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The Cost of “Bernie Care”

September 25, 2017 1 comment

Senator Bernie Sanders has expressed support for and formally introduced a plan for a health insurance system to be run by the federal government which has been called “Bernie Care” in some media outlets.  A number of other Democratic politicians have also expressed support for this idea. This is quite likely to be the Democratic Party response to the problems with Obamacare. Indeed Barack Obama expressed his own support for this national health insurance program before his first election as President (I saw the videotape of his statements at that time) but he claimed the country was not yet ready for such a health insurance program. What would such a program cost? The Urban Institute has published a study to answer this question. Read more…

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Minimum Wages: A Survey of the Evidence

January 3, 2017 4 comments

With the new year, minimum wages are rising in many cities and states, including Michigan where I live. I have written before on this subject (a link is given below) but I ran across a nice article containing a very readable summary of the evidence on this subject. It is a nice read for non-economists because it has no equations (gasp!) and it is not very long but it does provide an accessible summary statement of the empirical scientific evidence on the effects of the minimum wage. But I have another motive in providing this summary of the evidence.

The nature of scientific inquiry is that not all studies on a subject produce the same answer. As a result, more than one study is necessary because, as the evidence emerges, hopefully a consensus forms about the problem that is being studied. So undoubtedly there are studies suggesting that there is no connection between smoking and cancer but it seems quite likely that the preponderance of the evidence, and the highest quality work, reveals a link between smoking and cancer. I once saw Barack Obama “cherry-pick” evidence, citing one particular study indicating that minimum wages do not cause unemployment. But one study isn’t important; the entire literature is and here is a summary of what that literature shows.

An extensive survey by Neumark and Wascher (2007) concluded that nearly two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers.

This statement is taken directly from the article linked above. The Neumark and Wascher (2007) article is a scholarly study providing a more thorough analysis of the evidence.

The good news for an economist like me is that what we tell students in Econ 101 is correct: minimum wages cause unemployment. Some workers gain and some lose and the tragedy of the policy is that it harms those in our society who are the least-able to deal with a job loss and the loss of skill-accumulation that goes along with working. Namely, the policy harms people at the low end of the income distribution. This is just another example, in a long list of examples, of how a government can harm some of its citizens while the politicians, implementing the policy, claim that it helps those citizens. As long as the public is unaware of the evidence, politicians can get away with this destructive behavior.

Previous Post on Minimum Wages: minimum-wages-to-rise-in-2013

Fixing Obamacare

November 15, 2016 Leave a comment

Now that the election is over and President-Elect Trump has begun the transition to his administration, there has been some discussion of reforming the market for health insurance. I have written previously that Obamacare is in the process of collapsing because of its structural defects. For example, the Obamacare feature of guaranteed issue has caused a phenomenon known as adverse selection which is driving insurance companies out of the health insurance exchanges (links to other posts on Obamacare are given below). Here I thought it would be useful to outline some changes that seem to be sensible reforms to the currently-available flawed system.

Read more…

Serious Policymaking

June 24, 2016 Leave a comment

Much of the political behavior we see is theater or, even worse, buffoonery.  I simply tune it out because it is almost always a waste of time to observe the latest actions or comments by politicians. There is a notable exception to this unfortunate reality and that is the policy proposals recently generated by Speaker Paul Ryan and others in the House of Representatives.

This program is called “A Better Way” and the proposals cover many issues that need to be addressed. The documents that were prepared are too broad to be completely discussed here but I urge readers to read the documents for themselves because they are worth reading and considering. Here let me just mention their proposals about taxes, called A BetterWay-Tax-Snapshot.

The tax code is a disgrace. It is riddled with carve-outs for favored groups, complicated by political attempts at central planning or social engineering (e.g., we need more people in houses so we give a write-off for mortgage interest), and is full of vagaries that invite abuse by the IRS. I have stated elsewhere that when a tax code is clear regarding what is taxable, there is little room for bureaucrats to grind an axe against individuals or organizations they dislike. One aspect of the Ryan-proposed tax overhaul is a vast simplification of the tax code which I heartily endorse. But there are other aspects of the proposal that have merit.

The press has reported on several so-called “tax inversions” where companies merge in order to cut their tax bills. The response by many politicians has been typical. The politicians create the incentives that cause the mergers to occur, then the politicians complain about the actions they induced. Now it has been reported that a complex set of new regulations are being prepared by the U.S. Treasury designed to stop these mergers. So this provides yet another example of complexity added to an already-complex tax code providing employment for lawyers and accountants. The Ryan proposal reduces the corporate tax rate which reduces the incentives for these mergers to occur. Firms should merge because it increase their efficiency which raises the wealth of the stockholders, not because of tax policies that may actually reduce economic efficiency.

Finally, the proposal cuts personal marginal income tax rates while eliminating many deductions used by taxpayers to cut their tax bills. The marginal tax rate (MTR) is the additional tax incurred when an additional unit of pre-tax income is earned. These tax rates are a crucial part of the incentives faced by the public and there is comprehensive evidence that a lower MTR raises labor supply which will increase economic activity. This should move in the direction of reversing the low labor force participation rates we have seen and increase real GDP or economic growth.

There might be elements of this proposal or the others that have been offered in A Better Way with which I and others might quibble but these are thoughtful proposals that would correct many of the problems faced by the U.S. I hope that these documents will be read and pondered by all serious voters troubled by the state of the U.S.

Bias in Economics Textbooks [Updated]

April 25, 2016 Leave a comment

I recently saw a local newspaper article discussing the selection of economics textbooks to be used in teaching economics to high school students in my local school district. A school board member expressed some concerns that a text might be chosen that could reflect the political or other biases of the text authors. As an economist, I (unsurprisingly) endorse teaching economics to high school students but I am well aware that many economists express opinions about economic policy and other economics issues that do not reflect solid economic analysis. Rather their statements reflect their political or other biases.  And so I decided to pursue an example of possible bias recently discussed in a journal devoted to economic analysis.

Richard Vedder is Emeritus Professor of Economics at Ohio University and he recently wrote an article in the Winter 2016 issue of the Cato Journal on the state of academic economics. One matter that he discusses there is the accuracy or possible bias of economics texts and he provides what to me is a stunning example of misinformation in an economics text. I checked Professor Vedder’s example and it is indeed entirely accurate.

In Principles of Economics, 12th Edition (1985), written by the late Paul A. Samuelson and William D. Nordhaus, there is a discussion of the Soviet Union. Consider the following statement (Samuelson and Nordhaus, p. 775) about economic growth in the Soviet Union.

…there can be no doubt that the Soviet planning system has been a powerful engine for economic growth.

The Soviet Union collapsed in 1991 just six years after this statement was published! Does it seem reasonable to you, dear reader, that a country that is a growth engine of such magnitude would break apart a short time later? How can we explain this astonishing statement? How could these economists be wrong? Read more…

Government 101: Why Government Programs Never Seem to End

January 8, 2016 Leave a comment

Ronald Reagan once made a comment to the effect that government programs never seem to end. A recent story in the press indicates why Reagan was spot on with this comment.

A recent media report indicated that Senator Ted Cruz is campaigning in Iowa and he has criticized the ethanol programs imposed by the federal government. While Senator Cruz is not the only senator taking this position (for example, I have heard Senator John McCain enunciate an identical position in the past), what is remarkable is that Senator Cruz has made these critical remarks in a state containing residents, such as corn farmers, who benefit mightily from ethanol fuel mandates. The press report indicates that the ethanol industry is spending millions of dollars in an advertising campaign designed to prevent Senator Cruz from winning the Iowa caucuses.

This news report illustrates the truth of a comment that I heard the late Milton Friedman make many years ago explaining why government programs seem to last forever. The benefits of the ethanol program accrue to a small number of individuals who are fully aware of the manner in which they benefit. The costs of these programs are diffuse and spread across many individuals and are small, per individual, compared to the per-individual benefits that accrue to those who are made better off by the ethanol program. Indeed, those bearing the costs may not even be aware that they are made worse off by the ethanol mandates.

Econ 101 students can easily figure out the impact of ethanol fuel requirements. The demand for corn rises which raises the relative price of corn. Farmers rationally put more land into growing corn, an act which reduces the supply of crops other than corn, thus raising their relative prices. So we see that crops have their prices increased (and paid by consumers) in agricultural markets.

Second, talk to any automotive engineer as I have and they describe the ethanol mandates as absurd. They do little to reduce gasoline consumption and it is an inefficient fuel. As a friend once said, you could plant the entire United States with corn and you still could not run all of the cars in the U.S. Finally, there is now scientific evidence (I even saw this described on the evening television news many years ago) that ethanol production pollutes the environment more than the production of gasoline.

But corn farmers and those in the ethanol industry vote and use their votes partly to keep this environmentally-destructive subsidy to themselves in place. Welcome to the corruption of a democracy.

Obamacare Slowly Implodes (Updated)

November 30, 2015 3 comments

Readers of this blog know that I am a critic of the Affordable Care Act.  My view is that it was poorly designed and it has harmed millions of people who have lost access to their doctors and hospitals. (There are links at the end of this article to previous posts on this profoundly misguided law.) There is now accumulating evidence that the insurance exchanges are moving into what has been termed a “death” spiral, a process which can lead to the collapse of the insurance exchanges set up by the law.

This death spiral refers to a situation where insurance companies lose money selling health insurance on the exchanges and thus stop selling insurance to avoid these losses. The exchanges can collapse if all insurers withdraw from the exchanges, leaving millions of Americans without coverage. The design of the Affordable Care Act raises the possibility of this collapse because it limits the ability of insurers to charge higher prices to riskier applicants and because the law requires guaranteed issue, meaning that insurers must sell a policy to anyone who applies. Thus insurers must treat everyone as if they are bad risks and charge correspondingly higher prices for insurance but, if the applicant pool of insurance buyers is dominated by bad risks, insurance companies may lose money on their policies. This latter situation is known as “adverse selection.” There is now accumulating evidence that adverse selection has occurred in these insurance exchanges.

Read more…

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