One of the prominent economic debates to emerge during the coronavirus outbreak has been whether to continue with shelter in place measures that are hurting the economy but, hopefully, slowing the virus' spread. On this episode, Luigi does a cost-benefit analysis that shows why it could be better to keep the economy closed, and debates his proposal with Russ Roberts, host of the popular EconTalk podcast.
We derive a measure of firm-level regulatory costs from the text of corporate earnings calls. We then use this measure to study the effect of regulation on companies’ operating fundamentals and cost of capital. We find that higher regulatory cost results in slower sales growth, an effect which is mitigated for large firms. Furthermore, we find a one-standard deviation increase in our preferred measure of regulatory cost is associated with an increase in firms’ cost of capital of close to 3% per year. These findings suggest that regulatory risk is a major cost to firms, but the largest firms are able to manage that risk better.One obvious point here is that regulation is costly to firms. But it is less costly to large firms than small, this has implications for competition policy. Large firms may support regulation as a way of increasing the costs of small firms relatively more than for large firms. This means that large firms can use regulation as a way of forcing new, innovative small firms out of the market, and thus reduce competition.
Of the ideas that economists have to deal with every so often, one of the stranger ones is that of Social Credit monetary theory. Here in New Zealand Social Credit was once a third party with a reasonable following by voters. Back in 1955 it was such a force that an economist at the University of Canterbury, Alan Danks (later Professor and Sir) wrote a short pamphlet explaining what was wrong with the Social Credit approach to economics. The pamphlet is What Everyone Should Know about Social Credit by A.J. Danks, Christchurch: The Caxton Press, 1955.
There isn’t much disagreement among economists about what a national rent control policy would do to harm renters, housing prices, housing stock, and the incentive to build new housing. Nonetheless, Bernie Sanders persists. Ryan Bourne comments.
Actual and perceived problems associated with privatised utilities have led to some public disenchantment with these businesses. Polls suggest that there is a popular majority for renationalising them, and there is some cross-party support for this.Remember that one way to think about privatisation is that it is a way for a government to commit to a policy of non-intervention in the operation of a firm. Selling a business maximises the "distance" between the government and the firm and increases the political cost to interference with the firm. Renationalisiating a firm reverses this process and makes government interference that much easier. Renationalisation minimises the "distance" between the firm and the government and thus makes political intervention that much cheaper for the government.
Examination of these industries suggests grounds for concern over aspects of their recent operation. However, other criticisms are not substantiated, and there have been significant gains from privatisation which should not be ignored.
Many of the problems of these sectors are not intrinsic to private ownership but are the consequence of continued government intervention and regulatory failure. Some problems – such as the conflict between prices to consumers and cost to the taxpayer – would persist even in the event of renationalisation, and could get worse.
The record of post-war nationalisations was for the most part unhappy. The clamour for taking businesses back into state ownership ignores important lessons from that period, such as the instability of investment hen nationalised industries have to compete against other government priorities.
The cost of renationalisation would be considerable. The issue of compensation to private shareholders is being treated superficially: wider UK share ownership and the increased involvement of foreign investors would make it be much more difficult than in the past.
Foreign nationals would be in a strong position to challenge attempts to acquire assets at less than market value. Such attempts would damage the UK’s reputation for upholding property rights and could also lead to retaliatory measures against the UK’s own large stock of overseas investments.
Proposed new organisational arrangements for renationalised businesses are untested and may lead to continual politicisation, adversely affecting future performance.
It could be more sensible, where necessary, to strengthen the regulation of these businesses with a focus on reinforcing market mechanisms. The aim should be to reduce political interference and reduce disruption to business operations.
Notwithstanding political support for renationalisation from several parties, it seems unlikely that there will ever be complete consensus. Future governments might re-privatise, or threaten to re-privatise. The instability created by this sort of ping-pong would damage these industries’ performance, with consequent adverse effects for customers and taxpayers.
The metrics that $15 minimum wage advocates use to make the case for substantial minimum wage hikes are not, on their own, economically sensible benchmarks by which to set minimum wage rates.
Economy-wide productivity growth can be a poor guide to productivity trends for minimum wage workers and different localities, and it tells us little about whether firms have the power to set below-market wage levels.
Housing and childcare costs are unrelated to firms’ ability to pay or the value of the work minimum wage employees undertake. And comparing the income of someone working full-time at the federal minimum wage to existing poverty thresholds ignores the role of anti-poverty programs and the fact that many minimum wage earners are not poor.
Campaigners’ arguments often imply that minimum wages should be linked to productivity measures, living costs, or poverty thresholds. The evidence presented above suggests that translating these arguments into policy could produce damaging labor market outcomes.
The new conventional wisdom holds that a large increase in the minimum wage would be desirable policy. Advocates for this policy dismiss the traditional concern that such an increase would lower employment for many of the low-skilled workers that the increase is intended to help. Recent economic research, they claim, demonstrates that the disemployment effects of increasing minimum wages are small or nonexistent, while there are large social benefits to raising the wage floor.
This policy analysis discusses four ways in which the case for large minimum wage increases is either mistaken or overstated.
First, the new conventional wisdom misreads the totality of recent evidence for the negative effects of minimum wages. Several strands of research arrive regularly at the conclusion that high minimum wages reduce opportunities for disadvantaged individuals.
Second, the theoretical basis for minimum wage advocates’ claims is far more limited than they seem to realize. Advocates offer rationales for why current wage rates might be suppressed relative to their competitive market values. These arguments are reasonable to a point, but they are a weak basis for making claims about the effects of large minimum wage increases.
Third, economists’ empirical methods have blind spots. Notably, firms’ responses to minimum wage changes can occur in nuanced ways. I discuss why economists’ methods will predictably fail to capture firms’ responses in their totality.
Finally, the details of employees’ schedules, perks, fringe benefits, and the organization of the workplace are central to firms’ management of both their costs and productivity. Yet data on many aspects of workers’ relationships with their employers are incomplete, if not entirely lacking. Consequently, empirical evidence will tend to understate the minimum wage’s negative effects and overstate its benefits.
Has the trade war with China been good for American businesses and consumers? The first results are in, and David Weinstein tells Tim Phillips who the winners and losers are.
This paper summarises the evidence from recent research relating to the British Planning system’s impact on the supply of development. Planning serves important economic and social purposes but it is essential to distinguish between restricting development relative to demand in particular places to provide public goods and mitigate market failure in other ways, including ensuring the future ability of cities to expand and maintain a supply of public goods and infrastructure; and an absolute restriction on supply, raising prices of housing and other urban development generally. Evidence is presented that there are at least four separate mechanisms, inbuilt into the British system, which result in a systematic undersupply of land and space for both residential and commercial purposes and that these have had important effects on both our housing market and the wider economy and on welfare more widely defined.The article's conclusion reads,
The evidence shows, then, that our planning system is restrictive in terms of the overall supply of land and housing space in the aggregate. It is not just locally restrictive in order to preserve land of significant environmental quality which in its unbuilt state generates amenity or has recreational value. Such purely local restrictions are likely to have positive welfare effects although the costs they impose also need to be taken into account. Overall restrictiveness of supply relative to demand, in the absence of such environmental gains, does not increase welfare but does increase the price of housing relative to incomes, so reduces welfare, and has, as we have seen, unintended adverse consequences; for example on the length of commuting.So the answer to the question in the title seems to be broken policy. This raises the interesting and important question of, if you did a similar study for New Zealand would you get similar results? I'm very afraid you would. But just how broken are New Zealand's housing policies? And how costly are these blunders?
Our planning system imposes this overall restrictiveness by means of at least four separate mechanisms. Its decision making is systemically restrictive because results of applications and conditions imposed for ‘affordable’ housing are unpredictable, so development risk is increased; it imposes quantitative restrictions on the supply of space (where it is most valued) by its imposition of Green Belts and height controls; its mechanism for deciding how much land to allocate for housing ignores the most important determinant of demand, so systematically undersupplies land; and there is substantial variation in local restrictiveness measuredby the proportion of applications refused.
Since all have the effect of reducing the supply of housing and other development relative to demand this drives up prices in real terms. Not only has this made housing increasingly unaffordable but it has had very regressive distributional effects, especially redistributing assets to older home owners. There are other unintended effectsof more restrictive planning. A more restrictive pattern of local decisions on housing proposals causes a substantial increase over time in the proportion of local homes that are empty. Not only that but greater local restrictivenesssignificantly increases the average length of commutes for those working locally. There is also evidence consistent with Green Belts increasing commuting distances as workers leap frog out to buy less expensive housing space. This increases the spatial extent of cities even if it reduces the footprint of urbanisation.
The extent of the price distortions induced by restrictions on the supply of land and housing mean that there is a misallocation of resources. Even in the US, where overall restrictiveness has historically been considerably less than in Britain, it has been estimated (Hseih and Moretti, 2017) that GDP would have been some 13.5 per cent higher had not restrictions on building slowed the flowof labour to the highest productivity locations over the period 1964 and 2009. No similar estimates have been done for other countries. Cheshire et al. (2015), however, did estimate that the loss of total factor productivity in the supermarket sector in England, as a result of forcing them to locate on particular sites in ‘town centres’, was 32 per cent just between 1996 and 2008. Cheshire and Hilber (2008) estimated that the restriction on the supply of office space in British cities reached the equivalent of a tax on construction costs of 800 per cent in London’s West End and even in less prosperous cities, such as Birmingham, averaged 250 per cent: there is certainly evidence that the economic effects of planning which is generically restrictive, can be large.
To sum up, there seem to be many reasons for concluding that our policies determining housing supply are broken but no obvious reason to conclude that the housing crisis results from a ‘broken housing market’.
Sam Hammond is a policy analyst and covers topics in poverty and welfare for the Niskanen Center. Sam is a previous guest on Macro Musings, and he joins the show today to talk about his new article in National Review which addresses Senator Elizabeth Warren’s new proposal, the Accountable Capitalism Act, and its potentially negative effects. David and Sam also discuss the problematic stereotypes surrounding ‘corporate bigness’, the positive and negative features of co-determination, and why we need universal safety nets.
We study whether antisemitic discrimination in Nazi Germany had economic effects. Specifically, we investigate how the forced removal of Jewish managers affected large German firms. We collect new data from historical sources on the characteristics of senior managers, stock prices, dividends, and returns on assets for firms listed on the Berlin Stock Exchange. After the removal of the Jewish managers, the senior managers at affected firms had fewer university degrees, less experience, and fewer connections to other firms. The loss of Jewish managers significantly and persistently reduced the stock prices of affected firms for at least 10 years after the Nazis came to power. We find particularly strong reductions for firms where the removal of the Jewish managers led to large decreases in managerial connections to other frms and in the number of university-educated managers. Dividend payments and returns on assets also declined. A back-of-the-envelope calculation suggests that the aggregate market valuation of firms listed in Berlin fell by 1.78 percent of German GNP. These findings imply that discrimination can lead to significant economic losses and that individual managers can be key to the success of firms.So a non-discriminating firm (assuming there were some) would have a competitive advantage.
Navarro is an economist and director of the Office of Trade and Manufacturing Policy (OTMP), a White House agency created by President Trump. He is one of the rare economists to occupy a high-level advisory role in the White House. A Harvard University Ph.D., he is a stiff protectionist, which is rare among economistsRare is something of an understatement!
Navarro makes five distinct arguments against open trade with China and other countries. They can be summarized as follows:Lemieux then examines each of these arguments and show what is wrong with them.
- The impossible-competition argument: We cannot compete against a dirigiste and even totalitarian country like China. Trying to do so generates negative externalities.
- The fairness argument: “Unfair” trade is not free trade and is destroying the American economy.
- The trade deficit argument: The U.S. trade deficit is a serious problem that reduces gross domestic product and indicates unfair trade.
- The retaliation argument: Retaliatory protectionist measures are justified against protectionist countries; such retaliators are the real free-traders.
- The national security argument: Protectionism is required for reasons of national security.
Writing for Foreign Policy in March 2017, journalist Melissa Chan depicts Navarro as motivated by his love of media attention and his longing for political fame. He ran for public office several times, always unsuccessfully, and “morphed from registered Republican, to Independent, to Democrat, and back to Republican.” According to Chan, he is derided by well-regarded China analysts. Disregarding psychological and political speculations, one thing is sure: his arguments are not based on economic analysis.Trump's trade policies have done the almost impossible, they have united economists across the entire political spectrum Unfortunately for Trump, they are united against him and the policies that Navarro has been advocating.
To summarize my arguments, economics strongly suggests that the best trade policy is not to have one, to leave citizens alone to import or export as they wish. That’s true whether the country’s trading partners are free-traders or dirigistes like China. Free enterprise and economic freedom are not only efficient, they are what fairness is or should be about. There is no reason to be concerned with the trade deficit, except to the extent that it is caused by federal profligacy, in which case the solution is to solve the root cause of the problem. Retaliation only compounds other countries’ protectionism. National security is an easy protectionist excuse. Building a war economy in peace time is not acceptable in a free society.
The maintenance of economic freedom at home—which includes the freedom to import what one wants if one finds the terms agreeable—is the only individualist, coherent, and realistic policy. The young Peter Navarro seemed to understand that. Sadly, today’s Navarro does not.
Hyperinflation in Venezuela has reached astonishing levels, making life extraordinarily difficult for ordinary people and causing immense economic damage. Inflation is currently running at some 200,000 per cent and is projected by the IMF to reach 1 million percent by the end of the year.and he adds,
Using the salary of a full college professor as a benchmark, in the 1980s it took around 15 minutes of earnings to pay for one kilo of beef. In July 2017, this professor needed to work for 18 hours to pay for the same quantity. In mid-2018 he must work longer still, in the unlikely event beef can be found.As in all hyperinflations, the problems is that the government is printing too much money. Way too much!!
Prices are increasing at an ever faster rate. A large coffee with milk cost at least Bs.S.80 (Bs. 8,000,000) in Caracas on the 11th of September 2018, 78% more than the price of week before, and double what it cost 15 days ago and 220% more than five weeks ago.
Venezuela’s monetary base – the amount of money printed by the government – increased by an extraordinary 30% in one week alone at the end of August. The move by the regime to remove 5 zeros from the currency and place greater emphasis on its Petro cryptocurrency (since revealed by a Reuters investigation to be largely imaginary) seems to have been a smokescreen for even greater money-printing.But why print this amount of money, given you know what will happen?
In fact, it seems that physically printing money is beyond the means of the regime. As Venezuela’s banknotes are printed abroad, they have to be imported at significant cost to the government, which has led to severe shortages of physical cash. Since 2014, the number of active ATMS has plummeted to around 9,000, while card readers have multiplied.
The regime is printing money because it has little other means of staying afloat. It has largely destroyed the private sector through nationalisation and price control. Oil output is at its lowest level in more than 50 years and foreign reserves are at the same level as 1974 and plummeting downwards.Hyperinflation is just another sign, if you needed one, that the regime's economic policies are just not working. You have to wonder just how long this can go on. Hopefully not too long.
In fact, the new Siri was quite limited. Throughout its years of development, managers had asked that the geniuses writing the code include some way to understand trade-offs between the five living standards objectives. In the end it was decided that “opportunity cost” was simply an intellectual concept, had no practical use, and attempting to include it could break the whole application.This gets at one of the two basic questions about Treasury's "Living Standards Framework" I've had for some time now. Just how do they plan to trade-off one dimension in the framework against another? The second question is, Given that all the dimensions seem positively correlated with economic growth, what the point? Why not just concentrate on economic growth?
And anyway, hardly anybody in the building had even heard of opportunity cost – how important could it be? – and so the application shipped without it.
Examples of geographical clustering in industries, such as Silicon Valley, suggest that firms have potentially positive external effects on other firms' productivities. Dave Donaldson discusses his research on the extent to which this is taking place, the strength of these economies of scale - for firms, workers, and consumers - and the role the government can play to foster this.
About a month ago, President Trump walked up to a podium, and followed through on a big campaign promise. He said the U.S. was going to impose a 25-percent tariff on foreign steel, and a 10-percent tariff on foreign aluminum.
#833: Worst. Tariffs. Ever.
His announcement was met with a lot of face-palming from economists. Why? Because we've been down this road before.
Today on the show, we learn how the Smoot-Hawley tariff act of 1930 helped tank the world economy. And why it means that today, 90 years later, President Trump has the power to start what many people say is a trade war.
The Auckland venue for New Zealand's Americas Cup defence was agreed this week and will go to Auckland Council for sign off tomorrow. Yesterday, when I spoke to the Economic Development Minister David Parker about the sign off for the America's Cup village he was talking up the economic dividend the required investment of over two hundred million dollars of public money will yield. New Zealand Initiative economist Sam Warburton heard our interview yesterday and is unconvinced. He's in our Wellington studio.
Even if your trading partner dumps rocks into his harbour to obstruct arriving cargo ships, you do not make yourself better off by dumping rocks into your own harbour.Alas in a trade war as soon as one country dumps rocks in its harbours everybody starts dumping rock in theirs, and everybody losses. So no matter what some twitting presidents seem to think, trade wars are not easy and nobody wins them. They really are a lose/lose proposition.
