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All Reason.com articles with the "Economics" tag.



Published: Fri, 28 Apr 2017 00:00:00 -0400

Last Build Date: Fri, 28 Apr 2017 04:11:57 -0400

 



Katherine Mangu-Ward and Tyler Cowen on Robots, Death, and Complacency [Reason Podcast]

Fri, 14 Apr 2017 16:15:00 -0400

"When there's volitility, people will latch on to some non-optimal ideas," says George Mason economist Tyler Cowen in a conversation about his new book, The Complacent Class, with Reason magazine Editor in Chief Katherine Mangu-Ward. In a wide-ranging conversation that took place at the Mercatus Center in March, Mangu-Ward and Cowen cover automation, mobility, Donald Trump, productivity, immigration, whether complacency is a "rot" overtaking the United States, and whether we should be embarrassed by the fact that we order our dates, entertainment, groceries, and toilet paper without leaving our sofas.

Are you complacent? Before you listen to the podcast, take the quiz and find out.

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Welcoming Immigrants Means Higher Wages

Fri, 14 Apr 2017 13:30:00 -0400

"The benefits that immigration brings to society far outweigh their costs," declares an open letter to congressional leaders and President Donald Trump. The letter, published on Wednesday and signed by nearly 1,500 economists—including six Nobel Prize winners—notes that immigrant entrepreneurs start new businesses that hire lots of Americans; that immigrants are far more likely to work in innovative, job-creating fields such as science, technology, and engineering; and that they bring diverse skill sets that keep our workforce flexible, help companies grow, and increase the productivity of American workers. A new study parsing employment data between 1991 and 2008 confirms that immigrants significantly boost both the productivity and the wages of workers. The paper, published this week in the journal Economic Geography, compares how 160 U.S. metropolitan areas are faring according to the statistics compiled by the Census Bureau's Longitudinal Employer-Household Dynamics program. (This dataset has information on more than 30 million workers at 1.2 million businesses, including their sex, age, race, wages, length of employment, education, and country of birth.) The authors, economic geographers Abigail Cooke of SUNY-Buffalo and Tom Kemeny of the University of Southampton, note that "inclusive institutions" encourage trust, lowering costs and fostering cooperation. To get a handle on how inclusive various American cities are with respect to immigrants, the two researchers devise two indicators. The first measures how widespread social capital is in each city, and the second accounts for pro- and anti-immigrant ordinances adopted by local governments. Social capital consists of the connections of trust between individuals and entities that can be economically valuable. The authors constructed their indicator for social capital by assessing data from the County Business Patterns on the number of social, political, advocacy, business, professional, and labor associations per 10,000 residents in each metropolitan area. They also take into account the number of gathering places, such as specialty food shops, restaurants, cafés, bars, hair salons, corner stores, fitness centers, sports clubs, and bowling alleys. For a stark contrast between places with inclusive institutions and those without, the researchers focus their analysis on the cities that scored in the top and bottom third of their social capital indicator. Municipalities with the highest social capital included Appleton, Wisconsin; Des Moines, Iowa; and Trenton, New Jersey. Those with the lowest include McAllen, Texas; Fayetteville, North Carolina; and San Bernardino, California. Next they develop an inclusiveness indicator based on pro- and anti-immigration ordinances enacted by various metropolitan areas. They note that most of the ordinances specifically focus on undocumented immigrants, but they argue that their adoption indicates residents' attitudes toward immigration more generally. Some cities pass English-only rules or try to punish employers who hire undocumented immigrants; others pass sanctuary laws. In their analysis, they include the 160 urban areas that alternatively crossed thresholds in which at least 50 percent of their municipalities and counties had adopted either pro- or anti-immigrant ordinances. Metropolitan regions with more mixed policies were excluded. Among the cities scoring highest on the pro-immigrant indicator were Salem, Oregon; Austin, Texas; and Fresno, California. Anti-immigrant areas included Charlotte, North Carolina; Green Bay, Wisconsin; and Harrisonburg, Virginia. On top of all that, the researchers used the Census data to determine what percentage of people in each urban area is native and foreign-born. They also follow people's work and wage histories. The results? "What we found was remarkable. In cities that are unwelcoming to immigrants, as diversity rises, people's wages either don't change, or they go up by only a small amount," said Cooke in a statement released by SUNY-Buffalo. "In cities[...]



Immigrant Diversity Boosts Native-Born Wages: New at Reason

Fri, 14 Apr 2017 13:30:00 -0400

(image) "The benefits that immigration brings to society far outweigh their costs," declares an open letter to congressional leaders and President Donald Trump. The letter, published on Wednesday and signed by nearly 1,500 economists—including six Nobel Prize winners—notes that immigrant entrepreneurs start new businesses that hire lots of Americans; that immigrants are far more likely to work in innovative, job-creating fields such as science, technology, and engineering; and that they bring diverse skill sets that keep our workforce flexible, help companies grow, and increase the productivity of American workers. A new study in the journal Economic Geography parsing employment data between 1991 and 2008 confirms that immigrants significantly boost both the productivity and the wages of workers.




How Payday Lenders and Check Cashers Help the Poor

Thu, 13 Apr 2017 13:23:00 -0400

Payday lenders and check cashers have never been more popular with consumers. There are more payday lenders in the U.S. than there are McDonald's locations and Starbucks combined. Yet their business practice of charging extremely high fees and interest rates is widely condemned. Do alternative financial service providers merit their reputation as rip-off artists? Why do their customers choose to remain "unbanked?" To better understand how these businesses operate and why people choose to patronize them, Lisa Servon took a break from teaching at the University of Pennsylvania to work as a teller in the South Bronx and Oakland. She discovered that traditional banks are neglecting the poor and bilking the middle class, leaving payday lenders and check cashers to fill a crucial need. Reason's Todd Krainin spoke with Servon about The Unbanking of America: How the New Middle Class Survives, a first-hand account of what may be America's most widely misunderstood industry. Read J.D. Tuccille's review of the book from our March 2017 issue. Read Finance on the Fringe, our look at alternative banking services fifteen years ago. Produced, edited, and hosted by Todd Krainin. Cameras by Meredith Bragg and Josh Swain. Subscribe to our YouTube channel. Like us on Facebook. Follow us on Twitter. Subscribe to our podcast at iTunes. This is a rush transcript—check all quotes against the audio for accuracy. Todd Krainin: The first thing that really struck me in the book is that there are more payday lenders and check cashers in the United States than McDonald's and Starbucks combined. Is that true? Lisa Servon: Yes. Todd Krainin: That sounds crazy. Lisa Servon: It's actually just payday lenders, right? Todd Krainin: Right. Lisa Servon: Not even counting the check cashers, and that's an important difference because, in 13 states, payday lending is illegal. Todd Krainin: That speaks to some incredible need for this, what you call, alternative banking services. Lisa Servon: Exactly. Exactly. Particularly in the case of payday lenders for short term credit; small amounts of money for a small amount of time. Todd Krainin: What gave you the idea to take a break from your Ivy League job and work, of all places, in the South Bronx? Lisa Servon: I was interested in why so many people were using alternative financial services ... Payday lenders, check cashers, pawnshops ... when the story about them that you hear in the press, and even from consumer advocates and from policymakers, is that they're predatory, they're taking advantage of poor people, and yet, in the early '90s, you started to see an upward trajectory of use. These businesses are growing an incredible amount. Payday lending grew from a $10 billion business to a $30 billion business in about 10 years in the early 2000s. The implicit message in all of that writing was that low income people who were presumed to be the primary users ... I found out that wasn't exactly true either ... were somehow making bad decisions, that they weren't informed enough. If only they had the information that wealthier upper middle class people had then they would choose differently. That's the whole implicit message, even in the FDIC's categorization of people who's banked, unbanked, under-banked. By looking at the numbers, I couldn't really figure it out. I knew from working in poor communities for 20 years that low income people know where their money goes, probably more than people who have more of a buffer. I realize that if I wanted to really understand it, I had to get as close to the problem as possible. When you're a researcher, you have to match the method to the question. The only method I could really figure out was to get really close. I knew that even just talking to people and interviewing them would not give me the full story. It turned out to be right. Really, by working behind the window for months and looking at the way that people manage their money, I learned a ton. Todd Krainin: These check cashers are o[...]



The United Airlines Incident Does Not Require New Laws, Despite What Chris Christie Says. It Could Have Been Resolved by Intelligent Use of Markets.

Wed, 12 Apr 2017 13:45:00 -0400

Predictably, America's least popular governor, Chris Christie of New Jersey, approaches the national conversation generated by Chicago aviation police beating up and dragging Dr. David Dao off a United Airlines flight on Sunday by demanding more legal action. Christie, a Republican, is calling for quick federal action to ban the process of "overbooking," that is, selling more seats on an airplane than there are physically available. As a post here explained the other day, a libertarian-leaning economist, the late Julian Simon, invented and policy-entrepreneured into existence a wonderful price-system, free-market model for solving the problem of overbooking. Here's how it usually works: the airline starts offering monetary incentives (could be flight vouchers or cash or other considerations) to get enough customers to voluntarily give up their seat, increasing the offered price until the market for seats has cleared, that is, you've found enough people to give up the seat they paid for. That way everyone is happy, either with their seat or with payment that the person considers sufficient to make up for losing the seat. My criticisms of United and the police in this incident are not based on general hostility to overbooking, which both makes great economic sense for the airlines, almost certainly makes ticket prices less than they otherwise would be for customers, and creates win-win scenarios for airlines and passengers when the airline is smart enough to actually carry through the Simon policy to a market-clearing result. In the case of this United flight from which Dao was violently ejected, by all accounts United tried two rounds of offers, and after $800 decided to start busting heads. There is zero reason to believe that quick increases in the price offered to voluntarily abandon your seat would not have resolved this situation far more quickly and justly than calling the cops on Dao. (And, almost certainly after all the dings in the market and possibly the courts ahead for United, it all would have been far less costly for United as well.) Free market types are understandably attracted to explanations for seemingly idiotic or perverse behavior on the part of companies that blame government. In the conversation surrounding this United debacle, I've seen many people excited about a Department of Transportation regulation that sets a cap on the airlines legal obligation to pay off those bumped from an overbooked flight: Compensation shall be 400% of the fare to the passenger's destination or first stopover, with a maximum of $1,350, if the carrier does not offer alternate transportation that, at the time the arrangement is made, is planned to arrive at the airport of the passenger's first stopover, or if none, the airport of the passenger's final destination less than two hours after the planned arrival time of the passenger's original flight. But that has no application to United's bad decisions in the case of Dao's abuse. (Remember, the police's equally bad decisions were triggered by United's bad decision; while the cops should have been more curious about why they were asked to commit violence against Dao, they did so because the airline decided to treat him as an intruder on their property for no good reason, when what he was was a paying customer.) First, by all reports United didn't even reach their regulatory obligation to offer as much as $1,350 as an incentive. (I am discounting as extremely unlikely any possibility that no one on that plane paid more than $200 for a seat, though if that were so they would have met the obligation by offering 400 percent of that.) Second, despite how some want to interpret it, nothing in that regulation says it is illegal to offer more as compensation. It is not written as a price ceiling. It merely says the airlines' legally ordered obligation to the bumped will thus be met. Nor have I seen anyone point to any case law that seems to complicate my read of what the[...]



Why Should Police Help United Airlines Cheat Its Customers?

Mon, 10 Apr 2017 14:15:00 -0400

The world is rightly abuzz over an awful incident yesterday in which a man was beaten and dragged off a plane by police at Chicago's O'Hare airport for the crime of wanting to use the seat he's paid for on a United Airline flight getting ready to leave for Louisville. The man claimed to be a doctor who had patients to see the next morning, explaining why he neither took an initial offer made to everyone on the plane to accept $400 and a hotel room for the night in exchange for voluntarily giving up his seat nor wanted to obey a straight-up order to leave, in an attempt on United's part to clear four seats for its own employees on the full flight. No one considered even the $800 that was offered after everyone had boarded enough for the inconvenience, so United picked four seats and just ordered those in them to vacate. But the one man in question was not interested in obeying. (Buzzfeed reports, based on tweets from other passengers, that the bloodied man did eventually return to the plane.) While United's customer service policies in this case are clearly heinous and absurd, let's not forget to also cast blame on the police officers who actually committed the brutality on United's behalf. NPR reports that the cops attacking the man "appear to be wearing the uniforms of Chicago aviation police." While there may be something to be said for the ability for private businesses to summon the help of the police to remove people from their premises if they refuse to leave peacefully and their presence is unwanted, there is no excuse for the police to cooperate when the reason their presence is unwanted is not "causing a disturbance" or being violent or threatening to other customers, or stealing goods or services, or doing anything wrong at all, but rather wanting to peacefully use the service they legitimately paid for. Shame on both United for calling the cops on a passenger to make the lives of their employees and business easier, and shame on the police for having any part of it. [UPDATE: According to A.P., others may agree with the above; "Chicago aviation department says officer involved in dragging man off United flight placed on leave," A.P. tweets.] Buzzfeed News reports an interesting tag team of evaded responsibility as they tried to report on whether this was standard operating procedure. When asked why the airline had the man forcibly removed, and whether that was standard procedure in cases of overbooked flights, United refused to comment. Instead they told BuzzFeed News all further questions should be referred to Chicago Police. BuzzFeed News contacted Chicago Police and were told to contact the Chicago Department of Aviation. When BuzzFeed News contacted the Chicago Department of Aviation they were transferred to a TSA message bank. A TSA spokesperson later told BuzzFeed News they were not involved and to contact Chicago Police. It is not surprising that the wonderful and, if the price offered goes high enough always effective, voluntary means to get passengers to surrender an overbooked flight was developed by a fascinating economist from the libertarian movement thoughtworld, Julian Simon, whose role in the wonderful, rights-respecting, and economically efficient policy is detailed in this 2009 story from the Illinois News Bureau: Thirty years ago, U.S. airlines stopped arbitrarily grounding passengers on overbooked flights, instead offering rewards if travelers give up seats to make room for hurried fliers who need to touch down on time. Economist James Heins says the seemingly subtle switch has provided a $100 billion jolt to the U.S. economy over the last three decades - allowing airlines to run fuller, more profitable flights that in turn has trimmed air fares and increased tax revenue. Now, he hopes the milestone anniversary finally yields much-due credit for the late Julian Simon, a fellow economist well known for slaying gloom-and-doom population growth forecasts b[...]



Venezuela Reminds Us That Socialism Frequently Leads to Dictatorship

Tue, 04 Apr 2017 07:00:00 -0400

On March 29, the Supreme Court of Venezuela dissolved the country's elected legislature, allowing Venezuela's top court to write future laws. The court is filled with allies of Venezuela's socialist president, Nicolas Maduro, while the legislature is dominated by Maduro's opponents, and the court's ruling was seen as the latest step on Venezuela's descent into a full-fledged dictatorship. But following international outcry—as well as the appearance of cracks within Maduro's own party—the court reversed itself just a few days later, on April 1. Thus, the uneasy standoff between Venezeula's legislature and executive is set to continue. Last week's episode is only the latest reminder of the tendency of socialism to lead to dictatorship, as identified by the Nobel Prize-winning economist Friedrich Hayek in The Road to Serfdom. In 1944, when he wrote his book, Hayek noted that the crimes of the German National Socialists and Soviet Communists were, in great part, the result of growing state control over the economy. As he explained, growing state interference in the economy leads to massive inefficiencies and long queues outside empty shops. A state of perpetual economic crisis then leads to calls for more planning. But economic planning is inimical to freedom. As there can be no agreement on a single plan in a free society, the centralization of economic decision-making has to be accompanied by centralization of political power in the hands of a small elite. When, in the end, the failure of central planning becomes undeniable, totalitarian regimes tend to silence the dissenters—sometimes through mass murder. Hayek was fortunate enough to live to see the defeat of both the Nazi and Soviet totalitarian regimes. Unfortunately, there are still places where Hayek's most dire warnings remain relevant. Nicolas Maduro's Venezuela is one such place. Beginning in 1999, when Maduro's predecessor, the late Hugo Chavez, became President, the government has played an ever-increasing role in the Venezuelan economy. Price and wage controls were put in place, trade was restricted, and private property was expropriated—often without compensation. Partly as a result of those economically illiterate actions (the fall in the price of oil, which Venezuela depends on, did not have such dire consequences in any other oil-rich country), Venezuela's economy tanked and public opposition to the ruling regime increased. Thus, the 2015 parliamentary election saw the opposition to Maduro's leftist policies capture a super-majority in the country's National Assembly. Unfortunately, socialism, in spite of its manifest failings and Hayek's warnings, refuses to go away. Wannabe socialists are thus destined to learn not from history, but from their own mistakes. In the meantime, ordinary people suffer. To give just one example, between 1999, when Hugo Chavez took over as President, and 2016, average per capita income in Venezuela rose by 2 percent. In the rest of Latin America and the Caribbean, it rose by 41 percent. A similar story can be observed in Zimbabwe. Robert Mugabe, Chavez's erstwhile friend, has been in charge of his unfortunate country since 1980. Since then, Africa's income per person rose by 48 percent. In Zimbabwe, a socialist dictatorship, it has declined by 25 percent. Plus ça change, plus c'est la même chose. [...]



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[...]



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. T[...]



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 Clevela[...]



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="https://w.soundcloud.com/player/?url=https%3A//api.soundcloud.com/tracks/302528694&auto_play=false&hide_related=false&show_comments=true&show_user=true&show_reposts=false&visual=true" 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[...]