67992 (Author at Cato Institute) https://www.cato.org/ en Ryan Bourne with Caleb O. Brown on the nature of a pandemic recession https://www.cato.org/multimedia/cato-audio/ryan-bourne-caleb-o-brown-nature-pandemic-recession Wed, 01 Apr 2020 03:00:00 -0400 Ryan Bourne, Caleb O. Brown https://www.cato.org/multimedia/cato-audio/ryan-bourne-caleb-o-brown-nature-pandemic-recession Our Liberties Have Value Too https://www.cato.org/blog/our-liberties-have-value-too Ryan Bourne <p><span><span><span><span lang="EN-US" lang="EN-US">When thinking through the wisdom of COVID-19 lockdowns and orders, commentators often compare the value of lives saved against some loss of economic output (GDP) to determine whether the measure was cost‐​effective. But this is an apples vs. oranges comparison.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" lang="EN-US">The value of a&nbsp;statistical life is some calculation of what the average U.S. citizen is willing to pay for a&nbsp;reduction in their probability of dying. Suppose I’m willing to pay $20,000 to avoid a&nbsp;0.2 percent chance of death. The value of a&nbsp;statistical life for me is thus $20,000/0.2 percent = $10 million per statistical life saved. If this number were applied across the population, then a&nbsp;measure that prevented 500,000 deaths would create $5 trillion in value.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" lang="EN-US">But note carefully what this represents: it’s not about output or spending. The value we place on our lives through our choices represents our expectation of the pleasure we’d get from&nbsp;a&nbsp;full spectrum of things we’d miss if we died. Not just the consumption we’d forgo, in other words, but the value we place on time with friends and family, travel experiences, enjoying all the new non‐​market leisure activities we can engage in, and more. The value of a&nbsp;statistical life used to calculate a&nbsp;dollar&nbsp;measure of the value of lives saved in a&nbsp;lockdown is therefore an <em>economic welfare </em>measure, not a&nbsp;GDP measure.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" lang="EN-US">So the correct comparison when weighing up the wisdom of a&nbsp;lockdown is not “GDP lost” but “economic welfare lost.” That means we must account&nbsp;for the value of our lost liberties from shutdowns, stay‐​at‐​home orders, and closure of non‐​essential businesses. As British economist <a href="https://www.telegraph.co.uk/politics/2020/03/31/britain-needs-have-less-cowardly-debate-lockdown-trade-off-dilemma/">Andrew Lilico has said</a>, that includes “the cost of lost enjoyment, lost advance in our skills, lost spiritual development, lost self‐​expression, delayed marriages, missing of windows of opportunity to ever have a&nbsp;baby, missing the chance to sit at the bedside of a&nbsp;loved one dying of cancer,” and much more besides. These non‐​market losses mean the loss of economic welfare from lockdowns is much greater than observed losses to GDP.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" lang="EN-US">One of my friends has had to cancel his bachelor party as a&nbsp;result of the lockdowns; another probably won’t now have her ill Dad around to give her away at her wedding; some students are missing out on lessons that might permanently impair their understanding for life. It should be obvious these losses are greater than any hit to consumption or earning potential. My guess is that many of you at home feel like your evening time is worth less without the option&nbsp;of doing something different. You valued that option even if you wouldn’t act on it. In economic terms, <a href="http://caseymulligan.blogspot.com/2020/03/the-economic-cost-of-shutting-down-non.html">Casey Mulligan writes about</a> all this as a&nbsp;loss in the productivity of leisure time.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" lang="EN-US">Now, accounting for this lost value accurately is difficult. Especially because, even if governments lifted lockdowns, many of us would likely continue to curb our own non‐​market activities to avoid the risk of infection or spreading the virus to loved ones. The problem is in large part the virus, not just the policy response. In normal times too, libertarians would balk at the idea you could “aggregate” in some way these very personal valuations&nbsp;of liberties. And, just so my views are not misrepresented, I&nbsp;am not saying that trying to account for them necessarily changes the calculus to what is optimal policy either way.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" lang="EN-US">When thinking through how much pain we are willing to incur to save lives though,&nbsp;it’s essential that we do not place an implicit value of zero on our personal, non‐​market freedoms. The value of lives saved&nbsp;accounts for our ability to live those lives.</span><span> Cost estimates of lockdowns should account for the value of our restricted liberties too.</span></span></span></span></p> Tue, 31 Mar 2020 12:24:24 -0400 Ryan Bourne https://www.cato.org/blog/our-liberties-have-value-too Time to Move on the Economy vs. Public Health Debate https://www.cato.org/blog/time-move-economy-vs-public-health-debate Ryan Bourne <p><span>Human life is highly valuable. Basic economic reasoning therefore suggests that, given the risks of COVID-19 to vulnerable populations, we should be willing to withstand large economic costs to prevent the risk of substantial numbers of deaths. This is particularly true if most of those economic costs are temporary. </span></p> <p><span>In response to Donald Trump’s <a href="https://twitter.com/realdonaldtrump/status/1241935285916782593">tweet last week</a> suggesting “WE CANNOT LET THE CURE BE WORSE THAN THE PROBLEM ITSELF,” <a href="https://promarket.org/captured-western-governments-are-failing-the-coronavirus-test/">many</a> economists have indeed been making <a href="https://twitter.com/BetseyStevenson/status/1242180499566669828?s=20">these points</a>. </span></p> <p><span>They highlight estimates suggesting that the estimated value of a&nbsp;statistical life (commonly around $9.3 million) and a&nbsp;quality‐​adjusted‐​life year ($129,000) tend to be high. They show that modeling from the CDC and Imperial College suggests a&nbsp;high loss of U.S. life if no action is taken to stop the spread of COVID-19. They work out the value of additional lost lives if no government action is taken to avoid the worst‐​case scenarios where hospitals are over‐​capacity, with shortages of ICU beds. They conclude that we should be willing to incur trillions, and potentially tens of trillions, of lost economic output to ensure these lives are saved.</span></p> <p><span>Such simple analysis, though, largely tells us one thing: that inaction could be highly costly. Yet nobody is credibly suggesting today that we “do nothing.” What usually makes economists worth their salt is their ability to think on the margin, and to judge alternative realistic scenarios. Economists need to start being economists again.</span></p> <p><span><a href="https://bfi.uchicago.edu/working-paper/2020-26/">Michael Greenstone and Vishan Nigam’s work</a>, for example, estimates that social distancing measures alone (7&nbsp;day isolation for those with symptoms, 14&nbsp;day isolation for their family, and infrequent social contact with over 70‐​year olds for 4&nbsp;months) could save <em>up to</em> 1.7 million U.S. lives over the next six months relative to doing nothing, providing $8 trillion in benefits. </span></p> <p><span>That figure is sensitive to assumptions about the virus’s spread and death rates taken from the Imperial paper. It would be much lower at $3.6 trillion if the peak of daily deaths was 60 percent lower. But, still, even this suggests we should be willing to tolerate medium‐​term losses of up to 16 percent of today’s GDP to save those lives. Though economists do expect GDP to collapse significantly in Q2, most expect it to rebound strongly whenever the public health issue ends. So, taking this social distancing action looks cost‐​effective in the medium‐​term.</span></p> <p><span>Now, one can quibble with the assumptions of such analysis. My real problem though is that too few economists are then asking follow‐​up questions about the wisdom of <em>additional</em> policy: </span></p> <ul> <li><span>If this is broadly right, what are the <em>net impacts</em> of “nonessential business” closures or shelter‐​at‐​home orders? Are these more suppressive measures, in isolation, cost‐​effective? </span></li> <li><span>Are they even optimal from a&nbsp;public health perspective, given the larger economic pain and the likelihood of an infection peak if they are released abruptly?</span></li> <li><span>What if even stronger constraints on economic activity like this risk a&nbsp;financial crisis or widespread business failures that simple social distancing or contact tracing would not? </span></li> <li><span>After what length of time would such suppressive measures be cost ineffective?</span></li> <li><span>How does the potential for a&nbsp;vaccine change any of these considerations? </span></li> <li><span>Would any of these actions be bettered by throwing tons of resources simply into repeat COVID-19 and antibody <a href="https://johnhcochrane.blogspot.com/2020/03/reopen-economy-but-carefully.html">testing for the whole population</a>, combined with social distancing for those infected? </span></li> <li><span>Are there some industries caught up in the nonessential business closures we are seeing where the output costs of closures are high and the benefits in terms of reduced risk of infection low? Why aren’t these excluded? Are their big behavioral benefits to be seen to be all in it together?</span></li> </ul> <p><span>I don’t know all the answers. What I&nbsp;do know is that we seem to be locked in an inane debate about whether what we are doing is better than nothing. We should instead be focused on which policies minimize the combined long‐​term health and economic costs of this pandemic. Just because lives are valuable, and so action to save them is better than inaction, doesn’t mean specific lockdowns or shelter‐​at‐​home orders are optimal policy. We want to find the most cost‐​effective way of dealing with the public health crisis to enable economic activity to return to normal.</span></p> <p><span>In fact, big errors of thinking abound on all sides in this debate, from the “whatever it takes” crowd right through to the “cure is worse than the disease” view. So here’s some questions you should ask when you read commentators or economists comparing economic costs and healthcare benefits of certain actions:</span></p> <ol> <li><span>Are they comparing realistic alternative scenarios, or just “a particular action” vs. “complete inaction”?</span></li> </ol> <ol start="2"> <li><span>What assumption for death rates are they using, given this parameter is highly uncertain? (Hopefully greater testing will improve our knowledge in the very near future, and could help avert prolonged economic mistakes).</span></li> </ol> <ol start="3"> <li><span>How much do they value a&nbsp;human life? Does their assumption vary with age, rather than just presuming all human lives are of equal value?</span></li> </ol> <ol start="4"> <li><span>Are they seeking to account for a&nbsp;fairly comprehensive measure of costs and benefits for different scenarios? For example, potential lung damage for survivors of COVID-19, mental and physical health costs of shutdowns, risks of economic contagion, and the economic consequences of widespread bankruptcies?</span></li> </ol> <ol start="5"> <li><span>Do they correctly recognize that it’s likely that many producers and consumers would still restrict their activity to avoid the virus before an effective treatment, vaccine or herd immunity is developed, even if government policy changed?</span></li> </ol> <ol start="6"> <li><span>Over what time period are they comparing the value of any lives saved against GDP lost? It would be wrong, for example, to compare the value of lives lost against the decline in GDP for this quarter, given economists fully expect GDP to bounce back strongly as things begin to normalize. In fact, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3561560">some historical analyses</a> find public health policies with bigger short‐​term costs can produce better long‐​term economic performance.</span></li> </ol> <ol start="7"> <li><span>Are they comparing apples with apples? Lots of economists seem to be comparing the value of lives saved against GDP lost. But the value of human life is a&nbsp;welfare measure — it incorporates the benefits an individual expects to derive from his or her own life, including leisure time, friendships, and consumption. GDP, in contrast, just measures lost output. Shouldn’t we also account for the lost value of our liberties? </span><a href="http://caseymulligan.blogspot.com/2020/03/the-economic-cost-of-shutting-down-non.html">Casey Mulligan</a><span> has valiantly tried to assess broader losses to our economic welfare from lockdowns, such as not being able to participate in our preferred leisure activities, or experiencing worse schooling. These are real costs too.</span></li> </ol> <p><span>Yes, all this makes analysis more complicated. But policymakers are currently making huge decisions fundamentally altering the health and economic well‐​being of all of us. Economic cost‐​benefit analysis is made for trying to compare the cost‐​effectiveness of different policy options. It’s time to move the debate on from straw man discussions of “action” vs. “inaction” to assess what’s&nbsp;next.</span></p> Fri, 27 Mar 2020 17:02:25 -0400 Ryan Bourne https://www.cato.org/blog/time-move-economy-vs-public-health-debate A Pandemic Recession Is Different https://www.cato.org/multimedia/cato-daily-podcast/pandemic-recession-different Ryan Bourne, Caleb O. Brown <p>Understanding the nature of recessions caused by pandemics is critical to crafting a&nbsp;policy response. Ryan Bourne explains.</p> Wed, 25 Mar 2020 09:23:00 -0400 Ryan Bourne, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/pandemic-recession-different Ryan Bourne’s Tweet thread on the economy is cited on the Armstrong & Getty Show https://www.cato.org/multimedia/media-highlights-radio/ryan-bournes-tweet-thread-economy-cited-armstrong-getty-show Tue, 24 Mar 2020 10:58:38 -0400 Ryan Bourne https://www.cato.org/multimedia/media-highlights-radio/ryan-bournes-tweet-thread-economy-cited-armstrong-getty-show What Is “Nonessential” Business? https://www.cato.org/blog/what-nonessential-business Ryan Bourne <p><span>Maryland Gov. Larry Hogan has followed other governors in <a href="https://governor.maryland.gov/wp-content/uploads/2020/03/OLC-Interpretive-Guidance-COVID19-04.pdfhttps://governor.maryland.gov/wp-content/uploads/2020/03/OLC-Interpretive-Guidance-COVID19-04.pdf">ordering all “nonessential” businesses</a> to close workplace sites within his state. But is it so easy for policymakers to judge what is “essential” and “nonessential” business activity?</span></p> <p><span>Take supermarkets. They are essential as the main food source for people self‐​isolating or working from home. But if supermarkets and their supplies are essential, so are their goods’ manufacturers, the producers of plastic and cardboard carrying the goods, the company’s accountants and financial advisers, cleaning companies that&nbsp;serve the stores, cleaning products used by said companies, the truckers who ferry the goods, gas stations, rest stops, farms, farm equipment manufacturers, mechanical service stations for trucks and farm equipment, and more.</span></p> <p><span>As you can see when you review the family tree of any consumer‐​facing industry, the market economy is a&nbsp;vast network of interconnections, both vertically and horizontally. One of the reasons why even a&nbsp;partial shutdown can be so catastrophic is because of knock‐​on effects through supply‐​chains or indirect losses of income affecting families, as coming unemployment figures and GDP numbers will surely show. </span></p> <p><span>Hogan’s list of all he deems “essential” shows this clearly. The sheer number of industries thought required for society to function shows that a&nbsp;market economy is a&nbsp;vast tapestry of non‐​coercive, interlinked cooperation, far from the picture of dog‐​eat‐​dog competition painted by its critics.</span></p> <p><span>Firms “excluded” from shutting down include: the chemicals sector, a&nbsp;raft of commercial facilities (including dry cleaning), communications firms (internet, telecoms, cable, broadcasters), a&nbsp;whole of “critical manufacturing” companies, the “defense industrial base,” the energy sector, other utilities such as water, a&nbsp;range of financial services firms, the food and food processing supply chain, pet stores and vets, healthcare and related services, funeral homes, large parts of the transportation sector, sectors in IT, government facilities industries, and staffing and payroll service firms. </span></p> <p><span>A sector here, a&nbsp;sector there, and pretty soon you’re talking about pretty large parts of the economy. Hogan was at pains to point out that this list was “non‐​exhaustive” too, with companies encouraged to review additional guidance to check if they were unsure. </span></p> <p><span>My concern is that orders such as Hogan’s are sowing confusion rather than giving businesses clarity. There are good public health reasons why you might think mandated closures for mass entertainment activities– sports events, restaurants, bars, nightclubs, cinemas – are a&nbsp;good idea. There might also be a&nbsp;reason to impose temporary, emergency limits on numbers of people in social gatherings or stores. Both principles have in fact determined many private companies’ responses to this crisis, even prior to government action. A&nbsp;government message encouraging people to work from home may be reasonable guidance too.</span></p> <p><span>But grand declarations that all “non‐​essential businesses” should close risks inadvertently shutting down activities that policymakers hadn’t considered “essential” but whose absence will cause real harm to the public health effort or other essential sectors. One person’s non‐​essential business might be another business owner’s key supplier. It would surely be far better to avoid the mistakes of bureaucratic hubris and just outline directly which businesses and sectors should cease operations, with the list continually under review when clear problems arise.</span></p> Mon, 23 Mar 2020 14:31:14 -0400 Ryan Bourne https://www.cato.org/blog/what-nonessential-business Covid‐​19: Let’s Never Again Take Our Consumption Freedoms for Granted https://www.cato.org/publications/commentary/covid-19-lets-never-again-take-our-consumption-freedoms-granted Ryan Bourne <div class="lead text-default"> <p>A short evening walk is the only antidote many of us will have today against cabin fever. This statement is no begging bowl for pity. An ability to work from home in this febrile pandemic‐​riven economic environment is, of course, a&nbsp;blessing, not a&nbsp;curse. My privilege is checked. Workers and entrepreneurs in industries where demand and supply is cratering — especially restaurants, travel, hospitality, and more — are those who deserve our sympathy and support right now, particularly as unemployment spikes and businesses fail. There are worse fates than being confined to a&nbsp;sofa.</p> </div> , <div class="text-default"> <p>But city dwellers expecting an evening stroll to provide solace from confinement should be warned: you might find it fails to bring much light relief. For it’s only when ambling the semi‐​deserted streets that you observe all those restaurants, bars, coffee shops, and other entertainment venues that you frequent, sat there, empty, their financial futures bleak as individual distancing and government decrees eliminate their custom. It’s seeing them — the shuttered windows and darkened interiors — that reminds us of the mutually beneficial nature of market exchange. And as economists have long realized, our aversion to losses means we feel the hurt of the elimination of our consumer freedoms very hard when they are suspended.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>If one silver lining comes from this whole sad episode, it should be that, when it comes to thinking about day‐​to‐​day government policy, or choosing our political leaders, we never again take our economic freedoms for granted.</p> </div> </div> </aside> , <div class="text-default"> <p>My walk on Tuesday first took me through DC’s Chinatown, with about 1/​30th of its usual crowds milling its streets. I&nbsp;passed Wok and Roll, a&nbsp;Chinese restaurant with karaoke — a&nbsp;pastime that 15 million Americans were estimated to undertake at least monthly in 2011. Then onto a&nbsp;locked‐​down Regal Gallery Place cinema, an industry Americans spent&nbsp;<a href="https://www.the-numbers.com/market/" target="_blank">$11.35 billion on last year</a>, averaging around 4&nbsp;visits per individual annually. That’s adjoined to a&nbsp;locked‐​down Capital One Arena, of course, the home of the Washington Wizards NBA side, the NHL’s Washington Capitals and regular concerts.&nbsp;<a href="https://www.statista.com/statistics/196774/revenue-of-the-washington-wizards-since-2006/" target="_blank">The Wizards</a>&nbsp;and&nbsp;<a href="https://www.statista.com/statistics/196911/revenue-of-the-washington-capitals-since-2006/" target="_blank">Capitals</a>&nbsp;alone had combined revenues of $450 million in 2018/19, but now find their seasons suspended.</p> <p>Much of DC, especially in this area and on 14th street, where my walk ended, is filled with salad bars, takeaway joints, full‐​service restaurants, coffee shops and bars. From CAVA to Chopt, Fado’s Irish Bar to Hando Medo, La Colombe to Jeni’s Splendid Ice Creams, Shake Shack to Le Diplomate, Ted’s Bulletin to Lupo Verde, Compass Rose to Barcelona, Chicken and Whiskey to West Wing café, Ghibellina to The Gibson. All were pale shadows of their usual activity. At best filled with one takeout customer, most were running skeleton operations without any visible patrons, or found themselves closed entirely.</p> <p>A few times I&nbsp;temporarily forgot about the damned virus. “Perhaps I’ll pop in for a&nbsp;beer at Church Key to cure this thirst,” my brain mused. Then I&nbsp;remembered. And it’s that feeling that reminds one sharply of the benefits of mutually beneficial exchange in a&nbsp;market economy. The company and its workers need our patronage to survive, but we highly value their services too, hence why we are usually willing to pay much more than it would cost to cook, drink, or entertain ourselves at home to be their customer.</p> <p>Through daily votes with our wallets, we as consumers show how much we value these food, drink, ice cream, and coffee joints — the chefs, the products, the service and the atmosphere they provide. The losses to us of these places closing or being inaccessible is not primarily financial. We don’t feel the sort of pressure on our incomes being borne by the workers and business owners. But the losses are no less real. Though we moan that we “spend too much eating/​going out,” we are losing the consumer surplus of these supposed luxuries — the difference between the price we’d be willing to pay and the price we’d usually pay to enjoy them. We are losing this because of the virus and the containment policies coming in reaction to it.</p> <p>Those consumer surplus losses, shown through our “revealed preferences” — what we usually choose to spend our money on — add up dramatically across the economy.&nbsp;<a href="https://minnesota.cbslocal.com/2019/05/16/survey-shows-how-often-americans-dine-out/" target="_blank">Fifty‐​six percent of Americans</a>&nbsp;say they dine out, get takeaway or have a&nbsp;meal delivered 2&nbsp;to 3&nbsp;times per week. The US coffee shop industry includes more than 35,500 stores with combined annual sales of about $45 billion, according to research in 2018. It’s difficult to get exact numbers, but there are also estimated to be nearly&nbsp;<a href="https://www.statista.com/statistics/281713/us-bars-taverns-und-nightclubs-industry-establishments/" target="_blank">70,000 bars</a>, nearly 6,000 cinemas, 661,000 restaurants, and 5,000 bowling alleys too — many of which find themselves shutdown or limited to providing carry‐​out services today.</p> <p>Politicians nationwide are currently dubbing these industries “non‐​essential.” But even beyond the workforces whose labors are cruelly devalued with this label, they bring the memories and experiences that make life worth living. I&nbsp;doubt very many people will consider them “non‐​essential” in the 11th week of being stuck at home. They are also networked into the rich tapestry of a&nbsp;modern economy, serving as the fuel or light relief for workers in other “essential sectors,” or providing the end point of a&nbsp;supply‐​chain of activity that provides livelihoods for many other workers too (as&nbsp;<a href="https://fee.org/resources/i-pencil/" target="_blank">beautifully told in I, Pencil</a>).</p> <p>It’s only when our freedoms to operate or consume in such businesses are constrained, even in the midst of a&nbsp;public health crisis, that we realize just how valuable such freedoms are. Hundreds of millions of people around the world, and multiples of that number through history, have been denied basic economic rights, not just in these industries of socializing or travel, but many other day‐​to‐​day sectors too. Those constrained rights include the ability to set up a&nbsp;business or ply a&nbsp;trade freely, even when customers are there and willing to pay for your service. But it also includes the freedom to choose what and where to eat, drink, watch, or play, at your own convenience. In countries such as the modern U.S., we take those freedoms for granted. But we shouldn’t. They are a&nbsp;remarkable inheritance that we should cherish.</p> <p>The author Clarissa Wild once said, “People say you don’t know what you’ve got until it’s gone. Truth is, you knew what you had, you just never thought you’d lose it.” At the moment, we presume we are losing our economic freedoms as part of a&nbsp;temporary shared sacrifice, to ensure we avoid the catastrophic worst‐​case destruction of a&nbsp;pandemic. There’s good reason to believe this is true. This is a&nbsp;global crisis, necessitating not just a&nbsp;governmental, but a&nbsp;societal response. All hands to the pump.</p> <p>Yet when things normalize, and covid‐​19 hopefully passes, we must ensure that these losses of freedoms do turn out to be temporary. And if one silver lining comes from this whole sad episode, it should be that, when it comes to thinking about day‐​to‐​day government policy, or choosing our political leaders, we never again take our economic freedoms for granted.</p> </div> Sat, 21 Mar 2020 10:44:44 -0400 Ryan Bourne https://www.cato.org/publications/commentary/covid-19-lets-never-again-take-our-consumption-freedoms-granted Painful Choices Will Have to Be Made the Longer This Goes On https://www.cato.org/publications/commentary/painful-choices-will-have-be-made-longer-goes Ryan Bourne <div class="lead text-default"> <p>“Whatever it takes.” Just in case&nbsp;you didn’t hear the intended government message of reassurance to businesses, Chancellor Rishi Sunak repeated the&nbsp;mantra five times through Tuesday’s speech and in answering subsequent questions.</p> </div> , <div class="text-default"> <p>As the coronavirus ravages demand across the food, <a href="https://www.telegraph.co.uk/business/2020/03/17/governmenthas-effectivelyshut-hospitalitysector-says-trade-body/" target="_blank">&nbsp;transport and hospitality sectors</a>, and subdues demand in other industries, the Chancellor offered up to £330bn in zero‐​interest loans to businesses, business rates relief and cash grants to retail, hospitality and leisure companies, and £10,000 grants to small firms. Further subsidies for employment are reportedly to be announced.</p> <p>The Chancellor’s rationale for such action is more clear‐​headed than the US response, with president Trump promising cheques to every American.&nbsp;Rather than targeting consumption, Sunak wants instead to ease cashflow problems and curb layoffs from companies labouring under a&nbsp;necessary partial shutdown of&nbsp;the economy. His desire is to preserve capacity.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>We can support business if disruption is short, but after several months it becomes actively wasteful.</p> </div> </div> </aside> , <div class="text-default"> <p>A collapse in spending arising from “social distancing” and government‐​imposed containment measures risks killing many firms by holding back revenues, while costs such as rent, debt payments and payrolls persist.</p> <p>Sunak’s goal here isn’t to “stimulate the economy”, as such. He doesn’t want to risk speeding up the virus’s transmission. No, the aim, at least, is for taxpayer support to help companies to bridge the time until the virus passes.</p> <p>Taxpayers, so the thinking goes, are paying out or supporting activity in lieu of a&nbsp;missing insurance market. Households and businesses couldn’t feasibly have foreseen a&nbsp;global pandemic and if the state didn’t step in, thousands of normally viable businesses could be wiped out, so creating a&nbsp;deep recession and financial&nbsp;crisis.</p> <p>Now, we can all debate whether the&nbsp;measures will prevent that outcome. A&nbsp;lot of self‐​employed and gig economy workers seem precarious.&nbsp;<a href="https://www.telegraph.co.uk/business/2020/03/18/markets-live-coronavirus-latest-news-pound-euro-ftse-100/" target="_blank">Markets seem sceptical about the effectiveness of the business measures</a>. Aside from the scale, one reason might be that this strategy requires the effective economic shutdown to be brief. Policymakers ideally want it to become like an extended Christmas week or “bad season”, from which rapid bounce‐​back occurs, even if some economic activity disappears forever.</p> <p>But the truth is we simply don’t know the duration of this crisis yet. Epidemic modelling from Imperial College has suggested that we might need suppression policies for 55pc to 96pc of time over the next 18 months. Even when government controls are relaxed, workers and customers might still be reluctant to return to activities or establishments where fear of catching or spreading the virus is greatest. Until widespread testing and/​or a&nbsp;vaccine are available, this is the huge uncertainty.</p> <p>Reassuring businesses then, in principle, doesn’t require just committing to do “whatever it takes” but to do it for “however long it takes”. Yet such a&nbsp;promise would neither be believable, nor desirable. If we are really talking about 12 to 18 months of disruption, trying to hibernate much of the economy of February 2020 to “reawaken” it in mid‐​2021 becomes no strategy at all.</p> <p>Such an approach would require a&nbsp;gargantuan commitment from taxpayers. Zero‐​interest loans from government won’t help many firms with this duration of mothballing. As the Office for Budget Responsibility’s Sir Charles Bean explained on Tuesday, the longer this crisis rolls on, the more loans have to become cash grants, lest firms loaded with debts become insolvent. Many will be reluctant to take on loans anyway without certainty about the duration of disruption. So direct taxpayer support will ratchet.</p> <p>If longer than a&nbsp;year, up to a&nbsp;fifth of the economy being replaced by government transfers for no activity starts becoming actively wasteful. As the economy adjusts to its new reality, novel forms of business, new attitudes to teleworking, altered tastes, and alternative supply chains, will develop, making it less and less desirable or feasible to try to return to the economy of yesterday.</p> <p>And we see seeds of economic adjustment already. Supply chains for supermarkets are running on overtime. Amazon is hiring and raising wages. Demands have understandably shifted to certain coronavirus‐​related products and, before long, certain workers, who really need the income, will divert into delivery, supermarkets, and care work.</p> <p>Many families might re‐​examine too their preferences about having two income earners as childcare becomes scarcer. Paying firms to maintain the same workforces&nbsp;as today, in light of all this, becomes destructive.</p> <p>Cost‐​benefit analyses are always uncomfortable to think about during the heat of a&nbsp;crisis. But there must logically come a&nbsp;point when the rise in cost and the falling benefits of “bridging to recovery” makes a&nbsp;change of approach optimal.</p> <p>We are certainly not there yet and, given the flashing warning signs of an imminent output recession, the Government’s framework of thinking is sensible enough, for now. This genuine public health crisis must mean we all temporarily rethink the role of government.</p> <p>Highly targeted provisions of income support for households and businesses deeply affected by the downturn have a&nbsp;much clearer justification than expensive universal schemes such as a&nbsp;temporary “basic income”, although deciding on deserving targets is always fraught with difficulty.</p> <p>The key point is that the Government should avoid making promises it can’t keep. Bills currently in the US Congress for business support are good until June. By that time, the trajectory of the virus’s transmission should be much clearer. Programmes can always be renewed, if necessary. But promising “whatever it takes, for however long it takes” would be foolhardy.</p> <p>In what’s left of the market economy during this time, change occurs quickly. Governments could relax certain regulations, particularly the licensing of occupations and business “types”, to make transition easier still. What we cannot do is try to freeze the economy for years.</p> <p>Let us hope that the end of this current crunch then comes sooner rather than later. Otherwise we are looking at huge destruction, be it to livelihoods or our health.</p> </div> Thu, 19 Mar 2020 08:47:42 -0400 Ryan Bourne https://www.cato.org/publications/commentary/painful-choices-will-have-be-made-longer-goes The Upside‐​down World of Virus Economics. And Why We Free Marketeers Must Adapt Our Usual Ways of Thinking https://www.cato.org/publications/commentary/upside-down-world-virus-economics-why-we-free-marketeers-must-adapt-our-usual Ryan Bourne <div class="lead text-default"> <p>Governments are certainly taking action in the face of a&nbsp;likely coronavirus recession.</p> <p>Emmanuel Macron has committed the French state to protecting every company from bankruptcy. Steve Mnuchin, the U.S. Treasury Secretary, has announced that Donald Trump’s government willmail cheques to Americans within two weeks.</p> </div> , <div class="text-default"> <p>And Rishi Sunak yesterday unveiled a&nbsp;huge package of UK measures: £330 billion worth of zero‐​interest loans and loan guarantees for businesses, business rates relief and cash grants for retail, hospitality, and leisure companies, £10,000 cash grants to all small businesses, and a&nbsp;three month mortgage holiday for those in distress. More Government action, so we are told, will come with employment support. That’s on top of £12 billion coronavirus‐​related spending in last week’s budget.</p> <p>Many will question the specifics of the Treasury’s measures. Is there enough there to tide over restaurants and hotels seeing complete demand collapses? Will the offer of loans be enough for manufacturing firms suffering from delayed demand, given the crisis duration is unknown? If mortgage holders are worthy of support, why not renters? And is the existing generosity, eligibility, and administrative capacity of the welfare system broad enough to support households seeing job losses or falling self‐​employment income in the coming weeks?</p> <p>The answer is “probably not,” but the Chancellor’s assured tone screamed that more was to come. “Whatever it takes” was his message, repeated five times.</p> <p>If such questions seem weird coming from a&nbsp;free‐​market economist, it’s because we are in unprecedented times. <a href="https://capx.co/ignore-short-term-gdp-and-avoid-fiscal-stimulus-the-upside-down-economics-of-coronavirus/">As I&nbsp;outlined yesterday</a>, the upside‐​down world of coronavirus economics means that employees not engaging in on‐​site work is, today, largely a&nbsp;virtue, not a&nbsp;sin.</p> <p>Short‐​term GDP boosts and pumping up consumption are not desirable given the health consequences. We don’t want “fiscal stimulus.” In fact, economic activity will shrink precisely because of the social distancing and containment policies we need to curb the virus.</p> <p>Our key economic challenge is to avoid this necessary, short‐​term, pandemic from inducing “economic contagion.” We don’t want a&nbsp;temporary and partial shutdown of the economy to lead to otherwise viable businesses collapsing, with destructive losses of capital, worker‐​employer relationships, and resulting unemployment. Whereas ordinary recessions bring “creative destruction” among firms, few would suggest your local Indian restaurants could feasibly have foreseen a&nbsp;global pandemic eliminating months of its business income.</p> <p>The theoretical aim of policy then should be bridging over what is hopefully a&nbsp;short pause in activity, eliminating near‐​term distress for households and businesses to allow a&nbsp;V- or Nike‐​tick shaped recovery once the viral tsunami passes.</p> <p>In this light, Sunak’s approach recognises the nature of the business problem. Big on direct payments and loans, the Chancellor in effect has Government mimicking a&nbsp;missing insurance market, with cash payments and low cost loans available such that “good firms” remain tied over through this year, with further unspecified support to ensure they maintain employment too.</p> <p>The thought process is that most large companies can access credit or investment capital if they have long‐​term viability. Given current sentiment though, Government loans on more favourable terms may ease the pressure given any credit crunch. Smaller businesses are more likely to be credit constrained, and such will be the hit to activity in areas such as restaurants and hospitality, big loan repayments short‐​term may end up making businesses unviable anyway. Hence the cash grants announced yesterday.</p> <p>Now, from a&nbsp;free‐​market perspective, this all throws up some obvious concerns, not least taxpayers being on the hook for large loan losses. Timing is another worry. We still talk under the assumption that this pause in activity will last a&nbsp;few months. But if the Imperial College modelling suggesting that coronavirus suppression might require 18 months of containment is correct, then “bridging” won’t work, despite the Government’s best efforts.</p> <p>As the OBR’s Sir Charles Bean said yesterday, the longer this runs, the less likely loan, even on favourable terms, can plug firms’ budget shortfalls without endangering insolvency. So the Government would have to turn to taxpayer grants. But a&nbsp;less palatable truth is that the longer it goes on, the more market activity and the structure of the economy will change, and the less continuing support would be beneficial for any rebound.</p> <p>Already, understandably, more resources are flowing into the production of ventilators. Amazon is hiring more staff at higher wages. If we are holed up for a&nbsp;year or more, our spending habits will change, perhaps irrevocably. New enterprises will prioritise delivery. More shops would move to online only. The nature of firms and teleworking would change, and probably our interests and tastes too. At that stage, considering this an economic “pause,” aiming to return to where we left off, will just not be infeasible but undesirable.</p> <p>Of course, we aren’t there yet. But it’s worth bearing in mind. For Sunak yesterday fixated on big fiscal measures, no doubt considering stock market reaction. But, in fact, governments should also be considering regulatory changes and adjustments to their own spending that might make this period and any future adjustment easier.</p> <p>Just yesterday, for example, Robert Jenrick announced that cafes, restaurants and pubs will, from now on, automatically become takeaways and food delivery companies. Why there was a&nbsp;requirement to obtain permission through planning laws for this already is a&nbsp;mystery. But this is just the sort of innovative thinking that will give businesses and workers some breathing space, easing future change.</p> <p>With the crisis pressing, the government should think carefully about other steps that could both ease the immediate challenge and provide new ways of working. Why not relax licensing requirements and child‐​staff ratios for childminders? Why not ease overtime, agency worker rules and Sunday trading regulations to generate more income opportunities and allow smoothing of supermarket visits? Rather than seeking work, why not encourage jobseekers to do helpful tasks on Mechanical Turk? The possibilities for innovative thinking are endless.</p> <p>Then there’s the Government itself. For now, the coronavirus is being treated as an add‐​on to existing activity, requiring new funding. As businesses adjust, government as yet is not curbing its own activity by, say, delaying infrastructure projects. But if this crisis continues, might it change the Government’s outlook? If a&nbsp;fall‐​out from all this is greater remote working, how does that affect the “levelling up” agenda? Or undermine the business case for HS2?</p> <p>Sunak yesterday was firefighting a&nbsp;crisis and setting out his view of the macroeconomics. His answers have a&nbsp;clear coherent rationale: protect jobs while mothballing certain activity to contain the virus by providing bridging support to the recovery. But he must keep one eye on more uncomfortable possibilities, and keep other economic levers to make this less destructive under constant review.</p> </div> Wed, 18 Mar 2020 17:26:53 -0400 Ryan Bourne https://www.cato.org/publications/commentary/upside-down-world-virus-economics-why-we-free-marketeers-must-adapt-our-usual Nancy Pelosi Wants To Compound Difficulties For Major Employers https://www.cato.org/blog/nancy-pelosi-wants-compound-difficulties-major-employers Ryan Bourne <p><span><span><span lang="EN-US" lang="EN-US" lang="EN-US">Libertarians might disagree on the correct economic response to the coronavirus. It’s a gray area – with difficulty assessing where “public goods” interventions end, in light of a pandemic and failure to insure against it, and where heedless market‐​distorting bailouts begin. But we can all agree on one thing: now is the worst possible time for new government labor mandates on business.</span></span></span></p> <p><span><span><span lang="EN-US" lang="EN-US" lang="EN-US">Yet that is what Democrats want to do for many of America’s largest service sector employers. Faced with <a href="https://www.nytimes.com/2020/03/14/opinion/coronavirus-pelosi-sick-leave.html?action=click&amp;module=Opinion&amp;pgtype=Homepage">New York Times criticism</a> of Congress for failing to negotiate for employer‐​paid sick leave in companies with more than 500 workers, House Leader Nancy Pelosi <a href="https://twitter.com/SpeakerPelosi/status/1238997131886821377?s=20">retorted</a>:</span></span></span></p> <blockquote><p><span><span><span lang="EN-US" lang="EN-US" lang="EN-US">I don’t support U.S. taxpayer money subsidizing corporations to provide benefits to workers that they should already be providing. House Democrats will continue to prioritize strong emergency leave policies as we fight to put <a href="https://twitter.com/hashtag/FamiliesFirst?src=hashtag_click">#FamiliesFirst</a>…Large employers and corporations must step up to the plate and offer paid sick leave and paid family &amp; medical leave to their workers. Both now as we fight the <a href="https://twitter.com/hashtag/coronavirus?src=hashtag_click">#coronavirus</a> and in the years to come. <a href="https://twitter.com/hashtag/COVID%E3%83%BC19?src=hashtag_click">#COVIDー19</a></span></span></span></p> </blockquote> <p><span><span><span lang="EN-US" lang="EN-US" lang="EN-US">There are many downsides to sick leave mandates in normal times. </span></span></span>In the long run we’d expect employers to adjust for a paid‐​leave mandate by offering lower wages or other benefits, such that workers’ total compensation remains unchanged.<span><span><span lang="EN-US" lang="EN-US" lang="EN-US"> In the short‐​run reality, when wages are stickier, they encourage job and hours cuts, as <a href="https://www.wsj.com/articles/paid-sick-leave-is-a-failed-cure-11583964836">Aaron Yelowitz and Michael Saltsman write here</a>.</span></span></span></p> <p><span><span><span lang="EN-US" lang="EN-US" lang="EN-US">So advocating this mandate when service‐​sector businesses already see demand cratering and their supply‐​chains disrupted seems utterly destructive. Pelosi is, in effect, saying that the full near‐​term costs of discouraging the spread of the virus through isolating sick employees be borne by large companies, rather than taxpayers. It’s difficult to think of a quicker way of turning what’s (hopefully) a temporary shock for businesses into an unemployment problem.</span></span></span></p> <p><span><span><span lang="EN-US" lang="EN-US" lang="EN-US">This is particularly so when you look at the large companies who would be affected. Yes, Walmart should largely see demand hold up. Some restaurants will switch effectively to home delivery. But major employers currently not covered include companies such as Subway, Marriott, Holiday Inn, IKEA, Oliver Garden, and Nordstrom (see graphic below) – all of whom will see big downturns in revenues as voluntary and coercive social distancing ramps up. Food and hospitality industries, in particular, operate on very low profit margins. Increasing their cost base through these mandates could put some in severe trouble.</span></span></span></p> <p><span><span><span lang="EN-US" lang="EN-US" lang="EN-US">Ideally we wouldn’t have laws applied differently to small and large businesses. If paid sick leave for employees of small firms is considered so essential for emergency public health reasons that it must be covered by the federal government, it doesn’t make much sense to argue large businesses should instead be mandated to fund it themselves. Particularly when the consequences could be a spate of layoffs from firms already struggling today.</span></span></span></p> <figure role="group" class="filter-caption"><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="1d27950c-d143-4fac-86f4-996fed08c593" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-03/sick%20leave.jpeg?itok=9mGS401s 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-03/sick%20leave.jpeg?itok=BOWA-pA2 1.5x" width="700" height="706" src="/sites/cato.org/files/styles/pubs/public/2020-03/sick%20leave.jpeg?itok=9mGS401s" alt="Major employers without paid sick leave" typeof="Image" class="component-image" /></div> <br /><figcaption><div class="figure-caption text-sans-alternate">Source: New York Times </div> </figcaption></figure> Tue, 17 Mar 2020 11:31:40 -0400 Ryan Bourne https://www.cato.org/blog/nancy-pelosi-wants-compound-difficulties-major-employers Sunak’s Budget Marks the Tories’ Final Retreat From Thatcherism https://www.cato.org/publications/commentary/sunaks-budget-marks-tories-final-retreat-thatcherism Ryan Bourne <div class="lead text-default"> <p>The headlines were about&nbsp;a&nbsp;near‐​term splurge on coronavirus&nbsp;relief and delivering on the manifesto promise to “end austerity”. But Chancellor&nbsp;<a href="https://www.telegraph.co.uk/business/2020/03/11/rishi-sunak-primes-fiscal-pumpon-coronavirus-recession/" target="_blank">Rishi Sunak’s first Budget&nbsp;</a>saw a&nbsp;much broader shift in Tory economic philosophy than rubber‐​stamping more government borrowing.</p> </div> , <div class="text-default"> <p>For arguably the first time since 1979, this week’s Budget explicitly endorsed two policy principles Conservatives have long rejected: that governments should use public spending to steer the macroeconomy and that activist government can drive innovation and long‐​run growth.</p> <p>“By driving technological change,” Sunak’s Budget Red Book claims, “the Government will create the high quality, highly paid jobs of the future”. Such thinking, that state activity drives innovation and “creates jobs”, would have been anathema to Conservatives until just recently.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>For arguably the first time since 1979, this week’s Budget explicitly endorsed two policy principles Conservatives have long rejected: that governments should use public spending to steer the macroeconomy and that activist government can drive innovation and long‐​run growth.</p> </div> </div> </aside> , <div class="text-default"> <p>The party’s 1983 manifesto outlined how government overspending destroyed jobs. In 1987, they insisted “it is people who create wealth, not governments”.</p> <p>John Major’s 1997 offer to the electorate declared: “Governments do not create jobs. Businesses do.” It also said that “growth is created by people’s hard work, ingenuity, thrift and willingness to take risks”. David Cameron believed prosperity would come from “creating jobs in the private sector”.</p> <p>But, in recent years, segments of the party have romanticised the idea of government‐​led prosperity. A&nbsp;decade of near‐​stagnant productivity growth has left politicians scrambling, correctly diagnosing that innovation is the route to higher living standards. Now, <a href="https://www.telegraph.co.uk/business/2020/03/11/tories-have-turned-backs-thatcherism-sunaks-public-sector-budget/" target="_blank">the Thatcherite recommendation</a>&nbsp;to achieve that — liberating the private sector to deliver through supply‐​side reform — is out of vogue. Sunak’s speech reflects new Tory faith in government as the guarantor and source of innovation.</p> <p>“By driving technological change,” Sunak’s Budget Red Book claims, “the Government will create the high quality, highly paid jobs of the future”. Such thinking, that state activity drives innovation and “creates jobs”, would have been anathema to Conservatives until just recently.</p> <p>The party’s 1983 manifesto outlined how government overspending destroyed jobs. In 1987, they insisted “it is people who create wealth, not governments”.</p> <p>John Major’s 1997 offer to the electorate declared: “Governments do not create jobs. Businesses do.” It also said that “growth is created by people’s hard work, ingenuity, thrift and willingness to take risks”. David Cameron believed prosperity would come from “creating jobs in the private sector”.</p> <p>But, in recent years, segments of the party have romanticised the idea of government‐​led prosperity. A&nbsp;decade of near‐​stagnant productivity growth has left politicians scrambling, correctly diagnosing that innovation is the route to higher living standards. Now, <a href="https://www.telegraph.co.uk/business/2020/03/11/tories-have-turned-backs-thatcherism-sunaks-public-sector-budget/" target="_blank">the Thatcherite recommendation</a>&nbsp;to achieve that — liberating the private sector to deliver through supply‐​side reform — is out of vogue. Sunak’s speech reflects new Tory faith in government as the guarantor and source of innovation.</p> <p>The supposed economic benefits of state spending permeated his Budget speech. First, there was the coronavirus response, with more short‐​term funds for the NHS, sick pay and support for workers and businesses as insurance‐​like relief against the shock.</p> <p>Even the most libertarian of us recognise a&nbsp;rationale for such temporary support during an unexpected epidemic, not least to prevent widespread business failures and a&nbsp;financial crisis. But the additional £12bn of funds added to the £18bn extra day‐​to‐​day spending otherwise promised was not dubbed “bridging relief” or “providing short‐​term economic security” by the Chancellor, but a&nbsp;fiscal “stimulus”.</p> <p>Why, exactly, the Chancellor wants to “stimulate” economic activity, when curbing the virus’s transmission requires its reduction, is a&nbsp;mystery. But his wording was telling. For it shows Conservative openness to the idea of business cycle management through government spending.</p> <p>That shift back towards Keynesianism was confirmed with a&nbsp;promised review of whether “fiscal policy can provide timely and effective demand management”. Gone, seemingly, are the days of “monetary activism and fiscal responsibility” associated with former chancellor George Osborne.</p> <p>The break from orthodoxy when it comes to long‐​term growth and innovation is greater still. For four decades, Tories have seen government spending as a&nbsp;drag on the private sector and so sought to hold its growth below that of GDP. Sunak, in contrast, sees government spending as a&nbsp;source of prosperity, even considering rebadging more of it as investment to emphasise its supposed pro‐​growth benefits.</p> <p>His Budget promised robust growth in public service spending, with annual increases not seen since New Labour. But it is the £175bn extra infrastructure spend over the Parliament that he really heralds as a&nbsp;game‐​changer.</p> <p>No economist would deny, of course, that good infrastructure can enhance productivity. But the scale of this uplift guarantees substantial crowd‐​out of private sector capital projects. So who do you trust to choose and deliver projects with the highest economic returns: businessmen or Sunak?</p> <p>Assertions that a&nbsp;massive government infrastructure splurge is, on net, “good for the economy”, suggests the latter. I&nbsp;am not confident. Those who blindly expect infrastructure projects to deliver growth, and regional revival, should look to Japan in the Nineties, Spain in the 2000s, and New Labour’s failed regional regeneration attempts, to see how little is guaranteed.</p> <p>But Sunak’s trust in government as a&nbsp;growth source extends far beyond raising infrastructure spending to the highest level since the Seventies. The Budget also increased government broadband spend, start‐​up loans and export finance.</p> <p>It increased state R&amp;D spending to 0.8pc of GDP, while setting up a&nbsp;UK version of the US Advanced Research Projects Agency (Arpa) — a&nbsp;supposed “blue skies agency” to fund “high‐​risk, high reward science”.</p> <p>The brainchild of No 10 adviser Dominic Cummings, the agency is meant to bring together researchers to work on unusual projects, supposedly generating big spillover benefits for the private sector. But, as with infrastructure, there is a&nbsp;danger of crowd out. Taking great scientists into state activity removes them from private activity where their talents can be put to other productive uses.</p> <p>Government‐​led science hardly ended well for Harold Wilson and his “white heat of technology”. While the USSR’s researchers achieved great inventions, it turned few into consumer‐​facing innovations. Nor is there much historically here to suggest a&nbsp;British Arpa is necessary: the UK led the world in the industrial revolution with no state funding for non‐​military scientific or technological research.</p> <p>What Sunak’s speech represents, therefore, is an abandonment of key principles of Thatcherism — its fiscal conservatism, opposition to demand management, and belief in consumer‐​led entrepreneurial capitalism. Sunak seems confident that his counter‐​combination of higher public spending, more infrastructure investment, activist fiscal policy, and state‐​science can turn around the UK’s sluggish productivity growth. Historically, it’s unclear why he is so bullish.</p> </div> Thu, 12 Mar 2020 08:40:44 -0400 Ryan Bourne https://www.cato.org/publications/commentary/sunaks-budget-marks-tories-final-retreat-thatcherism Is the President Asking the Right Economic Question? https://www.cato.org/blog/president-asking-right-economic-question Ryan Bourne <p>President Trump wants to <a href="https://www.politico.com/news/2020/03/09/donald-trump-fiscal-stimulus-measures-124347">‘go big’ on fiscal stimulus</a>, so reports the media. And so far a&nbsp;lot of coverage of its likely contents has started from that premise – asking whether any package would help “stimulate” the economy by boosting spending.</p> <p>That seems to me the wrong way of thinking about the coronavirus problem, as it pertains to economics.</p> <p>In economic terms, an epidemic is first and foremost a&nbsp;supply‐​shock – a&nbsp;disruption to supply‐​chains and face‐​to‐​face activity, with workers taken away from production due to sickness or fear of sickness, potentially exacerbated through containment policies. That supply‐​shock, then, reflects the primary externality problem that’s unavoidable in the short term and the economic effects of public health measures needed to mitigate it. It is simultaneously a&nbsp;demand‐​shock because people avoid certain types of spending and socializing and foresee that incomes are likely to be lower as a&nbsp;result of this underlying problem.</p> <p>Seen this way, it is a&nbsp;conceptual mistake to think then that what we want right now is for fiscal policy, through taxes and spending, to somehow encourage a “return to normal” through boosting consumption. In fact, returning behavior to normal would risk worsening the externality problem associated with the spread of the virus, because more activity means more transmission. You wouldn’t start construction work with an imminent hurricane.</p> <p>Rather than asking: “Will this stimulate the economy?” (or even the stock market), it seems to me policymakers should instead be asking:&nbsp;“How can we deal with the massive externality problem without causing too much economic distress?”</p> <p>Viewed through that lens, big tax cuts – such as the proposed employee payroll tax cut – seem an expensive blunt instrument for alleviating distress. If social distancing is necessary, we don’t want employees out spending more money because they have more in their pockets. Certainly, there’s no case for a&nbsp;big payroll tax cut through November’s election, as President Trump seems to want.</p> <p>The key challenge is how to ease liquidity constraints binding on households and businesses which would suffer the biggest losses of income if demand for their services collapses or their activities were required to be temporarily paused. The payroll tax cut won’t do that, not least because anyone laid off won’t benefit from it, and those workers in many service industries such as restaurants and bars (where tips are important) won’t benefit much from it.</p> <p>Given few seem to have insured against this eventuality, there’s much more rationale for targeted measures that help otherwise viable businesses from going under or provide a&nbsp;degree of security for workers or contractors who would otherwise have perverse incentives to continue working even if sick. An employer payroll tax cut to avoid worker layoffs makes more sense than an employee‐​side cut, particularly if targeted at certain industries. And though they would be beset by cronyism problems, I&nbsp;can at least see the rationale in lending programs to help certain businesses bridge over what is hopefully a&nbsp;V‑shaped recovery.</p> <p>What we want to avoid though is big bailouts and moral hazard problems — throwing money at businesses that will&nbsp;not be viable in the new post‐​epidemic world. There have been worrying reports about the president wanting assistance for oil and natural gas companies in light of the fall in oil prices, for example. We don’t want to entrench the idea either that epidemics are some abnormal occurrence that governments would always step in to solve,&nbsp;crushing future market responses such as pandemic insurance or firms and households taking precautionary measures.</p> <p>The key point though is that the package the president eventually puts forward shouldn’t be judged by “whether it will stimulate the economy,” but instead&nbsp;“whether it will mitigate the distress that is coming as the virus spreads and necessary measures to contain it are rolled out.” It’s a&nbsp;subtle difference in emphasis, but an important one.</p> Tue, 10 Mar 2020 14:50:57 -0400 Ryan Bourne https://www.cato.org/blog/president-asking-right-economic-question Ryan Bourne discusses price‐​fixing and the coronavirus on Newsmax TV’s National Report https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-discusses-price-fixing-coronavirus-newsmax-tvs-national Tue, 10 Mar 2020 11:13:58 -0400 Ryan Bourne https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-discusses-price-fixing-coronavirus-newsmax-tvs-national Bernie’s $15 Minimum Wage Would Make America Less Hospitable for Immigrants https://www.cato.org/publications/commentary/bernies-15-minimum-wage-would-make-america-less-hospitable-immigrants David J. Bier, Ryan Bourne <div class="lead text-default"> <p>The Trump administration implemented its “public charge” rule last week. The&nbsp;<a href="https://www.federalregister.gov/documents/2019/08/14/2019-17142/inadmissibility-on-public-charge-grounds" target="_blank">rule</a>&nbsp;will generally refuse legal status to unskilled immigrants whom the government predicts will make less than 250% of the poverty line:&nbsp;<a href="https://aspe.hhs.gov/poverty-guidelines" target="_blank">$31,900 annually</a>&nbsp;for an individual. Democrats decried this move as immoral, and it is indeed&nbsp;<a href="https://www.cato.org/blog/public-charge-rule-bans-almost-entirely-self-sufficient-legal-immigrants">deeply flawed</a>, yet their party’s economic plans would create similar barriers to immigrants striving to realize the American dream.</p> </div> , <div class="text-default"> <p>Democratic presidential candidate Bernie Sanders is the leading example. The socialist senator <a href="https://berniesanders.com/issues/welcoming-and-safe-america-all/" target="_blank">promises</a> to rescind the public charge rule created by Trump. He <a href="https://berniesanders.com/issues/welcoming-and-safe-america-all/" target="_blank">says</a> it is appalling that our immigration system would &ldquo;discriminate on the basis of income.&rdquo; The land of the free, he quite rightly believes, should &ldquo;welcome all.&rdquo;</p> <p>Yet where Trump would stop many unskilled immigrants at the border, Sanders&rsquo;s policy platform would make it nigh impossible to hire them, essentially locking immigrants out of our economy. Sanders&rsquo;s federal minimum wage proposal would bar U.S. employers from hiring anyone, citizen or not, for less than $15 per hour, which is roughly $31,200 annually for a 40-hour-a-week worker. That&rsquo;s basically the same wage requirement as the public charge rule. Every other major Democratic presidential candidate <a href="https://www.politico.com/2020-election/candidates-views-on-the-issues/economy/minimum-wage/" target="_blank">supports</a> the same minimum wage requirement.</p> <p>Sanders&rsquo;s plan, just like Trump&rsquo;s public charge rule, tells immigrants that if employers aren&rsquo;t willing to pay them high wages, our country shouldn&rsquo;t welcome them. Sure, Sanders might argue he would approve a higher percentage of immigrant families seeking citizenship than Trump. But if employers can&rsquo;t hire them, far fewer will desire to immigrate anyway.</p> <p>The facts are clear: Low-skilled immigrants would be disproportionately affected by a major upward shift in the federal wage floor. The 4.1 million immigrants lacking a high school degree <a href="https://www.bls.gov/news.release/forbrn.nr0.htm/labor-force-characteristics-of-foreign-born-workers-summary" target="_blank">made up</a> 59% of that demographic in 2018, and their median annual wages were $27,820, well below the annual earnings of a $15-an-hour worker working 40 hours per week.</p> <p>Democrats believe, of course, that minimum wage laws raise pay without costing jobs. But such a high wage floor imposed across the whole country would have significant adverse effects on low-wage workers&rsquo; opportunities. That&rsquo;s why the Congressional Budget Office&rsquo;s median <a href="https://www.cbo.gov/publication/55410" target="_blank">estimate</a> was 1.3 million net lost jobs if a $15 minimum wage was implemented through 2025.</p> <p>Low-skilled immigrants are already <a href="https://cmsny.org/publications/warren-reverse-migration-022620/" target="_blank">abandoning states</a> such as California and New York in favor of states with lower minimum wages such as Texas and Virginia. This confirms research that low-skilled workers <a href="https://www.journals.uchicago.edu/doi/abs/10.1086/702650?mobileUi=0&amp;" target="_blank">move</a> or <a href="https://www.sciencedirect.com/science/article/abs/pii/S0166046216301156" target="_blank">commute away</a> from states with higher wage floors and shows that minimum wages destroy jobs. Nationally, we would therefore expect far fewer low-skilled workers to move to the United States if Sanders&rsquo; wage plan became law.</p> <p>True, firms may adjust in the short-term by restricting other work-related benefits, cutting hours, or reorienting production, allowing them to maintain jobs. But future <a href="https://www.nber.org/papers/w19262" target="_blank">job growth</a> in these industries will be lower, particularly in industries with <a href="https://www.bls.gov/cps/cpsaat45.xlsx" target="_blank">a high proportion of minimum wage workers</a>: food and drink establishments, accommodation, personal care, and private household work. Such sectors have historically been the first step on the jobs&rsquo; ladder for new, unskilled immigrants.</p> <p>Workers who lose their private sector jobs due to soaring minimum wages might find refuge in Sanders&rsquo;s proposed &ldquo;federal jobs guarantee,&rdquo; which would obligate the federal government to hire anyone at $15 per hour. But U.S. taxpayers will never support giving low-skilled immigrants public-funded jobs solely because they can&rsquo;t get a job anywhere else.</p> <p>Without jobs, immigrants will stay in their home countries, indirectly achieving the goal that Trump&rsquo;s public charge rule would achieve directly. We know this because when the economy stops creating jobs, as it did during the 2009 recession, <a href="https://www.cato.org/blog/immigrant-share-didnt-rise-first-time-recession">more immigrants leave the U.S. than come</a>.</p> <p>Despite empty claims that he would &ldquo;welcome all,&rdquo; Sanders has a long history of talking about keeping out low-wage immigrants.</p> <p>In 2015, the senator dramatically <a href="https://www.vox.com/2015/7/28/9014491/bernie-sanders-vox-conversation" target="_blank">denounced</a> &ldquo;an open-border policy [to] bring in all kinds of people [to] work at $2 or $3 an hour that would be great for them&rdquo; but &ldquo;would make everybody in America poorer.&rdquo; In 2019, he <a href="https://www.politico.com/story/2019/04/08/bernie-sanders-open-borders-1261392" target="_blank">was equally</a> blunt: "If you open the borders, my God, there's a lot of poverty in this world, and you're going to have people from all over the world. And I don't think that's something that we can do.&rdquo;</p> <p>But effectively closing legal employment to low-wage immigrants would hurt us all. The evidence <a href="https://www.cato.org/blog/immigrants-dont-lower-blue-collar-american-wages">is clear</a> that low-skilled immigrants create better job opportunities for the vast majority of U.S. workers. That&rsquo;s because rather than displace U.S. workers, immigrants <a href="https://www.aeaweb.org/articles?id=10.1257/app.1.3.135" target="_blank">actually complement them</a>. Workers with limited English ability work in the back of the restaurant, for example, while natives manage the front. This synergy makes the entire economy more productive.</p> <p>A genuine pro-immigrant agenda would look to create more such opportunities, not restrict them. Instead, while Trump wants to put up legal restraints against low-wage immigrants coming to the U.S., Sanders and other Democrats would put up wage controls to stop many from legally working. Their message is the same: If you are a poor foreigner, stay put.</p> </div> Mon, 09 Mar 2020 11:12:29 -0400 David J. Bier, Ryan Bourne https://www.cato.org/publications/commentary/bernies-15-minimum-wage-would-make-america-less-hospitable-immigrants Coronavirus Anti-“Price Gouging” Madness https://www.cato.org/blog/coronavirus-anti-price-gouging-madness Ryan Bourne <p>In light of <a href="https://www.ft.com/content/8db033ac-5d11-11ea-b0ab-339c2307bcd4">French government and Amazon threats</a> to stamp out sellers hiking prices for coronavirus‐​affected products (such as face masks and hand sanitizer), <a href="https://www.telegraph.co.uk/business/2020/03/05/coronavirus-price-hiking-should-praised-not-condemned/">my latest Telegraph piece</a> makes the case for allowing market prices to work in the face of near‐​term shortages.</p> <p>The case against anti‐​price gouging laws or restrictions is well‐​known. Economists <a href="http://www.igmchicago.org/surveys/price-gouging">generally oppose them</a>. In this case, it’s not even clear what is happening can be described as “gouging” – a term usually reserved for high price spikes in the aftermath of disasters.</p> <p>No, what we have here is good old supply and demand – <a href="https://www.cnbc.com/2020/03/03/coronavirus-hand-sanitizer-sales-surge-leading-to-price-hikes.html">the desire for these products is surging</a>, while in the short‐​term supply is relatively constrained. In this environment, price rises play a useful role in deterring over‐​purchasing and hoarding, whilst encouraging more supply to be brought to market in future. Sharp, for example, has <a href="https://www.bbc.com/news/technology-51706629">reoriented a TV factory to producing face masks</a>. We’d get much more of this, or companies working overtime to meet the new demand, if there was clear profit signal to do so.</p> <p>No sooner had the piece been published, but the <a href="https://www.gov.uk/government/news/cma-statement-on-sales-and-pricing-practices-during-coronavirus-outbreak">UK’s Competition and Markets Authority announced</a> that it was assessing whether to recommend the government introduce price controls there. No economic rationale was given for their position. UK economist Andrew Lilico points out that their own legal powers seem unlikely to cover retailers or merchants raising these prices – they usually have to find evidence of “significant market power” and “excessive pricing.” But given pharmacies, chemists, and supermarkets are fairly competitive, it’s not clear that any significant market power exists.</p> <p>Perhaps as a result of the threat of government action, or concerns about a consumer backlash, many firms in the U.S. have maintained low prices, with some even discounting the sanitizer in the face of rising demand. The results are clear, with many empty shelves (see picture below). I’ve heard stories from New York about pharmacy staff running behind‐​the‐​counter black markets.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="a8527b16-70f9-47ea-963e-4e0f06d5f72d" class="align-center embedded-entity" data-langcode="en"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-03/cvs.jpg?itok=Z3VhlbMY 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-03/cvs.jpg?itok=mBy-a7KN 1.5x" width="700" height="525" src="/sites/cato.org/files/styles/pubs/public/2020-03/cvs.jpg?itok=Z3VhlbMY" alt="CVS shelves for hand sanitizer completely empty" typeof="Image" class="component-image" /></div> <p>In the UK, most pharmacies are now restricting purchases to <a href="https://www.bbc.com/news/uk-51729012">2 per customer for hand sanitizer</a> (see picture below), rules which can be easily circumvented by multiple store visits or asking family members to buy separately. These mechanisms are a reminder that scarce resources still need some means of being allocated, even when legal prices cease to reflect reality. Government threats of action mean they are instead being rationed according to who’s lucky enough to be around when the store gets a new delivery, or who can find a black‐​market seller outside of the regulator or government’s purview.</p> <p>In the face of a potentially prolonged and worsening epidemic, muffling the price signals therefore risks disincentivizing much‐​needed supply expansions as the virus spreads. It’s bad enough that private sector firms are doing their best to keep sellers from legally serving the market. Government threats and laws would simply exacerbate the problem.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="35a25f52-63f1-4a81-8444-c0900d098835" class="align-center embedded-entity" data-langcode="en"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-03/superdrug.png?itok=hqrw97jC 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-03/superdrug.png?itok=kHn2eDvA 1.5x" width="700" height="525" src="/sites/cato.org/files/styles/pubs/public/2020-03/superdrug.png?itok=hqrw97jC" alt="UK stores restricts hand sanitizer sales to two per person" typeof="Image" class="component-image" /></div> Thu, 05 Mar 2020 12:06:57 -0500 Ryan Bourne https://www.cato.org/blog/coronavirus-anti-price-gouging-madness Coronavirus Price Hikes Should Be Praised – Not Condemned https://www.cato.org/publications/commentary/coronavirus-price-hikes-should-be-praised-not-condemned Ryan Bourne <div class="lead text-default"> <p>Have you tried buying hand sanitiser this week? By all accounts, store shelves have been&nbsp;<a href="https://www.telegraph.co.uk/business/2020/03/03/coronavirus-sends-hand-sanitiser-sales-soaring/" target="_blank">emptied of the stuff</a>, in the wake of public health warnings about the coronavirus.</p> </div> , <div class="text-default"> <p>Social media is full of images of unfilled racks at supermarkets or chemists, with laments about how panic buyers are hoarding products away from those with compromised immune systems “who really need it”. As a&nbsp;result of the backlash, Boots is now even rationing purchases to two per customer.</p> <p>At the same time, members of the public have been attacking third‐​party sellers for huge price rises for the same products on the Amazon marketplace.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The imposition of anti‐​price gouging legislation makes no economic sense and would have the opposite of the desired effect.</p> </div> </div> </aside> , <div class="text-default"> <p>Face mask prices have&nbsp;<a href="https://www.telegraph.co.uk/investing/shares/stocks-could-soar-coronavirus-pandemic/" target="_blank">jumped 2,000pc</a>&nbsp;as the panic has taken hold, while a&nbsp;pack of 24 2oz bottles of Purell hand sanitiser, usually around £8 to £10 per box, have been going for over £300.</p> <p>Amazon has assured users that it is doing whatever it can to eliminate such profiteering. The Competition and Markets Authority has even issued a&nbsp;warning, with chairman&nbsp;Andrew&nbsp;Tyrie pledging to do whatever it can to “act against&nbsp;rip‐​offs and misleading claims”.</p> <p>These phenomena are, of course, really two sides of the same coin. A&nbsp;surge in demand for face masks and sanitiser explains both the current observed shortages and some sellers hugely inflating prices. In the near term, supply of both goods is constrained.</p> <p>As demand has spiked, the price the market can bear has risen dramatically. It’s the inverse of prices of flights and hotels in Italy, Tenerife&nbsp;and Asia falling as demand for holidays has collapsed in areas of high virus prevalence.</p> <p>Whereas the public has no apparent problem with firms dropping prices, sellers raising them during a&nbsp;global health crisis feel the heat.</p> <p>The price spike in face masks has even been denounced by Amazon as “price gouging” – a&nbsp;term usually reserved for “greedy profiteering” on water and petrol following natural disasters.</p> <p>The government in France is threatening price regulation to stamp out such spikes. Other governments will be under public pressure to follow suit.</p> <p>Yet anti‐​price gouging laws, or even firms constraining prices now in the face of shortages, bring&nbsp;significant costs. Fixing prices below market rates dampens the message that price signals are telling us about relative scarcity and people’s willingness to pay.</p> <p>That’s worrying, because price rises help people become more careful about overuse or hoarding when products are scarce. And, in the longer term — which, right now, is especially important — higher prices create powerful profit incentives for new producers or merchants to make highly demanded supplies more widely available.</p> <p>In fact, anti‐​price gouging laws actively exacerbate the existing shortage problem, which is why economists overwhelming oppose them.</p> <p>Fixing prices below what customers are willing to pay encourages people to load up on the products when they are available. Restrictions such as “two per customer” rules can easily be circumvented by, say, getting every family member to buy separately.</p> <p>And such restrictions favour those who can check in on in‐​store availability regularly over those who value the product most.</p> <p>But the more important consequence is the discouragement of new producers or even small hoarders from bringing their supply to market.</p> <p>Given there’s a&nbsp;chance that we could be in for a&nbsp;<a href="https://www.telegraph.co.uk/global-health/science-and-disease/pandemic-meaning-coronavirus-uk-serious/" target="_blank">protracted global pandemic</a>&nbsp;with restrictions on travel and transportation, or workers being sick and unavailable to produce or ship new products, imposing price controls could be extremely shortsighted.</p> <p>That’s because the introduction of price gouging laws even after this shortage passes could dampen supplier plans for what the economist Tyler Cowen has called “option‐​ready supply” for when there are future demand surges.</p> <p>Consider&nbsp;<a href="https://www.telegraph.co.uk/technology/news/11873685/Why-Ubers-surge-pricing-is-good-for-you-according-to-Uber.html" target="_blank">Uber surge pricing</a>. When it starts raining, Uber prices spike as demand rises sharply. In the near term, this acts as a&nbsp;rationing device such that people who really value hailing a&nbsp;ride can do so. But it also encourages some additional drivers onto the road.</p> <p>Preventing this dynamic price adjustment has damaging consequences. Just after New Year in 2015, an experiment occurred in New York when Uber’s surge‐​pricing algorithm suddenly stopped working. As ride demand spiked, prices stayed flat.</p> <p>As a&nbsp;result, wait times doubled and the number of completed trips fell 80pc&nbsp;since drivers had no increased incentive to go out and meet the new demand.</p> <p>Upwardly flexible prices do not just help supply adjust to constantly changing demand, however. They also encourage drivers to go out in future when they foresee potential surges, such as if there’s rain expected or a&nbsp;big public event.</p> <p>In the same way, allowing hand sanitiser and face mask price signals to operate now will make leading firms and merchants, who have big reputational concerns, more likely to develop robust supply chains to avoid future shortages.</p> <p>This is a&nbsp;point made by Nobel prize‐​winning economist Richard Thaler. The behaviour of companies such as Amazon and others in, effectively, restraining third‐​party prices today may help them protect their customer‐​friendly reputation in the wake of a&nbsp;public health crisis.</p> <p>But by keeping prices low or, in the case of some American retailers, actively discounting them, they are making the products harder for new customers to obtain by encouraging the very hoarding that is infuriating the public.</p> <p>Price increases encourage us to find frugal ways to adapt and cope with&nbsp;undesirable shortage situations. Yes, ideally, everyone who needs the products would get exactly what they require to slow the spread of this virus at reasonable prices. But in the absence of that perfect world, fixing prices artificially low can lead to big problems.</p> <p>We can see this already with barren shelves and complaints. Governments would exacerbate the problem with populist “price gouging” laws.</p> </div> Thu, 05 Mar 2020 08:35:01 -0500 Ryan Bourne https://www.cato.org/publications/commentary/coronavirus-price-hikes-should-be-praised-not-condemned Ignoring Social Security Paints False Wealth Inequality Picture https://www.cato.org/blog/ignoring-social-security-paints-false-wealth-inequality-picture Ryan Bourne <p>My <a href="https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality">recent paper with Chris Edwards</a> concluded that studies estimating wealth inequality without accounting for Social Security would both exaggerate the level of inequality and overestimate its increases since the 1980s.</p> <p>We realized that increasing amounts of wealth for the bottom 90 percent had become tied up in Social Security claims over the past three decades. And <a href="https://www.cato.org/blog/government-expansion-increases-wealth-inequality">a&nbsp;host of evidence</a> suggests that redistributive programs, such as Social Security, actively crowd out private saving among those on modest incomes.</p> <p>By reducing the incentive and ability for lower paid workers to save (not least because of payroll taxes), Social Security widens marketable wealth inequality, which has been the focus of most inequality studies. Perversely, critics of current levels of marketable wealth inequality then use these calculations ignoring Social Security as justification for increasing the generosity of transfer programs such as&nbsp;Social Security, that would iwiden their preferred wealth inequality metrics further.</p> <p>A new study <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3546668">from University of Pennsylvania economists</a> adds empirical blast to our intuition. Whereas the oft‐​cited work of Thomas Piketty et al restricts wealth inequality statistics to the distribution of marketable assets, this new study estimates the present value of Social Security wealth too, before assigning it across the wealth distribution.</p> <p>Its conclusions are striking. Adjusting for Social Security wealth not only substantially reduces the level of wealth apparently “held” by the top 1&nbsp;percent and top 10 percent, it completely changes the trend since 1989:</p> <blockquote><p>Our most conservative estimates suggest that between 1989 and 2016 the top 10% share [of wealth] declined by 3&nbsp;percentage points and the top 1% share increased only slightly by 1.2 percentage points. This differs drastically from recent work that excludes Social Security and finds the top 10% and 1% shares rose by over 10 percentage points over this period.</p> </blockquote> <p>Why does including Social Security wealth have such a&nbsp;dramatic effect? Well, first, because the implied wealth is large, at around 42 percent of marketable wealth today. But, second, because Social Security wealth has increased over three‐​fold between 1989 and 2016, due to expansions of the program, a&nbsp;fall in real interest rates, and population aging, which means the share of workers near the peak of their Social Security wealth (just before retirement) is larger. As a&nbsp;result, in 2016 Social Security represented 57.7 percent of all wealth held by the bottom 90 percent by net wealth, up from 14.2 percent in 1989.</p> <p>As the study makes clear, there is no convincing rationale for excluding Social Security from studies of wealth concentration. But doing so exaggerates both wealth inequality levels and its increases over the last three decades. If some academics still contest that marketable wealth inequality alone tells us something interesting, then they must also acknowledge that Social Security’s existence widens that measure.</p> <p>Strangely, those who consider marketable wealth inequality a&nbsp;huge problem do not often advocate abolishing Social Security to narrow it. In fact, the opposite. So do they really care as much about wealth inequality as their rhetoric suggests?</p> Wed, 04 Mar 2020 18:13:09 -0500 Ryan Bourne https://www.cato.org/blog/ignoring-social-security-paints-false-wealth-inequality-picture Coronavirus: Beware It Being Used as a Cover for Promoting Socialism and Protectionism https://www.cato.org/publications/commentary/coronavirus-beware-it-being-used-cover-promoting-socialism-protectionism Ryan Bourne <div class="lead text-default"> <p>“You never want a&nbsp;serious crisis to go to waste.” “Only a&nbsp;crisis‐​actual or perceived‐​produces real change.” Rahm Emmanuel, Barack Obama’s Chief of Staff, and Milton Friedman, the libertarian economist, had different political ambitions. But they both understood how crises can facilitate radical economic and political change. The coronavirus, or Covid‐​19, now risks becoming one such crisis. Ascendant political ideas do not bode well for its consequences.</p> </div> , <div class="text-default"> <p>Much has been written on the near‐​term economics. Disruption to global supply chains, including lost production in China and consequent knock‐​on effects on shipping, could restrict the availability of certain goods, acting as an adverse supply‐​side shock. That will put upward on prices, which central banks would be wise to ignore.</p> <p>Purer “panic” risks sapping the demand‐​side of economies too, thus constraining output further. Restrictions on, or fears about, socialising, could induce short‐​term consumption contractions, most of which will bounce back later, but which will put near‐​term pressure on many businesses and liquidity‐​constrained households. Tanking markets reflect both such effects but, as <a href="https://www.bloomberg.com/opinion/articles/2020-03-01/coronavirus-is-exposing-market-fears-about-economy-and-politics">Tyler Cowen notes</a>, the market reaction is bigger than these imply, suggesting investors are passing judgment on political reactions too.</p> <p>The overall GDP impact depends on infection and death rates, the length and severity of containment, and consumers’ spending responses. Even with a&nbsp;death rate of one per cent, widespread infection could significantly affect output. School closures for a&nbsp;month, <a href="https://www.bbc.com/news/world-asia-51663182">as seen in Japan</a>, might multiply any economic drag by a&nbsp;factor of three. In the worst case, flights might be grounded, sporting events cancelled, and more.</p> <p>As <a href="https://www.conservativehome.com/thetorydiary/2020/02/as-the-coronavirus-spreads-hancock-must-seek-not-to-be-shipwrecked-by-those-twin-perils-complacency-and-panic.html">Paul Goodman outlined last week</a>, the Health Secretary must tread carefully between accusations of complacency or needless panic. <a href="https://twitter.com/PippaCrerar/status/1234020269343363072?s=20">Ministers are reportedly</a> “considering the trade‐​off between allowing an acute outbreak, from which the economy would rebound more quickly, or trying to save more lives by imposing restrictions…”</p> <p>Recognising trade‐​offs is welcome, but given the international nature of the problem and awful worst‐​case scenarios (widespread infection of health professionals, causing knock‐​on consequences for those sick without the virus), health concerns must dominate here, particularly to protect the elderly.</p> <p>Nevertheless, one understands why the economics spooks politicians. <a href="https://mainlymacro.blogspot.com/2020/03/the-economic-effects-of-pandemic.html">A&nbsp;2009 paper by Simon Wren‐​Lewis</a>, and <a href="https://mainlymacro.blogspot.com/2020/03/the-economic-effects-of-pandemic.html">Oxford University economist</a>, modelled an influenza pandemic. Assuming a&nbsp;three month flu similar to that seen in 1957 and 1968/69, with 35 per cent to 50 per cent of people affected, and those infected taking five to seven days off work, it assessed various lengths of school closures, the possibility of people proactively taking time off, and adjusting types of consumption.</p> <p>In the best‐​case UK GDP was projected to fall by 1.2 per cent in the quarter, with the year fall in GDP just 0.2 per cent as most consumption then rebounded. A&nbsp;more extreme scenario, with one per cent of the working population dying, school closures for 13 weeks, and four weeks pre‐​emptive absenteeism, would have seen GDP contract by 4.5 per cent over the year. If consumers really change their spending habits, that rises to circa six per cent – a&nbsp;similar near‐​term recession to the financial crisis.</p> <p>Now, that’s a&nbsp;severe scenario. But it’s worth bearing in mind given how much the financial crisis changed politics. Even a&nbsp;more muted impact could have profound consequences, once political opportunism kicks in.</p> <p>The most obvious could be how a&nbsp;U.S. downturn affects their Presidential race, particularly with Bernie Sanders still in the hunt for the Democratic nomination to face Donald Trump. <a href="https://twitter.com/JimPethokoukis/status/1234300468458856449?s=20">Goldman Sachs</a> estimates the coronavirus could shave a&nbsp;percentage point off GDP growth this year. No post‐​war incumbent has won a&nbsp;Presidential election with growth that weak.</p> <p>Though yesterday’s Democratic primary results were positive for Joe Biden, an escalating epidemic could rapidly change that race again. And with stories of U.S. citizens avoiding seeking medical treatment through fear of out‐​of‐​pocket costs, a&nbsp;crisis will allow Sanders to denounce a&nbsp;healthcare system that Biden helped create, pushing Sanders’ proposed socialisation of healthcare (so‐​called “Medicare‐​for‐​all”) to the forefront of the campaign, ahead of a&nbsp;Trump showdown.</p> <p>Sanders’ supporters certainly still smell blood. “If America ends up with major supply chain disruptions like China has had, a&nbsp;related stock market decline (already underway), and other adverse economic impacts, how voters, as taxpayers, weigh the costs versus benefits of ‘Medicare for all’ proposals could easily change,” said <a href="https://www.washingtonexaminer.com/news/sanders-sees-coronavirus-as-chance-to-boost-medicare-for-all">Steve Early</a>, a&nbsp;co‐​founder of “Labor for Bernie.”</p> <p>Remember that Sanders’ economic platform is <a href="https://capx.co/bernie-sanders-is-far-more-radical-than-corbyns-labour/">more radical than Corbyn’s Labour</a> – combining protectionism, a&nbsp;massive expansion of the welfare state, and a&nbsp;guaranteed well‐​paid public sector job for all who want one. If he wins, the Land of the Free turns in a&nbsp;radically different economic direction, institutional constraints notwithstanding.</p> <p>This would not be unusual. History shows crises invariably grow government, with emergency measures, new spending, and trade and social restrictions never quite normalising. Even if the U.S. avoids a&nbsp;socialist president, the coronavirus is already emboldening protectionists, particularly with regard interdependence with China. Donald Trump’s son (Don Jr) retweeted approvingly, for example: “For people worried about the economic impact of <a href="https://twitter.com/hashtag/coronavirus?src=hashtag_click">#coronavirus</a> and <a href="https://twitter.com/hashtag/StockMarketCrash2020?src=hashtag_click">#StockMarketCrash2020</a> – just imagine if we *didn’t* have a&nbsp;president in the White House who spent the past three years encouraging American companies to reduce their dependence on China.”</p> <p>Trump will use a&nbsp;potential pandemic to push reshoring, tighter borders, and immigration restrictions. Environmentalists concerned about carbon emissions will use it too to advocate for less international travel. Historians have pointed out that pandemics tend to occur after long periods of trade growth and integration, because of this sort of reaction.</p> <p>It’s not escaped my notice that three well‐​plugged‐​in UK journalists – Jeremy Warner, Iain Martin, and Andrew Neil – have all downplayed supply chains’ longevity, as part of the government’s hubristic desire to “reshape the economy.” We will see further anti‐​market sentiment when prices of certain goods rise through trade disruption too. There’s nothing like a&nbsp;shortage of hand sanitiser or certain foods to cause people to give up on supply and demand and denounce “greedy profiteering.”</p> <p>An anti‐​market, anti‐​free trade turn would be a&nbsp;disaster, though, and economically short‐​sighted. Yes, global interconnectivity and travel raises risks associated with pandemics, requiring contingencies. But free trade and interconnectedness also raises prosperity, providing more resources to deal with crises when they arise.</p> <p>A home‐​focused industrial policy hardly saved China from this epidemic. And it’s precisely trade openness and markets that ensure diversity of supply – particularly in medicine and food. If you think the UK or the US are vulnerable to lost production from Covid‐​19 now, imagine if everything was produced domestically and a&nbsp;pandemic hit here hardest.</p> <p>When crises hit though, as Emanuel and Friedman knew, the chaos provides opportunities for ascendant ideas currently waiting in the wings. Neo‐​socialism and protectionism are today’s fashionable “novel” opinions. Covid‐​19 could have a&nbsp;legacy much greater than any initial economic drag.</p> </div> Wed, 04 Mar 2020 17:20:38 -0500 Ryan Bourne https://www.cato.org/publications/commentary/coronavirus-beware-it-being-used-cover-promoting-socialism-protectionism Want To Reduce Government Spending? Educate The Public About The Federal Debt https://www.cato.org/blog/want-reduce-government-spending-educate-public-about-federal-debt Ryan Bourne <p>How do the U.S. public’s beliefs about the federal debt affect their attitudes to government spending and taxation?</p> <p>That is the question <a href="https://www.ssrn.com/abstract=2927483">a&nbsp;new paper by economists Christopher Roth, Sonja Settele, and Johannes Wohlfart</a> seek to answer, using a&nbsp;range of online experiments for a&nbsp;representative sample of the population. Using four different experiment designs, they first elicit people’s beliefs about the debt‐​to‐​GDP ratio compared to various historical or international averages. Then they tell a&nbsp;sub‐​sample what the actual debt‐​to‐​GDP ratio is and compare this treatment group’s attitudes towards government spending and tax with a&nbsp;control group, as well as assessing the treatment group’s relative propensity to donate to Cato or sign a&nbsp;petition for a&nbsp;balanced budget amendment.</p> <p>The results are interesting:</p> <ul> <li>Most people underestimate the degree of indebtedness of the US government. The median estimate is around 60 percent, far below the actual debt‐​to‐​GDP (<a href="https://fred.stlouisfed.org/series/GFDEGDQ188S">104 percent at the time</a>). More than 90 percent of respondents understated the level of debt, even when given a&nbsp;historical or international “anchor.”</li> <li>People who are told the true level of debt become more likely to consider current government debt too high and be supportive of cutting it. The relative preference for debt reduction in the treatment group compared to the control group is equivalent to 91 percent of the greater support for debt reduction among Republicans than among Democrats.</li> <li>Respondents with prior beliefs of a&nbsp;low debt‐​to‐​GDP ratio below 50 percent respond most strongly to the information in terms of their views on debt reduction and government spending.</li> <li>Data from a&nbsp;four‐​week follow up survey suggests that people update their beliefs about the debt given the information: the median belief in the treatment group is that the debt‐​to‐​GDP ratio is 75 percent. What’s more, beliefs are more precise for both people that under‐ and over‐​estimated the debt, suggesting genuine learning.</li> <li>The treatment group which learns about the true level of government debt becomes significantly less supportive of government spending, including in all subcategories – defense, infrastructure, schooling, social security, social insurance, health and the environment. Looking at a&nbsp;joint spending index, the information shifts policy preferences by one third of the preference gap for overall spending between Republicans and Democrats.</li> <li>Though people who learn about the debt become more likely to back higher taxes in theory, support for specific tax increases – income tax, wealth tax, and estate tax – are weaker and less robust. The authors conclude that the extra knowledge does not strongly change support for tax increases.</li> <li>The treatment group are more likely to donate a&nbsp;higher amount to the Cato Institute from an endowment of funds they are given. But treated respondents do not become significantly more willing to sign a&nbsp;petition in favor of introducing a&nbsp;balanced budget rule.</li> <li>The treatment group’s beliefs about the amount of government debt and their attitudes towards debt reduction and government spending persist in a&nbsp;four‐​week follow up to the study.</li> <li>Respondents who receive information about the level of government debt become significantly more likely to agree that the current public finances are not sustainable.</li> </ul> <p>The authors conclude:</p> <blockquote><p><span>our findings indicate that information about statistics that are relevant for future government spending and taxation can persistently change people’s attitudes towards current levels of spending…our finding that voters demand higher levels of spending when they underestimate the level of debt suggests that biased beliefs could contribute to the accumulation of high levels of debt as observed in many industrial countries. Finally, our results suggest that support for spending increases could diminish during times in which voters update their beliefs about government debt…</span></p> </blockquote> <p><span>This might explain one puzzle from recent years. The results suggest that the decline in the salience of the debt issue doesn’t so much reflect an ease among the public with increased borrowing as the opposite: a&nbsp;lack of focus on the high relative level of debt has fed through into beliefs about debt levels that are biased downwards, making people tolerant of higher spending.</span></p> Tue, 03 Mar 2020 12:59:32 -0500 Ryan Bourne https://www.cato.org/blog/want-reduce-government-spending-educate-public-about-federal-debt Ryan Bourne discusses his article, “Does Rising Industry Concentration Signify Monopoly Power?” on Sirius XM’s The Big Picture with Olivier Knox https://www.cato.org/multimedia/media-highlights-radio/ryan-bourne-discusses-article-does-rising-industry-concentration Thu, 27 Feb 2020 09:21:55 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-radio/ryan-bourne-discusses-article-does-rising-industry-concentration Ryan Bourne discusses the wealth gap on Washington Post Live https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-discusses-wealth-gap-washington-post-live Wed, 26 Feb 2020 13:45:50 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-discusses-wealth-gap-washington-post-live Billionaires Like Bloomberg Make Our Country Better, Not Worse https://www.cato.org/publications/commentary/billionaires-bloomberg-make-our-country-better-not-worse Ryan Bourne <div class="lead text-default"> <p>In this week’s Democratic debate, billionaire candidate Mike Bloomberg proved that capitalists are often the worst defenders of the market‐​based economic system that delivered their riches.</p> </div> , <div class="text-default"> <p>When Senator Bernie Sanders went on the attack, openly claiming that billionaires should not exist, Bloomberg said all the wrong things. “Mike Bloomberg owns more wealth than the bottom 125 million Americans. That’s wrong. That’s immoral,”&nbsp;<a href="https://www.nbcnews.com/politics/2020-election/full-transcript-ninth-democratic-debate-las-vegas-n1139546" target="_blank">said Sanders</a>, who proposes a&nbsp;recurring wealth tax that would take&nbsp;<a href="https://berniesanders.com/issues/tax-extreme-wealth/" target="_blank">8% of Bloomberg’s wealth above $10 billion</a>, every single year.</p> <p>Asked to justify his&nbsp;<a href="https://www.forbes.com/profile/michael-bloomberg/#4308aa591417" target="_blank">$63 billion‐​plus net worth</a>, Bloomberg fumbled: “All I&nbsp;know is I’ve been very lucky, made a&nbsp;lot of money, and I’m giving it all away to make this country better…I worked hard for it.”</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The moral basis for billionaires in a&nbsp;market economy is that most obtain wealth by providing products, services or investments we want and need. That some work hard or support progressive politicians’ election campaigns is irrelevant.</p> </div> </div> </aside> , <div class="text-default"> <p>Given that lots of us work hard and that luck is beyond our control, this is hardly a&nbsp;glowing endorsement of billionaires or of capitalism writ large. What’s more, it’s wrong on emphasis. Bloomberg’s primary contribution to the economy is not his philanthropy or even the jobs his company creates, but the value of the products and services his vision and leadership provides to consumers.</p> <p>Rather than pretend he’s uniquely industrious or that charitable giving is his vocation, Bloomberg should have used this opportunity to defend capitalism. In a&nbsp;competitive market economy, the only way for a&nbsp;businessman to get rich is to oversee an enterprise providing goods and services that thousands of us want to buy, at prices customers are willing to pay.</p> <p>The best entrepreneurs and managers dream up new innovative products, find better and less costly production methods, identify gaps to serve markets and keep their enterprises running efficiently.</p> <p>Bloomberg has gotten incredibly rich because of his media business and, most importantly, the Bloomberg Terminal — a&nbsp;financial industry tool that allows subscribers to access, compile, track and analyze financial information. Both are&nbsp;<a href="https://www.bloomberg.com/professional/solution/bloomberg-terminal/" target="_blank">used</a>&nbsp;by hundreds of thousands of people around the world because they regard them as useful, high‐​quality products. This is Bloomberg’s overwhelming social contribution: not the hours of hard work he puts in or how much money he gives away.</p> <p>The same is true of other entrepreneurs. WhatsApp founders Brian Acton and Jason Koum developed a&nbsp;best‐​in‐​class app, reaching&nbsp;<a href="https://www.cnn.com/2020/02/12/tech/whatsapp-two-billion-users/index.html" target="_blank">2&nbsp;billion users</a>&nbsp;in over 180 countries by offering extremely low‐​cost instant messaging services. Given the monetizing potential of such a&nbsp;big user base, the founders pocketed $15 billion when the company was sold to Facebook. Sanders would lament again that this&nbsp;<a href="https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality#poverty-matters-not-inequality">raises wealth inequality</a>. But their riches came from providing millions of ordinary people globally with cheaper communication.</p> <p>Similar stories can be told about Jeff Bezos and Amazon, the Waltons and Walmart, or even J.K. Rowling and her classic Harry Potter books.</p> <p>During the debate, Sanders retorted that it wasn’t Bloomberg’s abilities that made him rich, but the toil of his workers, who are of course much less wealthy. Yet in a&nbsp;market economy, individual rewards are not distributed according to “just desserts,” but by supply and demand. Very few people have the vision, managerial expertise and capacity to set up or run a&nbsp;large successful company. Having these qualities is&nbsp;<a href="https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2504" target="_blank">extremely important</a>, as shown by big shifts in stock prices when CEOs join or leave firms.</p> <p>In claiming billionaires’ wealth is “immoral,” what Sanders is really implying is that riches are somehow ill‐​gotten or that they could be redistributed painlessly without affecting the entrepreneurial activity that generates them.</p> <p>To be sure, there is&nbsp;<a href="https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality">a&nbsp;lot of cronyism</a>&nbsp;in our economy, which should be stamped out. Overly generous patent protections, trade tariffs and other government privileges can create circumstances that make some businesspeople rich at the direct expense of others. We should remove such programs.</p> <p>Yet taxing all top wealth, however it is made, risks deterring innovative entrepreneurs from starting the very companies that enrich our lives,too. Recurring taxes on the same wealth, year after year, reduces the returns to risky and innovative entrepreneurship, meaning we will get less of it. They also shrink the pool of funds that allow serial entrepreneurs or investors to take on new risky projects that can really drive innovation.</p> <p>The moral basis for billionaires in a&nbsp;market economy is that most obtain wealth by providing products, services or investments we want and need. That some work hard or support progressive politicians’ election campaigns is irrelevant. Bloomberg had the opportunity to defend his fortune by defending market capitalism from Sanders’ caricature and damaging policy ideas. In that moment, he blew it.</p> </div> Fri, 21 Feb 2020 13:17:57 -0500 Ryan Bourne https://www.cato.org/publications/commentary/billionaires-bloomberg-make-our-country-better-not-worse Antitrust Chapter in the Economic Report of the President https://www.cato.org/blog/antitrust-chapter-economic-report-president Ryan Bourne <p>This year’s Council of Economic Advisers (CEA)&nbsp;<a href="https://www.whitehouse.gov/wp-content/uploads/2020/02/2020-Economic-Report-of-the-President-WHCEA.pdf">Economic Report of the President</a> (EROP) contains a&nbsp;very heartening chapter on antitrust policy and competition issues. It’s clear the CEA doesn’t buy into the idea that the U.S. has a&nbsp;pervasive “monopoly problem” and is very aware of the danger of simplistic thinking around large digital platforms.</p> <p>The President’s economic advisers echo much of <a href="https://www.cato.org/publications/economic-policy-brief/does-rising-industry-concentration-signify-monopoly-power">my recent critique</a> on the use of crude national industry concentration measures as proxies for the health of competition. They bring lots of theoretical arguments and empirical evidence to bear that these are not reflective of relevant product markets pertaining to antitrust enforcement, not least because markets are often incredibly local.</p> <p>For example, six‐​digit NAICS codes are often used to assess sector‐​level concentration in many studies – and these go as granular as industries such as “book publishers,” “beauty salons,” and “car washes.” But, as a&nbsp;moment’s reflection of these examples suggests, these are clearly not relevant markets for antitrust. A&nbsp;beauty salon in Kenosha, Wisconsin doesn’t compete with one in Dupont Circle, Washington DC. In fact, the EROP highlights&nbsp;evidence I&nbsp;hadn’t seen before:</p> <blockquote><p>Werden and Froeb (2018) calculate the volume of commerce of the relevant markets alleged in DOJ merger complaints between 2013 and 2015 as a&nbsp;share of industry shipments in the six‐​digit NAICS sector. They find that in most cases, the antitrust markets accounted for less than 0.5 percent of the six‐​digit NAICS sector. In many cases, this is because the antitrust markets where the DOJ identified a&nbsp;competition problem involved single localities such as a&nbsp;city, State, or region, whereas the NAICS sectors are national.</p> </blockquote> <p>Still though, many seem to be conducting the public debate over whether the U.S. has a&nbsp;monopoly problem knowingly using data that is easy to collect but which doesn’t represent actual markets. It’s very pleasing the CEA demurs from this growing trend.</p> <p>Even better, the CEA report is clearly extremely skeptical of “Hipster Antitrust” calls to broaden the scope of antitrust law and the most interventionist policy proposals on “Big Tech,” including proposals for sector‐​specific remedies such as enforced data portability and interoperability, tougher restrictions on acquisitions, and&nbsp;bringing in a&nbsp;specific digital sector regulator.</p> <p>Perhaps most pleasing of all though is that the EROP doesn’t fall for the “this time is different” narratives we hear about digital platforms. It’s common to read that because of economies of scale, network effects, data, or firms competing on platforms they operate, that there’s something just unique about today’s tech companies that requires a&nbsp;more “forward‐​looking” antitrust. The CEA cites lots of evidence showing that none of these economic features of these markets ensure sustained dominance, in line <a href="https://www.cato.org/publications/policy-analysis/time-different-schumpeter-tech-giants-monopoly-fatalism">with my own work</a> showing how Schumpeterian competition from new products put pay to historical examples of firms said to have just these types of advantages.</p> <p>The overall chapter concludes:</p> <blockquote><p>confusion surrounding the effects of rising concentration appears to be driven by questionable evidence and an overly simple narrative that “Big Is Bad.” When companies achieve scale and large market share by innovating and providing their customers with value, this is a&nbsp;welcome result of healthy competition.</p> </blockquote> <p>Do <a href="https://www.whitehouse.gov/wp-content/uploads/2020/02/2020-Economic-Report-of-the-President-WHCEA.pdf">read the whole thing</a>. More from me on this issue can be found <a href="https://www.cato.org/publications/commentary/wheres-real-harm-google-amazon-facebook-apple">here</a>, <a href="https://www.cato.org/publications/commentary/facebook-deserves-more-credit-our-data-not-product">here</a>, and <a href="https://www.cato.org/blog/professor-tim-wu-makes-case-against-antitrust-policy">here</a></p> Thu, 20 Feb 2020 15:38:56 -0500 Ryan Bourne https://www.cato.org/blog/antitrust-chapter-economic-report-president Abolishing UK’s ‘Factory Tax’ Would Help Get Productivity Moving Again https://www.cato.org/publications/commentary/abolishing-uks-factory-tax-would-help-get-productivity-moving-again Ryan Bourne <div class="lead text-default"> <p>If the Government is intent on borrowing more, it should focus that borrowing on easing Britain’s biggest economic challenge. That’s&nbsp;<a href="https://www.telegraph.co.uk/business/0/budget-2020-date-next/" target="_blank">my pre‐​Budget advice to Rishi Sunak</a>, the new&nbsp;Chancellor.</p> </div> , <div class="text-default"> <p>With 10 Downing Street apparently advocating looser fiscal rules, Sunak is under pressure to deliver either a&nbsp;Tony Blair‐​style public services spending binge or a&nbsp;Nineties Japan‐​inspired infrastructure splurge.</p> <p>Each would leave Britain with higher government debt and, eventually, higher taxes. History suggests neither is a&nbsp;path to strong economic growth.</p> <p>Instead, the Chancellor should focus, laser‐​like, on how policy might&nbsp;<a href="https://www.telegraph.co.uk/business/2020/02/05/johnson-faces-productivity-chasm-london-poorest-regions-fights/" target="_blank">raise productivity growth</a>. Britain has laboured since the financial crisis, with output per hour growing at a&nbsp;measly 0.3pc per year, compared with 2.2pc pre‐​crash. The consequences are all around us, even as the jobs market booms.</p> <p>Average weekly earnings have only just surpassed their pre‐​crisis peak, savers’ returns are in the doldrums and extensive austerity was required to eliminate a&nbsp;stubborn resulting structural deficit.</p> <p>The causes of the “productivity puzzle” are complex. But its profound impact on living standards makes it imperative to reverse any long‐​held policy mistakes exacerbating it. One obvious source is Britain’s weak private investment level in plant, machines and buildings, which has been the lowest in the G7 for two decades as a&nbsp;share of GDP.</p> <p>A key cause of this is surely Britain’s stingy capital allowances for these investments within its corporation tax code – a&nbsp;phenomenon the Adam Smith Institute (ASI) has called a “factory tax”.</p> <p>While the UK has a&nbsp;<a href="https://www.telegraph.co.uk/technology/2020/02/10/chancellor-misses-1bn-tax-us-tech-giants-think-tank-finds/" target="_blank">low headline corporation tax rate</a>, new fixed capital investments can only be partially claimed back by businesses over time, rather than immediately written off like spending on raw materials or workers’ wages.</p> <p>Given inflation and foregone uses of those funds, the effect of this inability to fully recoup these investment costs is capital‐​intensive industries being tax disadvantaged relative to other sectors.</p> <p>Our complex system of depreciation schedules and asset lives, in other words, is an effective tax on manufacturing and factories, tilting the UK’s industrial structure away from the Midlands, Yorkshire and Wales (where manufacturing is relatively strongest) and towards the South East and London (where services and finance are concentrated).</p> <p>Actually, this tax bias has become worse since 2010. Part of the coalition government’s quid pro quo for lowering the headline corporation tax rate was making capital allowances for plant and machinery even less generous.</p> <p>Though there was a&nbsp;reintroduction of a&nbsp;structures and building allowance and an increase in the annual investment allowance in 2018, the UK still ranks 33rd of 36&nbsp;in the Tax Foundation’s “capital cost recovery” rankings of OECD countries.</p> <p>The last decade of corporation tax reforms taken together has therefore only seen a&nbsp;modest fall in the effective tax rate on new investment, which is why the business investment response of rate cuts has been so muted.</p> <p>Not many policy changes could raise GDP, move the tax code towards improved neutrality and further Boris’s aim for regional “levelling up” simultaneously. But removing this “factory tax” bias would do all three. In practice, that means introducing “full expensing,” where businesses could immediately and fully write off investment in plants, machinery and structures from their corporation tax bills, and carry forward losses with an interest factor.</p> <p>Abolishing the factory tax would eventually settle at reducing corporation tax revenues by about £9bn directly, according to ASI authors Sam Dumitriu and Pedro Serodio. Preferably any net shortfall would be made up by trimming spending.</p> <p>But rather than racking up debt for near‐​term consumption or wasteful high‐​speed rail projects, any additional borrowing to finance this will at least have a&nbsp;big economic pay‐​off.</p> <p>The ASI estimates the reforms would raise long‐​run investment in plants and machinery by 9.1pc and structures and buildings by 17.7pc, increasing labour productivity by 3.5pc (about a&nbsp;year‐​and‐​a‐​half of pre‐​crisis growth). Given other tax revenues would therefore rise, the tax cut would be far less costly than headline losses suggest.</p> <p>Oxford Centre for Business Taxation research on UK small businesses found firms qualifying for generous first‐​year investment allowances had 11pc higher investment levels than non‐​qualifying firms.</p> <p>Likewise, economist Eric Ohrn’s work found US states that temporarily implemented full expensing saw investment jump 18pc, on average, with higher employment achieved at 50pc lower cost per job than through government spending.</p> <p>Unsurprisingly, businesses respond to incentives. Studies generally find that a&nbsp;1pc fall in the post‐​tax cost of investment increases investment by anywhere between 7pc and 10pc. Yet Tory politicians seem to have forgotten this insight. Perhaps because many don’t fully appreciate the detail of the corporation tax reforms, they seem down on the idea of business tax cut‐​led growth right now.</p> <p>They shouldn’t be. We constantly hear that because “government borrowing is cheap … now is a&nbsp;good time to invest”. Yet government need not be the investor.</p> <p>If the Government can borrow at negative real rates over 30&nbsp;years, the fact that private projects tend to generate much higher returns on capital than public projects means that business tax cuts with good pedigree for stimulating investment (like full expensing) will often be better&nbsp;than government‐​led infrastructure spending.</p> <p>The March 11 Budget is a&nbsp;Boris‐​led administration’s first meaningful opportunity to flesh out what its eclectic economic wishlist will mean. His ministers have promised regional rebalancing, faster growth, tax cuts and sound long‐​term budgeting. Threading the policy needle on these goals, given the trade‐​offs inherent in many of them, is extremely difficult.</p> <p>Abolishing the UK’s factory tax is one idea that works towards all these objectives. Carpe diem.</p> </div> Thu, 20 Feb 2020 11:07:33 -0500 Ryan Bourne https://www.cato.org/publications/commentary/abolishing-uks-factory-tax-would-help-get-productivity-moving-again Ryan Bourne’s article, “Bernie Sanders is far more radical than Corbyn’s Labour,” is cited on WNIS’ Macrini’s Morning News Team https://www.cato.org/multimedia/media-highlights-radio/ryan-bournes-article-bernie-sanders-far-more-radical-corbyns Thu, 20 Feb 2020 10:20:44 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-radio/ryan-bournes-article-bernie-sanders-far-more-radical-corbyns