A break from all the Economic Mishigas

With all the economic mishigas dominating news cycle, I thought it was worth sharing a couple of articles that I have recently come across on the topic.

I found myself enjoying Donald Boudreaux’s Op-Ed in the Pittsburgh Tribune-Review. His tongue-in-cheek response to a reader’s email argues that capitalism is alive and well despite the headlines. I have included an excerpt below.

In the morning, my correspondent likely drinks coffee brewed from beans grown in Colombia or Ethiopia. For lunch, he eats a chicken sandwich or a quinoa-and-beet salad. Each of these foods is made available to him only through the efforts of countless strangers — producers such as chicken farmers, beet growers, truck drivers, insurance-company actuaries — spread across the globe and connected to him by a thick web of consensual capitalist acts of commerce.

Mike Munger’s American Institute for Economic Research article makes a rational appeal for capitalism. The entire article is worth the read, but I have included the crux of his argument below.

There are three elements to the argument for capitalism, and while they connect in crucial ways they can be separately defined. Those three elements are (a) division of labor; (b) impersonal exchange based on prices; and (3) economies of scale based on knowledge.

The Cost of Tariffs

When I wrote Make Whirlpool Great Again back in December 2016, I made the request for someone to study the full cost for each job saved by enacting the tariff. In April 2019, Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot unknowingly answered my call with their recent paper, The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines . Their analysis estimates that the tariff on washing machines created 1,800 new washing machine manufacturing jobs at the price of $1.47 billion dollars or $817,000/job. This $1.47B was paid by the American consumer via a 12% price increase in both washers and dryers.

Critics of the paper will correctly point out that cost analysis includes a 12% increase in dryer prices when the tariff applied only to washing machines. My rebuttal is that washers and dryers are complimentary goods since they are often sold in pairs. I would also argue that the paper’s findings further demonstrates the pervasive impact that tariffs have on prices of other goods that are not direct targets of the tariff. I wonder if somebody will be able to measure impact of tariff on prices on laundry mats or apartment rents that provide washer and dryers to tenants.

For those of you less inclined to read the paper, Mark Perry has written an op-ed about the above paper over at American Enterprise Institute where he summarizes and opines on the paper’s finding.

While I think paper is a great start, I am left with the same thoughts from my original post which I have included below.

While it will be relatively easy to compare the average price of a washing machine before and after the tariff takes effect, it will be impossible to calculate the potential impact of those additional dollars if they had been spent on higher and better uses.  I'd like to think we would all be better off if we spent the same amount of energy and resources creating new jobs and industries as we did protecting the old ones.

Please use the comment section below to share your thoughts or any other interesting articles on the subject.

ECS on Operation Varsity Blues

I, like many of you, have already reached peak saturation in the “Operation Varsity Blues” college admissions scandal. With celebrities, and other members of the elite 1%, paying up to $1.2M to help their children gain admission to their school of choice, it has all the makings of a Hollywood movie. Personally, I am eagerly awaiting the Ben Mezrich book that will eventually come from this story. However, I came across an interesting article by Tyler Cowen that was worth a read. I have included my favorite excerpt below.

First, these bribes only mattered because college itself has become too easy, with a few exceptions. If the bribes allowed for the admission of unqualified students, then those students would find it difficult to finish their degrees…What does that say about standards at these august institutions of higher learning?…Alternatively, you might think it is rather arbitrary who is admitted to any given university, and that many of those denied admission could get through the program competently, even if classes and grading were made harder. 

Personally, I cannot fathom admission to a desired college is worth $1.2 million over State U. Also, the people who can afford to pay this ransom probably have strong personal networks that can be leveraged to help their children. I imagine that former PIMCO CEO Doug Hodge could help his child get a competitive summer internship with a simple phone call. I also imagine that Lori Loughlin, or her agent, could get her daughter an audition without a degree from the USC School of Cinematic Arts.

Please use the comments to share any other novel/interesting opinions on the story. I am hoping somebody will read the entire FBI investigation and come up with an article discussing the market based price of a degree from institutions involved in the story. So far, $1.2M for a degree from Yale seems to highest valued degree.

Rent Control comes to Oregon

A recent WSJ Op-Ed opines on the impact that state-wide rent control will have on the Beaver State and its residents. While I do not question the intentions of state government, I do challenge their methods and expect this decision to make housing affordability worse over the long term. The article highlights Oregon’s “inclusionary” zoning policy enacted in 2017 led to a 64% drop in permit applications to build new apartments. It is my estimation that rent control will also have a negative impact and further suppress the ability to build more housing in Oregon. I think their efforts would be better spent streamlining the permitting process to help increase the housing supply. It will be interesting to see how these policies affect migration to Washington and Idaho.

Tyler Cowen wrote a blog post highlighting the unintended, but not unexpected, consequences of rent control back in 2016.

Mihir Zavery penned a more objective article in the New York Times on February 26, 2019. I share this article because it also includes statements from Gov. Kate Brown.

Sebastian Junger on Econtalk

EconTalk host Russ Roberts wrote a thoughtful blog post in response to the October Pittsburgh synagogue shooting. Rather than taking the opportunity to attribute the act of violence to a de jour of hot button issues like antisemitism or gun control, he chose to offer his own hypothesis for what drives these attacks, loneliness.

Having previously read Sebastian Junger’s book, Tribe, I found myself wondering how Mr. Junger would respond to the article. I was pleasantly surprised to see that Sebastian Junger was the guest on this week’s EconTalk episode.

While I highly recommend reading both the blog post and Tribe, I think the podcast can stand alone and is worth a listen.

Please use the comments section to share your thoughts or any content that you think adds to the discussion.

Pension Facts of the Day

  1. Sarah Krouse discusses the $4 Trillion Pension Hole in her recent WSJ article.
  2. Ted Dabrowski & John Klingner highlight Chicago's $125,000/household pension debt

I think these articles demonstrate the magnitude  of the public pension funding gap at both the macro and household levels. Even those of us without public employee pensions will most likely be affected whether through future tax increases or decreases in public services as municipalities and states struggle to meet their pension obligations.

While I think it is easy to identify the problem, solving the issue will definitely be a challenge. Personally, I think the long term solution is to reduce future pension obligations by transitioning from a defined benefits to a defined contributions plan. I think both the employer (taxpayer) and the employee would be better off with a 401k style account with a large annual employer contribution. This will prevent politicians from making future pension promises to buy current votes and will eliminate the compounding effect of under-funding pension funds and overly optimistic investment returns currently plaguing pension funds. It will also protect the employee from future benefit cuts as states and municipalities are unable to meet current pension obligations.

While it may appear that this proposed solution will transfer investment risk from the employer to the employee, I would argue that the employee has always been on the hook for lower than expected investment returns. I'd also expect that through tools at discount broker's such as Charles Schwab, Vanguard, Wealthfront and Betterment that employees could get similar returns for lower fees than employer managed pension funds.

Please use comment sections to push back at my proposed solution and share other interesting articles that pertain to this topic.  

True Impact of "Securing the Border"

I wanted to share some interesting content I've come across in the past week. I do not have much expertise on the topic, but think these perspectives are provocative and are worth sharing. 

  1. Malcolm Gladwell's recent podcast episode suggests that US attempts to secure its borders are not having their intended effect  (Hint: works a lot more like a prison and a lot less like a castle)
  2. Bryan Caplan's recent Economist article discusses the cost of closed border policy on the World economy. (Hint: $78 Trillion)

Please use the comment sections to share your thoughts or other interesting articles on the subject.


EconTalk on Suicide of the West

While I have been doing more writing on this blog as of late, I also want to use this blog to share other original content that I find particularly interesting.  

Russ Roberts and his guest Johan Goldberg discuss how tribalism, nationalism and populism are hurting the "American Exceptionalism" that they are supposed to protect.  Despite having different political ideologies, I found their discussion thoughtful and mostly partisan free.  If you enjoy this episode, Jonah's book is available for sale on Amazon

Please use the comment section to share your thoughts on the episode. Also, if you've read the book, let me know if it is worth a read.

My Perspective on the Facebook and Cambridge Analytica Story

Since the New York Times/London Observer story regarding the Trump campaign's use of Cambridge Analytica tools to target potential voters broke on March 17th, we have been inundated with news reports, articles, and blog posts about how a Facebook "Data Breach" helped Trump with the 2016 U.S. Presidential election. This story seems to piggyback the recent stories about Russia using Facebook to help Trump win the 2016 election.  My first thoughts were if Facebook can be so easily manipulated to sway elections, why couldn't the Bernie Sanders or Hillary Clinton campaigns, with their more technologically engaged base,  take advantage of the platform. With the amount of media coverage, and no actual data breach, I figured there must be more to the story.

As I read further into the story, it appears that the Trump campaign engaged Cambridge Analytica to help target potential voters with ads on Facebook. Aggregating user data and selling it to advertisers is a regular business practice for Facebook.  In fact, using my google browser and typing the search terms "does Facebook sell your data" I can find many articles dating as far back as 2014 that acknowledge the practice. Also, Facebook is not the only company that sells user data.  Major news networks like CBSNewsweek and ProPublica have been publishing articles about harvesting user data since 2012.  My internal cynic thinks that most of the media coverage and outrage either has to do with the fact that political campaigns are using big data to get votes or that unpopular President Trump benefited from this round.  Contrary to the recent sentiment, consumers often benefit from sharing data with advertisers. We seem to appreciate our data being analyzed when Amazon recommends a book based on previous purchases and when Netflix suggests what TV shows we may enjoy.  

While Cambridge Analytica did not hack into Facebook to obtain user data, their actions were deceptive. Cambridge Analytica was able to obtain data from an individual who went through the appropriate Facebook channels to access the data. While Facebook did not directly give Cambridge Analytica access, it does not seem that Facebook made much of an effort to prevent Cambridge Analytica from using it. Furthermore, Facebook's request to have Cambridge Analytica cease using data and delete it in 2015 shows that Facebook had been aware of how the data was being used and did not take action until the NYT article was about to be released.

My Takeaways

  1. Cambridge Analytica used deceptive tactics to obtain Facebook user data and lied  about their intended use of the data. 
  2. Facebook probably failed to live up to its obligation to protect user data . (I confess that I have not read though Facebook user agreement)
  3. I need to be more consciousness about what apps I allow to view my data.

Interesting Articles on the topic

  1. Cass Sunstein's op-ed implores us not overreact to this news story.
  2. Tyler Cowen's article  discusses how this story fits the larger narrative that "tech fears" are driven by the fear of loss of control.
  3. Leonid Bershidsky's op-ed argues that Facebook's business practices, and not Cambridge Analytica, are the bigger issue.
  4. The Daily Podcast episode walks through psychographic messaging and the mechanics  Cambridge Analytica used to acquire Facebook user data. (for sensationalized, partisan fueled hot takes, take a look at the "Background Reading" below the podcast episode)
  5. Josh Constine's article highlights the impact of Facebook Ad spending during the 2016 Presidential election

As per Metcalfe's Law, the value of networks grow as the size of the networks increases.  The impact of social media will continue to grow as more people become connected. The combination of larger networks and more powerful analytical tools, will enable advertisers to better target their potential users.  When used for good, it will facilitate cooperation to solve problems that stumped previous generations. However, it also enables bad actors to target susceptible victims.  It will be interesting to see how users protect themselves without completely disengaging from social networks.

Please use comments to share other thoughtful analysis of the story or ideas of how we can protect ourselves from being manipulated from similar events in the future.

Protectionism in the News

One of the advantages of having an unpopular president is that his bad ideas get the criticism that they deserve.  Listening to the mainstream media call tariffs a tax on the American consumer was music to my ears.  Not sure where these critics were when Trump imposed tariffs on solar panels and washing machines in January. With multinational corportations that source materials and manufacture goods all over the globe, it is impossible to impose restrictions in trade without creating some unintended consequenses. 

Below I have included some articles that I particularly enjoyed reading that are critical of recent tariffs and protectionism in general. Please use the comments to share any other articles that you have come across and feel are worth sharing.

  1. Trade Wars are Easy to Win 
  2. Some Questions for Protectionists 
  3. Trump's Tariff Folly

Crowdsourcing for Uncle Sam

Ezekiel J. Emanuel and Bob Kocher's recent WSJ editorial, What Medicare Could Learn from Netflix, discusses a proposed solution to help CMS improve its risk adjusted payment model to better allocate healthcare dollars for its patients. 

While most of us aren't healthcare policy buffs, looking for cost effective strategies to draw on social capital to improve the delivery of governmental services seems like a win for us all. The XPRIZE foundation has created a successful model that could easily be applied to government specific challenges.

Please use the comment section to suggest other govermental challenges that you'd like the our collective knowledge to address. 

The article is behind a paywall, so you need to be a subscriber to read the full story, but I have included a condensed excerpt that I found particularly interesting and hopefully will encourage you to read the entire article.

Tne way for Medicare to do better would be to emulate Netflix... Netflix ran a world-wide contest to improve... its proprietary algorithm for predicting how users would rate films they’d never seen... Within a year, over 2,000 separate teams... had submitted more than 13,000 algorithms. Eventually, the winning team... improved the algorithm by more than 10%. For a tiny cost, Netflix got a huge amount of computer-science research that even its highly skilled employees could not perform.

Medicare should do the same: create a contest open to anyone in the world who can beat its current risk-adjustment model...The winner should be able to use objective patient data to account for at least 45% of the spending variation caused by disease...


Lagniappe: Looks like WSJ is testing a new paywall strategy. Seems kind of cool

The Grumpy Economist on Recent "Stock Gyrations"

While I've been inundated with interviews, blog posts, emails and tweets from various sources wanting to share their thoughts on recent public stock market volatility, there has been a dearth of quality insight. One of the main reasons for starting this blog is to highlight good articles that I want to share with my friends.

John Cochrane's recent blog post provides a thorough analysis of the multiple factor that go into asset pricing and his hypotheses for recent changes in the public stock market.  Warning, this is a long post with lots of charts and equations. 

Please use the comment section to share your thoughts or to highlight other articles that are related to this article.

why can't this be fake news

Economist John Cochran shares his thoughts on recent tariffs on washing machines, solar panels and the regulatory hurdles of building infrastructure in the US in his recent blog post

While my sentiments closely align with those in the article, I am willing to concede that the impact of tariffs are more nuanced than purely good vs evil.  However, I think creating "optimal tariffs" that precisely balances costs and benefits is impossible and susceptible to cronyism.  I think as a whole, we are better off trying to eliminate tariffs than trying to design optimal tariffs. 

Redistribution of wealth Through Time Travel

John Cochrane's recent blog post summarizes the Joint Committee on Taxation distributional analysis of the new tax law. As you can see from the JCT table below, and reading John's blog post, income categories are paying the same relative share of the overall tax bill as before the recent changes in the tax code.  While it is too early to tell how accurate the the JCT estimates will be, it is fair to say that the JCT is expecting less change than the mainstream media coverage would suggest. 

My biggest issue with the JCT report is the $260 billion decrease in total tax revenue collected estimate.  Since the federal government does not plan to reduce spending to offset the decrease in tax revenue, the tax bill will increase the federal deficit and debt. While countless politicians and talking heads argue whether benefits of tax code changes are being distributed fairly between income categories, there seems to be a dearth of discussion about the primary function of the tax code. This failure to fund the federal government's annual spending redistributes $260 billion from future taxpayers to current taxpayers.  This makes the changes between income categories seem trivial.

JCT table.png
Source: https://3.bp.blogspot.com/-ongAVZfWX5w/WkW...

Tax Reform: Lies, Damn Lies, and Statistics

With conflicting bills in the House and Senate, conflicting news coverage and conflicting claims regarding the impact of the respective tax reform bills, it is challenging to determine the net impact of the proposed tax bills. Many of the articles I have read make contradicting arguments that are well supported by facts and statistics.  I cannot help but think of the old Benjamin Disraeli adage "there are three kinds of lies: lies, damn lies and statistics" when trying to sort through analysis of the tax bills.

My personal opinion on the matter is that that both proposed bills are very complex and affect a large heterogeneous population making it nearly impossible to determine the net impact of any of the proposed changes to the tax code. Also, since different rules apply to different groups, it is impossible for either bill to have a uniform impact on every taxpayer. 

Below I have cherry picked a few examples to demonstrate that both sides of the argument can be true depending on how the argument is framed.  Please feel free to add more examples or critiques to my arguments in the comments.

The proposed tax cuts are actually a tax cut

Support: The authors of the respective bills have created several hypothetical taxpayer cohorts who will have their 2018 bill reduced compared to 2017. 

Refute: The CBO reports that neither proposed bill will balance the budget and will increase the deficit and overall national debt. Thus, the bills actually are a tax deferral that will have to be repaid by future tax increases. Also, some taxpayer cohorts will actually have their personal tax bills for 2018 increase.

Proposed tax cuts help wealthy taxpayers 

Support: According to the Tax Policy Center research group, 45% of Americans paid zero federal income tax in 2015. While I am willing to concede that there are probably a few high earners in that group, the majority consists of low income earners.  So any additional reductions to marginal tax rates would disproportionately help the top 55% of taxpayers that actually pay federal income taxes.

Refute: According to the same  Tax Policy Center research group, elimination of the state and local tax deduction would increase tax liability for 88% of households with incomes of over $1 million by an average of approximately $46,000 per household.  This creates a scenario where some taxpayers will pay higher tax bills despite having lower marginal tax rates.

Changes to mortgage interest deduction will damage housing sector

Support: A Brookings Institute research paper reports that 26% of US taxpayers (35 million) took advantage of the mortgage interest deduction in 2009.  So if all other conditions are held constant, this group could see their tax bill go up with the elimination of the mortgage interest deduction.

Refute: Home ownership rates in Canada (69%) and UK (71%) are higher than in the US (60-63%) despite not having a mortgage interest deduction.  The additional $12,600 in standard deduction would more than offset mortgage interest deductions for all mortgages below $307,000 (assuming 4.1% rate on a 30 year amortization). 

Proposed bills are simpler than the existing tax code

Support: The proposed GOP House Bill will reduce the number of personal tax brackets from 7 to 4. According to multiple sources, it is also expected to reduce the number of filers who itemize their deductions from 30% to approximately 6%.

Refute: The GOP house bill is reported to be almost 500 pages long and still contains a large number of loopholes. Also take a look at the calculation for tax treatment of small business in this Washington Post article. This is definitely more complicated than the 25% rate for all that is being reported.

Protectionism: a Euphemism for Crony Capitalism

While protectionism seems to have strong supporters within both major political parties, it often falls short when put into practice.  George Will's Washington Post editorial shows just how difficult it is to implement protectionist trade policy in the modern economy. Multinational corporations with international supply chains create an economic impact that extends well beyond the borders where their headquarters are domiciled. It is very difficult, if not impossible, to punish intended targets without causing significant collateral damage. At best, it is a futile attempt to appease a nationalist base. At worst, it is an opportunity to perform a favor for a special interest.

I wonder if the 7000 direct Bombardier employees or the thousands of indirect employees supported by $3 billion in materials Bombardier purchases from the US suppliers every year feel protected by the tariffs. Do more expensive airplanes and the resulting higher ticket prices help Delta Airlines and its customers sleep more soundly at night? 

Quadrupling the cost of an airplane seems like a high price for the American consumer to pay to protect Boeing's opportunity to create a competing plane in the future. Unfortunately, this is just one example of cronyism created by protectionism.

Like Mr. Will at the end of his article, I am left wondering,

 Who will protect Americans from the radiating mischief of protectionism?

EconTalk on Populism

While they get a little off topic, Professor Philip Auerswald and Econtalk host Russ Roberts discuss the recent rise of populist movements across the globe.  Professor Auerswald's asserts that the density of urban communities enables cities to evolve at a faster pace than their rural neighbors.  It will be interesting to see how society and its leaders address this growing divergence. Click here to listen to entire episode.