Don’t Get Too Excited… April 23, 2007

The inflation numbers are in and despite the “better-than-expected” numbers, there is still reason for concern.

The Wall Street Journal reports:

However, a rate reduction seems unlikely until inflation shows a more marked deceleration. Consumer prices were 2.8% higher than a year earlier, according to Tuesday’s report, while core prices advanced 2.5% from a year ago, down from last year’s peak of 2.9%. Over the last three months, the core CPI has risen at a 2.3% annualized rate.The Fed’s preferred inflation gauge, the core personal consumption expenditures price index, is running at a 2.4% annual clip through February, well above the 2% level that’s considered the top end of the Fed’s comfort zone.

No matter the measure, inflation is still above the Fed’s implicit target. They will not be cutting rates any time soon.

Universal Health Care April 23, 2007

Michael Cannon writes:

I may lose my health policy decoder ring for asking this, but should we really be focusing specifically on covering the uninsured? What do we think covering the uninsured would accomplish?Would it improve health? Perhaps. But according to health economists Helen Levy of the University of Michigan’s Economic Research Initiative on the Uninsured and David Meltzer of the University of Chicago there is “no evidence” that expanding coverage is a cost-effective way to do so. That is, there are other approaches that could purchase more health for the money spent. Nor would expanding coverage appear to increase overall longevity. Health economist James Smith of Rand notes that health insurance “is vastly overrated in the policy debate.”

Read the whole thing.

Capitalism and Freedom April 23, 2007

Thoughts on taxes from MyDD:

I just paid my taxes, and I have to say, I always take pride when I do so. I don’t like having less money to spend, of course, and the complexity of the process is really upsetting. But I am proud to pay for democracy, and I feel when I do send money to the DC Treasurer and the US Treasury that that is what I am doing. The right-wing likes to pretend as if taxes are a burden instead of the price of democracy. And I suppose, if you hate democracy, as the right-wing does, then taxes are the price for paying for something you really don’t want. Personally, I find banking fees, high cable and internet charges, health care costs, and credit card hidden charges much more abrasive than taxes, because with those I’m just being ripped off to pay for someone’s summer home.

As a classical liberal, I am not a right v. left sort of person, so I will not denigrate either side. However, this “what you can do for your country” attitude was discussed by Milton Friedman in Capitalism and Freedom:

To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served.[…]

Government is necessary to preserve our freedom, it is an instrument through which we can preserve our freedom; yet by concentrating power in political hands, it is also a threat to freedom.

It is not our tax dollars that preserve democracy, it is our collective will as individuals who believe in freedom. While it is important to have government, Friedman further emphasized that it is essential to reduce the scope of government to prevent a concentration of power and political corruption.

The event of paying taxes is no more significant than his payments to the cable and internet companies. These are voluntary transactions. What is a better sign of freedom than paying for something of your own choosing?

Freedom and democracy are something to celebrate. However, it is no more patriotic to gleefully pay taxes than to question the role of government.

The Bootleggers Come to the Table April 23, 2007

“…every businessman is in favor of freedom for everybody else, but when it comes to himself that’s a different question. He’s always the special case. He ought to get special privileges from the government, a tariff, this, that, and the other thing…”

— Milton Friedman

With all the talk about global warming, environmentalists have been pushing for stronger regulations on fuel economy. Following the Supreme Court’s decision recently that the Environmental Protection Agency has the right to regulate emissions, the New York Times reported that the carmakers in Detroit were eager to help. This newfound cooperation from the automakers came as a surprise to many observers. However, those familiar with the theory of the “Bootleggers and Baptists”, this is something that has come to be expected.

Clemson University economics professor Bruce Yandle developed the “Bootleggers and Baptists” theory based on a common thread found in regulatory restrictions. According to Yandle, “durable social regulation evolves when it is demand by both of two distinctly different groups.” The first group, the paternalistic Baptists, is one that supports regulation on moral grounds and its name is derived from those who actively promoted prohibition. The second group, the rent-seeking Bootleggers, is one that stands to profit from the regulation. Often times, the Bootleggers stand in the background while benefiting from the new restrictions.

In this case, the Baptists are the environmentalists arguing that we must reduce greenhouse gas emissions to save the planet from the perceived threat of global warming. The Bootleggers are the automakers that, for years, have profited from environmental regulation. The only surprise is that this time, they have come to the foreground.

Automakers have long been the benefactors of environmental regulation. On the surface, the companies speak out on the behalf of the consumer, rightly pointing out the price increases that regulatory restrictions create. However, the automakers have worked with environmentalists toward compromise to secure higher profitability.

In the 1970s, at the behest of environmentalists, the Environmental Protection Agency began regulating motor vehicle exhaust systems. The EPA mandated that every car must be equipped with a catalytic converter to reduce the toxicity of automobile emissions. This, quite obviously, was seen as a victory for the environmentalist. In the background, however, was a Bootlegger by the name of General Motors. The U.S. automaker also stood to benefit from this regulation because they owned the patent for this new mandated device. Meanwhile Honda, which was developing a cleaner engine, abandoned its plans after the mandate.

The fact that American automakers are coming to the table to openly discuss regulation rather than doing so in the background is likely due to the fact that high gas prices and global warming concerns have begun to wear on the minds of potential car buyers. Demonstrating a common concern with consumers may prove to be a good move with respect to the carmakers’ bottom line.

Automakers routinely seek the cheapest way to comply with the regulation – and rightfully so — attaching catalytic converters and reducing the weight of vehicles rather than developing cleaner engines. This is just one example that demonstrates the inefficiencies of regulation. Restrictions reward those who can offer a patch to the problem in the short run while ignoring the potential benefits of innovation in the long run. Unfortunately, regulation is not flexible and there tends to be large political barriers toward de-regulation.

Rather than regulatory restrictions, the promotion of technological advancement should be the goal of those who seek to reduce emissions. Nevertheless, regulatory restrictions persist as the modus operandi to the detriment of consumers. If you ever wonder why, think no further than the Bootleggers and the Baptists.

The Free Market at Work April 23, 2007

Jerry Bowyer writes:

Pretend for a moment that you are a hard-core Leftie. I tell you a story in which a wealthy and powerful middle-aged white man insults several young black girls. His fate is to be determined by the hierarchy of a large multinational conglomerate peopled with old friends of his. Oh, and by the way, he personally brings millions of dollars of profits into the business. Who, dear temporary Leftie, will the good old boy corporate network back – the wealthy white guy or working class black girls?Surprise, they chose the girls. Why? Because of something called ‘consumer sovereignty,’ the doctrine preached by the great Austrian economist Ludwig von Mises, which holds that, in the end, consumers, not corporations, control the marketplace.

Read the whole thing.

Trickle-down thinking April 23, 2007

Robert Frank begins his column in The New York Times:

When asked why he robbed banks, Willie Sutton famously replied, “Because that’s where the money is.” The same logic explains the call by John Edwards, the Democratic presidential candidate, for higher taxes on top earners to underwrite his proposal for universal health coverage.

Had Frank talked to a historian, he would know that Willie Sutton never actually uttered those words. I mention this because it offers a bit of foreshadowing of the rest of the article.

Franks asserts:

Because higher taxes on top earners reduce the reward for effort, it seems reasonable that they would induce people to work less, as trickle-down theorists claim. As every economics textbook makes clear, however, a decline in after-tax wages also exerts a second, opposing effect. By making people feel poorer, it provides them with an incentive to recoup their income loss by working harder than before. Economic theory says nothing about which of these offsetting effects may dominate.

Clearly economic theory makes no conclusions about such responses. However, Frank’s argument is essentially the reverse of the trickle-down economists. Thus, if we cannot reject the substitution effect, we cannot reject the income effect either. Unfortunately, Frank believes that since we do not know the overall effect, his counterparts are wrong and by deduction, he is correct. If we know little about the overall effect, however, neither side can conclude that they were correct. Nevertheless, Frank trots on…

…attacking the straw man:

Trickle-down theory also predicts a positive correlation between inequality and economic growth, the idea being that income disparities strengthen motivation to get ahead. Yet when researchers track the data within individual countries over time, they find a negative correlation.

I am not aware of this hypothesis, but nevertheless let’s explore Frank’s claim. (I am aware that many trickle-down theorists do not care much about inequality, but this is not Frank’s argument). Income inequality has increased in terms of pre-tax dollars and excludes government transfers. So how exactly does taxation have any effect on inequality? One cannot argue that taxes are having an effect on a pre-tax phenomena.

Finally, Frank concludes:

The rich are where the money is. Many top earners would willingly pay higher taxes for public services that promise high value. Yet trickle-down theory, which is supported neither by theory nor evidence, continues to stand in the way. This theory is ripe for abandonment.

I have a hard time with the notion that the “rich” like to pay taxes. Nobody likes to pay taxes regardless of the services they produce. By the way, what are these services that the rich are so willing to pay for?

Good or bad, the trickle-down approach is essentially based on the ideology that low tax rates allow for a more efficient use of resources and that this efficiency will lead to greater economic growth.

UPDATE: The problem is not just with Franks’s logic, but also apparently due to the fact that he is not reading public finance literature. Greg Mankiw explains.

Hugo’s Mess April 23, 2007

The New York Times reports:

With President Hugo Chávez setting a May 1 deadline for an ambitious plan to wrest control of several major oil projects from American and European companies, a showdown is looming here over access to some of the most coveted energy resources outside the Middle East.

[…]

But this confrontation could easily end up with everyone losing.

The biggest energy companies could be squeezed out of the most promising oil patch in the Western Hemisphere. But Venezuela risks undermining the engine behind Mr. Chávez’s socialist-inspired revolution by hampering its ability to transform the nation’s newly valuable heavy oil into riches for years to come.

As Mr. Chávez asserts much greater control over Venezuela’s oil industry, his national oil company, Petróleos de Venezuela, is already showing signs of stress. Management has become increasingly politicized, and money for maintenance and development is being diverted to pay for a surge in public spending.

[…]

A departure of expertise and investment could weaken an oil industry already unsettled by being transformed into Mr. Chávez’s most crucial tool for carrying out his reconfiguration of Venezuelan society.

Mr. Chávez has raised taxes on foreign oil companies and forced other oil ventures to come under his government’s control. And he has purged more than 17,000 employees from Petróleos de Venezuela after a debilitating strike about four years ago. [Emphasis added.]

Blogging may improve job prospects April 23, 2007

The WSJ reports (free):

Corporate recruiters have long surfed the Web to vet potential hires, but now they are also surfing blogs to unearth job candidates, expanding their talent pool and gaining insights they say they can’t get from résumés and interviews.

Barry Ritholtz has more.