Wednesday, July 13, 2016

Taxpayers Need to Shine Light on Solar Energy

In 1982 as a graduate research student at the Department of Energy’s (DOE) Oak Ridge National Laboratory, I worked on solar energy projects. At the time, the goal was to replace fossil fuels with solar energy in the production of electricity. As an infant industry, it was argued that all solar needed was short-term taxpayer subsidies to become competitive with its elder rivals. However after 34 years and massive taxpayer subsidies, the industry still cannot compete cost-wise with rival energy sources in pro-ducing electricity.

The latest DOE data show that in 2013 taxpayers showered solar energy with $4.4 billion in subsi-dies for a mere 19 million megawatt hours (MWH) of electricity production, or one-half of one percent of total electricity usage for the year. That works out to $23 per MWH when the average retail price for electricity was only $13 per MWH. In addition to these subsidies, the federal government invested in scores of failed solar energy firms including $535 million in Solendra, $1.5 billion in Sun Edison, and even $2.7 billion in Spanish solar energy giant, Agengoa.

Despite the subsidies and excessive costs per MWH, advocates argue that solar energy remains an infant industry that needs taxpayer funds and regulatory coddling. If the goal is to reduce CO2 emissions from coal-fired electricity generation, a better approach is to introduce a carbon tax taking the decision making out of the hands of market meddling politicians, and putting it into the hands of individuals and investors with “skin in the game.”
Ernie Goss

Tuesday, June 14, 2016

Trans Pacific Partnership A Winner for U.S.: Politicians, Left and Right, Are Wrong

When politics and economics collide, economics comes up roadkill. Take the case of the Trans Pacific Partnership (TPP). More than 99% of economists support this trade pact, yet 100% of individuals still in the race for the U.S. presidency are opposed to opening up Asian markets to U.S. manufacturers, businesses and farmers via TPP.

In October 2015 in Atlanta, the Obama Administration reached agreement with Japan, Vietnam and nine Pacific Rim nations to reduce trade barriers to produce the largest trade pact in the nation's history.

Due to reductions in trade restrictions, the USDA estimates that implementation of TPP will expand U.S. sales abroad by $130 billion annually. According to my calculations, if agriculture accounts for its historic share of U.S. exports, TPP would boost agricultural sales by $8.4 billion, and U.S. net farm income by approximately $1.0 billion in one year alone.

The deal, however, requires Congressional approval and both Democrats and Republicans have finally found something they agree on----rejection of TPP, economic jingoism, or what I will call "economic tomfoolery."

In 2015, the U.S. was the second largest exporting nation, behind only China. In that same year, the U.S. worker was the most productive on the face of the earth. Slinking into protectionism by rejecting fair and free trade agreements only subsidizes the less productive, and slows overall economic prosperity. Ernie Goss.

Tuesday, May 17, 2016

Healthy Job Growth, Unhealthy Economic Growth: More Regulations Contribute to Weak Economy

Without even a hint of irony, President Obama last week sold, and even trumpeted, his administration's economic accomplishments to the national press. But much like Arthur Miller's Willie Loman, or Meredith Wilson's Harold Hill, the sales job stands in stark contrast to reality.

True, government data shows the U.S. unemployment rate stood at a healthy 5.2 percent with more than 200,000 jobs created each month over the past two years. On the other hand, government data indicated that the overall economy expanded at an annualized pace of only 1.4% for the final quarter of 2015 and a 0.5% rate for the first quarter of 2016. This seemingly inconsistent data, that is solid job growth and lousy overall economic growth, can be reconciled by peeking behind the headline data.

Since the economic recovery began in July 2009, GDP growth expanded at the slowest pace of any 7-year period since 1947. The brisk job growth has been in part-time, low wage and/or low productivity occupations and industries. For example, over the past two years, a reduction in the average hourly work week resulted in effective job losses of almost 420,000. Furthermore, output per worker since the beginning of the economic recovery is roughly one-third the long-term U.S. average. As a result, average percentage gains in compensation are now approximately 56% of the long-term average.

But there has been one area of vigorous growth---regulations. According to the Wall Street Journal, the Obama Administration is responsible for six of the top seven years of red-tape creation in the nation's history. This is good for economists and lawyers, but not for other workers.
Ernie Goss

Thursday, April 21, 2016

Environmentalism Starves Zimbabweans: GMOs the Latest Target of Anti-Science Zealots

The severe drought and three million starving citizens did not prevent the Zimbabwe government from rejecting food aid earlier this year. What accounts for this hazardous government policy? Zimbabwe now blocks any food aid that includes genetically-modified-organism (GMO) ingredients.

Sounding like a European Greenpeacer, Joseph Made, the Zimbabwe Minister of Agriculture declared that "The position of the government is very clear. We do not accept GMOs as we are protecting the environment from the grain point of view." But the science examining GMOs is more conclusive than research behind Made's baseless position. Since appearing in the lab three decades ago and in supermarkets in 1994, 1,700 peer-reviewed safety studies have been published focusing on human health and the environmental impact of GMOs. The scientific consensus from this research is that existing GMOs are no more or less risky than conventional crops.

Furthermore according to the U.S. Department of Agriculture, farmers using GMOs generally use less insecticide, obtain higher yields, and save farmer production time. As a result of its advantages, GMOs accounted for almost half of total land used to grow all U.S. crops in 2013.

African policymakers should look to science, not European environmental Luddites for food policy.

Ernie Goss

Tuesday, April 19, 2016

Cashless Payments: Benefits for the Poor?


I just returned from a conference of the ABA Business Law society in Montreal, where I was joined by several pals (Erin Fonte, Jillian Friedman, and Denis Rice) to present on the topic of The Emerging Cashless Society.  Movement away from paper money (or coins) to electronic payments is a global phenomenon.  While other countries may be leading the United States in moving away from cash, the United States is not far behind.

This phenomenon is primarily a product of private ordering.  People choose to transact business with credit cards, mobile payments, or other technologies such Pay-Pal or Dwolla rather than using currency. ( I like to use my Android Pay feature when I am at Whole Foods or Trader Joe’s.  In fact, when the fellow ahead of me uses cash, I cannot help wondering if the young clerk is really thinking, “what are these green papers and why do they convey value”?)  We like the convenience, as well as some of the additional services like fraud protection, dispute resolution, and airline miles that we get with other payment media, which cash cannot deliver.   

Governments are also pushing in this direction.  Cash presents both opportunities and problems.  Problems emerge because of its anonymity and untraceable character, which permit peer-to-peer transactions without an intermediary. Criminal enterprises prefer the certainty and finality of a cash exchange (i.e., the counterparty cannot stop payment on the check or effect a charge-back when the illicit goods are defective), as well as anonymity that cash facilitates.   That anonymity also creates a possibility for tax avoidance, even among otherwise lawful enterprises, as amounts received or paid are known only to the parties exchanging cash.  Without transmission through a network that requires an intermediary to assist in the transaction (such as a bank or payment processor), cash keeps some information private.

A private sphere presents a threat to government, particularly when that sphere can be populated with those hatching schemes that might threaten the wellbeing of others.  But the scope of that private sphere can be very important to people who are engaged in legal activities that have nothing to do with money laundering or tax avoidance.  This is a growing area of tension in our society.

Cash also plays a role in monetary policy that can become an important means of government finance. By printing paper money and using it to buy other assets (such as debt), goods and services, government effectively gets an interest free loan of potentially unlimited duration.  The “federal reserve note” in your pocket bears no interest and has no maturity date.  This feature of money, known as seigniorage, amounts to billions of dollars each year, giving that more than $1 trillion of currency is in circulation.  Although electronic forms of money could also deliver this benefit, some economists have opined that in a cashless society, the money supply likely shrinks as there would be less demand for paper money to be stashed away.
 
Government may also impose an implicit tax in the form of  inflation, which affects  all who hold cash, whether in paper form or in demand deposits.  That large stash of cash that Walter White buried in the desert in Breaking Bad loses value over time. Unlike a demand deposit, which can be readily transferred or reinvested in other accounts or assets with a compensating interest rate, it can be harder to invest that stash of cash, particularly if you have problems with money laundering rules like Mr. White did.

But restricted investment opportunities also affect the poor, who may also lack access to banking services (or face high transaction costs) and must hold and conduct their transactions in cash.  The amounts of cash they have are often not sufficient to participate in investments that might compensate for inflation risk.  Moreover, the cash payments  that they expect from wages, pensions, or government benefits are also subject to the erosion, as these amounts adjust only periodically, while  the corrosive effect of inflation is continuous.  (Of course, this affects all wage earners, not just the poor.)

Although debtors may  benefit from inflation if the interest rate is lower than the inflation rate, the poor who have debt are often put into high risk pools with higher interest rates.  In contrast, note that this week, the WSJ reported that some government debt is actually delivering a negative real interest rate due to the fact that the nominal interest rate is actually less than some measures of inflation. Government may benefit from this policy, but the common man may not (unless he, too, has long-term debt at favorable rates).

Private charities, including the Gates Foundation, have been active in working on improved financial services for the poor.  But these services are the product of innovations in payment processing, credit, and risk assessment, which are generally driven by a motivation for profit.  The ability to make payments electronically with lower transaction costs than cash and the ability to access lower-cost forms of credit will improve their wellbeing.  Innovations driven by the incentive for profit offer the possibility of benefitting the common man in significant ways.  But beware of government efforts to stoke the fires of inflation, which can undo these positive effects. 

EAM

 

Friday, March 25, 2016

Free Trade, Carrier, and Social Capital -- Trust in the Marketplace


As discussed in my prior post, free trade commitments produce winners and losers based on diffused decisions in the marketplace, rather than centralized government choices.  The capacity of government to redistribute creates a market for influencing those decisions.  This likely explains the fact that the Washington, D.C. metro area has the largest concentration of so-called “super Zips”, which reflect where high-earning individuals live.  Brokering that redistribution apparently pays very well.  (For more on this topic, see this story and interactive map:  http://www.washingtonpost.com/sf/local/2013/11/09/washington-a-world-apart/ .  And that compensation likely comes from the rest of us.

Samuel Gregg lays the foundation for resisting a regime in which government is empowered in this way in his recent insightful essay, Crony Capitalism:  Inefficient, Unjust, and Corrupting, http://www.crisismagazine.com/2016/crony-capitalism-inefficient-unjust-and-corrupting (March 24, 2016).  Gregg points out that crony capitalism is not merely a problem of authoritarian regimes, but it can also thrive in democracy.  It often results in redistribution that favors the connected class, rather than benefitting the common good.  Economic liberalization limits opportunities for politicians to provide these goodies in exchange for political support.  Shrinking government’s power also shrinks the power of the special interest and the lobbying class.  (That is probably not good for my people, the lawyers who often populate the lobbying class.  But it would be good for the country.)

One important clarification needs to be made about free trade commitments.  The fact that we allow the private sector to make decisions about where to produce, what to produce, and where to source their purchases, does not mean that these decisions are free from other moral considerations.   In fact, those other moral considerations are playing heavily into the reason that a departure like that announced by Carrier causes so much consternation.

As Francis Fukuyama explains in Trust, his seminal work on the role of social capital in economic life, economic life and social capital are inextricable intertwined:  “[O]ne of the most important lessons we can learn from an examination of economic life is that a nation’s well-being, as well as its ability to compete, is conditioned by a single, pervasive social characteristic:  the level of trust inherent in the society.”  (page 7).   Economic activities of any scale require human beings to collaborate.  Trust makes that collaboration possible. 

Moreover, economic activity is not an end in itself.  It is ultimately directed toward human good, meeting needs and wants with goods and services.  (Why do we call tangible things “goods”, if they are not designed for our benefit?)  Humans possess dignity that is expressed through meaningful work, producing things that their fellow humans need.  As Fukuyama explains, work and the fruits of labor, including money, are forms of recognition, as well as the source of satisfaction of material needs.  And that recognition comes from a community.  Solidarity with that community can provide important benefits, which cannot be ignored.

When a company like Carrier decides to outsource production, many will justly view that as a breach of a social contract between the workers and the company.  This produces mistrust, which can be magnified by other behavior, such as executives profiting while their fellow workers lose their jobs.  The result is greater division between workers and administrators, rather than solidarity.  Fukuyama provides several examples in which companies made decisions to protect their workers, which resulted in long-run benefits, including greater espirit de corps, cooperation, innovation, and productivity.   The pursuit of self-interest does not equate to advantage without considering the consequences on these relationships.

Outsourcing is the product of people making choices, sometimes choices with which we will disagree.  Will government make better choices than private enterprises?  We cannot go that route without fueling a fire which empowers government to do these things.  Changing the identity of one’s employer – working for the government instead of the private sector – does nothing to change the risks of bad decisions.  There is a role here for voice in the private sector, including the voice of board members and those who choose them. 

Carrier will likely pay a price for its decision, which can be seen in the loss of social capital.  It may experience problems with other workers, who see that the company is willing to throw them under the bus if it means extra profit.  (Of course, sometimes that may be inevitable – if goods cannot be made profitably, changes must occur.  Even the best of intentions cannot prevent some disruptions that come from market forces.)   The public may also choose to reject Carrier products because of its decision.  Ironically, as noted in my previous post, Carrier touts its record of “sustainability” in environmental matters.  But is “sustainability” also a feature that could describe a commitment to the community in which one conducts business?  Query whether we might benefit from a signaling mechanism that would more clearly transmit information about policies, commitments, and practices regarding employment and community development.   My colleague Vasant Raval and I have a working paper in this area, which I will discuss in a future post.

Creighton's Institute for Economic Inquiry is co-sponsoring an symposium, “Growing Trust in the Marketplace, which will be held on April 22, 2016, in the law school on the Creighton campus.  This symposium will take up the matter of trust and social capital in economic life.  See the IEI website for more information, under the “events” tab.  Preregistration is required if you would like to attend the lunch.  Here is a link: http://www.creighton.edu/instituteforeconomicinquiry/events/ .  I will be discussing the symposium tomorrow morning with Jeff Beals on the Grow Omaha show at 9:25 a.m. on KFAB radio (1110 a.m.)

Ed Morse

Thursday, March 24, 2016

Free Trade, Carrier and the Political Milieu



Free trade is like virtue – it is widely approved, but hard to practice.  Carrier Corporation’s recent announcement that it is moving manufacturing operations from Indiana to Mexico illustrates this tension.
 

Carrier, a subsidiary of United Technologies, manufactures heating and cooling systems and related products.  It also claims the mantle of an environmental steward: “Whether it’s reducing our greenhouse gas impact, leading the phase-out of ozone-depleting refrigerants, or introducting many of the world’s most energy efficient building solutions, at Carrier, we incorporate sustainability in all that we do. To us, it’s only natural.” https://www.carrier.com/carrier/en/us/sustainability/
But like all manufacturers, sustainability commitments require economic profitability.  Apparently, the company found that significant wage savings could be realized by moving some manufacturing operations to a lower-wage environment. Mexican workers, who would accept lower wages than their U.S. counterparts, are winners from this transaction. But this would mean that 1400 workers in Indianapolis and another 700 in Huntington would lose their jobs.
Mexican workers, who reportedly will earn about $3/hour vs. $20/hour for the U.S. workers, gain an opportunity to raise their standard of living.  The company's labor cost savings will likely translate either to lower costs for purchasers of Carrier products, or higher profits for shareholders of Carrier’s corporate parent, United Technologies. (Incidentally, UTX shares have increased by more than 10 percent following this announcement – though other confounding variables may explain this change. )
The distribution of those profits and/or cost savings is likely to be diffused throughout the economy. The consumer who pays less for the air conditioner may be able to afford new blinds, or maybe she will outsource her tax return preparation, landscaping, or hair styling services, thereby benefitting others in the economy. The same may be true for the UTX shareholder, who may be depending on investment income to support her retirement. But it seems that the costs are focused in the particular locales of the U.S. workers. And many of us are sympathetic to their plight. We know that it takes money to raise a family, and that requires good jobs and skills.

 
What can the government do? It could provide tax incentives to keep manufacturing in the U.S.  The federal government has actually done this. Examples include IRC § 199, which allows an additional deduction of up to nine percent of wages attributed to qualified domestic production activities against taxable income. This provision does incentivize domestic production, but its effect is muted. If the taxpayer is eligible for the full nine percent deduction, this translates into roughly a three percent tax savings (assuming, for ease of computation, a 33% marginal tax rate).  But that kind of reduction cannot overcome the labor cost savings that could be achieved by outsourcing production.
State and local governments also provide incentives, which can reduce state and local taxes. But since these are often small in relation to labor costs, the impact of those provisions may not be sufficient. Moreover, those incentives create local disparities, as small businesses often do not receive these incentives, while larger ones do. Is it really fair to tax the mom and pop shop at a higher rate than a large business?

 
Notably, Carrier also reportedly received a federal tax credit under IRC § 48C, which was designed to help finance manufacturing through advance tax credits associated with investments in so-called “green” production. This may confer a significant tax benefit, but it does not contain any clear rules about what happens if the facility stops production.  (If I get to invest, keep the tax credit, and then move on when a better deal arrives, it is kind of like crossing your fingers at a wedding ceremony – sorry, honey, but a better mate just came along.)
There is also the prospect of imposing a tariff on goods imported back into the U.S. from the foreign facility. That could sting, particularly if the U.S. is a major market for the good. It could unwind the prospect of labor cost savings, as well as lower costs for consumers or higher profits for shareholders by channeling these amounts to the government. It sounds like a magic solution. If it was effective -- and one of the candidates on the campaign trail suggests it would be – those good folks in Indiana would not be losing their jobs. It all sounds so sensible. And it makes political sense, too, since those who care about the Indiana workers will buy into it and may support the candidate, while those who are worried about costs and profits are probably not thinking much about their lost economic benefits, which are diffused and often hidden.

 
But of course, that is not the end of the story.  Mexico may respond by imposing a tariff on U.S. corn. That will be bad for the corn farmers, and for all their suppliers and employees. They will see the effects on their profits, and they will call their Senators and complain about the lack of free trade. And then there are the spillover effects of higher costs and lower profits caused by free trade –  consumers will pay more, and they will not outsource their tax return, landscaping, and hairstyling. Those who might have provided those services will wonder why business is slow, but they may not realize it is caused by the resulting restrictions on trade.  The workers in the Indiana plants would be OK, though, for the time being,  as long as their production is economically viable.   But can that last if the costs are not competitive in a global marketplace?  The government may also get to collect some tariffs, but do you think they will redistribute these funds as effectively as the accountant, the landscaper, and the hairstylist?
 
In many ways, the free trade argument resembles the argument that Ernie Goss and I have made about casino gambling. In our book, Governing Fortune (U. Mich. 2006), we argued that casino proliferation is the product of a political bargain in which costs are diffused and hidden, and benefits are apparent and concentrated. Trade restrictions may share these features, in that they deliver political benefits to those who might lose jobs, but they impose costs that are diffused throughout the economic landscape.

 
Moreover, trade restrictions  achieve these results through empowering government as the intermediary who can raise and lower prices at will. Will such power be exercised prudently and for the common good? Really? I guess it depends upon your understanding about human nature. If you think that some humans may seek out self-interest over the common good, do you think that this condition changes when your employer becomes the government, instead of the private sector?   Free trade is not a utopian solution. It produces winners and losers, but they are chosen in an impersonal manner through market forces, not by government minders.

[Note:  A similar version of this post can also be found at the Institute for Economic Inquiry blog, which can be found here:  http://blogs.creighton.edu/iei/ .]
Ed Morse