Category: Economics

Recovery Slows When Start-Ups Are Taxed to Pay for Bailouts of Failed Firms

Vernon Smith, whose views are quoted below, won the Nobel Prize in economics in 2002.

(p. A11) The rescue of incumbent investors in the government bailout of the largest U.S. banks in the autumn of 2008 has been widely viewed as unfair, as indeed it was in applying different rules to different players. . . .
. . .
The rescue, . . . , had a hidden cost for the economy that is difficult to quantify but can be crippling. New economic activity is hobbled if it is not freed from the burden of sharing its return with investors who bore risks that failed. The demand for new economic activity is enlarged when its return does not have to be shared with former claimants protected from the consequences of their risk-taking. This is the function of bankruptcy in an economic system organized on loss as well as profit principles of motivation.
. . .
Growth in both employment and output depends vitally on new and young companies. Unfortunately, U.S. firms face exceptionally high corporate income-tax rates, the highest in the developed world at 35%, which hobbles growth and investment. Now the Obama administration is going after firms that reincorporate overseas for tax purposes. Last week Treasury Secretary Jack Lew wrote a letter to the chairman of the House Ways and Means Committee urging Congress to “enact legislation immediately . . . to shut down this abuse of our tax system.”
This is precisely the opposite of what U.S. policy makers should be doing. To encourage investment, the U.S. needs to lower its corporate rates by at least 10 percentage points and reduce the incentive to escape the out-of-line and unreasonably high corporate tax rate. Ideally, since young firms generally reinvest their profits in production and jobs, such taxes should fall only on business income after it is paid out to individuals. As long as business income is being reinvested it is growing new income for all.
There are no quick fixes. What we can do is reduce bureaucratic and tax barriers to the emergence and growth of new economic enterprises, which hold the keys to a real economic recovery.

For the full commentary, see:
VERNON L. SMITH. “The Lingering, Hidden Costs of the Bank Bailout; Why is growth so anemic? New economic activity has been discouraged. Here are some ways to change that.” The Wall Street Journal (Thurs., July 24, 2014): A11.
(Note: last ellipsis in original, other ellipses added.)
(Note: the online version of the commentary has the date July 23, 2014.)

Moral Progress Accelerated in the 18th Century

(p. A11) For hundreds of years, people flocked to public hangings as a form of entertainment. Onlookers crowded into town squares and brought their families, reveling in the carnival atmosphere. Today most people are sickened at the idea of merriment at an execution. (Many are disturbed that executions take place at all.) We recoil from other once-common practices, too: slavery, the mistreatment of children, animal cruelty. Such shifts in attitude or belief surely constitute a form of moral progress and suggest, for once, that civilization is advancing and not receding.
. . .
Mr. Shermer defines moral progress as an “increase in the survival and flourishing of sentient beings,” which he illustrates with graphs and charts that reveal, among other things, a decline in war-related deaths, the expansion of the food supply, the reduction in major epidemics, the growth of world GDP and the spread of democracy.
Humanitarian achievements in the West, Mr. Shermer notes, began in earnest [in] the 18th century. Yet the ability to reason ethically is not a product of the Enlightenment. A moral instinct seems to be present at birth: Even infants possess innate intuitions about fairness and reciprocity, as Mr. Shermer explains. All societies punish free riders. The Golden Rule and Babylon’s Code of Hammurabi (advocating proportionate punishment) predate the ancient Greeks. So why did we need an Enlightenment to jump-start our moral progress?

For the full review, see:
SALLY SATEL. “BOOKSHELF; Getting Better All the Time; Crowds once flocked to watch executions. Now we recoil at the idea. What causes such transformations of ethical standards?” The Wall Street Journal (Tues., Jan. 20, 2015): A11.
(Note: ellipsis, and bracketed word, added.)
(Note: the online version of the review has the date Jan. 19, 2015.)

The book under review is:
Shermer, Michael. The Moral Arc: How Science and Reason Lead Humanity toward Truth, Justice, and Freedom. New York: Henry Holt and Co., 2015.

Over-Regulation Could Stifle Drones’ Potential to Revolutionize Our Lives

(p. A15) In the early days of the automobile, Vermont enacted a law requiring someone to walk one-eighth of a mile in front of every car and wave a red flag to warn pedestrians. Iowa directed all motorists to call ahead to warn each town on their route that they were coming. Some jurisdictions set speed limits so low that drivers who obeyed them risked having their engines stall.
Those laws seem humorously quaint, but if they had been widely adopted and enforced, the automobile revolution might have been shut down and its manifold benefits denied to millions. Today over-regulation could stifle the development of drones, which have the potential to revolutionize many parts of the economy and our everyday lives.
To cite a few examples: Amazon hopes to launch Prime Air, which would use drones to deliver packages in less than 30 minutes after an order is placed. Texas Equusearch, which organizes missing-person recovery efforts, can replace the labor of 100 volunteers with one drone. Clayco Inc., a construction firm, intends to use drones for aerial imaging of construction projects–replacing either helicopters, which burn fossil fuels and can be dangerous to those below, or construction workers, who risk serious injury through falls when they must climb to reach high, hard-to-reach places to take photos.

For the full commentary, see:
JOSEPH R. PALMORE and CHRISTOPHER J. CARR. “Overregulated Drones Struggle for Take-Off; The FAA has been slow and stuck in the past–precisely what the technology is not.” The Wall Street Journal (Mon., Feb. 23, 2015): A15.
(Note: the online version of the commentary has the date Feb. 22, 2015,)

Technology Getting Bum Rap for Job Woes

The job market has been anemic in a variety of ways, for several years. Some, as below, want to pin this on the advance of technology. I argue, to the contrary, that it is mainly due to our discouraging start-ups by bad policies (such as over-regulating and over-taxing). Start-ups, as Haltiwanger and his colleagues have been showing, are the main source of new jobs.

(p. A1) Lawrence H. Summers, the former Treasury secretary, recently said that he no longer believed that automation would always create new jobs. “This isn’t some hypothetical future possibility,” he said. “This is something that’s emerging before us right now.”

Erik Brynjolfsson, an economist at M.I.T., said, “This is the biggest challenge of our society for the next decade.”
Mr. Brynjolfsson and other experts say they believe that society has a chance to meet the challenge in ways that will allow technology to be mostly a positive force. In addition to making some jobs obsolete, new technologies have also long complemented people’s skills and enabled them (p. A3) to be more productive — as the Internet and word processing have for office workers or robotic surgery has for surgeons.
More productive workers, in turn, earn more money and produce goods and services that improve lives.
“It is literally the story of the economic development of the world over the last 200 years,” said Marc Andreessen, a venture capitalist and an inventor of the web browser. “Just as most of us today have jobs that weren’t even invented 100 years ago, the same will be true 100 years from now.”
. . .
There are certain human skills machines will probably never replicate, like common sense, adaptability and creativity, said David Autor, an economist at M.I.T. Even jobs that become automated often require human involvement, like doctors on standby to assist the automated anesthesiologist, called Sedasys.
. . .
Whether experts lean toward the more pessimistic view of new technology or the most optimistic one, many agree that the uncertainty is vast. Not even the people who spend their days making and studying new technology say they understand the economic and societal effects of the new digital revolution.
When the University of Chicago asked a panel of leading economists about automation, 76 percent agreed that it had not historically decreased employment. But when asked about the more recent past, they were less sanguine. About 33 percent said technology was a central reason that median wages had been stagnant over the past decade, 20 percent said it was not and 29 percent were unsure.
Perhaps the most worrisome development is how poorly the job market is already functioning for many workers. More than 16 percent of men between the ages of 25 and 54 are not working, up from 5 percent in the late 1960s; 30 percent of women in this age group are not working, up from 25 percent in the late 1990s. For those who are working, wage growth has been weak, while corporate profits have surged.

For the full story, see:
Claire Cain Miller. “Rise of Robot Work Force Stokes Human Fears.” The New York Times (Tues., DEC. 16, 2014): A1 & A3.
(Note: ellipses are added.)
(Note: the online version of the story has the date DEC. 15, 2014, and has the title “As Robots Grow Smarter, American Workers Struggle to Keep Up.”)

A relevant Haltiwanger paper is:
Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda. “Who Creates Jobs? Small Vs. Large Vs. Young.” Review of Economics and Statistics 95, no. 2 (May 2013): 347-61.

Fishing with Mosquito Nets, Where Food Is the Binding Constraint

(p. 1) BANGWEULU WETLANDS, Zambia — Out here on the endless swamps, a harsh truth has been passed down from generation to generation: There is no fear but the fear of hunger.
With that always weighing on his mind, Mwewa Ndefi gets up at dawn, just as the first orange rays of sun are beginning to spear through the papyrus reeds, and starts to unclump a mosquito net.
Nets like his are widely considered a magic bullet against malaria — one of the cheapest and most effective ways to stop a disease that kills at least half a million Africans each year. But Mr. Ndefi and countless others are not using their mosquito nets as global health experts have intended.
Nobody in his hut, including his seven children, sleeps under a net at night. Instead, Mr. Ndefi has taken his family’s supply of anti-malaria nets and sewn them together into a gigantic sieve that he uses to drag the bottom of the swamp ponds, sweeping up all sorts of life: baby catfish, banded tilapia, tiny mouthbrooders, orange fish eggs, water bugs and the occasional green frog.
“I know it’s not right,” Mr. Ndefi said, “but without these nets, we wouldn’t eat.”
Across Africa, from the mud flats of Nigeria to the coral reefs off Mozambique, mosquito-net fishing is a growing problem, an unintended consequence of one of the biggest and most celebrated public health campaigns in recent years.
The nets have helped save millions of lives, but scientists worry about the collateral damage: Africa’s fish.
. . .
“The nets go straight out of the bag into the sea,” said Isabel Marques da Silva, a marine biologist at Universidade Lúrio in Mozambique. “That’s why the inci-(p. 10)dence for malaria here is so high. The people don’t use the mosquito nets for mosquitoes. They use them to fish.”
But the unsparing mesh, with holes smaller than mosquitoes, traps much more life than traditional fishing nets do. Scientists say that could imperil already stressed fish populations, a critical food source for millions of the world’s poorest people.
. . .
In many places, fish are dried for hours in direct sunlight on treated mosquito nets. Direct sunlight can break down the insecticide coating. Anthony Hay, an associate professor of environmental toxicology at Cornell University, said fish could absorb some of the toxins, leaving people to ingest them when they eat the fish.
“It’s just another one of these ‘white man’s burdens,’ ” Mr. Hay said, referring to William Easterly’s well-known book critical of foreign aid by the West. “We think we have a solution to everybody’s problems, and here’s an example of where we’re creating a new problem.”
. . .
For Mr. Ndefi, it is a simple, if painful, matter of choice. He knows all too well the dangers of malaria. His own toddler son, Junior, died of the disease four years ago. Junior used to always be there, standing outside his hut, when Mr. Ndefi came home from fishing.
Mr. Ndefi hopes his family can survive future bouts of the disease. But he knows his loved ones will not last long without food.

For the full story, see:
JEFFREY GETTLEMAN. “Meant to Keep Mosquitos Out, Nets Are Used to Haul Fish In.” The New York Times, First Section (Sun., JAN. 25, 2015): 1 & 10.
(Note: ellipses are added.)
(Note: the online version of the story has the date JAN. 24, 2015, and has the title “Meant to Keep Malaria Out, Mosquito Nets Are Used to Haul Fish In.”)

The book referenced by Professor Hay, is:
Easterly, William. The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. New York: The Penguin Press, 2006.

Occupational Licensing Raises Costs for Consumers and Reduces Jobs

(p. B1) What lesson should we draw from the success of Uber?
Customers have flocked to its service. In the final three months of last year, its so-called driver-partners made $656.8 million, according to an analysis of Uber data released last week by the Princeton economist Alan B. Krueger, who served as President Obama’s chief economic adviser during his first term, and Uber’s Jonathan V. Hall.
Drivers like it, too. By the end of last year, the service had grown to over 160,000 active drivers offering at least four drives a month, from near zero in mid-2012. And the analysis by Mr. Krueger and Mr. Hall suggests they make at least as much as regular taxi drivers and chauffeurs, on flexible hours. Often, they make more.
This kind of exponential growth confirms what every New Yorker and cab riders in many other cities have long suspected: Taxi service is woefully inefficient. It also raises a question of broader relevance: Why stop here?
. . .
(p. B5) . . . like taxi medallions, state licenses required to practice all sorts of jobs often serve merely to cordon off occupations for the benefit of licensed workers and their lobbying groups, protecting them from legitimate competition.
This comes at a substantial social cost. “Lower-income people suffer from licensing,” Professor Krueger told me. “It raises the costs of many services and prevents low-income people from getting into some professions.”
In a study commissioned by the Brookings Institution’s Hamilton Project, Morris Kleiner of the University of Minnesota found that almost three out of 10 workers in the United States need a license from state governments to do their jobs, up from one in 20 in the 1950s. By cordoning off so many occupations, he estimates, professional licensing by state governments ultimately reduces employment by up to 2.8 million jobs.

For the full commentary, see:
Eduardo Porter. “Job Licenses in Spotlight as Uber Rises.” The New York Times (Weds., JAN. 28, 2015): B1 & B5.
(Note: ellipses added.)
(Note: the online version of the commentary has the date JAN. 27, 2015.)

The working paper co-authored by Krueger, is:
Hall, Jonathan V., and Alan B. Krueger. “An Analysis of the Labor Market for Uber’s Driver-Partners in the United States.” Working paper. January 22, 2015.

Kleiner’s working paper at Brookings, is:
Kleiner, Morris M. “Reforming Occupational Licensing Policies.” In The Hamilton Project, Brookings, Discussion Paper 2015-01, January 2015.

Over-Taxed and Over-Regulated Castles for Sale in Italy

(p. A3) While castles and historic mansions in Italy have long been family inheritances, today dozens of them are for sale, even in one of the most conservative real estate markets in Europe.
. . .
On historic buildings, where owners used to pay little as compensation for the elevated costs of maintaining centuries-old structures, the taxes increased by 20 or 30 times, depending on the property’s location.
On some buildings, taxes spiked from 3,000 euros (about $3,400) in 2011 to 75,000 euros (about $84,000) by 2013. That might be a small figure for castle dwellers in the United Kingdom, but it is a burden for Italian pockets, especially in regions where the property’s market value or tourism interest is low.
The trends, to many here, are indicative of Italy’s place as a country caught between its past glory and its modern difficulty in producing an innovative climate capable of ensuring its future.
. . .
. . . buyer beware: Living a nobleman’s life in Italy comes at a cost, even for many tycoons. New owners face the same onerous bureaucracy as Italians to make even minimal changes to many older properties.
Under Italian law, the owner of a historic building is its custodian, bound to maintain it and grant its security and, in some cases, its use to the public. Many buyers give up on properties of great historic value, but in bad condition, for this reason, brokers said.
“This is a problem for possible investors, who want to have modern comforts like a spa, air-conditioning or a lift,” said Mr. Pallavicini, of the Italian Historic Houses Association.
“We no longer live like in 1800,” he added. “But 99 percent of those changes are either impossible or extremely bureaucratic and complicated in an Italian historic building.”

For the full story, see:
GAIA PIANIGIANI. “PONTASSIEVE JOURNAL; Life of Italian Nobility for Sale, Complete With Regulations and Taxes.” The New York Times (Weds., JAN. 28, 2015): A11.
(Note: ellipses are added.)
(Note: the online version of the story has the date JAN. 27, 2015.)

Progress Depends on Removing Barriers to Innovation

In the quotation below, Bill Gates is referring to the late, and way-under-appreciated, economist Julian Simon.

(p. A3) “. . . Simon’s view was that humans would have to change to innovate,” Mr. Gates said. Innovation, in other words, is not preordained. Indeed, it’s happened much more in some societies than in others. And it has happened, Mr. Gates was arguing, because people and institutions took steps to remove the barriers to progress.
. . .
. . . , much of the world is enjoying one of history’s most rapid increases in prosperity. Life expectancy has risen more than six years just since 1990. The world, to quote the title of a book by the economist Charles Kenny, is “Getting Better.” As Mr. Gates says: “The world is actually improving a lot. We’re trying to deliver both the good news on the progress and the possibility to do more.”

For the full commentary, see:
David Leonhardt. “Africa’s Economy Is Rising, and Focus Turns to Food.” The New York Times (Thurs., JAN. 22, 2015): A3.
(Note: ellipses added.)
(Note: the online version of the commentary has the title “Africa’s Economy Is Rising. Now What Happens to Its Food?”)

The book mentioned by Charles Kenny is:
Kenny, Charles. Getting Better: Why Global Development Is Succeeding–and How We Can Improve the World Even More. Philadelphia, PA: Basic Books, 2011.

One of the great books by Julian Simon is:
Moore, Stephen, and Julian L. Simon. It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years. Washington, D.C.: Cato Institute, 2000.

Depression of 1920-21 Ended Quickly, Without Government Stimulus or Bailouts

(p. C3) Beginning in January 1920, something much worse than a recession blighted the world. The U.S. suffered the steepest plunge in wholesale prices in its history (not even eclipsed by the Great Depression), as well as a 31.6% drop in industrial production and a 46.6% fall in the Dow Jones Industrial Average. Unemployment spiked, and corporate profits plunged.
. . .
In the absence of anything resembling government stimulus, a modern economist may wonder how the depression of 1920-21 ever ended. Oddly enough, deflation turned out to be a tonic. Prices–and, critically, wages too–were allowed to fall, and they fell far enough to entice consumers, employers and investors to part with their money. Europeans, noticing that America was on the bargain counter, shipped their gold across the Atlantic, where it swelled the depression-shrunken U.S. money supply. Shares of profitable and well-financed American companies changed hands at giveaway valuations.
Of course, the year-and-a-half depression must have seemed interminable for all who were jobless or destitute. It was, however, a great deal shorter than the 43 months of the Great Depression of 1929-33. Then too, the 1922 recovery would bring tears of envy to today’s central bankers and policy makers: Passenger-car production shot up by 63%, for instance, and the Dow jumped by 21.5%. “From practically all angles,” this newspaper judged in a New Year’s Day 1923 retrospective, “1922 can be recorded as the renaissance of prosperity.”
In 2008, as Lehman Brothers toppled, the Great Depression monopolized the market on historical analogies. To avoid a recurrence of the 1930s, officials declared, the U.S. had to knock down interest rates, manipulate stock prices to go higher, repave the highways and trade in the clunkers.
The forgotten depression teaches a very different lesson. Sometimes the best stimulus is none at all.

For the full commentary, see:
JAMES GRANT. “The Depression Fixed by Doing Nothing; The agonizing but often forgotten 1920-21 economic crisis suggests that sometimes the best stimulus is none at all.” The Wall Street Journal (Sat., Jan. 3, 2015): C3.
(Note: ellipsis added.)
(Note: the online version of the review has the date Jan. 2, 2015, and has the title “The Depression That Was Fixed by Doing Nothing; The often forgotten 1920-21 economic crisis suggests that sometimes the best stimulus is none at all.”)

Grant’s commentary is elaborated on in his book:
Grant, James. The Forgotten Depression: 1921, the Crash That Cured Itself. New York: Simon & Schuster, 2014.

Wall Street Democrats Question Hillary Clinton’s Views on Job Creation

(p. B1) “Hillary said what?”
That was the question whispered among some of Wall Street’s most prominent Democratic supporters over the weekend after Hillary Rodham Clinton spoke on the campaign trail for Martha Coakley, the Democratic candidate for governor of Massachusetts.
“Don’t let anybody tell you that it’s corporations and businesses that create jobs,” Mrs. Clinton said on Friday in Boston.

For the full commentary, see:
ANDREW ROSS SORKIN. “Wall St. Wonders About Hillary Clinton.” The New York Times (Tues., OCTOBER 28, 2014): B1 & B6.
(Note: the online version of the commentary has the date OCTOBER 27, 2014, and has the title “Hillary Clinton’s Comment on Jobs Raises Eyebrows on Wall St.”)

Piketty Prefers Reform Instead of Receiving Legion of Honor

(p. A16) PARIS–French economist Thomas Piketty, author of the best-selling book “Capital in the Twenty-First Century,” has turned down the Legion of Honor, saying the government should focus on reviving the country’s anemic economy rather than “decide who is honorable.”
Mr. Piketty’s refusal of one of France’s highest distinctions–announced via a short declaration to the Agence France-Presse news agency–is a snub to the government a day after President François Hollande cited the global influence of French scholars as evidence of the country’s unfailing might.

For the full story, see:
INTI LANDAURO. “French Economist Refuses State Honor.” The Wall Street Journal (Fri., Jan. 2, 2015): A16.
(Note: the online version of the story has the date Jan. 1, 2015, and has the title “French Economist Thomas Piketty Refuses Legion of Honor.”)