Ecological Knowledge vs. Economic Knowledge

You may remember the name of Dr. John Holdren from an earlier post on this blog. Former summer fellow John Macek had written a letter to the editor in response to Holdren's claim that anyone who doesn't tow the line on global warming is "dangerous."

Now NYT columnist John Tierney is reporting that Obama has named Holdren as his science advisor. Tierney has more on Holdren's troubling past here.

It looks like John has more work to do.

Currently reading: Robert E. Kelly's The National Debt of the U.S., 1941 to 2008

No book can be more timely than Robert E. Kelly's The National Debt of the United States, 1941 to 2008.

Kelly, a retired CPA, corporate executive and management consultant is currently a contributing columnist to The Salem News. In this second editon, Kelly once again deploys an accountant's eye to the hard facts and government sources with illustrative tables. With the financial crisis wrecking global markets, the news is most certainly discouraging. But long before October 2008, Kelly sounded the alarm about the behemoth national debt. Before over-leveraged firms collided with the subprime disaster, Kelly paid ample attention to the debt clock.

In the past, public debt served as a handy credit card in the hands of sober political leader,s particularly in times of national emergencies when tax revenues were insufficient for the task at hand. Even President Franklin Delano Roosevelt, whom Kelly blames for redefining the role of the federal government in the lives of American, reluctantly turned to borrowing to finance World War II, mostly because tax revenues alone couldn't fund the effort. In the aftermath, Truman realized a slightly public debt less than the one he inherited. This rare, and perhaps illusory, feat was repeated by the end of Clinton's second term which, with its surplus, which enable a fleeting idea of paying down the debt. The assault on 9/11 disabused many of the resilience of new economy and its surpluses. Wars in Afghanistan and Iraq and a generous expansion of the welfare state under a Republican administration have brought us to the edge.

By Fiscal Year 2008, the United States had amassed a $9.9 trillion dollar debt, of which $5.6 trillion is owned by the public (presumably including foreign governments.) The remaining $4.3 trillion owed by "U.S. Government bodies" could theoretically be canceled out according to some observers. The "money that we owe ourselves" argument does not solve the problem says Kelly. He's worried the news will only get worse.

Kelly adeptly outlines the massive growth of public debt starting with FDR. But the real problems began with the arrival of the welfare state under Lyndon Baines Johnson, the first modern "guns and butter" president. Johnson's Great Society was the Second -- or perhaps Third -- American Revolution, a most unwelcome event.

"Shrouded though it might be in the language of compassion, Lyndon Johnson's Great Society was nothing more or less than the most recent bureaucratic quagmire, which, when successful, reduces them to the status of dependent cogs in a well-oiled centralized machine."

What came into full play during this upheaval was the rise of the American judiciary, a common theme stressed by Kelly. The activist judiciary, reading the election returns and finding socialism in the penumbra of the constitution aided the explosion of the public debt. The use of debt to finance public goods -- roads, national defense, the court system -- evolved into a blank check for welfare spending. Legislators and a few presidents resisted. But the legal march emancipated the nation from more stringent ways.

Ronald Reagan who best understood the problem at hand, that government was in fact the problem and not the solution was a mild -- if disappointing -- improvement. He had to fight the Cold War and knew that economic growth and innovation could help topple the Russian bear without so much as a direct shot. Yet the debt grew under Reagan notwithstanding arguments designed to obscure such as the debts relative size to the GDP.

The Great Society has been joined rather robustly by the Great Bailout of 2008 a paroxysm of corporate welfare that will do more than change America's attachment to now-quaint notions of limited government and free markets. The managed economy is now all the rage; the pendulum has swung violently toward a governance of "smart-set" who believe they can best allocate the scarce resources in society. Today credit markets, tomorrow consumer behavior.

A political and fiscal conservative, Kelly takes us back to the founding fathers who round out his ideal government. He ends the book with a warning from Jefferson who distrusted excess debt. "Though I am enemy to the using of our credit but under absolute necessity, yet the possessing a good credit I consider as indispensible in the present system of carrying on war. The existence of a nation to have no credit is always precarious."

George W. Bush has had the severe misfortune of making tough but wrong choices. He closes his term by launching a bailout out of the nation's foremost manufacturers in Detroit and beyond. The founder of American public debt, Alexander Hamilton could not even begin to make sense of how we are impoverishing our children today.

Bush Crowding Out

President Bush does like to stick by his word, as we have seen.

“I've abandoned free-market principles to save the free-market system ... I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis,"

Less then a week after making this statement to CNN, the Bush administration offered $17.4 billion in taxpayer earnings to GM and Chrysler, in order to prop up companies that are producing items that currently no consumers wants, and have not wanted for some time.

In April 2008, before the government begin handing out money, Honda's sales were up 4.2% and Nissan's were up 3.6% yet Detroit's big three car companies sale's were down 10.4% (HT: International Herald Tribune)

The opportunity cost here is seen in two major areas. First, that $17.4 billion could still be in the hands of taxpayers, encouraging spending. Secondly, these companies are putting capital to use in inefficient ways. Should they be allowed to go bankrupt, the capital would be allocated, by the invisible hand of the market, to much more efficient sources. This would in-turn create more jobs then are being protected.

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,"

Too bad President Bush did not see this quote as a good thing.
(minus "disorderly," but bankruptcy is a government regulation, if it was "disorderly" would a better fix be to adjust the regulation, as opposed to throwing money at companies?)

Record Low Rate

The Federal Open Market Committee again reduced interest rates, setting the target between 0 and 1/4 percent.

This reduction now leaves the committee without any room to cut further, reducing its policy options to help the country cope with the recent economic issues. In the committee's statement different policy measures are referred to, such as;

- Supporting financial markets,
- Purchasing agency debt and MBSs, and
- Implementing the Term Asset-Backed Securities Loan Facility (loans to households and small companies).

The committee also states that, due to low inflationary pressures, the rate could remain low "for some time."

Infrastructure Spending

Reading that close to 1 million people are currently without power, a posting by Alex Tabarrok at Marginal Revolution came to mind. In his posting, he notes how when people typically think of government spending on infrastructure, new bridges and highways come to mind and he makes a persuasive argument for a different type of spending.

"Even more valuable than transportation infrastructure would be greater investment in electricity infrastructure, a smart grid."

This could include numerous national projects to put in place a "smart grid." This type of grid would be able to have "smart pricing" enabling prices of electricity to go up when demand is high, a basic economic requirement, reducing the maxium load on power stations at peak times. Additionally, this grid would be much more robust then the current system, allow at least some of the people currently effected by the ice storm to have heat and lights.

Mr. Tabarrok states that power outages cost the U.S. $100 billion a year, suggesting there could be gains if the incoming administration thinks outside the box. Additionally, a "smart grid" would be a requirement for the transportation of energy, a key pillar for the expansion of green power.

The validity of government spending and its effect effect (or multiplier) has been debated recently, including this interesting article that places the Multiplier at 1.0, but looking into the short term, I suspect there will be an expansion of federal spending, in an attempt to shorten the current resession.

How Much Would You Pay?

Governor Blagojevich stands accused of attempting to sell President-Elect Obama's vacant seat in the U.S. Senate. Among other things, he asked for a very plum position at a non-profit or union job. His wife was part of any prospective deal.

Obviously a U.S. Senate seat has its value to each person and, in the case of Blagojevich, his spouse. Andrew Roth takes a crack at calculating the value of this open seat and comes out with a NPV (Net Present Value) of $6.2 million. However, this number is underestimates the what can be termed as the going price, considering in the 2004 election candidates for Illinois senate seat collectively spent $17.25 million.

There's another problem with this estimate. In accounting for only possible benefits, Mr. Roth makes a mistake similar to those made by environmentalists touting the economic returns of green power such as the number of jobs. If jobs were a benefit employees would pay their employers for them. For me the costs of a political career (including the deal-making with high-maintenance peers on a daily basis) would signal that the costs are much higher than the benefits.

This might be one of the many reasons that I was not asked to place a bid on the senate seat.

Biodieseling: the mirage of energy independence.

In May 2005, President Bush signed legislation creating federal subsidies for domestic biodiesel production. Along with supporters of biofuels, the President argued:

“... every time we use homegrown biodiesel, we support American farmers, not foreign oil producers.”

The reduction of baseline oil imports was a goal of the $1 per gallon tax credit, funded mainly though debt and the income tax payments. However, as is the case with most government-induced price distortions, unforeseen consequences came into play.

In 2007 almost 60% (291 million gallons out of 490 million gallons) of domestic production was exported. In the first eight months of 2008, an estimated 511 million gallons out of the 600 million gallons of biodiesel were exported rather than consumed domestically.

This means that $600 million was spent to replace 89 million gallons of oil. Since we import about 60% of our oil, we reduced our "foreign oil dependence" by 52 million gallons or a cost of about $11.54 per gallon, which seems to be hardly cost-effective.

HT: The Houston Chronicle

New Hampshire's Falling Competitiveness

New Hampshire is a prime example of what Dr. Haughton warned against today in his presentation of the BHI Competitiveness Report. Complacency.

The sixth annual report, released in 2006 ranked NH #3.
The seventh annual report, from 2007, ranked NH #9.
The eighth annual report, released today, dropped NH to #17 overall.

In an apparent attempt to reverse this trend, the state, along with private donors, if offering Massachusetts business owners who are considering moving their company to NH promotional tours.

"They will be picked up at the border in a limo, whisked away to lunch, and offered hockey or skiing tickets and a night's stay in an upscale Nashua hotel...A business recruiter will pitch New Hampshire's perks over lunch before taking the business owner to visit potential relocation sites."

(HT: Nashua Telegraph)

The NH state government could affect the "live free or die" state's ability to attract and retain business and to provide a high standard of living for its residents over the long run by considering where they have relative disadvantages according to our competitiveness report. By making the state more attractive to business, the state would not need gimmicks to lure business owners.

In 4 different areas, NH ranks in the bottom 10:

• Workers’ compensation premium rates: 46th
• Crime index change 2006-2007, %: 43th
• Electricity prices per million BTU: 44th
• Science & Engineering grad. students 100,000 inhabitants: 41th

State Competitiveness Report

On Wednesday, November 19th, at 9:30 AM the Beacon Hill Institute will present its Eighth annual State Competitiveness Report at the Suffolk University Law School, 120 Tremont St, Boston.

Mass. Governor Deval Patrick will open the event, followed with a summery of the findings by Johathan Haughton, BHI senior economist and lead author of the report. A panel discussion will follow consisting of Greg Bialecki, Massachusetts Undersecretary for Business Development, John Regan, Vice President of the Associated Industries of Massachusetts, and Michael George, CEO of OatSystems, Inc.

The report measures a states ability to attract and retain business and to provide a high standard of living for its residents over the long run.

For prior Competitiveness Reports see the Beacon Hill Institute Website

Wish List cont.

History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much,

Our aim should not be more government, it should be smarter government.

2.) I wish that G.W. Bush had actually acted over the last eight years like he believed that statement of his.

(HT: Bloomberg.com)

Wish List

I heard my first Christmas song of the season on the radio, which, combined with reading this article, motivated me to start my wish list

1.) I wish my Senator would craft a bill that would make it a federal crime to reduce total economic benefit.

The BBC article informs us that Senator Dianne Feinstein is

Crafting a bill that would make it a federal crime to sell tickets to the historic event.

with the event being Obama's inauguration.

Currently 240,000 tickets are being handed out to the public, free of charge by Senators, while there are reports that tickets are going for as much as $40,000 each.

My assumption is that these tickets are going to friends of(or people that gave money to) the senators. At a minimum they are going to people who would like to see the event.

The bill that Senator Feinstein is purposing would make it a federal crime (meaning that the FBI has jurisdiction to investigate) to use the free market for economic gain, also known as Capitalism.

Using a quick cost benefit rationale, if I received a ticket I would value it at a given amount (say $100). If someone valued seeing Obama's inauguration at $50,000 and offered me $40,000 for the ticket. Common sense would lead me to sell the ticket, amassing $39,900 of benefit for myself, and allowing my counter party to gain $10,000 in economic benefits. Total economic gain to society is $49,900.

I'm not sure why the Senator decided the government needs to be involved in this issue and prevent both sides from gaining.

Due to the public perception that "deregulation" and the "free market" caused our current economic woes, I hope that my Senator will not step in the way of personal decisions.

The myth of declining wages

Steven Chapman takes on Senator Obama's favorite mis-measure of the American economy: wages.

[Obama] makes a habit of claiming that "wages are shrinking," working families have lost ground, and the country desperately needs his "Rescue Plan for the Middle Class." His economic program rests on the unshakable conviction that everyone except the wealthy is doing worse and worse all the time. If elected, he will find sympathetic ears among Democrats in Congress, where never is heard an encouraging word.

In the midst of alarming headlines, it's easy to persuade people that things are worse than they used to be. The only problem is that aside from the transitory effects of the current turmoil, they aren't.

So like most politicians, Obama predicates his economic plan on a diet of fear that overlooks the ubiquitous economic progress of the last 25 years. He should know better. After all he's the candidate of hope.

The mistake made by the School of Gloom is looking only at wages, narrowly defined. According to the Bureau of Labor Statistics, average hourly earnings of production and nonsupervisory workers, adjusted for inflation, fell by 4 percent between 1975 and 2005. But those figures deceive because they omit fringe benefits like health insurance, pensions and paid leave, which make up a bigger share of total compensation than before. The numbers also rely on a mismeasure of inflation.

When those flaws are corrected, a very different trend leaps off the page. Median wages, says Fitzgerald, rose 28 percent between 1975 and 2005. Nor were the gains restricted to Bill Gates and Hannah Montana: Significant gains occurred in the middle as well.

The same pattern holds for households. The figures that suggest families are struggling to stay even overlook some types of income, and they don't account for the fact that households have gotten smaller on average. After accounting for such things, Fitzgerald found that "inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006."

None of this alters the fact that some people have done worse. Domestic and global competition, which raise living standards, also spell trouble for many companies and workers. A 50-year-old who loses a $30-an-hour job on the Chevy assembly line may never find anything comparable. But the steady, broad rise in living standards makes it clear that—at least until recent months—our economy consistently spawns more good jobs than it destroys.

Panel Discussion Video

I am proud to present the the October 21st Panel Discussion on the Federal Financial Bailout co-hosted by BHI video!

It is in .mov format, so Quicktime is required.

Moderated by Professor Haughton, the panel discusses different economic aspects of the current financial crisis, including who is to blame, details of the "Bailout Bill" and the roots of the crisis.

Panelists included:

Lynn E. Browne, Executive Vice President, Federal Reserve Bank of Boston
Kevin M. Cuff, Executive Director, Massachusetts Mortgage Bankers Association
Henry Kim, Associate Professor of Economics, Suffolk University
Jeffrey Miron, Senior Lecturer in Economics and Director of Undergraduate Studies, Harvard University

Running time is about 90 min.

BHI Releases Question 1 Study

On Tuesday BHI released a new study on the impacts that Question 1 would have on state residents. The majority of the current research on the effects of the elimination of the state personal income tax looks at an all or nothing case, with both sides arguing that the others vote would lead to lower economic outcomes.

The real world, especially politics, rarely operate with black or white but more often gray areas. Using this rational we examined cases where the Commonwealth could cut line-item spending to that of comparable states, thereby supplying the same amount of services of states such as New Hampshire, Colorado and Texas and increasing other taxes. This template could be used by the legislature to get though the income tax elimination, should voters support the ballot measure, and expand the economy.

The cuts in service to comparable states levels accounted for 70% of the lost income tax revenue. The remaining 30% is made up thought cost cuts (amending the state Prevailing Wage Law) and higher sales and property taxes.

These adjustments would enable the economy of Massachusetts to grow by 80k jobs and increase disposable income per household by $1,461.

Suffolk panel discussion on the federal financial bailout

BOSTON – (October 13, 2008) – To better explain the policy implications of the $700 billion bailout passed recently by Congress, the Department of Economics at Suffolk University will host a panel discussion, titled “The Current Economic Crisis: How Did We Get Here? Where Are We Headed?"

The discussion will take place on Tuesday, October 21 at 1 pm at the C. Walsh Theatre, Suffolk University, 55 Temple Street, Boston.

Confirmed panelists include:

Lynn E. Browne, Executive Vice President, Federal Reserve Bank of Boston
Kevin M. Cuff, Executive Director, Massachusetts Mortgage Bankers Association
Henry Kim, Associate Professor of Economics, Suffolk University
Jeffrey Miron, Senior Lecturer in Economics and Director of Undergraduate Studies, Harvard University

The hour-long discussion will be moderated by Jonathan Haughton, Professor of Economics, Suffolk University and will be followed by questions from the audience.

The themes to be addressed by the panel include:

•The institutional roots of the crisis: How much is Fannie Mae and Freddie Mac to blame? What about the Community Reinvestment Act? What about the concern over redlining?
•The economic roots of the crisis: What role did securitization play? Mark to market? The subprime lending craze? The housing bubble? Lack of oversight and regulation?
•The extent and depth of the crisis: Have we reached a bottom? When will we reach a bottom? What are the prospects for a long recession?
•The virtues (or evils) of the bailout: Did we need it? Will it do more harm than good?
•The outlook in the light of the current election season: What will the next administration do?

For more information contact:
Frank Conte, Director of Communications, Beacon Hill Institute, 617-573-8050
fconte@beaconhill.org.

Police Prevent Workers from Following the Law

This morning Massachusetts Water Resources Authority workers, trained as flaggers, attempted to complete their job of ensuring safety during routine maintenance around a manhole.

Unfortunately, the local police union felt that using their publicly-appointed enforcement to prevent the MWRA workers from completing their job, would also help their private interests. These MWRA workers were reporting to jobs which, thanks to D. Patrick's reform, previously paid Everett officers $42 an hour. After being forced off the site, someone left a bumper sticker on the manhole that said:

"Police Details Save Lives Governor Appointed Flagmen Won’t"

. These are the wrong-headed sentiments or Fevere Capt. James Guido's statement, who also had public road maintenance stopped. A clear cut example of conflict-of-interest.

“Your plan is faulty and we’re not going to allow you to work,”

My question this. If I found a government plan "faulty," say a plan for the union wage to be paid on all state construction sites, and I prevented these workers from preforming their job, what would happen?

Hat Tip: Boston Herald

An embarrassment of riches

So many entries, so little time! The Concise Encyclopedia of Economics is online.

Pres. Bush on Economic Crisis

The current economic issues in America are so complicated and intertwined, that I won’t even pretend to have an analysis. But, as I’m sure most readers did, I listened to Bush speak last night. After all it is Bush and his administration that has to deal with this issue now, as McCain and Obama are merely senators in the short term.

Two quotes jumped out at me, and hopefully someone can post a comment to help me understand the rational behind them.

“Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.”

Nice that he attempted to throw a bit to the economists, but the last part is where I have an issue. Why is this a problem? The market will go back to equilibrium. Yes, people will suffer, but that is because they either overpaid for a house or signed a mortgage that was above their means. Why should taxpayers have to pay? The government getting involved will merely add to more distortions.

“The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal.
And when that happens, money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back.”

Now this made me wonder, why would the American Government be the only place with the patience and resources to buy this? I know the Chinese Sovereign Wealth Fund has some cash, as well as some other Oil producing nations. Certainly other countries have a more balanced budget, supplying them with resources.

This does not even consider the private sector, which is willing to purchase assets that will “return to normal”. The fact is that the private market does not see these as investment worthy, so please do not try to convince us that the Treasury is doing this to break even.
Secondly, if we are buying at “current low prices” and the market for them will “return to normal” why not just say that the Treasury will make a profit, instead of just being “paid back”? Does Bush consider that to much of a stretch to pull off?

This plan that Bush is supporting comes from Paulson who declared in April 2007 that

"All the signs I look at" show "the housing market is at or near the bottom," Paulson said. The U.S. economy is "very healthy" and "robust,"

Not sure I would take his word to predict that these securities will be worth holding for a long period of time. If he truly believe this I'm all for him using his savings to make a fortune, but please don't use the Taxpayers.

America's Economic Myths

Suffolk University Master in Economic Policy student David Saied debunks some commonly-held economic myths over at the Ludwig von Mises's web site.

My personal favorite is a put-down of the unfortunately popular catchphrase: "energy independence." Both McCain and Obama would do well to have a quick look at this paper, as it seems one of the few things they both agree on is false.

The high price of oil has nothing to do with its origin; the price of oil is determined in international markets. Even if the United States were to produce 100% of the oil it consumes, the price would be the same if the worldwide supply and demand of oil were to remain the same.

Read the whole article.

EOT Cost Report

The Executive Office of Transportation and Public Works (EOT) has released its Road Flagger & Police Detail Cost Report & Analysis. The EOT findings include projected cost savings of between $5.7 million and $7.2 million in the first year. This is the money that the police union is working to preserve with the rent-seeking activity exclusive to the Commonwealth of Massachusetts.

The report leaves out any positive effects private flagging firms would bring as a result of competition. By letting the market set the rate, the Commonwealth could reap the benefits of lower wages.

The EOT Report concludes:

Under the draft road flagger and police detail regulations and the revised traffic management plans, the Commonwealth will realize cost savings through lower hourly rates for road flaggers, efficient use of road flaggers and police details on public works projects, and through greater control over the administration of the traffic management plan.

Government is not an efficient entrepreneur

Barack Obama thinks that government can pick a winner and his industrial policy suggests that green jobs will help grow the U.S. economy.

At last month's DNC, Obama claimed that he will “invest $150 billion over the next decade in affordable, renewable sources of energy” creating “five million new jobs that pay well and can't ever be outsourced.”

Not so fast with those job numbers says John Stossel who takes on Obama's major premise that government directed "investment" to create Green Jobs is something that he should be proud of. Obama's claim misses the larger point: government is a lousy investor subject to the push and pull of politics.

1.) Stossel reminds us "Alaska Rep. Don Young claimed the infamous "bridge to nowhere" would create jobs." Digging a hole then filling it is also creates jobs, but people would not consider that a benefit.

As BHI research economist Ben Powell has noted numerous times, “Jobs themselves are not a benefit; if they were, workers would be paying their employers for the privilege of working, rather than vice versa! It is the value created by performing those jobs that is the benefit, while doing the job is the cost an individual must pay to obtain a benefit.”

2.) Stossel also questions the idea “that Obama knows how best to 'invest' the $150 billion.” I have always held a firm belief that entrepreneurs invest much better then any politician. The entrepreneur risks their own money, and therefore will suffer any costs of a poor investment, encouraging them to measure the risk very carefully. The government risks my, and your, money so the costs are merely passed onto taxpayers. McCain suffers from the same issue, saying he “will support projects to advance technologies that capture and store carbon emissions,” funded via federal revenue. He is careful to say he is for “support,” as he is against “subsidies." Six one way, half a dozen the other.

Green jobs are touted as a welcome byproduct of climate change legislation. In truth it is taking money out of the private sector and putting it into a government that take a cut. When an indepth look is taken and the hand waving and populist rhetoric has been pushed aside, current climate change strategies that consist of a mixing of heavy handed government regulation often fail to meet the basic criteria of cost-benefit analysis.

More of this line of critique can be found here at BHI:

The Faulty Economics of Colorado's Climate Change Action Plan: A Peer Review

The Economics of Climate Change Legislation in North Carolina

Peer Review: Minnesota Climate Mitigation Action Plan Cost-Benefit Analysis

Boston's economy still strong

According to the latest Beige Book, the Boston economy is strong. A little good news in a cascade of gloom should always be welcomed.

The Boston-area economy is still getting banged up, especially the manufacturing, housing and commercial real estate sectors.

But the local economy overall appears to be weathering the nation’s economic storm somewhat well, with the high-tech sector still growing and adding jobs, according to a new survey released yesterday.

The Federal Reserve’s “Beige Book” - a compilation of interviews with local businesses - says the Boston and New York economies are showing “signs of stabilization,” while other areas of the country are experiencing “weak” and “soft” economic conditions.

The Boston area’s retail sectors, earlier hit by a cutback in consumer spending, reported “mixed or little change” in activity since the last Beige Book report in late July, the latest report said.

Tourism is doing “surprisingly good,” despite high gas prices that have discouraged travel around the country, the survey said.

Boston's diverse economy is an asset.

I, Pencil

Not many short stories can claim an introduction written by Milton Friedman that mentions both Adam Smith's thoughts on the invisible hand and Friedrich Hayek's thoughts on the importance of dispersed knowledge, but Leonard E. Read's short story I, Pencil is able too claim just that. Few other authors can bring the making of a pencil and the free market together in such a basic and understandable way.

~Leave all creative energies uninhibited

Globe publishes BHI Op-Ed on prevailing wages

Taking on the canard raised by police unions and paid details, we take a look at the prevailing wage.

GOVERNOR DEVAL PATRICK'S announcement that the state will substitute civilian flaggers for police details on public-works projects represents a watershed in Massachusetts politics. A Democratic, pro-labor governor taking on one of the state's most powerful unions - who knows where this could
lead?

Skeptics characterize the action as more form than substance. The Legislature put locally authorized construction projects (as opposed to state projects) temporarily off limits for civilian flaggers. And the unions ceaselessly argue that the state prevailing wage law will prevent any real savings from being captured.

In fact, the governor has shaken up the status quo. Intentionally or not, he also exposed the much deeper flaws that run through state labor policy.

Consider the unions' argument about the prevailing wage. They point out that the prevailing wage for civilian flaggers is about the same as the cost of hiring police details - an amount approaching $40 per hour. Because contractors have to pay the prevailing wage on public works projects, the state won't save any money by substituting civilian flaggers for police details - or so they argue.

By making this argument, the unions have done us a service. If a law compels the state to spend the equivalent of $80,000 a year for someone to flag down oncoming traffic, then it's time to rethink the law.

Read the whole Op-Ed.

A Crack in the Dam

Today's Boston Globe, citing sources close to the new regulation, hopefully proves my prior judgment of D. Patrick might have come a bit early and been incorrect.

It seems that Patrick is indeed willing to stand up to rent seekers and has taken the first steps to opening up the flagger labor market. Based on the unnamed sources, the "plan, which will be developed by the Massachusetts Highway Department, will delineate when police details should be used and when civilians in bright vests with flags will suffice."

This does not seem to change how municipalities current operate, but as David Tuerck, Director here at BHI states"There's a crack in the dam now... the governor has shown a great deal of political courage in taking this step."

Hopefully this injection of competition will reduce the number of cops that I typically witness on my walk to work who could be put to use preventing crime instead of adding thousands to their annual salary and inflating the state budget.

Police Details and the Road to Serfdom

See this letter to the Boston Herald:
(http://www.bostonherald.com/news/opinion/letters/view.bg?articleid=1111714&format=comments&cnum=2)

It provides a good illustration of what I have long seen as the key implication of Friedrich Hayek's argument in his best known book, The Road to Serfdom: that the restrictions on personal freedom imposed on ordinary citizens by the looting class beget further restrictions, which beget still further restrictions until there is no one left for the looters to loot. At some point, the motto, "We are all looters now," becomes apropos.

Massachusetts is the only state that requires public utilities and public works contractors to use paid uniformed police officers at work sites along public roads. Other states use civilian flaggers, who are paid far less.

The pay for the Massachusetts-style "police details" is almost $40 per hour, and the practice of using them is characterized by rampant featherbedding. Massachusetts drivers commonly see detail police ignoring the traffic they are supposed to direct while talking away on their cell phones or chatting with construction workers. The Beacon Hill Institute just conducted a poll showing that 86% of Massachusetts voters want to end this expensive perk.

The letter to which I provide a link here comes from a police union official who is trying to preserve the union monopoly that presides over the hiring of police details. The Governor of Massachusetts, thanks in large part to revelations from the Beacon Hill Institute, is considering a proposal to end this monopoly and to introduce the use of civilian flaggers on a limited basis.

I urge readers to take a number of lessons from this letter and from the comments that follow (of which I offer one). The first lesson is that no claim is too absurd to make when it might serve the goal of permitting the person making the claim to pick the pocket of someone else. Consider the claim that the state could not save money by hiring civilian flaggers since state laws would require the payment of a "prevailing wage" that is no less than the wage paid the police. That implies that state taxpayers and rate payers should have to pay something approaching $80,000 a year to do a job that could be performed by any functioning human being after a few hours of training. Suffolk University hires PhDs for less than that.

The second lesson goes back to my point that one form of looting begets another. Consider the argument that police details are a bargain because they don't require the health and pension benefits to which civilian flaggers would be "entitled." But, of course, there is no entitlement to such benefits traceable to the Constitution or any other founding document. What we have is a society in which entitlements of this kind are being imposed involuntarily on employers and, to a degree, the workers themselves. Suppose a retired police officer, who already has health and pension benefits wants to work as a civilian flagger -- a job for which he would be, by the union's own logic, supremely qualified. Under this logic he would be entitled to benefits he doesn't need and that he would happily forgo in order to make his services more competitive. Nevertheless, the union bosses use laws aimed at looting those employers who would prefer not to pay health and pension benefits as an argument for looting taxpayers who would prefer not to use grossly expensive police details.

And that isn't the end of it. An argument frequently used by the union bosses is that police details are important because police can make arrests and even respond opportunistically to crimes taking place near the work sites they are hired to work. By that logic, we should have a cop at every corner, inasmuch as the probabily of a crime taking place at a work site is immeasurably different from a crime taking place at any other point where traffic is flowing. For that matter, we should use cops everywhere that crimes can happen. No more mall cops or university cops. After all, they can't make arrests but can only detain suspects till the real cops arrive. Put a real cop everywhere, since the cost of doing that pales in comparison to the benefit.

This is but a small saga in the history of union looting, Massachusetts style. The prevailing wage law, the practice of using project labor agreements and others loom larger. But this one is worth following since it plays so heavily on our emotions. Some of us -- this writer included -- are "law and order" types who want to love the police. It saddens us to see people called to such an honorable profession embarrass themselves in this way by perpetuating a scam aimed only at fattening their wallets.

Update! The Herald published my letter this morning.

Solution Lies in the Free Market System

On Monday, John P. Holdren criticized global warming skeptics for challenging the scientific "consensus" around global warming. He also accused skeptics of stalling the political process necessary to combat global warming:

The extent of unfounded skepticism about the disruption of global climate by human-produced greenhouse gases is not just regrettable, it is dangerous. It has delayed - and continues to delay - the development of the political consensus that will be needed if society is to embrace remedies commensurate with the challenge. The science of climate change is telling us that we need to get going. Those who still think this is all a mistake or a hoax need to think again.

The Boston Globe printed my response today.

SKEPTICS OF climate change not only doubt the "scientific consensus" behind global warming but the proposed mechanism to combat global warming.

Supporters of decisive action on climate change assume that the federal government must step in and solve the global warming crisis using a "cap and trade" or carbon tax program. Advocates of these programs do not realize that both these mechanisms will severely hamper economic growth, and neither plan will slow global warming.

The only way to slow global warming is to allow entrepreneurs to create more energy-efficient products and technologies. As the demand for these products grows, entrepreneurs will naturally react to market forces and direct their energies to producing more energy-efficient products at a cheaper cost. Government intervention is not the solution to this problem, the free market is.

Another Failed Government Stimulus Program

Martin Feldstein says the last federal stimulus plan didn't work nor will a future stimulus plan or tax rate increase:

The small rise in spending in response to these tax rebates is similar to what previous studies of one-time tax cuts found. It also corresponds to what both basic economic theory and common experience imply. Although someone who receives a permanent annual salary increase of $1,000 typically would increase his annual spending by an almost equally large amount, a $1,000 rise in wealth caused by a share price increase or a tax rebate would raise spending only gradually over a number of years.

All of the evidence on one-time tax rebates implies that the Obama plan to send $1,000 rebate checks would do little to raise consumer spending and stop the decline in employment. If the past is an indicator of what would happen, the $65 billion he proposes to spend on this plan would raise consumer spending by only about $10 billion, or less than one-tenth of 1% of GDP.

The distinction between one-time tax rebates and permanent changes in net income is also important for the debate about Mr. Obama's proposal to raise income and payroll taxes. Because those tax increases would be permanent, they would cause a substantial reduction in consumer spending and aggregate demand. Moreover, as taxpayers begin to focus on the possibility of such a future tax hike, they will reduce spending without waiting for such legislation to be enacted. If Mr. Obama is looking for a way to stimulate the economy, he could begin by discarding his proposal to increase future taxes.

Here is more on Senator Obama's tax plans.

HT: Greg Mankiw

Bailouts and Moral Hazard III

First it was Bear Stearns, Fannie Mae, and Freddie Mac.

Then it was the Massachusetts Turnpike Authority.

Now it's the MBTA.

Given the nature of moral hazard, this could be quite a long series of blog posts.

Patrick Unwilling to Follow Through?

In its lead editorial today, "No Public Interest In Police Details," the Boston Herald cited a recent poll by the Political Research Center and the Beacon Hill Institute, both part of Suffolk University. The poll found that a full 86% of registered voters would prefer civilian flaggers to police details at public work sites.

In 2004, Police Details: Protection or Perk, the institute completed a study which concluded that the local police detail system is costly and doesn't improve public safety.

Unfortunately for the '09 fiscal year budget, Patrick is unwilling to stand up to the police unions, and opting instead to “coordinate with all of the interest groups.” Read this as a move to put off the issue that the Governor and the police unions hope the public forgets. But the governor ought to read the poll results a lot more closely. The show of support for reform by is coming from registered voters, voters who put Patrick in office, which ought to force his hand.

Gimmicks vs. Economics

Cities and towns have come up with the most ingenious ways to increase their rates of recycling. Framingham is a perfect example of this:

Framingham has started a new recycling program with monthly themes tied to environmentally friendly practices, a move that is apparently unique among area communities even as it reflects a trend of municipalities going green, say organizers.

The town started its program in June but had its first real event July 24, when the theme was recycling electronics. On Aug. 16, the town will host a "Shred Fest," whereby residents can take unwanted documents to the recycling center for shredding. Next month's theme is recycling at home, school, and work, with a focus on green purchasing, Framingham officials say.

"We're looking at trying to have an event that will create a buzz," said Mike Lavin, operations manager for the town's Solid Waste Division. "We want people to recycle more."

It sounds like a lot of fun, but there's a much easier way. Currently Framingham pays for it's trash collection program through taxes. As I have posted previously, a move to pay-as-you-throw (PAYT) would increase the rate of recycling without much effort from the city. It doesn't rely on people caring about Framingham pride or the environment, but their own self interest.

With PAYT, it pays to recycle.

Anti-Business Climates and State Budget Deficits

States that have unfavorable business climates generally tend to have high taxes that attempt to redistribute income across the state. Not surprisingly, states that try to redistribute income overextend themselves and run large deficits. Steve Malanga, an editor of the excellent RealClearMarkets.com, found that the top five anti-business states are running combined deficits of $33 billion! That amounts to 2/3 of all projected state budget deficits (twenty-nine states are projected to run deficits).

Development Counsellors International surveyed business executives to find out what states they thought were too hard to do business in. Executives named New York, California, New Jersey, Michigan and Massachusetts as the most anti-business states. Executives complained that these states had high taxes and too many regulations. As Malanga writes:

But any look at the states with the biggest deficits reminds us that governors and legislatures are largely the authors of their own problems, and that the biggest trouble some of them seem to have is that their taxing and chronic overspending have made them toxic to the business community.

This survey is interesting in comparison to BHI's 2007 State competitiveness Report. BHI found that the five states mentioned above had terrible fiscal policies for business competitiveness. The best fiscal situation was Massachusetts at 34th, while Michigan was 37th, New Jersey 46th, California 49th and New York finished last. However, it terms of overall competitiveness, Massachusetts finished 2nd, California 24th, New York 38th, Michigan 41st, and New Jersey 43. While state fiscal policies might have an effect on business climates, human capital, technology and security play important roles in state competitiveness.

Three Years Later: Still No Eminent Doman Reform

It was over 40 years ago that Herbert Gans chronicled the destruction of Boston's West End through so-called "urban renewal" in The Urban Villagers. The neighborhood had been home to thousands of working class Italian families when it was declared "blighted," taken by eminent domain and razed by the city. It is now home to luxury condos.

In 2005, the Supreme Court took up its first eminent domain case in decades with Kelo v. New London. The court ruled that the government can take people's land and hand it over to private developers just with the vague promise of "economic development" for the area. States across the country quickly reacted in horror and passed their own legislation limiting eminent domain.

Massachusetts was not one of those states. State Representative Marty Walz is now attempting to get legislation passed, but it looks like it is being stalled in the Senate. Local politicians predict doom and gloom if the legislation is passed, but studies have shown that just ain't so. In fact, another studied has shown that poor minorities are most likely to be victims of these land grabs.

So where exactly is the "public good" here? Is there someone out there who can explain and defend the use of eminent domain for me?

Broadband Internet as a Public Good

The governor is signing a bill today that would spend $25 million in taxpayer money to bring high-speed broadband internet to communities that do not currently have it.

I must have been out that day in economics class when the professor explained how "really fast internet" was a public good.

As federal judge Janice Rogers Brown once asked "When did government cease to be a necessary evil and become a goody bag to solve our private problems?"

On the brightside, the BHI blog will load much faster in western Massachusetts and the good people out there can more quickly download studies detailing how lower telecommunications taxes lead to more access.

Happy Birthday Milton Friedman

Were he still alive, Milton Friedman would have turned 96 yesterday. Friedman was one of the leading post-war free market economists, encouraging less government intervention and more responsibility for the individual. Friedman's success rest of his relentless ability to do what economists, almost by nature, are unable to do: speak about complicated issues in understandable terms. While most of his academic work centered around price-theory, he earned the 1976 Nobel Prize in Economics for his work on monetary policy.

Two quotes from Friedman sum up his thoughts on price theory quite well.

"Governments never learn. Only people learn."

"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."

Price signals and gas prices

Ed Glaeser has a great op-ed over at The Boston Globe on "the folly of 'fixing' energy price hikes". Nothing revolutionary, but he does a nice job of discussing how the high gas prices encourage people to use less gas/conserve energy and any attempt at lowering gas prices will only cause further problems. Prices act as a signal and the signal now is to use less.

But politicians sometimes react to high oil prices as if the Bill of Rights had bestowed on Americans the inalienable right to cheap fuel. Elected solons are now considering a Home Energy Affordability Tax Relief Act, which promises households a tax credit equal to one third of a home's energy costs up to $500. Some congressmen have called for restricting energy markets in an attempt to curb "speculation." Earlier in the election season, two presidential candidates came out for a temporary summer holiday for gas taxes.
Politicians seem to have an irresistible urge to intervene whenever voters start suffering from higher prices, but usually those interventions do more harm than good. Energy price controls were the clever idea of the 1970s, which only managed to give economists more evidence that you can't repeal the laws of supply and demand. Fixing prices below the market level, whether on oil or apartments, only produces shortages and long lines.

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

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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 naïve 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.

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?"