Bastiat’s Bastions

One of my students raised an interesting point when we discussed international trade and comparative advantage.  It seemed that all he had heard was that the U.S. no longer made much  anymore.  Now his point was more that we consume beyond what we produce, borrowing too much to pay for the trade deficit.  Still, many have the view that since manufacturing employment in the U.S. continues to decline (it peaked in 1979), that the U.S. is no longer making much stuff to sell.  Of course, part of what has been going on is that the U.S. has been increasing its services production.  Below is a link to a CBS news video along with links to a few articles on what has been going on with our production and trade in both manufacturing and in services.

First, is the rather misleading video of the CBS report by John Blackstone that aired 2/16/2010 on manufacturing in the U.S.  Note that the declines mentioned are measured in jobs rather than in output.

Now here is an article by Dan Ikenson of the Cato Institute that appeared in National Review Online in August, 2009 where he busts the myth that “We don’t [make things] any more — at least, not like we used to.” 

Along the same lines is a little longer is another article by Ikenson, “Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade,”  from 2007.

In an email (via a list I am on) from Ikenson I got Feb. 17^th, Ikenson writes:

The manufacturing jobs number (which, by the way, peaked in 1979 and has been on the same downward-sloping trajectory since then) masquerades as a barometer for the health of manufacturing, which has been setting all kinds of records with respect to output, value-added, revenues, profits, return-on-investment year after year (with the exception of the recent recession, which affected all sectors of the economy similarly). 

American manufacturing remains the world’s most prolific manufacturing sector accounting for 20-24 percent of global value-added; China accounts for about half that.  People ask: How can that be when most shelves in retail stores are loaded with products made in China, and ”Made in USA” labels are nowhere to be found?  Part of the explanation is that products labeled made in China are only 35-50%, on average, Chinese value-added.  (Apple iPods, which each register in our trade stats as a $150 import from China, contains about $4 of Chinese value-added–that’s only 3%!)  “Made in China” often means “snapped together in China” from components made in Japan, Taiwan, Singapore, Korea, and the United States.  Another part of the explanation for the dearth of “Made in USA” products on retail shelves is that U.S. manufacturing doesn’t make a lot of products sold on retail shelves.  Pharmaceuticals, chemicals, sophisticated componentry, airplane parts, and technical textiles aren’t sold through retailers, and those are some of the high-value products made in America.

Michael McKee writes this article at Bloomberg.com (Bloomberg News) from November, 2009, also busting the myth of U.S. manufacturing declines.

Finally, take a look at this February 17, 2010 op-ed article from the New York Times by W. Michael Cox , director of the Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business.  Cox writes here on the huge and growing size of U.S. production and exports of services.  I should point out that Dr. Cox is the former chief economist of the Dallas Federal Reserve, and even though I never had a class with Dr. Cox (he arrived my second year of graduate school), I still learned a good bit from him in our twice-a-week seminars at Virginia Tech.

 -MC

(A note to my students looking to get comment points–you will need to show that you looked at the video and have read the articles linked and cited above, or have done other reading on the subject–and link to your sources.)

What got my attention this week was something I heard this past Sunday on Fareed Zakaria’s Global Public Square (GPS) program on CNN.  Zakaria states point blank, that the Bush tax cuts are the single largest part of the deficit.

Notice that Mr. Zakaria thinks he has Greenspan and Paulson in a “gotcha moment,” claiming that they fail to live up to the ”courage of their convictions”  by not supporting immediate repeal of the Bush Tax Cuts.  The problem is that Zakaria is a poor listener.  We face two problems, the recession, which is short term and acute, and the deficit which is long term and chronic.  Notice that Paulson says that the deficit is a long-term problem.  Zakaria is missing a vital point in this discussion.  Reducing deficits, either by raising taxes or cutting spending, during downturns are widely thought to exacerbate recessions.  Paulson and Greenspan both suggest that now, because of our current recession, is not the time to be raising taxes, but they never rule out raising them at some time in the future.

Zakaria later points listeners to a Feb. 4, 2010 article in Time by Jeffrey Sachs, a leading economist at Columbia University, whose work on something called the “natural resource curse” has captured my recent research attention.

The current budget deficit runs about 10% of our national GDP (US  tax receipts are currently at 15% of GDP while spending is at 25%).  Sachs writes in his article that closing up the Bush tax cuts on the rich would only amount to .4% of GDP, which means that the Bush tax cuts account for only 4% of the deficit.  Sachs states: “even with rollbacks of tax cuts for the rich, the fiscal gap will remain enormous.  The Bush cuts in rates hardly account for the biggest part of the current deficit, as Zakaria claims.  Zakaria is not only a poor listener, he is also a poor reader.

Take a look at this picture of Federal Spending and Receipts in millions of dollars:

Here are those same figures but as percentages of GDP:

I should point out that there were actually two Bush Tax Cuts, one enacted in  2001 after 9/11 and the other in 2003.

Note that tax revenues rose faster after the 2nd Bush tax cuts than they did in the Clinton era, with the tax revenue growth coming to an end in 2007 at the beginning of the recession.

More importantly, notice that starting in 2001, public spending as a percent of GDP started to grow again after shrinking, as it had over the Clinton era.  While we should avoid post hoc thinking, we should also note that while the  tax cuts may have led to revenue declines, there were also large increases in government spending that started at the beginning of the Bush era.  The Bush spending programs included a generous pharmaceuticals program for the elderly, an increase in Homeland Security spending, an expensive war in Iraq in 2003 and allowing Republicans in Congress to spend heavily in their districts to increase their reelection chances.

It is the growth of entitlement spending that is at the heart of our future deficit problem, and in the very near future, growth in entitlement spending, from Social Security to Medicaid to Medicare, will be the drivers in our deficits.  Driving these spending figures are an aging population and rising health care prices.  One of the biggest reasons for the rising health care prices is that we have an aging population, boosting the demand for health care goods and services.  Increasing entitlements, through the health care bills that have gotten approval in the House and the Senate are destined to push projected deficits even higher.

A more realistic, as well as more pessimistic, view of the growing defict is reported in this ABC article.  The article reports the findings of the Peterson-Pew Commission on Budget Reform.  One of the commission’s publications is the testimony of Alice Rivlin.  Rivlin, an economist who was appointed by Johnson, Carter and Clinton to various government posts, recently testified before the Senate Budget Committee.  In her testimony, she states “In the next decade and beyond, federal spending, driven by the impact of an aging population and rising health care costs on Medicare, Medicaid, and Social Security, will rise substantially faster than the whole economy can grow–faster than the GDP.  Revenues, at any likely set of tax rates, will grow only slightly faster than the GDP.  The gap between spending and revenues will keep widening.” Obviously, repealing the Bush Tax Cuts, as Zakaria suggests, will do little if “revenues, at any likely set of tax rates,” will grow more slowly than the promised spending from Medicare, Medicaid, and Social Security.

Recently, my daughter and her roommate drove from Natchitoches, LA to Monroe, LA and followed her roommate’s global positioning device.   The car’s GPS routed them through Shreveport, doubling the usual time through Winnfield and Ruston.

As bad as the advice my daughter and her roommate got from the auto GPS, it did get her to her destination.  Zakaria’s suggestion that repealing the Bush tax cuts, or allowing them to expire, would put us much closer to erasing the deficit is just seriously misleading.   Zakaria’s GPS does not even set us on the right path.  Perhaps if Zakaria would listen more carefully and read the articles he suggests to his listeners, he might be worth listening to.

And this just in, President Obama has created a bi-partisan commission to come up with ways to deal with the deficit crisis.  From what I understand, the commission’s proposals would come before Congress to be voted on, yes or no, without amendments.  Unlike Zakaria’s suggestion of dealing with the Bush Tax Cuts (which should be on the commission’s table), President Obama has put us on course to effectively dealing with the long-term deficit problem, looking at both the spending and the revenue side of the deficit problem.

-MC

Once again, the idea of introducing a Value-Added Tax (VAT, better termed the “Stealth Tax”) to curb our mushrooming deficits is being discussed. This time, in a Feb. 4, 2010 article in Time magazine, Columbia University economist Jeffrey Sachs suggests the use of a new tax in America, the VAT, stating “Both sides could agree, for example, on a value-added tax (VAT) – a sort of national sales tax – combined with closing loopholes and reducing some marginal tax rates, including the corporate tax rate….”

Suggesting that we use a VAT instead of a straight-up sales tax to finance anything in this country, even a reduction in the corporate income tax, signifies either a lack of understanding of basic public finance or a willingness for the federal government to increase taxes on American buyers in ways unperceived by most voters.  While a VAT would be more visible than running deficits, which is another form of unperceived taxation, a regular sales tax would be far more visible by tax payers and works better in other respects, as well.

Sachs is right that a national VAT is sort of a national sales tax. With the VAT, instead of charging a flat rate on every dollar of retail sales, that same rate is collected from producers on the difference between the cost of the goods that they sell and their sales revenues, that is, on the value that they add to goods at each stage of production, from raw materials producer to manufacturer to wholesaler to retailer. Take the case of a loaf of bread that sells for a dollar. In the process of making the bread, a wheat farmer sells wheat to a mill which sells flour to a bakery which sells bread to a store which sells it to the final customer. The wheat that went into the flour that went into a loaf of bread sold for a quarter, while that much flour sold for a half dollar while the baker sold the bread to the retailer for 75 cents. Each producer adds a quarter at each of the four stages of production. If each producer is charged a 10 percent VAT, each of the four pays a tax of 2 1/2 cents, which adds 10 cents to the cost of the bread. The price of the bread ends up going up by 10 cents, the same amount as it would if there were just a national sales tax of 10 percent. Who ends up paying for this tax? It is the same person who ends up paying the sales tax, mostly the consumer.

This does not mean that there is no difference between these sales taxes and the VAT. Since most areas of the country already have some sort of sales tax, a national sales tax would cost little extra to collect. With a VAT, we would have to add a huge bureaucracy of accountants to check the cost of goods sold and the sales at each stage of production. This is a very costly tax to collect. With a sales tax, however, we could, in most states, piggyback collection and enforcement efforts on state and local government efforts.

Another difference is that the burden of a sales tax on the poor can be eased by putting exemptions on certain classes of goods, such as groceries, utilities or medicine, because the poor spend a larger portion of their income on these items than wealthier citizens. With a VAT, producer groups can be excluded, not consumer groups. Instead of easing the burden on certain consumers by exempting certain items such as groceries and medications from the sales tax, the VAT can only exempt certain producers.  This not only makes it difficult for the tax to be eased on the poor, but also makes it more likely that many producer groups will be lobbying in Washington to get their group excluded from the tax. Special interests do not lobby as much for exemptions from sales taxes because it is harder for consumer groups to organize than it is for producer groups. For Sachs, who rightly complains of the influence of special interests in Washington, to give special interests a greater incentive to lobby in Washington means that he does not understand the political incentives posed by certain forms of taxation.

A national VAT differs from a national sales tax in another important way. With a sales tax we see what we pay in these taxes at the cash register. The consumer never sees the bill for a Value-Added Tax, though the consumer ends up paying for the tax since it is mostly passed forward to the buyer. The lack of visibility of the VAT has prompted some critics of this tax, including me, to call it the Stealth Tax, because it hits the taxpayer/voter before she ever sees it coming. If there is a tax increase to pay for some new spending program, the tax increase is passed on as a price increase, and the buyer tends to blame the seller instead of the government.  But when the taxpayer/voter sees the bill for big government, she starts to question whether the spending is necessary. But when we don’t perceive the costs, we seldom question the value of the spending program.

The problem of the lack of visibility of a tax was first pointed out in 1903 by the Italian economist, Amilcare Puviani (as we see in this Richard Wagner paper), and then popularized among English-speaking economists by one of my professors, Jim Buchanan, a problem that has been called “fiscal illusion.” As voters, we are more likely to ask for new spending programs if we never notice how much it costs.   Importantly, Buchanan and others have noted that tax cuts and deficits fail to “starve the spending beast” of government, as many conservatives have proposed to deal with government spending, and instead reduce the visibility of the cost of spending to voters. Voters, then, become more supportive of almost every new spending program that comes along.  If the problem we are tackling with the VAT is the deficit, a very visible national sales tax makes a better weapon against the deficit than the stealthy VAT.

Sachs is quick to remind us that the VAT is widely used in Europe. This is true. And the Europeans have tackled the regressivity of the VAT buy introducing many spending programs to help the poor.  If we are facing a deficit problem, it would seem that additional programs to help alleviate tax regressivity unnecessarily add to the deficit by increasing spending on uncontrollable entitlements.

We should also note that the Europeans arrived at their VAT by their own peculiar history. Their VAT evolved from their former business tax, a tax on gross receipts at each stage of production. In our bread example, a 10 percent tax would collect 2 1/2 cents from the farmer, a little more than a nickel from the miller, about 8 cents from the baker and about eleven cents from the retailer, adding up to more than 21 cents. The Europeans quickly found that businesses could avoid the tax by combining the various stages of production into one business which would lower their taxes considerably, giving vertically integrated firms an advantage over those there are not.  It should also be pointed out that the Europeans already had a system in place to tax at each stage of business sales rather than a retail sales tax bureaurocracy.

So, if we are to go down the road of a new national tax on spending, we should note that a true national sales tax is superior to a VAT at every step, from being more visible and more of a deterrent to federal spending sprees, to being better suited to being shaped to help protect the poor from tax regressivity, to being less prone to being shaped to the liking of special interests, to being cheaper to administer.

-MC

(Note: I have written more than once about the Value-added tax, or VAT, and have repeated some of my own words from past articles, especially see “Vat for financing health care proposals still a bad idea.”)

The L.A. Times reports some of the problems with the new homeowner $8000 tax credit in this story.  Besides fresh ground for tax cheats to exploit, this tax credit may not be worth getting.

In my introductory economics class, we just finished looking at how taxes get passed forward to buyers in higher prices or back to the sellers in reduced prices received.  What we saw in class was that if the buyers faced few alternatives, while the sellers had many, most of the tax gets paid for by the buyer in the form of a higher price.  If the sellers have few alternatives, but the buyers have many, the sellers pay most of the tax in terms of a lower received price, while the buyers pay only a little more than the original price. 

Of course, if the government subsidizes buyers in a market instead of taxing them, the same thing happens, but in reverse.  Subsidies are only negative taxes, so a subsidy to buyers in a market just raises the amount the buyers are willing to pay to the sellers.  Consider the $8000 tax credit to home buyers.  This tax credit merely raises the amount buyers will pay to sellers.  And since the buyers have many alternatives while the sellers, often facing foreclosures, have few alternatives but to sell, have few alternatives but to sell, the price the buyers pay ends up rising almost by the amount of the tax credit.  Few new homes are being built in response to the tax credits.  So mostly, the tax credit for buyers boosts the prices received by those facing losing their homes in a foreclosure, where only the bank receives the money. 

So those considering buying a home before the December 1st deadline because of the tax credit should probably think twice.  Most of the tax credit will go to the sellers. 

But even if some of it goes to the buyers, shouldn’t it be worth the buyer’s effort?  The answer is maybe, but  maybe not.  One provision of the tax credit is that the buyer has to live in the home at least three years, or the buyer must repay half of the tax credit, or $4000.  If the buyer faces the possibility of losing her home, facing repayment of $4000, while having to pay $7000 more for a house and getting an $8000 tax credit may not be that good of a deal.   

-MC

Some months ago I was asked to find someone who could determine the feasibility of a device reinvented by a local fisherman.   The machine was an alternator driven by a bicycle that charged a car battery bicycle.  An electric motor hooked up to the battery turned the wheel of the bicycle.

The claim was that the device produced electricity.  Of course, it produced a charge, but used more energy than it produced—a perpetual motion machine.  Such machines have been invented and reinvented for hundreds of years.  And well-meaning garage inventors reinvent perpetual motion devices with every up-tick in energy prices.   But physics triumphs and we know that the law of conservation of energy and matter still rules.  Only part of the energy from the battery gets converted to work, with the rest being converted into friction and heat.  Energy is not created out of nothing.

In trying to reinvent the health care delivery system, Senator Baucus seems to have invented a perpetual financing device , but one that will only push up prices and inhibit real innovation.  What Senator Baucus wants to do is to tax the very providers of health devices, such as heart stents, artificial hips, and diagnostic machines in order to help pay for the new health care system that the federal government is reinventing.

There is a slight problem with all of this.  Taxes collected from businesses are only partly paid by the producers, with the rest of the tax paid by the buyers in the form of higher prices.  The easier sellers can move to something not taxed to sell, the more the tax gets passed along to buyers.  The more these taxed items are covered by insurance, by other people paying the bill, the more the tax gets passed along to the buyers.  If buyers have many non-taxed alternatives and find it easier to switch to them than the sellers can switch to non-taxed goods to sell, then less of the tax gets passed to buyers and the sellers will have to pay more of the tax.  Of course, if sellers find switching easier than buyers, the taxed gets passed on to the buyers.  In other words, the side of the market that can avoid the tax the easiest by switching what they have been doing will be the side that contributes less to paying the tax.

With medical devices, it is very likely that the sellers find it easier to go from making wheel chairs to making non-taxed items than wheel chair users can switch to some non-taxed item.  Still, to the extent that the tax is borne by sellers, it reduces profits in these industries and reduces innovation as well.

What looks like will happen with this financing plan is that the tax will be passed along to buyers including Medicaire and insurance, who will raise taxes and raise premiums to pay for the higher priced devices which will lead to higher prices for the medical devices, higher premiums and higher taxes.  Of course, after a while, the increasing out-of-pocket expenses reduce purchases along the way.

This financing scheme looks as if it were designed by the same guy who hooked up a car battery to an electric motor, a bicycle and an alternator.  The problem is that both of these end up coming to halt and are unsustainable schemes.  Genius at work?  Not!

-MC

Many on the conservative side have had many negative things to say about the “Cap and Trade” system.  It should be pointed out that “cap and trade” itself, is not  the source of their ire.  Rather, many conservatives do not like limitations being placed on CO₂ emissions in the US. 

What is this “Cap and Trade” system that is being implemented in the new climate change bill?  Cap and Trade is merely an approach to regulating emissions, and it is one that efficiently reduces those emissions.  It contrasts with two other approaches: one that is called the “command and control” approach to regulation and the other is an approach that taxes emissions, such as the proposed “carbon tax” to regulate greenhouse gases a decade ago.  Before looking look at these regulatory systems, let’s look at the ideal environmental regulatory outcome.

At first glance, it would seem that no pollution would be the best regulatory outcome.  Think of what this would mean when we consider CO₂ as a pollutant.  We inhale oxygen, but if CO₂ is a pollutant and we want no pollution, then, we better hold that breath.  But we cannot.  Stopping all pollution is just too costly. Anything we do to reduce our pollution will cost us something. But, of course, pollution itself is costly, either health costs, or aesthetic costs, or costs in losses of biodiversity. The ideal, then, is really to keep the total costs of pollution and the costs of reducing that pollution to a minimum. 

Generally, each extra ton of emissions of CO₂ causes the added costs of pollution to increase.  Also, if we look to reducing CO₂ emissions, we can find some inexpensive ways to cut emissions, and after we cut emissions in those ways, to cut emissions further, we would have to employ costlier and costlier means.  To keep these total costs to a minimum, the added costs from cutting a ton of CO₂ emissions have to equal the added costs of the damage done by another ton of CO₂ emissions.  If the added costs are higher from the damage done from another ton of CO₂ than from cutting emissions, we could lower total costs by cutting emissions.  On the other hand, if the added costs of cutting emissions by a ton are higher than from the damage done from another ton, total costs could be lowered if we go ahead and pollute that ton.  The “right amount” of pollution, then, is the amount where another ton would cause costs of cutting pollution by the same amount as the costs of the damage done by another ton of pollution.

Of the three methods of pollution control to understand, the easiest to understand is the “command and control” system.  Here, the regulatory commission sets requirements for each source of pollution, monitors them for compliance, and then sets fines and punishments for those who fail to comply with the regulatory requirements.  Here, possible polluters just do what they are told or face extremely high fines or other punishments.  The “command and control” name for this regulatory type comes from the management form used in the military.  Historically, most of regulation of the EPA has been of this “command and control” type.  The best way of thinking about this approach is to recall the lines from Tennyson’s “Charge of the Light Brigade:”

Theirs not to make reply

 Theirs not the reason why

    Theirs but to do or die.

 This command and control system of regulation does not do a very good job of keeping costs of regulation down, nor does it do a good job of balancing the costs of damage with the costs of reducing emissions.  The regulatory authority just does not have information on all of the costs.  This information is mostly diffused throughout the society—various electric power generating companies have a good idea of what their costs of cutting emissions are like, so a lot of people have bits and pieces of this information, and no one knows it all. 

One of the earliest regulatory suggestions for reducing the costs of pollution control was made by A.C. Pigou in 1920 in his book, The Economics of Welfare (with the word “welfare” meaning “wellbeing”).  Pigou suggested that a tax could be levied on certain activities, such as pollution, that would give people an incentive to reduce those activities.  Economists in the 1960s and 1970s saw that such a tax would get polluters to reduce pollution in a least-cost way.  Any producer who could reduce emissions at a cost below the tax would do so, while those who could only cut their emissions at a higher cost would not.  Suppose the tax on emissions is $100 per ton.  All pollution reduction that costs more than $100 per ton will not take place, but pollution reduction that costs less than $100 per ton will take place.  Lower cost cleanup activities replace higher cost cleanup and costs cannot get any lower.

A little later on, economists came up with a slightly different approach.  The environmental regulatory authority would first decide how much emissions would be allowed, create “pollution rights” which would be tradable.  Polluters who could reduce pollution very cheaply could then reduce their emissions and sell their rights to those who could only cut their emissions at a very high cost.  If the price of a pollution permit were higher than the cost of cutting emissions, the producer could then reduce their emissions and sell off their permit.  If the emission permit sold for a price below the cost of cutting pollution, the emitter would buy up permits.  If you think that such a scheme is unworkable, think again.  We have been using tradable permits of this sort to control SO₂ emissions that cause acid rain since the 1990s, and these permits trade on the Chicago Board of Exchange, along with various commodities.

The Pigou tax on pollution, which we saw a decade ago called a carbon tax, gives polluters a constant price to respond to, and the total amount of emissions could be higher or lower and can change over time.  If the costs of cleaning up go up, we end up with higher levels of emissions.  On the other hand, the tradable permits system produces a constant level of emissions but with a price of pollution that varies.  Both of these methods minimizes the costs of cutting pollution because both produces a price for cleaning up so that those with costs of cutting a ton of emissions above that price do not cut their pollution and those with costs of cutting a ton of emissions below that price do cut emissions.  Only the low-cost emission cutters reduce their pollution while high-cost emission cutters do not, and face either taxes or having to pay for pollution permits. 

For global pollutants, such as greenhouse gases, there could be international trade in CO₂ permits.  This is the general idea behind “cap and trade.”  For this to work well, however, there would have to be a global monitoring agency that could monitor each source of CO₂  emissions and would be ready to punish those polluters who do so without a permit.  This is the part of “cap and trade” that faces the biggest difficulties.  Remember that real regulation is not done by Soloman-like regulators who are infinitely fair, but by actual people, like international soccer referees, so that various human biases rather than fairness would show through in international environmental regulation.  The problem of political bias and lack of information in regulation is seen in this warning from Pigou himself (Some Aspects of the Welfare State,” Diogenes 7:1-11 (1954), p. 10.):

It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of them could usefully interfere with individual freedom of choice. Moreover, even though economist were able to provide a perfect blueprint for beneficial State action, politicians are not philosopher kings and a blueprint might quickly yield place on their desks to the propaganda of competing pressure groups. “Fancy” finance, like a fancy franchise, whatever its theoretical attractions, has, at all events in a democracy, dim practical prospects.

“Cap and Trade,” itself is a good idea.  It is a market-based approach to efficiently reduce the amount of emission of CO₂.  The real difficulties are first, setting the right amount of emissions to allow and second, monitoring and regulating by a global authority, giving up sovereignty to regulators who are likely to want to tilt the playing field away from favoring Americans.  Before going down the road of regulating CO₂ through any approach, we should be very sure of what human reductions in CO₂ will actually accomplish and whether there are alternatives that might work better, such as re-forestation of large areas of the planet.

-MC

Immigration is a contentious topic. Rather than add to the contention, I wish to clarify a poor economic argument that is frequently used in immigration policy debate. Many people support immigration because, “Americans aren’t willing to do the jobs that immigrants are willing to do.” This statement is potentially erroneous in that it confuses the notion of quantity of labor supplied with that of labor supply. Whereas quantity of labor supplied is the amount of labor a person or group provides at a given wage, labor supply is a schedule specifying a person or group’s quantity of labor provided at each possible wage level.

The statement quoted above stems from an observation—that some U.S. jobs are held almost exclusively by immigrant workers. From this observation, a fallacious conclusion—that domestic workers would not work in such jobs at any wage level—is drawn. To say that a group’s quantity of labor supplied is zero for a given job and wage is to say nothing about the group’s behavior at other wage levels. The graph below represents a possible depiction of a labor market with and without immigrant labor.

The graph features two supply curves, one showing quantity of labor supplied by citizens at each possible wage and another showing quantity of labor supplied by the combination of citizens and immigrants at each possible wage. In the absence of immigration, citizens would earn a wage of w_zero an hour and work q_zero hours in the featured labor market. However, if immigrants enter the country and work in the same market, the supply of labor shifts right (quantity of labor supplied increases at any given wage). In equilibrium, workers in this market now earn w_one per hour and work q_one hours. However, by looking along the labor supply curve of citizens, we find that citizens supply zero hours of labor to this market at a wage of w_one . Given their work and non-work alternatives, citizens opt out of the type of labor depicted in the presence of immigration (and its wage-depressing effect). However, citizens will rejoin this workforce if the wage rises above w_one .  Economist Chad Turner points out that this inducement of domestic labor at the higher wage will not obtain if the domestic labor supply curve is sufficiently leftward-shifted.   

Though immigrant laborers do benefit other members of our economy (e.g., consumers and producers), jobs would not go undone without them. Rather, in the absence of immigrant laborers, relevant market wages would move upward and induce the participation of citizens.

-SS

We are told by politicians that the way to reduce health care costs is by getting more people covered with health care insurance and getting more preventative care. Maybe. Maybe not.  When we look at the numbers, we have to conclude that the problem is that demand is shifting up faster than supply.  The only thing that will bring health care prices down is if we are able to get supply to increase faster than demand.

Recently, the White House hosted a Health Care Summit. C-SPAN had some good coverage on it that you see at their website. The links to the events are:

Summit Opening Remarks, Breakout Session, Obama and Kennedy: Closing Remarks on Healthcare Summit, BilyTauzin Interview on Pharmaceuticals.

Most of the discussion centered on health care coverage–insurance. I would suggest that the problem that most Americans face is not whether or not they are covered, but the high cost of coverage.  Premiums are very expensive. A lot of the productivity gains of the American worker in the last 20 years has been paid to the employee, not in wages, but in the employer’s share of health care premiums.

I plotted some health care data and came up with an interesting picture. I based this picture on two date sources: 1) National Health Expenditures 1960-2007 from the Centers for Medicare and Medicaid Services (http://www.cms.hhs.gov/nationalhealthexpenddata/ downloaded 3/10/2009) which provides estimates of the total expenditures in the US on health care and 2) the Consumer Price Index (CPI) subindex on health care (just like there is one on energy and another on food) which comes from the Bureau of Labor Statistics. I got a relative price of healthcare by dividing the Health Care CPI by the complete CPI (all goods and services). This tells us which is going up faster, general prices or health care prics and if HC is becoming more scarce (more in demand relative to what is going on with supply).

I divided the expenditure data by the Health Care CPI to get a quantity measure and then divided through by the population, to look at the quantity in per capita terms (more people means more buyers, but more suppliers too). Price and quantity combinations observed in the diagram below do not show a supply curve or a demand curve, but rather show where supply and demand intersect–the “equilibrium” values.

On the diagram above, the price is the Medical Care component of the Consumer Price Index (CPI) divided by the general (all goods and services) CPI, and multiplied by 100. 1983 is used as the base year (1983=100 for both all prices). The Quantity axis measures Health Care Expenditures per capita (Expenditures divided by the population) for that year and then divided by the Medical Care CPI, which gives us a measure of quantity for that year. Then, this quantity figure is “standardized” by 1983’s quantity (all years quantities divided by 1983’s quantity. The above should not be thought of as a demand or a supply curve, but showing the path of equilibrium prices and quantities for the years from 1960 (point furthest to the left) to 2007 (point furthest to the right). Think about how supply and demand must be shifting to give such numbers.

By the way, the 1960 point is at the lower left and the 2007 point is at the upper right. For things to look like this though, the demand must be growing or shifting out to the right faster than supply is increasing. And why has this occurred? Expanding health insurance coverage. The more someone else is paying our bills, the more we spend and the less attention we pay to our costs. Ever notice all those scooter store ads on TV, ads you never saw before Medicare started paying for scooter chairs? And all the ads say buy this and let Medicare pay for it (“If we approve it and Medicare turns you down, you get to keep the chair”), not a cent out of your pocket.

So, health care is way too expensive, because we have pushed up demand with all of our health insurance–and the politicians’ answer is more of the same, more HC insurance, more 3rd party payment, less individual responsibility. The folks at the Health Care Summit routinely avoid talking about doing anything on the supply side of the market–getting more doctors, more nurses more hospitals, more pharmaceuticals for the same prices (shifting supply out). Here are the questions we should be asking: How do we get the FDA to speed up its approval process? How do we get the med schools and nursing schools to open up their doors a bit wider? These are the things we need to get affordable health care, as universal health care increases demand without doing anything about supply.

-MC

James Glassman has this really insightful article on economic stimulus in the March issue (now online) of Commentary magazine (at commentarymagazine.com).  Readers of Bastiat’s Bastions will note that Mr. Glassman is also a fan of Bastiat and references the same story “What is seen and what is unseen,” that we have mentioned here repeatedly, starting with the first post here in January of 2006.

-MC

Economists look at a lot of numbers measuring economic activity. Good economists always remember what the numbers mean and what is ultimately important, what the ends are for people and what are merely means.

Right now, we are in the midst of a recession—a recession that looks to be quite serious. We see thousands of people losing their jobs, and when people lose their jobs, they lose their sources of income, lose their control over resources and stop being financially self sufficient, becoming someone for others to take care of. This is cause for despair for some, and true mental depression for others. Recently it was reported on the news that a man in California killed his wife, his five children and himself after becoming distraught over losing his job. That is depression.

To deal with this recession or depression or whatever term you chose to describe the downturn we are facing, the Democratic Congress has devised an “economic stimulus” plan that will push the currently large deficit up by more than 800 billion dollars. Surely, 800 billion dollars will put many people to work. The real question though, is “what will we buy when we auction away 800 billion dollars plus interest of our future?

The question of what we will be buying seems to be of little interest to President Obama and his party as he urges all haste in passing the stimulus package. Here is why such a question must be asked: It is not jobs that people really need, rather, it is the ability to buy things that is crucial. If the new jobs are not producing goods and services that people want with this stimulus package, we are just giving people money to buy but with no extra goods being produced, and all we will have done is increased the competition or the bidding war for the same old goods, driving prices for those goods ever higher.

In this story from CNN by Peter Valdes-Dapena, there are two proposals specifically designed to help out the ailing auto industry. One proposal is being pushed by Sen. Diane Feinstein, D.-Calif to not only help the auto makers, but also help the environment, or at least those are her stated intentions. The plan is to give buyers of new and more environmentally friendly vehicles a governmentally financed rebate if the dealer certifies that the buyer traded in their old gas guzzler and that their old car would be scrapped instead of being resold. To keep the dealers honest, the car’s VIN number would be tracked to make sure it did not show up in the used car market.

While there may be environmental benefits to Feinstein’s plan, the economic benefits are doubtful. Feinstein’s plan would cause cars to be destroyed so as not to compete with new cars and bring their resale value down. Think about what is really going on. Cars that still work, that still have value, would be scrapped, destroyed. Cars that could still drive some family around would no longer exist.

This reminds me of the programs of Franklin Delano Roosevelt (FDR) that failed get us out of the Great Depression. Recessions usually last about 2 years. The period from 1929 to 1941 became the Great Depression because over and over, the reactions of both Hoover and FDR to the recession, and the inaction of the Federal Reserve System, made matters worse, making the recession deeper and longer than it would have been otherwise.

One such program of FDR that he hoped would help the farmers, one that my Dad saw first hand, was one designed to boost the price of beef to help the farmers. FDR’s Department of Agriculture paid farmers for their cattle, dug large holes in fields around the country to herd the cattle into, shot the cattle and buried them in mass cow graves. While Americans were going hungry, our government destroyed food. Instead of helping to feed Americans, our government destroyed food.

The truth is destroying resources never helps our economy. In the inaugural post of Bastiat’s Bastions, Norbert Michel and I discussed why there was no silver economic lining to the destruction of New Orleans, that Katrina provided no benefit to New Orleans. Had the storm not destroyed the city, all of the resources devoted to rebuilding New Orleans and coastal Mississippi could have gone to building something else or producing something else, something that we could have had in addition to having the city. In Bastiat’s story, a boy broke a window with a stray ball (see our inaugural post again for the links to Bastiat’s story), and many people thought that the breaking of the window was a good thing, because it would increase work for other people. Bastiat, however, points out that had the window not been destroyed, the owner of the window would have still had a window, and would have bought other things had he not had to buy a new window.

Destroying one thing to only replace it means we have nothing that we would not have had. Think about this. Often when people are unemployed, they take the opportunity to finish that degree that they had started years ago or somehow prepare themselves for another occupation. Without the job that they had, their “opportunity costs” of completing the degree has fallen. So, when these individuals take jobs to merely replace something that other people already had and would have still had, if not for the destruction of their cattle by FDR or their old cars by Diane Feinstein, some people would have still had their cars and other people could have prepared for better jobs instead of wasting their time replacing cars that have been destroyed.

Keep in mind, there is no shortage of jobs, there is work to be done all around us. There are yards to be cut, houses to be painted, and people everywhere need help. People are not so much looking for jobs as looking for a way to get goods and services for their families. If we are employing people doing things that people don’t want to pay for with their own dollars, such as building new ATV trails, people will be just be receiving incomes to buy things that are not being produced.

Instead of stimulus, what we see in this package is pure waste. We may as well keep auto workers at their jobs by having the government buy up new cars, putting them on barges and dumping them off of the coast beyond the outer continental shelf. The image that comes to mind is of people being put to work by this stimulus package digging holes while other government workers come behind them to fill the holes back up.

What is the real point of this so-called stimulus package, then? Just as I was critical of Bush and the Republican Congress for wasteful spending on homeland security grants, we see even more pork in this present bill. In other words, the spending bills now being proposed to “stimulate” the economy will do more to stimulate the votes of special interest groups than to stimulate the economy.

My point, then, is that if we give a trillion dollars to people to make things that no one cares much about, we end up wasting the time and talents of our workers. And, like the person in the V8 commercial, when we realize what could have been, we will bang our heads with our hands for squandering funds on things no one wanted.

As is usual, our elected officials in Washington stand at the ready to “do something” about any problem even if doing something means making the problem worse. They are less concerned about the problem than the opportunity that it affords to spend money on their supporters. With the stimulus package, Congress is playing pork-barrel politics, which means the politicians are just using taxpayer funds and IOUs to buy their way to reelection.

-MC