggravated assault and homicide rates that started in the early 1970s. ...The empirical results in this paper indicate that reductions in emergency response times played a significant role in reducing U.S. homicides over the past 45 years. .... The reported 911 effects are quantitatively important, suggesting more than a 34 percent to 56 percent decrease in homicides that can be attributed to the 911 systems and associated reductions in response times. One simple approach to illustrate the benefits of 911 is to use our estimates to quantify the lives saved by 911 innovations. Such an exercise shows that in 2014, without 911 emergency services, the number of homicides in our sample cities would have been more than 13,000 homicides, instead of the reported 5,872. Citing the trends in Mobile, Alabama they report that the introduction of basic 911 coincided with an immediate 29 percent drop in that city's homicide rate which continued to fall in the following years. However, after the introduction of enhanced 911 in the l[...]

Why Tuition Should Not Be Free and Stupid Policy Experiments Should Be Small, Local, and Temporary

Wed, 04 Jan 2017 18:05:00 -0500

(image) Tonight's Kennedy (Fox Business Network 8 p.m. ET, with a repeat at midnight) is a very funny and informative television program, full of side-lisps and brain holograms and policy experiments and celebrity ISIS poetry, not necessarily in that order (though pretty close).

Reason will be represented in three segments. I'm on the Party Panel, along with funny-talkers Anthony Cumia and Ben Kissel, yakking about the fraught politics of replacing or revising Obamacare, the political optics of Donald Trump's inauguration, Lindsay Lohan's plan to combat ISIS, and the virtues of making dunderheaded economic policy experiments temporary, and on as micro a level as possible.

And shampoo model Robby Soave (pictured) will be on to explain why giving free college to Buffalo residents whose families make twice the state's median income isn't necessarily the most Phi Beta Kappa of plans. A fun time is guaranteed for all!

Minimum Wage Increases Kick In; Start Watching for Winners and Losers

Wed, 04 Jan 2017 11:30:00 -0500

2017 ushered in minimum wage increases in 19 states, some more reasonable than others, and some of which are just the start of a series of massive jumps. There will undoubtedly be "winners" and "losers" in these government-ordered increases, those who see actual raises vs. those who find jobs harder and harder to come by. And it's going to be a challenge to evaluate what truly happened. We are seeing increased automation of low-level low-skilled service jobs. Jacking up the minimum wage is going to increase the speed by which it happens, but it would be foolish to think it wouldn't eventually come regardless. Houman Salem, who owns a small fashion house in the San Fernando Valley out in Los Angeles, took to the op-ed pages of the Los Angeles Times to explain why he's packing up and moving out of California. Los Angeles famously decided to eventually jack up its minimum wages to $15 per hour and the entire state followed suit. Salem's commentary is particularly interesting because he writes about wages as a piece of a larger regulatory burden that affects his ability to do business. He explains that the minimum wage increase is the straw that broke the camel's back because of how difficult California makes it to operate a business: Here's what the math looks like: I pay my employees $10.50 an hour, plus productivity bonuses. In addition, I pay payroll taxes and one of the highest worker compensation rates in the state. Even still, I could likely absorb a minimum wage as high as $11.50 an hour. But a $15-an-hour wage for my employees translates into $18.90 in costs for me — or just under $40,000 a year per full-time employee. When the $15 minimum wage is fully phased in, my company would be losing in excess of $200,000 a year (and far more if my workforce grows as anticipated). That may be a drop in the bucket for large corporations, but a small business cannot absorb such losses. I could try to charge more to offset that cost, but my customers —the companies that are looking for someone to produce their clothing line — wouldn't pay it. The result would be layoffs. The irony here, Salem notes, is that because Nevada's regulatory costs are so much lower than California's, he may actually be able to pay his employees more by moving. Even though Nevada has a lower minimum wage than California, he'd be okay with Nevada raising it, because the overall cost per employee is lower there. (and it's probably also worth noting that the same amount of money goes further in Las Vegas than in Los Angeles, so employees making the same wages are actually wealthier) Salem's warning is a reminder that many of the states with the highest minimum wages also have the most oppressive regulatory atmospheres to do business. And that's naturally going to wreak havoc on businesses with smaller profit margins—anything retail. (Over contributing to Forbes, Tim Worstall blasts a New York Times editorial calling for a higher national minimum wage for not grasping what a small profit margin even large retailers operate on. Over at the Washington Examiner, Jason Russell slams the same editorial for not grasping that different communities have different costs of living.) Massachusetts officially has the highest minimum wage in the country right now at $11 an hour. And yes, it's hurting people. From The Boston Globe: The owner of two family entertainment centers in Massachusetts said she has reduced her staff to 20 people, down from 50, over the past two years, to counteract rising payroll costs. The employer, who asked not to be named because she feared repercussions from workers' advocates, said she and her husband have cut their hours of operation, replaced their DJ with canned music, and are working more themselves to stay afloat. They have also stopped hiring teenagers in favor of more experienced w[...]

How Crony Capitalism Works

Tue, 03 Jan 2017 15:15:00 -0500

(image) Higher campaign contributions by companies helps them to secure more federal government contracts at better terms that yield higher profits, says a new working paper from researchers associated with the Networks Financial Institute at Indiana State University. In "It's a Sweetheart of a Deal: Political Connections and Federal Contracting," economists Stephen Ferris and Reza Houston confirm earlier econometric findings that firms that make more contributions to politicians do better than companies that supply lower or no contributions. They measured political connections of firms by taking into account the size of political contributions made by each company's political action committee (PAC) to directly to Congressional candidates and political parties and to their associated PACs.

Looking at all of the firms listed on the S&P 1500 Composite Index, they find that companies that make above median political contributions received 6.1 to 8.6 times more federal contracts than those making below median contributions. In addition, larger contributors receive larger contracts that are together nearly 17-fold more valuable than the aggregate of those contracts made with companies whose contributions fell below the median.

Additionally, Ferris and Houston wanted to find out whether larger contributors got better contractual terms, that is, sweetheart deals. To probe this, they constructed a four-point Sweetheart Index based on contractual terms that are clearly advantageous to the contractor but not necessarily so for the government. Specifically, they scanned government contracts for no-bid, cost-plus, multi-year, and exemption from cost and pricing data provisions. Obviously, all four provisions enhance the profitability of the contracts. So what did Ferris and Houston find?

We observe that contract terms are consistently more favorable for firms with stronger political connections The overall sweetheart index across all measures of political connectivity is 1.12 for firms making below median political contributions. The corresponding value for those firms making above median contributions is 1.41. The difference in these index values is statistically significant.

So politically connected companies, that is, those make larger contributions to politicians and parties, are not only more likely to be awarded government contracts, they are also more likely to get sweetheart deals. President-elect Donald Trump says that he is going to "drain the swamp" that is Washington, D.C. His own career as crony capitalist and his Carrier intervention do not provide much hope that he will do more than change the denizens who inhabit that particular swamp.

What a Subway Breast-Implant Ad Can Teach Us About U.S. Health Care

Mon, 12 Dec 2016 16:00:00 -0500

For sheer accumulation of elite institutional prestige, it's hard to top Atul Gawande. He is a professor at both Harvard Medical School and the Harvard School of Public Health and a regular contributor to the New Yorker magazine, where I've enjoyed reading and learning from some of his brilliant and fair-minded past work. Gawande greeted the news of Donald Trump's election and its impact on heath-care policy with this gem: "eliminating Obamacare isn't going to stop the unnerving rise in families' health-care costs; it will worsen it. There are only two ways to assure people that if they get cancer or diabetes (or pregnant) they can afford the care they need: a single-payer system or a heavily regulated private one, with the kind of mandates, exchanges, and subsidies that Obama signed into law." A few days later I was in the New York subway and saw a poster advertising plastic surgery. "Breast augmentation," the poster blared: $3,900. "Free consultation, 100% financing available—includes all fees." On the health care financing question, I think the New York subway ad is closer to the truth of the matter than the New Yorker magazine. If there's anything American capitalism is really good at, after all—for better or worse—it's figuring out ways for consumers to pay for things that they otherwise couldn't afford, and may not even need. That new iPhone? Pay for it over two years in connection with your cellphone service contract. A new house? How about a 30-year mortgage, or even an interest-only adjustable rate mortgage? A new car? Lease it for three years. College tuition? Try a section 529 tax-deferred savings account, student loans, and financial aid. Leave cancer or diabetes aside for the moment. With all due respect to Professor Gawande, Harvard, and the New Yorker, it's just hard for me to believe that in the absence of Obamacare, the expense of pregnancy will suddenly become out of reach to ordinary Americans. Somehow, hundreds of millions of Americans managed to become pregnant in the more than two centuries that the republic existed before 2010, when the Patient Protection and Affordable Care Act was passed. If the law is repealed, we'll find a way to reproduce again afterward. If anything, pregnancy and childbirth are fine examples of the way that government involvement, regulations, and subsidies increase the cost of medical care rather than decreasing it. When someone else is paying, all of a sudden any personal financial incentive a patient might have had to see a cheaper nurse-midwife for routine prenatal care rather than a more highly paid obstetrician/gynecologist disappears. Likewise, if the government requires insurance companies to pay for a two-night hospital stay, why go home sooner? Much of the expense of modern pregnancy care—fetal echocardiograms, repeated sonograms, various other tests—relates to a policy agenda of preventing the birth of disabled individuals. That may or may not be a policy agenda worth furthering by making everyone's pregnancy more expensive, but if that is the tradeoff, let's at least be transparent about it, rather than pretending that it's the pregnancy, rather than the disability-birth-prevention, that is the expensive part. The most expensive part of health care is usually a doctor's time. The supply of trained physicians is artificially constrained by limits on how many medical students, residents, and fellows are accepted each year in American medical institutions. Even highly competent and experienced foreign-trained practitioners often are required to repeat their training if they want to immigrate here and practice in America. If Americans were paying directly for their own health care, you might see political pressure build to increase the supply of physicians (and [...]

Trump's Self-Defeating Trade Policy

Mon, 12 Dec 2016 00:01:00 -0500

Opposition to free trade was to Donald Trump's campaign what burgers are to McDonald's: not the entire menu but the essence of the brand. His fabled appeal to rural whites and unemployed steelworkers arose largely from his vow to get tough on foreigners who have been flooding us with goods. It has never been clear whether Trump sincerely believes what he says—given his history of making products in other countries offering low-cost labor—but it's always been apparent that he has no real grasp of the subject. He doesn't know much, and he doesn't know what he doesn't know. When he bragged about the $50 billion the Japanese SoftBank Group plans to invest in the United States, Trump clearly had no clue that it will actually hinder his effort to curb imports. Before people in Japan can make such an investment, they need American dollars, which are not printed in Tokyo. How do Japanese get American dollars? By selling goods or services in the United States. Every increase in foreign investment or lending here has to be accompanied by an equal increase in our trade deficit. It's a simple accounting truism. A $50 billion increase in Japanese investment translates into a $50 billion increase in Japanese imports. Trump can boost foreign investment or reduce imports, but not both. His threat to hit China with stiff tariffs has had similarly self-defeating consequences. Worries he'll start a trade war have caused a sharp decline in China's yuan against the dollar—which will reduce the price of Chinese goods shipped here while raising the cost of American products sold there. After attacking the Chinese for lowering the value of their currency, the president-elect has driven it down for them. He exhibits scant knowledge even on his favorite topics. Though Trump denounces NAFTA as a disaster, I've never heard him cite a single provision he doesn't like. All he knows is that we run a trade deficit with Mexico, which he assumes is a terrible thing. When he visited the Chicago Tribune for an interview with the editorial board last year, he claimed to favor free trade but complained that Ford was building a plant in Mexico and employing Mexicans. Asked whether that isn't how free trade works, he replied, "What do we get out of it?" His answer: "We never get anything." What we get from plants in Mexico that ship goods to the United States is just that—goods Americans want at a price they are willing to pay. The chief benefit of international commerce is that it allows the people of a nation to consume more than they would be able to if they had to make everything for themselves. This proposition is one of the oldest and most durable insights of economics. Trump has the idea that he can save and add American jobs by discouraging U.S. companies from moving production to other countries. He's even threatened to punish those that do. But this is a futile remedy. If gas furnaces can be made at a lower cost in Mexico, it ultimately doesn't solve anything for Carrier to keep manufacturing them in Indiana. Why not? Because its competitors, foreign or domestic, can put their plants in Mexico, gain a cost advantage and take sales away from Carrier. In the long run, Indiana may find that these jobs won't move away; they'll just disappear. Trump assumes he can force companies to build more in the United States by imposing tariffs on goods they make overseas for sale here. It would surprise him to learn that such duties would harm not just American consumers but also American producers. U.S. automakers use a multitude of imported components. Most of the cars built on our soil, in fact, contain more than 25 percent foreign parts. A lot of other products assembled here include materials or pieces made elsewhere. As a result,[...]

Two Immigrants Debate Immigration

Fri, 25 Nov 2016 12:00:00 -0500

Even as the mighty Statue of Liberty beckons the world's "poor and huddled masses" to America's shores, Americans themselves have been ambivalent, to put it mildly, about how many newcomers ought to be welcomed and from where. To the extent that a pro-immigration consensus has existed, it was always an uneasy one. But Donald Trump's meteoric political rise after embracing an extreme restrictionist agenda has shattered that fragile status quo, dividing pundits and public, academics and analysts throughout the 2016 election season. There's an absence of good polling data to shine a light on how immigrants themselves feel about this issue, but it's clear that even they don't all agree. George J. Borjas is a celebrated Harvard University economist who emigrated from Cuba to the United States with his mother at the age of 12, three years after Fidel Castro's regime took over the country and confiscated his father's garment factory. He has made vital contributions to many fields of economics, especially immigration, and has a new book, We Wanted Workers: Unraveling the Immigration Narrative, out this month. In it, he challenges the notion that immigration is "universally beneficial." Shikha Dalmia is a Reason Foundation analyst and a native of New Delhi, India, who came to America 31 years ago as an idealistic student looking to escape the corruption of a socialistic mixed economy. She writes extensively about immigration and firmly believes America shuts the door on outsiders at its economic and spiritual peril. What follows is a spirited exchange between the two on the empirical claims and proposed policy prescriptions in We Wanted Workers. Dear Professor Borjas:Let me congratulate you on a book that is a model of clarity. We Wanted Workers systematically walks readers through the immigration literature. Along the way, it offers a sense of the immensely knotty methodological problems that bedevil the dismal science. Also, I agree completely that the "overreliance on economic modeling and statistical findings" on this subject is a regrettable development that fosters the notion that "purely technocratic determinations of public policy" are possible. In fact, the scientific hubris underlying such efforts prevents a full airing of the normative and ideological commitments that ultimately do—and perhaps should—guide policy. That said, the more I read, the more despondent I got. The publisher's teaser promises that the book "takes a fresh and thought-provoking new look" that parses the claims on the "two extreme poles" of those calling for "tougher laws…in a racially tinged discourse" on one end and those pushing for "more open policies" on the other. But the book focused almost exclusively on the second target while largely ignoring the first, even when its own facts warranted a smackdown. You point out that the pro-immigration camp's claims that America is a magnet for the "best and brightest" are overblown because which foreigners—high-skilled or low-skilled—make a beeline for America depends on how well their skills are rewarded in their own country. Highly egalitarian countries such as Denmark lose their highly skilled workers because, relative to less-skilled counterparts, their labor is rewarded less well, whereas the reverse is the case in highly inegalitarian countries such as Mexico. That's an interesting thesis, but it doesn't explain India, my native country, which has extreme inequality and is among the biggest "donors" of high-skilled talent. It was odd that you shoehorned India into the same category as Canada and Australia as a country with "less inequality." But America's genius is not that it draws the best people but that it draws out the best from peop[...]

In Wired President Obama Praises Progress: But Does Not Know How It Happens

Thu, 27 Oct 2016 15:15:00 -0400

The folks over at Wired invited President Barack Obama to guest edit the November issue of the magazine. The theme is Frontiers. I finally got around to reading the president's introduction to the issue, "Now Is the Greatest Time to Be Alive." I entirely agree with the president. In his essay, the president writes: Let's start with the big picture. By almost every measure, this country is better, and the world is better, than it was 50 years ago, 30 years ago, or even eight years ago. Leave aside the sepia tones of the 1950s, a time when women, minorities, and ­people with disabilities were shut out of huge parts of American life. Just since 1983, when I finished college, things like crime rates, teen pregnancy rates, and poverty rates are all down. Life expectancy is up. The share of Americans with a college education is up too. Tens of mil­lions of Americans recently gained the security of health insurance. Blacks and Latinos have risen up the ranks to lead our businesses and communities. Women are a larger part of our workforce and are earning more money. Once-quiet factories are alive again, with assembly lines churning out the components of a clean-energy age. And just as America has gotten better, so has the world. More countries know democracy. More kids are going to school. A smaller share of humans know chronic hunger or live in extreme poverty. In nearly two dozen countries—including our own—­people now have the freedom to marry whomever they love. And last year the nations of the world joined together to forge the most comprehen­sive agreement to battle climate change in human history. I reported on all of those positive trends and more in my book, The End of Doom. As a politician, President Obama will naturally hype policies like climate change regulation as part of his legacy. But setting that aside, all of his other claims about improvements in the human prospects are true. But where the president disappoints is when he tries to explain how all of this truly marvelous progress occurred. Consider: This kind of progress hasn't happened on its own. It happened because people organized and voted for better prospects; because leaders enacted smart, forward-­looking policies; because people's perspectives opened up, and with them, societies did too. But this progress also happened because we scienced the heck out of our challenges. Science is how we were able to combat acid rain and the AIDS epidemic. Technology is what allowed us to communicate across oceans and empathize with one another when a wall came down in Berlin or a TV personality came out. Without Norman Borlaug's wheat, we could not feed the world's hungry. Without Grace Hopper's code, we might still be analyzing data with pencil and paper.... Because the truth is, while we've made great progress, there's no shortage of challenges ahead: Climate change. Economic inequality. Cybersecurity. Terrorism and gun violence. Cancer, Alzheimer's, and ­antibiotic-resistant superbugs. Just as in the past, to clear these hurdles we're going to need everyone—policy makers and commu­nity leaders, teachers and workers and grassroots activists, presidents and soon-to-be-former presidents. And to accelerate that change, we need science. We need researchers and academics and engineers; programmers, surgeons, and botanists. And most important, we need not only the folks at MIT or Stanford or the NIH but also the mom in West Virginia tinkering with a 3-D printer, the girl on the South Side of Chicago learning to code, the dreamer in San Antonio seeking investors for his new app, the dad in North Dakota learning new skills so he can help lead the green revolution. That's how we wil[...]