Archives: 04/2018

Sometimes Factories Move Abroad. That’s OK.

Writing in the New York Times recently, Louis Uchitelle calls for labor unions to be strengthened in order to prevent American firms from closing factories in the United States and shifting production abroad. Implicit in his argument is the notion that factories and the employment they provide are inherently desirable and the more the merrier.

Before addressing this point, however, let’s first acknowledge that the decline in the number of factories and factory workers in the United States is overwhelmingly a story about automation and improved use of information technology rather than trade or outsourcing. A widely-cited study by researchers at Ball State University found that increases in productivity explain almost 88 percent of such job losses.

Uchitelle’s contention, meanwhile, that greater unionization would stave off factory closures or even cause more to open in the United States is debatable. Sweden, the United Kingdom, and Japan, for example, all have significantly greater rates of unionization than the United States and yet have experienced higher percentage declines in manufacturing employment since 1990. And while he laments the “nearly neutered industrial unions” in the United States and their diminished proclivity to engage in strikes, a fondness for such worker protests hasn’t prevented France from similarly experiencing a greater percentage decline in factory jobs.

Manufacturing Employment, percentage change 1990-2016 

But even if increased unionization held the promise of fewer factory closures, it’s still not apparent why that outcome should be desirable. In fact, a blind obsession with the preservation of factory employment would almost assuredly make us worse off. 

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Leland Yeager, R.I.P.

On Monday morning (April 23, 2018), the Grim Reaper cut down Leland Yeager—a great scholar, collaborator, and friend. I share the sentiments about Leland that have already been expressed by David Gordon, David Henderson, and George Selgin.

To fill in the picture, I will recount my first encounter with Leland, which took place in the summer of 1967. Then, I will leap ahead to the last email I received from Leland on April 5, 2018.

I first met Leland in the summer of 1967, when I attended a short course on the principles of economics at the University of Virginia. The course was offered to young faculty with an interest in free-market economics. I qualified because I had recently joined the faculty of the Colorado School of Mines. What a course it was.  The Big Guns lectured. They included: Armen Alchian, Bill Allen, Bill Breit, Jim Buchanan, Warren Nutter, Gordon Tullock, and Leland Yeager. Leland presented the lectures on international trade. I can still recall them. He arrived fully prepared and ready to go—armed with a yardstick. Yes, a yardstick, which Leland used to draw complicated trade diagrams. And, typical of Leland, he did so with great precision. Indeed, Leland is the only professor I have ever observed who could, and did, draw picture-perfect diagrams on a chalkboard. Even while lecturing, Leland was an ever-careful and precise scholar.

Fast forward 50-plus years, and we arrive at the last email I received from Leland (April 5, 2018). Our correspondence over the past few years has largely focused on a book project that we have been collaborating on. Our book’s main idea – to treat waiting as a factor of production, and its price (the interest rate) as a reminder of the opportunity cost – contributes to unifying economic theory and identifying errors.  Fortunately, our manuscript for Capital and Interest is complete, thanks largely to Leland’s work and scholarship. As I recently promised Leland, I anticipate having the manuscript cleaned and ready to go to the publisher this summer.

As our work on Capital and Interest progressed, Leland would always add what I considered to be a throw-away line about his advancing years and ill-health. I thought Leland would make it into triple digits. However, in his last email, Leland alarmingly went way beyond his usual grumblings about his age and ill-health. He wrote, “At age 93 and suffering from weakness, fatigue, various ailments, and severe pains (most recently from osteoporosis), I must admit that I am in no condition to contribute much more to the MS.”  Leland’s shot across the bow shocked me because he remained as sharp as a tack. Indeed, in his last email, Leland did what he had always done: he never stopped turning over ideas and fretting about the quality of his work. Until his dying day, Leland remained to me that precise professor who lectured with a yardstick – a master of rhetoric, blackboard economics, and much, much more.

Must Rising Oil Prices Compel the Fed to Tighten More?

As crude oil prices recently approached $68 a barrel, a Wall Street Journal writer concluded that “inflation fears got an added jolt this week as oil prices rose to a three-year high.”

Two other Wall Street Journal writers added that “If crude continues to move higher, it could begin to stifle economic growth.”  They suggest that “higher consumer prices for gasoline and other energy products act like a tax, while pushing inflation higher and increasing pressure on the Federal Reserve to raise interest rates more aggressively.” 

Such anxieties about $70 oil are obviously overwrought. Crude prices were usually above $100 from March 2011 to September 2014, yet nobody was then fretting about inflation fears forcing the Fed to raise the fed funds rate.   

But this does raise two very important issues: First, the importance of soaring oil prices in the recession of 2008-2009.  Second, the way the Federal Reserve has overreacted to surging oil prices by pushing up interest rates before and during oil-shock recessions and (in 2008) leaning against their fall after the recession was well under way.

In May 2009, economist James Hamilton of U.C. San Diego testified before the Joint Economic Committee.  He noted that, “Big increases in the price of oil that were associated with events such as the 1973-74 embargo by the Organization of Arab Petroleum Exporting Countries, the Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf War in 1990 were each followed by global economic recessions. The price of oil doubled between June 2007 and June 2008, a bigger price increase than in any of those four earlier episodes.”  

Like every postwar recession except 1960, the “Great Recession” of 2008-09 was preceded by a spike in the price of crude oil.  West Texas crude soared from $54 at the start of 2007 to $145 by mid-July 2018.  Yet U.S. reporters and economists still write as though the Great Recession had nothing to do with a global energy shock but was instead a “financial crisis” that began with the collapse of an investment bank (Lehman Brothers) on September 15, 2008.  This is a stubborn myth.

In reality, the inability of unemployed homeowners to pay their mortgage bills, and the failure of investments tied to those mortgages, were secondary complications of a global energy shock which cut industrial production in Canada and Europe in 2017 before that happened in the U.S.  By the end of 2008, the contraction of real GDP “was twice as deep in Germany and Britain  [as it was in the U.S.] and much worse in Japan and Sweden.”

Because energy is a key part of the cost of doing business, higher energy costs made production and distribution less profitable and thereby shrunk the global economy’s supply.  Yet even as late as June 2008, as crude prices soared above $140, The New York Times and Washington Post were hysterical about illusory inflation – not recession. 

Did the Fed also mistake a temporary oil price spike for a sustained rise in the overall trend of inflation?  I believe it did that in 2008 and even more obviously in prior incidents of a sudden surge in oil prices.

The big oil price spikes (and recessions) between 1973 and 1980 that Hamilton mentioned were clearly matched by huge spikes in the Fed-controlled interest rate on federal funds.  Oil prices and the fed funds rate were also rising before the 1991 and 2001 recessions. When crude rose from $34 to $74 from May 2004 to June 2006, the fed funds rate rose from 1 percent to 5.25 percent.  Once recessions were well underway the Fed always began to bring interest rates back down, but always (including 2008) too slowly.

On January 2, 2008, The Financial Times published my article, “Why I am Not Using the-R-Word This Time.”   Citing James Hamilton, I wrote that “if the emphasis on oil prices in Prof Hamilton’s 1983 study is correct, the US economy is likely to slip into recession because of higher energy costs alone, regardless of what the Fed does. If Mr. Bernanke’s 1997 study is right, timely reductions in the Fed funds rate should avert such a recession.”  Once he became Fed chairman, unfortunately, Bernanke did not aggressively cut the funds rate in a timely manner – but instead tried hard to prop rates up.  As Cato’s George Selgin documented, “Between December 2007 and September 2008, the Fed sold over $300 billion in Treasury securities, withdrawing a like amount of reserves from the banking system, or just enough to make up for reserves it created through its emergency lending,” One result was to keep the fed funds rate above 2 percent until September when oil prices finally fell.  In October the Fed also began paying interest on bank reserves (above 1 percent until mid-December) to discourage bank lending.  

Although an oil price of around $70 is only half as high as the peak in 2008, and lower than it was just a few years ago, we do have a lot of experience with sudden increases in oil prices that always ended in recession.  And we have a lot of experience with the Fed acting as though they were not focused on “core” inflation at all (i.e., excluding energy) but were unduly influenced by the misleading and ephemeral impact of oil price gyrations on headline inflation numbers.  

So, the Wall Street Journal’s recent warning that “If crude continues to move higher, it could begin to stifle economic growth” would be likely only if crude moved a lot higher.  And the warning that a higher oil price must put “pressure on the Federal Reserve to raise interest rates more aggressively” would be likely only if the Fed has still not learned anything from one of its biggest and most frequently repeated mistakes.

In Seeking Good Body Camera Policy, Look to Lawmakers, Not Ethics Boards

When it comes to increasing police accountability and transparency it’s policy, not technology, that does the heavy lifting. Police body cameras, tools that are overwhelmingly popular among the public, are sometimes cited as a valuable resource for addressing police misconduct and secrecy. They can be, but only if the right policies are in place. Absent policies that balance privacy interests with the need to increase police accountability, body cameras are surveillance tools. The risk of body camera surveillance is especially pronounced at a time when a major body camera manufacturer is doing more work on artificial intelligence, a development that may result in the widespread use of police body cameras with real-time facial recognition capability.

Axon, the company that makes one of the most popular police body cameras, released a Law Enforcement Technology Report last year. That report outlined some of the technology that’s on the horizon: “Soon, you’ll be able to tell almost immediately if someone has an outstanding warrant against them, thanks to facial recognition technology.”

According to reporting by The Wall Street Journal, the merger of body camera and facial recognition technology is months rather than years away.

I’ve written on this blog before about why body cameras with facial recognition capability are a threat to civil liberties. I’m hardly alone in highlighting this threat. Axon’s leadership is clearly aware of the concerns raised by civil libertarians and has convened an AI Ethics Board. Yet it seems as if this board will have little if any impact on Axon’s development of technology that poses a significant risk to civil liberties.

An “Ethics Board” sounds like the kind of body a company that builds surveillance equipment and weapons should have. However, Axon’s AI Ethics Board lacks any kind of authority to ensure that the company’s products aren’t used unethically.

Yesterday, a coalition of civil rights groups wrote a letter to the Axon AI Ethics Board outlining their well-founded concerns. The letter calls for board members to assert themselves and oppose real-time facial recognition on body cameras, consult with community members with direct experience with the criminal justice system, limit sales to law enforcement agencies with appropriate body camera policies, and ensure that they have an oversight remit that covers all of Axon’s digital products.

Members of the AI Ethics Board, which includes eight volunteer civil liberties, AI, and criminal justice experts, do not currently have the authority to veto Axon products. A functional ethics board should be free to halt products or at the very least publish reviews of all Axon devices.

If Axon’s ethics board guaranteed that only departments with policies that increase accountability and transparency while also protecting civil liberties could buy Axon products the company would sell fewer body cameras. Dozens of America’s largest and most prominent police departments fail to implement praiseworthy body camera policies. For example, an Upturn examination of 75 police department body camera policies found that the Baltimore Police Department is the only department with strict limits on body camera footage being analyzed with facial recognition software, and that not a single department requires officers to write a report before reviewing body camera footage related to any incident. Giving the AI Ethics Board the power to dramatically affect sales is one of the reasons that Axon is unlikely to adhere to the recommendations in the recent coalition letter.

In all likelihood, Axon will continue to sell products that can, if governed by poor policies, erode civil liberties. Although Axon is signaling that it’s concerned about the ethical implications of its products, it doesn’t look as if its ethics board will prevent the proliferation of body cameras that will become known as tools of surveillance, not police accountability. In order for body cameras to achieve their potential as tools that improve policing it’s policymakers rather than private companies who will have to implement necessary changes.

The War On The Poor Has Many Fronts And Armies, Professor Krugman

Paul Krugman’s column yesterday lamented Republican policy towards the poor. He has particular gripes with Ben Carson’s changes to housing subsidies, increased work requirements for those seeking food stamps, and waivers granted to states to enable new work requirements for Medicaid.

I’m not going to get into these specific policy changes here. But let’s take Krugman’s analysis of the changes and the motivation for them at face value, and pose a question: how robust is an anti-poverty agenda that depends so much on political and societal attitudes to the poor?

As I outlined in a recent blog, it’s a mistake to think of policy towards the poor being merely about government transfers, services and benefits-in-kind. In fact, this focus on income and services has blinded the debate about poverty from the truth that there are lots and lots of state, local and federal policies that increase the price of goods and services the poor spend a disproportionate amount on.

Zoning laws and urban growth boundaries raise house prices. Regulations make childcare more expensive. Sugar, milk programs and the ethanol mandate increase food costs. Tariffs on clothes and footwear have particularly regressive effects. Energy regulations which seek to subsidize renewables rather than being “technology neutral” can raise prices. CAFE standards, constraints against ride sharing, and some regulations on gas taxes raise some transport prices too. Not to mention the broader effects of protectionism and occupational licensing in both raising prices and reducing efficiency across the economy.

Some of these things affect families by orders of magnitude greater than the changes Krugman is concerned about. Combined, they would have a huge impact for many households. What’s more, most of the status quo interventions make the economy less efficient too, reducing market-wages and, in the case of housing and childcare, deterring the mobility of labor over different dimensions. One cannot talk about a “war on the poor” without acknowledging these fronts and the armies which battle on them, not least because these bad policies in part drive significant demands for redistributive transfers in the first place.

In my view, it would be far more fruitful for liberals concerned with the well-being of the poor to focus on all these issues as part of a “first do no harm” poverty agenda. Why?

1. There’s evidence that fiscal transfers may have hit diminishing returns in terms of their role in poverty alleviation.

2. The fiscal environment is not conducive to huge new expenditures on programs, and evidence from other countries (not least Britain) suggests working age welfare is the first port of call for cuts when a fiscal crisis hits.

3. There are clear economic trade-offs where transfers are concerned. As this accompanying Twitter thread by Paul Krugman acknowledges, even increasing the availability and generosity of transfers to more people disincentivizes people from earning more income.

4. And crucially for Krugman’s column, attitudes to redistribution are volatile, and support can be replaced by narratives about “moochers” or “welfare queens” relatively quickly.

In contrast, a pro-market agenda seeking to undo existing damaging regulations at the local, state and federal levels could: reduce poverty, reduce the demands for redistributive activity, would not undermine work incentives and would be harder to undo given its dispersed nature. Those in favor of extensive redistribution should see this too: you do not have to believe existing anti-poverty programs have failed to acknowledge they can have negative unintended consequences, hit diminishing returns, or that their effectiveness is undermined by bad policies which drive up living costs.

A pro-market cost of living agenda would not “solve” poverty, of course. And there are major vested interests in each of these areas who would resist reform. But there are clearly lots of different wars on the poor being raged, even if inadvertently. As long as the poverty debate focuses on just income transfers and government services, the more bountiful battles against vested interests who drive up the poor’s living costs go unfought.

Feds Try To Force Church Cafeteria To Pay Volunteers As Employees

The Grace Cathedral church near Akron, Ohio, found itself in big legal trouble for running a (money-losing) cafeteria open to the public in which much of the labor was provided free by volunteer members of the congregation. Beginning in 2014, the U.S. Department of Labor investigated and then sued it on the grounds that for an enterprise, church or otherwise, to use volunteer unpaid labor in a commercial setting violated the minimum wage provisions of the Fair Labor Standards Act (FLSA) of 1938. A trial court agreed with the Department and found liability, but now, in Acosta v. Cathedral Buffet et al., the Sixth Circuit has reversed the ruling and sent the case back for further proceedings, noting that “to be considered an employee within the meaning of the FLSA, a worker must first expect to receive compensation.”

Judge Raymond Kethledge, writing in concurrence, takes issue with what may be the most remarkable argument advanced by the Department of Labor: that the congregation volunteers should count as employees because “their pastor spiritually ‘coerced’ them to work there. That argument’s premise — namely, that the Labor Act authorizes the Department to regulate the spiritual dialogue between pastor and congregation — assumes a power whose use would violate the Free Exercise Clause of the First Amendment.”

Judge Kethledge goes on to note that as “the record makes clear, the Buffet’s purpose was to allow the church’s members to proselytize among local residents who dined there,” and that along with its congregation volunteers the establishment “had 35 full-time paid employees — all of whom, incidentally, have lost their jobs as a result of this lawsuit.” 

A footnote: Given that the Obama Labor Department’s stance flies in the face both of sound labor policy and principles of church-state separation, why didn’t the Trump administration reverse position on it? One clue to a possible answer (via Ted Frank and commenters on Twitter) is that the nomination of a new solicitor for the department did not clear the Senate until December 21, 2017, two weeks after the case had been argued before the Sixth Circuit panel. (cross-posted and adapted from Overlawyered). 

 

Show Me the (Education) Money, Part II!

Last week I put up a post with charts showing total, per-pupil, public school spending between the 1999-00 and 2014-15 school years, as well as breaking out spending for a handful of states facing notable education unrest. Due to popular demand—if that’s what you call very mild comments from a few people on Twitter and Facebook—this post is going to break that spending into numerous subcategories used by the federal government in the tables that formed the bases for most of the charts. This post will only look at aggregate national data, but next week I’ll break down spending for those embattled states.

 

Looking at this inflation-adjusted chart, you can get a sense for how big numerous components of spending are relative to each other, and how they have moved over the 15-period. I won’t define all the categories—indeed, the federal definitions themselves are not entirely clear—but the two biggest ones that people are most likely to be interested in are “instruction,” which includes really important things like teacher and principal pay, and “capital outlay,” which covers costs for things such as acquiring property and new buildings. Also important are “student support services” and “other support services,” which include compensation for people like guidance counselors and speech pathologists, and costs for business support services.

Overall we see the same trend as previously: spending up between 99-00 and 07-08, down between 07-08 and 12-13, then trending back up. Just eyeballing the chart it appears that the one area that saw a very meaningful dip over the period was capital outlay.

Is it? Crunching the numbers between 99-00 and 14-15, it seems to be. Only two categories of spending saw drops for the entire period: the very tiny “enterprise operations”—basically, funding from selling things—and capital outlays. Enterprise operations dropped 2 bucks per student, or about 9 percent, while capital outlay fell by $314, or almost 24 percent. In contrast, instructional spending rose by $876, or approaching 15 percent.

Between the pre-Great Recession, 07-08 spike, and 14-15, numerous categories saw drops, with the biggest dip in both dollar and percentage terms coming to capital outlays: $540 and 35 percent. Instructional spending fell only a modest 4 percent, or by $286. Meanwhile, “student support services,” “other support services,” and “food services” actually experienced increases. For the entire 15-year period, student and other support services saw the biggest increases in percentage terms, both growing by about a third.

What does this mean? At least in the aggregate, public schools did not cut spending for the overall period, but did during the recession and its aftermath. But it was in buildings and other property where the most serious cutting occurred both overall and post-Recession, with instructional outlays growing overall and various supports receiving increases even in the worst of times.

Of course, the aggregate does not apply to any given state, where the locus of education authority is held. See you next week for a look at some of those guys.