Social Security and Medicare Questions for Presidential Candidates

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WASHINGTON, D.C. /PRNewswire-USNewswire/ — As voters consider their choices in state primary elections and in the run-up to the general election, the American Academy of Actuaries is urging them to “make issues count” by evaluating the substance of presidential and congressional candidates’ positions, aided by the Academy’s new series of Election Guides.

“Decisions made by the next president and Congress will shape the long-term financial health of Medicare and Social Security. With millions of Americans relying on these programs, now is the time to start asking the hard questions of candidates—before the nominations are secured, and then all the way through Election Day,” said Academy President Tom Wildsmith. “The Academy election guides provide voters with a nonpartisan roadmap to critical issues, and with questions to effectively press candidates for the substance and details of their positions.”

The Academy’s Election Guides provide general background and a close examination of selected major public policy issues, and provide sample questions to ask candidates, such as:

Social Security

  • Should benefits be lowered or raised, and how would the change affect Social Security’s solvency?
  • Should Social Security’s limit on taxable earnings be raised?
  • What are the advantages of raising Social Security’s retirement age?

Medicare

  • How should Medicare’s long-term financial challenges be addressed?
  • Will you change the benefit structure of the traditional Medicare program and/or allow coverage of additional services to meet the needs of an aging population?
  • If you advocate a premium support approach for Medicare, how would the benefit package be defined?

The initial 2016 election guides released by the Academy focus on the financial condition and other policy considerations related to Medicare and Social Security. The Academy will add future guides focusing on other policy areas throughout the election year, including long-term care and other health care issues, retirement policy, and climate change.

For more information, visit http://election2016.actuary.org.

AAALOGOAbout the American Academy of Actuaries

The American Academy of Actuaries is an 18,500+ member professional association whose mission is to serve the public and the U.S. actuarial profession. The Academy assists public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.

The Myth of Scandinavian Socialism by Corey Iacono

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Bernie Sanders has single-handedly brought the term “democratic socialism” into the contemporary American political lexicon and shaken millions of Millennials out of their apathy towards politics. Even if he does not win the Democratic nomination, his impact on American politics will be evident for years to come.

Sanders has convinced a great number of people that things have been going very badly for the great majority of people in the United States, for a very long time. His solution? America must embrace “democratic socialism,” a socioeconomic system that seemingly works very well in the Scandinavian countries, like Sweden, which are, by some measures, better off than the United States.

Democratic socialism purports to combine majority rule with state control of the means of production. However, the Scandinavian countries are not good examples of democratic socialism in action because they aren’t socialist.

In the Scandinavian countries, like all other developed nations, the means of production are primarily owned by private individuals, not the community or the government, and resources are allocated to their respective uses by the market, not government or community planning.

While it is true that the Scandinavian countries provide things like a generous social safety net and universal healthcare, an extensive welfare state is not the same thing as socialism. What Sanders and his supporters confuse as socialism is actually social democracy, a system in which the government aims to promote the public welfare through heavy taxation and spending, within the framework of a capitalist economy. This is what the Scandinavians practice.

In response to Americans frequently referring to his country as socialist, the prime minister of Denmark recently remarked in a lecture at Harvard’s Kennedy School of Government,

I know that some people in the US associate the Nordic model with some sort of socialism. Therefore I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.

The Scandinavians embrace a brand of free-market capitalism that exists in conjunction with a large welfare state, known as the “Nordic Model,” which includes many policies that democratic socialists would likely abhor.

For example, democratic socialists are generally opponents of global capitalism and free trade, but the Scandinavian countries have fully embraced these things. The Economist magazine describes the Scandinavian countries as “stout free-traders who resist the temptation to intervene even to protect iconic companies.” Perhaps this is why Denmark, Norway, and Sweden rank among the most globalized countries in the entire world. These countries all also rank in the top 10 easiest countries to do business in.

How do supporters of Bernie Sanders feel about the minimum wage? You will find no such government-imposed floors on labor in Sweden, Norway, or Denmark. Instead, minimum wages are decided by collective-bargaining agreements between unions and employers; they typically vary on an occupational or industrial basis. Union-imposed wages lock out the least skilled and do their own damage to an economy, but such a decentralized system is still arguably a much better way of doing things than having the central government set a one-size fits all wage policy that covers every occupation nationwide.

In a move that would be considered radically pro-capitalist by young Americans who #FeelTheBern, Sweden adopted a universal school choice system in the 1990s that is nearly identical to the system proposed by libertarian economist Milton Friedman his 1955 essay, “The Role of Government in Education.”

In practice, the Swedish system involves local governments allowing families to use public funds, in the form of vouchers, to finance their child’s education at a private school, including schools run by the dreaded for-profit corporation.

Far from being a failure, as the socialists thought it would be, Sweden’s reforms were a considerable success. According to a study published by the Institute for the Study of Labor, the expansion of private schooling and competition brought about by the Swedish free-market educational reforms “improved average educational performance both at the end of compulsory school and in the long run in terms of high school grades, university attendance, and years of schooling.”

Overall, it is clear that the Scandinavian countries are not in fact archetypes of successful democratic socialism. Sanders has convinced a great deal of people that socialism is something it is not, and he has used the Scandinavian countries to prove its efficacy, while ignoring the many ways they deviate, sometimes dramatically, from what Sanders himself advocates.

Corey IaconoCorey Iacono

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

The Bible and Hayek on What We Owe Strangers by Sarah Skwire

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It’s so much easier to sympathize with our own problems and with the problems of those we love than with the problems of complete strangers.

Adam Smith observes in The Theory of Moral Sentiments that our ability to sympathize with ourselves is, in fact, so out of all proportion to our ability to sympathize with others that the thought of losing one of our little fingers can keep us up all night in fearful anticipation, while we can sleep easily with the knowledge that hundreds of thousands on the opposite side of the world have just died in an earthquake.

Hayek makes the same point in The Fatal Conceit:

Moreover, the structures of the extended order are made up not only of individuals but also of many, often overlapping, sub-orders within which old instinctual responses, such as solidarity and altruism, continue to retain some importance by assisting voluntary collaboration, even though they are incapable, by themselves, of creating a basis for the more extended order. Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules.

It may not be the best part of our humanity, but it is a very human part. We care more about those we see more often, understand more thoroughly, and with whom we share more in common.

And maybe that’s not so bad. We treat family differently, after all. My daughter will get a giant pink fluffy stuffed unicorn from me on her birthday. I don’t believe that I am similarly obligated to provide fuzzy equines for all other eight-year-olds. Different treatment is a way of acknowledging different kinds of bonds between people and different levels of responsibility to them.

All of this is on my mind because the other night, after I gave a talk on liberty and culture, an audience member and I had a discussion about banking, debt, and interest rates during which he carefully explained to me how Jews lend each other money for no interest, but when they lend to Christians, the sky’s the limit. Everyone knows it, because it’s in the Bible.

He was right, sort of. It is in the Bible, sort of.

It’s right there in Deuteronomy 23:

You shall not give interest to your brother [whether it be] interest on money, interest on food, or interest on any [other] item for which interest is [normally] taken. You may [however], give interest to a gentile, but to your brother you shall not give interest, in order that the Lord your God shall bless you in every one of your endeavors on the land to which you are coming to possess.

But textual interpretation is a tricky business. And textual interpretation of a text that has existed for thousands of years and been wrangled with by millions of interpreters — well, it doesn’t get much trickier than that.

But it seems worth noting that the word used here (both in translation and in Hebrew) is literally “brother.” This has been interpreted over the years to mean “fellow Jew.” But the word, as given, is brother.

What I think the passage means to emphasize by using this word — regardless of whether we are talking about literal brothers, or just “brothers” — is the importance and of treating those who are closest to us with particular care and concern. The kind of business relationship that is part of Hayek’s extended order, or that is located in an outer ring of Smith’s concentric circles of sympathy, doesn’t come with extra moral responsibilities to one another. A price is agreed on. A bargain is struck. An exchange is made. Everyone is content. But in an intimate order — with brothers or sisters, husbands or wives, parents or children — we have a responsibility to give more and do more than in the extended order.

And so observant Jews are told that they should not pay or charge interest to brothers — whomever they consider those brothers to be.

Though it has been interpreted uncharitably by many over the years, this passage from Deuteronomy is not a passage about cheating the outsider. This is a passage about taking special care of those who are closest to our hearts. It’s hard to find anything to object to in that.

Sarah SkwireSarah Skwire

Sarah Skwire is the poetry editor of the Freeman and a senior fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis. She is a member of the FEE Faculty Network.

Our Awesome, Creative, Fashionable Knockoff Culture by Jeffrey Tucker

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The modern fashion industry is one of the most creative, dynamic, fast-moving, profitable, and downright interesting sectors in the economy. But right now, there are worries in the air. It seems like the old-fashioned fashioned runway show — groovy music, cameras flashing, debuts of new stuff you can buy months later — is no longer working for the industry.

“Everyone drank the Kool-Aid for too long, but it’s just not working anymore,” Diane von Furstenberg of the Council of Fashion Designers of America told theNew York Times. “We are in a moment of complete confusion between what was and what will be. Everyone has to learn new rules.”

The problem, as industry sees it, comes down to two factors.

The first problem: smartphones. As soon as the models hit runways, the images are spread everywhere and instantly. They are Tweeted, Instagramed, Youtubed, Facebooked, and instantly saturate the culture. This makes life easier for “pirates” (in quotes because you can’t actually “steal” a design).

They can go into production very quickly and have knockoffs on the shelves in weeks. The price premium that has made high fashion highly profitable is no longer working as it once did.

IWWIWWIWI

Also contributing is the influence of what is called “IWWIWWIWI”: I Want What I Want When I Want It. Rapid information flows have heightened the intensity of demand. With complete public awareness of new fashions happening within hours of their being made public, people are already ready for something new by the time the clothing is available for purchase. IWWIWWIWI is dramatically shortening the time structure of production.

Even the traditional four seasons of clothing, with a traditional lag between display and availability, is changing. Designers are being pressured to make new designs available the day of the show. Releasing Spring fashions in January and Fall fashions in May isn’t doing it anymore. The seasons that have shaped the industry for many decades are becoming one, ever-evolving season. “Panseasonal,” they call it.

Sharing the Runway

What has this meant for the runway show? They’ve had to change to become massive public events, featuring concerts, album releases, fireworks, courting of editors and writers, and elaborate media shows. The big show this year was in Madison Square Garden with 18,000 attendees and ticket sales running as high at $6,000 on the secondary market, featuring the release of Kanye West’s new album.

Here’s the rub: fashion itself plays a diminished role relative to pop music and the glitzy stardom associated with it. In fact, the fashion industry is seeking to gain attention by hitching its act to the popularity of other sectors. That’s apparently wounded some egos.

As always, however, the fashion industry will change and adapt. This is an industry trained over generations to compete, persuade, and sell. Cronyism doesn’t work in fashion like it does for banking, education, or even software. There are no bailouts, no subsidies to speak of, and no government favors that insiders can count on to protect them against upstarts. And these upstarts can come from anywhere.

Markets without IP

This is the industry’s second gripe: its lack of government protection.

Here’s the crucial and counterintuitive fact: intellectual property legislation, as it applies to literary works and software, has never applied to fashion. If you see something, you can copy it. It’s legal and expected. This is why even big box stores like Walmart and Target carry cheap knockoffs of the very thing you saw on New York runways just a few months ago. And it’s why the distance between what average people can look like and what the rich look like is growing shorter by the day.

The absence of strict rules has created this hyper-competitive environment and made less discernible the class identity distinctions associated with clothing.

There are a few intellectual property rules. You can copyright original prints and patterns and novel designs. That rule, however, hardly ever applies, and even then, it is almost impossible to enforce. It requires litigation and time, and the courts have not consistently sided in favor of the designer, so it is an iffy proposition. True, Christian Louboutin won his lawsuit to protect the red sole of his shoes. But this is rare. And the big money isn’t always on the side of the copyrighters — companies like Forever 21 specialize in knockoffs and hardly ever lose a case.

A Culture of Fakes

There is also the issue of trademark, which applies to brands. Only Calvin Klein can really make a Calvin Klein. Only Nike can be Nike✓. But trademark has done next to nothing to stop the flood of knockoffs, as anyone who has shopped the streets of any large city can tell you. In a typical shopping district in Istanbul or Rome, or just about any other major city in the world, fakes and the real thing are sold practically next door to each other, and all sellers make money doing so. The fakes are sometimes so sophisticated that it takes an industry expert to tell the difference.

Efforts by law enforcement have done nothing to shut down the industry of fakes. And this is despite efforts by ICE, CBP, FDA, FBI, the Patent and Trademark Office, the Postal Service, and other alphabet soup agencies. In the end, most everyone has come to terms with the reality: the industry is being created by a culture of fakes.

You might say that this is a market in fraud, but that’s not quite accurate. Consumers know exactly what they are buying. They are not being fooled. They want to spend far less for something that looks very expensive. The people meant to be fooled are third parties who see them wearing it. And those with the financial means — and high risk aversion to having their friends find out that they are not carrying a real Gucci — pay for it. Everyone makes money, and no one is physically harmed.

Finally, there are patents that apply to actual new innovations, such as the Vibram 5-finger shoe. It was the coolest thing to happen to footwear in ages. So of course everyone wanted to make their own. Even with the patent, and deep pockets to enforce the patent, it didn’t work. Within months after this implausible shoe caught on, other companies made 4-finger and 3-finger models, and everyone had the new running style ramp up. Vibram sued, but they eventually settled, after finding that it was fighting a losing battle.

A Market that Works

Apart from these two protections, fashion is a free market, and this accounts for why the industry is so crazy competitive, innovative, and profitable — even if those profits aren’t as concentrated as they once were.

Of course, the industry’s biggest players don’t approve. For years, they’ve been pushing Congress for legislation that would apply copyright to fashion. So far, Congress hasn’t gone along. But it is hardly surprising that industry would want to ratchet down the competitive mania a few notches. Having legislation on their side would promote a longer period of profitability for unique items. It would permit the largest players to enjoy great safety, and perhaps not have to sweat so much about staying ahead of the curve.

It’s good that Congress has never gone along. The free market in fashion has been beneficial for everyone, in the long run. Contrary to our standard assumptions about intellectual property, its virtual absence in fashion hasn’t reduced innovation at all. In fact, the entire industry provides a paradigmatic look at how a creative industry can function without government regulation and monopolization.

Since the advent of the capitalist revolution in the late middle ages, the market has provided humankind with an endless variety of garments at ever low prices, reducing class barriers and delighting the working multitudes at the same time. This continues to this day, despite ever falling prices for just about everything. In a global market without substantial state regulation, one might not expect a beautiful creative order to emerge. But that is exactly what has happened.

This market is too marvelous, productive, and delightful to be brought down by the advent of smartphones and social media. Fashion will survive and thrive as never before.

Jeffrey A. Tucker

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE and CLO of the startup Liberty.me. Author of five books, and many thousands of articles, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook. Email.

Ted Cruz’s VAT Is a Dangerous Gamble by Daniel J. Mitchell

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This is a very strange political season. Some of the Senators running for the Republican presidential nomination are among the most principled advocates of smaller government in Washington.

Yet all of them have proposed tax plans that, while theoretically far better than the current system, have features that I find troublesome. Marco Rubio, for instance, leaves the top tax rate at 35 percent, seven-percentage points higher than when Ronald Reagan left town.

Meanwhile, Ted Cruz and Rand Paul (now out of the race) put forth plans that would subject America to value-added tax.

This has caused a kerfuffle in Washington, particularly among folks who normally are allies. To find common ground, the Heritage Foundation set up a panel to discuss this VAT controversy.

You can watch the entire hour-long program here, or you can just watch my portion below and learn why I want Senator Cruz to fix that part of his plan.

Allow me to elaborate on a couple of the points from my speech.

First, a good tax system is impossible in a nation with a big welfare state. If the public sector consumes 50 percent of economic output, that necessarily means very high marginal tax rates.

Second, all pro-growth tax reform plans tax income only one time, either when earned or when spent, which means those plans all are consumption-based taxes in the jargon of public finance economists. Which is also just another way of saying that these tax plans get rid of double taxation.

On this basis, a VAT is fine in theory. Moreover, it could even be good in reality (or, to be technical, far less destructive than the current system in reality) if all income taxes were totally abolished.

Third, since Cruz’s plan leave other taxes in place, I’m worried that future politicians would do exactly what happened in Europe — use the new revenue source to finance an expansion of the welfare state.

Proponents of the Cruz VAT correctly point out that the plan simultaneously will abolish both the corporate income and the payroll tax, which sort of addresses my concern.

But keep in mind this is only an acceptable swap if you think

  1. the plan will survive intact as it move through the legislative process;
  2. the VAT won’t raise more money than the taxes that are abolished.

I’m not sure either assumption is valid.

Last but not least, proponents of the Cruz VAT plan keep denying that the plan includes a VAT. If you recall from my remarks, I think this is silly. It is a VAT.

To bolster my argument, here’s what Alan Viard wrote for the American Enterprise Institute.

Cruz’s proposed VAT would have a 16 percent tax-inclusive rate, and Paul’s proposed VAT would have a 14.5 percent tax-inclusive rate. Both VATs would be administered through the subtraction method rather than the credit invoice method used by most countries with VATs.

The use of the subtraction method would not alter the fundamental economic properties of the VAT. A VAT is equivalent to an employer payroll tax plus a business cash flow tax.

Let’s close by citing some very wise words from Professor Jeffrey Dorfman of the University of Georgia (Go Dawgs!). Here are the key parts of his column forForbes:

Conservatives are worried about national consumption taxes for several reasons, principally: these taxes’ ability to raise large sums of revenue and the ease with which politicians can raise the rates. Because national consumption taxes are efficient and can be applied to a larger base than is typical of state and local sales taxes they can raise large sums of money.

While liberals think this is a plus, conservatives are rightly wary of taxes that could supply government with more money. More importantly, conservatives are suspicious of the semi-hidden nature of consumption taxes and the ability to raise them incrementally.

Bingo.

The bottom line is that even if we decide to call the VAT by another name, it won’t alter the fact that some of us think it’s too risky to give politicians an additional revenue source.

This post first appeared at Dan Mitchell’s blog.

Daniel J. Mitchell

Daniel J. Mitchell

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

PODCAST: Listen to “I, Pencil” on Freakonomics Radio by Jeffrey Tucker

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It’s thrilling that a full episode of the popular Freakonomics podcast is dedicated to Leonard Read’s legendary essay “I, Pencil.” The episode interviews pencil makers and sellers, economists and writers, and provides a look back at what gave rise to this essay in the first place.

It also features the crucial role that FEE has played in emphasizing the decentralized and spontaneous processes that build the good society, in contrast to the fashion for central planning that has defined economic and social policy in the 20th and 21st century.

The host, Stephen Dubner, says:

Let’s begin in 1946. That’s when a man named Leonard Read starts an organization called the Foundation for Economic Education, or FEE. The FEE is a think tank meant to extol the virtues of free-market capitalism. It’s an early proponent of libertarianism in the U.S. Read was a businessman, from Michigan. He started out in wholesale groceries, later ran the Los Angeles Chamber of Commerce. In 1958, the FEE published an essay, written by Read, called “I, Pencil.” …

It’s a bold claim the pencil makes – “not a single person knows how to make me.” But the claim would seem to be justified. And it’s an interesting way of looking at the world, yes? At how interdependent we are, at how specialized we are. The deeper conclusion that Leonard Read was making, however – this is where things get really interesting.

The episode is beautifully produced, the product of massive research and interviews. It updates some of the details from Read’s pencil 58 years ago, and re-applies the lesson in the case of a man who tried to make an ordinary $10 toaster from scratch and on his own.

In the end, the lesson is the powerful one that any student can absorb from a detailed knowledge of economics: even the simplest products require a vast and extended order of market production, made possible through ownership, capital, trade, the division of labor, and signaling systems such as prices. No one person can do it, and certainly no government can do it.

Listen to the podcast here or on iTunes.

Jeffrey A. TuckerJeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE and CLO of the startup Liberty.me. Author of five books, and many thousands of articles, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook. Email.

VIDEO: Be Suspicious of the Stories We Tell Ourselves by Scott Sumner

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People like to think in terms of stories:

It’s a movie classic. The lovers are out for a walk when a villain dashes out of his house and starts fighting the man. The woman takes refuge in the house; having seen off his rival, the villain re-enters and chases after her. Yet the hero returns, pulling open the door so that the heroine can escape. The villain chases the lovers, until they finally flee, and he smashes his own home apart in fury.

Who are these characters? None of them ever made another movie, and you won’t find them in any directories of famous actors. They are, in order of appearance, a large triangle (villain), a small triangle (hero), and a circle (heroine). The animated film was made in 1944 by the psychologists Fritz Heider and Marianne Simmel of Smith College in Massachusetts, whose paper ‘An Experimental Study of Apparent Behaviour’ is a milestone in understanding the human impulse to construct narratives.

At one level, their movie is just a series of geometric shapes moving around on a white background. It appears to lack any formal elements of story at all. Yet study groups (of undergraduate women) who saw the film in 1944 were remarkably consistent in their judgment of what it was ‘about’. Thirty-five out of 36 decided that the big triangle was a mean, irritable bully, and half identified the small triangle as valiant and spirited.

That’s a striking result: near unanimity on the emotional journey of a bunch of shapes. Then again, how surprising were these findings? Abstract animation existed as early as the 1920s, and experimental animators such as the Hungarian Jules Engel had already shown in sequences such as the Mushroom Dance in Walt Disney’s Fantasia (1940) that very little visual information is needed to create characters and story. So perhaps research was just catching up with what the empiricism of art had already discovered.

I’ve found that stories get in the way of logical thinking in economics. When I try to explain that a tight money policy led to the recession of 2008, I have to contend with the fact that people have already interpreted the events of 2008 through a very different set of stories, ones much more consistent with Hollywood. (Indeed there is a new example in the theaters right now.)

People don’t like my claim that the Fed needed a more expansionary policy because:

  1. It would “bail out” foolish borrowers (or foolish lenders?)
  2. I would simply be “papering over” deeper structural problems (or perhaps the failures of the Obama administration.)
  3. It would be taking the “easy way out”, not making the hard decision to endure a period of austerity.
  4. “There’s a price to be paid” for the reckless excesses of the housing bubble.
  5. It would just be “kicking the can” down the road.

These metaphors do more to obfuscate than enlighten, but they appeal to our sense that society can be understood through stories. Trump and Sanders have cleverly exploited this human weakness, in their current campaigns.

At times it seems like the press is so enamored with stories that they don’t even need any facts. Consider this assertion in a recent WSJ “story”:

After substantially revaluing the yuan over a decade in response to protectionist threats, China now finds the strong dollar has left its currency grossly uncompetitive with the euro, the yen and all the rest.

The alarming recent devaluation of the yuan, while a sensible response for China, is creating strains throughout emerging economies and deep uncertainty through all global supply chains.

When you look at the numbers, this comment literally makes no sense. The Chinese yuan has been very strong in the last few years, and has strongly appreciated against the other emerging market currencies. But it seems to fit a deeply held narrative, which people cling to because it makes a good story. China’s a “big triangle,” trampling all over the “smaller triangles,” like Brazil and Indonesia and Vietnam.

Banking is another example. In the recent crisis, the biggest problems were in the small and mid-sized banks. The FDIC (i.e., we taxpayers) spent tens of billions of dollars paying off the depositors of the smaller banks, who made lots of reckless subprime mortgages. But it makes a better story to blame the biggest banks, so that’s become the standard narrative.

Then there was the orgy of predatory borrowing: people lying about their incomes to get mortgages. But that doesn’t make a good story, so let’s make it “predatory lending.” Sometimes their are competing stories, as when the right claims the police are a “thin blue line” protecting civilization from barbarism, whereas the left sees the police as powerful bullies, picking on the most downtrodden members of society.

Bernie Sanders sees a financial system where Grandma (Jimmy Stewart banks) was replaced by the wolf (Goldman Sachs).

In my view, Alice in Wonderland best captures the counterintuitive nature of monetary economics.

PS: I’m sure I stole part of this from the very first TED talk I ever saw, by Tyler Cowen:

Cross-posted from Econlog.

Scott SumnerScott Sumner

Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.

What Marx Got Right about Redistribution – That John Stuart Mill Got Wrong by Alan Reynolds

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The idea that government could redistribute income willy-nilly with impunity did not originate with Senator Bernie Sanders. On the contrary, it may have begun with two of the most famous 19th century economists, David Ricardo and John Stuart Mill. Karl Marx, on the other side, found the idea preposterous, calling it “vulgar socialism.”

Mill wrote,

The laws and conditions of the production of wealth partake of the character of physical truths. There is nothing optional or arbitrary about them. … It is not so with the Distribution of Wealth. That is a matter of human institution only. The things once there, mankind, individually, can do with them as they like.

Mill’s distinction between production and distribution appears to encourage the view that any sort of government intervention in distribution is utterly harmless — a free lunch. But redistribution aims to take money from people who earned it and give it to those who did not. And that, of course, has adverse effects on the incentives of those who receive the government’s benefits and on taxpayers who finance those benefits.

David Ricardo had earlier made the identical mistake. In his 1936 book The Good Society (p. 196), Walter Lippmann criticized Ricardo as being “not concerned with the increase of wealth, for wealth was increasing and the economists did not need to worry about that.”

But Ricardo saw income distribution as an interesting issue of political economy and “set out to ascertain ‘the laws which determine the division of the produce of industry among the classes who concur in its formation.’

Lippmann wisely argued that, “separating the production of wealth from the distribution of wealth” was “almost certainly an error. For the amount of wealth which is available for distribution cannot in fact be separated from the proportions in which it is distributed. … Moreover, the proportion in which wealth is distributed must have an effect on the amount produced.”

The third classical economist to address this issue was Karl Marx. There were many fatal flaws in Marxism, including the whole notion that a society is divided into two armies — workers and capitalists. Late in his career, however, Marx wrote a fascinating 1875 letter to his allies in the German Social Democratic movement criticizing a redistributionist scheme he found unworkable.

In this famous “Critique of the Gotha Program,” Marx was highly critical of “vulgar socialism” and considered the whole notion of “fair distribution” to be “obsolete verbal rubbish.” In response to the Gotha’s program claim that society’s production should be equally distributed to all, Marx asked,

To those who do not work as well? … But one man is superior to another physically or mentally and so supplies more labor in the same time, or can labor for a longer time. … This equal right is an unequal right for unequal labor… It is, therefore, a right to inequality.

Yet Marx offered a glimmer of utopian hope about the future in which things would become so abundant that distribution would no longer be a matter of concern:

In a higher phase of communist society … after the productive forces have also increased with the all-around development of the individual, and all the springs of cooperative wealth flow more abundantly — only then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banner: From each according to his ability, to each according to his needs!

That was not a prescription but a warning: For the foreseeable future Marx knew nothing would work without work incentives. If income were equally distributed to “those who do not work,” why would anyone work?

Contemporary public economics — “optimal tax theory” and the newest of the “new welfare economics” — also teaches that to tax a man “according to his abilities” would give able men a very strong incentive to use their skills to hide their earnings (and therefore their abilities) from tax collectors. This predictable response to tax penalties on high earnings is confirmed by economic research on the elasticity of taxable income.

Distributing government spending “to each according to his needs” must likewise give potential recipients a strong incentive to exaggerate their needs. People who got caught doing that used to be called “welfare cheats” and considerable cheating still goes on in food stamps, Medicaid, etc. The Earned Income Tax Credit, for example, gives low-income working people an extra incentive to not report cash income from tips, casual labor or illicit activities.

In The Undercover Economist, Tim Harford rightly notes that “when economists say the economy is inefficient, they mean there’s a way to make somebody better off without harming anybody else” (called “Pareto optimality”). But argues that Nobel Laureate Kenneth Arrow figured out a way to efficiently redistribute income with “appropriate lump-sum taxes and subsidies that puts everyone on equal footing.” As Harford says, “a lump-sum tax doesn’t affect anybody’s behavior because there’s nothing you can do to avoid it.”

Unfortunately, Harford says “an example of a lump-sum redistribution would be to give eight hundred dollars to everybody whose name starts with H.” That simply shows that if the subsidies were not ridiculously random then the subsidies will affect behavior and will not be lump-sum. The government could collect a lump-sum tax of $800 from every adult and then send a lump-sum subsidy of $800 to every adult with no net effect, for example, but why do that? If the government tried to tax people on the basis of abilities or to subsidize on the basis of needs, even Marx knew that would have a terrible effect on incentives.

The whole idea was curtly dismissed by another Nobel Laureate, Joseph Stiglitz, in his 1994 book Whither Socialism? (p. 46): “The ‘old new welfare economics’ assumed that lump-sum redistributions were possible,” wrote Stiglitz; “The ‘new new welfare economics’ recognizes the limitations on the government’s information.”

The reason governments cannot simply take money from some people according to how able they are, and give it to others according to how needy they are, is because people who were aware of that plan would not be foolish enough to accurately reveal their abilities and needs.

Actual taxes and transfer payment distort behavior in ways that undermine economic progress and commonly produce results (such as trapping people in poverty) that are the opposite of their stated intent.

This post first appeared at Cato.org.

Alan ReynoldsAlan Reynolds

Alan Reynolds is one of the original supply-side economists. He is Senior Fellow at the Cato Institute and was formerly Director of Economic Research at the Hudson Institute.

This Crazy 100-Year-Old Law Makes Almost Everything More Expensive by George C. Leef

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The 2016 presidential campaign so far has featured almost no discussion of downsizing the federal government. Americans would benefit enormously if we could get rid of costly old laws that interfere with freedom and prosperity, and future generations would benefit even more.

I keep hoping that someone will manage to put this question squarely to the candidates in either party: “What laws would you seek to repeal if you were the president?”

There are so many laws that ought to be repealed, including countless special interest statutes that benefit a tiny group while imposing costs on a vastly greater number of Americans. But if candidates need an idea of where to start, one such law is the Merchant Marine Act of 1920, also called the “Jones Act.”

The Act requires that all shipments between American ports to be done exclusively on American ships. As Daniel Pearson explains,

Its stated purpose was to maintain a strong U.S. merchant marine industry. Drafters of the legislation hoped that the merchant fleet would remain healthy and robust if all shipments from one U.S. port to another were required to be carried on U.S.-built and U.S.-flagged vessels.

The theory behind the law is musty, antiquated mercantilism — the notion that the nation will be stronger if we protect “our” industries against foreign competition.

Imagine how strong we would be if there had been a Jones Act for automobile transportation. Would Americans be better off today if the Detroit automakers had remained an oligopoly by keeping out all of those Hondas, BMWs, and Hyundais? Obviously not — yet this logic has handicapped US shipping for 96 years.

A recent op-ed in the Honolulu Star-Advertiser nicely explain the absurd consequences of this law. The writer just wants to buy a cabinet, but “although the cabinet was made in Taiwan, it could not be off-loaded in Hawaii, but rather had to be shipped to the West Coast, then loaded onto an American ship for the costly backward journey to Hawaii.” Tons of time, fuel, and expense wasted, all thanks to the Jones Act.

We get a more comprehensive view of its costs from a report by the Government Accountability Office (GAO) last September. The report, titled “International Food Assistance: Cargo Preference Increases Food Aid Shipping Costs,” shows the heavy cost of the law. The GAO, known for its non-partisan, straight-shooting approach, found that the Jones Act increased the cost of shipping food aid by 23 percent.

What does that mean? Between 2011 and 2014, the taxpayers had to fork over an extra $45 million to ship food for USAID. With Washington’s prodigious spending, we’ve gotten used to the idea that amounts under a billion are too small to bother with, but that is the wrong way to look at things. Even if we didn’t have a constantly increasing national debt, we ought to root out every needless federal expenditure.

Treading very delicately, the GAO states that, because the Jones Act “serves statutory policy goals,” Congress should merely tweak it so that aid agencies can find less costly shipping. But the federal government has no constitutional authority to be in the business of international aid, and carving out a special exemption for this would simply help the government avoid the consequences that it is inflicting on everyone else. Congress should simply repeal the protectionist law entirely.

The Jones Act also distorts our energy market and leads to higher prices than otherwise. Writing at The Federalist, trade attorney Scott Lincicome points out that, due to the law’s restrictions, only thirteen ships can legally move crude oil between US ports, and those ships are “booked solid.” As a result, shipping American crude from Texas to Philadelphia costs more than three times as much as it would cost to send it all the way to Canada on a foreign vessel.

One of the Act’s few congressional opponents is Arizona Senator John McCain, who pointed out in this testimony that Hawaiian cattlemen who want to sell livestock on the mainland “have actually resorted to flying the cattle on 747 jumbo jets to work around the restrictions of the Jones Act. Their only alternative is to ship the cattle to Canada because all livestock carriers in the world are foreign-owned.”

Hawaii is especially hard hit by the Jones Act, but other states and territories that depend heavily on water-borne shipping also suffer. Consider Puerto Rico: a 2012 study by the New York Fed found that it cost about $3,063 to ship a 20-foot container from an east coast US port to Puerto Rico, but shipping the same container to a foreign destination, such as Jamaica, would cost only about $1,687. Because it is an American territory, the poor island pays almost twice as much to import American products.

For nearly a century, we’ve paid more at the pump, more for goods, more in taxes, and even more to do charitable aid, all because of this ancient special interest law.

All that the Jones Act accomplishes is to guarantee a market for costly, unionized American shipping. It is similar in purpose to the Davis-Bacon Act, which guarantees a market for high-cost unionized construction (as I explain here).

Such special interest laws are never good for the country as a whole, but they are passed and maintained because their lobbyists are crafty, knowledgeable, and highly motivated, while the voting public is mostly ignorant.

It takes a spotlight and presidential leadership to get rid of them. Will any of this year’s crop take up the challenge?

George C. LeefGeorge C. Leef

George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.

Housing Finance’s Two Punch Bowls by the Federal Government Should Be Removed

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As famously stated by Fed Chairman William McChesney Martin in 1955: “The Federal Reserve, after the recent increase in the discount rate, is in the position of the chaperon who has ordered the punch bowl removed just when the party was really warming up.”

As the Fed is now finding out, removing the punch bowl can be problematic if the party is already past warming up. Since it announced a ¼ point increase in the Fed funds rate on December 16, 2015, the two year and ten year Treasury notes have dropped 33 basis and 54 basis points respectively. The ten year rate is at 1.76%, near its all-time low of 1.58%. 30-year mortgage rates, which are priced off of it, have declined to 3.72%, the lowest level in 9 months and only marginally above the all-time low of 3.35% set in November 2012. Clearly the interest rate punch bowl has not been removed.

But housing finance benefits from a second punch bowl spiked by a plethora of federal housing guarantee agencies— Federal Housing Administration, Fannie Mae, Ginnie Mae, Freddie Mac, Federal Housing Finance Agency, etc. Today these agencies guarantee 85% of all primary home purchase loans. Loan leverage, as measured by the Pinto-Oliner National Mortgage Risk Index (NMRI) for agency home purchase loans, has been steadily increasing on a year-over-year basis since January 2014. Increases in first-time home buyer leverage have led the way, benefiting from the particularly liberal lending standards of the Federal Housing Administration (FHA). Seven in eight FHA loans to first-time buyers have an NMRI rating of high risk. Add in the fact that the FHA, to a great extent, neither prices nor underwrites for loan risk, making this is a punch bowl that can give quite a hangover.

The result has been a rapid increase in real (inflation adjusted) home prices, with prices up nationally about 16.5% since the home price trough in 2012. History teaches us that once the divergence hits 20% or more, the process of reverting to the mean becomes quite painful, as it is achieved through a drop in home prices. Such divergence can continue for a long time—in the recent boom it lasted 12 years and resulted in a 62% increase in real home prices. Of equal concern is that real prices since the 2012 trough have gone up even more—up 19% for entry-level homes. This makes it harder for low-income borrowers to buy without taking out a high risk loan.

It is well known why this phenomenon occurs. Liberalization of credit terms such as lower downpayments, increasing debt-to-income ratios, or declining interest rates increases demand. When undertaken in a seller’s market where supply is constrained (defined as an inventory relative to sales of six months or less), there is a tendency for this liberalization to be absorbed in price increases rather than increased access. The National Association of Realtors has reported an existing home seller’s market for 40 straight months.

The housing market, like others, is subject to the law of supply and demand. In the same 1955 speech Chairman Martin observed: “It is true that in a great emergency we have been willing to make a departure from our market structure…. The law of supply and demand is suspended temporarily, but it cannot be permanently repealed. It is always with us just as is the law of gravity.”

While this situation is bullish in the near term for continued housing price gains, in the end the taxpayer and low income buyers are the ones taking on the risk. It is time for the Fed and federal guarantee agencies to start removing the punch bowls and acknowledge that home prices are subject to the law of gravity—what goes up must come down.

EDITORS NOTE: This column originally appeared om InsideSources.com.

Why the 20-Year Mortgage Is the Answer to Housing Finance Mess

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A recent Associated Press poll found more than six in 10 respondents expressed only slight confidence — or none at all — in the ability of the federal government to make progress on important issues facing the country.

The public’s skepticism is well founded, especially when it comes to federal housing policy. Notwithstanding an alphabet soup of government agencies and federally backed companies — Federal Housing Administration, Fannie Mae, Ginnie Mae, Freddie Mac, Federal Housing Finance Agency, etc. — and trillions spent on government-mandated “affordable housing” initiatives, our home ownership rate today is no higher than it was in the mid-1960s. What is best described as a nationalized housing finance system has failed to achieve its two primary goals: broadening home ownership and achieving wealth accumulation for low- and middle-income homeowners.

The U.S. home ownership rate as of the fourth quarter of 2015 is 63.8%, the same as in the fourth quarter of 1966, and only marginally higher than the rate in 1956. More troubling, our housing policy has been unsuccessful at building wealth — the antidote to poverty. Between 1989 and 2013, median total accumulated wealth for households in the 40th to 60th percentiles has decreased from $76, 100 to $61,800, while median wealth for households in the 20th to 40th percentile has decreased by more than 50%, from $44,800 to $21,500. It was precisely these groups that were targeted to be helped by affordable housing policies.

For the last 60 years, U.S. housing policy has relied on looser and looser mortgage lending standards to promote broader home ownership and accomplish wealth accumulation, particularly for low- and middle-income households. Leverage first took the form of low down payments combined with the slowly amortizing 30-year term mortgage, which resulted in rapidly accelerating defaults, foreclosures and blighted neighborhoods. Since 1972, homeowners have suffered between 11 million and 12 million foreclosures. During the 1990s and early 2000s, new forms of leverage were combined with declining interest rates. With demand increasing faster than supply, the result was a price boom that made homes less, not more affordable, necessitating even more liberal credit terms. We are all familiar with the outcome—a massive housing bust and the Great Recession.

Today, in the shadow of Fannie and Freddie’s continued existence, taxpayers are again driving home prices up much faster than incomes — particularly at the lower end of home prices. U.S. housing policy has become self-justifying and self-perpetuating — loved by the National Association of Realtors, many housing advocacy groups, and the government-sponsored enterprises, but dangerous to the very home buyers it is supposed to help.

To help achieve sustainable, wealth-building home ownership opportunities for low- and middle-income Americans, our current government-backed command and control system should be replaced with market-driven antidotes. For most low- and middle-income families, the recipe for wealth-building over a lifetime contains three ingredients: buy a home with a mortgage that amortizes rapidly, thereby reliably building wealth; participate in a defined contribution retirement plan ideally with an employer match; and invest in your children’s college education.

Here are three steps to make the first goal — quickly amortizing mortgages — more of a reality:

First, housing finance needs to be refocused on the twin goals of sustainable lending and wealth-building. Well-designed, shorter term loans offer a much safer and secure path to home ownership and financial security than the slowly amortizing 30-year mortgage. Combining a low- or no-down-payment loan with the faster amortization of a 15- or 20-year term provides nearly as much buying power as a 30-year FHA loan. A bank in Maine offers a 20-year term, wealth-building loan that has 97% of the purchasing power of an FHA-insured loan. By age 50 to 55, when the 30-year-term loan leaves most homeowners saddled with another decade or more of mortgage payments, the cash flow freed up from a paid-off shorter-term loan is available to fund a child’s post-secondary-education needs and later turbocharge one’s own retirement.

Second, low-income, first-time home buyers should have the option to forgo the mortgage interest deduction and instead receive a one-time refundable tax credit that can be used to buy down the loan’s interest rate. Borrowers who participate in a defined contribution retirement plan might receive a larger tax credit, enabling them to lower their rate even more.

The one-time tax credit would support wealth-building by being available only for loans with an initial term of 20 years or less. To avoid pyramiding subsides and reduce taxpayer exposure, only loans not guaranteed by the federal government would be eligible. This would provide a big start to weaning the housing market off of government guarantees. With the Low-income First Time Home buyer — or LIFT Home — tax credit in place, the Fannie and Freddie affordable housing mandates could be eliminated, ending the race to the bottom among government guarantee agencies. Reductions in the Department of Housing and Urban Development’s budget and other budgeted amounts supporting “affordable housing” should also be used to fund LIFT Home. Better to provide the dollars directly to prospective homeowners, than to be siphoned off to bureaucracies and advocacy groups.

Third, the home mortgage interest deduction should be restructured to provide a broad, straight path to debt-free home ownership. Today’s tax code promotes a lifetime of indebtedness by incenting homeowners to take out large loans for lengthy terms so as to “maximize the value” of the deduction. Current law should be changed to: limit the interest deduction for future home buyers to loans used to buy a home by excluding interest on second mortgages and cash-out refinancing; for future borrowers, cap the deduction at the amount payable on a loan with a 20-year amortization term; and provide a grandfather on the deduction cap for existing home loan borrowers with 30-year loans as long as their interest savings go toward shortening the loan’s term.

A 21st-century market approach to wealth-building offers a safe and secure path to home ownership and financial security, something we haven’t had for decades.

EDITORS NOTE: This column originally appeared in The American Banker.

Americans’ Incomes Are Unequal, But Mobile by Chelsea German

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Americans often move between different income brackets over the course of their lives. As covered in an earlier blog post, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives, and over 11 percent of Americans will be counted among the top 1 percent of income-earners for at least one year.

Fortunately, a great deal of what explains this income mobility are choices that are largely within an individual’s control. While people tend to earn more in their “prime earning years” than in their youth or old age, other key factors that explain income differences are education level, marital status, and number of earners per household. As Mark Perry recently wrote:

The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school and graduating, getting and staying married, etc.), which means that individuals and households are not destined to remain in a single income quintile forever.

According to the economist Thomas Sowell, whom Perry cites, “Most working Americans, who were initially in the bottom 20% of income-earners, rise out of that bottom 20%. More of them end up in the top 20% than remain in the bottom 20%.”

While people move between income groups over their lifetime, many worry that income inequality between different income groups is increasing. The growing income inequality is real, but its causes are more complex than the demagogues make them out to be.

Consider, for example, the effect of “power couples,” or people with high levels of education marrying one another and forming dual-earner households. In a free society, people can marry whoever they want, even if it does contribute to widening income disparities.

Or consider the effects of regressive government regulations on exacerbating income inequality. These include barriers to entry that protect incumbent businesses and stifle competition. To name one extreme example, Louisiana recently required a government-issued license to become a florist.

Lifting more of these regressive regulations would aid income mobility and help to reduce income inequality, while also furthering economic growth.

This post first appeared at HumanProgress.org.

Chelsea GermanChelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Is Cheap Gas a Bad Thing? by Randal O’Toole

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Remember peak oil? Remember when oil prices were $140 a barrel and Goldman Sachs predicted they would soon reach $200? Now, the latest news is that oil prices have gone up all the way to $34 a barrel. Last fall, Goldman Sachs predicted prices would fall to $20 a barrel, which other analysts argued was “no better than its prior predictions,” but in fact they came a lot closer to that than to $200.

Low oil prices generate huge economic benefits. Low prices mean increased mobility, which means increased economic productivity. The end result, says Bank of America analyst Francisco Blanch, is “one of the largest transfers of wealth in human history” as $3 trillion remain in consumers’ pockets rather than going to the oil companies. I wouldn’t call this a “wealth transfer” so much as a reduction in income inequality, but either way, it is a good thing.

Naturally, some people hate the idea of increased mobility from lower fuel prices. “Cheap gas raises fears of urban sprawl,” warns NPR. Since “urban sprawl” is a made-up problem, I’d have to rewrite this as, “Cheap gas raises hopes of urban sprawl.” The only real “fear” is on the part of city officials who want everyone to pay taxes to them so they can build stadiums, light-rail lines, and other useless urban monuments.

A more cogent argument is made by UC Berkeley sustainability professor Maximilian Auffhammer, who argues that “gas is too cheap” because current prices fail to cover all of the external costs of driving. He cites what he calls a “classic paper” that calculates the external costs of driving to be $2.28 per gallon. If that were true, then one approach would be to tax gasoline $2.28 a gallon and use the revenues to pay those external costs.

The only problem is that most of the so-called external costs aren’t external at all but are paid by highway users. The largest share of calculated costs, estimated at $1.05 a gallon, is the cost of congestion. This is really a cost of bad planning, not gasoline. Either way, the cost is almost entirely paid by people in traffic consuming that gasoline.

The next largest cost, at 63 cents a gallon, is the cost of accidents. Again, this is partly a cost of bad planning: remember how fatality rates dropped nearly 20 percent between 2007 and 2009, largely due to the reduction in congestion caused by the recession? This decline could have taken place years before if cities had been serious about relieving congestion rather than ignoring it. In any case, most of the cost of accidents, like the other costs of congestion, are largely internalized by the auto drivers through insurance.

The next-largest cost, pegged at 42 cents per gallon, is “local pollution.” While that is truly an external cost, it is also rapidly declining as shown in figure 1 of the paper. According to EPA data, total vehicle emissions of most pollutants have declined by more than 50 percent since the numbers used in this 2006 report. Thus, the 42 cents per gallon is more like 20 cents per gallon and falling fast. [Ed. note: And pollution is also mostly due to congestion.]

At 12 cents a gallon, the next-largest cost is “oil dependency,” which the paper defines as exposing “the economy to energy price volatility and price manipulation” that “may compromise national security and foreign policy interests.” That problem, which was questionable in the first place, seems to have gone away thanks to the resurgence of oil production within the United States, which has made other oil producers, such as Saudi Arabia, more dependent on us than we are on them.

Finally, at a mere 6 cents per gallon, is the cost of greenhouse gas emissions. If you believe this is a cost, it will decline when measured as a cost per mile as cars get more fuel efficient under the current CAFE standards. But it should remain fixed as a cost per gallon as burning a gallon of gasoline will always produce a fixed amount of greenhouse gases.

In short, rather than $2.38 per gallon, the external cost of driving is closer to around 26 cents per gallon. Twenty cents of this cost is steadily declining as cars get cleaner and all of it is declining when measured per mile as cars get more fuel-efficient.

It’s worth noting that, though we are seeing an increase in driving due to low fuel prices, the amount of driving we do isn’t all that sensitive to fuel prices. Real gasoline prices doubled between 2000 and 2009, yet per capita driving continued to grow until the recession began. Prices have fallen by 50 percent in the last six months or so, yet the 3 or 4 percent increase in driving may be as much due to increased employment as to more affordable fuel.

This means that, though there may be some externalities from driving, raising gas taxes and creating government slush funds with the revenues is not the best way of dealing with those externalities. I’d feel differently if I felt any assurance that government would use those revenues to actually fix the externalities, but that seems unlikely. I actually like the idea of tradeable permits best, but short of that the current system of ever-tightening pollution controls seems to be working well at little cost to consumers and without threatening the economic benefits of increased mobility.

This post first appeared at Cato.org.

Randal O’TooleRandal O’Toole

Randal O’Toole is a Cato Institute Senior Fellow working on urban growth, public land, and transportation issues.

Low-Skilled Workers Flee the Minimum Wage: How State Lawmakers Exile the Needy by Corey Iacono

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What happens when, in a country where workers are free to move, a region raises its minimum wage? Do those with the fewest skills seek out the regions with the highest wage floors?

New minimum wage research by economist Joan Monras of the Paris Institute of Political Studies (Sciences Po) attempts to answer that question. Monras theoretically shows that there should be a close relationship between the employment effects of raising the minimum wage and the migration of low-skilled workers.

When the demand for local low-skilled labor is relatively unresponsive (or inelastic) to wage changes, raising the minimum wage should lead to an influx of low-skilled workers from other states in search of better-paying jobs. On the other hand, if the demand for low-skilled labor is relatively responsive (or elastic), raising the minimum wage will lead low-skilled workers to flee to states where they will more easily find employment.

To test the model empirically, Monras examined data from all the changes in effective state minimum wages over the period 1985 to 2012. Looking at time frames of three years before and after each minimum wage increase, Monras found that

  1. As depicted in the graph below on the left, those who kept their jobs earned more under the minimum wage. No surprise there.
  2. As depicted in the graph below on the right, workers with the fewest skills were having an easier time finding full-time employment prior to the minimum wage increase. But this trend completely reversed as soon as the minimum wage was increased.
  3. A control group of high-skilled workers didn’t experience either of these effects. Those affected by the changing laws were the least skilled and the most vulnerable.

These results show that the timing of minimum wage increases is not random.

Instead, policy makers tend to raise minimum wages when low-skilled workers’ real wages are declining and employment is rising. Many studies, misled by the assumption that the timing of minimum wage increases is not influenced by local labor demand, have interpreted the lack of falling low-skilled employment following a minimum wage increase as evidence that minimum wage increases have no effect on employment.

When Monras applied this same false assumption to his model, he got the same result. However, to observe the true effect of minimum wage increases on employment, he assumed a counterfactual scenario where, had the minimum wages not been raised, the trend in low-skilled employment growth would have continued as it was.

By making this comparison, Monras was able to estimate that wages increased considerably following a minimum wage hike, but employment also fell considerably. In fact, employment fell more than wages rose. For every 1 percent increase in wages, the share of a state’s population of low-skilled workers in full-time employment fell by 1.2 percent. (The same empirical approach showed that minimum wage increases had no effect on the wages or employment of a control group of high-skilled workers.)

Monras’s model predicts that if labor demand is sensitive to wage changes, low-skilled workers should leave states that increase their minimum wages — and that’s exactly what his empirical evidence shows.

According to Monras,

A 1 percent reduction in the share of employed low-skilled workers [following a minimum wage increase] reduces the share of low-skilled population by between .5 and .8 percent. It is worth emphasizing that this is a surprising and remarkable result: workers for whom the [minimum wage] policy was designed leave the states where the policy is implemented.

These new and important findings reinforce the view that minimum wage increases come at a cost to the employment rates of low-skilled workers.

They also pose a difficult question for minimum wage proponents: If minimum wage increases benefit low-skilled workers, why do these workers leave the states that raise their minimum wage?

Corey IaconoCorey Iacono

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

Tech Sector Bears Brunt of Capital Taxes, Random Regulation by Dan Gelernter

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According to our president’s final State of the Union, we’ve recovered from the economic crisis and now enjoy the strongest, most durable economy in the world. Obama does acknowledge that startups and small businesses may need some help, so he wants to reignite our “sprit of innovation” — which he plans to do by putting Vice President Biden in charge of curing cancer.

But the problem facing startups is not a lack of innovation. We are being killed by the economy, which, for those of us who have to live in it, is not good at all. Young entrepreneurs may have spent last year working hard, innovating and building, only to find their companies are worth less now than when they started.

The market is adjusting downwards. Valuations are sinking. The investors I’ve spoken to feel the Fed’s free-money policy has created a dangerous over-valuation of companies and stocks and, now that the rates are coming back up, the air is being let out. 2015, they say, was a tough year because we knew this was coming. 2016 is going to be even tougher.

There is something else weighing on the minds of entrepreneurs and investors alike — regulatory uncertainty. No startup can deal with compliance by itself — not even software companies with no physical products to sell. Startups have to hire lawyers and compliance experts to help them, and this is money we’re not spending on product development or marketing or making our prices more competitive.

The way Obamacare is being implemented, for example, makes our hair white. The rules seem to change with bureaucratic whim; various parts of the law are suspended by executive order. How will we comply next year, and what will it cost? Nobody knows.

In the meantime, the Democratic candidates for President are proposing large hikes to the capital gains tax, which increases effective risk for investors and depresses valuations. Will these hikes ever take place? We don’t know, and that uncertainty carries an additional price.

We’re already seeing more investors decide to weather the storm on the sidelines, keeping an eye on their current affairs and declining to invest in companies they would have snapped up a year ago. A tech startup with a working product will find it harder to raise money today than it would have two years before with nothing but a concept. Not only are we faced with a weak market now, the trend is even more disturbing.

The problem is easier to diagnose than to repair. As an entrepreneur, I’d like to see less regulation and lower taxes. And not just lower taxes on the companies themselves, but on the people who can afford to invest in them. This may come as a surprise, but it’s the hated “one percent” that invests in startups and helps entrepreneurs’ dreams come true. When taxes cut deeper into the pockets of the wealthy, it most negatively affects us — the entrepreneurs and the people we would have hired — not the wealthy.

Regulation remains erratic, and the policies of the next administration cannot be foreseen. 2016 is going to be a hard year for the startup. Investments will continue to decline until investors see a stable market. And they’re not looking at one right now. Companies will die as a result, and not for lack of innovative ideas.

Dan Gelernter

Dan Gelernter is CEO of the technology startup Dittach.