Monthly Archives: December 2013

Introduction to the Pacific Trade Negotiation

The discussion about the closed process around a trans-Pacific Partership was mildly of concern, though not totally surprising.  In general though there isn’t much in the way of issues raised just:  There might be something bad here…

My cousin has been asking me if I’m up to speed on the dangers of the Trans-Pacific Partnership (TPP). I explained to him that Paul Krugman had just declared that the TPP was no big deal, so I assumed it must be awful, but no–I didn’t really know much about it. After reading some of the information he sent my way, I am glad he alerted me to this important issue; I can see why Dean Baker chastised Krugman for his nonchalance, though Baker and I are worried about (slightly) different aspects of it. In this post, I just want to “introduce” Free Advice readers to the TPP, to make sure you know why more and more people are warning about it.

Here’s Wikipedia’s opening description:

Since 2010, negotiations have been taking place[9] for the Trans-Pacific Partnership (TPP), a proposal for a significantly expanded version of TPSEP. The TPP is a proposed trade agreement under negotiation by (as of August 2013) Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.[10]

The TPP is intended to be a “high-standard” agreement aimed at emerging trade issues in the 21st century.[11] On November 13, 2013, a complete draft of the treaty’s Intellectual Property Rights chapter was published by WikiLeaks.[12][13] This and other leaks have drawn criticism and protest of the negotiations from global health experts, internet freedom activists, environmentalists, organized labor, advocacy groups and elected officials, in large part due to the secrecy of the negotiations, the expansive scope of the agreement, and controversial clauses in the drafts leaked to the public.

The website The New American has a lot of good coverage of the TPP, but this essay from August 2013 is the single best one that gets one up to speed on some of the essential concerns. Here are some key excerpts (bold is mine):

The USTR [U.S. Trade Representative] “Fact Sheet” cites as evidence of its transparency efforts the number of consultations it has held with its selected trade advisory committees and privileged “Civil Society stakeholders.” It states, for instance:

Over the course of the TPP negotiations, USTR has conducted more than 147 meetings with the trade advisory committees. Since June 11, 2010, USTR has posted 110 TPP documents to a website for cleared trade advisors to review and provide comments.

This transparency boast actually exposes a dangerous feature of the TPP process: The TPP documents are not available to the average American citizen, only to “cleared trade advisors.” And who are the “cleared trade advisors”? According to the USTR, these are “representatives from industry, agriculture, services, labor, state and local governments, and public interest groups.” But, apparently, that does not include elected representatives of the American people, since members of Congress have been forced to plead, and threaten in order to get a peep at the secret TPP texts.

For instance, Senator Ron Wyden (D-Ore.), the chairman of the Senate Finance Committee’s subcommittee on International Trade, Customs, and Global Competitiveness, requested copies of the TPP draft documents but was stonewalled by the USTR. When Senator Wyden threatened to propose a measure in the Senate that would force transparency on the proc­ess, the USTR agreed to grant the senator a peek at the documents, though his staff was not permitted to see them. This type of secretive process has no legitimate place in our system of government, and it obviously puts Congress at a distinct disadvantage in the TPP process, since the real work of examining the detailed legal texts normally falls to congressional staff members who are often experts in particular areas of domestic and foreign policy.

Wyden spokeswoman Jennifer Hoelzer…pointed out, “An advisor at Halliburton or the MPAA [Motion Picture Association of America] is given a password that allows him or her to go on the USTR website and view the TPP agreement anytime he or she wants.”

As just one example of the enormous dangers that are lurking in the hundreds (or thousands) of pages of still-secret texts, consider the leaked TPP draft text on intellectual property that would threaten Internet freedom — as well as American sovereignty — with new TPP surveillance requirements. As The New American reported last year, the leaked document would mandate that TPP member nations enact regulations that require Internet service providers (ISPs) to privately enforce copyright protection laws. “Current U.S. law,” noted The New American’s Joe Wolverton, “specifically the Digital Millennium Copyright Act (DMCA), would be supplanted by TPP Article 16.3. This provision in the TPP draft document paves the way for a new copyright enforcement scheme that extends far beyond the limits currently imposed by DMCA.”

The Electronic Frontier Foundation pointed out the TPP threat to Internet freedom:

Private ISP enforcement of copyright poses a serious threat to free speech on the Internet, because it makes offering open platforms for user-generated content economically untenable. For example, on an ad-supported site, the costs of reviewing each post will generally exceed the pennies of revenue one might get from ads. Even obvious fair uses could become too risky to host, leading to an Internet with only cautious and conservative content.

The net effect would be to squeeze out the smaller, independent ISPs, further cartelizing our communications and news media, and eventually wiping out the burgeoning alternative Internet-based news media.

I’ll be returning to this topic in the future, but I wanted to at least make my readers aware of the controversy. The Obama Administration is seeking to restore “fast-track approval” powers on this, which would allow an up-or-down vote on the whole TPP without discussion of its individual components.

As a final point in this introductory post, let me say this: The problem with these “free trade” agreements is that some critics rely on centuries-old protectionist fallacies; they are afraid of “cheap imports.” Anyone familiar with Bastiat understands why such worries are misplaced.

However, those of us who believe in genuine free trade shouldn’t trust government officials when they title something a “free trade” agreement. It doesn’t take years of backroom negotiations to reduce tariff rates. No, something is really fishy with this TPP and other such deals.

Introduction to the TPP
Bob Murphy
Thu, 26 Dec 2013 22:38:01 GMT

Meaningless Sentence of the Day


This NY Times story on the middle class’s struggle with the new healthcare law is generally pretty good, but this sentence struck me as comically meaningless:

Experts consider health insurance unaffordable once it exceeds 10 percent of annual income.

What the heck does this mean?  The typical American spends more than a third of income on housing.  Does that make housing unaffordable?  Presumably not.  What makes 10 percent the magic threshold for health insurance but not for other categories of crucial spending?  Who are these experts, and what criterion do they use to determine what is affordable?
Probably what the sentence means is that people have become accustomed to spending less than 10 percent of income on health insurance and are unhappy when they have to spend more.  But if healthcare costs keep rising as a share of national income, as many economists believe they will, then we will have to adjust our perceptions of what is affordable.
Addendum: The Times story, particularly the graphic, suggests that the implicit marginal tax rate some people face under the Affordable Care Act subsidies can sometimes exceed 100 percent.  It is hard to believe that the law is so badly written as to have this feature, but that seems to be the implication.

Meaningless Sentence of the Day
Greg Mankiw
Sat, 21 Dec 2013 14:54:00 GMT

Why English Majors (and their editors) Should Take an Economics Class

My dear daugher may well major in English too!

To avoid writing silly articles, as appeared in the Sunday New York Times under the title “Triumph of the English Major.” Gerald Howard, a book editor in New York City writes of an early experience:

I had the idea that we should reissue two early novels by the fine writer Alice Adams…
So there I was in our C.F.O.’s office with a P. & L. that just eked out a 7 percent return. He looked at that piece of paper dubiously….Then, with that wry and sad expression with which financial people have regarded liberal arts people since at least the invention of movable type and perhaps even written language, he signed off on my shortfallen P. & L. and said to me, “You know, we could make more money by just putting this advance into a certificate of deposit.”
I knew he was right…C.D.’s were paying 10 percent per annum or more….
However, as I went back to my office I experienced an instance of what the French call “stair wit.” I thought, wait a minute, I am putting that $7,500 to work. It’s an investment. The chain of activity I am putting in motion will give work to printers and shippers. It will provide bookstores (there were still bookstores) with tangible goods to sell at a profit. The revenue from those sales will help to pay my salary, my colleagues’ salaries, even our C.F.O.’s salary. Alice Adams will have some thousands of dollars in her pocket — maybe to invest in a C.D. All this and a few thousand people fewer than I put down on the P. & L. (I’d lied, of course) will have bought and enjoyed two excellent novels that deserved to be in print.
Whereas if we’d just put that money in the hands of a bank, they would just … well, I was pretty hazy on what a bank would actually do with that money, but my general sense was that it would sit there in a vault microbially propagating itself and what good would that do anybody? Economically I was putting my shoulder — or Penguin’s shoulder — to the wheel! I came away with the conviction that I wasn’t useless anymore.

This makes a good quiz question for an undergraduate micro class. Make it an essay question, for the English majors. “What’s wrong with this story?”

There is a reason for that “wry and sad” expression. The French may call it “stair wit.” Or perhaps that was “bêtises d’escalier?” Maybe “fall down the stairs wit?”
Because of course money in the hands of a bank does not “microbially propagate” itself in a way that does no good to anybody. Perhaps I can appeal to literary sensibility with a few song lyrics, explaining what will happen to young Michael Banks’ tuppence invested wisely in the bank:

You see, Michael, you’ll be part of
Railways through Africa
Dams across the Nile
Fleets of ocean greyhounds
Majestic, self-amortizing canals
Plantations of ripening tea

(Ok, the song goes on to “think of the foreclosures..” but we don’t want to get in that here.)
The $7,500 dollars Mr. Howard invested in a book would have been lent out by the bank to someone else, who would have invested it in a better project. Someone might have started a restaurant, or even a bookstore. Every single dollar of goods, every single job created by his investment, would have been created by the alternative, and more.
He just didn’t see the (say) new immigrant, turned down on a loan application for $7,500 to start that lifetime dream restaurant. Or turned down on a mortgage application, thus denying a whole construction crew a summer’s employment. And the lumberyard its sales and so on. The invisible hand is, alas, invisible.
That is a great strength of the market. It works, even when the people involved don’t understand it. Alas, democracy requires voters with some clue.
Oh. And who is this boss who signs off on obviously cooked 7% return projects when CDs were yielding 10? No wonder print media is going down the toilet. And who are the editors who signed off on this piece? I don’t write for the Times (I try on occasion, but they always reject me). But at the Wall Street Journal, they tear apart my prose and push every little detail of fact and logic. Do the NYT editors not know that banks do not microbially propagate money?
Mr Howard concludes

…future epochs will remember us as a coarse and philistine people who squandered our bottomlessly rich cultural inheritance for short-term and meaningless financial advantage.

And that is why you should major in English.

I think it more likely that future epochs, if there are any after we screw this one up, will remember us as a pampered people who squandered our bottomlessly rich scientific and financial heritage by willful ignorance of how it works.
Majoring in English is a fine thing to do. We need more good writers.  But take an economics class, so when you write about the world, your elegant prose does not reflect complete ignorance about how that world works. You don’t need to suffer equations. Reading Smith, Hayek, and Friedman will do.
Bah Humbug!

Why English Majors (and their editors) Should Take an Economics Class
John H. Cochrane
Mon, 23 Dec 2013 21:21:00 GMT

Happy Holidays

from the Atlantic

Cats Are Just as Loving as Dogs. Maybe More So


This article originally appeared in the Newton blog on RealClearScience. You can read the original here. ON THE MORNING of May 21, 2010, Cherry Woods was taking a walk around her suburban Houston neighborhood, when she witnessed an ominous sight. Two, large dogs were barreling towards her from …
Read More

Cats Are Just as Loving as Dogs. Maybe More So
Ross Pomeroy
Sun, 15 Dec 2013 17:00:00 GMT

Two Approaches to Fiscal Policy

I think it is fair to point out that Reagan’s big spending was likely more for defense than now, and the decline is from a huge peak under President Obama.

Consider the following graph, with both series (coincident series for economic activity) normalized to 2011M01=0.

Figure 1: Log coincident economic indexes, both normalized to 2011M01=0. NBER defined recession dates shaded gray. Source: Philadelphia Fed, NBER, and author’s calculations.

One series pertains to the state I live in now (Wisconsin), and has pursued a policy of spending cuts and tax cuts skewed towards high income groups. The other is the state I lived in before coming to Wisconsin (California). It dealt with the serious fiscal problems it faced in part by cutting spending, and by raising taxes. Interestingly, both states had new governors taking power in January 2011 (Walker in Wisconsin, Brown in California). And in both cases, one party holds power in both houses of the legislature, as well as holding the governorship — Republicans in Wisconsin, Democrats in California.

It’s not surprising to anybody with acquaintance with data (or just plain reality) that the red line is Wisconsin, the blue is California. While this is not a controlled experiment — there are many other variables of importance (although they both share the same monetary policy) — the comparison is suggestive.

So, for completeness’s sake, here is the figure again, series labeled, and the US series added.

Figure 2: Log coincident economic indexes for California (blue), Wisconsin (red), and US (black), all normalized to 2011M01=0. NBER defined recession dates shaded gray. Source: Philadelphia Fed, NBER, and author’s calculations.

More on California here.

Two Approaches to Fiscal Policy
Menzie Chinn
Tue, 27 Aug 2013 04:00:02 GMT

To avoid failure, the Affordable Care Act must evolve


By now, the potential consequences of too few young and healthy individuals participating in the new insurance marketplaces are well known. As Ross Douthat described,

[T]he law can work only if people who don’t necessarily benefit immediately from its provisions decide to participate anyway. If they respond to higher premiums by either staying out or dropping out, then Obamacare will be permanently unstable: the dollar figures, both for insurers and the government, simply won’t add up.

The participation of the young and healthy is supposed to be required, of course, by the individual mandate. But the mandate’s penalty is relatively modest and its enforcement mechanisms relatively weak, which means its power ultimately depends more on civic duty than on immediate self-interest.

The law’s advocates have explicitly acknowledged this point. Explaining the case for the mandate last month, The Atlantic’s Matt O’Brien allowed that “a rational self-maximizer” might decide to pay the fine instead of buying costly coverage. But “real people,” he argued, “aren’t rational self-maximizers … We don’t like to feel like we’re doing the wrong thing. We like to follow the rules instead. Feel like we’re a good person.”

That the viability of the new marketplaces rests on convincing people that it is their civic duty to purchase health insurance is a weak link. I expect it will break in some markets, though it’ll work well in many others. There may be too many people in some states who believe or are led to believe that going uninsured is just fine.

And, you know what? Provided it’s arrived at by honest means, I respect that choice. It’s not one I’d make for myself or my family at current health insurance prices, but I don’t think I should impose my view on others. It’s neither irrational nor immoral for others to judge current prices too high.

Though I support the Affordable Care Act (ACA), I have a great deal of trouble with the idea that people must purchase insurance. Not only am I not convinced of arguments to the contrary, the law doesn’t strongly support it. Yes, there is an “individual mandate,” but it’s well known what that really means: if you don’t enroll in a plan meeting certain requirements, you must pay a tax penalty, unless you meet one of the hardship exemptions. (I have no moral qualms about the government’s constitutional role to tax in this manner.)

Sure, you can call it a “mandate.” But it’s just a choice. Play or pay. Both are legal. Views differ on the extent to which each is moral or just. I choose to interpret them as both perfectly legitimate. Indeed, the whole setup is equivalent to a tax break for purchasers of insurance. No purchase, no tax break. Big whoop.

And yet, within the community rating/guaranteed issue framework, the non-participation by younger and healthier people imposes a cost on others. Premiums will go up. Markets may fail. Within a few years, we will face the question of what should be done about that. The answer is almost in the law itself.

ACA section 1332 establishes a new waiver program that allows the Secretaries of HHS and Treasury to waive certain provisions of the ACA in order to support state demonstrations. Section 1332 waivers — referred to in the law as “Waivers for State Innovation” — are available for plan years beginning on or after January 1, 2017. […]

In order to qualify for a waiver, a state’s proposal must be able to demonstrate that resulting coverage will be at least as comprehensive as coverage through a state health insurance exchange. Benefits must be as generous as those provided by qualified health plans through an exchange, and premiums and cost sharing must make coverage at least as affordable as that provided under the ACA. Furthermore, the state’s plan must be budget-neutral and must assure that a comparable number of residents will be covered.

This sounds promising, but I think a few states will balk at the idea that coverage must be at least as comprehensive as the ACA prescribes, with benefits at least as generous, etc. However, if some of these requirements were relaxed, many states that currently resist the ACA might be willing to implement a variant that is more broadly attractive to their residents.

Would that be so bad? I don’t think so. After all, what’s adequate, affordable coverage is subjective. Reasonable people can differ. And the alternative to a less generous, lower premium design may very well be a dysfunctional market, which is clearly worse.

Whether you believed it at the time of passage, reality may soon prove that the ACA is, in fact, too inflexible to meet the goals that motivated it. Universal access to adequate, affordable coverage (in some sense) best describes its chief aim. Though it’s still too early to tell for sure, I’m willing to bet that that aim cannot be achieved in some states unless the law evolves to permit them greater flexibility in design.



To avoid failure, the Affordable Care Act must evolve
Austin Frakt
Sat, 07 Dec 2013 23:00:00 GMT

The Role of a Flawed State Vs Flawed Private Enterprise

  1. Check out this post and my response below.

  2. I accept that there are things that only the state can do. I think especially, keeping the peace broadly speaking; and second providing for the those who can’t do so. I think that tea parties ignore the latter especially, thinking that small government leads to prosperity, that lead to all boats rising, even for the poorest.

    In fact, I think prosperity means change and that often leaves many behind: the older; the less educated; the geographically immobile; those who just can’t adapt for a lot of reasons. Joseph Schumpeter called this creative destruction, and it is certainly a product of capitalism in the past and now. Free enterprise and free exchange and commercial activity is the best path to a wealthy and growing economy; but I also believe it is unable without a state provided safety net to provide for the victim of creative destruction that society as a whole benefits from.

    I find it odd that it is often acknowledged that democracy is just the best of the flawed forms of human governance – it isn’t perfect. Few who advocate free enterprise have the equivalent humility to acknowledge that while it is the best way manage resources of the alternative available – but it isn’t perfect. I acknowledge both that market economies are the best way to build a society in the face of scarcity, but both are far from perfect. So I suppose I believe in the strong stem you suggest to provide a softer landing for those left by hand by the progress of capitalism.

    That said, I also like constant attempts to move the state out of functions that can be privatized, and I prefer less growth in the stem than more other things equal. I think that at least in more instances education; road; utilities and other functions that have long been left to the public sector could be moved into the private sector to the benefit of most or all. Liberals have in fact promoted airline deregulation and efforts along these lines, but the belief in your strong (and perhaps steadily growing) stem makes that hard at times I think. Finally growth in the stem is inevitably going to concentrate power in that stem, and the history suggests that is risky, the leaders of any state are just human and not  always to  be trusted.   The founders of this nation understood that, and we shouldn’t forget it in evaluating the size of the stem.

    Distribution of US Federal Taxes


    For those who like some facts to go with their arguments over redistribution and tax policy, the Congressional Budget Office has just published “The Distribution of Household Income and
    Federal Taxes, 2010.” Here is some of what caught my eye.
    There are several main categories of federal taxes: individual income tax, the social insurance taxes that fund Social Security and Medicare, corporate income tax (which is ultimately paid by individuals), and excise taxes on gasoline, cigarettes and alcohol. This chart shows the average tax rates paid in each category, broken down by income group.

    A few observations here:
    1) It’s important to remember that this is the average rate of tax expressed as a share of income. For example, those in the top 1% are almost surely  paying the top marginal tax rate of about 40% on the top dollar earned. But when all the income taxed at a lower marginal rate is included, together with exemptions, deductions, and credits, this group pays an average of 20.1% of their income in individual income tax.
    2) Average individual income taxes are negative for the bottom two quintiles. This arises because of “refundable” tax credits like the earned income tax credit and the child tax credit, which mean that many lower-income households not only owe zero in taxes, but receive an additional payment from the IRS.
    3) In the calculations for effects of the corporation income tax, the underlying assumption is that high-income households end up paying much of the cost, because they are the ones who own most of the stock in these companies. In the calculations for excise taxes, the analysis is that low-income households pay a greater share of their income for these taxes, because they spend a greater share of their incomes on these products.
    What if instead of looking at average tax rates, we look at the share of each of these taxes collected from the different groups? The table looks like this:

    The top quintile pays 92.9% of all income taxes and 68.8% of all federal taxes. The top 1% pays 39% of all income taxes and 24.2% of all federal taxes.
    How have federal tax rates changed over time for various income groups? It’s true that average tax rates for the top 1% are down from the mid to late 1990s. It’s also true that tax rates for the rest of the income distribution are lower in 2010 than back in the 1990s. From 2008 through 2010, the federal tax rate as a share of income was at its lowest level during this time period. Of course, this is due in part to people having less income and finding themselves in lower tax brackets, and in part to various tax cuts aimed at stimulating the economy.

    Finally, how does the federal tax system alter the distribution of income in the United States? Here’s a table from the report that I edited to focus on the 2010 data. You can see that in terms of before tax income, the lowest quintile had 5.1% of income before taxes, and 6.2% of income after taxes; the highest quintile had 51.9% of income before taxes, and 48.1% of income after taxes; and the top 1% had 14.9% of income before taxes, and 12.8% of all income after taxes. Because these figures are based on income, they don’t take into account how spending programs that don’t provide income directly to people like Medicare, Medicaid, or food stamps affect consumption levels.

    I’ll close by saying that in my experience, presenting these kinds of statistics doesn’t really change anyone’s mind about whether the tax system is fair or unfair, or how the tax system should be altered.  Back in 1938, Henry Simons of the University of Chicago wrote a book called Personal Income Taxation, in which he commented: “The case for drastic progression in taxation must be rested on the case against inequality — on the ethical or aesthetic judgement that the prevailing distribution of wealth and income reveals a degree (and/or kind) of inequality which is distinctly evil or unlovely.” Most people don’t alter their “ethical or aesthetic judgement” about what is “evil or unlovely” based on statistical charts. But I live in hope that the presentation of facts, like water against stone, can at least erode the sharper edges of some of our political disputes.

    Distribution of US Federal Taxes
    Timothy Taylor
    Thu, 05 Dec 2013 12:00:00 GMT

    The Impact of Immigration on Wages, Internal Migration and Welfare


    From Suphanit Piyapromdee:

    Over the past few decades, the number of immigrants entering the U.S. has increased substantially. The local impacts of immigration may differ from national impacts since some cities attract more immigrants. Even within a city, workers may be affected differently depending on the substitutability of their labor with that of the new arrivals as well as their abilities to move. This paper studies the impact of immigration on wages, internal migration and welfare. I develop and estimate an equilibrium model where labor differs by skill level, gender, experience and nativity. Workers are also heterogeneous in city preferences and place attachments. Cities vary in productivity levels, housing prices and local amenities. The results indicate that a 30 percent increase in the stock of immigrants has a small impact on the wages and welfare of natives. If workers are constrained to remain in their original locations, the initial wage impacts on previous immigrants are negative and much more severe in the popular destina- tions for new immigrants. When workers migrate in response to the immigration, the negative wage and welfare impacts in most locations are diffused. However, the negative impacts on the wages of low skill workers in some locations intensify. This is because low skill workers have stronger attachments to places, and hence are less mobile relative to high skill workers. The extent to which the migration responses reduce the adverse wage impacts depends on a city’s labor composition. The model is also used to assess changes in the skill mix of immigrants and a location-specific immigration policy.

    The Impact of Immigration on Wages, Internal Migration and Welfare
    Sat, 07 Dec 2013 20:35:47 GMT