Thursday, July 31, 2008

Red Sox Nation's Economic Impact

As a lifelong member of Red Sox nation, I can tell you that nothing controls the mood and emotions of New Englanders more than the Red Sox (and in the winter, substitute the weather). From 1918-2003, New Englanders were a solemn bunch as the Sox went through an 86 year World Series drought. However, Red Sox nation is in a better mood lately, winning two World Series championships in four years.

Does the Red Sox success have any implications for economic conditions in Boston? According to a recent study by Bank of America, the Red Sox' success does effect the local economy. 29% of workers surveyed admitted to skipping work and 14% have missed a business meeting to attend a game. Economists would point to the productivity loss from this lost work time, but I think there is some "psychic profit" from bringing the community together and putting everyone in a good mood. These benefits probably bring greater productivity gains in the long run.

However, given the recent Red Sox skid and the antics of LF Manny Ramirez, do you think more than the reported 9% of people are skipping work to recover from a Red Sox loss hangover?

HT: Freakonomics

Wednesday, July 30, 2008

More on Food Stamps

My favorite local archrival, John Edward, responded to a letter I had written to the Lowell Sun in regard to the rise in food stamp use in Massachusetts. My letter was a shorter version of a previous post on this blog, so I did indeed leave out some of the other explanations for the rise.

I sent in my response to the Sun this morning, so I won't make any more comments until they publish it (or toss it in the trash can).

Update: The Sun printed my response here.

Less smoking, less beer sales in British pubs?

Beer sales in British pubs have dropped to their lowest level since the Depression. The Charlotte Observer reports,

Blame a nationwide smoking ban that took hold last year, rising costs, competition from supermarkets and an economic downturn that has more Britons tossing back a Newcastle or Boddingtons at home and skipping the local watering hole.

I blame the smoking ban quite a bit, the ban changes a lot of the culture of going down to the local pub for a pint. People aren't drinking as much at bars, but beer sales are up four percent at supermarkets and stores.

Here is the real kicker, the consumer group Campaign for Real Ale reports that for the first time since the Norman Conquest in 1066, more than half of British villages are dry.

Tuesday, July 29, 2008

This is really getting old...

Shocking news from the Metro:

Work to revamp Kenmore station and its new busway began in 2005. When they open sometime this winter, they would be two years behind schedule and $16 million over budget (from $31.3 million to $47.3 million).

Meanwhile, at Copley and Arlington stations, where work began in 2006, outdated posters state the modernized stations will be ready by spring 2009. But current estimates slate completion for winter 2009, while costs have increased by $14.7 million (from $46.27 million to nearly $61 million).

The T attributes the delays and overruns to several factors. One is unforeseen deterioration of Arlington station’s mezzanine. Another, at Kenmore, is underground utilities discovered that weren’t on any maps, as well as streetscape changes made in light of community concerns.

What? A public project in Massachusetts running over cost and behind schedule???

Not to kick them while they're down, but they forgot to mention the additional costs of police details (usually there's about six of them in Kenmore Square) and the wage inflation as a result of prevailing wage laws.

Economics Does Not Lie

Guy Sordon exclaims that "Economics Does Not Lie" in the summer edition of City Journal, a periodical published by the Manhattan Institute. Sordon, a contributing editor to City Journal, argues that the increasing mathematical sophistication of economics is responsible for tremendous improvement in worldwide living standards:

Behind all this unprecedented growth is not only the collapse of state socialism but also a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. The revolution began during the sixties and has finally brought economists to a broad, well-founded consensus about what constitutes good policy. No longer does economics lie; no longer would Baudelaire be able to write that “economics is a horror.” For the mass of mankind, on the contrary, it has become a source of hope.

Sordon finds the ten essential tenets of the "science of economics." Sordon argues that if policymakers follow these largely laissez-faire principles, the world economy will prosper. The whole article is worth a read.

HT: RealClearPolitics

Monday, July 28, 2008

The Health Care "Market"

Paul Levy, the President and CEO of Beth Israel Deaconess Medical Center, has some great insights to problems facing health care:

The problem with the health care "marketplace" is that it is not a real market. There are so many intermediaries that the usual connection between buyer and seller that we see in other fields does not exist. Thus, the incentives for suppliers (doctors and hospitals) to engage in efficiency improvements and value enhancement are extremely slow to emerge. Also, the incentives for consumers to seek greater quality and lower costs likewise are very weak in this field. (This is aggravated, of course, by the lack of transparency about relative quality of providers.)

Then, we overlay on that the fact that government sponsored programs, Medicare and Medicaid and other state subsidized insurance plans, are ruled by administrative fiat and competing political agendas, and we see that over 40% of the delivery of health care is not subject to market influences at all. One result there is the focus on quick fixes that have headline value (not allowing payment for "never" events, for example) that only cover an infinitesimally small portion of the problem but do not address underlying structural problems. Another result is political battles focused on splitting the pie differently but not making the pie the right size or more tasty.

The whole post is worth a read.

Prononents of socialized medicine love to frame health care as a market failure. As Levy points out though, we hardly have a free market in the health care industry. Before we go on adding even more regulations, it would be best to examine the effects of the ones we have in place now.

An actually move toward a free market in health care, like the utilization of market forces in just about every other industry, would bring us much better services at much lower costs.

Friday, July 25, 2008

Good Sign from the Senate

In 2006, the Massachusetts General Assembly created a 25% tax credit for film production companies to shoot films in Massachusetts. The legislature believed that this tax credit would attract new business and create jobs in the Commonwealth. However, other states have joined in the act and a film tax credit "arms race" has erupted to see who can offer the biggest subsidies to the film industry.

Remarkably, the Massachusetts Senate has declined to take up the film industry tax credit bill. Senate President Therese Murray said the bill was "not on top of our agenda" as the legislative session ends next Thursday.

Subsidies such as tax credits distort the natural marketplace by favoring one industry over another. BHI suggested that Massachusetts simplify and lower the corporate tax rate to help all industries, not just the film or biotech industries. A uniform, lower tax rate will attract business to Massachusetts. Kudos to the Senate for rejecting this unnecessary tax giveaway.

Thursday, July 24, 2008

Is Laissez Faire to Blame?

Thomas Sowell is one of the intellectual giants of our time. Not since Milton Friedman have we seen an economist who can translate economic jargon into everyday language.

Sowell's two latest columns, both on the so-called housing crisis, are a testament to his ability to see an issue clearly. Despite what others say, Sowell demonstrates how government, not the market, is at the root of the latest housing crisis. You can read them here and here.

I once had an economics professor tell me that the crisis came about because the housing market was unregulated. He said this with a straight face ignoring the long history of housing legislation and regulation. No doubt my professor would like more government. But, as Howard Husock has demonstrated, housing problems become worse when the federal, state and local governments intervene.

Wednesday, July 23, 2008

The latest Beige Book is out!

The latest Beige Book from the Federal Reserve Bank of Atlanta is out. If you're interested in how district banks review the economy in their own backyards, this is definitely worth checking out.

Hard Times or Easy Rules?

This entry is a follow-up on John's post about the media's coverage of the economy.

Today's Globe story, "Food stamp use soars in Mass," is an illustration of how the media lacks a sense of proportion. Given the ubiquity of economic progress, are we as bad off as the screaming headlines suggest?

At first glance the reader gathers the impression that there are hungry people out there scrapping for food. But further down the inverted pyramid of the story is a useful detail that obviously doesn't fit into the messy and gloomy Globe meme of economic chaos.
The online applications made available in November, combined with the state's eight new satellite offices, help working families and disabled people who might have difficulty going into state offices for interviews and paperwork, officials say. Four of the new centers - in Boston, Lynn, Chelsea, and Fall River - are dedicated solely to food stamps. The state is also waiving the need for face-to-face interviews more frequently for working families and the disabled.

In June, the state changed its asset requirements for recipients and no longer considers bank accounts, retirement accounts, or property ownership when determining eligibility.
Basically, it's not so much that the demand for food stamps has increased because more people going hungry. Rather the rules have changed thus lowering the transaction costs for acquiring food stamps. The incentives to apply for food stamps are now greater than they were a year ago.

The downturn in the business cycle no doubt puts a strain on low-income people. However, there is little evidence that indicates a long-term rise in hunger. The bureaucrats have shifted the goalposts to ensure the survival and expansion of the food stamp program.

Cox and Alm ask "How are we Doing?"

Economic pessimists would like Americans to believe that our current economic struggles echo the harsh conditions of the Great Depression. John Stossel reports in a recent column that the media is reacting more negatively to economic news than their counterparts in the early 1930s.

As we have previously noted, not everyone agrees with such dismal forecasts of the economy. In this month's The American, W. Michael Cox, a Senior Vice-President and Chief Economist at the Dallas Federal Reserve, and Richard Alm, the bank's senior economics writer, argue that our economy is doing quite well in historical terms. Compared to our grandparents' generation, real incomes have risen, productivity has increased, and gasoline is cheaper per hour of work. Moreover, we enjoy a greater standard of living, safer workplaces, more leisure and access to luxury products unimaginable to previous generations.

Cox and Alm argue that our current economic struggles are a mere blip in economic progress:

Taken together, it’s enough to shake our faith in American progress. The best path to reviving that faith lies in gaining some perspective— getting out of the short-term rut, casting off the blinders that focus us on what will turn out to be mere footnotes in a longer-term march of progress. Once we do that, we see the U.S. economy, a $14 trillion behemoth, is doing quite well, thank you very much.

So, as the authors ask, "How are we Doing?"

HT: Jeff Jacoby

Addendum: Robert Samuelson agrees that we are not heading towards a depression.

Demand curves still slope downward

A headline from the Boston Metro "U.S. gas demand falls, prices blamed". According to a report issued by MasterCard, U.S. gasoline demand fell 3.3 percent.

I'm glad to know that my Econ 101 class was right and that demand curves slope downward. Prices continue to act as a signal for people to their alter behavior, in this case by buying less gasoline.

Tuesday, July 22, 2008

Homeland Inefficiencies

Interesting paper on aviation security from a couple of Aussies at the University of New Castle:

In particular, significant expenditure has been dedicated to two aviation security measures aimed at preventing terrorists from hijacking and crashing an aircraft into buildings and other infrastructure: (i) Hardened cockpit doors and (ii) Federal Air Marshal Service. These two security measures cost the United States government and the airlines nearly $1 billion per year. This paper seeks to discover whether aviation security measures are cost-effective by considering their effectiveness, their cost and expected lives saved as a result of such expenditure. An assessment of the Federal Air Marshal Service suggests that the annual cost is $180 million per life saved. This is greatly in excess of the regulatory safety goal of $1-$10 million per life saved. As such, the air marshal program would seem to fail a cost-benefit analysis. In addition, the opportunity cost of these expenditures is considerable, and it is highly likely that far more lives would have been saved if the money had been invested instead in a wide range of more cost-effective risk mitigation programs. On the other hand, hardening of cockpit doors has an annual cost of only $800,00 per life saved, showing that this is a cost-effective security measure.

That's not pocket change. Any idea on how this has gone unnoticed?

Why are we surprised?

The Wall Street Journal is reporting that teenage unemployment could be at its highest rate in decades:

A weaker summer employment market, stemming from an anemic economy and higher age requirements for many jobs, has resulted in a idle summer for many teens. Almost one in four 16- and 17-year-olds can't find work, and the Northeastern University Center for Labor Market Studies found this summer's teen employment rate could reach a postwar low. That decline could have implications far into the future.

...

Howard Rosen, an economist with the Peterson Institute for International Economics, said that though teenage labor data are volatile, the figures could indicate a problem in the teenage job market. He said higher minimum wage requirements may be leading employers to favor older workers.

A higher minimum wage encourages employers to move away from the use of unskilled teenagers. Typically, they will give more work to current employees or hire more skilled workers instead. The Fair Minimum Wage Act of 2007 boosted the federal minimum wage from $5.85 to $6.55 this summer and to $7.25 next summer - that's a 24% increase over two years! Are we to be surprised that a dramatic increase in the minimum wage is followed by a dramatic jump in teen unemployment?

BHI did a study of a proposed minimum wage hike in Massachusetts several years ago and found that it would hurt low wage workers - the exact people that it was supposed to help.

Politicians love raising the minimum wage because it makes them feel good about themselves. If they paid attention to the actual consequences of their actions, they would feel a lot different.

Government and Free Markets?

This blog likes to identify how the absence of a market system in the allocation of scare resources cannot be solved efficiently by government intervention. Secretary of Transportation Mary Peters makes a compelling case for a free market solution to congested airports by illustrating the virtues of a peak pricing system for runways during rush hour--something that's clearly lacking today:

You’re already familiar with the concept of demand-based pricing. It’s why using your cellphone at night is cheaper than making a call on your lunch hour and why renting a beach house in New Jersey costs more in the summer than in the winter.

Under the current system, however, the airlines pay the airports the same price (based on aircraft weight) for flights at heavily congested times as every other time.

These weight-based prices mean that there’s no incentive for airlines to use larger planes, which can move more people during busy flight times. In fact, using smaller planes keeps demand — and ticket prices — higher. It should come as no surprise that delays at popular flying times and into popular airports have exploded in recent years...

After all, the airlines themselves lower ticket prices to attract passengers when demand is low and then raise prices to maximize revenues when demand is high. What would happen if airlines were required by the government to charge the same ticket price for travel on Dec. 24 as they charge in the middle of September? There would either be rationing of extremely scarce seats on Dec. 24 or exorbitantly high prices for widely available seats in the middle of September. In either case, this inefficient outcome would damage the economy broadly and the aviation sector specifically.

Yet that is exactly how airports charge airlines for the use of their terminals and runways.

Even as airfares at Logan Airport continue to rise while the number of flyers continues to fall, a peak hour pricing system would improve efficiency.

Sunday, July 20, 2008

Planning the City

Last week's Boston Sunday Globe Magazine contained a profile of Kairos Shen. He is the new chief planner for the city of Boston and is described in the article as "lead visionary" for the city.

The Globe printed my letter to the editor in today's magazine.

After Mayor Menino finishes my reading my letter, I will gladly loan him my copy of The Death and Life of Great American Cities.

Addendum: BHI reviewed Jacobs' The Nature of Economies back in 2000.

Saturday, July 19, 2008

Slim Pickens When It Comes to Economic Sense

One impression that you get from the latest pronouncements by the anti-global-warming crowd is that they are, to a man, innocent of the discipline of economics.

I have already commented on Al Gore's convoluted reasoning with respect to electric power: While his proposal to wean the U.S. electric power industry off fossil fuels in 10 years sounds bold and imaginative, it is, in fact, nonsense. Gore's problem is not that U.S. electric power companies burn fossil fuels; his problem is that those fuels are valuable for producing energy and will remain so as long as they offer a cheaper source of energy than the alternative. Someone, whether U.S. electric power companies, foreign power companies, or some other energy consumer is going to gain access to those fuels and burn them. Meanwhile, under Gore's proposal, U.S. electric power consumers will just subsidize these other consumers to burn the very fuels that could have been used more efficienctly as they currently are.

We are getting further nonsense from billionaire T. Boone Pickens. His obsession is over our "dependency" on foreign oil, on the huge "wealth transfer" that results from U.S. oil imports. In fact our dependency on foreign oil is of exactly the same significance as our dependency on foreign coffee. We import most of what we consume when it comes to both products and we send dollars to foreigners to buy both. The reason we do this is because it would be more costly to try to produce all of our coffee or all of our oil at home.

Do we suffer when jihadists and other lunatics threaten our oil imports? Sure. Do we suffer when oil dollars go to fund the efforts of the same lunatics to kill us? Sure. But somehow goading U.S. electric power companies into using wind power to the exclusion of foreign oil or natural gas does nothing to increase the reliability with which those companies supply the end product, which is electric power. Wind power is itself unreliable and requires backup in the form of traditional power sources in order to work. And it does nothing to stop the jihadists from killing us. They will continue to sell oil for a lot of money until such time as the private sector, motivated by high oil prices, discovers a way to make electric power and other power more cheaply using renewable and non-carbon fuels. (Actually, there is another way, and it's called nuclear power. But that's another story.)

There is no good solution to the dependency problem except for someone in the Arab/Muslim to convince the jihadists that they could find better uses of their time than blowing up oil facilties and generally causing their famous brand of mischief. But wait, isn't that what the government of Iraq is trying to do now? It seems that the most effective way to increase energy reliability and to discourage lunatics from disrupting oil supplies and killing us is to drill for oil at home and to fund the U.S. Army.

Friday, July 18, 2008

Al Gore, Prohibitionist

Al Gore wants to be Rachel Carson but has revealed himself to be Carrie Nation. He talks about protecting the environment, when all the while he really just wants to banish fossil fuels from the marketplace. There is no better example of his prohibitionist mentality than his recent demand that the United States produce 100% of its electricity from renewable and carbon-free sources in 10 years.

Only about 30% of our electricity currently comes from these sources. The question is what will happen to the fossil fuels that are used to make the remaining 70%, once those fuels are no longer used to produce electricity. The answer is that they will find their way to the market place to be used, as they are now, to produce energy, whether in the United States or abroad. A “strategic initiative” that is aimed at substituting alternative fuels for fossil fuels in the production of one kind of energy is doomed to failure unless it somehow eliminates the value of using the same fossil fuels to produce other kinds of energy.

If Mr. Gore really wants to spur the United States and other countries to use alternative fuels to produce electricity or any kind of energy, he should just sponsor legislation to prohibit the use of fossil fuels. Otherwise, he is just blowing smoke.

Thursday, July 17, 2008

On my reading list


Just arrived in the mail, J. Patrick Rooney and Dan Perrin's new book America's Health Care Crisis Solved. We'll be reviewing it ASAP. Meanwhile, from the publisher's press release:
America's Health Crisis: Solved shows that the current health care crisis is not about the care itself: American health care remains the best in the world. Rather it is a crisis of access, insurance, transparency -- and this crisis has been created by government meddling in health care markets over many decades. Rather than look for ways for government to solve the problem, Rooney and Perrin show that government is the problem. To fix this increasingly broken system, we must take health care decisions out of the hands of bureaucrats and return them to those with the most interest in quality, affordable care -- the consumers themselves.
The authors' blog is here.

You Ain't Seen Nothing Yet

The Globe is breaking a big story in today's paper on the Big Dig, the gift that keeps on giving. (Warning: If you have high blood pressure, read no more.)

What started out as a $2.8 billion project in 1985 is today projected by the Globe to cost $22 billion (that's $7 billion more than the last estimate). And to think some of the Big Dig boosters still think it's a bargain!
The Big Dig, officially known as the Central Artery/Tunnel Project, has been beset by financial and other problems including the death of one person. It's funding has also rested on a myth, says the Globe. The state taxpayers' share of the mega-project is a staggering 73 percent. And it's going to get worse. State transportation officials are considering increasing tolls on the turnpike and adding them on I-93.

Hindsight being 20/20, there are many unintended consequences on staking the state's future on what's nothing more than an urban beautification project that happens to serve as a road. One reason for the Big Dig's high cost can be traced to its
project-labor agreement(PLA) status. What's a PLA? Find out here.

BHI's Tuerck on Global Warming Legislation

In this month's edition of Carolina Journal, David G. Tuerck argues persuasively that global warming alarmists ignore -- if not diminish --- the economic costs of climate change mitigation. The tendency among activists and others calling for more aggressive policies against GW rests on a claim that going green will be an economic stimulus. That's not the case.

Tuerck contends the foundation of such economic analysis is based on flawed methodology. The debate could use a dose of more rigorous cost-benefit analysis, a domain left better to economists than environmentalists.

Earlier this year, the Beacon Hill Institute conducted a peer review of the Center for Climate Strategies' (CCS) proposal for climate change legislation in North Carolina. The whole report is available here. Tuerck explains his critique of the NC-CCS:
And the trouble with [the NC-CCS] representation is that it doesn’t make any sense. You can’t create jobs that are good jobs that are adding to the state economy by shifting workers from more productive to less productive activities. You can’t create good jobs, the kind of jobs we want to create, by increasing energy costs, by increasing the price of electricity, by imposing what amounts to new taxes. This is not the way to create jobs. What you have to do, in order to analyze what will really happen, is look at the cost-increasing effects of the legislation, look at the taxes that would be implicitly imposed, and sort out the negative effects that these actions would have on the state economy. You can sort out those effects, as we have tried to do, and you can identify them for their negative effect on jobs and the like. And then, when you’re done with that, you can ask the question, “Is it worth it to pursue this legislation given the negative effects that will actually be imposed?” All these claims about job creation and the like, though, are bogus claims and unsupportable by even the most na├»ve sort of economic analysis.

Cost of Goverment Day for Massachusetts

It took Americans until July 16 to pay for the total costs of federal, state, and local government according to Americans for Tax Reform. Grover Norquist "Happy Cost of Government Day" noted that it took until yesterday for Americans to pay federal taxes, state and local taxes, and pay the costs associated with federal regulations, and state regulations. Residents of Massachusetts are still paying though, they won't have paid for all governmental costs until July 21. By this estimate, people in the Bay State work 202 days to pay for the government.

The Tax Foundation does a similar, less subjective study, looking at federal and state and local taxes to determine the Tax Freedom Day. Massachusetts celebrated Tax Freedom day on April 28. The Bay State paid five days more worth of taxes than the national average (April 23).

The costs of regulations are significant. Government regulations add so much to the tax burden, that Massachusetts taxpayers have work an additional 89 days just to pay for regulations.

Senator Obama's Capital Gains Tax Plan

Presumptive Democratic presidential nominee Senator Barack Obama (D-IL) supports raising the capital gains tax from 15% to 25%, an increase of 67%. Economic growth is determined by a nation's investment in both human and physical capital. An increase in the capital gains tax will reduce investment in the stock market and reduce future economic growth.

Many believe that an increase in the capital gains tax will only affect the "wealthy" or Wall Street stockbrokers. However, virtually all citizens are affected by an increase in capital gains taxes. Pensions and 401k plans are directly affected by the capital gains tax and the direction the stock market takes in response to the tax. All citizens are affected by lower economic growth that results from low investment. If Senator Obama wants to raise the standard of living for Americans, he should abandon his plan to raise the capital gains tax.

Wednesday, July 16, 2008

Electoral College Debate

Massachusetts is currently debating the National Popular Vote Bill. Last week, the House of Representatives passed the bill by a wide margin: 116-39. The Senate is scheduled to vote on the bill tomorrow or early next week.

Defending the electoral college system, Boston Globe columnist Jeff Jacoby prefers the status quo and believes the NPV is a bad idea.

Supporters of NPV believe that presidential candidates would be forced to pay attention to all states rather than swing states. But there's another way to get their attention.

In 2003, James D. Miller, an economist at Smith College, suggested that Massachusetts modify its electoral college system from the current winner-take-all format to proportional representation. Miller argues that this change would force even Democratic standard-bearers to actively campaign in 'safe' states like Massachusetts.

Here is my take on the electoral college.

Moral Hazard and Bailouts II

Governor Patrick is proposing a bailout of the Massachusetts Turnpike Authority.

The House, acting swiftly at the administration's request, gave initial approval yesterday to legislation that would allow the Turnpike Authority to use the state's higher credit rating to refinance its debt to lower its interest costs. The move means taxpayers would be responsible for the turnpike's debt if the agency defaults.

Putting aside the history of mismanagement by the Massachusetts Turnpike Authority and the sorry history of the Big Dig, what incentive do the members of the Turnpike Authority have to make sure taxpayers don't end up shouldering the risk?

Unlike the private sector, where shareholders keep management close to the vest, the overseers of public agencies are long gone after making critical decisions. Such political appointees to the turnpike board will not be around 10 years from now. There isn't an incentive to think long-term.

The debate over financing public infrastructure is not exclusively a political problem to pin upon Democrats or Republicans but a public choice problem. The question is "what is the proper institutional setting to prevent the creation of moral hazards in the first place?"

Affordability of gasoline is at 1960 levels

The Cato Institute has a great blog post looking at the gasoline affordability index. As hard as it is to believe, today's gasoline affordability is the lowest it has been since 1982. That puts the affordability equal to 1960 levels. Cato says one reason for increased affordability is due to the rise in disposable personal income.

Read more.

Tuesday, July 15, 2008

The Politics of Bailouts

Yesterday, I had discussed one economic aspect (moral hazard) posed by the bailout of Fannie Mae and Freddie Mac, government-sponsored enterprises.

Today, our friends at the Heritage Foundation offer a public choice perspective by explaining why so many politicians are interested in a bailout.

A snippet:

When Fannie’s accounting scandal came to light in 2004, conservatives pushed hard for reforms to phase out Fannie and Freddie. Led by former Walter Mondale and Barack Obama campaign adviser James Johnson, Fannie and Freddie pushed back hard, raising millions of dollars for members of the relevant oversight committees and opening up “Partnership Offices” that funneled money into various housing projects in districts of key members of Congress.

This problem, with some attention, could have been solved years ago. But, as always with politics, it's worth asking, "Cui bono?" The answer is politicians who think they can always effectively address "market failure" without engendering "government failure."

Monday, July 14, 2008

Convention Problems in Denver

As the Beacon Hill Institute found in 2004, the economic benefits of hosting political conventions are often exaggerated. City officials and convention planners overrate the contributions made by conventioneers to the local economy without seriously taking into account the costs such events incur. In addition, last minute changes can upset the best estimates.

According to Politico.com, Denver-area businesses are disappointed; they don't think they'll benefit the upcoming August Democratic convention. They blame union requirements, poor communication and disorganization of the Democratic committee for the dismal prospects.

There's one more wrinkle. The presumptive Democratic nominee Senator Barack Obama will now move his acceptance speech to Invesco Field, which will increase the cost of security. Thus another item on the expense side of the ledger rather than a boost.

Measuring the costs and benefits of political conventions requires a look at what conventions displace. The key is always to make sure that business as usual occurs and that disruptions are kept to a minimum. More background on the economics of political convention can be found here.

Moral Hazard and Bailouts

Moral hazard is a concept that economists use to describe how the separation of negative consequences from an individual's actions can lead them to take risks which they would not normally take.

It is the main reason why fathers do not give their daughters access to their credit cards. The daughter, never seeing the bill her father will have to pay, is more likely to go on a shopping spree.

In much the same way, the federal government is now encouraging bad decisions on the part of mortgage companies by bailing them out in times of financial trouble. Earlier this year, the government bailed out Bear Stearns and now they are going to bail out Fannie Mae and Freddie Mac.

This may bring stability to financial markets in the short run, but it will only increase instability in the long run as corporations come to realize that taxpayers will come to the rescue anytime they make a stupid decision.

Friday, July 11, 2008

Sales Tax will Mean Trouble for Chicago, Part II

Kate Sheehan has already explained one obvious problem with Cook County's (IL) decision to increase its sales tax to 10.25%. However, economists know that there are always unforeseen economic effects to government policy. Could Chicago's sales tax have an unseen, harmful effect on its servers in the restaurant industry?

A reader made this point at the new Nudge blog written by Harvard Law Professor Cass Sunstein and University of Chicago economist Richard Thaler, who coauthored a book by the same title.

A common practice for restaurant tipping is that a diner uses the sales tax to determine the waiter's tip. For example, with a 5% tax in Massachusetts, diners generally triple or quadruple the sales tax to pay a waiter the standard 15-20% tip. The Nudge reader, who generally doubled the sales tax to figure out his waiter's tip, said he would reconsider this practice after the sales tax increase would raise the tip to a higher level than usual. The reader correctly notes that this may reduce a typical waiter's earnings with careful consumers who analyze their bills. As a result, servers will lose some of their income and purchasing power.

Not surprisingly, this is another example of a government policy that will produce unanticipated effects that harm the local economy.

Thursday, July 10, 2008

Freedom Fest

"The World's Largest Gathering of Free Minds" is currently taking place in Las Vegas, Nevada. Freedom Fest is an annual conference dedicated to bringing the leading free market intellectuals together for discussion and debate.

The theme of this year's conference is "8 Great Debates in '08?", headlined by a debate between New York Times bestselling authors Christopher Hitchens and Dinesh D'Souza. However, an intriguing undercard match-up pits Cato Tax Policy specialist Daniel Mitchell debating our own Dr. David Tuerck, Executive Director of the Beacon Hill Institute. The two men will debate "Flat Tax vs. Fair Tax."

The Beacon Hill Institute has already done extensive research on the Fair Tax. Several of our reports can be found here.

World Net Daily will provide daily coverage of the event.

Good Economists, Terrible Columnists

What is it about writing op-eds that makes smart economists say stupid things? Paul Krugman is a prime example. Few of his fellow economists dispute Krugman's rigorous academic work on international economics. His New York Times column is another story.

Apparently Nobel Laureate Joseph Stiglitz has gone down the same road with this recent op-ed:

Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy.
Stiglitz is right to say that rhetoric about markets has not always matched policy. But he's dead wrong on the facts: the introduction of more free market mechanisms into the developing world and the first world for that matter are generally prescriptions for economic growth.

The Population Bomb isn't Exploding

Government failures are causing high food prices and shortages, not overpopulation. In 1798, Thomas Malthus predicted mass starvation when he wrote An Essay on the Principle of Population. Paul Ehrlich restated this belief in 1968 in his book The Population Bomb, both men and many others, have made doomsday forecasts in which Earth's population goes beyond sustainable levels and as a result much of the population starves. The recent high food prices beg the question: has our population become too large, are the Malthusians right?

High food prices are the result of a multitude of government failures, not the size of our population. Biofuel mandates are artificially diverting farming practices away from growing food; government policies putting price controls on food, banning food exports, and protective tariffs on food are also resulting in underproduction. These policies do not allow farmers to see true price signals and as a result farmers do not produce the amount of food that is actually demanded.

Ronald Bailey has a great article on this topic at Reason.

Wednesday, July 9, 2008

Other reasons to flee

Edward Moscovitch argued in a Herald op-ed last week that the exodus of young people from Massachusetts has nothing to do with our high taxes.

Citizens for Limited Taxation's Barbara Anderson replied on Monday arguing that taxes are indeed the problem

I replied on Wednesday arguing that taxes and land-use regulations are the problem.

Tuesday, July 8, 2008

Civics Lesson for Sal

The Boston Herald published my letter concerning Speaker Salvatore DiMasi's support for the "National Popular Vote" initiative.

Civics lesson for Sal

Speaker Sal DiMasi is wrong for endorsing the National Popular Vote initiative (“Salvatore DiMasi backs abolishing Electoral College process in favor of national vote,” July 1).

The Founders instituted the Electoral College for several reasons. Many argue that a switch to a popular vote system would enfranchise more voters; in fact it would disproportionately give more power to the larger states and metropolitan areas, leaving small states with little or no influence. Candidates would concentrate on densely populated areas where their resources could be more efficiently spent to reach voters. Voters in lesser populated areas would be ignored.

Furthermore, the National Popular Vote movement assumes the traditional, two-party system will hold. This will not be the case. We would see many elections like 1860, where the winning candidate only received 40 percent of the vote. A national popular vote system would encourage regional and issue-specific candidates, making it rare that one candidate would win a majority. A major candidate could only concentrate on his regions of strength and ignore the other parts of the country.

The Founders developed a system that has worked well for 218 years. Why change it now?

John Macek III

A Liberties Czar? Bad Idea

In a break from our daily economics-related posts, I offer my letter to the editor of the New York Times.

A Liberties Czar? Bad Idea

To the Editor:

Re “How to Put Civil Liberties in the White House” (Op-Ed, June 30):

Geoffrey R. Stone argues that the federal government should create an official position dedicated to protecting civil liberties.

While Mr. Stone concedes that the federal government already has an attorney general and many other positions with the same responsibility, he misses a crucial problem: this new civil liberties watchdog would be another political appointee of the executive branch, thus likely to follow the wishes of his boss, the president.

As a presidential appointee, the new civil liberties supervisor would reflect the values of the president. His ideas about what is an appropriate level of liberty would probably not differ from the president’s.

Why should the federal government create a redundant position just to confirm the administration’s viewpoint?

If Americans are really concerned about civil liberties, they should elect officeholders who will uphold the Constitution without the urging of an unnecessary bureaucrat.

John Macek III
Worcester, Mass., June 30, 2008

Monday, July 7, 2008

Medicare may be making the primary care doctor shortage worse

Having trouble finding a primary care doctor? Medicare may be making the shortage worse according to a new study by the Harvard Medical School.

Simplify Tax Code to Boost Economy

In March, Congress passed the Recovery Rebates and Economic Stimulus for the American People Act of 2008. The bill was designed to stimulate the sluggish American economy.

In Sunday's Worcester Telegram and Gazette, I proposed a better way to stimulate long-term economic growth. The T&G liked my letter so much it named it "Letter of the Week."

Simplify tax code to boost economy

LETTER OF THE WEEK


U. S. Rep. James P. McGovern, D-Mass., said, “It’s their money and they need to decide how to spend it,” in response to the rebate checks currently being issued by Congress (“Found money,” Telegram & Gazette, June 26).

However, Mr. McGovern and his colleagues could better help the economy now and in the future by simplifying the tax code.

Americans have to waste millions of dollars and hours each year trying to figure out how to pay their high taxes.


Simplification of the tax code would leave more hard-earned tax dollars in taxpayers’ pockets, leading to higher economic growth and negating the necessity of these election-year economic stimulus packages.

JOHN MACEK III

Friday, July 4, 2008

The PhD in Economics at Suffolk University

The Economics Department at Suffolk University is pleased to announce the release of its new web ad.

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More information on the PhD program is available here.

Thursday, July 3, 2008

Recent Prop 2 1/2 Votes on Google Maps


View Larger Map

Green: Passed
Yellow: Mixed Pass/Fail
Red: Failed

Money, corruption, and political power

Janet Domenitz, of MASSPIRG, wrote an op-ed in the Globe last week blaming the ills of our electoral system on "big money" (who happens to be cousins with Big Oil, Big Pharma, Big Business, but not Big Bird).

My response was printed in today's Globe.

Tuesday, July 1, 2008

Sales tax will mean trouble for Chicago

Last February, the Cook County Board voted to raise the sales tax to 10.25%. The increase went into effect yesterday giving Chicago the highest sales tax rate in the nation -- higher than New York City and Los Angeles. Supporters of the tax hike argue that the increase will bring in an additional $440 million. But is this a realistic estimate? Since higher taxes create a disincentive, I would bet against that optimistic estimate. That's because consumers will take their business elsewhere, particularly when planning to purchase big ticket items such as appliances, furniture, electronics and professional services.

As Old Town resident David Ashamalla told CBS News, "It's kind of frustrating. I go to Best Buy or something, and high-priced electronics – it adds like $20, $30 to a TV I bought."

Every textbook used in every college public finance class recognizes two overriding principles of taxpayer behavior: (1) Higher tax rates exert a combination of positive and negative effects on economic behavior. And (2) the negative effects exceed the positive effects insofar as it is easy for taxpayers to avoid paying the higher taxes and insofar as the tax takes a bigger bite out of taxpayer income or buying power.

Moreover sales taxes are regressive. That is to say they fall more heavily on the poor who must pay more of their income for high taxed goods and services. While the revenue estimates are open to question, there's no doubt that retail sales will be rough in Chicago and Cook County. Lake County, Indiana get ready for a wave of Chicago shoppers!

BHI on the economics of political conventions

Governing magazine takes a look at the costs and benefits of this summer's political conventions. Despite the lack of economic benefits, some convention boosters obviously believe in the oncoming triumph of hope over experience.Conventions rarely live up to the economic windfall.
This year's host locations aren't willing to concede this point. Kirsten Morell, a spokesperson for the Minnesota Department of Employment and Economic Development, says her agency's analysis indicates that people who shy away from the Twin Cities during the Republican convention will either spend money elsewhere in Minnesota or visit the Twin Cities at another time. Colorado and Minnesota both expect economic windfalls of $160 million or more.

Stop the Loopholes

The Boston Globe recently weighed in on the current corporate tax reform recommending that "simplifying and lowering the corporate tax rate" would induce businesses to “locate and expand in Massachusetts.”

In its study of business taxation last April. the Beacon Hill Institute recommended cutting the corporate income tax to 5.3% and making it uniform for all corporations. Simplification and reduction in the corporate income tax would provide the necessary stimulus to grow the Massachusetts economy. It would also send a message to business that the new, slimmer code and rate would be predictable and unencumbered by exceptions. The House and Senate corporate tax bills took a pass on BHI's suggestions. There's always a next time, when the legislature may discover that its current edition of corporate tax reform doesn't go far enough.

Massachusetts House Approves Cigarette Tax Hike

The House has just passed a $1 tax hike on cigarettes in what I am calling An Act to Benefit New Hampshire Border Convience Stores. This brings the total cigarette tax to $2.51. Massachusetts will soon have the 3rd highest cigarette tax in the country.

Economists call this a positive cross-price elasticity of demand. It's a fancy way of saying that when the price of cigarettes increases in Massachusetts people will go to New Hampshire, where cigarettes are much cheaper, to buy a carton.

And with gas prices surpassing $4/gallon, you can expect people to do the rest of their shopping in sales tax free New Hampshire while they're up there.

This means less business for Massachusetts convience stores and longer drives for Massachuetts consumers. The only winner here is convience stores and markets near the New Hampshire border.

Demand Curves Slope Downward

According to the U.S. Energy Information Administration, oil consumption dropped in April to a level not seen since 2002. The idea that people consume less of something when its price increases is not a revolutionary idea. Yet some people just have a hard time accepting it. When prices increase, consumers alter their behavior: driving less, planning fewer trips to run errands or using other modes of transportation. They even buy more fuel efficient cars.

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