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

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

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

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

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

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

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

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

"V" as in victory or V-shaped recovery?

Ever the optimist, Brian Wesbury thinks the economy is turning around.

We have said from the beginning that the recession would end quickly and a V-shaped recovery would follow. Now, a combination of loose monetary policy and reforms to overly strict (and inappropriate) mark-to-market accounting rules have ended the financial panic.

He has the charts to prove his case.

Has North Carolina handed out an unfair tax break?

The problem with targeted tax breaks? They apply only to the favored few companies that government thinks will win out in the marketplace.

Charlotte Observer: Apple to build computer data center in North Carolina

Apple will come to North Carolina, investing $1 billion in a computer data center over nine years.

Gov. Beverly Perdue announced the expansion this afternoon after signing legislation that will cut the California company’s tax bill in North Carolina by about $46 million over a decade. Legislators moved rapidly last month to approve the measure, which changes the way corporate income taxes are calculated for a capital-intensive business like Apple. It is expected to be the only company that will benefit.

“North Carolina continues to be a prime location for growing and expanding global technology companies,” Perdue wrote in a statement. “We welcome Apple to North Carolina and look forward to working with the company as it begins providing a significant economic boost to local communities and the state.”

The data center is expected to have at least 50 full-time employees, although another 250 contractors could be employed to manage security, landscaping and heating and air conditioning systems. Including construction jobs, the presence of the facility could put a total of 3,000 people to work, according to Department of Commerce estimates.

The best tax system is comprised of a low rate with few or no exemptions.

Cap and trade will cost you!

RON BAILEY: Energy Price Deceit: Congress tries to hide its cap-and-trade energy price increases.

The central fact of the cap-and-trade proposal is that it will increase the price of energy. If energy prices don't go up, the goal of getting energy producers, manufacturers, and consumers to shift away from carbon generating fuels (coal, oil, and natural gas) toward low-carbon sources of energy (nuclear, solar, wind, conservation) will not be achieved.

Whatever else they are, the folks in Congress are not stupid when comes to protecting their electoral viability. They are painfully aware of the fact that, while Americans express support for regulations to reduce greenhouse gases, 77 percent in a recent ABC News/Washington Post poll declared themselves either "very concerned" or "concerned" that "federal regulation of greenhouse gases could substantially raise the price of things you have to pay for."

So in an attempt to ward off voter displeasure over higher energy prices brought about by Congressionally-mandated carbon rationing, the denizens on Capitol Hill have tacked on a number of Rube Goldbergesque policy obfuscations designed the mask the price increases. These include subsidies and tax breaks for retrofitting buildings to use less energy, setting energy conservation appliance standards, subsidies for higher mileage automobiles, and imposing a renewable fuel standard on utility companies, among many other things.

The chief technique that Congress is using to hide the mandated price increase in electricity and natural gas from voters is giving away free emissions permits to local electricity and gas distribution companies. In the ACES bill, some 30 percent of emissions permits are allocated free to local distribution companies who are supposed to sell the permits and then pass along the money to consumers as a lump sum rebate to offset their higher utility bills. Why a lump sum?

As Harvard University environmental economist Robert Stavins explains in his article on "The Wonderful Politics of Cap-and-Trade," the hope is that such rebates will compensate "consumers for increases in electricity prices, but without reducing incentives for energy conservation." Even if they are getting a rebate, higher monthly electric bills will still likely annoy voters. But let's assume that this scheme actually works as intended and blunts household displeasure about paying more for electricity and natural gas.

There's one big problem: The proposal merely shifts the price paid by consumers for energy from local utilities to other products and services. For example, Resources for the Future economists Rich Sweeney and Dallas Burtraw calculate that auctioning all of the carbon emissions permits would result in a price of $20.91 per metric ton. However, allocating 30 percent of the carbon dioxide emissions permits free to local utilities as proposed under the ACES bill would mean lower electricity prices, and lower prices would mean more consumption. The result is that there would 24 percent fewer emissions reductions in the electricity sector than would have been the case had all permits been auctioned.

More on climate change mitigation here.

BHI in the Boston Globe: Sales tax hike necessary?

BHI Executive Director David G. Tuerck in today's Boston Globe:

On this matter, it is the governor who is right and the bill's sponsors who are being "disingenuous." For one thing, the $900 million estimate apparently ignores the fact that sales taxes drive business to other states and to the Internet. Under the new law, a TV set that could be bought for $1,000 in New Hampshire will cost $1,062.50 in Massachusetts, just another reason to drive an hour to make a big purchase and to stock up, along the way, on liquor, cigarettes, and other items.

The proposed tax hike will have negative consequences for the state economy. We predict a loss of 12,666 private-sector jobs, as stores in Lawrence and Lowell lose business to stores in Salem and Nashua. And because unemployed workers stop paying income taxes, the state will lose revenue from that source even as it gains revenue from the sales tax. In fact, the higher sales tax can be expected to yield only about $674 million in new revenue when losses in other revenues are accounted for.

Before the Legislature decides to inflict a new burden on state taxpayers, retailers, and workers, it would do well to ask just why it wants to enact a broad-based tax increase in the first place. A 25 percent increase in the sales tax would be a panicky response to what was seen just a few years ago as an exercise not in fiscal ruin but in fiscal dexterity.

Gordon Brown's upcoming pluck of the goose: Britain raises marginal rates

We knew all along that Gordon Brown was no Maggie Thatcher! Here's the unvarnished Brown, class warrior.

JEAN-BAPTISTE COLBERT, Louis XIV’s finance minister, famously said that the art of taxation was like plucking a goose; the aim was to get the most feathers with the least hissing. But tax policy should aim to do more than smother protest: it should also seek to raise the most money with the least distortion to economic activity.

By this measure, Britain’s attempts to fill the fiscal gulf created by recession are a dismal failure and a lesson to cash-strapped governments everywhere. Take marginal income tax rates, announced in the British budget of April 22nd. Once national insurance is added in, effective marginal rates will climb from 31.5% to 41.5% through to 61.5% on those earning just over £100,000 ($147,000), thanks to the withdrawal of the personal tax allowance. After that, the rate will fall back to 41.5%, before rising again to 51.5% on incomes over £150,000.

The bizarre incentives of income tax are only the start. High earners also face the withdrawal of tax relief on their own pension contributions and a tax charge on the “benefit-in-kind” provided by employers’ payments into their schemes. Depending on how much the employer contributes, this will push marginal rates well above 50%. It will also discriminate against employees in defined-contribution, or money-purchase, schemes where employers match what workers put in. But the effect is not uniform; the convoluted rules will mean some high earners will get more tax relief on their contributions than they did before. What a mess.

As recently as 2006, the government drove through a reform of the pensions rules that simplified a notoriously complex system. Employees could, in effect, make pensions contributions when they felt flush and still get tax relief. Those reforms were a much-needed incentive for employees to build up their pensions at a time when many employers were abdicating responsibility for providing a decent income in retirement. The new rules return pensions to the complexity of string theory.

The best tax systems combine low rates with minimal exemptions. Businesses and citizens should be making decisions based on their economic opportunities, not the advice of their accountants. But Gordon Brown is too clever by half. He introduced a sliding scale that made capital-gains tax highly complex, and then reversed himself, introducing a single rate of 18%. The effect was both to raise the tax rates for sellers of small businesses and to introduce a vast discrepancy between the tax rates on capital and income. An attempt to introduce a levy on foreign workers (known as non-doms) was botched, and may yet drive many high-earners out of the country.

These wheezes were designed chiefly with politics in mind: all those nasty plutocrats deserved a hammering. By putting economics second, Mr Brown has made it harder to balance the books. Waste and lower growth because of poor tax policy will only make the fiscal hole harder to fill. The new tax will do little to reduce Britain’s budget deficit. On the government’s own forecasts, which assume the wealthy will not change their behaviour, the assault on the rich will raise just £7 billion. With avoidance, the tax will raise still less

A higher top marginal tax rate of 61.5% above $147,000 is going to sock a lot of people.

Herald lead editorial cites BHI sales tax study

Expanding the debate on taxes, The Boston Herald cites BHI's new study on a proposed sales tax increase for Massachusetts. The choice words are here:

That 20 percent increase in the sales tax no doubt will be filed as an amendment to the House budget on which debate is expected to begin April 27. That’s because for many lawmakers hitting up the taxpayers is easier than saying no to public employee unions (who would be asked to pay a greater portion of their health insurance under the proposed House budget) or cops (who would lose Quinn Bill pay hikes for college degrees).

But the Beacon Hill Institute study found that the 20 percent sales tax hike would “destroy 10,182 private sector jobs and reduce investment by $41.31 million per year. The average person would lose approximately $369 a year in wages.”

The tax, of course, is the most regressive and would hit low income families hardest. Also bearing the brunt of the impact would be small retailers along the New Hampshire border - already an endangered species - as Massachusetts residents head north to avoid taxes on computers and a host of high-ticket electronics.

The Institute noted that the state was already losing about 2.2 percent to 3.5 percent in sales taxes to Internet sales. And that Amazon.com’s 2008 holiday season sales increased by 16 percent over the previous year, while Massachusetts’ sales tax revenue dropped 8.6 percent for the same period.

There may be nothing that can be done to stop that kind of bleeding, but there’s no need to make it worse either. And that’s what a sales tax hike would do.

Tax increases have consequences.

A bad idea for retail in Massachusetts: Legislature again considers sales tax hike

Increasing the state's sales tax by 20 percent will have negative effects on the Massachusetts economy. According to BHI's trademark STAMP tax model, raising the rate to 6% would destroy approximately 10,000 jobs and preclude some $41 million in business investments. Sales taxes raise prices. They may raise revenue in the short-run but they have corrosive effects over the state's long-term competitiveness. A higher sales tax also means that shopping across the border in New Hampshire for big ticket items such as furniture, electronics and other home goods becomes more attractive. Moreover sales taxes (including the state's generous exemptions for necessities) are always regressive.

The BHI FaxSheet is available here.

Background on the current proposal from the Boston Globe.

Who's to blame for the fiscal crisis facing all 50 states? Reason Foundation suggests the states, for spending far beyond population growth and inflation.

The Boston Tea Party pays a visit to BHI's neighborhood

David G. Tuerck, BHI's executive director, addresses the April 15, 2009 Boston Tea Party.

BHI reads The Nation

Yes it's true, we're glad to read The Nation, particularly when it unmasks some really bad bipartisan policies.

Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry--handsomely--to use more fossil fuel. "Which is," as a Goldman Sachs report archly noted, the "opposite of what lawmakers likely had in mind when the tax credit was established."

The massive tax subsidy has barely been reported in the press, but it's caused a stir in the paper industry, which is struggling to stay profitable in the teeth of the recession. "Everybody's talking about it," paper industry analyst Brian McClay told me. "In the US and elsewhere in the world--in Canada and Brazil and Chile and Europe."

On March 24 International Paper (IP) announced it had received its first check from the IRS for a one-month period this past fall. The total? A whopping $71.6 million. "It's probably close to a billion a year of cash," McClay said. "If you look at the economics of this business, to make that kind of money today you'd have to be on another planet." IP's stock rose 12 per-
cent on the news.

The origins of the credit are innocent enough. In 2005 Congress passed, and George W. Bush signed, the $244 billion transportation bill. It included a variety of tax credits for alternative fuels such as ethanol and biomass. But it also included a fifty-cent-a-gallon credit for the use of fuel mixtures that combined "alternative fuel" with a "taxable fuel" such as diesel or gasoline.

Enter the paper industry. Since the 1930s the overwhelming majority of paper mills have employed what's called the kraft process to produce paper. Here's how it works. Wood chips are cooked in a chemical solution to separate the cellulose fibers, which are used to make paper, from the other organic material in wood. The remaining liquid, a sludge containing lignin (the structural glue that binds plant cells together), is called black liquor. Because it's so rich in carbon, black liquor is a good fuel; the kraft process uses the black liquor to produce the heat and energy necessary to transform pulp into paper. It's a neat, efficient process that's cost-effective without any government subsidy.

"Seventy-three percent of the energy we use in our mill system we produce," says Ann Wrobleski, IP's vice president for global government relations. "We feel like we're the original green industry, if you will." (In developed nations, paper is the third-largest industrial greenhouse gas emitter, behind the steel and chemical industries.)

By adding diesel fuel to the black liquor, paper companies produce a mixture that qualifies for the mixed-fuel tax credit, allowing them to burn "black liquor into gold," as a JPMorgan report put it. It's unclear who first came up with the idea--Wrobleski told me it was "outside consultants"--but at some point last fall IP and Verso, another paper company, formerly a part of IP, began adding diesel to its black liquor and applied to the IRS for the credit. (Verso nabbed $29.7 million at just one of its mills in the final quarter of 2008 for its use of mixed fuel.)

Hat tip: Mankiw.

The pitfalls of ethanol

Another reason to get rid of taxpayer subsidies for ethanol: wasted water resources.

The current Energy Secretary, Steven Chu, is no fan of corn-based ethanol, presumably because a variety of studies have suggested that it takes a significant amount of energy to produce, diluting its impact on carbon emissions. Nevertheless, the Energy Independence and Security Act sets hard targets for ethanol produced from biofuels, and the US has largely met those through corn-based ethanol to date. A study that appeared in the journal Environmental Science & Technology suggests that we should carefully consider how we meet future goals, as different regions in the US require radically different amounts of water to get the ethanol to market.

Past studies have suggested that the cost in water use for ethanol derived from corn might be high—as high as several hundred liters of irrigation water for each liter of ethanol to make it to the pump, with an added 40 liters of water used in the process of converting the corn to ethanol. Still, those estimates were based on models of irrigation use that didn't account for regional variations in use, and relied on evapotranspiration models to estimate the amount of water needed.

The new study avoids these issues by diving down into data that's available from a variety of governmental organizations. These include the Census of Agriculture and the Farm and Ranch Irrigation Survey, made available by the US Department of Agriculture and the US Geological Survey. These provide a state-by-state breakdown of the use of irrigation water, while the USDA has data on the amount of corn produced at the county level.

Crunching the numbers revealed radical differences among the states. Some of the major corn-producing states, like Iowa and Illinois, required very little irrigation to get a liter of ethanol to market (5 and 11 liters, respectively). At the other end of the spectrum, drier states like Colorado and California required staggering amounts: nearly 1,200 liters for Colorado, and a staggering 2,138 for California.

"The largest corporate welfare program in the history of the U.S."

The coming Cap-and-Trade debacle.

The Supreme Court's decision last year that the Environmental Protection Agency (EPA) has the authority to regulate carbon dioxide under the Clean Air Act and the EPA's ruling in March that carbon dioxide threatens the public's health and welfare, have put considerable pressure on Congress to act. Naturally, when the federal government puts hundreds of billions of dollars in play, it attracts a lot of rent-seekers. "The special interests that seek to derail, blunt, or tailor any new climate policy to their narrow agendas have already gathered in staggering numbers," declared The Climate Change Lobby, a study conducted by Center for Public Integrity. In 2008, more than 770 companies and interest groups spent an estimated $90 million funding 2,340 climate change lobbyists in Washington, DC.

The prospects of carbon rationing and permanently higher fuel prices are going to produce far-reaching changes in the ways companies do business and hit consumers hard in their pocketbooks. In March 2008, House Energy and Air Quality Subcommittee member Rep. Mike Doyle (D-Penn.) told the Capitol Hill newspaper Roll Call, "You are either at the table or on the menu." Mixing his metaphors, Doyle added, "This train is leaving the station." Now it's largely a question of whom it's going to run over.

The House hikes the ante on climate change bill.

No one ever sold short the ambitions of individual Congressmen. They see opportunities in every crisis. The first draft of the climate change bill casts caution to the wind (excuse the pun).

The cap-and-trade portions of the draft bill are incredibly ambitious, covering 85 percent of the economy's carbon pollution—from electric utilities to oil companies to large industrial sources, leaving out only smaller entities. The legislation would aim to cut U.S. greenhouse-gas emissions 3 percent below 2005 levels by 2012, 20 percent by 2020, and 83 percent by 2050. That's slightly more stringent than what Obama has proposed, though not quite as steep as what the IPCC has called for to avoid drastic climate impacts.

Responding to Project Labor Agreement proponents

The Globe published our letter to the editor responding to Marc Erlich's defense of Project Labor Agreements.

For the record, here is the letter we sent to the Globe.

To the Editor:

In his op-ed defending Project Labor Agreements (“Unions a stabilizing force,” March 22), Mark Erlich claims that that our first 2003 study of Massachusetts school building projects had to be “completely revised” following “a stinging critique of the data, methodology, and conclusions.”

The fact is that we updated that study when several additional months of investigation permitted us to double the number of schools in our sample. In the second study, we found that PLAs added 14% to the minimum project bid, rather than 17%, as in our original study.

Somehow, Mr. Erlich did not feel compelled to recognize that finding, or our finding in subsequent studies, that, for school building projects in Connecticut and New York, PLAs increased bids by 17% and 20%, respectively.

PLAs and the Prevailing Wage Law are aimed at protecting the union monopoly over the minority of construction workers who belong to unions. The effect of that monopoly is limit the number of construction projects that can be undertaken and to limit the number of construction workers who can be hired – a result that gives the lie to Mr. Erlich’s hypocritical expression of sympathy for blue-collar workers.


David G. Tuerck
Executive Director
Beacon Hill Institute
Suffolk University

Cap-and-Trade Translates Into Job and Income Losses for California

Anyone who thinks that solving the climate change problem will generate economic benefits should think long and hard after reading the latest report from the Beacon Hill Institute. The institute examines claims made by proponents that reducing emissions will create jobs and benefits for the California economy.

BHI on ABC's 20/20 "Bailouts and Bull"

It's worth repeating: Not all economists agree on the Obama stimulus package. BHI's executive director David G. Tuerck on John Stossel's "Bailouts and Bull" segment on 20/20:

The irrepressible urge to raise the state sales tax

Talk is resurfacing about boosting the sales tax by 20 percent. The bad penny of tax policy; it won't go away.

Top state lawmakers are seriously considering a controversial and politically risky plan to boost the sales tax by one penny to 6 percent, socking it to Bay State residents already facing possible gas and booze hikes.

Both House Speaker Robert DeLeo (D-Winthrop) and Senate Ways and Means chairman Steve Panagiotakos (D-Lowell) are eying a sales tax of 6 cents on the dollar that they say would bring an additional $750 million a year into state coffers.

“I don’t think anything can be considered as off the table,” DeLeo said yesterday, later adding he plans to pass reforms before any additional taxes are considered.

A conservative think tank blasted any talk of a sales tax hike in a tough economy, saying that even a one penny increase could mean a loss of 10,000 private sector jobs along with a $40 million drop in investment revenue.

“Any tax increase the state undertakes right now will have a negative effect on the economy because it will drive business to other states,” said Beacon Hill Institute Executive Director David Tuerck, who urged lawmakers to focus on cuts instead.

Tax hikes can be hazardous to a political figure’s health - especially during a recession - as evidenced by a recent dip in Gov. Deval Patrick’s job approval ratings. Many speculated Patrick’s plans to boost taxes on gas, booze and candy were partially to blame.

The Age of Thrift

People are holding back when it comes to spending. Here are some tips on how to be frugal.

More here.

Does it pay to be a global warming skeptic?

Among the skeptics Ron Bailey of Reason reports from the Heartland Institute's 2009 International Conference on Climate Change.

Czech President Vaclav Klaus was today's marquee speaker. He held nothing back, apparently:

Klaus also warned that powerful rent-seeking groups were riding the global warming alarmism bandwagon all the way to the bank. Rent-seeking occurs when individuals, firms, or organizations attempt to make money by manipulating the regulatory environment rather than by trade and production. Klaus cited firms and non-governmental groups that plan to profit from carbon rationing in the form of emissions permits trading and by deploying highly subsidized solar and wind energy projects.

Climate change may or may not be real; "fixing" it will be especially expensive.

Not what it seemed: GDP fall is steep

Associated Press:

WASHINGTON (AP) - The economy contracted at a staggering 6.2 percent pace at the end of 2008, the worst showing in a quarter-century, as consumers and businesses ratcheted back spending, plunging the country deeper into recession.

The Commerce Department report released Friday showed the economy sinking much faster than the 3.8 percent annualized drop for the October-December quarter first estimated last month. It also was considerably weaker than the 5.4 percent annualized decline economists expected.

A much sharper cutback in consumer spending - which accounts for about 70 percent of economic activity - along with a bigger drop in U.S. exports sales, and reductions in business spending and inventories all contributed to the largest revision on records dating to 1976.

Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky.

Meanwhile Greg Mankiw thinks the Obama administration's forecasts are a bit too rosy. The Obama forecasts are on the left (no pun intended):

2009: -1.2% -1.9%
2010: +3.2% +2.1%
2011: +4.0% +2.9%
2012: +4.6% +2.9%
2013: +4.2% +2.8%

Accumulating the difference, you find that Team Obama projects about 6 percent higher GDP in 2013 than do private forecasters.

As the eminent American philosopher Yogi Berra says: "It's tough to make predictions, especially about the future."

Catching on, Sumner and his 15 minutes of fame

Getting viral on the internet is still pretty much a black-box enterprise. And of course, luck has something to do with it.

Prior to this over-extended 15 minutes of fame, Bentley economist Scott Sumner toiled in macro obscurity. But a lot of the flash out of the pan starts would with who you know -- or rather -- who knows you.

I am still piecing together how I suddenly went from obscurity to semi-obscurity yesterday. I had sent Brad Delong my piece on Friedman and Schwartz, and he was kind enough to link to it (without comment.) I assume that Tyler Cowen saw that link, and his very kind comments suddenly pushed my blog into the public eye. Then Arnold Kling also had some nice things to say here.

Now that I have readers, I obviously need some new material. Please be patient as my teaching responsibilities (and my cold) will slow things down for a few days. However, this weekend I plan two of what I hope will be my best posts. So please stop back later. I greatly appreciate all those who commented. I will reply to recent comments later today.

Ironically, I had already been planning a post to send to some of my favorite pragmatic libertarians (such as Tyler Cowen, Will Wilkinson, Deirdre McCloskey, Robin Hanson) on a non-monetary topic (my recent research on cultural values and neoliberalism.) I’ll try to have that ready by Sunday. By Saturday you can expect a longer than average post on rational expectations, policy lags, and monetary transmission mechanisms that will give you an idea of how I developed my somewhat unorthodox take on monetary theory. I think you will find it interesting.

DeLong and Cowan, that's pretty much the A-team of econ bloggers projecting their own form of the Oprah effect. Get there and you can get far. Professor Sumner may regret the new workload and the glare but that's the price you pay when you are "Oprahsized."

The against-the-grain theory is explained here.

Taking on the sacred cow, the mortgage interest deduction

No policy better demonstrates how the tax code distorts the market than the federal income tax deduction for mortgage interest. Ed Glaeser offers a modification to this gem.

In action, the law of unintended consequences of biofuels

It takes a large carbon footprint to grow biofuel. I would think we would have learned this lesson by now.

More on the deleterious effects of converting land for biofuels from Knowledge Problem.

Shovel Ready in Massachusetts

The Boston Business Journal is reporting that Governor Deval Patrick has released his list of the state's "shovel ready" projects. The projects will vie for a piece of the recently-passed, $789 billion stimulus package. As expected, Boston leads the list of municipalities with projects" ready to go" with $1.1 billion.

Wherever the money is spent you can count on big labor to be there ready to push for Project Labor Agreement designations on any major construction project. Non-union firms are already raising the red flag. That's because PLAs are costly, anti-competitive measures according to BHI's past research. But PLAs aren't the only problem. The state's higher than national average prevailing wage law will also mean fewer projects will be undertaken.

Meanwhile, how well will unemployed workers in Massachusetts benefit considering the huge influx of construction funding? According to ProPublica, a journalism site that tried to measure how well any benefits align with the high unemployment states, Massachusetts will do much better than high unemployment states such as Michigan and Nevada.

The 78-page "wish list" (dated 2/9/09) from the Governor's office is here.

BHI economists oppose stimulus bill

President Barack Obama on January 9, 2009:

There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.

Not so fast, Mr. President. Plenty disagreement can be found here including BHI economists David G. Tuerck and Ben Powell.

Governor Patrick releases House 1 Budget Recommendations

Citing the current economic downturn and declining state revenues, Governor Deval Patrick this morning released his House 1 budget. The $28 billion budget raises registry fees and meals and hotel taxes, draws from the state's rainy day fund and expands the state's bottle bill. The governor also reaffirmed a recent plan to cut $128 million from this year's local aid and $220 million in the next fiscal year.

Flanked by members of this cabinet at the State House, Patrick outlined the "multi-pronged solution" including a fix to the current FY 2009 budget. One part of that effort includes the elimination of sales tax exemptions on certain foods and beverages such as candy and alcohol. This change is expected to generate $25 million this year and $121.5 million next year with funds to be earmarked for public health and wellness programs.

Throughout the press conference, Patrick stressed his efforts to strike a balance between competing interests, long-term goals and commitments and the sharp downturn in revenues.

"The national recession is inflicting serious pain across Massachusetts, from household budgets to the state's balance sheets, and like many residents throughout the Commonwealth, we have to make do with less," said Governor Patrick. "At the same time we also have opportunities. The Economic Recovery Plan leverages reforms and responsible budgeting that could help alleviate the mounting pressure on our communities now and in the future."

Patrick said the the budget may call for more layoffs of state employees. He noted that some programs faced severe reductions "to prevent deeper cuts" down the road.

A portion of the governor's proposed budget relies on federal aid dollars yet to be approved by Congress. The Governor said he was optimistic that the Obama administration would provide states with funds from the stimulus package.

Patrick also unveiled a second Municipal Partnership Act which calls for the an increase in the meals tax and an option for cities and towns to levy their own 1 percent sales tax. It also calls for the ability of local government to tax telecommunications property, a measure that will raise approximately $26 million according to budget documents. The act urges cities and towns to shift more of their retirees to Medicare, a move which won legislative approval last year.

Patrick also suggested that cities and towns could achieve efficiencies from regionalization particularly in the area of contract advertising.

"I anticipate there will be vigorous debate," the governor told reporters. "But endless debate is not acceptable. We need action."

During a question and answer session, Patrick said the state will move to direct all capital gains tax revenue to rainy day fund. In the past, capital gains tax revenue, because of their volatile nature, have made estimates used for planning budgets unpredictable and complex.

New revenue for the FY2010 budget include proposals for:

Meals and hotel taxes ($150 million from a 1-cent statewide increase dedicated to taking the sting out of local aid cuts and $200 million for a 1-cent local option)

Commonwealth Wellness Fund: Earmarking $121.5 million for public health initiatives by eliminating sales tax on alcohol, candy and sweetened beverages.

Expanding the state's bottle bill: Earmarking $20 million for recycling and water and and sewer rate relief by including once exempt beverages such as water, juice, sports and coffee-flavored drinks into the bottle bill program.

Registry fees: Earmarking for the state highway fund an expected $74.5 million from "updated and consolidated Registry of Motor Vehicle fees."

More on the governor's budget recommendations here, here and here.

Press coverage Globe/AP; Herald and Boston Business Journal

Who Turned Down the Heat?

As goes California, so goes the rest of the nation.

"Next year in California, state regulators are likely to have the emergency power to control individual thermostats, sending temperatures up or down through a radio-controlled device that will be required in new or substantially modified houses and buildings to manage electricity shortages."

That's according to the New York Times. This latest intrusion into our personal consumption preferences is reminiscent of a masterpiece that I have just re-read. If California regulators are so wise and efficient, why stop there? It could also deploy its technology to regulate the amount of cold water in my shower or the temperature in my oven. It could even turn off my alarm clock in the night to save power during a brownout!

The California Energy Commission's argues that the new technology allows it to adjust house temperatures in response to price changes.

People respond to incentives on their own without government requirements. Heating costs are no different than those associated with gasoline prices. People consume less when prices are high and they measure those costs and the benefits (in this case, a warmer house) because that's their preference, not the state of California's.

In the name of innovation, Russ Nelson says no to perpetuity

The Angry Economist:

Copyright must expire, just like people must die.

Bill Easterly continues the argument

Bill Easterly taking on the conventional wisdom in developmental economics by setting up his own blog. Our review of his classic, The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics was published here in 2003.

Wall Street Journal cites BHI study on prevailing wage laws

Some good advice for President Obama should he take it.

President Obama said in his Inaugural Address yesterday that government must spend to rebuild roads and bridges, but that those "who manage the public's dollars" must also "spend wisely" and "reform bad habits." With that ambition in mind, here's an idea to save tens of billions of taxpayer dollars in the months ahead: Repeal Davis-Bacon superminimum wage requirements for construction projects.

We're referring to the 1931 law that requires contractors on all federal projects to pay a "prevailing wage." In practice, this means paying the highest union wage in every part of the country. Over the years nearly every analysis -- by the Congressional Budget Office, the Government Accountability Office and Office of Management and Budget -- has concluded that Davis-Bacon tangles projects in red tape and inflates federal construction costs.

A 2008 study by Suffolk University and the Beacon Hill Institute examined local wage data for construction workers and found that the Department of Labor estimates for the "prevailing wage" in cities are about 22% above the actual wages paid in these cities. It estimates that Davis-Bacon adds slightly less than 10% to federal building costs, or $8.4 billion a year.

Tech Community to Obama: Repeal Sarbox!

In many respects, PC Magazine's John Dvorak speaks for Silicon Valley, which is fed up with the unintended consequences of Sarbanes-Oxley.

Sarbanes-Oxley makes it nearly impossible for an American start-up to make a public offering and survive it. Designed to curb the excesses and crookedness that lurked behind the Enron scam, MCI, and other financial catastrophes that took place in the early part of the decade, this law contributed to the out-and-out financial meltdown we are now witnessing. And how did it benefit anyone?

What Sarbanes-Oxley has done is add an outrageous reporting burden, which costs an estimated 4 percent of revenue to implement. All American corporations are immediately put at a disadvantage to the tune of 4 percent off the top. And what's the point of these new requirements? Simply to get accounting firms off the hook for cooked books or criminal activity. It has nothing to do with protecting the public, just protecting the accounting firms.

Venture capitalist Tim Draper once told me that a company has to make $300 million a year to be able to afford the overhead required to comply with Sarbanes-Oxley. Less than that and public corporations just bleed to death.

No matter what you think of Sarbanes-Oxley, one thing is very noticeable: Since the law's inception, the number of little Silicon Valley start-ups that went public is close to nil. This is the worst IPO market in years, and it's stifling the country. IPOs have been a traditional form of wealth creation and corporate protection unlike anything else. And you've seen what has happened without them. It's no coincidence that the economy is tanking. Sure, you can blame the housing bubble. But I blame the whole financial collapse on Sarbanes-Oxley and a moribund Silicon Valley.

If any savvy business people can manage it, they need to get Obama to lead the way in repealing this stifling and corrupt law immediately. It's done us no good whatsoever and promises to continue to slow progress. The country will be perpetually in a recession unless we realize what's at the root of the problem.

In today's pro-intervention environment, peeling away the major showpiece legislation of last meltdown might be wishful thinking.

Advice for Obama from Professor Phelps

Those willing to give the new President advice are certainly not in short supply. But Professor Edmund Phelps's advice is always worth taking.

I welcome the announced projects for more and better infrastructure -- roads, bridges, airports, broadband, and the electric grid. This initiative -- even if taken by every country -- will contribute a net increase to employment in the capital goods sector and to aggregate employment in the U.S. In contrast, global tax cuts to households, to the extent they stimulate a world-wide increase in consumer demand, will drive up world interest rates and could thus damage employment.

I confess, though, that investing in infrastructure does not make my heart soar. Glaringly omitted from President Obama's announced plans is the idea of boosting another kind of social investment. In his victory speech after the North Carolina primary win, he spoke feelingly of the centrality of work in everyone's life, recalling how much his father-in-law's job had occupied his thoughts and given him pride. He spoke of "rewarding work," the title of my 1997 book on using tax credits to induce companies to employ more low-wage workers.

Instead, a proposed cut in the payroll tax rate -- up to a certain earnings level -- is planned. Low-wage earners will get their piece of it. But that will not be enough of a pay boost to create careers of self-discovery and transform neighborhoods and cultures among the least advantaged. My hope is that it is not too late to revert to the ideas expressed in North Carolina.

Our review of Rewarding Work can be found here.

'More Jesse James than Wyatt Earp'

The following remarks were delivered by Economics Chairman David G. Tuerck this morning at a Suffolk University Alumni Association program at Sargent Hall, Suffolk University Law School titled, “The New Sheriff in Town” to mark the inauguration of President Barack H. Obama.

Good morning and my thanks to Laura Piscopo and Eliza Parrish for putting this program together.

I understand that we are about to witness is widely seen as a transformative event in American history. That it is. But the transformation that we will get, as I see it, will not be the one being celebrated all over the world. Rather, it will be one that undermines the Constitution to the end of making social policy, that undermines national security to the end of placating the anti-war left and that ends up eroding a large swath of the private economy to the end of effecting a vaguely socialist policy agenda. There’s a new sheriff in town all right, but he’s more Jesse James than Wyatt Earp.

Obama’s predictable assaults on the Constitution and on national security are perhaps the most serious harm that we can expect from his administration. In connection with today’s panel, however, it is important that we not underestimate the harm that his policies will inflict on an already faltering economy. During the campaign, Obama promised to promote green energy, redistribute income, punish corporations, empower unions, expand government and restrict foreign trade – an agenda that, if implemented, would reduce productivity and living standards. That the public would elect a presidential candidate intent on implementing this agenda stands as a great mystery to me. Far less mysterious is the harm that these policies will inflict on the economy.

Now I suspect that many of my fellow economists who supported him have told themselves that Obama couldn’t have possibly have meant to implement the policy prescriptions that got him elected. And, indeed, but for the current financial crisis, there is the possibility that, having won the election, he would be listening to the saner voices around him and forgetting most of what he promised during the campaign.

But the financial crisis means that this is not to be. With the economy in a downward spiral, Obama knows, as do his handlers and sponsors on the left, that he has a mandate to try everything under the sun in order to put things right. Which is why we can expect him to advance a much heralded trillion-dollar recovery plan. When the attitude is that the country must do something – anything – to speed recovery, we can expect that something to be what bought votes during the campaign.

Let’s first consider the baseline projections against which we can assess the likely effects of Obama’s policies. I have surveyed a number of forecasts, ranging from relatively optimistic to highly pessimistic and reached the conclusion that the economy, as measured by real GDP, will continue to decline straight into 2010. This is bad news for two reasons: First, it means we’re in for at least a four-year stretch before employment, the housing market and equity prices recover significantly from the current collapse. Second, it means that Obama administration will be driven by political considerations to take increasingly desperate measures, many of which will make things worse rather than better, to right the economy.

To be sure, most economists now seem to favor a fiscal stimulus consisting of a combination of tax cuts and spending increases. You can accept their advice if you wish, but I think it is the result of a new kind of derangement syndrome, perhaps to be classified by psychologists someday as Obama mania or just plain Obama nuttiness.

One clue as to the temporary insanity that is now sweeping through the economics profession is the renascent popularity of Keynesianism. Otherwise sensible economists are re-branding themselves as Keynesians, as if applying that label will lend scientific authority to nostrums, which just a few months ago they would have considered laughably naïve.

You probably remember Keynes from your Principles of Economics class where you were shown how a dollar of deficit spending will deliver three, four or even ten dollars of new GDP. Keynes laid out this doctrine 73 years ago in his book The General Theory of Employment, Interest and Money. While the idea of magically expanding the size of the economy by just running deficits has an obvious appeal, the fact is that Keynes’s ideas began to undergo serious challenge in the 50s and then fell into utter disrepute in the late 60s and early 70s, with the onset of stagflation and the productivity slowdown.

In the intervening years, defenders of orthodox Keynesianism had become as rare among economists as creationists among biologists – and, for good reason: Until just a few weeks ago, new theories, developed by the last two generations of macro economists, had relegated Keynesian orthodoxy to a historical curiosity. Now, all of a sudden, Keynes is all the rage because we find ourselves in a protracted slowdown and because Obama’s policy pronouncements need some kind of intellectual justification. It’s as if Einstein, on discovery relativity, decided to return to pre-Newtonian theories of gravity in order to put the right spin on his ideas.

If we want just one example of how contemporary economics argues against Obamanomics, we need look no further than a July 2007 paper by Christina and David Romer, published as a National Bureau of Economic Research Working Paper. There, the authors find that fiscal measures of the kind being advanced by the Obama team “have been largely unsuccessful” at stimulating the economy, just as other critics have warned.

One reason why such countercyclical policies don’t work, say the Romers, is that “it is difficult for fiscal policy to respond to economic developments.” What makes this article particularly interesting is that co-author Christina Romer is slated to become Chairman of the Council of Economic Advisors in the new administration.

Another implication of Romer’s paper is that tax cuts of the kind undertaken during the Reagan and Bush administrations -- that is, tax cuts aimed at promoting economic growth -- are, unlike the cuts proposed by Obama, highly effective for expanding the economy. If Professor Romer were up to the Herculean task of disabusing her boss of his spread-the-wealth philosophy and of imparting some understanding of contemporary economics to his thinking, then perhaps we could put hope in this administration after all.

But back to Keynes. Another economist, Robert Higgs, has pointed out that World War II was the nation’s one great experiment with a Keynesian remedy – unintended though it was. And what happened during the war is just what modern economic theory, as opposed to antiquated Keynesian theory, would suggest. The expansion in government spending crowded out private investment almost dollar for dollar. Meanwhile the expansion of consumption, which the Keynesian multiplier is supposed to bring about, didn’t take place.

Franklin Roosevelt, also now being elevated to godly heights by the Obamamaniacs, in fact never took Keynes seriously. And ironically, it is Keynes himself who provided what is probably the best rationale for why his recommendations would appeal to a Roosevelt or an Obama. In his foreword to the German version of The General Theory, Keynes admitted that his ideas could “be much easier adapted to the conditions of a totalitarian state” than a free-market economy. When a reporter asked an incredulous Joe Biden whether he and Obama were advancing a Marxist agenda, she was on to something.

Earlier I said that the current crisis bodes ill for any hope that the new President’s economic policies will redound to the benefit of the nation. There is simply too much opportunity and too much pressure to accommodate his electoral base for him to do anything short of what he promised. Thus we will have four years of the various recovery-killing measures that he promised the electorate: cap-and-trade, union card check, NAFTA revision, higher minimum wages and all the rest. And there’s nothing in today’s $150 million extravaganza that can offer any comfort over these realities. This new sheriff is going to make us long for the days when the hombre from Texas was in charge.

Economics Department Spring 2009 Seminars

Each academic year, the Economics Department at Suffolk University hosts several seminars featuring the work of faculty, students and visiting scholars. The seminars usually take place in the large conference room on the sixth floor of 1 Bowdoin Square in Boston and typically run from 1:05 p.m. to 2:20 p.m.

The schedule, which is expected to expand over the course of the semester, lines up as follows:

Thursday, Jan 22
Henry Kim
"Fiscal Policies in DSGE Models"

Thursday, Feb 19
Randall Holcombe (Florida State University)
Topic: Public Choice

Tuesday, Feb 24 C
Cagdas Sirin
"A Double Hurdle Model: Workplace Restriction, Prices,
Income Level and the Demand for Cigarettes"

For samples of past seminar topics visit the Economics Department's news page.

Wesbury: "Inflation is not dead; it is just hibernating."

Don't let today's lower inflation rate fool you. All those newly printed greenbacks sloshing around mean that sooner or later the big inflation is coming. So says Brian Wesbury.

Oil, where is it going?

Any belief that energy prices had bottomed out were wiped away early in the day as crude plumbed new lows for the year and more government data suggested the economy may be worsening.

"The bull oil era is officially over," said Phil Flynn, an analyst at Alaron Trading Corp.

Light, sweet crude for February delivery fell more than percent, or $2.78, to $34.50 a barrel Thursday on the New York Mercantile Exchange. At one point prices fell as low as $33.20.

Crude prices have fallen so fast, the cost for retail gasoline has yet to catch up. Pump prices nudged up again overnight, but is likely to fall.

Some of us might want to rethink the end of the bull market in oil.

The nifty gadget above tracks the latest price in oil in near real-time. Oil was priced 34.69 a barrel today (January 15, 2009).

Congress thinks big, very big!

Not to let a crisis pass by without throwing caution to the wind, Congress is proposing an $825 billion stimulus.

Full text (all 258 pages) here.

Against the grain! A trillion here or there won't help.

A new year of magical thinking.

"The best thing the federal government could do now is avoid the phony Obama tax cut and not increase spending at all. It's time for the Senate Republicans to step up."

David Henderson explains why in Forbes. The rest of us may know why the Republicans can't step up.

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.