2013 proves revised principle of economics that "people aren't that stupid"

Yoram Bauman's stand up routine about Greg Mankiw's 10 principles of economics is worth a laugh. (I show it to my students in principles classes.)

The past few years have reminded of me of principle three, which jokingly says that "people are stupid".

Given the support for Obamacare, Obama's reelection, the continued support for higher minimum wages, and more, there is plenty of evidence to support the third revised principle of economics.  I would prefer to think that "people are ignorant of economic consequences", but regardless, there is plenty of support for disastrous policies.

Thankfully, 2013 provided some evidence for point number four which says "people aren't that stupid".  The plunge in support for Obamacare after seeing the consequences should give us all a bit of hope.  The support for Obama himself after his lies about "keeping your doctor/plan" has also plummeted.  It's now at 40%, which is one of the lowest approval ratings for any president.

If you hit people over the head with the evidence of the bad policy choices, they'll start to realize their mistakes.  That's a good thing and provides evidence for translated principle number four:

People aren't that stupid.

Liquor privatization on way in PA? And other links

1. On the prospect for liquor privatization in PA.

2. Great quote/picture:

3. Dan Mitchell on the biggest risk factor leading to premature death

Excerpt:

Nope, the answer isn’t smoking. Or fatty food. Or 16 oz. sodas.

And it’s not alcohol, driving too fast, or standing between politicians and a TV camera.

In the past 100 years or so, the biggest cause of premature death has been government.

4. Your tax dollars at work: US government is funding pornography research.

Economic restrictions in Minnesota

Link here

Excerpt:

Winona implemented the nation's first comprehensive rental cap ordinance in 2006.The so-called 30 percent rule was imposed to rein in "excessive on-street parking, anti-social behavior and deteriorating housing conditions" among students renting houses near the university. 

"The importance of the case is the city's ability to impose appropriate licensing standards for the betterment of the community," said George Hoff, who represented the city before the appellate court. 

Since property owners with rental units were grandfathered in, the number of houses that can be legally rented varies block to block. 

I'm glad somebody is fighting this.  Rent controls like these almost always result in economic inefficiencies, and in this case its clear that big-business (the university) is just trying to capture more economic gains by these restrictions.

I'm not optimistic that the courts will resolve this on the side for freedom, but I'm happy that these individuals are fighting for it.

Would debtor's prison raise money?

Link here

There is a legal question here which I'll ignore.  I want to focus on the question of whether debtor's prison really costs a county money.  The story seems to imply that these are not only costly for the individuals, but for the governments that run these prisons. 

Excerpt:

"The problem is it's not actually much of a money-making proposition ... to throw people in jail for fines and fees when they can't afford it. If counties weren't spending the money jailing people for not paying debts, they could be spending the money in other ways."

The Brennan Center for Justice at New York University's School of Law released a "Tool Kit for Action" in 2012 that broke down the cost to municipalities to jail debtors in comparison with the amount of old debt it was collecting. It doesn't look like a bargain. For example, according to the report, Mecklenburg County, N.C., collected $33,476 in debts in 2009, but spent $40,000 jailing 246 debtors -- a loss of $6,524.

The analysis done by these advocacy groups, as you might expect, is flawed.  While the county in NC mentions how they lost $6,524 that year, there is no discussion of the fines that were paid by others who wished to avoid being jailed.  There likely are many who pay their debts faster (or more completely) when there is a threat of serving time in jail.  

I suspect that for the cost of $6,524, Mecklenburg County, which has a population of about 970 thousand, might have an extra 500 people who pay their $50-$500 fines specifically because they know they could go to jail if they don't pay.  That would mean an extra $25,000-$250,000 in revenue.  That is a pretty nice return on the $6,524 cost incurred.

Often the economic analysis in news stories isn't sound.  This is a good example.

If economists wrote Christmas cards, and other links

1. If economists wrote Christmas cards - funny!

2. Great Greg Mankiw post about measuring changes in income, and how statistics can be distorted.  

It concludes:

Take this as a cautionary tale.  When people talk about changes in income over time, make sure you know what measure of income they are citing.

3. Jayson Lusk on the hidden cost of food.

The last paragraph is really good ...

This essay arose from my failed attempts to explain externalities to noneconomists and my desire to challenge fellow economists to think more seriously about the real-world implications of policy advice derived from simple textbook models. In popular writing about food and agriculture, there seems to be a lack of appreciation for the types of externalities that reduce welfare and of the difficulty associated with crafting corrective actions that actually increase the size of the pie.

This is something I struggle with when I teach principles of microeconomics.  The nuance of when government intervention would be worthwhile. When we discuss market failures, textbooks all seem to assume that a government that attempts to fix the failure won't have failures themselves.  I.e., they will be completely efficient at fixing the problem.  Anybody with one lick of common sense knows this isn't true, yet even "right-leaning" textbooks seem not to acknowledge this issue.

Criticism of my "Learning Economics Through Pictures" series

On Saturday, a comment was posted criticizing my "learning economics through pictures" series.  (See here for my most recent post in the series.)  I had posted a link to one of the posts on the "teaching economics" page on LinkedIn and she provided a comment.  It was by Karen Reid (who I don't know).  I'll post her comment here, and my response below

Not sure what you’re going for with this chart and accompanying comments. I never hide my political leanings when I teach – the students deserve to know any potential bias I may bring to the material. In that light, I’ll reveal my position now. I am tend to be liberal, especially on social policies, but I am also an economist which brings balance to my poor bleeding heart. That said, I strive to present both sides of the issues accurately if I have to enter the political realm. Generally I try to remain in economic land. 

I looked at your other two pages on minimum wage and poverty to try to get a clearer picture. First let me say that I am not a fan of using secondary, tertiary (or beyond) data. Not familiar with tipstrategies.com or Townhall.com, but am opposed to using Wikipedia as a reliable source for anything. 

Looking at the minimum wage page, you say that you are framing an “economic” argument, assuming discrepancies in unemployment particularly during the last recession offer sufficient proof. You mention the damaging effects of the forty five cent minimum wage increase. Over a year, working 40 hours for 50 weeks that increase will cost the employer an additional $900.00 per worker. Is that an onerous burden? It doesn’t necessarily seem to be, at least to me. I don’t think it would hurt McDonald’s bottom line at all. Since employees (especially at the lower end of the wage scale) are likely to have a marginal propensity to consume near one, that extra money will be spent, thereby increasing GDP. If we’re looking at strictly economic effects that should be considered. Finally, on the minimum wage, I fear that the important discussion is not only economic, it is a question of values, of how people survive, of what kind of country we want to live in, of equity. There are many valid points on both sides of the issue which bear discussion. I realize that these pages you present are only a part of the discussion and that during class you have the opportunity to present a more complete picture. 

Briefly, in your War on poverty presentation, 15% poverty is a large enough number to warrant LBJ’s attention and I think it was commendable of him to take action. The problem is, as it so often is with politicians, that they neglected to consider incentives. In this case, these policies did often create a disincentive to work. The interesting question is how much abuse of the system actually occurs. Many people justifiably deserve some help, and we all know that the majority of those living in poverty are children. Should we penalize them for the assumed sins of their parents? Or create other programs that are child specific, bypassing the parents completely. Again, this issue transcends economics and goes to the question of what kind of country we want to live in. 

Finally, what bothers me about the federal government spending page –besides the fact that the chart is from Wikipedia – is that your points have a more normative than positive flavor. Simply presenting the numbers should be enough to provoke thought and discussion among your students. Commenting with one opinion on balancing the budget, the efficacy of other federal programs, and the horrors of the debt belong somewhere else, not on a page that is trying to present information. Unless, of course, your true intent is to make points of another kind.

Here was my response on the LinkedIn page 

1. I use secondary charts/data often on my blog. I only allocate a small amount of time for blogging, as I don't want it to interfere with my teaching, research, and personal time. I’m familiar enough with all this data where I'm comfortable with it’s accuracy. If you think any is inaccurate, please let me know. But as long as its accurate, using secondary charts/pictures in a blog seems perfectly appropriate to me. 

2. On the general idea of normative vs. positive economics. In introductory classes, I agree that we should teach positive analysis. That’s what I teach, and my normative views are not taught in the class. However, for my blog (which isn't required), I use positive analysis to help make normative recommendations. I see that the unemployment rate among teenagers is 25% and know that the literature generally shows that minimum wage increases cause unemployment (positive analysis) and therefore think that is a reason we should (normative analysis) lower the minimum wage. 

3. More on the minimum wage. I don't know that a picture will ever provide sufficient proof of an (economic) consequence.  But a picture is simple, easy to understand, but can make some good points. That's why I like this series. If you want "sufficient proof" of minimum wage increases harming society, see the book that reviews all the literature by Newmark and Wascher. Regarding a minimum wage increase boosting the economy, I disagree. While some would keep their jobs and make more, others would lose their jobs and earn nothing. 

4. On the values of a minimum wage. I think a set of rules that allows people to be able to work to gain marketable skills is good and reflects good values. Related to this, a minimum wage decrease would be the "right" thing to do, strictly from a human rights perspective. Being able to obtain a job (or keep it) is crucial. With our current minimum wage and the high teenage unemployment rate that comes with it, many who are now unemployed will be worse off throughout their whole lives based on not being able to obtain an entry-level job now. That is a travesty. 

5. More later on the War on Poverty …

Wonderful speech by Vince Flynn

Link here

Vince Flynn was my favorite author.  This speech by him is funny and very informative about foreign policy issues.

Another bad idea by Elizabeth Warren

She's been so wrong about so many things in the past.  Now ...

Link here: Proposal to prevent credit checks.

Excerpt:

Sen. Elizabeth Warren (D-Mass.) on Tuesday proposed legislation to prevent companies from using a person's credit history ...

Why would we want to ban a company from using all relevant information about a person prior to hiring them?  If a credit history is a good indicator of success on a job, this is valuable, and those who are responsible will be rewarded (correctly), and those who aren't will have a tougher time getting jobs (correctly).

If a credit history isn't a good indicator of success on a job, then companies who waste they're time on this will lose profits to other companies.

There are always adverse consequences when you try to interfere with the free market.  Senator Warren hasn't figured that out yet.  Unfortunately, since she isn't a job creator and appears to have no meaningful interaction with businesses, she probably never will.

Replacing minimum wage workers

My brother sent me this one.  (Source: weknowmemes.com)

I find this a bit humorous, but also sad.  I spent two years working in fast food restaurants for minimum wage.  I know that I wouldn't have been hired at the higher wages (even adjusting for inflation) that are being requested.

Groups differ on economic impact of fracking ...

Link to story here

I'm quoted at the end. (Reasonably well ... I was interviewed at home and I was managing my children at the time.  It wasn't my best interview, so I'm happy the quote turned out OK.)

An excerpt:

Energy In Depth Ohio, the public-relations arm for the state’s oil and gas industry, touted the findings on its website. Shawn Bennett, the group’s field director, posted a blog entry under the heading “New Report Shows Major Growth in Ohio Shale Jobs” and praised the “tremendous 30 percent” bump in core employment.

But not everybody saw those numbers as such a success.

“Thirty percent of a few thousand jobs is not that many,” said Amanda Woodrum, a researcher for Policy Matters Ohio.

How Nelson Mandela embraced markets and other assorted links

1.  Over 50 times more people sign up for online gambling in NJ than Obamacare.

2.  Critique of "warmists", from NY times oped

Excerpt:

People have a right to religious and cult beliefs within reason. But the warmists have been proved wrong time and again, each time reacting with little more than pictures of forlorn polar bears on ice floes and trying to shut down the opposition. (More bad timing: Arctic ice increased by almost a third this past year, while that at the South Pole was thicker and wider than it’s been in 35 years.)

3. How Mandela switched views to embrace markets.

Excerpt:

The story of Mr. Mandela’s evolving economic view is eye-opening: It happened in January 1992 during a trip to Davos, Switzerland, for the annual meeting of the World Economic Forum. Mr. Mandela was persuaded to support an economic framework for South Africa based on capitalism and globalization after a series of conversations with other world leaders.

Learning economics through pictures: Who pays taxes in the US?

This is the fourth post in a series about learning economics through pictures.

Links to ...

Post 1: The Minimum Wage

Post 2: The War on Poverty

Post 3: Federal Government Spending

Here are two pictures showing who is paying taxes in the United States:

Source: Greg Mankiw's principles of economics textbook.  And a bonus picture

(Source: Taxfoundation.org)

These two related pictures provide several insights:

1. First, incomes are unequal.  The occupiers rallied about it, and while my view of the occupiers is generally quite negative, they were right about the fact that incomes in the US are very unequal.  (In my opinion they're wrong about what to do about inequality, their view that showers are overrated, and more, but on this point they're right.)

2. Another claim by the left, however, that the rich do not pay their fair share in taxes, is incorrect.  Those who make high incomes contribute far, far more than those without high incomes.  The top 1% paid over 28% of the federal income taxes collected in this country.  28%!  That is stunning contribution from such a small percentage of our country's citizens.

3. Those earning these high incomes are contributing far more than they receive back in government spending.

4.  When I see the bottom graph, I fear what may happen.  It shows that middle income individuals are receiving more in benefits than they are paying in taxes.  I'm not certain this is entirely true, but you will run into a problem when the median voter is getting more back from the government than he or she is contributing.  I think they're probably including social security/medicare in here, which isn't an ideal comparison, since many people pay into that system prior to receiving those benefits (so I don't view it as unpaid benefits).

Regardless of how benefits received are computed, the percentage of people in this country that are receiving more in government benefits than what they're paying in taxes has been growing.  When people have no sense of responsibility to pay for their own food, healthcare, housing, phones, etc., we'll see more votes for politicians who promise benefits without regard to the costs.

The politicians get power and a nice salary.  The voters get to legally rob their neighbor.

Great oped about legalizing online poker

From The Federalist - Link here.

Excerpt:

The federal government recently told the individual states it would not interfere with state-specific laws authorizing and regulating online poker. However, only a few states have begun to seriously consider this option. Those that do will have differing regulations and standards, meaning gaming companies will have to navigate a patchwork of often contradictory legal requirements. Moreover, each state that authorizes online poker must ensure that nobody can access that state’s poker sites from outside the state. For all intents and purposes, online poker remains dead thanks to the U.S. Justice Department, even though few seriously argue that it is illegal.

Radio interview about minimum wages, the Pope, and more

Link is here.

We talked about freedom, gambling, minimum wages, and how the Pope is clueless.  Fun times.

Journal retracts study about genetically modified foods

From LA Times

Excerpt:

In a statement released from its Cambridge, Mass., offices on Thursday, publisher Elsevier said that upon closer review of the paper, editors determined that the experimental sample was too small to allow for clear conclusions.

Also, the type of rat involved in the experiment is known for high incidence of tumors, it said. ... "However, there is legitimate cause for concern regarding both the number of animals in each study group and the particular strain selected."

... It was quickly embraced by opponents of genetically altered foods and stoked debate over California's failed Proposition 37, which sought to require labeling for genetically modified foods.

Kudos to the journal for retracting, but this was a huge mistake as it allowed a number of people to be misled.  This mistake by Elsevier made the world a worse place.  

Why the Pope is wrong and other Assorted Links

1.  Jayson Lusk talks about the questions he heard on a chat with a radio station.  

It's a bit depressing.

2.  Seattle-Tacoma airport passes a bill attempting to help the poor that will hurt the poor.  

Minimum wage to $15/hour.  Does anybody really think these firms are going to hire people who can't otherwise get a job for $10/hour?  Unfortunately, it appears that a majority of voters in that area are that unintelligent.

3. More people are renouncing their US citizenship.

4. The Duke accuser got convicted of murder.  Nobody reports it.

Every faculty member at Duke who spoke against the Lacrosse players should be fired.  If I was provost, dean, etc., I would do it, and I wouldn't care if they had tenure.

5.  Why the Pope is wrong about capitalism.

Excerpt:

Actually, he might. Because, as compelling and as charismatic as he is, if we, in The City of Man, took the Pope’s advice on economic issues, we’d end up with millions more living in poverty.

Quite frankly, this Pope is an idiot.  He's also dangerous, for reasons the quote above indicates.  Nothing has done more to bring people out of poverty than the free market.

NPS director retracts anti-fracking statement and other fracking links

1. NPS director retracts anti-fracking statement.  Link here

Excerpt:

Jarvis, in his mid-November letter to Rep. Rob Bishop (R-Utah), said nobody in management reviewed the staff comments and that their handling was “contrary” to NPS protocol.

The NPS sent the comments in August to the Bureau of Land Management (BLM), which is drafting rules to govern hydraulic fracturing — or “fracking” — on federal and Indian lands.

The comments enraged the gas industry by citing an op-ed.

2. Fracking could be coming to Spain

When more countries open up to fracking, it becomes more likely that the price of natural gas will stay low.

3.  New Yorkers split on fracking

I find this stunning.  With all the scare-tactics used and money expended by those who oppose fracking in New York, I am stunned that only half the population opposes it.

My newest oped - Casinos do not create cultural wastelands

Appears in The Federalist

Excerpt:

Opponents of casinos and gambling will often claim that casinos cause terrible problems.  In a way, the opposition to gambling makes for strange political alliances.  For example, the right-wing organization Focus on the Family claims gambling “is morally bankrupt from its very foundation.”  They also quote the Bible in their opposition.  Many on the left also oppose gambling, but for different reasons.  For example, some on the left who oppose gambling claim that gambling is like a tax on the poor and uninformed.  Others claim that people who gamble are exploited by casinos, which are large corporations.  The opponents of gambling think if a new casino moves into an area, it only hurts society.  They’re wrong.

Defending working on Thanksgiving

I wrote about it a couple days ago.  Here is Matthew Yglesias on working on Thanksgiving.

Excerpt:

With all due respect, I think the politicization of this issue is worth an eye roll or seven. I remember when Christmas Day in D.C. when I was sitting around the house alone watching basketball because I'm Jewish, and I decided to take a halftime trip to the Safeway. The store wasn't very busy and I was bored and curious, so I asked the (African-American and presumably not Jewish) woman working the register if it was a bummer to have to work on Christmas. She said, basically, no, that it was a great opportunity to pick up an extra shift and earn overtime pay. That seemed like a very sensible answer.

On the other hand, the security guard on duty in my building that day told me that it absolutely was a drag to be working on Christmas, overtime pay be damned. That also seemed like a very sensible answer.

Which is just to say that in a diverse nation with more than 300 million citizens, opinions are going to vary on the pros and cons of extended business hours.

Happy Thanksgiving!

Happy Thanksgiving!

For some Thanksgiving reading, I recommend John Stossel's "Thankful for Property".

Excerpt: 

The lesson that a commons is often undesirable is all around us. What image comes to mind if I write "public toilet"? Consider traffic congestion and poor upkeep of many publicly owned roads. But most people don't understand that the solution is private property.

When natural resources, such as fish and trees, dwindle, the first impulse is to say, "Stop capitalism. Make those things public property." But they already are public -- that's the problem.

Preventing consenting adults from making transactions - Thanksgiving edition

Many stores are now open on Thanksgiving night.  Not everybody is happy about it.

Link here

And here

And here

In these stories, and in other places you see quotes against it. E.g., our local newspaper, The Daily Item, had these facebook comments:

"My mother has to give up her Thanksgiving holiday to be at work. Greedy coorperation can't give employees a break. I don't agree with it at all. I feel anyone who thinks they "have" to shop on Thanksgiving doesn't know the true value of family."

and this:

"As an RN, I worked Thanksgiving. Healthcare is a 24/7 job and I was paid well to do it. I didn't like it, but accepted it because that is part of the job. Retail is not!! These ppl get paid little more than minimum wage. Nobody is going to die if they don't get quite what they wanted for Christmas...Employees should be home with their families, not filling the coffers for some rich corporation who couldn't give a shit about their employees."

My thoughts:

1. These stores all want profits, but they only profit from being open on Thanksgiving because their customers want this.  The market for retail sales seems reasonably competitive, and this change to be open on Thanksgiving is clearly a direct response to meet consumer preferences.

2. The workers at these stores have a choice.  They could choose not to work on Thanksgiving.  If they're valuable enough to the store, the store will allow that.  If they're not, they may have to find a different job.  They should know that it's likely that the next best job they could obtain will offer lower pay, but that's the trade off: if a person wants a more-ideal schedule, he or she generally will have to accept lower pay.  These workers are receiving more money than what they could otherwise for working a shift that is not as appealing.  Economists call this "compensating wage differentials".  It is the same reason plumbers generally make more than Kindergarten teachers.  Being a teacher is more non-monetarily satisfying, and that translates to a higher supply of teachers and a lower wage relative to plumbers.

3. So for those who don't like that stores are open on Thanksgiving, what do you want to do? Even if you think that the stores are greedy, and want to shut them down ... what is your proposal?

One option someone might say is that stores can't be open on Thanksgiving.  This raises several questions, however.  Are stores allowed to open at midnight?  Are you going to ban them from having workers in at 9:00 PM Thanksgiving night to prepare?  What about e-commerce?  Are you going to force the Internet stores to shut down also?  What about those who really want the extra money: Are you planning to compensate them for not working?

4. Those who are complaining want to enforce their values on the rest of society.   They want to prevent consenting adults from engaging in mutually beneficial transactions.  This isn't like Obamacare or government regulations - where failing to take an action can put you in jail - everybody involved is making a choice without government interference.  This is about freedom.  Should people and firms have the freedom to operate as they wish?  Some people clearly think they should not.

My new oped in Forbes - Obamacare Won't Make Healthcare More Affordable: Here's What Will

Link here

Excerpt:

But regardless of what you think about Obamacare, it should be clear this law isn't going to help in keeping health care policies in check. Whether it is repealed or not, there are several policies that legislators can and should pursue to help make healthcare more affordable.

Why do we celebrate JFK more than C.S. Lewis?

Nice piece at The Federalist about how CS Lewis and JFK died on the same day.

Excerpt:

The coincidence of JFK and C.S. Lewis dying on the same day gives us a lot to ponder. Many people mourned and adored Kennedy for his worldly glory, his seemingly superhuman qualities – brilliance, style, good looks, and being “Mr. Camelot” himself. By contrast, Lewis, the stodgy looking medievalist at Oxford, would have been the actual specialist on the legends of Camelot, and the enchantment it holds for us.

Until I read this article, I had no idea C.S. Lewis died the same day as JFK.  I have read others express their disappointment about excess celebration of politicians when they die, and too little focus on non-politicians.  (John Stossel has some in one of his recent books.)

It seems clear to me that we should celebrate the life of C.S. Lewis far more than JFK.  JFK was a politician.  He sought powerful positions, but also never created anything.  I do generally respect JFK (other than his adultery - I can't really respect somebody who is so terrible to his family), as I think he seemed like a reasonable president and his actions in war were heroic.  But what tangible contributions did he make to society, other than law changes?

C.S. Lewis, on the other hand, contributed greatly to society.  To those who don't like his books, his work caused absolutely no pain or suffering.  The same cannot be said of JFK.  But to those who liked his work, he has provided hours of enjoyment.  Further, he has helped millions of children learn to read by giving them books they loved.  The Narnia books are wonderful for kids.  One of my children, when still learning to read, devoured these books.  Thousands of other children have as well.  I think it is fair to claim that CS Lewis did far more to educate the youth of society than JFK.

I respect politicians who work hard and always try to make the right decisions.  (Even if I disagree with them.)  That being said, I think we overestimate their greatness and underestimate the greatness of those who contribute to society in other ways.

Three economic impact studies

1. San Francisco to "begin economic analysis of chain stores".  

Excerpt:

The city’s Planning Department is close to hiring a firm to study the “economic implications of formula retail uses” and “the effects of formula retail uses on community vitality and character.”

I bet they'll find that chain stores have a negative economic impact.  Anybody want to place a friendly wager?  (Note - this, of course, doesn't mean they actually have a negative impact.  That's only what the study will claim.)


2.  The economic impact of the MMA in New York

Excerpt:

Legalizing mixed martial arts events in New York State would generate more than $68 million in economic activity per year, according to a UFC-commissioned study released Thursday morning.

Bringing in MMA would provide an economic impact, but this estimates seems inflated.  If UFC brings in tourists who spend an average of $200 visit, and that effect is multiplied by 2, that would mean they need to bring in 170,000 visitors annually.  That sounds too high.  It would have a positive economic  impact from the tourists who visit.  However, they also include "UFC gyms".  That would only take money away from other gyms (or other local businesses), so that shouldn't be included in an economic impact statement.  


3. Economic Impact of Nonprofit Arts in Dayton, Ohio

PDF here

Short story here

This study seems to ignore the substitution effects.  I.e., if these arts organizations didn't exist (and the jobs didn't exist), wouldn't people just spend their money elsewhere in Dayton?  Not all would, but many would, which means other organizations would gain jobs.  The arts certainly have an economic impact, but this study seems to overstate that impact. 

Reagan speech on air traffic union strike

This is great.  I had never seen this before (I was quite young when this event occurred):

Learning economics through pictures: Federal government spending

This is the third in a series of posts on learning economics through pictures.  Click here for a post on the minimum wage, and here for a post on the War on Poverty.

Picture from wikipedia

This pie chart shows where the US Federal government spends money.

From here, I think there are several observations that can be made:

1. To get the budget balanced, entitlement (medicare and social security) spending needs to be contained.  It is 43% of the budget, and is projected to increase.  Two options are that the benefits could be reduced (perhaps through smaller annual increases) or the retirement age could be increased.

2. War and defense spending aren't cheap.  $700 billion in defense spending works out to over $2,000 for every single man, woman, and child in the United States.

3. The debt matters.  In addition to possibly (and I hear a gasp from all left-wing economists as I type this) paying back the debt, right now 6% of the federal budget goes to nothing but paying interest on government bonds.  Given that increasing amounts of the debt are owned by foreigners, this is decreasing the GDP of our country.

Given the massive deficits run up by Obama and expected large future deficits, this won't decrease anytime soon.  This is especially true if interest rates increase.

4.  Discretionary spending isn't trivial.  There are entire agencies like the Department of Education, the Environmental Protection Agency, HUD, etc. that arguably do more harm than good by existing (even if they were costless).  If they're all eliminated, we benefit not only by them not damaging the economy, but also by budget savings.  Even if not completely eliminated, if they're cut, this could provide a big help to the budget.

Assorted Links

1.  Terrorists in Venezuela run their government

Very sad.  Excerpt:

President Nicolás Maduro ordered a military "occupation" of the company's five stores as he continues the government's crackdown on an "economic war" it says is being waged against the country, with the help of Washington.

2. A rare oped that disparages an economic impact study.

The analysis isn't perfect, however.  The costs of creating energy, including waste disposal, is what gives energy job creation power.  That and the reduction of energy prices.  The author discounts that like it couldn't create an economic impact.  It may not be a good thing, but it certainly creates an economic impact.  

3. A list of Senators who made the same Obamacare promise.  ("You can keep your plan")

Anybody of these people who are up for reelection in 2014 needs to hope this situation gets better fast.  

4. Nice oped by Robert Samuelson on global warming

Excerpt:

Pindyck sounds like a “global warming denier.” He isn’t. True, he thinks climate change and its adverse economic consequences could be wildly overstated. He also thinks they could be wildly understated. 

5. Jayson Lusk asks whether we should ban beer.  

Excerpt:

If we apply the same logic the FDA used to justify banning transfats, then clearly beer must be also banned.  Prohibition redux.  

Bloomberg story on fracking growth

Link here.

Excerpt:

“Within three to five years, there should be exponential growth in drilling as there was in the U.S.,” Edward Morse, head of commodities research at Citigroup Inc., said in an interview. “The big problem isn’t replicating the geology, it’s replicating the critical ingredients that got the American shale revolution going.”

This type of drilling growth would be huge, of course.  If there is a slowdown in drilling, we will expect energy prices to rise, but if drilling rates increase prices likely will stay low.  Much of the speech I heard last Thursday discussed predictions for how the price for natural gas would rise soon (and dramatically).  Future growth into areas that haven't yet been fracked (both in US and abroad) will help determine future prices.

Percentage of each president's cabinet with private sector business experience ...

From David Kendall.  The only comment I'll make is that I'm sure there are alternative definitions to "private sector experience".  Still, this is rather stunning.

The percentage of each past president's cabinet who had worked in the private business sector prior to their appointment to the cabinet. ... Here are the percentages.  

T. Roosevelt.................... 38%
Taft................................ 40%
Wilson ........................... 52%
Harding........................... 49%
Coolidge......................... 48%
Hoover ............................ 42%
F. Roosevelt..................... 50%
Truman........................... 50%
Eisenhower................ .... 57%
Kennedy......................... 30%
Johnson.......................... 47%
Nixon.............................. 53%
Ford................................ 42%
Carter............................. 32%
Reagan............................ 56%
GH Bush.......................... 51%
Clinton .......................... 39%
GW Bush........................ 55%
Obama............................. 8%

fracking links

1. California's try to ban fracking in "backdoor way"

Excerpt:

In politics, it's not what you know, it's whom you know.

That's the logic a group of political insiders are banking on in a push to ban fracking in California, a state that appears on the precipice of a fracking boom.

2. From WSJ: Both sides mislead when it comes to fracking

(At SU, we saw this just recently with an anti-fracking speech this past week.)

Excerpt:

Opponents of fracking have gone to great lengths to unrealistically portray fracking as an unprecedented environmental disaster while failing to acknowledge any of the economic benefits. For these opponents, fracking is all bad.

AND

There are many people whose lives have been altered in one form or another by the incursion of drilling into new areas. When those lives have been altered in negative ways–even if only by more noise and traffic—some will naturally be opposed if they can’t see any personal financial benefit.

3. Great article on fracking from the economist. 

4. Not quite fracking, but close.  SU converts from coal to natural gas.  I did some analysis on this project.

Political Trivia now available for those with a Nook

My ebook is now available for those with a Nook e-reader.

You can still buy from amazon, too, by clicking here.

Fracking economics - review of presentation given by Deborah Rogers

SU hosted hosted an anti-fracking speaker, Deborah Rogers, on Thursday night.  (link here.)  

She is an anti-fracking activist, focusing on the financial side. I knew this going into the speech, but I was still hopeful she would give an objective presentation of the facts, then just discuss her interpretation of them.  That didn't happen.

As somebody who reviews economic impact studies and sees the bias on both sides, many of her statements were misleading or interpreted in a way I found questionable. 

Here are four issues I had with points she made:

1. Do you want to produce something using more inputs, or less inputs?  She talked about how the direct jobs with natural gas drilling were "only" 180,000 nationwide.  That produces 45% of our country's energy.  This is while the direct jobs with renewable energy was about the same, but produced 15% of energy.  She then concluded that it would be better to promote renewable energy because it creates more jobs.  (Note - you could make an externalities argument for why to use renewables - but that's not what she was doing.)

This is faulty economic logic.  If you can produce more output with the same amount of workers, then you're better off.  If it takes 3 times the workers to produce some level of output, the price will be higher. 

2. She laughed off the statement that "fracking has helped the poor", claiming that natural gas companies had no interest in helping the poor.  Here is an excerpt from  the story she was discounting:

Thanks to the lower price for natural gas, families saved roughly $32.5 billion in 2012. (That's 7.4 billion MMBTUs of residential use of natural gas times the $4.40 reduction in price.) The windfall to all U.S. natural gas consumers—industrial and residential—was closer to $110 billion. This is greater than the annual income of all of the residents in 14 states in 2011.

She, of course, didn't go into the specifics, she just called it laughable that companies would want to help the poor.  With that, she might be right.  But the great thing about the free market is that sometimes the poor do benefit, even if the companies had no intention of helping the poor.  Because of fracking, the quantity of natural gas increased, pushing the price down.  This helped the poor.  She can deny this all she wants, but its pretty clear the lower natural gas prices have benefited the poor, and, as I argued, are a big reason Obama got reelected.

3.  Is the natural gas industry being unfairly subsidized relative to "green energy"?  She described, several times, how the drilling industry damages roads and don't pay the fair share of the damage.  This, she says, gives them an unfair advantage over green industries.  Several points related to this:

A. In research I'm doing with Dave Ramsaran, we have found that these companies are paying for road improvements, and citizens are saying their roads are better.  What she claimed didn't match what we found in our research.

Let's assume she's right for a moment, however ....

B. It's disingenuous to talk about fracking being subsidized by government relative to green energies.  The only reason windmills, solar panels, etc. are somewhat viable now is they've been so heavily subsidized by tax dollars.  Many times, quite poorly.

C. Do other companies pay road taxes?  For example, what about Fed Ex or UPS?  Or environmental companies?  If no companies pay traveling on roads, should frackers?

4. She disregarded the indirect jobs, saying they're counting "prostitutes and strippers".  If any statement showed her bias, it was this.  Technically, she's right.  If fracking brings in 1,000 jobs, one or two might be for strippers and prostitutes. The others are for grocers, restaurant workers, hotel workers, lawyers, etc., however.

There was one part of her talk that I thought was informative and interesting.  She made an argument for why she thought production would drop and prices would rise.  I've heard others make the case before, but she made it as clearly as I've ever heard.  I don't think I agree with her (and it's different from other reports), but it was a well-argued case and was informative.  Overall, however, I was quite disappointed.

Both the left and right make assumptions that can help give an incomplete story on the economics of fracking.   Those who do this work, from both the left and right, get paid for this, and it's a common problem with many economic impact studies, not just fracking.  Unfortunately, I felt like yesterday's speech was a good example of this.

My new piece at The Federalist - Benefits of Poker

Link here

It opens:

Organizations that oppose gambling will often claim that gambling has no benefits.  This isn’t true.  Beyond the enjoyment we experience, many forms of gambling can teach useful skills.  Blackjack, for example, teaches us about odds, variance, and money management.  Placing bets on horse racing can also teach people an enormous amount on odds and probabilities, as betting on different horses offers different payouts for winning. Even those with limited mathematical backgrounds quickly learn that betting $5 on a horse with 14-1 odds will pay them back $70 for a win.  Similar skills can be learned with sports betting.

While these and some other forms of gambling can provide some skill development, none offers the opportunity to develop real world skills like poker.  

Link to audio podcast with Commonwealth Foundation

Last week I posted the link to the video podcast.  An audio podcast version is also available - the link is here ... or here.

Claiming Obamacare is "Affordable" doesn't make it so

The left, faced with the unmitigated disaster which is Obamacare, is attempting to deflect criticism in any way possible.

One way the left is deflecting criticism is by criticizing the those who use the word Obamacare instead of calling it the "Affordable Care Act". 

Link here to a story.

Excerpt:

Politics is a messaging and optics game. On the subject of an overhaul for a flawed health- care system, the law should never have been about him. It should be about providing affordable and accessible health care to Americans. Period. The polling on "Obamacare" speaks for itself. On the eve of the ACA rollout, a CNBC poll discovered that "30 percent of the public [didn't] know what ACA [was] versus only 12 percent [for] Obamacare." Compounding that was the 46 percent who opposed "Obamacare," versus the 37 percent who opposed the ACA.

While I applaud the left for looking at creative ways to hide Obamacare's failure, simply calling it "affordable" doesn't mean it makes health care affordable or better.  Similarly, calling a program rent control does not mean it will help rent prices (look at New York City) and calling a very high minimum wage a "living wage" doesn't mean people with low skills will be employed to enjoy this wage.

The video of Obamacare fraud ... stunning

It's 10 minutes, but well worth watching.  These groups are recommending people commit fraud, they're working on a non-profit to help Obama, and more.

Related story here

Learning economics through pictures: The War on Poverty

This is part 2 of the series.  Click here for part 1.

This picture shows the poverty rate in the United States, from 1950-2010.  (Image courtesy of Townhall.com)

When things seem to be going bad, many people clamor for the government to "do something".  (I've seen Thomas Sowell discuss this so many times that he gets credit from me - e.g., see here.)  With the War on Poverty, Lyndon B. Johnson decried poverty rates and said that the government should have a "War on Poverty".  This declaration, made in 1964, occurred when poverty rates had been falling somewhat steadily for the past 15 years.  Yet, with 15 percent of Americans in poverty, LBJ wanted to "do something".

Among the programs/agencies signed into law or expanded after the "War on Poverty" pledge in 1964 and before LBJ left office in early 1969 were:

* Medicare/Medicaid
* HUD (Department of Housing and Urban Development) - helped expand public housing
* Community Action Program
* Increases in federal welfare program known as "Aid to Families with Dependent Children" (AFDC)
* And more

These programs, of course, wouldn't have an impact right when the pledge was made.  The laws have to pass, then be implemented.  It is probably fair to say that the programs would have started to have an impact in 1967.  So if they started to matter 1967 - how should we assess their impact?

One way people might first think to assess whether the "War on Poverty" was a success would be to compare poverty rates shortly before and after it was implemented.  However, that wouldn't quite be fair, as that would be ignoring the trends that had been occurring prior to the "War on Poverty's" implementation.  What we see is that poverty had been decreasing the United States for the fifteen years prior to the "War on Poverty" programs.  Once they were implemented, however, the decreases in poverty immediately stopped.  if you just started in 1967 and looked at poverty rates from then until today, it would appear the War on Poverty had no impact.  Given the billions spent, that of course, would be bad.  Unfortunately, it's quite a bit worse than it first appears, as poverty rates had been declining, and that decrease stopped abruptly as soon as the War on Poverty programs were implemented.

Why?  A big reason is the so-called anti-poverty programs that were implemented actually discouraged work. These programs created a subculture of people who learned to get paid while not-working, and persistently stayed poor.  The programs passed by LBJ helped create what is often referred to as a cycle of poverty, and are the big reason why poverty rates in this country are higher today than they were when the War on Poverty programs started having an impact over 45 years ago.

This simple picture provides a great opportunity to teach several economic lessons:

1. Just having good intentions to fix the economy isn't enough.  Governments can intend the best, but can still fail and cause terrible consequences.
2. Sometimes the free market is the best way to reduce poverty.
3. Doing nothing can be better than doing something, especially when doing something distorts incentives to work.

Part 3 in this series will be released soon.

Interdisciplinarity does not pay ... at least for new Ph.D.s

Link to story here

Excerpt:

Kniffin and Hanks used data from the Survey of Earned Doctorates, and focused on the more than 26,000 people who earned doctorates that year who are U.S. citizens. The income of new Ph.D.s, of course, varies by such factors as discipline, whether postdoctoral employment is within academe or outside it, and whether the first job after the Ph.D. is a postdoctoral fellowship. Kniffin and Hanks came up with their $1,700 gap by controlling for discipline, age, gender and ethnicity.

Susquehanna University, along with many other universities, emphasizes interdisciplinary.  We even require all students to take an interdisciplinary course.  

A couple notes:

1. Mid-career salaries may be higher for those who's dissertations emphasized interdisciplinarity.  
2. Given the market for Ph.D.s is not a representative market, this doesn't necessarily translate into what happens for those with bachelor's degrees.

Those notes aside, I thought this was a fascinating result.

Football lawsuits ... Pop Warner edition

Here's a USA today story.

Excerpt

The family of a Pop Warner youth football player, paralyzed making a tackle during a 2011 game, filed suit in California this week alleging he was taught an unsafe "head-first" technique by his coaches and that the Pop Warner organization and others failed to ensure the coaches complied with rules banning such tackling.

It reminded me of the story 18 months ago by Tyler Cowen

Cowen argues that if lawsuits mean that communities and schools won't host football, that's how football would lose its dominant position as America's number 1 game.  (You'd lose the pipeline of people who play.)  Stories like this scare me for that reason, even though it sounds like the player's family might have a case, if their allegations are true.

Economists paid to endorse clothing? And other links

1. Alex Tabarrok asks if Obama spied on Romney

Excerpt:

As recently as a few weeks ago if anyone had asked me that question I would have consigned them to a right (or left) wing loony bin. Today, the only loonies are those who think the question unreasonable.

2.  The World Series of Poker crowns a new champion.  

I miss playing in the WSOP.  Next year I'll be back in Vegas for a preliminary event, and I'm looking forward to it.  I'll post details as it gets closer.

3.  Daniel Hamermesh from Freakonomics thinks people will pay him to wear clothing to class.

Excerpt:

The university could ask me to advertise—wear a cap, or a t-shirt, just like a tennis star—showing the product of whichever companies bid the most for the rights to advertise on my apparel during class. 

Seriously?  Who is going to pay to have an economist endorse his/her items?  Don't get me wrong, I don't mind the idea of making a few extra dollars to wear a brand of clothing, but I seriously doubt people like me and Dr. Hamermesh are going to who these firms look to when marketing their clothing.  I think some companies might even pay me NOT to wear their clothing.

4.  Great flowchart of Obama's "you can keep your health plan"  ...

I was a guest on a Commonwealth Foundation video podcast

As anyone who regularly reads this blog knows, I am a big fan of the Commonwealth Foundation.  They do solid research and then work hard to make sure Pennsylvania's policy makers get this information.

I recently got the honor of being a guest on their podcast.  Topics included forced payments of union dues by teachers, right-to-work, unionization in general, and other topics.

I enjoyed it and I hope you do too.

Here's the link to the youtube video.  It was accidental (the poster is behind my desk, and I was facing my webcam at my desk), but I'm happy that my "Awesomeness" poster in the background came through well.

One awful vote result and one good vote result

1. Starting with the bad ... It's sad when voters decide that consenting individuals can't engage in transactions they both find beneficial.

That's exactly what New Jersey voters did, increasing their minimum wage and then tying it to inflation.  (The CPI has a history of being overstated, which makes this far more damaging than just a one-time increase.)  This will certainly lead to job losses, less training for young and unskilled workers, and other negative consequences.  I just discussed this yesterday.

The voters' attitude towards minimum wage laws is more proof that economic education is still desperately needed.

2.  Some good news.  Voters in Washington reject GMO labeling.

While one of the two had a good result, I'm not happy.  Both laws would have damaged lives, and one has become law.  I hope that someday in the near future there will be one of two vote results that I liked, where both bills were set to improve lives.

Learning economics through pictures: The minimum wage

Sometimes a picture is worth ... well, you know the cliche.  Over the next couple of weeks, I intend to post pictures that provide an enormous amount of information about the economy and economic policies.  This is the first post of the series.

Here's a picture of unemployment rates and how they vary by age groups:

This picture tells a story of the impact of minimum wages.  Many argue that minimum wages are good for society.  Some will make claims that a working family can't survive on the minimum wage, while others argue that a higher minimum wage is inefficient, but that its better than other forms of government aid.  There is subset of advocates who take their advocacy of minimum wages to another level, and will try to argue that minimum wages have little to no effect on unemployment.

This, of course, is complete nonsense.  Economic theory predicts that the minimum wage will cause unemployment among the affected groups - those whose human capital is so low the wage that they're value to employers is close to the minimum wage.  If you don't want to believe the theory, there's a simple way to test whether the minimum wage matters.  We simply need to look at the unemployment rate across age groups.  If the unemployment rate is approximately the same, then we would be forced to admit that the minimum wage likely doesn't matter.  If it's different, however, then we'd look to the minimum wage as the likely culprit.

The picture provides dramatic evidence of the minimum wage's damaging impact.  Not only is the 16-24 year old unemployment always higher, but look how much larger the unemployment rate went up for teenagers during the Great Recession.  The unemployment rate for other demographic groups went up by about 5%, but for teenagers it was by 10%.  That didn't happen during the 2001 recession, so why now?  

The US raised the minimum wage to $6.55 in 2008 and $7.25 in 2009.  Terrible timing, and the results were predictable and unfortunate.

Picture from tipstrategies.com

Parts 2 and 3 coming soon.