Archive for the 'Myths' Category

Quote Of The Day

“Kaplan also points out that the pay of those at the top of other highly-paid occupations has grown dramatically as well, like lawyers, athletes, and hedge fund managers. Here’s a figure showing the pay of top hedge fund managers relative to that of CEOs in the last decade. Kaplan writes: “The top 25 hedge fund managers as a group regularly earn more than all 500 CEOs in the S&P 500. In other words, while public company CEOs are highly paid, other groups with similar backgrounds and talents have done at least equally well over the last fifteen years to twenty years. If one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why the other professional groups have had a similar or even higher growth in pay. A more natural interpretation is that the market for talent has driven a meaningful portion of the increase in pay at the top.” — Economist Tim Taylor

Quote Of The Day

Richard Posner on the liberal daydream of working 20 hour weeks and enjoying more “leisure”:

The Skidelskys have an exalted conception of leisure. They say that the true sense of the word is “activity without extrinsic end”: “The sculptor engrossed in cutting marble, the teacher intent on imparting a difficult idea, the musician struggling with a score, a scientist exploring the mysteries of space and time — such people have no other aim than to do what they are doing well.” That isn’t true. Most of these people are ambitious achievers who seek recognition. And it is ridiculous to think that if people worked just 15 or 20 hours a week, they would use their leisure to cut marble or struggle with a musical score. If they lacked consumer products and services to fill up their time they would brawl, steal, overeat, drink and sleep late. English aristocrats in their heyday didn’t work, but neither did they cut marble or explore the mysteries of space and time. Hunting, gambling and seduction were their preferred leisure activities.

Americans value leisure, but it is expensive leisure, and so they have to work hard in order to pay for it. As a result they have less leisure time than if their preferred form of leisure were lying in a hammock, but on balance they obtain more pleasure.

Why So Little Lobbying?

University Of Chicago economist Casey Mulligan tries to answer the puzzle:

Some people have expressed dismay at the unprecedented amounts spent on 2012 political campaigns. But heightened political spending and other forms of political participation are an expected consequence of our more active government.

As explained by a pioneer in political economy research, Gordon Tullock, the real surprise about spending on campaigns and lobbying is how little it is compared with the amount of resources controlled by governments.

The federal government spends about $4 trillion every year, and state and local governments another $2 trillion, not to mention the resources these governments control through regulatory activities.

At the same time, estimates of aggregate campaign and lobbying spending are well below than 1 percent of total government spending. For example, analysis of filings under the Lobbying Disclosure Act finds that $3.5 billion was spent on lobbying in the year 2010.

Although economists have trouble explaining why observed lobbying spending is so little in total, economic analysis has been successful at explaining why there is more lobbying in California than, say, Vermont and why lobbying expenditure often peaks at the height of legislative activity. More is at stake.

For better or for worse, an active government begets lobbying activity.

Full post can be found here.

Quote Of The Day

“Suppose you start a new charity to provide free haircuts for hippies. You only manage to raise the money to pay for three haircuts a year. The Prisoners’ Dilemma might explain why people aren’t more generous with their money in general. But the Prisoners’ Dilemma doesn’t explain why the other charities raise so much more money than yours. If you ask “Why don’t people give more money to my charity?,” the best answer is that people hold your charity in low esteem. Similarly, if total donations to the U.S. government add up to a few million dollars a year, the best explanation is that people see lots of better ways to spend not just their dollars, but their charitable dollars.” – Bryan Caplan, on what people giving so little of their charity money to government says about their views on government efficiency

Quote Of The Day

“Second, the argument that elites are generally opposed to government involvement in the economy reveals the very US-centric focus of Krugman and Wells. Even a perfunctory look at recent or distant history (or at our book!) should have been enough to convince one that in most societies, even in the supposedly laissez-faire 19th century Britain, elites work very hard to make the government intervene in the economy — of course, in a very specific way, to support them. It should thus be no surprise that extractive institutions are rarely built on the foundations of laissez-faire economics — think of slavery, labor draft systems such as the mita, government monopolies, institutions such as the “colour bar” in South Africa designed to keep blacks disadvantaged and forced to supply cheap labor, and government corruption.” — Economists DARON ACEMOGLU AND JAMES ROBINSON, blogging at Why Nations Fail

Are Federal Workers Overpaid? The CBO Weighs In

Remember a while back, during the Wisconsin governor Walker fiasco, the debate that raged regarding government workers and their wages with respect to private sector workers? You had right wing economists arguing that federal workers were indeed overpaid and left wing economists arguing the opposite. An honest observer might have found it difficult to know who was right.

Well now, the CBO has weighed in on the topic and has come down on the side of right wing economists:

Differences in total compensation—the sum of wages and benefits—between federal and private-sector employees also varied according to workers’ education level.

Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees.
Federal workers whose education culminated in a bachelor’s degree averaged 15 percent higher total compensation than their private-sector counterparts.
Federal employees with a professional degree or doctorate received 18 percent lower total compensation than their private-sector counterparts, on average.
Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.

Of course I, a huge fan of Andrew Biggs at AEI, knew this long ago. For more on Andrew Biggs research on this see here, here and especially here.

Obama’s Nostalgianomics

Megan McArdle on President Obama’s speech:

I think the speech made it even clearer that other speeches have that the president’s vision of the world is a lightly updated 1950s technocracy without the social conservatism, and with solar panels instead of rocket ships. Government and labor and business working in tightly controlled concert, with nice people like Obama at the reins–all the inventions coming out of massive government or corporate labs, and all the resulting products built by a heavily unionized workforce that knows no worry about the future.There are obviously a lot of problems with this vision. The first is that this is not what the fifties and sixties were actually like–the government and corporate labs sat on a lot of inventions until upstart companies developed them, and the union goodies that we now think of as typical were actually won pretty late in the game (the contracts that eventually killed GM were written in the early 1970s).

And to the extent that the fifties and sixties were actually like this, we should remember, as Max Boot points out, that this was not actually the day of the little guy. Big institutions actually had a great deal more power than they do now; it was just distributed somewhat differently–you had to worry less about big developers slapping a high-rise next to your single-family neighborhood, and a whole lot more about Robert Moses deciding he wanted to run a freeway through the spot where your house happened to be.

The military model of society–employed by both Obama, and a whole lot of 1950s good government types–was actually a kind of creepy way to live. As Boot says, “America today is far more individualistic and far more meritocratic with far less tolerance for rank prejudice and far less willingness to blindly follow the orders of rigid bureaucracies.” If you want the 1950s except without the rigid conformity and the McCarthyism, then you fundamentally misunderstand what made the 1950s tick.

Finally, there’s the fact that the 1950s ended in the 1970s. In the 1950s, American products were envied all over the world; by 1980, they were a joke. This is not some radical disconnect; it is the beginning and end of the same process. The technocratic American institutions became sclerotic agents of inertia. Bosses whose pay was capped poured their energy into building personal empires instead of personal fortunes. Unions like the UAW began making demands on their companies so heavy that even the UAW president who had negotiated these amazing pay increases began to fear that his members had lost their minds.

Full post here.

Two Economic Models For The Poor

Leftists like to portray the European economic model as more “poor” friendly than the United States  economic model. But that depends on what your preferences are: if you are poor and would prefer less disposable income with more government services, then yes, the European model would be preferable. However, if you are poor and would prefer more disposable income with less government services, then no, the European model would not be preferable. It all depends on your preferences.

Economist Tim Taylor, in contrasting government redistrubition trends around the world points this out:

On the tax side, the U.S. tax code is already highly progressive compared with these other countries. The OECD published at 2008 report called “Growing Unequal: Income Distribution and Poverty in OECD Countries, which states (pp. 104-106): “Taxation is most progressively distributed in the United States, probably reflecting the greater role played there by refundable tax credits, such as the Earned Income Tax Credit and the Child Tax Credit. … Based on the concentration coefficient of household taxes, the United States has the most progressive tax system and collects the largest share of taxes from the richest 10% of the population. However, the richest decile in the United States has one of the highest shares of market income of any OECD country.After standardising for this underlying inequality … Australia and the United States collect the most tax from people in the top decile relative to the share of market income that they earn.”

This finding is surprising to a lot of Americans, who have a sort of instinctive feeling that Europeans must be taxing the rich far more heavily. But remember that European countries rely much more on value-added taxes (a sort of national sales tax collected from producers) and on high energy taxes. They also often have very high payroll taxes to finance retirement programs. These kinds of taxes place a heavier burden on those with lower incomes.

The 1980’s Onward

John Taylor, defends his view that post the 1970’s America entered “a period of unprecedented economic stability and growth in the ’80s and ’90s.” He writes:

No one can deny that the 1930s and the 1970s were tough decades for the economy. And job creation in the expansions of the 1980s and 1990s was amazing: There were two long expansions in the 1980s and 1990s: 1982-1990 and 1991-2001. In November 1982—the start of the1980s expansion—total non-farm payroll employment was 88,770 according to BLS historical statistics. In March 2001, the peak of the 1991-2001 expansion, it was 132,500. The difference in those 220 month was 43,730, about 44 million.  There is no other 220 month period in the post war period where so many jobs were created. Note that this is not just the Reagan expansion; it includes all of the Clinton years. And as the following graph illustrates the 1980s and 1990s were a period of “stable and sustained growth.” In fact because of the stable and sustained growth the period is called the Great Moderation which has been documented by many economists. Here is the Wikipedia entry which uses the same chart and contains many references. Unfortunately, the Great Moderation ended with the Great Recession and the non-existent recovery. 

His full defense, along with a graph, can be found here.

Quote Of The Day

“BTW, progressives like Yglesias often point out that no matter what they say, the GOP is devoted single-mindedly to one goal, and one goal only—lower tax rates for the rich.  And I have to agree that that is an obsession of many GOP economists.  But then why the strange pattern of state income taxes around the country?  Income taxes are often higher in conservative Republican states in the South, than in liberal Massachusetts.  Even more surprisingly, the rich in the South are especially likely to be Republicans (as compared to the rich in Boston, NY and LA.)  Yes, there are some GOP states with no income tax (Texas, Tennessee and South Dakota.)  But there are also swing states (Nevada, New Hampshire and Florida) and even one liberal state (Washington.)  Why don’t the southern and Rocky Mountain GOP states at least cut the top rate down to Massachusetts levels (5.3%)?” –Scott Sumner, Economist

Setting The Record Straight On Herbert Hoover

Megan McArdle writes:

Hoover did not tighten up on spending.  According to the historical tables of the Office of Management and Budget, spending in 1929 was $3.1 billion, up from $2.9 billion the year before.  In 1930 it was $3.3 billion.  In 1931, Hoover raised spending to $3.6 billion.  And in 1932, he opened the taps to $4.7 billion, where it basically stayed into 1933 (most of which was a Hoover budget).  As a percentage of GDP, spending rose from 3.4% in 1930 to 8% in 1933–an increase larger than the increase under FDR, though of course thankfully under FDR, the denominator (GDP) had stopped shrinking.

This spending represented a substantial increase over the Coolidge years (outlays had been steady between $2.85 billion and $2.95 billion since 1924).  And in real terms they represented a very substantial increase, since both nominal and real GDP were falling.

Hoover did not tighten up on spending.  According to the historical tables of the Office of Management and Budget, spending in 1929 was $3.1 billion, up from $2.9 billion the year before.  In 1930 it was $3.3 billion.  In 1931, Hoover raised spending to $3.6 billion.  And in 1932, he opened the taps to $4.7 billion, where it basically stayed into 1933 (most of which was a Hoover budget).  As a percentage of GDP, spending rose from 3.4% in 1930 to 8% in 1933–an increase larger than the increase under FDR, though of course thankfully under FDR, the denominator (GDP) had stopped shrinking.This spending represented a substantial increase over the Coolidge years (outlays had been steady between $2.85 billion and $2.95 billion since 1924).  And in real terms they represented a very substantial increase, since both nominal and real GDP were falling….

Hoover did not tighten up on spending.  According to the historical tables of the Office of Management and Budget, spending in 1929 was $3.1 billion, up from $2.9 billion the year before.  In 1930 it was $3.3 billion.  In 1931, Hoover raised spending to $3.6 billion.  And in 1932, he opened the taps to $4.7 billion, where it basically stayed into 1933 (most of which was a Hoover budget).  As a percentage of GDP, spending rose from 3.4% in 1930 to 8% in 1933–an increase larger than the increase under FDR, though of course thankfully under FDR, the denominator (GDP) had stopped shrinking.This spending represented a substantial increase over the Coolidge years (outlays had been steady between $2.85 billion and $2.95 billion since 1924).  And in real terms they represented a very substantial increase, since both nominal and real GDP were falling.

Quote Of The Day

“I do get the point that if you are young and idealistic and want your work to have a goal of alleviating poverty, working for a typical business may seem unlikely to relate to your objective. But it’s hard to know. Has poverty in India and China been reduced more by the action of aid agencies or by the fact that those countries are now embedded in the supply chains of U.S. service and manufacturing firms?” — Arnold Kling 

Gender Inequality And The Plow

The Freakonomics blog has an interesting perspective:

From a pair of Harvard economists, Alberto Alesina and Nathan Nunn, and a UCLA business school professor, Paola Giuliano, comes this working paper (Abstract here and below; full version here) that tests the hypothesis that current gender role differences can be traced to shifting methods of agriculture, particularly the introduction of the plow, which required significant upper body strength, grip strength, and burst of power that favored men over women.

Some of their conclusions:

  • We find a strong and robust negative relationship between historical plough-use and unequal gender roles today. Traditional plough-use is positively correlated with attitudes reflecting gender inequality and negatively correlated with female labor force participation, female firm ownership, and female participation in politics.
  • We find that women from cultures that historically used the plough have lower rates of labor force participation in the US. This provides evidence that part of the importance of the plough arises through its impact on internal beliefs and values.

Full post here.

Quote Of The Day

“This week, Bloomberg BusinessWeek put the financial woes of the U.S. Postal Service on its cover with a story titled “The End of Mail.” The dire plight of the USPS isn’t exactly news — it’s been losing money since 2006, including nearly $20 billion since 2007. But the cliff the agency has been driving toward is fast approaching. The agency is now almost $15 billion in debt. Unless the government steps in, it will default on $5.5 billion of retiree health-care costs in September. By October it will reach its legal debt limit, and by the end of the year, the USPS will be out of cash — insolvent and unable to operate.” — Freakonomics Blog

Quote Of The Day

“The crack-cocaine sentencing disparities result from racial bias.”   In fact, black leaders were the first to sound the alarm about the drug.  In 1986, Queens congressman Alton Waldon called on his colleagues to legislate against crack: “For those of us who are black this self-inflicted pain is the worst oppression we have known since slavery. . . . Let us . . . pledge to crack down on crack.” The bill that eventually passed, containing the crack/powder distinction, won majority support among black congressmen, none of whom objected to it as racist.” –SecularRight blog

Quote Of The Day

“Not only is Smith not endorsing a progressive income tax, he isn’t endorsing any sort of income tax. Reading further into the passage, he successively rejects taxes on income from capital, taxes on wages, and taxes on the income of professionals. The only income he approves of taxing is the income of government officials. What he is arguing for is a system of taxation whose effect is proportional to income, not a tax on income.” — David Friedman, rebutting the claim that Adam Smith endorsed a progressive income tax