Category Archives: Uncategorized

Tragic Harvey Flooding Was a Known Risk

31 Thursday Aug 2017

Posted by in Flood Insurance, Global Warming, Subsidies, Uncategorized

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Houston-flood-1935

The photo above is downtown Houston during the flood of 1935, which I lifted from a post on Roy Spencer’s blog. The rate of rainfall from Hurricane Harvey in Houston is not unprecedented, according to Spencer. The geographic breadth and duration of the heavy rainfall might be, but ready comparisons are difficult on that basis, even for the 100 years of recorded rainfall in East Texas. The tragic severity of the flood damage is probably unprecedented as well, though the full tally won’t be in for some time. The severity is a consequence of four factors: the breadth of the rainfall, its duration, the growth of the Houston metro area, and the unnecessary development of low-lying areas that can no longer provide effective drainage and absorption of rainfall due to impervious cover.

Harvey was (and is) a big storm, but an unusual aspect of Harvey was the way it stalled after making landfall:

“The exact same tropical system moving at, say, 15 mph might have produced the same total amount of rain, but it would have been spread over a wide area, maybe many states, with no flooding disaster. This is usually what happens with landfalling hurricanes. … Instead, Harvey stalled after it came ashore and so all of the rain has been concentrated in a relatively small portion of Texas around the Houston area. In both cases, the atmosphere produced the same amount of rain, but where the rain lands is very different.“

Spencer also notes that Harvey is in no way evidence of global warming, as many in the media have implied:

“Roger Pielke Jr. has pointed out that the U.S. has had only four Category 4 (or stronger) hurricane strikes since 1970, but in about the same number of years preceding 1970 there were 14 strikes. So we can’t say that we are experiencing more intense hurricanes in recent decades. … Going back even earlier, a Category 4 hurricane struck Galveston in 1900, killing between 6,000 and 12,000 people. That was the greatest natural disaster in U.S. history. … And don’t forget, we just went through an unprecedented length of time – almost 12 years – without a major hurricane (Cat 3 or stronger) making landfall in the U.S.“

As for the role of development in the severity of the flooding, Spencer says:

“Major floods are difficult to compare throughout history because the ways in which we alter the landscape. For example, as cities like Houston expand over the years, soil is covered up by roads, parking lots, and buildings, with water rapidly draining off rather than soaking into the soil. The population of Houston is now ten times what it was in the 1920s. The Houston metroplex area has expanded greatly and the water drainage is basically in the direction of downtown Houston.”

Short memories and inaccurate assessments of flood potential might have encouraged excessive building in low-lying areas in and around Houston. However, the profligate extension of federal flood insurance to properties in those areas played a large role. Here is Michael Grunwald:

“Nearly two decades before the storm’s historic assault on homes and businesses along the Gulf Coast of Texas this week, the National Wildlife Federation released a groundbreaking report about the United States government’s dysfunctional flood insurance program, demonstrating how it was making catastrophes worse by encouraging Americans to build and rebuild in flood-prone areas.“

Houston played a noteworthy role in the report quoted by Grunwald:

“‘Houston, we have a problem,’ declared the report’s author, David Conrad. The repetitive losses from even modest floods, he warned, were a harbinger of a costly and potentially deadly future. ‘We haven’t seen the worst of this yet,’ Conrad said.

Climate alarmists would be well-advised to read Spencer’s piece on Harvey. It offers  excellent historical and climatological context. It’s also interesting to read some of the venomous ad hominem sprayed in Spencer’s direction by alarmist trolls in the comments section. Spencer knows too well, however, that “floods aren’t just due to the weather“. Let’s hope that the Houston area won’t be encouraged to rebuild in low-lying areas by prospective subsidies from a federal flood insurance program in need of drastic reform.

Paris Climate Dance: a Concon

07 Wednesday Jun 2017

Posted by in Global Warming, Redistribution, Uncategorized

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Ah, Paris, we bid you adieu. For both scientific and economic reasons, the Paris Climate Accord is pure numbskullery. We should all be grateful that President Trump has decided to revoke the expensive promises made by Barack Obama under the agreement in a willful effort to appease the world’s rent seekers.

From a scientific perspective, the accord’s prescriptions are premised on a partial effect: absent any feedbacks, carbon emissions would raise the atmospheric temperature slightly. But feedback effects are massively important, as anyone familiar with the climate models’ terrible track record of predictive performance might guess. Water vapor, cloud formation, wind currents, and the response of the Earth’s biomass are just some of the effects that impinge on the relationship between atmospheric carbon and temperatures. In addition, carbon forcings are relatively minor compared to the energy impulses delivered by natural sources, including solar activity and the Earth’s varying axial tilt. Paleoclimate data shows that the world has been this warm before, and warmer.

The economic case against the Paris Accord is even stronger. The very idea that authorities would impose huge material sacrifices on mankind in an effort to prevent a threat for which the evidence is so weak should give pause to any rational individual. Beyond that, however, the real function of the accord was not so much carbon mitigation as it was a shift in the distribution of wealth. This quote of Steven Allen, in a scathing assessment of the agreement, is instructive (forgive his mid-sentence switch to sarcasm):

“Mainly, it’s about taking money from taxpayers and consumers and businesspeople and electricity ratepayers and giving it to crony capitalists, and taking money from people in relatively successful countries and giving that money to rich people in poor countries, to the benefit of members of governing elites who support the Paris deal for the good of humanity and not at all because they expect to line their pockets with it.“

World carbon emissions were expected to keep rising at least through 2030 under the agreement. The subsidies it promised to crony capitalists in the renewable energy industry were to generously fund technologies that are not economically viable without government support, to the detriment of relatively clean-burning fossil fuels, not to mention nuclear power. The U.S. promised to reduce absolute carbon emissions, but the world’s greatest emitter of carbon dioxide, China, promised only to seek to limit emissions per unit of GDP, but not until sometime down the road. That means China’s level of emissions might not reverse, given the rapid growth of the Chinese economy. India’s commitment is similar. And Russia promised a reduction relative to a depressed 1990 level of emissions, which means they have plenty of room for growth.

As for the U.S., where absolute carbon emissions have been decreasing since 2007, the Paris Accord relied on so-called “voluntary” limits to be imposed by federal mandates. Financial demands were made by developing countries under the deal: $100 billion per year. And who would pay for that? Taxpayers in the developed countries, of course. One can only imagine the lust of unaccountable third-world officialdom for those funds. Thus far, the U.S. has paid only $1 billion into the so-called Green Climate Fund, and at least half of that was taken from a State Department account from which disbursal did not require Congressional approval.

Jeffrey Tucker, who is anything but a fan of Donald Trump, minced no words in his assessment of the Paris “treaty”. Here are a few selected quotes:

“The Paris Agreement is a ‘voluntary’ agreement because its architects knew it would never pass the US Senate as a treaty. Why? Because the idea of the agreement is that the US government’s regulatory agencies would impose extreme mandates on its energy sector: how it should work, what kinds of emissions it should produce, the best ways to power our lives (read: not fossil fuels), and hand over to developing world regimes billions and even trillions of dollars in aid, a direct and ongoing forcible transfer of wealth from American taxpayers to regimes all over the world, at the expense of American freedom and prosperity. …

The exuberant spokespeople talked about how ‘the United States’ had ‘agreed’ to ‘curb its emissions’ and ‘fund’ the building of fossil-free sectors all over the world. It was strange because the ‘United States’ had not in fact agreed to anything: not a single voter, worker, owner, or citizen. Not even the House or Senate were involved. This was entirely an elite undertaking to manage property they did not own and lives that were not theirs to control. …

The Paris Agreement is no different in its epistemological conceit than Obamacare, the war on drugs, nation-building, universal schooling, or socialism itself. They are all attempts to subvert the capacity of society to manage itself on behalf of the deluded dreams of a few people with power and their lust for controlling social and economic outcomes.“

The popular fascination with climate scare stories has provided a useful channel of influence for would-be central planners and redistributionists. These social dementors reject the proposition that science is a process of continuing challenge and testing, thereby subverting the very notion of scientific inquiry. They make the laughable claim that 170 years of temperature data, much of which is quite sketchy, is sufficient to draw strong conclusions about the trends and dynamics of the climate on a four billion year-old planet.

Even worse, the climate alarmists insist that they have a monopoly on scientific knowledge, despite a significant share of skeptics in the climate science community. But in pursuit of that monopoly, the alarmists have gone so far as to undermine the integrity of the peer review process in the climate literature and to manipulate temperature data to exaggerate recent records. They have promoted the false claims that cyclonic storm energy has increased with carbon concentration and that sea levels are rising at an increasing rate. (Coastal property values don’t seem to reflect those concerns.) They would have us confuse actual climate data with model predictions, and they continue to offer prescriptions based on carbon-forcing models after many years of terrible forecast performance. They claim that a small increment (one part per 10,000) to the concentration of a trace atmospheric gas will dominate other forces exerting far greater variations in energy. They ignore the benefits that an increase in nourishing carbon dioxide and warming can provide. And they make the anthropocentric claim that a costly sacrifice by mankind, in an attempt to reduce that trace gas slightly if at all, will pay off reliably by reducing global temperatures, despite the very modest claims on those grounds by the Paris Accord itself.

Here is a link to 17 earlier posts on Sacred Cow Chips having to do with the hypothesis of anthropomorphic global warming, including this one written in late 2015, at the time of the Paris Climate Summit.

The Renewable Energy Jobs Hoax

30 Tuesday May 2017

Posted by in Renewable Energy, Subsidies, Uncategorized

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James Taylor at Forbes reveals the dishonest math behind the claim that renewable energy generates more jobs than “conventional energy”, i.e., fossil fuels. It’s a simple trick, as Taylor explains:

“… renewable energy advocates create the broadest possible definition of workers ‘supported’ by the solar power industry, falsely claim that the solar power industry ’employed’ all these workers, and then compare that to the narrowest possible definition of just a single segment of workers ‘directly’ employed in the ‘extraction’ component of the much larger natural gas industry.“

Taylor notes that, “In reality, renewable energy isn’t even in the same universe of job creation as conventional energy.” He goes on to cite the report on which these claims are based and picks it apart. The renewable energy job assertions are obviously self-intereseted, as rent seeking lobbyists know that the political class is dominated by easy marks for renewable energy wonder-stories.

Of course Taylor is correct that the claims about renewable energy jobs are false in the aggregate sense. However, it might or might not be true in the marginal sense, and that’s clearly the sense in which the claim is intended to be taken, despite the fact that the data used is not marginal in nature. If true, it’s not a selling point for renewable energy subsidies because “more jobs” represents a greater marginal cost.

And that brings us to an even more critical issue missed by Taylor: public policy should not be based on the objective of direct job creation. Jobs are a cost, not a benefit. We value the finished goods, not the inputs required to produce them. If you don’t quite get that, imagine two bids for the construction of new kitchen in your home. Same plans, same completion date, similarly brilliant customer reviews of the competing contractors. Without knowing the actual bids, if one contractor tells you it’s a three-man job and the other says it’s a four-man job, you’ll be pretty certain which bid you’ll want to accept.

Ah, but you say, that’s not a fair comparison, because I’m paying for it. Yes you are, just as taxpayers (and more generally society) must pay for the subsidies that lobbyists wheedle out of politicians. Or you say, Ah, but we want more renewable jobs because we want renewable energy, ’cause it’s just right. Maybe, maybe not, but if that’s so, then the idea that the cost is higher because more jobs are required per unit of energy is not a good rationale.

It’s often the case that public policy aimed at “creating jobs” is not accompanied by higher output, lower prices, or even… more jobs! For example, tariffs on foreign goods give an advantage to American producers, but at the cost of job losses in import industries and higher domestic prices that harm consumers more broadly, and thereby reduce jobs. When certain industries or firms are subsidized by the government, the taxpayer is harmed directly, not to mention suppliers of alternatives. This is true at the local and national levels: politicians love to talk about job creation when they offer incentives for new facilities or relocations to their jurisdictions, but these subsidies may put other local firms at a competitive disadvantage and leave taxpayers holding the bag for public services supplied to the recipient firm. When government undertakes large taxpayer-funded infrastructure projects, which might or might not boost productivity, the taxes are damaging and the projects are often poorly planned and lack effective cost controls. Jobs are not a reason to support such projects.

Similar points have been discussed in the past here on Sacred Cow Chips, with links to articles emphasizing the distinction between direct jobs created and economic welfare like this one. “Jobs” should never be a policy objective in and of itself. As Tim Worstall explains in a brief review of Mark Zuckerberg’s recent commencement address at Harvard, jobs simply are not the point! Policy must have a better rationale than the high cost of the labor input!

The CBO’s Obamacare Fantasy Forecast

25 Thursday May 2017

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Today the Congressional Budget Office (CBO) released its report, or ‘score’, on the version of the American Health Care Act (AHCA) that recently passed in the House of Representatives. It is similar in most respects to the CBO’s score of the earlier version of the bill that never came to a vote. This time, the CBO reduced by one million its estimate of the number of Americans that it projects would lose insurance coverage relative to the status quo (Obamacare). The new estimate is just as unrealistic as the first, for the reasons discussed in an earlier post on this blog:

Sacred Cow Chips

The Congressional Budget Office (CBO) is still predicting strong future growth in the number of insured individuals under Obamacare, despite their past, drastic over-predictions for the exchange market and slim chances that the Affordable Care Act’s expansion of Medicaid will be adopted by additional states. Now that Republican leaders have backed away from an unpopular health care plan they’d hoped would pass the House and meet the Senate’s budget reconciliation rules, it will be interesting to see how the CBO’s predictions pan out. The “decremental” forecasts it made for the erstwhile American Health Care Act (AHCA) were based on its current Obamacare “baseline”. A figure cited often by critics of the GOP plan was that 24 million fewer individuals would be insured by 2026 than under the baseline.

It was fascinating to see many supporters of the AHCA accept this “forecast” uncritically. With the AHCA’s failure, however, we’ve been given an opportunity to witness the distortion in what would have been a CBO counterfactual…

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The Taxing Logic of Carbon Cost Guesswork

11 Saturday Mar 2017

Posted by in Environment, Taxes, Uncategorized

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An article by three prominent economists* in the New York Times this week summarized the Climate Leadership Council’s Conservative Case for Climate Action“. The “four pillars” of this climate plan include (1) a revenue-neutral tax on carbon emissions, which are used to fund… (2) quarterly “carbon dividend” payments to all Americans; (3) border tax adjustments to account for carbon emissions and carbon taxes abroad; (4) eliminating all other regulations on emissions of carbon. The “Case” is thus a shift from traditional environmental regulation to a policy based on tax incentives, then wrapped around a redistributive universal income mechanism.

I’ll dispense with the latter “feature” by referencing my recent post on the universal basic income: bad idea! The economists advocate for the carbon dividend sincerely, but also perhaps as a political inducement to the left and confused centrists.

The Limits of Our Knowledge

The most interesting aspect of the “Case” is how it demonstrates uncertainty around the wisdom of carbon restrictions of any kind: traditional regulations, market-oriented trading, or tax incentives. Those all involve assumptions about the extent to which carbon emissions should be restricted, and it’s not clear that any one form of restriction is more ham-handed than another. Traditional regulation may restrict output in various ways. For example, standards on fuel efficiency are an indirect way of restricting output. A carbon market, with private trading in assigned “rights” to emit carbon, is more economically efficient in the sense that a tradeoff is involved for any decision having carbon implications at the margin. However, the establishment of a carbon market ultimately means that a limit must be imposed on the total quantity of rights available for trading.

A carbon tax imputes a cost of carbon emissions to society. It also imposes tradeoffs, so it is similar to carbon trading in being more economically efficient than traditional regulation. A producer can attempt to adjust a production process such that it emits less carbon, and the incidence of the tax falls partly on final consumers, who adjust the carbon intensity of their behavior accordingly. For our purposes here, a tax is more illuminating in the sense that we can assess inputs to the cost imputation. Even a cursory examination shows that the cost estimate can vary widely given reasonable differences in the inputs. So, in a sense, a tax helps to reveal the weakness of the case against carbon and the carbon-based rationale for allowing a coercive environmental authority to sclerose the arteries of the market system.

The three economists propose an initial tax of $40 per metric ton of emitted carbon. The basis for that figure is the so-called “social cost of carbon” (SCC), a theoretical construct that is not readily measured. Economists have long subscribed to the theory of social costs, or negative externalities, and to the legitimacy of government action to force cost causers to internalize social costs via corrective taxation. However, the wisdom of allowing the state to intrude upon markets in this way depends on our ability to actually measure specific external costs.

Fatuous Forecasts

The SCC is based on the presumed long-run costs of an incremental ton of carbon in the environment. I do not use the word “presumed” lightly. The $40 estimate subsumes a variety of speculative assumptions about the climate’s response to carbon emissions, the future economic impact of that response, and the rate at which society should be willing to trade those future costs against present costs. The figure only counts costs, without considering the huge potential benefits of warming, should it actually occur.

Ronald Bailey at Reason illustrates the many controversies surrounding the calculation of the SCC. He notes the tremendous uncertainty surrounding an Obama Administration estimate of $36 a ton in 2007 dollars. It used an outdated climate sensitivity figure much higher than more recent estimates, which would bring the calculated SCC down to just $16.

A discount rate of 3% was applied to projected future carbon costs to produce an SCC in present value terms. The idea is that today’s “collective” would be indifferent between paying this cost today and suffering the burden of future costs inflicted by carbon emissions. This presumes that 3% is the expected return society can earn for the future by investing resources today. Unfortunately, the SCC is tremendously sensitive to the discount rate. Together with the more realistic estimate of climate sensitivity, a discount rate of 7% (the Office of Management and Budget’s regulatory guidance) would actually make the SCC negative!

Another U.S. regulatory standard, according to Bailey, is that calculations of social cost are confined to costs borne domestically. However, the SCC attempts to encompass global costs, inflating the estimate by a factor of 4 to 14 times. The justification for the global calculation is apparent righteousness in owning up to the costs we cause as a nation, and also for the example it sets for other countries in crafting their own carbon policies. Unfortunately, it also magnifies the great uncertainties inherent in this messy calculation.

Lack of Evidence

This guest essay on the Watts Up With That? web site by Paul Driessen and Roger Bezdek takes a less gracious view of the SCC than Bailey, if that is possible. As they note, in addition to climate sensitivity, the SCC must come to grips with the challenge of measuring the economic damage caused by each degree of warming. This includes factors far into the future that simply cannot be projected with any confidence. We are expected to place faith in distant cost estimates of heat-related deaths, widespread crop failures, severe storm damage, coastal flooding, and many other calamities that are little more than scare stories. For example, the widely reported connection between atmospheric carbon concentration and severe weather is demonstrably false, as are reports that Pacific islands have been swallowed by the sea due to global warming.

Ignoring the Benefits

The SCC makes no allowance for the real benefits of burning fossil fuels, which have been a powerful engine of economic growth and still hold the potential to lift the underdeveloped world out of poverty and environmental  distress. The benefits of carbon also include fewer cold-related deaths, higher agricultural output, and a greener environment. It isn’t surprising that these benefits are ignored in the SCC calculation, as any recognition of that promise would undermine the narrative that fossil fuels are unambiguously evil. Indeed, an effort to calculate only the net costs of carbon emissions would likely expose the entire exercise as a sham.

The “four pillars” of the Climate Leadership Council‘s case for climate action rest upon an incredibly flimsy foundation. Like anthropomorphic climate change itself, appropriate measurement of a social cost of carbon is an unsettled issue. Its magnitude is far too uncertain to use as a tool of public policy: as either a tax or a rationale for carbon regulation of any kind. And let’s face it, taxation and regulation are coercive acts that better be undertaken with respect for the distortions they create. In this case, it’s not even clear that carbon emissions should be treated as an external cost in many applications, as opposed to an external benefit. So much for the corrective wisdom of authorities. The government is not well-equipped to centrally plan the economy, let alone the environment.

  • The three economists are Martin Feldstein, Ted Halstead and Greg Mankiw.

Costco Labor Productivity Drives Its Wages

26 Thursday May 2016

Posted by in Minimum Wage, Uncategorized

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Buyer beware: various memes promoting a higher minimum wage, or a mandated “living wage” of $15, cite Costco as “proof” that a higher wage floor does not imply that product prices must rise. In fact, Costco pays relatively high wages to its hourly workers and it is a discount retailer, but it is highly misleading to treat these facts in isolation or to suggest that they imply anything about cost-price causality and the consequences of changes in costs. A higher wage floor would add cost pressure to any business employing low-skilled labor and even some employing more skilled workers like Costco. Many of these firms would have to raise prices to remain viable.

Costco says that it pays an average wage of $17 plus benefits. A quick glance at Glassdoor.com shows starting pay rates well below that average, which is no surprise. Costco recently increased its lowest pay rates for the first time in eight years, to $13 and $13.50 an hour from $11.50 and $12. However, there may be some slight-of-hand used to support other quotes of Costco’s average wage. It’s been claimed elsewhere that the company pays an average wage of $20, and President Obama asserted that Costco’s average wage is $21. Typically, quotes of hourly wages do not include the value of benefits. One blogger suggests that these higher figures may have been calculated by averaging across job classifications, rather than dividing the company’s total hourly wage bill by the number of worker-hours. One other qualification is that roughly 10% of the workers in a typical Costco warehouse store dispense free samples but are not employed by Costco. The average hourly wage of “workers at Costco” would likely be lower than $17 if they were included.

Nevertheless, it’s true that Costco pays a relatively high wage rate to its hourly workers. How can they afford to do so? As it happens, Costco has relatively few workers relative to other retail operations, and its average revenue per transaction is high. According to Megan McArdle at Bloomberg, in 2013, Costco’s average square-feet of floor space per employee was almost twice WalMart’s; according to MarketWatch, Costco’s average revenue per employee is now nearly three times the comparable figure for WalMart (enter COST and WMT). Obviously, Costco employees are highly productive in terms of revenue, and that is closely associated with higher wages.

The high productivity at Costco is not an accident. While a good wage is certainly a motivating factor, the productivity of Costco’s work force starts with screening during the hiring process, where the company is known to prefer significant retail experience. They also emphasize the demanding physical requirements of certain jobs, and given their thin staffing, a relatively high level of responsibility for a retail worker. Newcomers are said to be under a watchful eye, and effective performers are rewarded. It takes four to five years to reach the top of the wage scale in a job category. Many of those categories involve specialized skills, such as licensed opticians, butchers, cake decorators, forklift drivers, licensed hearing aid dispensers, and registered pharmacists (these categories drive up the average wage). The company provides training opportunities in various areas, and average employee turnover is low, which reduces costs. The Costco warehouse stores are without typical retail amenities; they are bare-bones with goods sitting on pallets rather than displayed on shelves. This also lowers costs, giving the company additional leeway in shaping its generous wage policy.

Returning to the question of pricing, Costco’s example cannot be generalized. First, it might not be such a good example of price restraint in the face of higher wages to begin with. To bolster earnings, Costco is expected to raise its membership fees by about 9% in 2017; undoubtedly there is also room for retail margins to increase. Time will tell. Second, again, Costco’s wage policy works fairly well because its business model rests largely on high labor productivity. Basic economics teaches us that higher productivity drives higher wages. Workers who earn less than Costco wages are, in general, less productive. This is a consequence of more limited skill sets, less experience, and sometimes weak desire. Those earning at the minimum wage are handicapped by an inability to contribute at high levels, or an inability to demonstrate that they can at their hiring date. Thus, they work in jobs that do not require developed skills. For their employers, higher wages are not a path to profitability.

Mandating an increase in the wage floor is not possible without other market adjustments. First, like anything else, the demand curve for low-skilled labor slopes downward, so a higher wage floor reduces the desired labor input. Job losses befall the least skilled in such a scenario. This consequence has greater breadth in a world in which opportunities for automation are plentiful. Another possible adjustment is an increase in the price charged to customers, which might be a reflexive response among business operators. However, they must compromise when confronted with the competitive effects of passing along an increase in costs. There could be other cost-reducing changes in job structure, benefits, break times, and any number of other conditions and circumstances of employment. Finally, some business owners might accept a lower level of profitability, depending on their disposition and the competitive tenor of the markets in which they operate. Some Costco shareholders believe that might be the case, as the company’s earnings have softened recently.

The final outcome is likely to be a combination of the adjustments described above. Unfortunately for proponents of a higher wage floor, the economy cannot and will not transform itself into a community of Costco clones. With limited skills, the motivational power of higher wages goes only so far. All price floors create excess supply, in this context unemployment. Excess supplies tend to consist of the most marginal units, in this case, the least productive workers. Perhaps sheer ignorance causes agitators for wage mandates to overlook this inevitable marginalization. The real minimum wage is zero.

A note on the cartoon above: It reminded me of an amusing passage in Margaret Mitchell’s “Gone With The Wind” when Rhett Butler, in a sardonic moment, suggests to Scarlett O’Hara that she change the name of Kennedy’s General Store in Atlanta to “Caveat Emptorium, assuring her that it would be a title most in keeping with the type of goods sold in the store. She thought it had an imposing sound and even went so far as to have the sign painted….” Later, Rhett learns that she actually had the sign made, but an embarrassed Ashley Wilkes clued her in to the meaning. She is furious, and Rhett laughs hysterically.

Obama’s On-The-Clock Undertime Rule

23 Monday May 2016

Posted by in Labor Markets, Regulation, Uncategorized

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Hurting the ones you love: one of the Obama Administration’s calling cards is a penchant for misguided economic policy; the change in an overtime rule announced Wednesday by the Department of Labor (DOL) is a classic example. The DOL has amended the rule, which requires payments of time-and-a-half to workers who exceed 40 hours per week, by doubling the threshold at which salaried employees are exempt from overtime to $47,500 annually. This affects almost 5 million workers earning between the old threshold of $23,660 and the new threshold. While the media heralds Obama for “lifting the wages of millions of workers”, those with a grasp of economic reality know that it is a destructive policy.

The rule change is unambiguously bad for employers, many of which are small businesses. That should not be too difficult to understand. Most private employers operate in competitive markets and do not earn lavish profits at the expense of their employees. They need good employees, especially those in positions of responsibility, and they must pay them competitively. By imposing higher costs on these businesses, the rule puts them in a position of greater vulnerability in the marketplace. The higher costs also include extra record keeping to stay in compliance with the rule. The impact on new business formation is likely to be particularly damaging:

“We might be told that the answer for a startup is simply to ‘go and raise more money.’ But — aside from diluting the founders who are paying for the company with their sweat in exchange for the hope of a payoff that comes in years, if ever — raising capital is the single most difficult thing I do as a startup entrepreneur. I would invite anyone not in our field to give it a shot before he endorses a regulation that will impose greater capital costs on us.

Regulators often act as though they cannot imagine a world where a few hundred or a few thousand dollars can make the difference between success and failure. If you raise our costs even modestly, you will put some of us out of business.“

Shutting down, or not starting up, is a bad outcome, but that will be a consequence in some cases. However, there are other margins along which employers might respond. First, a lucky few well-placed managers might be rewarded with a small salary bump to lift them above the new exemption threshold. More likely, employers will reduce the base salaries of employees to accommodate the added overtime costs, leaving total compensation roughly unchanged.

Many other salaried employees with pay falling between the old and new thresholds are likely to lose their salaried status. Their new hourly wage might be discounted to allow them to work the hours to which they’re accustomed, as demotivating as that sounds. If their employers limit their hours, it is possible that a few extra workers could be hired to fill the gap. Perhaps that is what the administration hopes when it claims that an objective of the new rule is to create jobs. Unfortunately, those few lucky hires will owe their jobs to the forced sacrifice of hours by existing employees.

A change from a salary to hourly pay will have other repercussions for employees. Their relationships to their employers will be fundamentally transformed. Ambitious “hourly” managers might not have the opportunity to work extra hours in order to demonstrate their commitment to the business and a job well done. When the rule change was first proposed last June, I paraphrased a businessman who is one of my favorite bloggers, Warren Meyer (also see Meyer’s follow-ups here and here):

“As [Meyer] tells it, the change will convert ambitious young managers into clock-punchers. In case that sounds too much like a negative personality change, a more sympathetic view is that many workers do not mind putting in extra hours, even as it reduces their effective wage. They have their reasons, ranging from the non-pecuniary, such as simple work ethic, enjoyment and pride in their contribution to reward-driven competitiveness and ambition.“

As hourly employees, these workers might have to kiss goodbye to bonus payments, certain benefits, and flexible work arrangements, not to mention prestige. The following quotes are from a gated Wall Street Journal article but are quoted by James Pethokoukis in his piece at the AEIdeas blog of the American Enterprise Institute:

“Jason Parker, co-founder of K-9 Resorts, a franchiser of luxury dog hotels based in Fanwood, N.J., said the chain will reduce starting pay for newly hired assistant managers to about $35,000 from the $40,000 it pays now. That will absorb the overtime pay he expects he would have to give them, he said. …

Terry Shea, co-owner of two Wrapsody gift shops in Alabama, would prefer to keep her store managers exempt from the overtime-pay requirement as they are now. But raising their salaries above the new threshold to ensure that would be too big of a jump for those jobs in her region, she said. Instead, she’ll convert the managers to hourly employees and try to limit their weekly hours to as close to 40 as possible. She’ll also have to stop giving them a comp day when their weekly hours exceed 46, a benefit she said they like as working moms.

‘I will be demoted,’ said one of her store managers Bridget Veazey, who views the hourly classification as a step backward. ‘Being salaried means I have the flexibility to work the way I want,’ including staying an extra 30 minutes to perfect a window display or taking work home, she said. She is particularly concerned Ms. Shea might stop taking the managers on out-of-town trips to buy goods from retail markets, an experience she said would help her résumé but includes long days.“

Here is some other reading on the rule change: Nick Gillespie in Reason  agrees that it’s a bad idea. Andy Puzder in Forbes weighs in on the negative consequences for workers.  John Cochrane explores the simple economic implications of mandated wage increases, of which the overtime rule is an example. As he shows, only when the demand for labor hours is perfectly insensitive to wages can a mandated wage avoid reducing labor input.

This is another classic example of progressive good intentions gone awry. Government is singularly incapable of managing the private economy to good effect via rules and regulations. Private businesses hire employees to meet their needs in serving customers. The private compensation arrangements they make are mutually beneficial to businesses and their employees and are able to accommodate a variety of unique employee life-circumstances. Good employees are rewarded with additional compensation and more responsibility. By and large, salaried workers like being salaried! Hard work pays off, but the Obama Administration seems to view that simple, market truism as a defect. Please, don’t try to help too much!

Authoritarian Designs

31 Sunday Jan 2016

Posted by in Progressivism, racism, Uncategorized

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eugenics certificate

Why condemn today’s progressives for their movement’s early endorsement of eugenics? Kevin Drum at Mother Jones thinks this old association is now irrelevant. He furthermore believes that eugenics is not an important issue in the modern world. Drum’s remarks were prompted by Jonah Goldberg’s review of Illiberal Reformers, a book by Thomas Leonard on racism and eugenicism in the American economics profession in the late 19th century. Tyler Cowen begs to differ with Drum on both counts, but for reasons that might not have been obvious to Drum. Eugenics is not a bygone, and its association with progressivism is a reflection of the movement’s broader philosophy of individual subservience to the state and, I might add, the scientism that continues to run rampant among progressives.

Cowen cites John Stewart Mill, one of the great social thinkers of the 19th century, who was an advocate for individual liberty and a harsh critic of eugenics. Here is a great paragraph from Cowen:

“The claim is not that current Progressives are evil or racist, but rather they still don’t have nearly enough Mill in their thought, and not nearly enough emphasis on individual liberty. Their continuing choice of label seems to indicate they are not much bothered by that, or maybe not even fully aware of that. They probably admire Mill’s more practical reform progressivism quite strongly, or would if they gave it more thought, but they don’t seem to relate to the broader philosophy of individual liberty as it surfaced in the philosophy of Mill and others. That’s a big, big drawback and the longer history of Progressivism and eugenics is perhaps the simplest and most vivid way to illuminate the point. This is one reason why the commitment of the current Left to free speech just isn’t very strong.“

Eugenics is not confined to the distant past, as Cowen notes, citing more recent “progressive” sterilization programs in Sweden and Canada, as well as the potential use of DNA technologies like CRISPR in “designing” offspring. That’s eugenics. So is the child quota system practiced in China, sex-selective abortion, and the easy acceptance of aborting fetuses with congenital disorders. Arguably, Obamacare “effectiveness research” guidelines cut close to eugenicism by proscribing certain treatments to individuals based upon insufficient “average benefit”, which depends upon age, disability, and stage of illness. Obamacare authorizes that the guidelines may ultimately depend on gender, race and ethnicity. All of these examples illustrate the potential for eugenics to be practiced on a broader scale and in ways that could trample individual rights.

Jonah Goldberg also responded to Drum in “On Eugenics and White Privilege“. (You have to scroll way down at the link to find the section with that title.) Goldberg’s most interesting points relate to the racism inherent in the minimum wage and the Davis-Bacon Act, two sacred cows of progressivism with the same original intent as eugenics: to weed out “undesirables”, either from the population or from competing in labor markets. It speaks volumes that today’s progressives deny the ugly economic effects of these policies on low-skilled workers, yet their forebears were counting on those effects.

Scientism is a term invoked by Friedrich Hayek to describe the progressive fallacy that science and planning can be used by the state to optimize the course of human affairs. However, the state can never command all the information necessary to do so, particularly in light of the dynamism of information relating to scarcity and preferences; government has trouble enough carrying out plans that merely match the static preferences of certain authorities. Historically, such attempts at planning have created multiple layers of tragedy, as individual freedoms and material well-being were eroded. Someone should tell Bernie Sanders!

Eugenics fit nicely into the early progressive view, flattering its theorists with the notion that the human race could be made… well, more like them! Fortunately, eugenics earned its deservedly bad name, but it continues to exist in somewhat more subtle forms today, and it could take more horrific forms in the future.

Two earlier posts on Sacred Cow Chips dealt at least in part with eugenics: “Child Quotas: Family as a Grant of Privilege“, and “Would Heterosexuals Select For Gay Genes?“.

 

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Bernie, Donald and Ignatius?

29 Friday Jan 2016

Posted by in Immigration, Socialism, Uncategorized

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BernieTrump

We have candidates vying for the nominations of both major U.S. political parties with tendencies toward nationalism: Bernie Sanders and Donald Trump. They both oppose liberalized immigration and they are both anti-trade, playing on economic fears in articulating their views. Sanders has attempted to soften his rhetoric on immigration since last summer, when he alleged that it harms U.S. workers.

There are differences between Sanders and Trump on the treatment of existing illegal immigrants. Despite Trump’s protests to the contrary, his nationalism has had ethnic overtones.

Trump’s positions on immigration and trade protectionism are not necessarily at odds with Republican tradition, which is a mixed bag, but they are consistent with a faith in big government and central planning. An anti-immigration and anti-trade platform is certainly no contradiction for Sanders, because central planning is integral to his avowed socialism.

Sanders has been called a “socialist with nationalistic tendencies”. He favors government provision of free health care and higher education, heavy redistribution, and severe restrictions on property rights via high taxation. Trump, on the other hand, has been called a “nationalist with socialist tendencies.” He too has called for nationalized health care, increasing certain transfer payments, as well as compromises to state rights. It would probably be more accurate to describe Trump as a corporatist, a system under which large business entities both serve and control government for their own benefit. For example, Trump has used and favors eminent domain to secure land for private projects, generous bankruptcy laws to eliminate business risks, and “deal-making” between government and private enterprise in order to “get things done.” Corporatism is a flavor of fascism, and it is perfectly consistent with a statist agenda.

Thus, each party has candidates who are by degrees both nationalist and socialist. In using these labels, however, I plead innocent to a violation of Godwin’s Law. Of course they are not Nazis, but they are nationalistic socialists. The distinction is explained nicely by B.K Marcus in The Freeman. Both candidates take positions that are consistent with the platform of the National Socialist German Workers Party, circa 1920.

As an aside, Marcus provides some fascinating etymology of the word “Nazi”, quoting Steve Horwitz:

“The standard butt of German jokes at the beginning of the twentieth century were stupid Bavarian peasants. And just as Irish jokes always involve a man called Paddy, so Bavarian jokes always involved a peasant called Nazi. That’s because Nazi was a shortening of the very common Bavarian name Ignatius. This meant that Hitler’s opponents had an open goal. He had a party filled with Bavarian hicks and the name of that party could be shortened to the standard joke name for hicks.“

Marcus also quotes Mark Forsyth on this topic:

“To this day, most of us happily go about believing that the Nazis called themselves Nazis, when, in fact, they would probably have beaten you up for saying the word.“

Back on point, I’ve written about both of these candidates before: Trump here and here; Sanders here. To keep things even, here is one more interesting take on Bernie.

“His family managed to send him to the University of Chicago. Despite a prestigious degree, however, Sanders failed to earn a living, even as an adult. It took him 40 years to collect his first steady paycheck — and it was a government check.”

Read the whole thing!

It’s difficult for me to take these two candidates seriously because they do not take individual liberty seriously, nor do they understand the power of private markets to promote human welfare. I also have strong reservations about their understanding of constitutional principles, and I suspect that either would have few qualms about taking Mr. Obama’s cue in stretching executive authority.

Instead of the headline above, it would have been more accurate to say “Bernie, Donald and Ignoramus!” Unfortunately, one of these guys could be our next president. Well, it won’t be Sanders.

More Unpleasant Obamacare Arithmetic

15 Monday Jun 2015

Posted by in Obamacare, Uncategorized

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How-the-ACA-Works

States with expanded Medicaid eligibility may be more vulnerable to adverse selection, hastening the death spiral of their Obamacare insurance exchanges relative to states without expanded Medicaid. This is because 1) the expanded, eligible Medicaid population is young, and 2) pricing (net of subsidies) and benefits on the exchanges encourage sicker individuals to purchase plans with richer benefits. The Political Calculations blog presents this case in “How Medicaid’s Expansion Tips the Scales Against Obamacare“:

“… we observe that the states that did not expand their Medicaid programs have a much larger share of their ACA-enrollment occurring in the lower-tier metal plans that would tend to be favored by healthier individuals. Meanwhile, in the states that expanded the enrollment of their Medicaid programs under the law, we find that a significantly larger portion of their ACA enrollments were in the plans that would be favored by less healthy individuals.

In fact, we see that in Medicaid expansion states, 13.2% of their ACA enrollment occurred in the highest-tier Gold and Platinum level plans, while non-Medicaid expansion states saw 7.7% of their enrollment for these highest tiers of health insurance coverage.

The seemingly small 5.5% difference between these two figures becomes exceptionally significant when you consider how extremely concentrated health care expenditures are in the United States, where just 5% of U.S. patients are responsible for generating 50% of all health care spending in the nation.“

It will be difficult to confirm this hypothesis using data on premium increases, or actual exchange failure, until the temporary risk corridors and transitional reinsurance program expire. However, this year, several of the states in which proposed premium increases are the largest have expanded Medicaid eligibility. Robert Laszewski has a good discussion about some the reasons for the large premium increases in Forbes. It’s early and there are signs that it will get worse.

As noted last week on this blog, Medicaid itself does not stack up well in terms of how highly it is valued by recipients and the moral hazard inherent in the program. Here we see an additional bug: expanded Medicaid appears to siphoning away younger potential enrollees from the exchanges in those states, worsening the problem of adverse selection, which will negatively affect their claims experience.