Archive for the Category Misc.

 
 

What’s the matter with Kansas? (big government)

Kansas elected a governor named Sam Brownback in 2010.  He cut income tax rates, promising faster economic growth.  It didn’t work out, and now he’s in a close race for re-election.  Last summer over at Econlog I focused on the absurd claim that these income tax cuts should be expected to raise revenue.  (Not sure who made them, either actual supply-siders, or liberals like Paul Krugman fantasizing about nutty supply-siders.)  In any case, there is virtually no way a state income tax cut cut could boost state income tax revenue, given how low state MTRs are compared to federal MTRs.  Indeed in my Econlog piece I pointed out that the total top MTR in Kansas rose dramatically under Brownback, due to the Obama tax increases.

But the top rates rose even more in other states, so why didn’t Kansas do a bit less bad?  I’m not certain, but I think people tend to expect too much from slight tinkering with taxes and spending. Supply-siders have no one but themselves to blame when they oversell a policy.  I wouldn’t blame the Kansas voters for dumping their governor.

To get a better perspective on what’s wrong with Kansas, let’s compare it to the other 5 states in the center of the country.  Foreign readers know about Texas, but stacked on top are 5 boring, anonymous, rectangular-shaped states.  These cover the Great Plains, a desolate windswept prairie with cold winters and hot summers.  Nothing like the south of France.  Basically there is no reason that any sane person would want to live in any of those 5 states.

[I can cop a superior attitude because I grew up in more sophisticated Wisconsin.  Which has trees. And lakes.  Even as we midwesterners resent the condescension of the coastal elites, we develop our own pecking orders, our own prejudices.]

Here is data I found for state government spending as a share of gross state product in fiscal 2015, for the Great Plains states (north to south):

North Dakota:  16.6%

South Dakota:  13.9%

Nebraska:  17.7%

Kansas:  18.3%

Oklahoma:  16.9%

Texas:  15.2%

Notice that Kansas is the big spender, even after Brownback.  By comparison, California is 18.1%. (Is this data accurate?)

It’s hard to know which of America’s states is the least well known.  Texas is famous.  Oklahoma was a musical.  Kansas had The Wizard of Oz.  Nebraska has Warren Buffett. And North Dakota is newly famous for “the Bakken.”  The only thing marring South Dakota’s prefect blandness is Mt Rushmore.

I would also say that South Dakota has the least going for it.  Three of those states have oil, and Kansas has some affluent suburbs of Kansas city, without the inner city poverty.  Nebraska has slightly better farmland.  And yet by some miracle, South Dakota is booming.  Here’s The Economist, in an article titled “Quietly Booming:  How a neglected state is succeeding”:

Quiet success might be South Dakota’s motto. It has no oil industry; its neighbour North Dakota, with its shale-oil boom, gets all the notice. It has no large military base. There is not even an influential university. Yet South Dakota’s 3.7% jobless rate is the third-lowest in America. The rate is even lower in Sioux Falls, which has the fourth-fastest-growing economy in the country.

The state economy used to rest on farming, but today hospitals and financial companies are among the chief employers. The change began in 1980 when the state enacted financial reforms, prompting Citibank to move its credit-card business there. So many banks followed that the state now has more bank assets, $2.76 trillion, than any other, including New York.

Manufacturing and biotech are thriving, too. Last year Marmen, a French-Canadian wind-turbine manufacturer, opened its first American plant not far from Sioux Falls. Bel Brands, the American arm of a French dairy company, has also invested in the state. South Dakota sits usefully in a nexus of north-south and east-west interstate highways. There is also a decent labour pool. Many workers are little more than a generation from the farm: absenteeism is low, and the unions insignificant.

Taxes are attractively low. South Dakota has no state income tax, personal-property tax, inventory tax or inheritance tax (which has led to a growing trust industry). The regulatory climate is also benign. Dennis Daugaard, the Republican governor, believes in keeping government out of business’s way. “When it comes to laws,” he says, “more isn’t always better.” Since 2011, when he came to office, he has repealed 3,724 regulations.

While people have been looking at Kansas, South Dakota is the real supply-side miracle.  In my view the key is the lack of a state income tax.  While Brownback did cut the top rate in Kansas, it was merely to 4.8%, only slightly below the 5.3% rate in Massachusetts.  In contrast, the top rate is 0% in South Dakota (and Texas.)  Personally, I wouldn’t move to South Dakota if it was negative 10%.  (I plan to retire in California.)  But the zero rate is probably low enough to draw in a few hardy midwesterners.  But a 4.8% rate?  Sorry Brownback, that’s not going to produce any miracles, not when you are sandwiched between Texas and South Dakota.

PS.  The Economist mentions that the Indian reservations in western South Dakota are very poor, as firms don’t want to invest in a place where they would not be able to have any property rights.  I don’t recall seeing that issue discussed in the blogosphere.

PPS.  Matt Yglesias and Ryan Avent and Paul Krugman are right; the coastal areas need to build much more housing.  People want to live in California despite the horrible state government. That’s why their housing prices are so high.  Instead people are forced into places like the Great Plains. And that’s a crying shame.  (Did I mention that I plan to retire in CA?)

PPPS.  Koch Industries is based in Wichita, Kansas, and uses a Thomas Piketty-like egalitarian management approach:

The system is highly democratic. Koch has an unusually “flat” organisational structure for a company its size. Workers can earn more than their bosses. High-school-educated farm boys from Kansas can rise faster than Ivy League MBAs and end up running multibillion-dollar divisions.

PPPPS.  After doing this post I came across an article in the WSJ on the new rankings by the Tax Foundation:

Fast-growing Wyoming [#1 tax climate] has no corporate or individual income tax, but it can’t rest on its laurels. Wyoming is facing new competition from states seeking to modernize their tax systems to compete for jobs and opportunities. Kansas fell three spots to 22nd despite its income-tax cuts because other states didn’t stand still.

Matt Yglesias’ recent posts

Why do I like Matt Yglesias’s posts?  Consider 5 done in the past few days:

Car dealers are awful. It’s time to kill the dumb laws that keep them in business.

BTW, Has anyone asked Warren Buffett if he plans to advocate ending the horrible laws that protect car dealers from competition?  (Like those car dealers he just bought.)  Or whether he intends to support the dealers so he can accumulate even more billions of dollars by ripping off ordinary Americans?  He seems more honest and idealistic than the average Ukrainian oligarch, but it’d be nice to know for sure.  And don’t even ask about the “free market loving” GOP.

DC’s streetcar isn’t even running and it’s already making buses slower

But streetcars look neat . . . kinda European.

Amazon is doing the world a favor by crushing book publishers

I really, really, really dislike publishers.

Democrats are using Ferguson to drive black turnout. But they’re in charge in Missouri.

Surely the Dems would not incite racial fears for selfish electoral reasons?

Obama’s latest plan to boost the economy? Bring back subprime mortgages

After the 2008 crisis just about everyone on the left blamed it on “deregulation.”  (Wait, if banking was deregulated then why did I have to sign 20 consumer protection forms every time I refinanced in the early 2000s?)  I pointed out that the regulators also missed the crisis, so what makes us think they would do any better the second time around?  My liberal friends replied that we now know the evils flowing from unrestrained lending to people who couldn’t possibly repay their mortgages.  But that seemed like too low a bar to me, closing the barn door after the horse had left.

Sure, now it’s obvious that subprime loans were a disaster.  But if the banks had known that in 2004-06 they obviously wouldn’t have made those bad loans, and they would have also refrained from investing in MBSs MSEs.  Yes, regulators have learned their lesson, but so have banks!  Banks are also tightening up on their standards.  So I ask again, what makes us think regulators could do any better next time? And isn’t it setting an excessively low bar to merely have regulators prevent an exact repeat of what went wrong in the 2006 housing bubble?  Anybody could do that!

Well I should have saved my breath, for as Yglesias points out the bar might have been set way too low, but the regulators still couldn’t clear it.  While banks have tightened their standards, regulators have returned to encouraging subprime mortgages.  And this occurred under a supposedly pre-regulation pro-regulation liberal Democratic president.  If regulation doesn’t work now, how is it supposed to work under the next GOP president?  Maybe Paul Krugman can tell us.

Krugman mocks conservatives who predicted inflation, and still insist the real problem is easy money.  And rightly so.  But I’d say the same about any liberal blogger who still thinks “deregulation” was the cause of the 2006 bubble.  If they haven’t learned by now that our regulators are utterly incompetent, then they never will.  Those progressives should be mocked in exactly the same way Krugman mocks conservatives who still insist the Fed’s “easy money” policy will soon create inflation.

PS.  I like the way Reason.com defined the new policy:  ”Insanity defined.”

PPS.  I wish Kevin Drum the best.  I’ve never met him, but based on his writing he seems like a great guy.

Bayesian updating

Here are some interesting articles that I ran across.  First one from the Economist on the real (actual) minimum wage—zero:

Perhaps not coincidentally, the number of unpaid internships has grown just as hiring has become riskier, pricier and more complex. In recent years anti-discrimination and unfair-dismissal rules have been tightened, and minimum wages raised, in many rich countries. The growing cost of benefits such as pensions, health care and maternity leave makes employees more expensive. Interns have therefore become an appealing alternative.

I’ve recently argued that CEOs should be paid far more than they were paid in the 1960s, because their jobs are much more consequential.  Here’s evidence that they are not overpaid:

So, if the shares rise on an executive’s death, that means he was overpaid; if they fall, he was not. By this measure only 42% of the bosses studied were overpaid; furthermore, those with the most eye-popping rewards were found to be giving the best value for money, as measured by the share-price slump when they passed away.

The study also reckons that of the increase in value that results from a firm hiring an executive, he gets 71% and the shareholders therefore get 29%. In the sense that investors at least get some positive reward from the relationship, executives as a whole are not overpaid.

Followers of Mr Piketty are unlikely to be convinced. They would say that even when bosses add more value than the amount by which their pay exceeds the average, they are still overpaid because the average is itself excessive; and that it is inherently indecent for bosses to get such a big share of the gains from their relationship with their firms.

Yeah, they would say that, wouldn’t they?

Recently I did a long post at Econlog saying education wasn’t very important (at the margin in developed countries) and that spending more money wouldn’t have much impact.  I did point to one strong counterargument, a study showed that having a single good teacher at a young age can substantially impact a person’s life outcome.  I found that result quite surprising, but now it looks false:

Estimates that adjust for changes in students’ prior achievement find evidence of moderate bias in VA scores, in the middle of the range suggested by Rothstein (2009). The association between VA and long-run outcomes is not robust and quite sensitive to controls.

Also check out Bryan Caplan’s excellent post on the dubious merits of compulsory attendance laws.

Update:  Tyler Cowen cites a study that conflicts with my prior belief.  But is it scalable? And does it go beyond improving test scores, to improving life outcomes?

I’ve also argued that most anomaly studies in finance are merely data mining, and hence are essentially worthless.  Look at the last sentence in this abstract:

Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. Our new method allows for correlation among the tests as well as missing data. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false.

I’m skeptical of proposals to “regulate” the financial system.  Here’s one example:

“DON’T bail out the big banks on Wall Street another time,” thundered Richard Durbin, an American senator, “Once in a political lifetime is enough!” His amendment to the Dodd-Frank financial reform of 2010 capped the fees banks can charge merchants to process debit-card transactions, on the grounds that banks were gouging businesses and their customers. But the limits on “interchange fees”, as the financial jargon has it, have not worked out as planned. They have resulted, by one calculation, in the transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. These were not the beneficiaries Mr Durbin had in mind when the amendment came into effect three years ago this week.  .  .  .

Meanwhile the banks, which are in even worse shape, have tried to make up for the lost revenue with higher charges for other things, including monthly fees for having a debit card, or even a current account. In 2009 banks provided 76% of America’s current accounts free of charge; last year the figure was only 38%. The higher charges in turn, have pushed 1m Americans out of the formal financial system—not the result Mr Durbin was aiming for.

I predicted that Hollande’s socialist policies would fail, and he’d do a U-turn just like Mitterrand:

The new team is engineering a shift in economic policy not unlike that under Mitterrand, who made a sharp U-turn in 1983, also after two years in office. Like Mitterrand, Mr Hollande has so far spent most of his time making matters worse. Having declared during his campaign that the “world of finance” was his enemy, and promised his 75% top tax rate, Mr Hollande increased taxes by €30 billion ($40 billion) in his first year. He reversed some of Mr Sarkozy’s popular work-friendly policies, such as tax-free overtime. He sent out mixed messages to foreign investors and entrepreneurs. He failed to curb public spending. And he brought in new rules that choked growth in sectors such as construction.

On Mr Hollande’s watch, the overall tax take grew from 43.7% of GDP in 2011 to 46% in 2013. Annual income growth in 2012-14 has averaged a mere 0.4%. Unemployment, which Mr Hollande had promised to bring down, edged up to over 10%. Confidence collapsed, investment was put on hold, and many of the rich left for Brussels or London. To take but one example of the damage Mr Hollande has wrought, new rent-control rules designed by Ms Duflot (who refused to serve under Mr Valls because she considered him too right-wing) have battered the construction industry. In the two years to January 2014, new housing starts fell by nearly a quarter.

Now the government has gone into reverse. It has embraced a business-friendly mix of policies in a bid to revive the private sector. This may stop short of what the economy needs to get back on its feet, but it contains a decent dose of common sense. In 2015 a cut in the hefty social charges paid by employers will come into full effect, in an attempt to encourage hiring. Savings of €21 billion will be squeezed out of public spending, including €9.5 billion from the social-security system. Perhaps most symbolic of all, the 75% top tax rate, set up initially as a temporary two-year measure, will be quietly allowed to die.

If the Piketty/Krugman soak the rich policies won’t work under a socialist government in France, when and where will they work?

In other posts, I’ve expressed concern over eco-terrorists (think unibomber) who believe the world is overpopulated. Soon they’ll have a weapon:

Nearly 50 cities, mostly in America and Europe, are now home to groups of biohackers or amateur laboratories where they can meet and experiment. Besides Open Wetlab, these include Biocurious in Sunnyvale, California, Genspace in New York and La Paillasse in Paris. The number of biohackers around the world is anybody’s guess, but the movement’s main online-mailing list boasts nearly 4,000 members and is growing rapidly.

What drives the movement is the belief that “biology is technology” (to quote the title of a book by Rob Carlson, a DIYbio pioneer): that DNA is a form of software that can be manipulated to design biological processes and devices. But some people worry that amateur laboratories could create killer bugs or provide training for bio terrorists. For the moment, at least, such fears seem premature.

For the moment . . .

Someday I’ll change my mind, and stop being so dismissive of new theories that challenge my prior beliefs.  But not today.

HT:  Tyler Cowen

Layoffs reach the lowest level EVER

A few weeks ago I pointed out that new claims for unemployment (4 week average) as a share of total employment had reached the lowest level since April 2000.  I predicted it would soon beat that record.  Now it has; they are at the lowest level ever.  Here’s what we know (or at least I suspect) about the new economy:

1.  Low interest rates are the new normal.

2.  Low layoffs are the new normal.

3.  High stock prices are the new normal.

4.  Greater income inequality is the new normal.

5.  Fewer people moving between states is the new normal.

6.  Slow RGDP growth is the new normal, probably due to both slower employment growth and lower productivity growth.

7.  The Great Moderation is back after a one year hiatus (mid-2008 to mid-2009).  This expansion may last a record 10 plus years, but will still be a lousy expansion.  Don’t call it the Great Moderation, call it the Mediocre Moderation.  Mediocre labor markets are the new normal.

8.  Just as overall economic growth reflects deep institutional realities, the quality of macro policy reflects the quality of institutions doing macro teaching and research.  A small country like Canada can easily outperform a big region like the eurozone, if its macroeconomists (Laidler, Rowe, Carney, etc.) are better informed about the realities of monetary economics and AD than those macroeconomists of the eurozone, who don’t even seem too sure of what AD is.  But these differences are not carved in stone—Germany was ahead of the English-speaking world in their understanding of monetary economics during the 1970s.  As the issues change, the relative strength of each country changes.

Update:  The Nikkei Asian Review has published a phone interview of me.  I’m told this is a major Japanese paper.

Quick update on NGDP futures

No one told me it was going to be hard to give away money!  Seriously, there are a few more complications than I anticipated, and I am now waiting for specific instructions from iPredict and Hypermind about how to proceed.  But it will get worked out.

Meanwhile the early Hypermind Q3 futures contract, with 100 euros in prize money, has now been upgraded to a combined Q3 and Q4 with 1000 euros in prize money. So it just became much more attractive.  Recall that at Hypermind, traders do not have to put up their own money–it’s not “gambling.”  But you do need to register first.  

Eventually we will deliver much more money for prizes at Hypermind.

Update:  I was sent the following information:

The real-time forecasts are published on this page, which requires the password: “illusion“.

https://hypermind.lumenogic.com/hypermind/app.html?gtp=vitrine&selection=NGDP

The contracts are at about 34/35 right now, which means 3.4% to 3.5% annualized growth.  That seems like an opportunity.  :)

PS.  Super busy this week.  All I have time for is to point out that the collapse of the Chinese economy, predicted for 20 years, once again failed to materialize in Q3.  Now some brave souls are predicting Chinese growth will slow over time.  You mean they won’t keep growing at 10% as they become highly developed?  I never would have guessed.