Friday, August 7, 2015

Business Experience Is No Cure-All in Government

Because government and business are fundamentally different in their financing and their evaluation, good business practices can make for poor governing.

The election cycle regularly brings forth successful businesspeople who argue that voters should select them for public office over seasoned politicians because of the skills and experience they acquired in the business sector. In 1996, billionaire Ross Perot started his own political party to advance his quest for the presidency of the United States. Financier Mitt Romney was the Republican nominee in 2012. And now Carly Fiorina and Donald Trump are vying with politicians for the 2016 nomination, arguing, as the New York Post put it, that “America is in desperate need of a suave, successful businessperson like Trump — or former HP CEO Carly Fiorina — to solve what ails our economy.”

In their natural habitat, business leaders work with investors, customers and employees to create value. Each of their relationships is typically voluntary in that no investor is forced to provide funds, no customer is forced to purchase the product, and no employee is forced to work rather than pursuing some other opportunity.

The financing of government is unique in that the government can, and primarily does, force people and organizations to provide resources – these are taxes and takings. As a result, those at risk of taxes or takings change their behavior in order to reduce their exposure. A family may work less, in part because of the income tax burden that comes with working more. A business may cease to operate, or operate on a deliberately limited scale, in part because of the sales tax or regulatory burdens it faces while in operation.

Tax and regulatory avoidance behaviors are known in the economics profession as “excess burdens” because the burdens of taxes and regulations exceed the amount of resources that the government is acquiring. The family that pays $10,000 per year in taxes of course loses the $10,000, but it also has lost something in the adjustments it made – maybe working less – in order to avoid paying even more tax than the $10,000 it already pays. It makes tax-avoiding adjustments because it does not voluntarily pay taxes; rather, it pays them to prevent punishment, and it is perfectly legal to pursue less heavily taxed activities.

Some of the lost tax dollars might be recovered if the government spends it wisely – something like the dividend an investor would receive if he invested funds in a wisely managed business. But the losses due to tax-avoiding adjustments are irrecoverable and have no analogue in business, because unlike taxpayers, investors, employees and customers are voluntary contributors. As a result, a government leader ought to be less ambitious with his or her project ideas than a businessperson should, because government projects have their excess burdens.

The employer-employee relationship is also different in the public sector than it is in the business sector. Public-sector employees are five times more likely to be unionized than private-sector employees are. Moreover, the ultimate government employers are the elected officials, who of course cannot persist in their roles without being re-elected. As a result, a number of government employees are “asked” to participate in political activities that support their boss’s continued tenure.

Although past governing success is no guarantee of future performance in office, the next great president will likely have more experience in public office than business triumphs.

Update on Employment per Capita

through July. Below uses the same methodology I displayed in the past. The self-employed component is volatile ... it would be nice to have some kind of error bands on this series ... but that is still work in progress.

Thursday, July 2, 2015

Update on the employment rate

through June. Below uses the same methodology I displayed in the past. The self-employed component is volatile ... it would be nice to have some kind of error bands on this series ... but that is still work in progress.

Thursday, June 18, 2015

Is Obamatrade the same as freer trade?

The legal question du jour is whether Congress should allow special voting procedures (fast track) for international trade agreement agreements negotiated by the executive branch. This brings forth the age-old debate of the merits of free trade, as if free or freer trade is at stake with fast track.

But that is jumping to conclusions without reading the text of the trade agreements.

Experts jumped to conclusion, based on chapter titles alone, that the ARRA would help the economy recover, when in fact it prolonged the recession.

Experts jumped to the conclusion that Obamacare would create economic growth, when in fact it is hindering it.

Is Obamatrade another chapter in this saga, in which the federal government hinders economic growth and in the process convinces the experts to assert the opposite?

Reading the text of Obamatrade (specifically, the international trade agreements that would be fast tracked) is a better way of answering the question than extrapolating from the above historical pattern. But the text is secret.

Here are four educated guesses, that perhaps someday might be confirmed by reading the text.

  1. There are some begger-thy-neighbor policies that are implemented when nations act unilaterally. Because they shrink the world economic pie, one might expect such policies be restricted by multinational agreements.
  2. There are some internationally procompetitive policies that are implemented when nations act unilaterally. Multinational agreements set the stage for international collusion, which benefits the parties to the agreement but shrinks the worldwide pie and harms those not party to the agreement (the latter parties can be entire nations or parts of nations not represented).  Some of the nations harmed might be small nations and African nations.
  3. Rumor has it that financial services, which includes insurance, are part of the agreements. But there is no way that the Obama administration would allow foreign businesses to sell their health insurance products -- without politically correct elements like "free" birth control, deductibles ceilings, and regulated premiums. So expect the actual trade agreements to help prevent citizens from looking to foreign businesses to supply desirable products that are currently not supplied domestically.
  4. Among world leaders, there is a near consensus to do a lot of bad economics in the name of "public health." E.g., to dishonor patents on pharmaceuticals and medical devices.

In my view one should seriously consider the possibility that the new and secret trade agreements make trade less free, rather than more.

Tuesday, June 16, 2015

Piketty's Feast

Revealed preference speaks volumes. Admittedly, my hardcover version of Capital in the Twenty-First Century was delivered “for free” by the publisher of this periodical, but the opportunity cost of retaining it was extraordinary last spring when its publisher and distributors remarkably ran out of stock and the market for used copies was surging. I did more than retain it: I also purchased the electronic version so that I could search its contents readily and accurately and fit the 685-pager in a coat pocket.

More significantly, I read it, in some places carefully enough to dig into the appendices of its online appendices. The University of Chicago—my alma mater and employer—offered Thomas Piketty a faculty position in 1993, and to our disappointment he turned us down. For several years, Piketty’s (and Emmanuel Saez’s) inequality estimates have been used for teaching public economics at Chicago, and I have personally benefitted from his tutoring regarding the details therein. The students are hungry for data on inequality and its trends, and it is my privilege to help with the grocery shopping.

[read the rest at The Independent Review]

Friday, April 3, 2015

Update on self-employment and total employment

Again the headlines (today: "below expectations") are different from the totals including self-employment. Below uses the same methodology I displayed last month.

Monday, March 30, 2015

Burtless: Two Economic Mistakes in One Sentence

Brookings' Gary Burtless writes

It seems odd that critics of the ACA emphasize the potentially adverse impacts of the law on workers forced to accept part-time jobs but fail to notice that their logic suggests more workers in total must be employed.

Dr. Burtless should have read my book, or some of the labor economics literature dealing with part-time work cited therein, to see why he has the economic logic backwards, and in fact nothing here is "odd."

My revised edition (to be published by University of Chicago Press), has the clearest explanation:

A conventional wisdom [e.g., Burtless quote] says that employment rates increase to “compensate” for work hours lost from taxes on full-time schedules. Under this view, more people working 29 hours rather than, say, 35, would mean that employers simply have to hire more or keep workers on the payroll longer in order to accomplish the tasks necessary to conduct their business. The conventional wisdom fails in two ways. ...full-time employment taxes can be avoided by reducing employment and increasing hours per employee. My conservative estimates suggest that this case will be far more prevalent than the twenty-niner situation: the ACA will reduce the nationwide weekly employment rate by 3 percent below what it would have been without the ACA.

...Moreover, even if full-time employment taxes were avoided by reducing weekly work hours, there would not be a commensurate increase in the employment rate because weekly hours would not be reduced for normal business or personal reasons, but rather to avoid penalties and implicit taxes. The penalties and implicit taxes make the business of an employer more expensive, or being an employee less rewarding, even in those cases when people avoid the new tax by adjusting their employment conditions rather than writing a check to the federal treasury. Some employers may go out of business, or never start their businesses in the first place, because of the extra cost of the tax (or the costs of adjustments needed to avoid the tax) or because of the additional costs (e.g., higher wages) needed to attract workers to positions that render them ineligible for exchange subsidies. The net result is that the labor market will involve fewer total hours, and that higher employment rates, if any, will not be enough to compensate for the reduced hours per week. This economic reasoning has been confirmed by empirical studies of previous public policies that raised the relative employer cost of weekly work hours, and failed to create a commensurate increase in employment because the average hour worked by employees had been made more expensive or less productive.

Wednesday, March 25, 2015

Friday, March 6, 2015

Fewer jobs in February?!

The headline payroll employment was (seasonally adjusted) higher in February than in January. However, the headline does not include the self employed or agricultural workers. If we add those in (from the household survey), the number of jobs fell from Jan to Feb. If we also look at it per capita terms, jobs per capita fell two months in a row after being essentially constant Nov-Dec.

Jobs in Thousands through Feb 2015

Jobs per Adult through Feb 2015

To be clear, I am measuring the vast majority of jobs from the same establishment survey that makes headlines. All I'm doing is adding an estimate for the narrow category of workers known to be excluded (in terms of FRED series, my formula is PAYEMS + LNS12027714 + LNS12032184). Interestingly, self employment fell 340,000 in the past month and 238,000 over the past year.

Friday, February 27, 2015

The War on Poverty

According to Milton Friedman

The war on poverty of which so much has been made since then has been a very good thing indeed for many thousands of civil servants who have been able to make excellent careers and many thousands of academic people who have been able to do study after study on poverty.

From Friedman on Galbraith