Tag Archives: us

Why economy of scale failed?

Economy of scale is the advantage that firms obtained though increasing the scale of production or operation. Under economy of scale, enterprises have less product marginal cost and more outputs, thus there will be less fixed cost per unit because the fixed costs will be separated to more products. This advantage helps firms to improve efficiency and earn more profit.

However, this rule in economy is not fit in natural gas industry in US.

Reported in WSJ, A new breed of Energy Company is a hit with investors using a mantra long scorned in the oil-and-gas business: Small is beautiful. Actually many years ago, energy firms in US still believed in the economy of scale. At that time the Shale Boom happened thus gas extractors hunted for more and more large scale gas fields. They believed that more reserves and production they owned, the lower their marginal cost and more profits would they have. However, we all know what happened next, the huge amount of natural gas reduce the prices dramatically without much changes in marginal cost. Those big gas companies earned revenues that cannot even cover their marginal costs.

Now the investment opinion is reversed. Investors trust that the “quality” is more important than “sheer number”. This is to say, they gave up the old believes of economy of scale, now the cost of certain gas extractor is more notable. “It’s quality over quantity. We don’t have one million acres and we don’t strive to have one million acres,” says Daniel Rice IV, the 33-year-old chief executive of Rice Energy Inc.

The good news is that US government is preparing for its natural gas export terminals. According to WSJ, the Obama administration’s approval of a seventh application to export natural gas. Some lawmakers agreed with such a decision because the domestic natural gas companies are hungering for increasing in natural gas prices. The exportation can decrease the domestic supply thus raise the prices. Others who disagree this decision said that some jobs could be affected, also the domestic electricity price could also raise.

The reason why economy of scale failed in this market is that supply exceeded demand, so the effective choice for gas companies is to reduce their supply. Reported in WSJ, natural-gas prices on Thursday posted their biggest one-day gain in two months after a smaller-than-expected increase in U.S. inventories reignited fears that supplies are too low. This fear was caused by two reasons: first after this long winter, the gas supplies appeared to be scarce; second the export plan made gas supplies to be less than expected.

It’s essential for those firms to find a way to earn profits and make their business sustainable. We can wait to what will happen in the future about this industry.

[Revised] Who’s afraid of Isaac Asimov? And should we even be?

Wrote the book based on that robot movie with Will Smith. Or was that the other way around? – Isaac Asimov (image credit)

Evan Soltas had an interesting post about labor market tightness a couple of weeks ago. His main point is that, looking at the quits rate, you might think that labor markets are pretty tight right now. That might be a sign that, overall, there’s not a lot of unused economic capacity, or at least, not a lot of unused capacity that matters (more on that below). If you think that’s the case, you’d reach very different policy conclusions when it comes to monetary tightening than someone who thinks there’s still plenty of slack in the economy.

Quite a few people have given their 2 cents already. John Aziz makes a point about the potential benefits of overshooting: it might create jobs for some of the long-term unemployed.

Evan may have a good reason for disregarding the long-term unemployed. John’s proposal might be all we need. But if neither of the two is completely right, we may be in trouble.

Why does Evan think that the long-term unemployed don’t matter? He says that if they don’t compete with more active members of the labor force, they can’t hold back wage growth or interfere with employer/employee matching (because they won’t keep people from quitting a job they don’t like for one they enjoy). Which is a valid point.

But in the medium to long run, a drop in lower labor force participation seems like somewhat of an issue. And participation is down:

It seems to me that there are three possible reasons for this, and three scenarios how this could play out:

  1. The decrease in labor force participation is transitory. In that case Evan’s assessment is correct, although you could still argue that the possibility to overshoot is a risk worth taking, given its potential benefits.
  2. The decrease is more or less permanent, due to labor market hysteresis. In that case, overshooting alone might do the trick.
  3. The decrease is more or less permanent, and it’s a (labor!) demand trend. In that case, we might have a real issue on our hands.

1) Will it all be over soon?

Evan seems pretty convinced that the long-term unemployed “really can’t matter much in a macroeconomic sense”. I think that statement makes sense only if you assume that, in the long run, labor force participation will return to its pre-crisis level. Else, I would like to see an argument as to why we should ignore the fact that 3% of the total US labor force decided to take some time off. Changes of that magnitude are the ones that tend to matter little now, but a lot if they turn out to be persistent over several years’ time.

2) The UI forever (well, kinda…)

Just so we’re clear: economists have a somewhat peculiar interpretation of the word permanent. When I say that the drop in labor force participation might be permanent, I don’t really mean forever. I mean, “for around ten years or so”. Which is substantially longer than recovering from the recent crisis will take (hopefully, anyway), and thus covers a much longer time span than scenario one. So why might participation be depressed for a whole decade?

There are a few stories you could tell that might lead to scenario two. Maybe people lost a lot of human capital while they were unemployed, and have genuine trouble finding a job. Or maybe, employers regard long-term unemployment as a signal. Long-term unemployment might indicate that you’re not the kind of person people would want to employ. Granted, it might also mean you were just unlucky and got laid off at a time when it was really hard to find a new job. But so long as employers have plenty of ‘good’ applicants to choose from – people who aren’t sending out the long-term unemployment signal – they might be okay with rejecting you anyway.

I’m not sure how likely this scenario is, but if this is the one we’re in, definitely overshoot! Temporarily overheating the economy may raise inflation a little, but it would also mean more job openings and fewer people applying. Making job applicants scarce would provide an incentive for employers to take a closer look at the long-term unemployed, and to figure out whether what happened to them was just bad luck – or whether they’re actually bad apples.

3) Rise of the Robot Lords

What if the long run equilibrium level of employment is actually decreasing over time? Take a look at the bigger picture:

For a while now, there has been stagnation and quite a substantial drop in labor force participation, even before the dot-com bubble. If employers desperately needed these people, wouldn’t you expect them to raise wages and try to lure some of them back into the game?

I know this sounds a little like a sci-fi cliché, but if falling demand for labor due to increased mechanization were responsible for discouraging workers from even trying to find a job, overshooting will at best give a temporary boost to labor force participation. After that, we’re back to the downward trend.

The remedies for this kind of situation are very different from what we need to do in the other two cases. Increasing the general level of education would be a good idea (it generally is, but especially in this case).

Rethinking the social safety net would be another (this is probably worthy of a post of its own, but let me give you my intuition). Many of the labor-intensive industries of today might rethink their business model once robots become more cost-effective. What happens if mechanization puts us into a position where the vast majority of workers in classic manufacturing jobs (cars, steel) – and possibly also a fair few in the service sector (eventually, burger-flipping robots will be the norm) – are no longer needed? And when, at the same time, the new ’employees’ – machines – won’t ever ask for pensions, or unemployment benefits? Well, it seems to me that indefinite unemployment insurance, or a guaranteed basic income, might not be so Utopian in this scenario.

Faced with this kind of affluence, society might well decide that the dangers of ‘paying people to be unemployed‘ are far outweighed by the benefits of getting much closer to what John Rawls would call a well-ordered society. And, especially in a highly educated society, I think we have reason to believe that people actually want to work, instead of being on the dole. As Jeffrey Smith nicely said (referring to Arno Duebel, a German who had been living off unemployment benefits for 36 years straight):

The actual mystery, though, is not the existence of someone like Arno, but rather, given the relative generosity of many European welfare states, their relative scarcity.

By the way, labor force participation isn’t just down for low-skill workers; this may be an issue that affects us all, even those with a college education (albeit to a lesser degree):

image

Like I said, this deserves a post of its own.

Humans good, robots bad?

I think that the third scenario is the one we want to be in. Any kind of job that a robot (or machine in general) can do better then a human – why not let it do it?

But it’s also the most difficult one to come to terms with, politically and ideologically. The left would need to give up part of its struggle for the ‘working class’, at least in the classical meaning of the word – factory workers, hard manual labor, that kind of thing. The right, on the other hand, might need to concede that in this kind of environment, maybe having a basic income won’t annihilate the US economy.

Issues like these would have to be dealt with during the next few years and decades. Or, who knows, maybe we are in scenario one, and Evan is right, or two, and John is right. But if not – and there are good reasons to believe this – we might want to start thinking about the implications.

Who’s afraid of Isaac Asimov? And should we even be?

Wrote the book based on that robot movie with Will Smith. Or was that the other way around? – Isaac Asimov (image credit)

Evan Soltas had an interesting post about labor market tightness a couple of weeks ago. The main idea is that, looking at the quits rate, you might think that labor markets are pretty tight right now. That might be a sign that, overall, there’s not a lot of unused economic capacity, or at least, not a lot of unused capacity that matters (more on that below). If you think that’s the case, you’d reach very different policy conclusions when it comes to monetary tightening than someone who thinks there’s still plenty of slack in the economy.

Quite a few people have given their 2 cents already. John Aziz makes a point about the potential benefits of overshooting: it might create jobs for some of the long-term unemployed. Evan may have a good reason for disregarding the long-term unemployed. John’s proposal might do the trick. But if neither of those two is true, we may be in trouble.

Why does Evan think that the long-term unemployed don’t matter? If they don’t compete with more active members of the labor force, then they don’t hold back wage growth or interfere with employer/employee matching (because they won’t keep people from quitting a job they don’t like for one they enjoy). Which is a valid point.

But in the medium to long run, a drop in lower labor force participation seems like somewhat of an issue. And participation is down:

It seems to me that there are three possible reasons for this, and three scenarios how this could play out:

  1. The decrease in labor force participation is transitory (in that case Evan’s assessment is correct, although you could still argue – and I would – that the possibility to overshoot is a risk worth taking)
  2. The decrease is more or less permanent (ceteris paribus), but it’s a (labor!) supply shock (in that case, overshooting alone might do the trick)
  3. The decrease is more or less permanent, and it’s a (labor!) demand trend (in that case, we might have a real issue on our hands)

1) Will it all be over soon?

Evan seems pretty convinced that the long-term unemployed “really can’t matter much in a macroeconomic sense”. That statement makes sense only if he assumes that, in the long run, labor force participation will return to its pre-crisis level. Else, I would like to see an argument as to why we should ignore the fact that 3% of the total US labor force decided to take some time off. Percentage point changes of that magnitude are the ones that tend to matter little now, but a lot if they turn out to be persistent over several years’ time.

2) Weird psycho stuff

Scenario number two – as the headline may suggest – seems unlikely to me, and would require some weird hysteresis effects of long-term unemployment. Even if everybody who’s been out of a job for a while today decided to stop looking forever, there’s no good reason why future members of the labor force would do that too. Parents would need to instill in their kids a certainty that they’ll never find work, and shouldn’t even start trying. Or something along those lines.

I really doubt that that’s the one we’re in, but if it is, definitely overshoot – that way, you might be able to shock today’s long-term unemployed out of their lethargy and avoid whatever weird spiral of self-enforcing beliefs you can think of that would make this scenario even work.

3) Rise of the Robot Lords

What if the long run equilibrium level of employment is actually decreasing over time? Take a look at the bigger picture:

For a while now, there has been stagnation and quite a substantial drop in labor force participation, even before the dot-com bubble. If employers desperately needed these people, wouldn’t you expect them to raise wages and try to lure some of them back into the game?

I know this sounds a little like a sci-fi cliché, but if falling demand for labor due to increased mechanization were responsible for discouraging workers from even trying to find a job, overshooting will at best give a temporary boost, and then we’re back to the downward trend.

The remedies for this kind of situation are very different from what we need to do in the other two cases. Increasing the general level of education would be a good idea (it generally is, but especially in this case). Rethinking social security would be another.

I think that the third scenario is the one we want to be in. Any kind of job that a robot (or machine in general) can do better then a human – why not let it do it?

But it’s also the most difficult one to come to terms with, politically and ideologically. The left would need to give up part of it’s struggle for the ‘working class’, at least in the classical meaning of the word – factory workers, hard manual labor, that kind of thing. The right, on the other hand, might need to concede that in this kind of environment, maybe instituting a basic income won’t annihilate the US economy.

Things like that would be issues for the years and decades to come. And the long-term unemployed today deserve our attention just as much as those of tomorrow. Or, who knows, maybe we are in scenario one, and Evan is right. But if not, we may at least want to think about the implications of this. I’ve always thought that the best kind of paper is a theoretical one anyway.

What Can Your Great-Great-…-Great-Grandparents Do For You?

The Economist has an interesting interview with Gregory Clark, an economic historian at UC Davis, who has recently published a book about social mobility. He claims that it is large, hugely persistent, can’t be influenced by policymakers, and is overall a really big deal.

This might surprise you, since a lot of people like to point out that income mobility in the US isn’t so bad, or at least hasn’t been declining over the last 30 years. Which really isn’t much of a statement, because that might still mean that it’s just been persistently terrible. Whatever you think about income mobility (it’s worth pointing out, for example, that certain regions provide much better chances to ‘move up’ in life), it’s worth noting that social mobility is actually much more than just how much money you make relative to your parents. And that’s at the core of Clark’s book.

Basically, he argues that there’s much more to social status (and the influence that comes with it) than just income. Think about education, for example, or holding public office. Depending on which metric you use, Bill Gates either descended in social status compared to his folks (he doesn’t have a college degree), or easily surpassed them (he’s the richest man in the world, after all).

So Clark developed an index of social status, or as he calls it, ‘social competence’, taking into account several dimensions of it, and tracks how parents’ and kids’ status are related over time. And when I say over time, I mean he goes back to the middle ages (at least wherever records permit). That’s another core part of his study: his time series data stretch back for centuries. I hadn’t thought about this too much, but it’s true that if you only have data on one or two generations of people, it’s quite possible that an increase (or decline) in status from one generation to the next is simply a ‘fluke’ in the data; someone just got lucky for once. So increasing the number of periods you look at is a sensible idea.

So he has this huge data set; what does it tell him? Clark concludes that social mobility is extremely low, both across countries and over time. He also concludes that government policies have no influence on it whatsoever. I haven’t read the book, so I don’t know how valid this concern is, but it seems his analysis comes very close to saying this low mobility is basically justified. Those who are at the top are there because they’re simply ‘better’ than others in terms of their necessarily inherited social competence.

So what now? Despair in the face of a social mobility problem that we can’t overcome? Accept it, because those at the top somehow ‘deserve’ to be there? I want to be very clear here. I’m not spending this much time talking about the book because I agree with his conclusions. I don’t, especially not the last one. I also think that the idea of ‘deserving’ to inherit more social competence and hence power is nonsense, because that would imply that you somehow deserve your parents. I doubt that.

Plus, on a more technical note, there’s no good reason to believe that something that you can track from the middle ages up until today will stick around in the future. Societies have undergone changes over the last 100 years that were more dramatic than anything we’ve seen before. So this data set probably puts too much weight on observations from a time when the whole institutional backdrop of this debate was radically different. Way back when, you could literally inherit your mom’s or dad’s claim to the throne (hell, in some places you still can, unless your mom seems dedicated to outlive you). Because really, what we usually care about isn’t so much average social mobility over time – it’s marginal social mobility right now.

However, there are some really important points to draw from this. One is that quite often, we underestimate the limitations of our data. Looking at what happens from one generation to the next in one country at one point in time isn’t at all the same as saying, “generally, this is how parents’ and kids’ status are related”.

Another, and really the more important one (for me at least) is that when we talk about social mobility and inequality, we often talk about money. We go straight to income inequality and income mobility, as though the only thing that determines whether everybody has the same chance at a good life is determined by how much money they can make. It’s really much more than that (although having a ton of money helps). If we found that even today, quality of life is highly correlated between parents and their children, and perhaps even found that there’s a causal relation there, that should be a big part of our debate.

Why Do So Many China’s Network Companies Plan U.S. IPO?

According to today’s WSJ, another Chinese web. company Sina is planning U.S. IPO recently. (China’s Sina Plans U.S. IPO for Weibo) China’s Weibo social-media service has transformed discourse in the world’s second-largest economy, giving a generation of young Chinese a way to reach millions outside traditional government-controlled media channels. Now its owner hopes to take it public in the U.S.—at the same time that Weibo faces its biggest challenge to its four-year reign as China’s top online forum.

Sina Corp. Sina is aiming to raise roughly $500 million in a second-quarter U.S. initial public offering of the Twitter -like service, according to two people with direct knowledge of the deal. Sina—which is already listed in the U.S.—has hired Credit Suisse AG and Goldman Sachs Group Inc. to handle the U.S. listing, one person said. The Financial Times reported the Weibo IPO plans earlier Monday.

This is not the first time that China’s network company planning IPO in the United States. And it seems there are more and more China’s companies willing to join this trend. So why do they want to enter U.S. market but not China’s own stock market? I’ll explore the reasons regarding this situation.

From macro perspective, IPOs in US are more attractive than China’s domestic IPOs due to the buoyed stock markets and increasing risk appetite. And IPOs with a US domicile have naturally benefited foreign IPOs, like Chinese firms, in particular IPOs in specialty industries such as internet, consumer related deals. Thus it’s an opportunistic move by the company to capitalize on the increasing demand for China-linked IPOs in the US. (Is a wave of Chinese IPOs on the horizon?) 

On the other hand, obviously the respective IPOs are obviously highly risky deals. Good performance eventually has to come in line with strong earnings, to justify valuations. Because of the market sentiment toward the Chinese IPOs after the accounting scandal, both investors and Chinese firms are cautious more than ever about the environment.

According to Timothy J. Keating: “the US equity market is built on trust, and many Chinese issuers have destroyed trust among US investors,” CEO of Keating Capital, a business development company that specializes in making pre-IPO investments. “It will take a long time for this damage to be repaired, and rightfully so,” he added.

In conclusion, I think the most important reason for China’s firm to join US IPOs is because of a more healthier and mature investing environment. But I do think the heavy rely on “relations” in China’s society is another cause for firms to join the “easier” oversea market.

[Revised] Lies, Damned Lies, And The Wall Street Journal

I never, ever have seen media this way. It’s almost indescribable. Making up stories, refusing to run real stories. It’s making themselves look like utter fools. There’s no journalism, there is no media. There’s pure, full-fledged advocacy here. – Rush Limbaugh

I’ve joked about the WSJ misrepresenting facts that don’t suit its ideology in the past, but what they think they can get away with these days is simply not funny anymore. Let me present to you two recent examples of exceptionally poor journalism in the Journal. One is an article on CBO and the minimum wage, the other on the 2009 stimulus bill. I’ll take them in turns.

As you’ve probably noticed, CBO’s estimates regarding the impact of raising the minimum wage to $10.10 are making the rounds (even on our class blog). Here’s what the Journal has to say about this:

CBO estimated that President Obama’s latest proposal—$10.10 by 2016 from $7.25 today—could cost half a million Americans their jobs…

the CBO estimate [stated that] that 16.5 million workers would get a raise, and that some of those would therefore climb above the federal poverty line…

“many low-income workers are not members of low-income families”…

overall real income would rise by $2 billion,” says the CBO study. That’s out of an economy of $16 trillion…

President Obama is pitching a higher minimum wage as a matter of economic justice […] as the CBO report shows, for many of the poor it will merely push them out of the job market and even deeper into poverty. (emphasis added)

Sounds pretty bad, doesn’t it? The minimum wage will impoverish the United States! And that’s coming from a “Democratic-run budget shop” such as CBO! That’s one devastating report, huh?

Except that when you look at the actual CBO publication, you’ll notice that it’s not just about 500,000 people (potentially) losing their jobs. It’s also about 900,000 people being lifted above the poverty line on net (“some of those”, indeed). So CBO isn’t saying that raising the minimum wage is a crazy idea, and that liberals are really, really stupid for proposing it. It’s saying that there is a trade-off involved. It’s also saying that all told, the total number of people below the poverty line would decline!

All told, there are pros and cons to raising the minimum wage, and we could have a sensible debate about it. That is, if the WSJ wasn’t actively trying to only tell half the story. I’m just waiting for them to change their slogan to ‘fair and balanced‘.

The piece on the stimulus bill is right along the same lines (for a much better discussion than the Journal has to offer, I refer you to our class blog):

The $830 billion spending blowout was sold by the White House as a way to keep unemployment from rising above 8%. But […] 2009 marked the first of four straight years when unemployment averaged more than 8%…

The Obama White House had been egged on by liberal economists like Paul Krugman, who in November of 2008 recommended a stimulus of at least $600 billion…

Those stupid, stupid liberals again, getting their economics all wrong. Except that Krugman has said and continues to say that the stimulus should have been bigger. That’s what proposing a minimum means, you see!

Also, what’s this about 8% unemployment, and how it’s related to stimulus being a big, big failure? Let’s take a look:

This clearly shows that stimulus failed, right? If you can’t see it, you should stop questioning right-wing doctrines, you liberal ignoramus don’t worry: it’s not there. That graph shows no counterfactual whatsoever. There’s no way to infer from this what unemployment would have been like without the stimulus.

I think unemployment would’ve been much higher. I think so because there are models that predict this. I think so because there’s empirical evidence for it. But hey, estimating this stuff is difficult. If you’re using a different model, you might disagree. The Journal, however, simply claims that stimulus is nonsense without giving any justification whatsoever. That’s dishonest, cheap, and if you did it in a term paper, you’d get an F.

The Journal also criticizes that the stimulus money was spent on “stupid” things, such as education and studies about youth drug & alcohol abuse and college sex life. Feel free to form your own opinion about how stupid and pointless that was for a country that’s dealing with dismal PISA scores, 88,000 alcohol-related deaths per year and college rape on the rise.

But of all the nonsense expressed in those two articles, this takes the crown:

The failure of the stimulus was a failure of the neo-Keynesian belief that economies can be jolted into action by a wave of government spending. In fact, people are smart enough to realize that every dollar poured into the economy via government spending must eventually be taken out of the productive economy in the form of taxes. The way to jolt an economy to life and to sustain long-term growth is to create more incentives for people to work, save and invest. (emphasis added)

Not only is this a claim that Ricardian Equivalence is literally true, which is most certainly false. It’s also a claim that you want to encourage people to save more in a depressed economy, which is the complete opposite of what you should be doing (and would’ve cost you points on question nine of the midterm).

All this betrays a deep, deep ignorance of economic theory and evidence, and a lack of journalist ethics. Why are we reading the WSJ again?

Recovery on hold with profits overseas (revised)

The United States’ recovery from the recession of 2008 has been painfully slow. It has been a period characterized by persistent unemployment.  Companies are not adding the jobs they shed during the recession.  During this same period American companies have made healthy profits.  However, these profits have not translated into growth.  Below is the labor participation rate, which is a measure of what portion of the population is working.  The shaded areas are recessions, and coincide with drops in the participation rate.  The recoveries that follow show sharp increases in the rate.  After this most recent recession is clear that this recovery is different.

EMRATIO_Max_630_378

Many think that the economy isn’t recovering like is has in the past because there is money just sitting on the sidelines.  One way to get that money working would be to institute an electronic currency, removing the zero lower bound on interest rates by removing 0% interest on paper money, and instituting negative interest rates to draw the money out.  Unfortunately, the paradigm shift needed on the part of the public for this to take place isn’t going to occur anytime soon.  I personally think that such a shift will most likely come from a popular cry for relief from inflation as opposed to breaking the zero lower bound, since the change would be more appealing to the public then.  With electronic money and the removal of the zero lower bound firmly in the future, the United States is in need of something that can help now.  Companies like Apple, Google, and Exxon Mobile are hoarding their profits overseas (an estimated 1.9 trillion in May 2013).  The federal government should incentivize this money to come back to the US where it can work for Americans.

When multinational companies bring their profits back from over seas, the government takes what is called a repatriation tax. This tax rate is currently 35% of what ever is left after the company pays taxes in whatever country it earned them.  Since the money is taxed as soon as it is brought into the country, there will be over a third less of it when it gets here.  Further eroding these mountains of cash is the debts taken out in order to do share buy backs and pay dividends to shareholders.  Investors want some of the profits if the company isn’t going to use them.  The companies themselves would prefer the money was in the US, but current fiscal policy discourage this.  If the government is serious about stimulating the economy, it may have to get out of its own way.

The repatriation tax is preventing corporations from bring these profits back to the United States.  Apple told them as much in 2013.   In order to stimulate the growth that the United States desperately needs, the federal government should provide a tax holiday for corporations to bring their profits home.  This could amount to taxing the profits at a lesser rate, say 10%, but also in hundreds of billions of dollars returning to the United States.  How could this be a bad thing for an economy needing further stimulation?  Opponents to this idea argue that it was tried in 2004 and didn’t lead to any tangible benefits.  While there is no guarantee the companies won’t pay healthy dividends to shareholders or pay down debt, companies will also invest some of the money in acquisitions and research.  There is a lot more money overseas now then there was in 2004, and the country wasn’t struggling to add jobs in 2004.  While opponents say it has the potential to cost the government billions in lost revenue, so does a lack luster recovery.  In addition, the analysis of the 2004 policy was done in 2011, and many positive ramifications of the investments would have been wiped out by the recession.

The money American companies are keeping overseas represent prosperity that has already been earned. The federal government may hate the idea of letting that much money in with such a small slice going in its coffers, but if the United States is going to have one of the highest corporate tax rates the world, how much of this cash does it make sense for companies even to bring back?  The United States government should provide corporations with the incentive they need to bring their profits back to the United States by providing a tax holiday for the money they are currently keeping over seas.  The existing policies should also be modified to make America competitive again with regard to corporate tax rates.  It is only driving money away from our shores (IBM, Chrysler are examples). This money and these policies could be the missing ingredient for the United States recovery.

Lies, Damned Lies, And The Wall Street Journal

I never, ever have seen media this way. It’s almost indescribable. Making up stories, refusing to run real stories. It’s making themselves look like utter fools. There’s no journalism, there is no media. There’s pure, full-fledged advocacy here. – Rush Limbaugh

I’ve joked about the WSJ’s policy of omitting and misrepresenting facts whenever they don’t suit its ideology in the past, but what the Journal thinks it can get away with these days is simply not funny anymore. I’ll focus on two recent articles, one on CBO and the minimum wage, the other on the 2009 stimulus bill. Let me take them in turns.

As you’ve probably noticed, CBO’s estimates regarding the impact of raising the minimum wage to $10.10 are making the rounds (even on our class blog). Let’s see what the Journal has to say about this:

CBO estimated that President Obama’s latest proposal—$10.10 by 2016 from $7.25 today—could cost half a million Americans their jobs…

the CBO estimate [stated that] that 16.5 million workers would get a raise, and that some of those would therefore climb above the federal poverty line…

“many low-income workers are not members of low-income families”…

overall real income would rise by $2 billion,” says the CBO study. That’s out of an economy of $16 trillion…

President Obama is pitching a higher minimum wage as a matter of economic justice […] as the CBO report shows, for many of the poor it will merely push them out of the job market and even deeper into poverty. (emphasis added)

Sounds pretty bad, doesn’t it? The minimum wage will impoverish the United States! And that’s coming from a “Democratic-run budget shop” such as CBO! That’s one devastating report.

Except that when you look at the actual CBO publication, you’ll notice that it’s not just about 500,000 people potentially losing their jobs. It’s also about 900,000 people being lifted above the poverty line on net (“some of those”, indeed). So CBO isn’t saying that raising the minimum wage is a stupid idea, and that liberals are really, really stupid for proposing it at all. It’s saying that there is a trade-off involved. It’s also saying that all told, the total number of people below the poverty line would decline! That means there’s pros and cons, and that we could have a debate about this. That is, if the WSJ wasn’t actively trying to only tell half the story. I’m just waiting for them to change their slogan to ‘fair and balanced‘.

The stimulus piece is right along the same lines (for a much better discussion than the Journal has to offer, I again refer you to our class blog):

The $830 billion spending blowout was sold by the White House as a way to keep unemployment from rising above 8%. But […] 2009 marked the first of four straight years when unemployment averaged more than 8%…

The Obama White House had been egged on by liberal economists like Paul Krugman, who in November of 2008 recommended a stimulus of at least $600 billion…

Those stupid, stupid liberals again, getting their economics all wrong. Except that Krugman has said and continues to say that the stimulus should have been bigger. That’s what proposing a minimum means, you see!

Also, what’s this about 8% unemployment, and how it’s related to stimulus being a big, big failure? Let’s take a look:

This clearly shows that stimulus failed, right? If you can’t see it, you should stop questioning right-wing doctrines, you liberal hack don’t worry: it’s not there. That graph shows no counterfactual whatsoever, and there’s no way to infer from this what unemployment would have been like without the stimulus.

I think it would’ve been much worse. I think so because there are models that predict this. I think so because there’s empirical evidence that that’s the case. But hey, estimating this is difficult. If you’re using a different model, you might disagree. But the Journal simply claims that stimulus is nonsense without giving any justification whatsoever. That’s dishonest, cheap, and if you did it in a term paper, you’d get an F.

The Journal also criticizes that the stimulus money was spent on “stupid” things, such as education and studies about youth drug & alcohol abuse and college sex life. Feel free to form your own opinion about how stupid and pointless that was for a country that’s dealing with dismal PISA scores, 88,000 alcohol-related deaths per year and college rape on the rise.

But of all the nonsense expressed in those two articles, this takes the crown:

The failure of the stimulus was a failure of the neo-Keynesian belief that economies can be jolted into action by a wave of government spending. In fact, people are smart enough to realize that every dollar poured into the economy via government spending must eventually be taken out of the productive economy in the form of taxes. The way to jolt an economy to life and to sustain long-term growth is to create more incentives for people to work, save and invest. (emphasis added)

Not only is this a claim that Ricardian Equivalence is literally true, which is absolute BS. It’s also a claim that you want to encourage people to save more in a depressed economy, which is the complete opposite of what you should be doing.

All this betrays a deep, deep ignorance of economic theory and evidence, and a lack of journalist ethics. Why are we reading the WSJ again?

 

Magna Charter?

Both the Economist and the Wall Street Journal are hyped about charter schools, and worried about Bill de Blasio’s effort to make life harder for them. Those two magazines don’t agree very often (which is why I like reading the Economist, and feel less enthusiastic about reading the Journal). That suggested to me that either something must be very wrong with this picture – or charter schools must really be as good as they say.

In case you’re also late to the party (or, like me, not from the US), charter schools are publicly funded schools that are run independently. They have much more freedom to hire and fire teachers and set their curriculum than ‘regular’ public schools, although the exact regulations vary from state to state. They are also not unionized. And the Economist and the Journal love them.

The articles both cite a couple of examples of charters outperforming neighboring public schools. Says the Economist:

Bronx 2 [a charter school], part of the Success Academies network, serves black and Latino children from mostly low-income families. Its pupils did extraordinarily well in the 2013 state examinations—97% passed mathematics and 77% passed English. The school ranked third in the state, even beating children in well-heeled Scarsdale, a well-to-do New York City suburb. Bronx 2 shares space with PS 55, a traditional district public school where only 3% of pupils passed English and only 14% passed maths.

That sounds pretty impressive. And there’s plenty of stories like this one out there. Probably enough to persuade the average sociologist or PoliSci major. But let’s be honest, as an economist it takes something special to convince you. Doesn’t this whole thing just beg to have a paper written about it?

Turns out you weren’t the first to think that. The good news is that there’s a vast literature on the subject. The bad news is that it’s highly inconclusive. Findings on the gains that charter schools bring range all the way from none to basically none to (modest) benefits (some actually find negative effects). They also seem to be much more segregated than ordinary public schools.

At any rate, the picture is much less rosy than the Economist and the Journal try to make it seem. I kind of expected this, because neither article really has a convincing argument as to why charter schools should be better, they simply state that they are.

I think charters get a lot of good PR partly because some of them do phenomenal things with kids from less phenomenal parts of town. Which is good, because those kids might fall through the cracks otherwise. But it’s also the reason why charter schools are often highly segregated.

Some charters also seem like an attractive place to highly skilled, progressively minded teachers due to their less restrictive curricula (and, sometimes, substantially higher salaries). Which is good for kids who attend them, but not as great for kids who don’t.

So what now? Should we abandon run-of-the-mill high schools for charters? All told, I don’t think it’s charter schools per se that make a difference. There’s nothing special that somehow magically makes them generally better than regular schools (least of all the lack of a teacher’s union, no matter how much the Journal tries to hammer that point home).

But there is something special about some charter schools. Some of them attract really good teachers. People in education love to talk about a meta-study published by John Hattie in 2008, which aggregated the results of 50,000 smaller studies and tried to answer one question: what works in education? Hattie came up with a list of things that drive students’ performance. Turns out that a bunch of them are ultimately down to one person: the teacher (by the way, I love how the least important aspect on that list is, “Teacher subject matter knowledge”).

So what we really shouldn’t worry about is whether charter schools ‘work’ or ‘don’t work’, or whether the teacher’s union should be squashed (I think it shouldn’t, in case you’re wondering). We shouldn’t worry about that because charter schools in general are no silver bullet.

What we should really worry about is how we make sure that we get good people to teach in all of our schools, no matter who runs them or who pays the salaries. What we should worry about is how we can keep teachers motivated instead of using them as cannon fodder. What we should worry about is providing appropriate funding and making sure that everybody gets a shot at a decent education (that last point alone should be enough to keep people busy for a while).

There are some charter schools that could teach us a lot about addressing those issues. Both ‘ordinary’ public schools and other charters would do well to listen to them.

Who Deserves To Be A ‘Young Invincible’?

The Wall Street Journal frets:

The ObamaCare exchanges are unlikely to survive financially unless enough healthy, low-cost young people buy overpriced policies to subsidize everybody else.

Now there are several problems with the article I’m referring to here, but I find this to be the most severe one. And it’s one that keeps popping up again and again. Some people – mostly conservatives, but not exclusively – seem to think that asking young, healthy people to pay higher premiums than their expected costs of treatment is somehow deeply immoral, and should be stopped immediately. This, it seems to me, must be based on the idea that young, healthy people have somehow earned the right to be young and healthy, and that sick, old, or otherwise more ‘expensive’ members of society somehow deserve to be sick, old, or’expensive’.

Do you deserve to be a ‘young invincible’? Do you deserve to be a healthy individual between 18 and 29 in 2014? I’d say you don’t (and for that matter, I don’t either).

The fact that somebody was conceived between 1985 and 1996 isn’t really a great achievement on their part, is it? You obviously didn’t exists pre-birth, so it’s really none of your business that you happen to be young, and that that lowers your risk of getting sick.

Whether you deserve your good health is more debatable, although a lot of health-related issues are rooted in your genes. That means that not having any genetic disposition towards, say, cancer gives you an advantage over someone who does, in terms of expected quality of life and health care costs. But you din’t do anything to ‘earn’ that advantage – you’re born with it. You have what’s known as a morally arbitrary (economic) advantage. There’s now reason why you shouldn’t get cancer, but the other person should, or vice-versa. You just happen to be the one who doesn’t.

The same goes for being born into a family that can afford to lead a healthy lifestyle, and chooses to do so. Growing up in a healthy environment will make you more aware of the importance of living a healthy life yourself. But it’s not that you were somehow allocated to nice, healthy parents before you were born because you were somehow better than others who got dealt a worse hand (i.e. less healthy childhood). Actually, maybe you believe you were. I don’t.

So if you’re a ‘young invincible’, you are so not because you deserve to be, but because you happen to be. And others, who are just as much of a human being as you are, and have just as much of a right to an enjoyable life, happen to not be a member of that exclusive group.

The same, by the way, goes for old people. Had the ACA been instituted ten years ago, or ten years from now, the group of the ‘young invincibles’ would be a completely different set of individuals! Suddenly, you wouldn’t be among them anymore. Does that mean that suddenly, those other people deserve to be young and healthy? Obviously not.

Healthy young people have a whole life ahead of them. Throughout that life, they’ll be able to make lots of money if they so choose. Sick, young people don’t have that same rosy expectation. I’m not asking any of those lucky, healthy ones to give up their health and share it with the sick. That’s not only impossible, but it would also be insensible. I don’t want to punish anyone for being healthy.

What I ask is that people realize that they’re lucky, and that it’s acceptable that they should share their resources with the less fortunate members of society. That’s not impinging on their personal liberties, it simply ensures that other people, who are less fortunate, can effectively lead a life worthy of a human being. And part of that means being able to pay your health bills and get the treatments you need.

If you think this whole idea through, you’ll notice something else too: the ‘young invincibles’ of today are the middle-aged heart-attack risks of tomorrow. People get older. Over the course of your life, if you start out paying a premium that’s higher than your expected costs, and then move on to a premium close to, and eventually perhaps even lower than, your personal costs, what did you pay in total? Seems like it’s at least close to a fair premium, all things considered.

If you can show me a free market model of health care where the outcome is that nobody is being discriminated against on the basis of the health expectations they get dealt by the great lottery that is birth, I’ll consider that as a viable option. I’ve seen government-run models that do this. I haven’t seen laissez-faire ones.