Tag: economist

Obama to Seek Cap on Federal Pay Raises

USA Today reports that President Obama is seeking a cap on federal pay raises:

President Obama urged Congress Monday to limit cost-of-living pay raises to 2% for 1.3 million federal employees in 2010, extending an income squeeze that has hit private workers and threatens Social Security recipients and even 401(k) investors.

…The president’s action comes when consumer prices have fallen 2.1% in the 12 months ending in July, because of a massive drop in energy prices. The recession has taken an even tougher toll on private-sector wages, which rose only 1.5% for the year ended in June — the lowest increase since the government started keeping track in 1980. Private-sector workers also have been subject to widespread layoffs and furloughs.

Last week, economist Chris Edwards discussed data from the Bureau of Economic research that revealed the large gap between the average pay of federal employees and private workers. His call to freeze federal pay “for a year or two” received attention and criticism, (FedSmith, GovExec, Federal Times, Matt Yglesias, Conor Clarke) to which he has responded.

As explained on CNN earlier this year, the pay gap between federal and private workers has been widening for some time now:

Sweet, and Yet Very, Very Sour

sugarMy colleagues have blogged before about the recent sugar “market” woes. There was some hope that the USDA, which manages sugar imports very carefully to maintain U.S. prices up to three times higher than world prices, would relax the sugar quotas this year and give sugar users some well-deserved and long overdue relief.

Alas, it was not to be. According to Congress Daily, the USDA announced today [$] that there would be no increase in the import quota for the time being, and that their models saw no cause for alarm because of predicted increases in domestic production and Mexican imports (allowed special import status through NAFTA). And who cares about sugar users’ concerns when you have models?

The American Sugar Alliance says (sigh) that the announcement “makes perfect sense. Supplies are adequate and will soon be building. If any tightness were to emerge, it would not be until next summer. USDA will have adequate time next spring to boost supplies.”

Do you hear that, sugar consumers of America? The USDA is on the case. Now, I’ve got nothing personally against the folks at USDA. I know many of them personally and they are fine people, and smart economists, who are just following congressional orders. But, really, are we still, in 2009, in an at least nominally market-oriented economy, seriously attempting to micro-manage supply and demand of commodities?

One last point from the Congress Daily story (which requires a subscription to read this far):

Last August, the Bush administration adjusted the tariff rate quota to allow an additional 300,000 short tons of sugar to enter the country…[American Sugar Alliance Economist Jack Roney] said the additional sugar … caused raw cane sugar prices to plummet from 23 cents per pound to 19 cents per pound. (emphasis added)

In November 2008, when U.S. raw sugar prices were 19.83 cents per pound, world prices were 12.87 cents per pound. Even allowing for the fact that domestic prices indeed fell quite a lot, on what planet does Mr Roney consider a domestic price over 50 percent above an (unusually elevated) world price to be a “plummet”? Is whether we are paying a lot more – rather than a lot, lot more – really the standard we are aiming for here?

To be sure, world sugar prices are high right now, at least by historical standards. (The average world raw sugar price last fiscal year was 13.67 cents per pound. Last quarter the average world raw sugar price was 16.09 cents per pound. See here for all my price data) But even if they fall back to to historically average levels, Big Sugar wants to keep domestic prices high, and to prevent Americans from having access to cheaper sugar, forevermore.

It really leaves a bitter taste in one’s mouth.

Rose Friedman Passes

Rose Friedman, co-author of several books with her late husband and Nobel laureate economist Milton, passed away this morning. Rose and Milton co-wrote Free to Choose the wonderful book that formed the basis of Milton’s PBS television series, as well co-writing their joint auto-biography “Two Lucky People.”

She was intimately involved in the school choice movement both before and after Milton’s passing, as co-founder of the Milton and Rose D. Friedman Foundation for School Choice, ably led by Robert Enlow.

Rose and Milton were not just skilled economists who cared about kids, they were a charming couple. At a casual policy event a decade ago, they shared a single armchair to ensure that there would be enough seats for everyone. They weren’t just models of commitment to a worthy cause, they were models for how two smart, forthright people can build a marriage that lasts a lifetime.

Rose and Milton will long be remembered.

Is Buying an iPod Un-American?

We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.

Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:

In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:

The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.

Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”

The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.

To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at Amazon.com.

How Many Uninsured Are There?

The Wall Street Journal’s Numbers Guy tackles the question:

The Census Bureau estimates that the number of uninsured amounts to 45.7 million people. But the agency might be over-counting by millions due to faulty assumptions…

Even though legislation won’t cover many of them, illegal immigrants are especially difficult to enumerate: Few raise their hands to be counted. Prof. [Jonathan] Gruber estimates they make up about 13% of the uninsured today, or nearly six million people of that 45 million number…

Of the rest, some people are eligible for health insurance but don’t know it and many can afford it but don’t want it. About 43% of uninsured nonelderly adults have incomes greater than 2.5 times the poverty level, according to a report released Tuesday by the business-backed Employment Policies Institute.

He left out a few things, though.

The estimate of 46 million uninsured, which comes from a less-than-ideal government survey, has been the occasion of a fraud on the public.  For 20 years, the Church of Universal Coverage told us that 40-some million Americans are uninsured for the entire year.  Then, experts including the non-partisan Congressional Budget Office said that no, 40-some million is the number who are uninsured on any given day, and a lot of those people quickly regain coverage.  The number of Americans who are uninsured for the entire year is actually 20-30 million.  Yet the Church of Universal Coverage kept using that 40-some million estimate as if nothing had happened – even though the meaning of that estimate had completely changed.

The Congressional Budget Office also reports that as many as 15 percent of those 20-30 million chronically “uninsured” are eligible for government programs, so they’re effectively insured.

According to economists Mark Pauly of the University of Pennsylvania and Kate Bundorf of Stanford, as many as three-quarters of the uninsured could afford coverage but choose not to purchase it.  Again, according to the Congressional Budget Office, 60 percent of the uninsured are under age 35, and 86 percent are in good-to-excellent health.

Government intervention has made health insurance unnecessarily expensive for them, so these folks quite sensibly don’t want to be ripped off.  Mandating that they buy coverage is really about hunting them down and taxing them.

The Cost of Flu Fears - and Our Ongoing Vulnerability

The ever-sensible Shaun Waterman has begun to tally the cost of overreaction to the fear outbreak inspired by the H1N1 flu strain. He reports in ISN Security Watch:

Even the precautions that you take against this kind of global flu pandemic could knock about 1.9 [or] 2 percent off global [economic production]. That’s about a trillion dollars,” according to journalist Martin Walker, who cited World Bank figures from a study last year.

The Economist reported last week that the crisis in Mexico was costing Mexico City’s service and retail industries $55m a day - not because of the handful of deaths but because of people’s reactions. And that was even before the national suspension of non-essential public activities called for this week by the authorities there, which was expected to double that cost.

Waterman also cites my joke about moving Vice President Biden to an undisclosed location in future crises - not for his protection or government continuity, but to keep him away from the media.

It’s comedic wrapping on a substantive point: As long as people look to government leaders in times of crises, leaders have a responsibility to communicate carefully, according to a plan, and with message discipline. If they don’t, the damage can be very high.

Even if all Americans knew to dismiss the words of the Vice President as if he’s a “Crazy Uncle Joe” - and they don’t - foreign tourists certainly don’t know that. Biden harmed the country simply by speaking off the cuff.

Here, an outbreak of flu appears to have caused billions of dollars in damage to the world economy. One billion lost to the U.S. economy is about 145 deaths (using the current $6.9 million valuation for a human life). When overreactions restrict economic activity, that reduces wealth and thus health and longevity.

Now, imagine what might happen if the United States encountered a novel, directed threat - some kind of attack that inspires widespread concern. Will Vice President Biden and officials from a half-dozen agencies rush forth with personal observations and speculation? The results could be devastating, especially to a country that is already suffering economically.

People die from poor situation management, and it makes Americans worse off. Political leaders should not get a free pass for failing to communicate well just because it’s hard to do.

The Obama Administration should learn from its many errors in handling the rather benign H1N1 flu situation. It should train up for communicating in the event of a real emergency. If the Obama Administration fails to soothe nerves in the event of some future terrorist attack, that will be a clear failure of leadership.

Robert H. Frank, A 200% Tax Even Socialists Will Hate

In the latest issue of Forbes, Cornell University economist Robert H. Frank is pushing “A Tax Even Libertarians Can Love.” I hope he wasn’t counting on this libertarian’s support.

What he advocates is “replacing the income tax with a progressive tax on spending. …A family’s income minus its savings is its consumption, and that amount minus a large standard deduction – say, $30,000 a year for a family of four – would be its taxable consumption. …Rates would start low, perhaps 20%, then rise gradually with total consumption. …With savings tax-exempt, top marginal tax rates on consumption would have to be significantly higher than current top rates on income.”

His concept of “significantly higher” includes tax rates of 100-200% on marginal income that isn’t saved.  This is about minimizing affluence, not maximizing revenues.  There is ample evidence from Emmanuel Saez and others that the amount of reported income drops sharply as marginal tax rates rise above 25-30% (and even less on capital gains).

In his 2007 book, Falling Behind: How Rising Inequality Harms the Middle Class, Frank suggests marginal tax rates of 50% above $220,000  and rising to 200%.  Since seniors (like me) commonly finance retirement from past savings, Frank’s tax scheme amounts to rapid confiscation of past savings.

For young people, Frank’s tax can’t possibly encourage savings because it discourages earning any income in the first place.  Consumption is, after all, the motive for both earning and saving.   The prospect of facing future consumption taxes of 50-200% would surely discourage saving much, because the rewards from invested savings (namely, future consumption) would be subjected to such prohibitive tax brackets. Under this steeply progressive tax on unsaved income, any income exempt from taxes today would be subject to brutal taxes whenever folks wanted to buy anything of value, like a car or house, or to retire on their accumulated savings.

In another April 25 piece in The New York Times, Mr. Frank shifts from promoting confiscatory taxes on consumption to defending small tweaks to the current tax regime. “The current [tax] system is much fairer than many people believe, and the president’s proposal will make it both fairer and more efficient.” That comment was aimed at the tea parties.  Yet tax party protesters clearly understood, as Frank does not, that the president’s first wave of proposed tax increases come nowhere near paying for his grandiose spending plans.  My estimate of last October, that Obama’s plans would add $4.3 trillion to the deficits over ten years is now looking much too generous, if not wildly optimistic.

In the New York Times piece, Frank argues that income differences are mainly a matter of luck.  As he often does, Frank pretends to possess evidence about this topic that other economists have missed.  He says, “economists have only begun to realize [that] pay differences often vastly overstate differences in performance.”

In his book, whenever Frank alludes to what “the evidence suggests,” his sources are usually suspect, obsolete or invisible. He claims “regulations, like cartoons are data.”  He cites an unpublished master’s thesis, unidentified surveys and “casual impressions.”

Frank  claims “happiness can be measured reliably” by brain waves.  Explaining this better in the Economic Journal in 1997, he noted that people who say they are happy show “greater electrical activity in the left prefrontal region of the brain” which “is rich in receptors for the neurotransmitter dopamine, higher concentrations of which been shown independently to be correlated with positive affect.”  If we accept the amount of dopamine in the brain as the gauge of happiness, however, then the happiest people are those who routinely abuse crack and meth.

In the second chapter of Falling Behind, his first graph lists a Census Bureau URL as the source for household income data from 1949 to 1979.  Click on that link and you will find the data only go back to 1967.   In reality, all of Frank’s income and wealth graphs actually came from Chris Hartman at inequality.org. Hartman is not an economist or statistician, but a “researcher, writer, editor, and graphic designer with experience in politics, higher education, and publishing.”  Hartman’s non-facts used in Robert Frank’s first graph actually came from a 1994 book from the Economic Policy Institute, reflecting the “authors’ analysis…  of unpublished census data.” Frank’s comparison of CEO pay with “average wages” came from Hartman’s flawed calculations for United for a Fair Economy, which were critiqued on page 131 of my textbook Income and Wealth. And Frank’s demonstrably false claim that “asset ownership has become even more heavily concentrated during recent years” is likewise from inequality.org.

In short, Professor Frank often bases his remarkably strong opinions on fragile facts.