Are progressive income taxes a stable source of revenue?

RealClearMarkets - State Taxes Produce Wild Revenue Swings

More surprising, but ultimately logical, are the results from states with flat income taxes. The usual expectation is that flat taxes will produce more stable revenues than progressive income taxes that rely disproportionately on high earners. This is because high income people tend to have volatile incomes that move sharply with overall economic performance.

However, five of the seven states with flat taxes saw income tax revenue drops above the 11.4% national average. While Pennsylvania and Utah outperformed most states with drops under 9%, Indiana's flat tax saw a 20.3% drop in collections, and the four others ranged from 11.7% to 14.3%. Meanwhile, New York and New Jersey (which have graduated income taxes that rely heavily on high-income taxpayers) saw revenue drops under 9%.

Progressives will point to these results as evidence that graduated taxes do not promote revenue instability. They are wrong. What has happened is that states with flat income taxes have resisted political impulses to raise income taxes. Meanwhile, states with sharply graduated taxes have tended to impose (often sharp) income tax hikes for the current fiscal year. If states like New York and New Jersey hadn't raised taxes, their revenue performance would be among the worst in the country.

No state with a flat tax raised its income tax this year. However, eight states with graduated income taxes raised rates: Connecticut, California, Delaware, Hawaii, New Jersey, New York, Oregon and Wisconsin. Most of these personal income tax increases were in the form of new or increased "Millionaire's Taxes", which contrary to the name may be imposed on incomes as low as $125,000. The sole exception is California, which raised tax rates across the board including in its millionaire bracket.

In New Hampshire: 'A real win for the principle of fair and open competition '

Bid process marked by PLA stopped:

MANCHESTER -- Dick Anagnost went to bed Thursday night believing the nine years he invested in bringing a new Job Corps Center to the city was coming close to fruition.

He woke up yesterday not so sure.

That's when he learned the U.S. Department of Labor canceled the bid process for the 160,000-square-foot center planned off Dunbarton Road. The estimated cost of the project is $35 million.

"It'll be a terrible blow if this thing goes away," said Anagnost, chairman of the New Hampshire Job Corps Task Force.

Anagnost said he spent most of yesterday trying to find out when or if the bid process would restart. He also said he called on the help of the state's four legislators in Washington, D.C.

The Labor Department's decision came a day short of one month after North Branch Construction of Concord filed a protest with the Government Accountability Office. North Branch decried the Labor Department's requirement for a Project Labor Agreement (PLA) that the contractor contends mandates following union rules and paying into union benefit funds as a condition for bidding on the project.

The Associated Builders and Contractors, which represents 25,000 merit shop construction and construction-related firms that employ more than 2 million people, is supporting North Branch in its legal battle.

"This is a real win for the principle of fair and open competition in government procurement," said North Branch attorney Maurice Baskin of Venable LLC. "It is no coincidence that the Department of Labor canceled its unlawful PLA mandate the day before the agency was required to file a response to our bid protest. We demonstrated that there was no justification for imposing a PLA on this project and that the PLA mandate violated the Competition in Contracting Act and other long-standing federal procurement requirements."

North Branch filed the protest contending that most contractors in the state are non-union and the PLA would prevent them from working on the project.

"We are not anti-union," Ken Holmes, president of North Branch Construction in Concord, said in a statement at the time the protest was filed. "We work with union and non-union contractors, but the preponderance of contractors in New Hampshire are non-union. This knocks all of them out of the ball game.

The Beacon Hill Institute has published several extensive studies undermining the claims that Project Labor Agreements save taxpayers money. The latest can be found here.

Latest economic news in Massachusetts

The unemployment rate dips slightly to 8.9%

Holiday sales are expected to fall 3%.

Even Hollywood thinks state tax credits for movie-makers or subsidies for mega-stars are a bit dubious.

And of course the latest horror stimulus horror story; missing the mark. Globe: “People are scratching their heads because some of this doesn’t make sense. Studying pollen during the Viking Age isn’t going to create a lot of jobs and help the economy."

The dead hand on your television

It, of course, was only a matter of time. APNEWS: California targets TVs to lower electricity demand.

SACRAMENTO, Calif. (AP) - The most power-hungry television sets could soon be banned from store shelves in California as state energy regulators on Wednesday consider a first-in-the nation mandate intended to lower electricity demand.

If adopted, the regulations will require televisions sold in California to be more energy efficient beginning in 2011. The requirement would be tougher in 2013, with only one-quarter of the TVs on the market currently meeting that standard.

Energy commissioners say TVs account for about 10 percent of a home's electricity use. The concern is that the energy draw will rise by as much as 8 percent a year as consumers buy larger televisions, add more to their homes and watch them longer.

Some manufacturers say implementing a power standard will cripple innovation, limit consumer choice and harm California retailers because consumers could simply buy TVs out of state or order them online.

The standards would apply to all TVs up to 58 inches, allowing increasing power use for larger TVs.

For example, all new 42-inch television sets must use less than 183 watts by 2011 and less than 116 watts by 2013. That's considerably more efficient than flat-screen TVs placed on the market in recent years.

A 42-inch Hitachi plasma TV sold in 2007 uses 313 watts while a 42-inch Sharp Liquid-crystal display, or LCD, TV draws 232 watts, according to Energy Commission research. LCDs now account for about 90 percent of the 4 million TVs sold in California annually.

Industry representatives have said the standards would force manufacturers to make televisions that have poorer picture quality and fewer features than those sold elsewhere in the U.S.

California has previously led the nation in setting efficiency requirements for dishwashers, washing machines and other household appliances as a way to address the state's growing electricity demand.

So goes California, so goes the nation.

Where is the inflation?

It's there lurking according to this sketch by Veronique de Rugy:

Besides placing undue faith in the Fed’s ability to time perfectly any necessary anti-inflationary measures, the consensus suggests that the nation’s central bank now has the heretofore undiscovered ability to increase the money supply without creating inflation. If true, this would be an important new development, since inflation has long been rightly vilified for destroying entrepreneurship and long-term economic growth. But if false, this conceit could prove dangerous indeed. And it’s probably false.

Treasurer Cahill to address BHI's Competiveness Event

State Competitiveness Report
Keynote Speaker
Timothy Cahill,
Treasurer and Receiver General of the Commonwealth of Massachusetts

Wednesday, December 16, 2009 - 9:00 a.m

Sargent Hall
First Floor Function Hall, Suffolk University Law School
120 Tremont Street
Boston, MA 02108
RVSP - phone: 617-573-8750;
e-mail: compete@beaconhill.org


Sponsored by:
THE BEACON HILL INSTITUTE &
THE DEPARTMENT OF ECONOMICS at SUFFOLK UNIVERSITY

A jobless recovery?

Federal Reserve Bank of Philadelphia: Economy to grow but job growth will lag.

"The U.S. economy will grow over each of the next five quarters, according to 41 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters see real GDP growing at an annual rate of 2.7 percent this quarter. On an annual-average over annual-average basis, forecasters see real GDP falling 2.5 percent in 2009 before rebounding in each of the following three years. Real GDP will grow 2.4 percent in 2010, 3.1 percent in 2011, and 3.3 percent in 2012. As the table below shows, these estimates are a bit higher than those the forecasters projected in last quarter's survey.

The labor market looks weaker now than it did three months ago. Unemployment is now seen at an annual average of 9.3 percent in 2009 and 10 percent in 2010, before falling to 9.2 percent in 2011 and 8.3 percent in 2012. These estimates mark upward revisions from the forecasters' previous projection. Likewise, growth in jobs looks weaker. The forecasters see nonfarm payroll employment falling at a rate of 160,000 jobs per month this quarter and 35,000 jobs per month next quarter. Both estimates mark downward revisions from the previous survey. The forecasters see jobs beginning to grow in the second quarter of 2010. Over the second half of the year, jobs will grow at a rate of 150,000 per month. The forecasters' projections for the annual average level of nonfarm payroll employment suggest job losses at a monthly rate of 427,000 in 2009 and a further loss of 70,000 per month in 2010.

Growth looks like this: 3.5%

REUTERS:

WASHINGTON - The U.S. economy grew in the third quarter for the first time in a year, beating market expectations, as consumer spending and new home-building rebounded, signaling the end of the worst recession in 70 years.

The Commerce Department, in its first estimate of third-quarter gross domestic product on Thursday, said the economy grew at a 3.5 percent annual rate, the fastest pace since the third quarter of 2007, after contracting 0.7 percent in the April-June period.

The growth pace in GDP, which measures total goods and services output within U.S. borders, was above market expectations for a 3.3 percent rate. The economy last grew in the second quarter of 2008.

"Better than expected GDP is confirming that the Great Recession has ended," said Kevin Flanagan, fixed-income strategist for Global Wealth Management at Morgan Stanley in Purchase, New York.

"The question going forward is, is this more of a statistical recovery or are we going to get some meaningful momentum on a sustained basis."

More analysis here.

2009 Nobel Prize

Professor Ben Powell supplies his thoughts on both the 2009 Nobel Prize and a grad discussion board about the topic as well as some further reading material. Enjoy!

Sorry I'm a bit slow on this but I was out of the country until last night and am only now reading the commentary on this year's nobel prize winners Lin Ostrom and Oliver Williamson. I was shocked and thrilled to see this year's announcement. Williamson was not a surprise at all but I would have expected him to share the prize with Alchien or Demsetz. Instead by awarding it with Elinor the committee has highlighted a commonality in that both of them illustrating how to generate institutions to improve economic outcomes. In Williamson's case, it's the reason for the firm. In Elinor's it's the spontaneous generation of rules governing the commons and the reason why many top down solutions don't work. In both cases these should be conceived of as institutions embedded in the market or more broadly, civil society.

The reason I'm writing to the grad students specifically (and cc'ing the faculty) is because of the very troubling grad student blog (and very popular) I read this morning (warning, comments in it are vulgar and sexist):

The crux of their complaints seem to be that Elinor shouldn't have one because:
1) They never read her in their grad education
2) She hasn't published in many "top" economics journals
3) She's trained in political science and therefore not capable of doing economics.

This is a VERY sad state of affairs. They instead should feel ashamed of the lack of breadth of their own reading and their narrow focus outside of the broader tradition of political economy. Elinor asks some of the biggest "big think" type questions about institutions that should have a major impact in one's thinking on economic development especially but many other things as well. Her main publications have been books rather than econ journals and she's influenced some of the other big thinkers in economics (for instance 2002 Nobel winner Vernon Smith). Her work doesn't collapse neatly into a max subject to type framework or other training these grad students have got. Instead of seeing this as a limitation of their models they see it as a limitation of what is interesting. This is very shallow thinking and blinds them to important questions. I'm glad I work in a place that does have some appreciation for a more broad tradition of political economy.

I encourage you all to get some knowledge of Ostrom (and Williamson but if you've done any IO you'll be familiar with him anyway, or perhaps should be regardless of field since he is the world's most cited economist). Here are a few excellent blog posts or op-ed's by accomplished economists who will give you a general sense of her work. If you want to read her own writing her most influential book is "Governing the Commons" but that is rather high cost. There was just a nice symposium in the Journal of Economic Behavior and Organization that summarizes the bloomington school and includes a contribution from her:
June 2005 57(2), "Polycentric Political Economy: Essays in honor of Elinor and Vincent Ostrom" that would be a lower cost intro.

At a minimum check out some of the following:

David Henderson's WSJ op-ed:

Vernon Smith's Forbes column:

Paul Romer's Blog:

Alex Tabborak's blog:

Peter Boettke's Blog:

And Peter Klein on Williamson

Congrats to Ostrom and Williamson and happy reading to all of you.

At 9.3

U.S. 9.8% MA 9.3%. Make of it what you will.

A morning Email

Before I had my first cup of coffee today, an interesting E-mail chain had formed. Starting with the following quote, curtosy of Professor Jonathan Haughton, a lively debate was set off. Professor David Tuerck, Professor Ben Powell, Alfonso Sancez-Penalver and I, both of BHI, weigh in on the subject of universal health care.

Just this weekend I came across this quote from Hayek (chapter 9 in The Road to Serfdom):

“Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance — where, in short, we deal with genuinely insurable risks — the case for the state’s helping to organize a comprehensive system of social insurance is very strong.”

Is this not a case for universal health coverage of some sort (and for some conditions)?

Jonathan Haughton
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Yes, it is. And I would say, sadly so. Of course, Hayek is talking about a state run insurance system as opposed to the single-pay system to which we are headed. Nevertheless, he did himself no good by succumbing to this one urge to recommend a statist solution.

David G. Tuerck
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Agreed. You can find further, misguided, quotes from him in the Constitution of Liberty. I think these off the cuff concessions are inconsistent with the body of his work on knowledge and competition as a discovery procedure.

Ben Powell
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Perhaps. I see a somewhat different problem, which I am a bit surprised that he didn't address: some sickness really is not the fault of the individual - alzheimer's, Type 1 diabetes, and the like. But what about illness that results from personal choices - lung cancer (from smoking), Type 2 diabetes (from obesity), for instance. A key problem from an insurance perspective would be how to distinguish between these. In other worlds, how to insure against serious problems that are not one's fault without creating too much of an incentive to go easy on prevention.

Of course we already have universal health insurance (thanks to Ronald Reagan!), in that emergency rooms may not deny care to those who need it. That's appropriate, but one can't help thinking that it is a hugely inefficient way to provide such coverage - it is financed in haphazard fashion (mainly as cross-subsidies from our tax-favored health premia).

Jonathan
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I keep thinking that, aside from the best solution, which would be complete government withdrawal from health care, the government should just take care of people who are sick through no fault of their own and who can't pay for their very expensive health care. This is the "high risk pool" of uninsurable people with chronic, unpreventable problems. It should ignore everyone else. People who go to emergency rooms could be chased down and made to pay for their care, and if they can't or won't pay, the hospitals could pass that cost along to the rest of us. In a rational market, young people could contract for health insurance now at rates that reflect the cost of their health care as they get older. By the way, I suspect that emergency room care is pretty efficient. I've gone to the emergency room at least three times to get a quick prescription for bronchitis and gladly paid the premium rather than wait for my doctor to see me. 'We could expand the availability of health clinics, too.

People who don't pay for insurance until they are middle age and then come down with some predictable middle-age disease have nothing to complain about. They rolled the dice and now they're out of luck. The key is health insurance available to the young, who are usually healthy, that they are guaranteed to keep even when they get older and sicker. I would rather let private charity take care of people in the high risk pool than give the government the job of caring for them, but that much government involvement I could take.

David
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Having read all these messages you are almost selecting what the government should cover instead of whether the government ought to cover. Going down that path opens a lot of questions that are not easy to answer. You mentioned before lung cancer from cigarette smoking. It is true that more patients of lung cancer are cigarette smokers but there has not been a definite scientific proof that smoking cigarettes causes lung cancer. What happens with patients of lung cancer that don't smoke? Even if it were to be proofed that smoking somehow caused lung cancer, what if the patient smoked in his 20s but had lung cancer in his 30s, what if he had it in his 40s, 50s or 60s? Continuing with cancer, what is considered to be the individual's fault? As we know cancer patients' descendents are at a higher risk of getting cancer. Is this the fault of the individual? Should the individual pay for the sins of the parents?

Having individually tailored insurance is not effective, either privately or publicly. The high risk patients may not be able to afford the insurance so the low risk patients are the ones who pay for the others' risks. Unless there is some risk poolin, insurance is not affordable by a lot of people. If you want the government to cover these high risk uninsurable patients, this funding is done via taxes. Why shouldn't it be done with a general private insurance plan? In the private plans they take into account whether you present a higher and lower risk at the time they issue the plan, so at least it is somewhat tailored. Private, for profit, companies have a higher incentive to look into a plead for free insurance from the people that claim to not afford the insurance they need.

The real question is, however, should we have universal insurance? The problem of answering yes to this question is that there are people who cannot afford it. How do they get it then? This may lead to government intervention, which is inefficient since government administration is not as efficient as private. The problem with answering no to that question is that some people cannot have their sicknesses treated. There are nonprofit health practices, but I'm not sure if they would cover open heart surgery.

Not a topic to be easily solved.

Alfonso Sanchez-Penalver
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I agree there has to be risk pooling; otherwise why bother with insurance. But if one forces everyone to buy insurance, this represents a very regressive tax. A solution would be to provide everyone in the country with (say) a $4,000 health insurance voucher, and people could pay more for fancier coverage; but this provides an incentive for insurance companies to spend a lot of money figuring out ways to not insure high-risk individuals - surely a directly unproductive activity. Increasingly, I get pulled toward some sort of "basic medicare for everyone" solution with fairly high copayments, with scope for individuals to buy additional coverage (private hospital rooms, lower deductibles, etc.).

David may be right that emergency room service may not be as inefficient as all that; but if we were to encourage more "doc in a box" outfits, a lot of the relatively routine stuff could be handled more cheaply. More generally, I think we need to address restrictive practices in medical education and practice (excess certification; requiring a bachelor's degree before strating medical school; limited use of nurse practitioners and nurses for routine stuff).

On a related, but different issue; if a generic drug is available for, say, $20, and the brand drug costs, say, $50, why do insurance companies not limit reimbursements to ($20 - deductible)?

Jonathan
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The core problem here is that health insurance as it currently exists is no longer insurance, but prepaid health care. Insurance is a contract voluntarily arrived at according to terms voluntarily agreed upon in which the person insured is promised benefits, given a specified, adverse turn of events. Moral hazard makes it uneconomical for such contracts to cover events over which the insured has control. That's why my car insurance doesn't cover oil changes, tire rotations and minor accidents. Also, to be economical, insurance must cover events that occur with increasing probability over the lifetime of the insured, provided the insured buys into the insurance when he is young. In this respect, health insurance is exactly like life insurance.

So what's wrong with the status quo? For one thing, mandated benefits mean that I am insured against the cost of taking my Nexium, this for a condition that I could alleviate by the simple expedient of eating fewer spicy foods - the equivalent of insuring my car against damage due to not changing my oil. The second problem is the push to insure people against "pre-existing conditions." It is one thing if a patient is 22 and poor and has a pre-existing chronic problem like ALS. It's another thing if the patient comes down with diabetes at age 50, when he is wealthy but hasn't bothered to buy insurance. In my judgment, both patients should have to turn to charity for help. Presumably, a charity will take more pity on the first patient than on the second. But it doesn't matter since contributions to charity are voluntary. On the other hand, since I'm only 99% conservative, I'd be willing to go along with using taxpayer dollars to help the first patient, as long as I didn't have to help the second.

Anything wrong here?

David
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
You bring a good point. Here's my question, what should happen to the 50 year old who is poor, not wealthy, and comes down with diabetes? I believe in your mind you have a clear path where people are born poor and end up wealthy, but this is not necessarily the case. Even when it is, you are saying that in you 1% liberal mind, the government who is primarily financed by those wealthy 50 year olds to cover the 20 year old case... why? Well... because the 50 year old can afford to pay himself!!! Why should he have to when he is paying more taxes than the 20 year old??? That would be making him pay twice for insurance. That one percent mind of yours is very liberal!!!

Alfonso
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
My question on this, is in relation to what should insurance actually cover, regardless if its by the state or a private company. If I found out tomorrow that I was going to have a child, would I take out an insurance policy to pay for his or her first car in 16 years? Or would I start a small savings account, and put cash aside here and there. I know today that in 50 years time I will inevitably have medical issues. Should the insurance plan that I have cover there medical costs that I know will occur? Should I just expect insurance to cover actual random events (car crash injury, ect?) or above a certain expected level?

Mickey Head

Look to history for the bright upside

Nathan Fisk in today's Christian Science Monitor: Why the US will survive this recession.

Then, as in 2008, America's most prominent financial institutions collapsed or nearly failed under the weight of speculative promises. Yes, the devastation is remarkably similar, but so is the cure.

From the Panic of 1837 to the Great Depression of the 1930s to the difficulties of 1969 and '70 when the cost of living jumped 15 percent, American ingenuity has consistently beat back economic calamity.

In 1837, it was the individuals who cast their vision forward who succeeded. Tough times spur recovery.

The time is ripe for American genius to surge. We must shed the idea that our government can buy us out of a depression or somehow use a new tariff or tax to encourage growth.

Rather, we must turn to our ingenuity and the audacious independence unique to our nation – and change the course of America.

A heavy social safety net

This will strain the entire concept of social security. Reuters: Half of babies born in rich world will live to 100

[Researchers] said huge increases in life expectancy -- of more than 30 years -- had been seen in most developed countries over the 20th century.

And death rates in nations with the longest life-expectancy, such as Japan, Sweden and Spain, suggest that, even if health conditions do not improve, three-quarters of babies will live to celebrate their 75th birthdays.

"But should life expectancy continue to improve at the same rate, most babies born in rich nations since 2000 can expect to live to 100 years," they wrote.

The researchers, who pooled and analysed data from several international studies, said they wanted to explore "a common view" that a big rise in the proportion of older people would come as a result of helping an increasing number of frail and ill people survive longer -- with huge personal and societal costs.

But they found that even though many people who live to age 85 have chronic diseases such as diabetes and arthritis, they have only become frail and disabled at a later stage, essentially postponing frail old age instead of extending it.

"This apparent contradiction is at least partly accounted for by early diagnosis, improved treatment, and amelioration of prevalent diseases so that they are less disabling," they wrote.

"People younger than 85 years are living longer and, on the whole, are able to manage their daily activities for longer."

Project labor agreements on federal projects are not a good idea

While not as prominent as the push for union card check elections, anti-competitive Project Labor Agreements are a significant part of President Obama's pro-labor agenda. Last February the President signed an executive order encouraging the use of union-only projects on efforts valued over $25 million. The problem is that PLAs are costly and counterproductive.

A new BHI report, Project Labor Agreements on Federal Construction Projects: A Costly Solution in Search of a Problem reviews the rationale for PLAs on federal projects and finds it wanting.

BOSTON, MA – A new study released today by the Beacon Hill Institute (BHI) finds that Project Labor Agreements (PLAs), which will be permitted under an executive order from President Obama, will significantly increase construction costs on federal projects while doing nothing to protect the interests of federal taxpayers. The executive order reverses a prohibition on PLAs that was in effect during the Bush Administration.

The purpose of the BHI study, which is entitled Project Labor Agreements on Federal Construction Projects: A Costly Solution in Search of a Problem, was to determine whether the reversal of this prohibition is in the interest of federal taxpayers.

PLAs are agreements with contractors that establish the rules to be followed by firms that bid on construction projects. PLAs typically require a contractor to hire workers though union hiring halls, require non-union workers to pay dues for the length of the project and force contractors to abide by union rules on pensions, work conditions and dispute resolution.

In February, President Obama issued Executive Order 13502, which allows executive agencies to require contractors to use PLAs on federal construction projects costing $25 million or more. The federal government’s deadline for accepting comments on the order is September 23, 2009.The purpose of a PLA is to assure labor “peace” during construction projects.

But a review by BHI of federal construction projects during the Bush Administration found no instances of labor disputes that resulted in significant project delays or increased costs.“Our examination of the record produces no evidence of any systematic connection between the absence of a PLA, on the one hand, and cost overruns or delays caused by labor disputes, on the other,” said David G. Tuerck, one of the authors of the study and Executive Director of the Beacon Hill Institute. Therefore, the justifications offered by the Obama Administration for reinstating PLAs are not supported by the evidence.

The full report can be obtained here.

A veritable list for economics studentts

Something for everyone on this very useful list of the 100 Best Blogs for Economics Students.

My favorite is Marginal Revolution.

If it walks like a duck...

CHRISTIAN SCIENCE MONITOR:

'You get into a lot of semantics here,” says Eric Toder, an expert at the nonpartisan Tax Policy Center in Washington. But he says if money is owed to the IRS, “I supposed you would call that a tax."

Mass. foreclosures on the decline - Boston Business Journal:

On the mend?

BBJ: "Mass. foreclosures on the decline."

That's a little more than spare change

The president's cap-and-trade idea will hurt working families

The Obama administration has privately concluded that a cap and trade law would cost American taxpayers up to $200 billion a year, the equivalent of hiking personal income taxes by about 15 percent.

A previously unreleased analysis prepared by the U.S. Department of Treasury says the total in new taxes would be between $100 billion to $200 billion a year. At the upper end of the administration's estimate, the cost per American household would be an extra $1,761 a year.

A second memorandum, which was prepared for Obama's transition team after the November election, says this about climate change policies: "Economic costs will likely be on the order of 1 percent of GDP, making them equal in scale to all existing environmental regulation."

Why Richard Epstein is a genius

Separating the heat from the light, Richard Epstein praises his University of Chicago colleague and Obama appointee Cass Sunstein before intellectually burying him.

"Sunstein is by any fair account the most prominent, versatile and influential left-of-center legal academic in the U.S. His nomination has been supported, sensibly enough, by The Wall Street Journal, which also sees him correctly as one of the more conservative players in the Obama administration. But apparently, its wise counsel did not slow down key Republican senators who held up his nomination on at least three separate occasions, in part because of their worries that his view on hunting and animal care make him an extremist on animal rights.

Regrettably, they seem more influenced by the caricature of his position on the American Conservative Union Web site and Glenn Beck's brutal hosing this past July that also denounced Sunstein for his passionate support of Franklin D. Roosevelt's Second Bill of Rights. This sad tale has been well recounted by David Weigel in the Washington Independent. Therefore, it is perhaps no surprise that Sunstein's was confirmed was by the embarrassingly narrow vote of 57-to-40.

These unseemly outbursts of ignorant incivility have ripped at our country's frayed political fabric. One oft-neglected cost of these hysterical tactics is that they discredit ordinary academics, like myself, who strongly disagree with the views that Sunstein has so consistently and elegantly defended. Quite simply, it is to be drowned out by the childish arguments of my supposed allies. The correct political stance is to give President Obama wide latitude in choosing his subordinates, and then to dispute them on the key substantive issues.not"

But of course then there are the problems with Sunstein's long-nourished fantasy, a Second Bill of Rights, rounding out FDR's expansive use of government to drown out the fear from wants far and wide.

... it is Roosevelt's treacherous transformation of human aspirations into enforceable legal rights. There are two enormous gaps in that chain of reasoning. First, it does not specify the persons who must bear the correlative duties to this expanded set of rights. Nor can we duck this problem by imposing the obligations on the state or government, which consists, of course, of all those original right bearers in a different capacity.

So in the end we can't maintain the universality of Roosevelt's claim: We have to distinguish between those of us who count as "the people" and everyone else, those who don't really count at all. If we all have the rights to decent jobs, then workers have the right to form unions, regardless of the consequences to employers, shareholders and the public at large. If farmers have the right to a decent living, the rest of us have to suffer Roosevelt's deadly double of agricultural subsidies and state-sponsored crop cartels.

A second difficulty is as acute as the first. Who fills in the content of the right by telling us what counts as a decent price or a remunerative wage? In a world of major uncertainty, these questions have no fixed answer. But in a political setting, we devised schemes then to assure living wages to autoworkers, only to see Roosevelt's rickety structure comes crashing down on our heads. But do we learn humility from failure? Of course not, if we think that now is the time to implement a regime of positive rights to health care--oops, to health care insurance--funded by punitive and self-destructive taxes on the rich.

In short, there is no way to translate Roosevelt's--or Sunstein's vision--into sustainable social practices. But that's just what the First Bill of Rights can do with its bloodless protection of private property and freedom of contract, speech and religion. Now we can specify the correlative duties with precision: keep off the property of others, and don't meddle in their agreements. Follow these rules and you can stimulate investment and reward hard labor. By keeping our aspirations modest, we can keep our achievements high--which is why we don't want to undermine the first Bill of Rights by adopting the second.

When will people learn that there are only negative rights, not positive rights and the U.S. Constitution derives its power from the former, not the latter?

Association Health Plans hold the answer for small business

Is it time for Association Health Plans? GLOBE: Relief in state health plan sought

President Obama’s vision for overhauling the nation’s health care looks remarkably like the landmark plan Massachusetts launched three years ago, but in one striking difference he would exempt many small businesses from having to contribute to workers’ insurance coverage.

For those small businesses that do provide insurance, Obama’s plan would offer tax credits to offset costs and would create an exchange where employers could buy coverage at competitive prices - two key things Massachusetts has not done.

The differences underscore a sore spot for many small business owners in Massachusetts, who have been lobbying for relief under the state’s law, saying insurance has become unaffordable.

Obama said in his speech to the nation Wednesday night that his overhaul would exempt 95 percent of small businesses - those with fewer than 50 workers - from having to pay for workers’ health insurance.

But in Massachusetts’ overhaul, businesses with the equivalent of 11 or more full-time workers must offer coverage or pay a penalty - a requirement that has chafed at many small business owners who say they lack the buying clout of big businesses to bargain for cheaper insurance rates. Small business owners say they have had to shoulder double digit annual increases in their premiums in recent years, typically higher than the 7 percent to 9 percent increases larger businesses have faced.

A 1996 state law prohibits small businesses from negotiating as a group.

Yesterday, Governor Deval Patrick said publicly for the first time that he backs efforts to change that law.

“That [law] is wrong in my view, and it needs to be changed,’’ Patrick said in a conference call with reporters.

Pending legislation would allow businesses with 50 or fewer employees to form a nonprofit consortium to bargain for cheaper rates.

Back in 2005, the institute release a study highlighting the benefits of allowing small businesses to develop association health plans.

It found that

- a small group purchasing pool has the potential to: provide coverage to an estimated 10,258 firms, of which 4,273 did not previously offer insurance;

- extend coverage to 83,575 enrollees, of which 24,822 were previously uninsured workers and their dependents;
reduce the number of uninsured workers by 14,687, and

- reduce the burden of uncompensated care by $47.6 million

However, such plans were met (and will continue to be met) with resistance from large insurance companies in the Bay State.

Press release June 28, 2005

Here is the full study.

Herbert Spencer's Bad Rap

A closer look: Herbert Spencer reconsidered.

Bad news on the poverty rate

It was bound to happen:

U.S. poverty rate hits 11-year high.

It's almost official: Recession over

Jay Fitzgerald reporting on the Federal Reserve's Beige Book release highlighting slight economic improvement, particularly in New England.

The Boston district is seeing minor economic gains in a number of sectors.

“Retailers, manufacturers, and software and IT service providers, while still reporting mixed results, are more confident about their companies’ and the economy’s eventual recovery,” the report said.

A sign that some businesses might be ready to start hiring, at least part-time workers, would be found in interviews with temp firms, the report said. “Staffing firms cite an uptick in activity,” the report said.

The number of residential homes sold has increased, though overall prices continue to fall, the report said. One big sore spot is commercial real estate, which remains “very soft.”

Clunker!

On the hook: "Taxpayers face heavy losses on auto bailout". Can't say we are surprised.

Dropping to number 2!

Should we worry? World Economic Forum: U.S. drops to second in competitiveness index.

Switzerland knocked the United States off the position as the world's most competitive economy as the crash of the U.S. banking system left it more exposed to some long-standing weaknesses, a report said on Tuesday.

The World Economic Forum's global competitiveness report 2009/2010 showed economies with a large focus on financial services such as the U.S., Britain or Iceland were the losers of the crisis.

The U.S. as the world's largest economy lost last year's strong lead, slipping to number two for the first time since the introduction of the index in its current form in 2004.

"We have been expecting for some time that it may lose its top-position. There are a number of imbalances that have been building up," said Jennifer Blanke, Head of the WEF's Global Competitiveness Network.

"There are problems on the financial market that we were not aware of before. These countries (like the U.S. and Britain) are getting penalized now," she said.

The end of the recession?

BRIAN WESBURY:

"Today’s data should end, once and for all, any notion that the US is still in recession."

There is no French free lunch when it comes to health care

Guy Sorman writing in City Journal:

It may indeed seem free, or close to free, for an American tourist receiving treatment in an emergency; as a French taxpayer, however, I paid a heavy price for Paretsky’s husband’s treatment. And you, my American reader, did too.

How much? France’s costly national health insurance is mostly financed by taxes on labor. A Frenchman making a monthly salary of 3,000 euros will pay approximately 350 of them (deducted by his employer) for health insurance. Then the employer will add approximately 1,200 euros, making the total monthly cost to the employer of this individual’s services not 3,000 euros but 4,200. High labor costs in France affect not only consumer prices but also unemployment rates, since employers are reluctant to pay so much for low-skill workers. Economists agree that unemployment rates and the cost of national health insurance are directly related everywhere, which partly explains why even in periods of economic growth, the average French unemployment rate hovers around 10 percent.

Sometimes it works the other way

WSJ:

HOUSTON -- Farouk Shami, a Palestinian-born hairdresser who built a $1 billion manufacturing company around a popular line of hair irons, is moving all of his production of hand-held appliances from China to a sprawling new factory here.

The move flies in the face of conventional wisdom, which says gadgets like this are best made in a low-cost country. But, he says, outsourcing has led to a loss of control over manufacturing and distribution.

"We'll make more money this way -- because we'll have better quality and a better image," says the 66-year-old, who says his company, Farouk Systems Inc., spends about $500,000 a month fighting counterfeits, most of which he says originate in China. The company collects the fake products and tracks the source, and then brings action in China to shut down illegal producers.

Mr. Shami figures having production under his nose will help him control quality and inventory, and also fight the fakes, since imported irons will automatically be suspect. He sells in 104 countries, but the U.S. represents over 60% of the company's sales.

"I think you're starting to see more manufacturers rethinking outsourcing," says Daniel Meckstroth, an economist at the Manufacturers Alliance/MAPI, a public policy and research group based in Arlington, Va., calling a June speech by General Electric Co. CEO Jeffrey Immelt, where he said that overseas outsourcing had gone too far and that U.S. companies needed to expand domestic production, a "bellwether of what's happening in manufacturing."

Broken windows theory in action: Cash for clunkers!

BRIAN WESBURY applies the "broken windows" fallacy to Cash for Clunkers:

The basic problem with cash for clunkers is that it uses the old “broken windows” theory of economic activity. Everyone who lives in a hurricane zone knows that typically people are never busier than right after a major storm. Roofs need to be replaced, while damage to vegetation, glass, power lines, boats, etc., all require overtime to repair. All that activity gets counted in GDP.
 
But everyone also knows the storm was a bad thing, destroying property that was built at a cost in the first place. Sure, everyone is as busy as a beaver, but they’re just busy replacing what they had, not actually improving their standard of living.

A wealth tax for the deficit?

ARNOLD KLING:

Other countries that have defaulted have not had the option of enacting wealth taxes. When you are in a banana republic with shaky government finances and you have a lot of wealth, you send that wealth over to the United States, where your government cannot get to it. That "safe haven" motive is what keeps the dollar so strong. Anyway, by the time the banana republic gets around to enacting a wealth tax, all the wealth has fled the country and there is nothing left to tax. So the banana republic defaults.

Will it be "U-shaped" or "V-shaped"?

NOURIEL ROUBINI in the FINANCIAL TIMES:

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.

Infant mortality and health care reform

STEVE CHAPMAN:

"A lot of things could be done to keep babies from dying in this country. But the health care 'reform' being pushed in Washington is not one of them."

Federal minimum wage laws hurt those who need help!

Steve Chapman in Reason:

The suspension of disbelief required to support the minimum wage will only take you so far. It's impossible to deny that if it were illegal to pay someone less than a mere $36 an hour, a lot of jobs would vanish. But a small dose of poison is still po ison, and in this case it's being administered to a patient who is already ill.

Moving up to 8.6%: Latest Mass. unemployment rate

Still lagging the U.S. rate. Does this mean Massachusetts will recover slower than the rest of the nation?

Introducing the sociological imagination.

Josh McCabe, former BHI intern, has a new blog, The Sociological Imagination that will try to drag both economists and sociologists closer to each other.

Josh McCabe is a first year PhD student at the State University of New York at Albany where I'm sure he'll drag his teachers closer to the world of Austrian economics.

Hat tip: Organizations and Markets

The sound of wind in Texas felt like a good idea

The bloom is off the rose! T. Boone Pickens's wind farm dreams meet the gale force of reality.

Plans for the world's largest wind farm in the Texas Panhandle have been scrapped, energy baron T. Boone Pickens said Tuesday, and he's looking for a home for 687 giant wind turbines.

Pickens has already ordered the turbines, which can stand 400 feet tall — taller than most 30-story buildings.

"When I start receiving those turbines, I've got to ... like I said, my garage won't hold them," the legendary Texas oilman said. "They've got to go someplace."

Pickens' company Mesa Power ordered the turbines from General Electric Co. — a $2 billion investment — a little more than a year ago. Pickens said he has leases on about 200,000 acres in Texas that were planned for the project, and he might place some of the turbines there, but he's also looking for smaller wind projects to participate in. He said he's looking at potential sites in the Midwest and Canada.

In Texas, the problem lies in getting power from the proposed site in the Panhandle to a distribution system, Pickens said in an interview with The Associated Press in New York. He'd hoped to build his own transmission lines but he said there were technical problems.

Stuck in a funk: MA biz confidence low

The diminished expectations diminish further.

SPRINGFIELD - The confidence Massachusetts business leaders have in the economy fell slightly last month to 38.2 on a 100-point scale with 50 being neutral, according to survey results released Tuesday by Associated Industries of Massachusetts, a Boston-based business lobbying group.

The state's business confidence had been 39.0 in May. The number had been inching upward after hitting an all-time low of 33.3 in February, said Andre Mayer, senior vice president for research at Associated Industries of Massachusetts.

A year ago, business confidence was 48.9.

"I think this is telling us the same thing we saw in the recent national employment report," Mayer said. "The recession has bottomed out, but we are not seeing a strong recovery."

The national unemployment rate increased to 9.5 percent in June, a 26-year high.

Since the recession began in December 2007, the economy has lost a net total of 6.5 million jobs.

"I think signs are accumulating that an economic recovery that we'd thought was coming in the second quarter of this year won't occur until either very late this year or in 2010," said Michael D. Goodman, director of economics and public policy research at the University of Massachusetts' Donahue Institute.

STAMPing out our critics

No matter how hard they try, BHI's critics in Pennsylvania still
don't have a handle on STAMP.

New financial industry rules are self-defeating

In a recent letter to the Boston Herald, BHI Koch Summer Fellow Andrew Dabrowski thinks more rules don't make for better rules.

The Herald’s criticism of the new financial regulation package simply fails to go far enough (“Regulation history,” June 21). Suffice to say, there are many, many new rules, and very few of them will do anything substantial.

Does anyone really believe that the same tired government agencies will be able to manage ever more responsibility? Far from helping the American consumer, these new regulations will further restrict banking activity. Putting the brakes on the financial industry should be the last thing the economy needs. Obama’s regulation will fail to modernize the financial regulatory system, leaving it open to future disaster.

Ideally, the new rules should have centralized regulation by eliminating the legions of individual regulators. I don’t necessarily argue for a single agency, but rather for fewer, more effective institutions.

WSJ publishes letter from BHI Koch Summer Fellow

Last week the Wall Street Journal published a letter to the editor from BHI Koch Summer Fellow Alex Weckenman. Here's the entire letter:

Messrs. Rivkin and Casey argue that a public healthcare plan violates the privacy rights established in Roe v. Wade. But where is the violation of privacy?

Roe v. Wade.prevents the government from limiting access to abortion on the grounds that the decision to abort is a private matter best left to the woman. That same logic may prevent government from limiting access to the type of treatment that a patient deems most suitable. But the existence of a public plan does not preclude access to private insurance. Those that disagree with the government plan are free to pursue whatever private alternative they choose.

Government restrictions on access to private care are the real privacy rights violations. For example, the ban on interstate purchases of health insurance, like a ban on abortion, limits an individual's autonomy on a deeply personal issue.

Alex Weckenman
Boston

BHI on Green Jobs

Green Jobs a Cost, Not Benefit, to the National Economy

Academic Study Finds Critical Economic Flaws and Assumptions in Previous Reports

BOSTON, MA – Recent studies forecasting the potential economic benefits of government green job programs are critically flawed and erroneously promote these jobs as a benefit, according to a report released today by The Beacon Hill Institute (BHI) at Suffolk University.

The economic analysis reviewed the primary claims of three of the most influential green jobs studies and found serious economic flaws in each.

“Contrary to the claims made in these studies, we found that the green job initiatives reviewed in each actually causes greater harm than good to the American economy and will cause growth to slow,” reported Paul Bachman, Director of Research at the Beacon Hill Institute, one of the report’s authors.

The studies reviewed by BHI include:

* The United Nations Environment Programme, International Labor Organization, International Trade Union Confederation’s Green Jobs Initiative, “Green Jobs: Towards Sustainable Work in a Low-Carbon World.”

* The Center for American Progress, “Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy.”

* The U.S. Conference of Mayors, “U.S. Metro Economics: Current and Potential Green Jobs in the U.S. Economy” prepared by Global Insight.

The authors of the BHI critique identified a fundamental error in each of these studies, specifically "counting the creation of a green job as a benefit and rationale for its proposed program in and of itself.”

The BHI study also stresses that “Jobs -- green or otherwise -- are not benefits but are instead costs. If the green job is a net benefit it has to be because the value the job produces for consumers is greater than the cost of performing the job. This argument is never made in any of these three green jobs studies.”

The executive director of the Beacon Hill Institute and co-author, David G. Tuerck, went further, noting that “these studies are based on arbitrary assumptions and use faulty methodologies to create an unreliable forecast for the future of green jobs.

“It appears these numbers are based more on wishful thinking than the appropriate economic models, and that must be taken into consideration when the government is trying to turn the economy around based on political studies and the wrong numbers,” Tuerck said.

According to BHI, the results of the study also show estimates on how a state-based cap and trade policy will negatively impact both job growth and wages. One specific critique involves job creation in the state of Indiana, where previous reports did not take increased energy costs from a “cap and trade” system into consideration when looking at job creation. In that case, BHI developed a computable general equilibrium (CGE) model and found that contrary to previous studies, Indiana would lose more than 18,000 jobs in 2009, up to nearly 29,000 job losses in 2011, and that real disposable income would be cut by nearly $1 billion in 2009 and close to $1.5 billion in 2011.

The authors concluded by noting that further economic analysis is needed before governments move forward on green job initiatives. “All three green jobs studies we reviewed are riddled with economic errors, incorrect methods, and dubious assumptions. Economic policy should not be based on such faulty analysis. Serious economic studies of costs and benefits are desperately needed before the adoption of any green jobs proposal.”

For more information and the full study, please visit www.beaconhill.org.

WSJ: Cap and Trade Fiction

WALL STREET JOURNAL skewers Waxman-Markey and the CBO.

... Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.

To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

BHI's work on cap-and-trade can be found here.

Taxes do matter: Hav-a-Tampa to close plant

A simple narrative. Taxes raise the price of a good. Demands trends downward. Fewer goods produced. Jobs lost. Taxes matter.

Several things conspired to hurt Altadis' sales, McKenzie said, including the recession and the growth of indoor smoking bans. The bans have especially hurt sales in cold-weather states, where it's impractical to smoke a cigar outdoors in the winter, he said.

However, the company attributed much of its trouble to the State Children's Health Insurance Program, or SCHIP, a federal program that provides health insurance to low-income children. It is funded, in part, by a new federal tax on cigars and cigarettes. McKenzie couldn't say how much sales of Hav-A-Tampa cigars had fallen off, but the numbers have dropped significantly, he said.

Previously, federal excise taxes on cigars were limited to no more than a nickel, said Norman Sharp, president of the Cigar Association of America trade group. The tax increase, which took effect April 1, raises the maximum tax on cigars to about 40 cents, Sharp said.

Before the tax increase was passed, the cigar industry warned that consumption of cigars could fall as much as 30 percent in the year after its passage. It's not clear yet how big of an impact the law is having on sales, Sharp said.

Harrison said she understands the company's predicament and that Altadis has tried to treat its employees fairly, including guaranteeing employees two months of pay. Like her employer, she put part of the blame on the SCHIP tax hike.

"We can't afford to make these cigars in the U.S. anymore," she said.