Imprecision and Unsettled Science

21 Friday Apr 2017

Posted by pnuetz in Global Warming, Propaganda

Tags

Abatement Cost, Carbon Abatement, Carbon Forcings, Carbon Limits, Charles Hooper, Climate models, Cloud Formation, Confidence Interval, David Henderson, Earth Day, Measurement Error, Natural Climate Variation, Solar Forcings, Statistical Precision, Surface Temperatures, Temperature Aggregation, William Nordhaus

Last week I mentioned some of the inherent upward biases in the earth’s more recent surface temperature record. Measuring a “global” air temperature at the surface is an enormously complex task, requiring the aggregation of measurements taken using different methods and instruments (land stations, buoys, water buckets, ship water intakes, different kinds of thermometers) at points that are unevenly distributed across latitudes, longitudes, altitudes, and environments (sea, forest, mountain, and urban). Those measurements must be extrapolated to surrounding areas that are usually large and environmentally diverse. The task is made all the more difficult by the changing representation of measurements taken at these points, and changes in the environments at those points over time (e.g., urbanization). The spatial distribution of reports may change systematically and unsystematically with the time of day (especially onboard ships at sea).

The precision with which anything can be measured depends on the instrument used. Beyond that, there is often natural variation in the thing being measured. Some thermometers are better than others, and the quality of these instruments has varied tremendously over the roughly 165-year history of recorded land temperatures. The temperature itself at any location is subject to variation as the air shifts, but temperature readings are like snapshots taken at points in time, and may not be representative of areas nearby. In fact, the number of land weather stations used in constructing global temperatures has declined drastically since the 1970s, which implies an increasing error in approximating temperatures within each expanding area of coverage.

The point is that a statistical range of variation exists around each temperature measurement, and there is additional error introduced by vagaries of the aggregation process. David Henderson and Charles Hooper discuss the handling of temperature measurement errors in aggregation and in discussions of climate change. The upward trend in the “global” surface temperature between 1856 and 2004 was about 0.8° C, but a 95% confidence interval around that change is ±0.98° C. (I believe that is probably small given the sketchiness of the early records.) In other words, from a statistical perspective, one cannot reject the hypothesis that the global surface temperature was unchanged for the full period.

Henderson and Hooper make some other salient points related to the negligible energy impulse from carbon forcings relative to the massive impact of variations in solar energy and the uncertainty around the behavior of cloud formation. It’s little wonder that climate models relying on a carbon-forcing impact have erred so widely and consistently.

In addition to reinforcing the difficulty of measuring surface temperatures and modeling the climate, the implication of the Henderson and Hooper article is that policy should not be guided by measurements and models subject to so much uncertainty and such minor impulses or “signals”. The sheer cost of abating carbon emissions is huge, though some alternative means of doing so are better than others. Costs increase as the degree of abatement increases (or replacement of low-carbon alternatives), and I suspect that the incremental benefit decreases. Strict limits on carbon emissions reduce economic output. On a broad scale, that would impose a sacrifice of economic development and incomes in the non-industrialized world, not to mention low-income minorities in the developed world. One well-known estimate by William Nordhaus involved a 90% reduction in world carbon emissions by 2050. He calculated a total long-run cost of between $17 trillion and $22 trillion. Annually, the cost was about 3.5% of world GDP. The climate model Nordhaus used suggested that the reduction in global temperatures would be between 1.3º and 1.6º C, but in view of the foregoing, that range is highly speculative and likely to be an extreme exaggeration. And note the small width of the “confidence interval”. That range is not at all a confidence interval in the usual sense; it is a “stab” at the uncertainty in a forecast of something many years hence. Nordhaus could not possibly have considered all sources of uncertainty in arriving at that range of temperature change, least of all the errors in measuring global temperature to begin with.

Climate change activists would do well to spend their Earth Day educating themselves about the facts of surface temperature measurement. Their usual prescription is to extract resources and coercively deny future economic gains in exchange for steps that might or might not solve a problem they insist is severe. The realities are that the “global temperature” is itself subject to great uncertainty, and its long-term trend over the historical record cannot be distinguished statistically from zero. In terms of impacting the climate, natural forces are much more powerful than carbon forcings. And the models on which activists depend are so rudimentary, and so error prone and biased historically, that taking your money to solve the problem implied by their forecasts is utter foolishness.

Embracing the Robots

03 Friday Mar 2017

Posted by pnuetz in Automation, Labor Markets, Technology

≈ Leave a comment

Tags

3-D Printing, Artificial Intelligence, Automation, David Henderson, Don Boudreaux, Great Stagnation, Herbert Simon, Human Augmentation, Industrial Revolution, Marginal Revolution, Mass Unemployment, Matt Ridley, Russ Roberts, Scarcity, Skills Gap, Transition Costs, Tyler Cowan, Wireless Internet

Machines have always been regarded with suspicion as a potential threat to the livelihood of workers. That is still the case, despite the demonstrated power of machines make life easier and goods cheaper. Today, the automation of jobs in manufacturing and even service jobs has raised new alarm about the future of human labor, and the prospect of a broad deployment of artificial intelligence (AI) has made the situation seem much scarier. Even the technologists of Silicon Valley have taken a keen interest in promoting policies like the Universal Basic Income (UBI) to cushion the loss of jobs they expect their inventions to precipitate. The UBI is an idea discussed in last Sunday’s post on Sacred Cow Chips. In addition to the reasons for rejecting that policy cited in that post, however, we should question the premise that automation and AI are unambiguously job killing.

The same stories of future joblessness have been told for over two centuries, and they have been wrong every time. The vulnerability in our popular psyche with respect to automation is four-fold: 1) the belief that we compete with machines, rather than collaborate with them; 2) our perpetual inability to anticipate the new and unforeseeable opportunities that arise as technology is deployed; 3) our tendency to undervalue new technologies for the freedoms they create for higher-order pursuits; and 4) the heavy discount we apply to the ability of workers and markets to anticipate and adjust to changes in market conditions.

Despite the technological upheavals of the past, employment has not only risen over time, but real wages have as well. Matt Ridley writes of just how wrong the dire predictions of machine-for-human substitution have been. He also disputes the notion that “this time it’s different”:

“The argument that artificial intelligence will cause mass unemployment is as unpersuasive as the argument that threshing machines, machine tools, dishwashers or computers would cause mass unemployment. These technologies simply free people to do other things and fulfill other needs. And they make people more productive, which increases their ability to buy other forms of labour. ‘The bogeyman of automation consumes worrying capacity that should be saved for real problems,’ scoffed the economist Herbert Simon in the 1960s.“

As Ridley notes, the process of substituting capital for labor has been more or less continuous over the past 250 years, and there are now more jobs, and at far higher wages, than ever. Automation has generally involved replacement of strictly manual labor, but it has always required collaboration with human labor to one degree or another.

The tools and machines we use in performing all kinds of manual tasks become ever-more sophisticated, and while they change the human role in performing those tasks, the tasks themselves largely remain or are replaced by new, higher-order tasks. Will the combination of automation and AI change that? Will it make human labor obsolete? Call me an AI skeptic, but I do not believe it will have broad enough applicability to obviate a human role in the production of goods and services. We will perform tasks much better and faster, and AI will create new and more rewarding forms of human-machine collaboration.

Tyler Cowen believes that AI and automation will bring powerful benefits in the long run, but he raises the specter of a transition to widespread automation involving a lengthy period of high unemployment and depressed wages. Cowen points to a 70-year period for England, beginning in 1760, covering the start of the industrial revolution. He reports one estimate that real wages rose just 22% during this transition, and that gains in real wages were not sustained until the 1830s. Evidently, Cowen views more recent automation of factories as another stage of the “great stagnation” phenomenon he has emphasized. Some commenters on Cowen’s blog, Marginal Revolution, insist that estimates of real wages from the early stages of the industrial revolution are basically junk. Others note that the population of England doubled during that period, which likely depressed wages.

David Henderson does not buy into Cowans’ pessimism about transition costs. For one thing, a longer perspective on the industrial revolution would undoubtedly show that average growth in the income of workers was dismal or nonexistent prior to 1760. Henderson also notes that Cowen hedges his description of the evidence of wage stagnation during that era. It should also be mentioned the share of the U.S. work force engaged in agricultural production was 40% in 1900, but is only 2% today, and the rapid transition away from farm jobs in the first half of the 20th century did not itself lead to mass unemployment nor declining wages (HT: Russ Roberts). Cowen cites more recent data on stagnant median income, but Henderson warns that even recent inflation adjustments are fraught with difficulties, that average household size has changed, and that immigration, by adding households and bringing labor market competition, has had at least some depressing effect on the U.S. median wage.

Even positive long-run effects and a smooth transition in the aggregate won’t matter much to any individual whose job is easily automated. There is no doubt that some individuals will fall on hard times, and finding new work might require a lengthy search, accepting lower pay, or retraining. Can something be done to ease the transition? This point is addressed by Don Boudreaux in another context in “Transition Problems and Costs“. Specifically, Boudreaux’s post is about transitions made necessary by changing patterns of international trade, but his points are relevant to this discussion. Most fundamentally, we should not assume that the state must have a role in easing those transitions. We don’t reflexively call for aid when workers of a particular firm lose their jobs because a competitor captures a greater share of the market, nor when consumers decide they don’t like their product. In the end, these are private problems that can and should be solved privately. However, the state certainly should take a role in improving the function of markets such that unemployed resources are absorbed more readily:

“Getting rid of, or at least reducing, occupational licensing will certainly help laid-off workers transition to new jobs. Ditto for reducing taxes, regulations, and zoning restrictions – many of which discourage entrepreneurs from starting new firms and from expanding existing ones. While much ‘worker transitioning’ involves workers moving to where jobs are, much of it also involves – and could involve even more – businesses and jobs moving to where available workers are.“

Boudreaux also notes that workers should never be treated as passive victims. They are quite capable of acting on their own behalf. They often act out of risk avoidance to save their funds against the advent of a job loss, invest in retraining, and seek out new opportunities. There is no question, however, that many workers will need new skills in an economy shaped by increasing automation and AI. This article discusses some private initiatives that can help close the so-called “skills gap”.

Crucially, government should not accelerate the process of automation beyond its natural pace. That means markets and prices must be allowed to play their natural role in directing resources to their highest-valued uses. Unfortunately, government often interferes with that process by imposing employment regulations and wage controls — i.e., the minimum wage. Increasingly, we are seeing that many jobs performed by low-skilled workers can be automated, and the expense of automation becomes more worthwhile as the cost of labor is inflated to artificial levels by government mandate. That point was emphasized in a 2015 post on Sacred Cow Chips entitled “Automate No Job Before Its Time“.

Another past post on Sacred Cow Chips called “Robots and Tradeoffs” covered several ways in which we will adjust to a more automated economy, none of which will require the intrusive hand of government. One certainty is that humans will always value human service, even when a robot is more efficient, so there will be always be opportunities for work. There will also be ways in which humans can compete with machines (or collaborate more effectively) via human augmentation. Moreover, we should not discount the potential for the ownership of machines to become more widely dispersed over time, mitigating the feared impact of automation on the distribution of income. The diffusion of specific technologies become more widespread as their costs decline. That phenomenon has unfolded rapidly with wireless technology, particularly the hardware and software necessary to make productive use of the wireless internet. The same is likely to occur with 3-D printing and other advances. For example, robots are increasingly entering consumer markets, and there is no reason to believe that the same downward cost pressures won’t allow them to be used in home production or small-scale business applications. The ability to leverage technology will require learning, but web-enabled instruction is becoming increasingly accessible as well.

Can the ownership of productive technologies become sufficiently widespread to assure a broad distribution of rewards? It’s possible that cost reductions will allow that to happen, but broadening the ownership of capital might require new saving constructs as well. That might involve cooperative ownership of capital by associations of private parties engaged in diverse lines of business. Stable family structures can also play a role in promoting saving.

It is often said that automation and AI will mean an end to scarcity. If that were the case, the implications for labor would be beside the point. Why would anyone care about jobs in a world without want? Of course, work might be done purely for pleasure, but that would make “labor” economically indistinguishable from leisure. Reaching that point would mean a prolonged process of falling prices, lifting real wages on a pace matching increases in productivity. But in a world without scarcity, prices must be zero, and that will never happen. Human wants are unlimited and resources are finite. We’ll use resources more productively, but we will always find new wants. And if prices are positive, including the cost of capital, it is certain that demands for labor will remain.

The Greening-Carbon Nexus

17 Saturday Dec 2016

Posted by pnuetz in Environment, Global Warming

≈ 2 Comments

Tags

Atmospheric Carbon Concentration, Climate Change, Climate Consensus, David Henderson, Global Greening, global warming, Harrison H. Schmitt, Matt Ridley, Pollution, Rand Paul, Rodney W. Nichols, Roy Spencer, Thomas Malthus

Satellite records show that our world is experiencing a remarkable “greening” in the 21st century, to the seeming chagrin of the environmental left. There is now more vegetation than two decades ago, and greener vegetation, across as much as 50% of the Earth’s vegetated surface area. That area is expanding as well, and the creeping greenery has improved soil moisture levels in some drylands. This bodes well for agricultural productivity, putting another nail in Malthus’ coffin. The satellite studies have concluded that most of the enhanced vegetation is attributable to greater concentration of CO2 in the atmosphere, as opposed to warming or other possible causes. An interesting feedback is that the enhanced vegetation increases natural absorption of CO2, providing an enhanced carbon sink. This, in turn, has caused a pause in the growth of atmospheric carbon cencentration.

The environmental left knows these developments tend to undermine their preferred narrative that human emissions of CO2 must be reduced — at any cost. In fact, already there are warnings that global greening will “outgrow its benefit” as the greater volume of plants begins to decay, releasing carbon. You just can’t make some people happy! But not all of the carbon release from plant decay adds to atmospheric carbon — some is soil-bound — so the greening should provide a fairly durable carbon sink.

Global greening was one of the major motifs in Matt Ridley’s 2016 Global Warming Policy Foundation Lecture. Ridley covered various evidence of greening, but he also discussed the failure of a large contingent of climate researchers to follow a legitimate scientific approach to the study of climate change. Instead, they have politicized their field of study, committing a few noteworthy frauds along the way:

“It is irresponsible not to challenge the evidence properly, especially if the policies pursued in its name are causing suffering. Increasingly, many people would like to outlaw, suppress, prosecute and censor all discussion of what they call ‘the science’ rather than engage in debate. …

No wonder that I talk frequently to scientists who are skeptical, but dare not say so openly. That is a ridiculous state of affairs. We’re told that it’s impertinent to question “the science” and that we must think as we are told. But arguments from authority are the refuge of priests. Thomas Henry Huxley put it this way: ‘The improver of natural knowledge absolutely refuses to acknowledge authority, as such. For him, scepticism is the highest of duties; blind faith the one unpardonable sin’.

What keeps science honest, what stops it from succumbing entirely to confirmation bias, is that it is decentralized, allowing one lab to challenge another.“

It is all too true that policies advanced in the interests of curbing a slight warming trend cause real suffering, and the pain is heavily concentrated on the most impoverished. The presumed benefits of activist climate-change policies are speculative, at best. They have little chance of reversing atmospheric carbon concentration on their own.

Ridley makes note of the substantial evidence that sensitivity of the climate to airborne carbon concentration is low. This has become increasingly evident with the unfolding of a consistent record of over-forecasts of global temperatures by climate forcing models. Roy Spencer provides insights about these models in a recent discussion of global warming and “dodgy science” on his blog.

There is a widespread myth that 97 percent of climate scientists believe human activity is the main cause of global warming. In fact, that claim was based on a paper counting citations, not scientists; the methods used in the study and the citations themselves were also questionable. I have reviewed that evidence here on Sacred Cow Chips. David Henderson reviewed it here. A large number of studies find fault with so-called “consensus” pronouncements. They should always be viewed with suspicion.

There is also a lively debate underway over whether CO2 should be considered a pollutant! I exhale, therefore I pollute? To the extent that fecal matter is considered a pollutant, is it fair that to say that CO2 is, too? After all, both are anthropogenic. No, they are not even close in terms of an immediate threat to human health. As a philosophical matter, the idea that anything done by man is “unnatural” denies the fact that we are a very part of nature. Obviously, CO2 is not in the same class as pollutants like sulfur dioxide, ammonia, carbon monoxide or toxic metals. Today, these pollutants are very common in many parts of the world, and they are very threatening to human life. Effective mitigation technologies are available, but instead, in the developed West, we fixate on an increase in CO2 concentration of 100 parts per million over many decades, the climate implications of which are de minimis.

Rand Paul’s Facebook page has an ungated link to a WSJ.com commentary by Rodney W. Nichols and Harrison H. Schmitt on “The Phony War Against CO2”. Their commentary provokes questions as to the motives of the environmental left, and certain members of the research community, in shilling for the cause. That we would fight the greening of the globe, and the potential agricultural benefit it could bring, is bizarre. To devote enormous resources to an endeavor that is largely futile is a waste and a tragedy.

Mobility, Safety Nets & Sticky Webs

23 Thursday Jun 2016

Posted by pnuetz in Big Government, Welfare State

≈ Leave a comment

Tags

Affordable Care Act, Andrei Schleifer, Basic Income Guarantee, Christopher Jencks, Curley Effect, David Henderson, Dependent Class, Don Boudreaux, Earned Income Tax Credit, Edward Glaeser, Employment Incentives, Extreme Poverty, Henry Hazlitt, Kathryn Edin, Labor Force Participation, Luke Shaefer, Marginal Revolution, Medicaid expansion, Michael Tanner, Milton Friedman, Mises Wire, Obamacare, Social Safety Net, Tyler Cowan, Universal Basic Income, Veronique de Rugy, War on Poverty, Welfare State, work incentives

We’re unlikely to reduce the share of the U.S. population living in economic dependency under the current policy regime. So many aspects of tax law, regulation and aid programs are designed as if to perpetuate or perhaps even worsen the situation. I’ve discussed this topic before on Sacred Cow Chips in “Degrees of Poverty and the Social Safety Trap“, and “Minority Politics and the Redistributionist Honey Trap“.

Many supporters of aggressive anti-poverty efforts take umbrage at any suggestion that government aid might discourage the poor from engaging in productive activities. They imagine an implication that the poor are “lazy”, perfidious or otherwise undeserving of assistance. Whether that is a misunderstanding or merely rhetorical bite-back, the fact is that it is rational to respond to incentives and there is no shame in doing so. Unfortunately, many assistance programs contain incentive traps or income “cliffs” that discourage work effort. This applies to food stamps, rent subsidies, Obamacare subsidies, and many more of the 120+ federal aid programs and other state and local programs.

Here’s a new example from a research abstract posted at Marginal Revolution: The Medicaid expansion had very negative effects on labor force participation. The funding for Medicaid expansion at the state level was authorized by the Affordable Care Act (ACA) — aka Obamacare, but only about half the states went along with it. From the abstract:

“I find a significant negative relationship between Medicaid expansion and labor force participation, in which expanding Medicaid is associated with 1.5 to 3 percentage point drop in labor force participation.“

The direction of impact is hardly unique, and as Tyler Cowen notes at the link:

“Work is good for most people, and it is even better for their future selves, and their future children too.“

The negative impact of Obamacare is more massive than the estimate above might suggest. Veronique de Rugy at Reason.com discusses how “Federal Programs Keep People Poor“. While most of her article is about the negative impact of high marginal tax rates on the employment prospects of the poor, she also recalls an ugly CBO estimate of the ACA’s impact:

“In 2014, the Congressional Budget Office—Congress’ official fiscal scorekeeper—revised its original estimate to report that because of the law, by 2024 the equivalent of 2.5 million Americans who were otherwise willing and able to work will have exited the labor force.“

There are several different channels through which the negative effects of the ACA operate: Small employers are incented to limit their hiring and the hours of employees, and federal subsidies (and sometimes state benefits) are available to individuals only so long as they remain below certain income thresholds. Again, this is typical of many government aid programs (the Earned Income Tax Credit (EITC) being an exception). More from de Rugy:

“When the government takes away a person’s benefits as his income goes up, it has the same effect as a direct tax. And remember, when you tax something, you usually get less of it. That means these programs can actually hinder income mobility: In order to continue receiving their government cash, individuals are forced to limit the amount they earn. Thus, they have an incentive not to try to climb the income ladder by putting in extra hours or signing up for job training and educational programs.“

Mises Wire recently carried a reprint of an essay by the great Henry Hazlitt, “How To Cure Poverty“. The gist of Hazlitt’s argument is that government largess simply cannot create wealth for society, but only diminish it. The mere process of redistributing the current “pie” consumes resources, but that is minor compared to the future reduction in the size of the pie brought on by the terrible incentives inherent in income taxation and many government benefit programs:

“The problem of curing poverty is difficult and two-sided. It is to mitigate the penalties of misfortune and failure without undermining the incentives to effort and success. … The way to cure poverty is … through … the adoption of a system of private property, freer trade, free markets, and free enterprise. It was largely because we adopted this system more fully than any other country that we became the most productive and hence the richest nation on the face of the globe. Through this system more has been done to wipe out poverty in the last two centuries than in all previous history.“

Harvard professors Edward Glaeser and Andrei Schleifer have written about “The Curley Effect: The Economics of Shaping the Electorate“, which posits that redistributive policies that are harmful to constituents can be rewarding to politicians. The paper deals with policies that encourage emigration of affluent voters away from cities, but which nevertheless reward politicians by increasing the proportion of their political base in the remaining constituency. It seems to apply very well to many major cities in the U.S. However, it certainly applies more broadly, across states and nations, when affluent people and their capital are mobile while the less affluent are not, especially when benefits are at stake. It’s no secret that promises of benefits are often attractive to voters in the short run, even if they are harmful and unsustainable in the long run.

The welfare state appears to have helped to sustain many of the poor at an improved standard of living after accounting for benefits, or it has prevented them from falling into “deep poverty”. However, it hasn’t succeeded in lifting the poor out of dependency on the state. Pre-benefit poverty rates are about the same as they were the late 1960s. In addition, Christopher Jencks observes that the “Very Poor” have in fact become poorer. That’s discussed in his review of “$2.00 a Day: Living on Almost Nothing in America” by Kathryn Edin and Luke Shaefer. Jencks presents statistics showing that those in the lowest two percentiles of the income distribution have suffered a fairly sharp decline in income since 1999. Many of these extremely poor individuals do not avail themselves of benefits for which they could qualify. In addition, the EITC requires earned income. A job loss is a wage loss and, if it goes on, a loss of EITC benefits. Unfortunately, work requirements are more difficult to meet in the presence of wage floors and other distortions imposed by heavy-handed regulation.

A guaranteed national income has become a hot topic recently. Michael Tanner weighs in on “The Pros and Cons…” of such a program. There are many things to like about the idea inasmuch as it could sweep away many of the wasteful programs piled upon each other over the years. It is possible to construct a sliding-scale guarantee that would retain positive incentives for all, as Milton Friedman demonstrated years ago with his negative income tax concept. However, as Tanner points out, there are many details to work out, and the benefits of the switch would depend upon the incentive structure built into the guarantee. As a political plaything, it could still be dangerous to the health of the economy and an impediment to income mobility. Don Boudreaux has registered objections to a guaranteed income, one of which is based on strengthening the wrongheaded argument that we derive all rights from government. Even more interesting is David Henderson’s take on a basic income guarantee. He finds that the budgetary impact of a $10,000 guarantee would equate to a 30% increase in government spending, and that assumes that it replaces all other assistance programs! Henderson also discusses the public choice aspects of income guarantees, as well as moral objections, and he concludes that there are strong reasons to reject the idea on libertarian grounds.

The economy is riddled with too many subsidies, penalties and bad incentives that distort the behavior of various groups. The well-to-do often benefit from subsidies that are every bit as distortionary as those inherent in many public assistance programs. They should all be swept away to restore a dynamic economy with the potential to lift even more out of poverty. There could be a role for a guaranteed income on the grounds that it is better than what we’ve got. But we should recall the words of Hazlitt, who reminded us that we’ve come so far on the strength of property rights, private initiative, and free trade. Left unfettered, those things can take us much farther than the ugly pairing of beneficence and coercion of the government behemoth.

Obamacare’s Left-Handed Monkey Wrench

20 Tuesday Oct 2015

Posted by pnuetz in Central Planning, Obamacare

≈ Leave a comment

Tags

ACA, Accountable Care Organizations, Bending the Cost Curve, central planning, David Henderson, Exchange Enrollment, Ezra Klein, John C. Goodman, Medicare Advantage, Megan McArdle, Michael Schaus, Obamacare, Obamacare Coops, Obamacare Replacement, Pay For Performance, Risk corridors, Wharton ACA Study

Distorted overtures celebrating the great success of Obamacare continue, but no one who cares about the facts is buying the blather. Megan McArdle reminds us that even if we stipulate that the 9.9 million now enrolled on the exchanges have gained something, Obamacare has delivered far less than promised. McArdle also notes the high-risk skew of the population within the risk pools. That’s why insurers are losing money on Obamacare coverage, though their losses have been covered via government “risk corridors” thus far. In “Obamacare Bear Market” at wsj.com (links to a Google search result to get around the paywall — or just search “wsj Obamacare Bear”), we hear about the dismal financial performance of the Obamacare coops, which sell plans on the exchanges. The WSJ also reflects on a new working paper from Wharton economists:

“They conclude that, ‘even under the most optimistic assumptions,’ half of the formerly uninsured take on both a higher financial burden and lower welfare, and on net ‘average welfare for the uninsured population would be estimated to decline after the ACA [Affordable Care Act] if all members of that population obtained coverage.’

In other words, ObamaCare harms the people it is supposed to help. This is not a prescription for a healthy, durable program.“

Health economist John C. Goodman gives more detail on the Wharton study in “Obamacare is bad for the middle class“. Even Ezra Klein admits that the health plan is a failure. Whether Klein really gets it or not, the result is just another failure of central planning. Here’s a quote from Michael Schaus from the last link:

“The same people who failed miserably at launching a website will soon be regulating the sophisticated day-to-day decisions of hospitals, insurers and doctors.“

Anticipating another year of disappointing enrollments ahead, the White House now is low-balling its enrollment target for 2016. This an apparent attempt to present a better face to the public when the bad numbers roll in.

Another piece by Goodman explains that “bending the cost curve” with Obamacare was always a fool’s errand. Again, it has a lot to do with the folly of central planning:

“In a normal market, the entrepreneurs wake up every morning and ask themselves: How can I make costs lower, quality higher, and access to my product better today?

But in a bureaucratic system – where revenues are determined not by customer satisfaction, but by complicated payment formulas – they tend to wake up and ask: How can I get more money out of the payment formulas today?“

Goodman explains that an insurance firm providing coverage through Medicare Advantage would have nothing to gain by introducing cost-saving innovations: all of the extra profit would be turned over to Medicare. Incentives matter, but bureaucrats often fail to understand incentives and their power to improve performance. Goodman also describes the poor results of the so-called Accountable Care Organizations, the futile pilot programs and demonstration projects related to the practice of medicine, and the gaming that has taken place within the hospital “pay-for-performance” program. Ironically, the most certain outcome of any attempt to impose central planning on an industry is that there will be unintended and undesirable consequences.

Goodman has written a book proposing an Obamacare replacement, entitled “A Better Choice: Healthcare Solutions For America“. Here is David Henderson’s favorable review, in which he focuses on the negative labor market effects of Obamacare, including poor incentives for employers and work effort, among other things. To close, here’s an excerpt from Henderson’s introduction:

“If you think that the Patient Protection and affordable Care act (ACA, also known as Obamacare) is bad because of its expense, the distortions it causes in the labor market, its failure to provide people what they really want, and its highly unequal treatment of people in similar situations, wait until you read John C. Goodman’s A Better Choice: Healthcare Solutions for America. You will likely conclude that the ACA is even worse than you thought.

That’s the bad news. The good news is that Goodman … proposes reforms that would do more for the uninsured than the ACA does, and at lower cost, and also would make things better for the currently insured. and it would do all this while avoiding mandates, creating more real competition among insurers, and making the health care sector more responsive to consumers….“

Degrees of Poverty and The Social Safety Trap

01 Thursday Oct 2015

Posted by pnuetz in Poverty

≈ 1 Comment

Tags

Anti-Poverty Programs, Census Bureau Report on Poverty, David Henderson, Family Disintegration, income inequality, James D. Agresti, Living Standards, Measuring Poverty, Minimum Wage, Poverty, Public education, Robert Rector, War on Drugs, War on Poverty

The poor in the United States are extremely well-off by international standards. That is clear in the chart above, which David Henderson discusses in “The Role of Luck In The Income Distribution“. By luck, Henderson means that one’s country of birth has a huge impact on their ultimate place in the global income distribution. The chart compares positions in a single country’s income distribution with corresponding points in the global distribution (2008 data). For example, an individual in the 20th percentile of the U.S. income distribution (20 on the horizontal axis) is in roughly the 86th percentile of the global distribution (from the vertical axis). Those at the very bottom of the U.S. income distribution have a greater income than half of the individuals in the world. The average U.S. earner in the lowest 20% earns more than nearly 75% of all earners globally. Individuals across the entire income distribution in the U.S. have higher incomes than their counterparts elsewhere.

Within the U.S., we often use the term “impoverished” in a fairly parochial sense: compared to our compatriots, not to the rest of the world. Robert Rector discusses the living standards of the poor in America in “How Do America’s Poor Really Live? Examining the Census Poverty Report“. The actual census report released this month is discussed in The Atlantic here. Rector states the following:

“According to the government’s own reports, the typical American defined as poor by the Census Bureau has a car, air conditioning, and cable or satellite TV. Half of the poor have computers, 43 percent have Internet, and 40 percent have a wide-screen plasma or LCD TV. … Far from being overcrowded, poor Americans have more living space in their home than the average non-poor person in Western Europe.“

Rector notes that the Census Bureau’s measure of poverty is based on a flawed definition of income, one that is inconsistent with how income is defined in calculating official measures of poverty in other countries. The Census definition excludes most welfare benefits, and taxes aren’t always subtracted from income by other countries. The Rector post linked above contains an incorrect link to this recent article on international comparisons of poverty rates. When the measurement inconsistencies are corrected, the official U.S. poverty rate is similar to the advanced economies of Europe, and it is lower than Eurooean poverty rates based on a more inclusive definition preferred by many on the left. And again, the actual standard of living of those below the official poverty level in the U.S. is impressive compared to the rest of the world. It is also impressive from a historical perspective.

Rector discusses the failure of the welfare state and the War on Poverty to lift the impoverished out of dependency. This has been covered here on Sacred Cow Chips several times (see here and here). The terrible structure of incentives built into many anti-poverty programs is one of the primary causes, as well as the failure of public education. Also at fault are minimum wage legislation, the War on Drugs, tax policy and a regulatory regime that discourages job creation by punishing new capital investment and business creation.

The left often claims that the distribution of income in the U.S. is becoming increasingly skewed toward high-income households. In “Myths and Causes of Income Inequality“, James D. Agresti demonstrates that the real causes of this phenomenon are demographic. The splintering of families at low income levels has increased the number of low-income households and reduced average incomes among those households. At the level of individual earners, there is no discernible trend in income inequality. According to Agresti:

“… the rise of household income inequality stems from family disintegration driven by changing attitudes toward sex, marital fidelity, and familial responsibility.“

Agresti stops short of drawing a link between anti-poverty policies and the disintegration of the family, though there are reasons to suspect pernicious connections along those lines.

It is easy to exaggerate the extent and severity of poverty in the U.S.; doing so is of obvious value in promoting the leftist agenda. In reality, the poor in this country are provided with a standard of living through public assistance that is high relative to their counterparts across the globe, and it is similar to other advanced economies. In addition, when changes in the structure of households are neutralized, there has been no upward trend in income inequality, contrary to assertions from the left. Our long-term objective should be to lift able recipients out of dependency, consistent with President Johnson’s original goals for the War on Poverty. That will require major reforms to our anti-poverty efforts, public education and many other aspects of public policy. Most poor families in the U.S. receive support that is enviable to the poor elsewhere. Nevertheless, their plight of dependency has dispiriting and self-reinforcing effects.

Racism And Minimum Wage Fairy Tales

02 Saturday May 2015

Posted by pnuetz in Markets, Price Mechanism, Regulation

≈ 2 Comments

Tags

Carrie Sheffield, David Henderson, Davis Bacon Act, Eugenics, John F. Kennedy, Minimum Wage, Progressive Rhetoric, Racial Discrimination, racism, Thomas Leonard, Thomas Sowell, Walter Williams

The real history of the minimum wage is an unsavory tale unknown to most current observers. The myth that it had honorable origins is widespread, with special currency among the progressive Left. Their uncritical support for a higher wage floor reflects a failure to grasp its pernicious economic effects on low-skilled labor and an ignorance of its historical context as a mechanism enabling racial discrimination. In fact, minimum wage legislation was often motivated by racist economic concerns, as Carrie Sheffield explained a year ago in this commentary in Forbes. She quotes, among others, the great Thomas Sowell, an African-American economist, from this opinion piece:

“In an earlier era, when racial discrimination was both legally and socially accepted, minimum-wage laws were often used openly to price minorities out of the job market.“

Sowell cites historical examples of minimum wage legislation intended to harm the employment prospects of Japanese, Chinese and blacks, including the following:

“Some supporters of the first federal minimum-wage law in the United States — the Davis-Bacon Act of 1931 — used exactly the same rationale, citing the fact that Southern construction companies, using non-union black workers, were able to come north and underbid construction companies using unionized white labor.

These supporters of minimum-wage laws understood long ago something that today’s supporters of such laws seem not to have bothered to think through. People whose wages are raised by law do not necessarily benefit, because they are often less likely to be hired at the imposed minimum-wage rate.“

Walter Williams, another well-known African-American economist, provides more evidence of these origins of the wage floor in “Mandated Wages and Discrimination“:

“During the legislative debate over the Davis-Bacon Act, which sets minimum wages on federally financed or assisted construction projects, racist intents were obvious. Rep. John Cochran, D-Mo., supported the bill, saying he had ‘received numerous complaints in recent months about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.’ Rep. Miles Allgood, D-Ala., complained: ‘That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.’ Rep. William Upshaw, D-Ga., spoke of the ‘superabundance or large aggregation of Negro labor.’ American Federation of Labor President William Green said, ‘Colored labor is being sought to demoralize wage rates.’ The Davis-Bacon Act, still on the books today, virtually eliminated blacks from federally financed construction projects when it was passed.“

An article by Thomas C. Leonard in the Journal of Economic Perspectives, “Eugenics and Economics in the Progressive Era“, reinforces the point:

“The progressive economists believed that the job loss induced by minimum wages was a social benefit as it performed the eugenic service ridding the labour force of the unemployable.”

And if that isn’t enough for you, David Henderson has this to say:

“Unions don’t support minimum wage increases because their own members are working at the minimum wage. Virtually all union employees–I’ve never heard of an exception–work at wages above the minimum. Northern unions and unionized firms, for example, have traditionally supported higher minimum wages to hobble their low-wage competition in the South…

… In a 1957 Senate hearing, minimum-wage advocate Senator John F. Kennedy of Massachusetts, who just four years later would be President of the United States, stated,

‘Of course, having on the market a rather large source of cheap labor depresses wages outside of that group, too – the wages of the white worker who has to compete. And when an employer can substitute a colored worker at a lower wage – and there are, as you pointed out, these hundreds of thousands looking for decent work – it affects the whole wage structure of an area, doesn’t it?’“

One can claim that JFK was advocating for a higher wage floor to benefit all workers, but it’s hard to avoid the conclusion that “protecting” white workers was his priority. And it strains credulity to deny that JFK was aware of the other side of the coin: there would be negative repercussions for low-skilled black workers. What is painfully obvious about minimum wage legislation is that the real beneficiaries are generally not those competing for minimum wage jobs, but more entrenched labor interests.

It is an unfortunate reality that blacks make up a disproportionately large share of the unskilled labor force. According to another commentary by Walter Williams, unemployment among blacks was not a chronic problem in the first half of the 20th century, even among teens, and male labor force participation among blacks was higher than for whites. Over the past 50 years, however, black unemployment has averaged twice the rate for whites. Minimum wage legislation has encouraged this disparity.

Today’s advocates of a higher minimum wage are inadvertently rooting for a policy that compounds the disadvantages faced by the least skilled workers. The minimum wage contributes to a negative disparate impact on black labor market outcomes and prevents blacks from gaining valuable job experience. It is impossible to regulate wages without impinging on hiring decisions, and it is impossible to regulate both wages and hiring without impinging on the survival of employers. To help the unskilled, the best thing policymakers can do is allow them to trade their labor freely.

Peak-Resource Myopia Serves the State

08 Sunday Feb 2015

Posted by pnuetz in Peak Oil

≈ Leave a comment

Tags

David Henderson, Don Boudreaux, Government Failure, Michael Lynch, Peak Oil, Scarcity, Thomas Malthus, William Jevons

We often hear we’re at the “peak” availability of some resource, but what’s really meant is that we’re at a cliff’s edge, about to run dry. These claims are usually uninformed and have been wrong historically. Of course, scarcity is real; it’s why I do economics and love markets, which solve the problem of scarcity through voluntary, arms length cooperation in balancing needs and wants with the availability of resources. But scarcity at any point in time rarely implies anything about the availability of resources going forward. Current knowledge and conditions, and existing technology for extracting and utilizing resources, provide signals about opportunities; they should not dominate our outlook for the future in a dynamic economy.

The view that the availability of resources is subject to hard limits, or that they will “run out”, is discussed by David Henderson in his post “The Jevons Fallacy,” regarding the “peak” views often credited to economist William Jevons. Henderson quotes his own bio of Jevons:

“Jevons failed to appreciate the fact that as the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources. In particular, he did not anticipate oil or natural gas. Also, he did not take account of the incentive, as the price of coal rose, to use it more efficiently or to develop technology that brought down the cost of discovering and mining (see natural resources).”

Don Boudreaux has a few thoughts on Henderson’s post and the topic of scarcity, emphasizing the contribution of human ingenuity to the supply of resources:

“Atoms are created and made into matter by the impersonal forces of nature (or, if you are a theist, by God). In contrast, matter is made into resources only by human creativity, especially when this creativity is unleashed and directed by markets. So more humans – and more markets – quite realistically (and, so far, historically) mean an increasing, not a decreasing, supply of resources.”

A 2005 post at the humansunderrated blog made the same point: “Only one resource truly matters and that is the human mind.” And the human mind, guided by market signals, is what ultimately solves the problem of scarcity. It does not get solved when human initiative is shackled by regulation, insecure property rights, or protected monopoly interests, which are all varieties of government failure.

In “Peak Nonsense,” Michael Lynch concurs:

“And so here we go again on the trial of exhaustion theory, one step removed from the scientism of central planning where decline rates are projected and a social cost of depletion is calculated for an extraction tax. But it is all bad science. ”

There is no end to scarcity. It will always be with us, but we have not reached peak oil, peak fossil fuels, peak food, or peak anything. The dreary viewpoint credited to Jevons and Thomas Malthus is misguided as long as people remain free to engage in voluntary production and trade. The “peak” perspective serves the interest of statists who’d prefer to impose arbitrary limits on our productive potential.