Weekend Contest: Two-Cow Economics


Professional economists get tired of explaining complicated concepts to those of us who can’t count to 20 without taking off our shoes. One popular simplification is to compare competing economic systems using the example of a farmer who owns two cows. A Kiwi talk-show host named Mike Hosking put a few of the examples in graphic form:


Scott Walker and the Terrible, Horrible, No Good, Very Bad Stadium Deal


Scott-Walker-Bucks-1024x800Two days ago, I praised Gov. Scott Walker’s quiet conservatism. Today, I’ll criticize his inconsistency. The Milwaukee Bucks decided they needed a new basketball arena and they told the government to pay for it. If politicos didn’t cough up $250 million, the NBA warned that the Bucks might leave Wisconsin. Nice team you have here, Milwaukee. It’d be a shame if something happened to it…

Taxpayers would rightly be furious if a private business demanded they fund a supermarket, an office building, or a strip mall — why on earth should they send their hard-earned money to millionaire athletes and billionaire owners? But, like most politicians of both parties, Walker quickly knuckled under to a threat from a major sports league:

Wisconsin Gov. Scott Walker (R) signed legislation Wednesday to spend $250 million from taxpayers on a new arena for the Milwaukee Bucks basketball team — a deal he has championed for months despite fierce opposition from fiscal conservatives who usually agree with him.

In Defense of Corporate Short-Termism


SummersIn a new Financial Times note, Larry Summers defends some key elements of Hillary Clinton’s “pro-worker” economic agenda: higher minimum wage, mandated family leave benefits, tax incentives to boost corporate profit sharing. Of course, since these agenda items come from a Clinton-aligned Center for American Progress report that Summers himself co-wrote, he is really just talking his own book. Not so interesting. But his counter-argument or addendum to Clinton’s “quarterly capitalism” or “short-termism” agenda is thought-provoking:

At the same time scepticism about whether all horizons should be lengthened is appropriate. A generation ago, the Japanese keiretsu system of cross ownership of corporate shares — which insulated corporate managements from share price pressure — was seen as a strength. Yet, Japan’s manifest macroeconomic difficulties aside, companies lacking market discipline have squandered leads in sectors from electronics to automobiles to IT.

Managements of companies that are dissipating the most value, such as General Motors before it was bailed out by the US government in 2009, have often been the most enthusiastic champions of long-termism. Market participants who are willingly placing high valuations on Silicon Valley start-ups that lack any profits and have little revenue may be putting too much, not too little, weight on the distant future. That, at least, is the implication of those who see the inflation of a “technology bubble”.

Obama’s Success: It’s the Institutions, Stupid


Over the past few weeks and months, Obama has been winning. His administration has proved unstoppable on just about every item on its agenda, from environmental and energy regulation to illegal immigration to gay marriage to Obamacare. Indeed, the president recently acknowledged this obliquely, saying that gun control “has been the one area where I feel that I’ve been most frustrated and most stymied.” It’s difficult to find any other area where conservatives have held back the progressive tide. The next president will be hard-pressed to contain the damage to our economy, our international interests, and our liberty.

Two competing narratives dominate the 2016 GOP nomination contest. The first stresses competence and experience. Obama, this narrative goes, came to office as a community organizer with no real-world experience and little political experience. He surrounded himself with ignorant young hacks, and has stumbled from one mistake to another. Thus we need to nominate an experienced administrator with a proven record as an executive: no more first-term senators.

Economic Debate: Kasich, Rubio, Bush Up — But Trump’s Protectionism is the Real Downer


DebateWith a record 24 million people watching the GOP debate, you’d think there would have been a lot more time spent on the most important issue of the day: the economy. Look at any poll. Jobs and the economy are always at the top of the list. But there was barely a mention of this on Thursday night.

The Republican party is not going to win this election unless it persuades the electorate that its primary principles of low marginal tax rates, lighter regulation, free trade, and a sound dollar are the best path to growth. Call it free-market capitalism. Call it supply-side. Call it entrepreneurship. Call it take-home pay. But the endgame is growth and prosperity.

So let’s make this very simple. Like almost every election in American history, 2016 is going to be about growth versus redistribution, private-sector markets and competition versus government planning, and a hard reliable dollar versus a protectionist collapse of the greenback.

The SEC’s New CEO Pay Rule Is Useless and Dishonest


To match Special Report SEC/INVESTIGATIONSA party line, three Democrats vs. two Republicans vote of SEC commissioners has finalized a rule that will require companies to disclose the ratio of the compensation of their CEOs to the median compensation of their employees. This rule is required under the 2010 Dodd-Frank financial regulation law.

Like most progressive policies, this sounds good on its face to most people. “No more fat cats! No more too big to fail!” chants the collective liberal media and political establishment. But, again like most progressive policies, it’s not quite so simple.

People naturally grumble at the idea of some CEO making millions and millions of dollars each year while some employees at their given company are making minimum wage. This makes the idea behind the SEC’s new ratio rule politically popular and an easy sell. The problem is that proper perspective isn’t applied to the issue of CEO compensation. Let’s address a few key points that explain why CEOs are compensated so handsomely in many cases.

The US Middle Class Hasn’t Stagnated for Decades — And Democrats Should Stop Saying it Has


Money_Flickr_8_5_2015-e1438792499478In my new The Week column, I explore “What Democrats Get Wrong About the Middle Class.” Here is a bit:

The problem is that Census data paints an incomplete picture. A University of Chicago poll of top economists earlier this year found that 70 percent agreed that the Census conclusion “substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.” How far off are those numbers? Maybe quite a bit. Feldstein argues that they fail to take into account shrinking household size, the rise in government benefit transfers, and changes in tax policy. They also measure inflation in a way some experts thinks overstates the true rise in living costs. He notes that when the Congressional Budget Office took all those factors into account, it found median household income had risen by 53 percent since 1980, five times as much as the narrower Census figures.

And it could be even higher. A lot higher. A growing number of economists are questioning whether our existing measures of economic growth and inflation are suited to the digital economy. A recent Goldman Sachs analysis suggests we may be understating annual economic growth by nearly a third due to our inability to accurately measure how vastly improved software and hardware are boosting productivity. Likewise, government data ignores the consumer value of free internet services like Facebook, Google, and Twitter. Put it all together, and Feldstein thinks real median household income may have risen by 2.5 percent a year over the past 30 years, not 0.3 percent. That would suggest a doubling of living standards over the past generation. And even those figures ignore welfare gains from rising life expectancy, which economists Charles Jones and Peter Klenow think could equal a full percentage point a year.

Dutch King: The Welfare State Is Over


King Willem-AlexanderThe American left regularly points to the social democracies of northern Europe as templates for a better United States. If only our economic policies were more like those in Sweden, Finland, or The Netherlands, there would be no limit to our success. What they haven’t noticed are the ample flaws of those systems in shown in social stagnation, capital flight, and reduced freedom.

But the most important development our progressives miss is that these famously liberal states are rolling back their safety nets. Over the past decade a center-right coalition in Stockholm has eliminated the worst excesses of Sweden’s welfare state, angry Finns are trying to cut up Greece’s credit cards, and the Dutch monarch has now declared the welfare state of the 20th century dead.

King Willem-Alexander, two years into his reign following the abdication of Queen Beatrix, has called for a “participation society” to replace the outdated system of government handouts. In a televised speech Monday, he asked citizens to take an increasing amount of responsibility for their social and financial health as The Hague slowly retracts taxpayer-funded welfare programs.

On Innovation, Redistribution, and the ‘Veil of Ignorance’


IndianSlum_Flickr_8_3_2015-e1438616049740What kind of society would you desire if you had to enter it cold, sight unseen? The classic example: What would have been the opinion of antebellum slaveholders if there were an equal chance they would enter society as a slave owner or a slave? The “veil of ignorance” is a common philosophical thought experiment for helping determine the ethics of social arrangements or of an optimal social contract. More to the point today, what sort of modern welfare state would you want if you had an equal chance of possessing the sort of innate skills likely to gain you a high income in a particular society as of not having those skills? You might, perhaps, want a social contract that includes income transfers from high skill to low skill. A social contract with social insurance. But an interesting new paper out of the Minnesota Fed by V. V. Chari and Christopher Phelan wonders about incentive effects:

For instance, policy mechanisms that transfer income from highly skilled people to those with low innate skills frequently require progressive income taxes. Such policies affect incentives regarding the acquisition of skills through effort and education. If high incomes are highly taxed, high-innate-skills individuals may have less incentive to get, say, a medical degree. Economic arrangements seen as best using the behind-the-veil criterion typically trade off such output losses against the “insurance” or welfare gains associated with transfers. … A rich-country policy to tax high incomes will redistribute income (within that country) from those with high innate abilities (and, by assumption, with the ability to become highly skilled) to those with lower innate abilities. In so doing, that policy will reduce inequality within the rich country, but it will also create disincentives there to becoming highly skilled and thereby reduce the global supply of skilled workers. This reduced supply of skilled workers from the developed country then reduces opportunities for young workers in the poor country to become skilled. … We conclude that using the behind-the-veil-of-ignorance criterion to advocate for redistributive policies within developed countries while ignoring the effect of these policies on people in poor countries violates the criterion itself and is therefore fundamentally misguided.

Take the issue of trade. Many free trade opponents in advanced economies point out the economic impact on low-skill workers from having to compete with counterparts in emerging economies. But maybe this should count, too, as Chari and Phelan explain: “According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing world increased by 59 percent. This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.”

Donald Trump, Supply-Sider?



shutterstock_283689917Is Donald Trump a supply-sider? In his still young presidential campaign, he has said several times that he wants to be the “jobs president.” In his announcement speech, he put it this way: “I will be the greatest jobs president that God ever created.”

On Rick Perry’s Plan to Reform Wall Street


PerrySpeechRick Perry has a financial reform agenda (via The Hill):

Former Texas Governor Rick Perry is taking a position to Hillary Clinton’s left on financial reform, and pushing for a policy to break up big banks staunchly advocated by Sen. Elizabeth Warren (D-Mass.). The GOP presidential candidate laid out his vision for Wall Street reform in a speech Wednesday. And among his policy proposals, Perry apparently advocated for the return of the Glass-Steagall Act, which established a firewall between traditional commercial banking and investment banking. … In remarks delivered in New York, Perry did not mention Glass-Steagall by name, but floated among several policy proposals one that is practically identical. … Perry also floated an alternate idea of requiring large banks to hold additional capital as a cushion, but the idea of cleanly separating commercial and investment banking was a signature provision of Glass-Steagall.

Perry also called on Congress to wind down housing giants Fannie Mae and Freddie Mac, but did not detail a process for doing so. There is bipartisan agreement that the current housing finance system, in which Fannie and Freddie guarantee the vast majority of new mortgages, is unsustainable, but coming up with a new system has been a significant challenge. … In the meantime, Perry said the two government-sponsored enterprises should be placed under stricter rules regarding the types of mortgages they can back, while encouraging private entities to adopt a bigger role in the marketplace. He also pushed for changes to the Consumer Financial Protection Bureau long favored by Republicans, including bringing its budget under congressional control and reworking its leadership structure.

This is Perhaps the Best Part of the White House Report on Job Licenses


072917white-hoouse1A welcome summer surprise from Team Obama (via the FT):

From auctioneers and barbers to scrap metal recyclers and travel guides, the number of jobs requiring a licence has been expanding rapidly across US states. Now the White House is warning that the occupational licensing requirements imposed by individual states are getting so burdensome that they are holding back the overall US economy, by lifting costs to consumers and erecting barriers to workforce mobility. In a report, the administration called on states to scrap unnecessary regulatory requirements and to harmonise more requirements across state lines, as it rolled out suggestions for better practice in the area. The White House Council of Economic Advisers, Treasury and Department of Labor report cited estimates suggesting licensing restrictions cost millions of jobs nationwide and have boosted consumer costs by more than $100bn. America’s obsession with occupational licences sits awkwardly with the country’s reputation for free market capitalism, but a quarter of US workers require a licence to do their jobs.

This is an issue many center-right reformers, including myself, have been highlighting for some time. More than once I have pointed to an Institute of Justice analysis of 100 low- and moderate-income occupations that found 66 jobs with greater average licensure burdens than EMTs, including interior designers, barbers, cosmetologists, and manicurists. The White House suggests several reforms including a simpler application process, easing exclusions for workers with criminal records, “sunrise and sunset” cost-benefit reviews, and public membership on licensing boards, but this, I think, is especially important.

On Magic and Markets


Image.ashxMagic: the Gathering is a collectible card game created by Wizards of the Coast some 22 years ago. The nature of the game involves two or more players engaging in a battle of wits and strategy: picture chess but with players choosing from hundreds of different chessmen, each with different abilities. It involves aspects of resource management, strategy, bluffing, and cunning. The game is “collectible” in nature, in that the cards come in booster packs with varying rarities, with the more powerful cards tend to be rarer and thus more expensive.

MtG’s real-world economy resembles that every other commodity market. Supply and demand meet at the market-clearing price, and scarce commodities that are in demand tend to cost more. Sometimes, a great deal more. The people who run the company have done a good job of managing the supply side, keeping prices reasonable — i.e., within the reach of players of average means — even in the face of exploding demand. They carefully track the amount of product being sold, and release about four expansion sets (typically containing more than 150 new cards) each year, in multiple languages, worldwide.

There are multiple avenues by which players can engage in the game, and demand for cards generally comes in the form of people looking for single cards to use in their games, as well as those who are merely collectors or speculators. MtG’s most popular and most-played format is called “standard” which involves cards that were printed in the past two years (older cards rotate out and are only legal in older formats). Most of the cards that fuel the singles market for these formats ultimately find their way from draft tables to internet and brick-and-mortar retailers, but another source of cards comes from MtG’s online presence: Magic: the Gathering Online, or MtG Online

In Praise of the Sharing, Peer-to-Peer Economy


shutterstock_278653268Zipcar founder Robin Chase has an HBR piece, “Who Benefits from the Peer-to-Peer Economy,” where she discusses how workers are faring in the collaborative/peer-to-peer/on demand/sharing/gig economy, defining it as “marked by many platforms that engage a diversity of peers to contribute excess capacity which can be harnessed for greater impact … new platforms increasingly give the small the powers of marketing and distribution that were once reserved for the very large.” Same goes for manufacturing with 3-D printing, for instance, or MOOCs. But, she adds, policymakers must engage this new aspect of the US economy:

Governments need to recognize and prepare for this new third way of working which is neither full-time nor temporary part-time, but a new way of life. The Internet exists and everything that can become a platform will. Local and federal governments need to start tying benefits to people and not jobs, ensuring that labor is protected during this disruptive and swift transition. In a world struggling to cope with incessant disruption brought on by fast-paced technical innovation, climate change, urbanization, and globalization, Peers, Inc. is the structure for our times. It enables us to experiment, iterate, adapt, and evolve at the required pace. I’m happy this flexible new tool has come to exist. But while we are reaping the economic benefits brought on by individual contributions, we need to proactively share the productivity and innovation gains with individuals, too.

While I think the scope of the problem here has been exaggerated, Chase makes a good point, especially about tying benefits to people rather than jobs. Which is why mandating new benefits and employer costs is the wrong way to go. From my recent The Week column:

Just Because Hillary Clinton Thinks Corporate ‘Short-Termerism’ Is a Problem Doesn’t Mean it Isn’t



The FT’s Ed Luce takes a look at the “quarterly capitalism” or “short-termism” issue, concluding that it has merit as well as political legs. He points out that “US investment is at its lowest since 1947″ but that last year “S&P 500 companies spent more than $500bn on share buybacks.” He doesn’t, however, think further raising the capital gains tax rate for short-term investment is an effective solution — as Hillary Clinton wants to do — versus reforming executive pay:

It is doubtful such tinkering would be enough to alter investors’ time horizons. The lure of a bird in the hand would still outweigh two in the bush. Many big investors, including pension funds, are already exempt from taxation. Nor is [Clinton’s] proposal likely to deter shareholder activists, whose gains from holding C-suites to ransom will outweigh any new penalties. As long as chief executives’ compensation packages are set by the share price, little is likely to change.

Goldman Sachs Says the US Economy Should be Growing a Lot Faster Than GDP Stats Say. Here’s Why


Is the US economy doing better than we think? That is the upbeat thesis Goldman Sachs put forward in May, arguing that official statistics are mismeasuring productivity growth in the digital economy. Goldman economists Jan Hatzius and Kris Dawsey on the “productivity paradox,” as they put it:

Measured productivity growth has slowed sharply in recent years … But is the weakness for real? We have our doubts. Profit margins have risen to record levels, inflation has mostly surprised on the downside, overall equity prices have surged, and technology stocks have performed even better than the broader market. None of this feels like a major IT-led productivity slowdown. One potential explanation that reconciles these observations is that structural changes in the US economy may have resulted in a statistical understatement of real GDP growth. There are several possible areas of concern, but the rapid growth of software and digital content—where quality-adjusted prices and real output are much harder to measure than in most other sectors—seems particularly important.

Hillary’s Inconceivably Stupid Capital-Gains Tax Scheme


shutterstock_287370872The worst sectors of the worst recovery since World War II are business investment in new plants and equipment and new business start-ups. These are the biggest job-creators, and their slump is a key reason for the sub-par labor recovery, with low participation rates and high involuntary part-time workers.

So if investment is the problem, what does Hillary Clinton go out and do? She proposes jacking up the tax on investment. It’s almost inconceivably stupid.

In her latest economic speech, Clinton proposes doubling the capital-gains tax rate on the profit made from asset sales (stocks, bonds, real estate) held a day less than one year up to two years. Right now, if you take a capital gain a day more than one year, you are taxed at a 20 percent rate. Actually, it’s 23.8 percent when you include the health-care surtax. So under Clinton’s brilliant new play, you’d be taxed at 43.4 percent — the top individual cap-gains rate of 39.6 percent plus the 3.8 percent Obamacare surtax.

My Political Downsizing Dream Team


downsizing-govScott Walker, President (I want him to use his proven mettle to dismantle the administrative state over his eight years).

Rand Paul or Bobby Jindal, Vice President (I want them to take turns being president the following 16 years).

Ted Cruz, next Supreme Court Justice.

The Left vs. the Sharing Economy: Where Are the Atari Democrats of Today?


Atari-2600-Wikimedia-commons-500x293Vox’s Timothy Lee looks at how Republicans and Democrats view the emerging sharing economy. Republicans — at least nationally — seem almost uniformly positive. They see Uber, for instance, as a feisty, innovative startup vs. regulators and the cronyist taxicab cartel. But Democrats are sort of split. Lee:

Some liberals dislike Uber on ideological grounds, but others — especially in the media, politics, and technology centers of New York, Washington, and San Francisco — are regular Uber customers. On one side of this debate are old-school liberals with strong ties to the labor movement and urban political machines. For them, Uber is a conventional story about worker and consumer rights. Labor unions believe Uber is flouting the law by classifying workers as independent contractors rather than employees. And they would love to unionize Uber’s fast-growing workforce.

More broadly, conventional liberals are suspicious of claims that deregulation and innovation will benefit workers and consumers in the long run. They view Uber’s “gig economy” as part of a broader trend toward declining worker power. They blame decades of deregulation — under both Republicans and centrist Democrats like Bill Clinton — for this trend, and believe stricter regulation of Uber could be part of a larger trend toward stricter regulation of labor markets more generally. In his campaign against Uber this week, Bill de Blasio primarily focused on congestion concerns, but he also mentioned workers’ rights as a major concern.

The Toronto Uber Controversy: The Real Issues


2012916-uber-torontoThe Uber controversy has come to Toronto. As most people know, Uber is the smart-phone app that allows people who need a ride to connect to a driver affiliated with Uber. As in other cities, the local taxicab monopoly freaked out at the prospect. If one’s only source of information were the local media, one would get the impression that the taxicab owners’s beef is that Uber’s arrival tilts the playing field against those who comply with City regulations designed to ensure driver safety and car safety.

What the media leaves unmentioned is that a cab license in Toronto costs between $80,000 and $100,000 on the open market, because the number of cabs in Toronto is fixed. In other words, cab owners are paying for the privilege of belonging to a monopoly. This cost has nothing to do with safety regulations.

Another associated but unstated fact is that the financial burden of purchasing a cab license means that the cab owner has less money left over to maintain his car. The more you pay for the license, the less money you have to keep the car in good running order. The result: ratty old cabs.