Monday, May 22, 2017

Economic vs. Personal Feedom in Singapore

Today’s New York Times carries an op-ed by Singaporean novelist Balli Kaur Jaswal on censorship in her home country. It begins by describing the deletion of scenes from American TV shows that feature taboo subjects like vibrators and nonbinary gender identification. It continues with a tongue-in-cheek account of her efforts, together with high-school friends, to figure out just what “sex” was by raiding their mothers’ stashes of contraband women’s magazines. But the real point of the op-ed is a serious one: In Singapore, freedom of information is spotty, at best.

The story sent me running to one of my favorite data troves: The rich collection of statistics on economic and personal freedom put out by the Cato Institute’s Freedom of the World project. Singapore is famous for its economic freedom. On the Cato economic freedom scale, it earns a score of 8.71 out of a possible 10, second only to Hong Kong’s 9.03. The high rating is helped along by sound money, free trade, and a small government, along with perfect 10s in areas like freedom to dismiss workers, freedom from minimum wage requirements, and freedom to practice your chosen profession without a license. These economic freedoms pay off in terms of prosperity. Singapore’s GDP per capita is third in the world, after Qatar and Luxembourg.

When it comes to personal freedom, though, it’s another story. On Cato’s personal freedom index, Singapore ranks seventy-seventh out of 159 countries, a little better than Cambodia or India, but not as free as Turkey or Papua New Guinea. What’s the problem?

Friday, April 21, 2017

How Big Government Affects Freedom and Prosperity

Economists, libertarian economists included, love to measure things. The Human Freedom Index (HFI) from the Cato Institute is a case in point. Its authors have assembled dozens of indicators of personal and economic freedom. They invite interested researchers to use them to explore “the complex ways in which freedom influences, and can be influenced by, political regimes, economic development, and the whole range of indicators of human well-being.”

I am happy to accept the invitation. This post, the first of a series, will take a first look at what we can learn from the data about the relationships among freedom, prosperity, and government. The relationships turn out to be not quite as simple as many libertarians might think. 

The Data

The Human Freedom Index consists of two parts. One is the Economic Freedom Index (EFI) from the Fraser Institute, which includes measures of the size of government, protection of property rights, sound money, freedom of international trade, and regulation. The other is Cato’s own Personal Freedom Index (PFI), which includes measures of rule of law, freedom of movement and assembly, personal safety and security, freedom of information, and freedom of personal relationships. The Cato and Fraser links provide detailed descriptions of the two indexes.

In order to explore the way freedom influences other aspects of human well-being, I will draw on a third data set, the Legatum Prosperity Index (LPI) from the Legatum Institute. The LPI includes data on nine “pillars” of prosperity, including the economy, business environment, governance, personal freedom, health, safety and security, education, social capital, and environmental quality.
The EFI and PFI cover 160 countries and the LPI 149 countries. In this post I will use the set of 143 countries for which data are available in all three indexes. The Cato, Fraser, and Legatum links above provide detailed methodological information.

Thursday, April 13, 2017

Hayek on Carbon Taxes: Markets without Prices or Prices without Markets?

As far as I know, Friedrich Hayek never wrote a word about climate change, but two of his most famous works contain arguments that bear directly on this key issue of environmental policy. Judging from what he wrote about the role of science in public policy and the use of knowledge in society, I think that if he had lived on into the twenty-first century, he might have supported a carbon tax.

The role of science in public policy

Hayek’s 1945 article, “The Use of Knowledge in Society,” draws a distinction between two kinds of knowledge. One is “knowledge of the particular circumstances of time and place,” that is, knowledge that is widely dispersed among individuals, each of whom sees only a small part of the whole picture. The other is scientific knowledge, which, he says, we can reasonably expect to find in the possession of a suitably chosen body of experts.

Most of the article focuses on how best to make use of dispersed knowledge. However, near the beginning, Hayek comments briefly on the role of scientific knowledge:

It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available— although this is of course merely shifting the difficulty to the problem of selecting the experts.

Hayek quickly moves on to his main subject, but he returns to the issue of scientific knowledge several years later.  In a 1960 essay, “Why I am Not a Conservative,” he explains the differences between the conservative worldview and that of “liberals,” a term Hayek uses in the European sense for what Americans would call classical liberals or libertarians. Liberals, he says, are prepared to come to terms with new scientific knowledge, whether they like its immediate effects or not. Conservatives, in contrast, are more wary of science:

Monday, April 10, 2017

High-Risk Pools Pose a Dilemma for Conservatives

High-risk pools have played a prominent role in the debate over U.S. health care policy, especially on the conservative side. In contrast to liberals, who lean toward a single-payer system or public option, conservatives would like to limit the government’s role to the very sick and the very poor. For the poor, they seem ready (grudgingly) to accepted Medicaid, or something like it, as long as coverage is limited to the “truly needy.” What to do about the very sick is a more complicated problem. High-risk pools, which both HHS Secretary Tom Price and House Speaker Paul Ryan have endorsed, offer a possible solution, but one that comes with issues of its own.

High-risk pools in theory

High-risk pools are a response to the inability of private companies to offer insurance at an affordable premium unless their pool of customers has enough healthy individuals to keep average  claims low. If too many sick people join the pool, claims and premiums, begin to rise. Rising premiums cause healthy people to drop out of the pool and take their chances on life without coverage. The dropouts push premiums higher still for those who remain in the pool until, eventually, no one can afford coverage. Economists call this phenomenon adverse selection. It is popularly known as a “death spiral.”

The traditional way of dealing with adverse selection was to practice medical underwriting, which means dividing the population into separate pools according to health status. If medical underwriting is permitted, insurers quote premiums that reflect the actuarial risk of each pool. They may refuse altogether to cover people with pre-existing conditions, cover them only at very high rates, or place caps on annual or lifetime benefits.

Although it keeps premiums affordable for the relatively healthy, medical underwriting inevitably means that some people cannot obtain coverage at an affordable premium, or have exhausted their coverage by reaching their spending caps. Before the Affordable Care Act (ACA or “Obamacare”) limited medical underwriting, many states created high-risk pools to meet their needs. Such pools were not intended to be profitable and were supported by government subsidies.
Described in this way, high-risk pools sound like a good compromise between the comprehensive government health care found in the rest of the developed world, and a purely market-based system that would make health care unaffordable for any but the healthy and the wealthy. What could go wrong? Several things, it turns out.

Saturday, April 1, 2017

Universal Healthare Access is Coming to the US. Stop Fighting It. Make it Work.

Many observers are describing the dramatic failure of the American Health Care Act (AHCA) as a debacle, but perhaps it will prove to be a step forward. As everyone knows by now, the United States is alone among advanced economies in not having universal access to health care, but it is already much closer to such a system than most people realize. The defeat of the ACHA may be a tipping point in which the forces trying to figure out how to make universal access health care work gain the upper hand over those that are fighting it.

The true scope of government in our healthcare system

The term “single payer” is often used to describe the healthcare systems of other high-income countries. Although that is a convenient term, it is not entirely accurate. As the following chart of healthcare spending in OECD countries shows, all countries use a mix of private and public payments. Furthermore, even in many countries where the government share of spending is high, the actual administration of payments is split among several funds, trusts, or regional agencies. There are no countries where all health-related services, including optical and dental services, drugs, and long-term care, are entirely free to patients without co-pays or deductibles.  Healthcare systems of OECD countries also differ widely in such aspects as whether facilities are publically or privately owned, whether doctors are public employees or independent practitioners, and whether private provision of healthcare, in competition with public services, is encouraged or discouraged.

Wednesday, March 15, 2017

To Succeed, Healthcare Reform Must Include Action on Prices

 Republican reformers have repeatedly promised affordable healthcare for all Americans — doubly affordable, in fact. They promise to put premiums and out-of-pocket costs within reach of low- and middle-income consumers, and at the same time, that the plan will be affordable to the federal budget, even given the constraints their most conservative members would like to impose on federal revenues.

Unfortunately, the American Health Care Act (AHCA) now before Congress will make healthcare affordable in the budgetary sense only while making it less affordable in the individual sense. According to analysis by the Congressional Budget Office, the AHCA will reduce the budget deficit by $337 billion over a ten-year period, but only at the expense of reducing the number of insured by 14 million in the near term and by 24 million after the full effects of the bill come into force. As the CBO points out, even many people who retain coverage will find it more expensive because the ACHA tax credits will be less than the subsidies available through exchanges under the current Affordable Care Act (ACA or "Obamacare"). For others, the only option that will become more “affordable” is that of going without insurance, due to the ACHA’s elimination of the ACA’s individual mandate.

Under the ACHA or ACA, one uncomfortable fact remains unavoidable: There is no way to make healthcare affordable for either the budget or individuals without strong action to control prices for drugs, medical devices, hospitals, and doctors’ fees that are higher than in any other country. The current draft of the ACHA does nothing to deal with that critical problem.

Monday, March 13, 2017

Why California's Push for a 100 Percent Carbon Free Grid is the Wrong Way Forward

Although there is a clear lack of will to do much about climate change at the federal level, California is another story.  In a recent poll, 69 percent of California voters backed policies to cut emissions. The latest sign of enthusiasm is a bill introduced by State Senate leader Kevin De León that would completely decarbonize the state's electric grid by 2045. Currently, California state law calls for half of all retail electricity to be produced from renewable sources by 2030, with an intermediate goal of 25 percent by 2016, reached slightly ahead of schedule.

Is 100 percent decarbonization feasible? Anne C. Mulkern, writing for E&E News, reports that several experts she talked to said it was. Utility executives were somewhat more skeptical, but Pedro Pizarro, CEO of Edison International, agreed that 100 percent renewable power was technically possible, while expessing concerns about reliability, and timing.

Even if the goal is technically it possible, though, does it make sense to mandate a goal of 100 percent renewable electric power by a certain date? In my view, it does not. Carbon pricing remains a better tool for reducing California's carbon footprint.

Carbon pricing California style

But, you might say, hasn't California already tried carbon pricing with its flagship cap-and-trade scheme? Yes, and it isn't working very well. However, if we look carefully, we will see that the problems arise from circumstances particular to the state, rather than from any inherent flaw in carbon pricing as a concept.

The economic reasoning behind cap-and-trade is to give companies an incentive to reduce emissions by requiring them to buy a permit for each ton of carbon dioxide they emit. The higher the price of permits, the greater the incentive. Prices are set by monthly auctions supplemented by a secondary market, in which permits can change hands privately.

Wednesday, March 8, 2017

How "Ryancare" Would Inrease the Risk of a Healthcare Death Spiral

 On March 6, the Republican House leadership finally released a draft plan for repealing and replacing the Affordable Care Act (ACA). Although only a draft, it has already earned the name of "Ryancare." As this is written, with the ink not yet dry, it already is running into political trouble. Influential Republicans are dismissing it as a “framework for reform” or a “work in progress.”

Still, it is not too early to address one question that will demand an answer no matter what happens to this early draft: will it, or any replacement for the replacement, stop the impending death spiral in the individual insurance market that is at the heart of the ACA’s problems?

From what we know of Ryancare so far, the answer is “No.” Here is why.

What is the “death spiral”?

Just how does this notorious “death spiral” work? Start with a basic truth: A private insurer can profitably offer healthcare coverage to a pool of customers only if it can find a premium that is low enough to be affordable, yet high enough to cover expected claims and administrative costs, with enough left over to keep shareholders happy. In order for that to happen, the pool of customers must contain enough healthy people to keep claims and premiums low.

Thursday, March 2, 2017

Paradox: Why Do Analysts Say Higher Interest Rates are Driving Bank Stocks Higher, When Earlier They Said Low Rates Were Good for Banks?

As the stock market soars to one record high after another, analysts do not hesitate to tell us why. One popular explanation is that expectations of higher interest rates are pushing up the stocks of banks and other financial companies  (example). Yet not so long ago, the same analysts were telling us that Wall Street in general and banks in particular were getting rich on the “free money” that the Fed was supplying to them at historically low rates (examples here and here). What gives?

To understand how interest rates affect bank profits, we turn to a wonky concept of financial economics known as the duration gap. Setting the precise mathematics to one side (read this if you really care), the duration gap refers to the difference between the maturity of a bank’s assets and its liabilities. If a bank funds itself with from short-term sources like deposits and uses those funds to make fixed rate mortgage loans or buy long-term bonds, then it has a positive duration gap. Interest rates tend to be higher on long-term financial instruments than on those with short maturities, so is the way banks traditionally made a profit.

The downside of the traditional banking model is that a positive duration gap means that profits fall when interest rates rise.  Suppose, for example, that your bank makes 30-year fixed-rate mortgages and funds them with deposits that pay an interest equal to the federal funds rate (the rate on overnight loans that the Fed uses at its primary interest rate target). If the loans earn 4 percent and the fed funds rate is 0.5 percent, you have a nice spread of 3.5 percent  between return on assets and cost of funds, allowing a good profit even after deducting  operating expenses.  However, if short-term rates went up, your bank would be in trouble. If the fed funds rate went up to 2 percent while your old fixed-rate mortgages still brought in just 4 percent your spread would be cut to 1.5 percent and your profits, after operating expenses, might evaporate altogether.

Falling Government Investment Casts Doubt on Pie-in-the-Sky Growth Estimates

  •  The budget proposals being prepared by the Office of Management and Budget incorporate revenue estimates based on GDP growth rates of 3 percent or more.
  • The proposals include across-the-board decreases in nondefense discretionary spending
  • Such cuts will make it difficult to reverse the long decline in government investment, casting doubt on the likelihood of achieving ambitious growth estimates.
Government investment at all levels accounts for only about 15 percent of gross fixed investment in the United States, but its economic significance is greater than that modest share suggests. Government investment affects investors in private industry in several ways through its impacts on growth of the economy as a whole, on suppliers of construction services and materials for government investment projects, and on users of government infrastructure. Negative trends in government investment raise concerns for all of these reasons.

Three charts reveal the extent of these negative trends. The first chart takes a long-term look at gross investment in fixed assets at all levels of government. It shows that total government investment has fallen by about half since the 1960s. Investment at the federal level and at the state and local levels contribute roughly equal shares of the total, but the federal share has fallen more rapidly. Federal gross investment in fixed assets as a share of GDP in 2015 was just a third of its 1961 peak value. >>>

Follow this link to read the full post and view the charts on

Friday, February 24, 2017

Questions Republican Healthcare Reformers Must Answer

Republicans do not yet have a full replacement for the Affordable Care Act (ACA or “Obamacare”), but the outlines of one are emerging. The Policy Brief on Repeal and Replace issued by House Republicans on February 16 points the way toward a three-tier system. It promises to provide  “coverage protections and peace of mind for all Americans—regardless of age, income, medical conditions, or circumstances,” while ensuring “more choices, lower costs, and greater control over your health care.”

Those are lofty aspirations, but reformers will have to address many difficult questions before they can be met. To find realistic answers, they will have to overcome divisions within the party, ideological constraints, outside pressures, and some hard realities of healthcare economics.

Conceptual framework

The new policy brief, and similar plans put forward by Rand Paul, Mark Sanford, Paul Ryan, and others, include many common elements. Together, they point to a three-tier system that, in broad outline, would look like this:

Central tier, for individuals and households with incomes well above the poverty line in which no member suffers from a serious chronic health condition. Such people account for roughly 70 percent of the population and roughly 25 percent of personal healthcare spending. Members of this tier would be served by conventional commercial health insurance. The cost of premiums would be covered by a combination of individual payments, advanceable healthcare tax credits (HCTCs), and employer contributions. Premiums and HCTCs could rise with age, but insurers would not be allowed to charge differential premiums based on pre-existing conditions or to refuse coverage. High-deductible policies would be encouraged by using health savings accounts (HSAs) for covering out-of-pocket costs.

Thursday, February 23, 2017

Multiple Job Holders Represent a Still-Untapped Labor Reserve

The Office of Management and Budget is due to release tax and spending plans for the 2018 fiscal year soon. As reported recently by the Wall Street Journal, the plans are expected to be based on relatively optimistic growth forecasts of 3 to 3.5 percent per year, well above consensus estimates. The debate over the realism of the budget plan will turn, to a significant degree, on whether there are a sufficient reserves of untapped labor to support higher growth rates.

Although the headline unemployment rate is approaching levels that the Fed and many other observers equate with "full employment," other indicators, not so well known, suggest that there are still significant untapped labor reserves. This post looks at one such neglected indicator, multiple job holders. (In a post earlier this month, I looked at another neglected indicator, nonemployment index, which also suggests the existence of hidden labor reserves.) >>> 

Follow this link to read the full post at

Wednesday, February 22, 2017

Repeal Fuel Economy Standards and Replace Them with a Tax

The Wall Street Journal reports that automakers are asking the EPA to repeal automobile fuel economy standards, known as Corporate Average Fleet Economy (CAFE) standards, which are set to rise to 56 miles per gallon by 2025. Repealing the standards would be a good idea, provided they were replaced by tax designed to achieve an equivalent saving in fuel. A carbon tax would do the job nicely, but an increase in the existing tax on motor fuels would also work.

What, exactly, is wrong with the CAFE standards? The fundamental problem is that they attack the third-party effects, or negative externalities, of motor fuel use, such as pollution, highway congestion, and accidents, only partially and indirectly. As a result, the cost of achieving a given reduction in fuel use via CAFE standards is higher than it would be if the same result were achieved more directly through a carbon tax or an increase in the federal gasoline tax.

Sunday, February 19, 2017

What Happened to the OMB Data? Mystery Solved (Partially)

Yesterday I wanted to retrieve some data from the OMB archives, so I went to the usual spot, There was almost nothing there. All I found were links to “budgetary analysis” of the new administration’s executive orders. The “analysis” pages themselves contain nothing but short paragraphs signed by Acting Budget Director Mark Sandy, which say that the executive orders will not have any significant budgetary impacts. 

I had read of the efforts of paranoid climate scientists to download data from NASA, NOAA, and other sites, fearing that the Trump administration would scrub them all clean, so I got a little paranoid myself. Could it be that the new gang doesn’t want us to have any background data that might be used to put their budget efforts in a bad light?

It turns out that the situation is a little less sinister than it first looked. Turns out that the Obama administration had a “digital transition plan” that archived all the old data. The OMB archives are here, for example. There are no permalinks, though. Any old links you have saved to Obama-era materials take you to a broken link page on the Trump White House site that has a link to the Obama digital transition page. Down at the bottom of that page there is a long list of agency archives, including the one for the OMB. Eventually you can find what you are looking for.

On Thursday, the Senate finally got around to confirming Mick Mulvaney as the new budget director. We can hope he will assign someone to get to work on the amateurish OMB web page that is still there as of today. We can hope that Mulvaney’s people will give us links to the Obama archives. When a new, professional-looking, user-friendly, OMB website appears, we will know that the chaos has settled down in at least one branch of the Trump White House.

Thursday, February 16, 2017

Crop Insurance Targeted By Budget Cutters As Deficit Debate Looms

Congress will soon start debating the federal budget for the 2018 fiscal year. As the following figure shows, the Congressional Budget Office projects that after shrinking for several years, the budget gap will soon begin to widen if there are no changes in current policy. Crop insurance is one of several farm programs in the crosshairs of Congressional budget hawks who hope to keep that from happening.

Crop insurance may seem like small change compared to massive programs like health insurance subsidies under the Affordable Care Act, but critics have long targeted it as wasteful. The Heritage Foundation, a consistent ally of budget cutters, characterizes crop insurance, along with other farm subsidy programs, as “a massive transfer of wealth from taxpayers to mostly large agribusinesses that are (or should be) fully capable of managing their business operations without this special treatment.”

Wednesday, February 15, 2017

Universal Basic Income: The Complete Caplan-Dolan Dialog

Bryan Caplan is Professor of Economics at George Mason University and Senior Scholar at the Mercatus Center. He is the author of The Myth of the Rational Voter: Why Democracies Choose Bad Policies, named "the best political book of the year" by the New York Times, and Selfish Reasons to Have More Kids: Why Being a Great Parent Is Less Work and More Fun Than You Think. He has published in the New York Times, the Washington Post, the Wall Street Journal, the American Economic Review, the Economic Journal, the Journal of Law and Economics, and Intelligence, and has appeared on 20/20, FoxNews, and C-SPAN. He is now working on a new book, The Case Against Education.

Ed Dolan is a retired economist, active blogger, and Adjunct of the Niskanen Center. At various times, he taught at Dartmouth College, the University of Chicago, George Mason University, the American Institute of Business and Economics in Moscow, the University of Economics in Prague, and the Stockholm School of Economics in Riga. He is the author of TANSTAAFL: A Libertarian Perspective on Environmental Policy and editor of Foundations of Austrian Economics. He contributes regularly to,, The Milken Institute Review, and Ed Dolan’s Econ Blog. He holds a PhD in economics from Yale University.

This impromptu dialog took place over several days in early 2017 on several different platforms. For readers’ convenience, I have put all the separate segments together here. To help keep things straight, everything written by Caplan is set in the Helvitica font and everything written by Dolan in Times

CAPLAN: Opening Statement (Econlog, Jan 24, 2017)

The Many Faces of Means Testing

Isn't a Universal Basic Income just another name for a negative income tax, such as Tax = -$10,000 + .3*Income?  If so, isn't a Universal Basic Income means-tested by definition?
The answer to the first question is Yes.  UBI is just Milton Friedman's negative income tax in new packaging.

The answer to the second question, however, is more equivocal.  The UBI is means-tested in the weak sense that your net payment falls with income.  But the UBI dispenses with many other traditional forms of means-testing.  Most notably:

1. Means-testing by age.  Most welfare states prioritize children and the elderly.  The implicit theory is that, unlike prime-age adults, the very young and the very old are unable to provide for themselves.

2. Means-testing by dependents and marital status.  Most welfare states prioritize single moms with minor children.  The implicit theory is that single moms have reduced opportunities to work due to their family responsibilities.

3. Means-testing by health.  Most welfare states prioritize the disabled.  The implicit theory is that they're not healthy enough to work.

4. Means-testing by job history.  Most welfare states prioritize people who recently lost their jobs over people who have never worked, or lost their jobs a long time ago.  The implicit theory is that the short-term unemployed are unlucky, while the long-term unemployed are lazy.

If your UBI proposal includes factors like these in its formula, it's very hard to see what makes it a UBI. 

Sunday, February 12, 2017

Where Will An Expanding Economy Find New Workers? Clues From The Non-Employment Index

The hope of faster economic growth is a major factor behind the upturn in markets since the November election, but where will an expanding economy find the workers it needs? If it cannot find them, then any stimulus from tax cuts, regulatory reform, or infrastructure spending risks turning into inflation rather than healthy growth.

Some observers place their hopes on tapping the reserve of workers who have left the labor force. The percentage of the population who participate in the labor force has fallen from its peak of around 67 percent in the 1990s to about 63 percent today.  Just how likely are those labor-force dropouts will return to work? We can get an idea by looking at data on transition rates, by which we mean the probabilities that a non-employed worker in any labor-force category will find a job in the next month.>>>

Follow this link to read the complete chart at

Friday, February 10, 2017

CNN’s Sanders-Cruz Healthcare Debate: A Scorecard

CNN, Senator Sanders, and Senator Cruz deserve congratulations for a great town hall. Real focus, real exchange of views, even real agreement now and then on some important ideas. Worth viewing, or if you missed it, worth reading the transcript.

Still, articulate and well prepared though the participants were, there were things they should have said that they didn’t say. I often had the feeling that Cruz was changing the subject when he didn’t have answers and glossing over some key points that needed closer examination. At the same time, I think Sanders missed some chances to hold him to account. Here is my scorecard, organized by topic.

Pre-existing conditions

The ACA (or Obamacare) has many detractors, and it has flaws that Sanders himself admits, but some parts are popular. None is more popular than the mandate that insurance companies must cover people regardless of pre-existing conditions. Probably fewer than one in ten Americans falls into that category, but almost everyone has a parent or child or spouse or friend who is in the ten percent. Together that ten percent of patients account for about two-thirds of all personal healthcare spending. Even if you are healthy, your biggest fear is that you might develop cancer, or diabetes, or have a bad auto accident, and end up in the ten percent without adequate healthcare coverage.

Thursday, February 9, 2017

Why So Many Healthcare Risks are Uninsurable and Why It Matters

As the US begins a great national debate over healthcare policy, investors in affected industries will need to understand some basic principles of healthcare economics. This post focuses on one such principle-that of insurability. I hope to deal with others in future posts.

A risk must meet certain well-known conditions in order to be economically insurable. Healthcare risks meet some of these conditions. For example, large numbers of people are similarly exposed, and the magnitude and probability of risk are usually calculable. However, healthcare risks, at least for many people, fail to meet two other key conditions of insurability: They are not always fortuitous , and actuarially fair premiums are not always affordable.

The problems of fortuity and affordability arise from an inconvenient but inescapable fact of healthcare economics-the highly skewed distribution of medical expenses. >>>

Follow this link to read the full post on

Two Cheers for Climate Action Council's Conservative Carbon Dividend Proposal

As a firm supporter of both carbon taxes and a universal basic income (UBI), you would think that I would be thrilled by the new report, The Conservative Case for Carbon Dividends, released Wednesday by the Climate Leadership Council (CLC).  It puts a price on carbon like a good carbon tax should, and it gives people a monthly dividend, as a UBI would do. But when I look at the proposal as a whole, I’m not as thrilled as I ought to be. I’m afraid it’s a bad marriage of two good ideas.

What’s good about the Carbon Dividend

There are some very bright guys behind the CLC proposal—Martin Feldstein, Greg Mankiw, Hank Paulson and more. They have the best of intentions. Their proposal is a conservative analog of the Carbon Fee and Dividend plan from the more liberal Citizens’ Climate Lobby (CCL). Both plans would impose a tax on carbon emissions and distribute the proceeds equally as unconditional payments to all citizens. Both plans would gradually raise the tax over time. The CLC plan would start a little more aggressively, at $40 per ton rather than $15. That part of it is fine by me.

The CLC plan also has a few add-ons that the CCL version does not. It proposes a rollback of other carbon emission regulations that would be made redundant by the tax. (The release is vague about exactly which regulations would go. I hope ethanol mandates and CAFE standards are on the hit list.) The CLC also proposes rebating the carbon tax to exporters and imposing it on the carbon content of imports. There is some logic in that, although it might take some careful drafting the make the proposal compliant with WTO rules.

Sunday, February 5, 2017

In Search of the Elusive Victims of Globlization

The 2016 US Presidential election has placed trade policy high on the national agenda. Both Bernie Sanders, on the left, and Donald Trump, on the right, campaigned on overtly protectionist platforms. Now that Trump is in office, he has begun implementing his program of “buy American, hire American.”

In response, many members of the economics profession, always a bastion of free-trade sentiment, have taken a new look at something they always knew but did not always like to talk about: the fact that trade creates winners and losers. In a widely cited paper, “The China Shock,” David Autor and colleagues show that the losses from trade shocks to the US economy are larger and more persistent than many had thought. Such research makes it understandable how politicians can assemble victims of trade shocks into winning coalitions.

Although Trump and Sanders have directed most of their critique of global trade at the way it creates losers in the US economy, other critics are more concerned with the effects on US trade partners. Taking advantage of the media attention drawn by their sometimes disorderly protests against the Seattle meetings of the World Trade Organization in 1999, these critics emphasize that trade creates victims in poor countries as well as rich.

In an entry, “Defining the Anti-Globalization Movement,” in the Encyclopedia of Activism and Social Justice, Mark Engler points out that there is no unified movement that fits that term. Instead, there is an informal coalition of trade unionists, environmentalists, indigenous rights activists, organizations promoting sustainable development, and anti-sweatshop campaigners.  Many of these groups spurn the “anti-globalist” label, preferring terms like “global justice movement” or even (standing the term on its head) the “globalization movement.”

What unites these groups, Engler says, is the belief that the corporate-led globalization of the past quarter century has exacerbated global poverty and increased inequality. Many of them frame their mission as one of opposition to neoliberalism, by which they mean policies including privatization of public industries, opening markets to foreign investment and competition, removing controls on capital flows, reducing tariffs and other trade barriers, and ending government protections for local industry. Movement participants, Engler says, “argue that these policies have created sweatshop working conditions in the developing world, threatened unionized jobs and environmental protections in the global North, benefited the wealthy at the expense of the poor, and endangered indigenous cultures.”

At the risk of oversimplification, I think there is a unifying theme here, which I will call the globalization hypothesis : The proposition that free trade (or neoliberalism, if you prefer) has enriched elites at the expense of the vulnerable in both the developed and the developing world.

The search for evidence

At the same time trade issues were making their way regularly into the headlines, I was working on an unrelated project using some large data sets that were rich in global economic, social, and political indicators. It occurred to me that it might be possible to get some insight into the validity of the globalization hypothesis by looking for critical differences in these indicators between countries that were more open to trade and those that were less open.

One of the data sets is the Economic Freedom Index from the Fraser Institute. It includes a component, Freedom to Trade Internationally, that seems to capture important parts of the neoliberal agenda, as described by critics like Engler. Fraser’s trade freedom score, as I will call it, is calculated on a scale of zero (least free) to ten (most free), based on indicators for tariffs, regulatory trade barriers, compliance costs for importing and exporting, black market exchange rates, controls of the movement of capital and people, restrictions on foreign ownership and foreign investment, capital controls, and freedom of travel.

The other data set I will use here is the Legatum Prosperity Index . Its creator, the Legatum Institute, is more sympathetic to the global justice perspective, in that it views prosperity as the creation of a better life for individual people rather than as just the accumulation of material wealth. The Legatum index organizes the data into distinct economic and noneconomic components, or “pillars”: Economic quality (macroeconomic indicators, and financial institutions); business environment; governance (political participation, transparency, and rule of law); education; health; safety and security (both national security and personal safety); personal freedom (human rights, legal rights, and tolerance); social capital (personal relationships, social network support, civic participation); and natural environment.

The Fraser Institute’s data set covers 159 countries while that from the Legatum Institute covers 149. Both indexes are available for an overlapping set of 144 countries.


First, let’s check to see if these data support the proposition that free trade is associated with strong macroeconomic performance and a good business environment. Neoliberals certainly think that it does, and I think many global justice advocates do not dispute it at the macro level. Here is a scatter plot of the Fraser trade freedom scores against the Legatum economy and business environment scores:

As expected, there is a solid positive relationship in both cases. The correlation coefficient for the economy is 0.63 and for the business environment 0.71, where a coefficient of 1.0 would indicate a perfect fit. Both coefficients are statistically significant at the 0.01 level. No surprises here.

But what about the noneconomic effects of free trade? That is where we might expect evidence relevant to the globalist hypothesis to show up. To see if it does, I first calculated a “social prosperity” score for each country, consisting of the combined scores, scaled zero to 100, on the Legatum components for governance, education, health, security, personal freedom, social capital, and environment. Here is the result:

This result is surprisingly similar to the chart for the economic and business components: The correlation coefficient between social prosperity and freedom to trade is 0.68, again positive and statistically significant. That is also true for each of the individual components of social prosperity. Putting correlations in parentheses, in countries that are open to free trade, people tend to be better-governed (0.67), better educated (0.61), healthier (0.60), more secure (0.64), and freer (0.57). They also enjoy more social capital (0.43) and a better natural environment (0.43).

There is still a reason to be skeptical, however. Maybe what is really happening is that a few wealthy, free-trading countries are pulling up the average on the right side of the chart at the expense of their poorer third-world trading partners. If that is the case, we would expect the relationship between trade and social prosperity within the developing group to be negative, or at least much weaker than within the entire sample.

We can check that possibility by dividing the sample into two parts, one for countries that are already wealthy and the other for the developing world. The next chart does that. The blue diamonds represent the 35 members of the Organization for Cooperation and Development; the red squares are the remaining 109 non-OECD countries.

The correlation between trade freedom and social prosperity remains positive (0.63) and statistically significant within the non-OECD group, just as it is for the group as a whole. There are some outliers, however.

At the extreme left of the chart, three countries, Iran, Venezuela, and Argentina, are the least open to trade of any countries in the world. All three lie above the trend line, indicating that they have better-than-expected social prosperity scores. They are not exactly poster-children for social prosperity — Iran  and Venezuela are below the world social prosperity median, and Argentina is only a little above it — but they do suggest that at least a few countries have closed themselves off to trade without suffering disastrous social consequences. The data don’t give much of a clue as to what the three might have in common, except that all of them have poor scores on governance and somewhat better than expected scores on education.

Meanwhile, at the extreme right, we find Singapore and Hong Kong, the two countries that are most open to trade of all. Both of them also have higher than expected social prosperity scores. Singapore ranks number one in the world in safety and security and number two in health, although personal freedom, where it ranks ninety-seventh, is clearly a weak spot. Hong Kong has excellent scores for health, safety, and education, but it ranks a smoggy ninety-eighth in terms of its natural environment.

Interestingly, there is no significant correlation between freedom to trade and social prosperity within the OECD. Perhaps that should not come as a surprise, since the OECD is not a randomly selected group. Countries are not invited to join unless they have open economies, so there is not enough variation among members in that regard to give statistically meaningful results.

What does distinguish OECD countries even more than trade freedom is good governance — a Legatum category that includes participation, transparency, democracy, and rule of law. Eighteen of the twenty highest governance scores in the world belong to OECD countries. (The only non-OECD countries in the group are number 18, Singapore, and number 19, Uruguay.) Since good governance correlates highly with other elements of social prosperity, it is not surprising that the OECD countries lie in the upper-right-hand corner of the chart.

The issue of equality

Even when we split the sample into OECD and other countries, we have not really come to grips with one of the central concerns of the global justice movement. Its adherents would rightly point out that even if the national averages for social prosperity indicators might look good for countries that trade, the individual elements of prosperity, whether health care, education, or personal security might still be unequally distributed within each country. If so, then our charts, which show only country averages, might mask a tendency for trade to benefit elites within each country at the expense of the rest of society.

As a starting point, we can look at the relationship between openness to trade and equality of income distribution within countries, using data from the UN Human Development Report. That report includes Gini indexes of income inequality for 116 countries that overlap with the Fraser trade freedom data. Gini indexes range from zero (completely equal distribution) to 100 (maximum inequality). The most equal distribution in the UN data set is Sweden, with an index of 25, followed closely by Norway. The least equal is Namibia, at 63.9, with South Africa a close second. The United States has the second-highest score in the OECD, surpassed in inequality among that group only by Mexico. The US Gini index of 40.8 is just above the global median of 39.9.

Across the whole sample of countries, the correlation coefficient of the Gini index with the trade freedom score is -0.31, not a tight fit but statistically significant at a 0.01 level of confidence. Since the Gini index increases as equality decreases, the negative correlation coefficient means that the countries that are most open to trade tend to have more equal income distributions. However, that correlation turns out to be attributable entirely to the association between the two variables within the OECD. The correlation coefficient within the non-OECD group is -0.02, negative but not statistically different from zero. There is, then, no evidence here to suggest that trade freedom is associated either in one way or the other with pure inequality of income distribution within our group of developing countries.

However, it is the relationship between trade and inequality for the noneconomic elements of social prosperity that really goes to the heart of the globalization hypothesis.  Anecdotally, we know that there are countries where elites are well educated and live long lives while the poor are illiterate and die young. Is there any evidence in our data set that there is a general tendency for countries that are open to trade to fit that pattern?

Unfortunately, we don’t have explicit data on the within-country distribution of most of the social prosperity indicators. What we do know, however, is that the people who put together the Legatum index were aware of this issue and took steps to deal with it. They did so by including indicators within each component of their index that minimize the likelihood that countries with high degrees of social inequality could achieve high scores. For example:
  • The Legatum education component includes adult and youth literacy rate, a Gini index for education equality, primary school completion rate, secondary school enrollment, and the ratio of school enrollment for girls and boys. Those indicators are weighted to account for about half of the education score. As a result, education indicators that might be skewed toward national elites, such as test scores and enrollment in top universities, cannot by themselves give a top score to a country as a whole.
  • The health component includes access to basic sanitation, immunization rates, deaths from tuberculosis, and life expectancy at birth. The presence of such indicators would pull down the score of any country in which only elites live healthy lives.
  • The personal safety and security component includes measures of malnutrition, homelessness, deaths from civil and international conflicts, number of refugees, and safety of walking at night. These indicators would generate low scores in countries where only elites were safe and secure.
Other components include similar indicators measuring items of social prosperity that are by their nature beneficial to all, not just to elites. That is true even of the components relating to economic quality and business environment. You can find the full listing of indicators for each component in an appendix to Legatum’s Methodology Report.


The findings reported here do not constitute an actual refutation of the globalization hypothesis, as we have formulated it — the proposition that free trade systematically enriches elites at the expense of the vulnerable in both the developed and the developing world. What they do show is that once we move away from case studies and anecdotal evidence, broad statistical evidence to support the hypothesis is hard to find. On the contrary, if anything,  there seems to be a significant tendency for people to live healthier, more secure, and freer lives in countries that are open to global trade than in those at similar levels of development that are less open.

I doubt if that finding is really a surprise to thoughtful supporters of the global justice movement. Even in a country where trade brings gains in broad indicators of social prosperity, such as infant mortality and girls’ literacy, there can be individual losers, and the gains, even among the winners, may not be distributed as widely as one might like. The real issue facing the global justice movement is what to do about it.
The positive association between trade and social prosperity at the national level suggests that the proper response, in both wealthy and developing countries, should take the form of policies that spread the gains of trade widely and help individuals to adjust to change, rather than in rolling back the process of globalization itself.

In an essay on globalization in The Scientific American, UC-Berkeley economist Pranab Bardhan puts it this way:
There is no race to the bottom in which countries must abandon social programs to keep up economically; in fact, social and economic goals can be mutually supportive. Land reform, expansion of credit and services for small producers, retraining and income support for displaced workers, public-works programs for the unemployed, and provision of basic education and health can enhance the productivity of workers and farmers and thereby contribute to a country’s global competitiveness. Such programs may require a rethinking of budget priorities in those nations and a more accountable political and administrative framework, but the obstacles are largely domestic.
Conversely, closing the economy to international trade does not reduce the power of the relevant vested interests: landlords, politicians and bureaucrats, and the rich who enjoy government subsidies. Thus, globalization is not the main cause of developing countries’ problems, contrary to the claim of critics of globalization — just as globalization is often not the main solution to these problems, contrary to the claim of overenthusiastic free traders.
Our data support Bardham’s view, inasmuch as the correlation of good governance with other indicators of social prosperity is even stronger than that of openness to trade. Ultimately, each country is responsible for its own governance, but wealthy countries that trade with nations that are poor and badly governed can support local efforts. They can insist that their own companies not just comply with local labor and environment standards, but aim higher than those local standards. They can insist that their own nationals do not corruptly conspire with local economic and political elites at the expense of the poor. And they can politely but firmly resist the suggestion of any of their own citizens that the best way to help people on lower rungs of the global economic ladder is to refuse to buy anything from them.

Originally posted at Fabius Maximus

Headline Unemployment Remains Low, bt Structural Problems Persist

The headline US unemployment rate has changed little over the past few months. In January, the rate moved up a tenth of a point to 4.8 percent, still well within the range that the Fed sees as consistent with its mandate to maintain maximum employment - the "Nairu," as economists call it.

The headline unemployment rate does not tell the whole story, however. One of the key features of the labor market during the Great Recession was the very strong rise in long-term unemployment, defined as workers who remain jobless, but continue to seek work, for 27 weeks or longer. As the next chart shows, the share of all unemployed who are out of work 27 weeks or longer remains much higher than was the case this far into previous expansions.  > > >

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Thursday, February 2, 2017

Dutch Economy Expected To Remain Strong As Key Election Looms

Three, possibly four Eurozone countries will hold national elections this year in which the populist right hopes to score major gains. Outright victory still seems unlikely in any of them, but following Brexit and Donald Trump's victory in the US elections, observers are nervous.

The Netherlands, with elections in March, is the first of the four. France will follow in April, Germany later in the year, and Italy, perhaps, depending on how things play out. Given the timing, a big win for its right wing party, the PVV, led by Geert Wilders, would set an ominous tone.

Fortunately, the Netherlands enters the election cycle in relatively good economic shape. As the following chart shows, it is expected to outperform the Eurozone average this year on each of six key economic indicators.>>>

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