Interpreting the California Vote

In their May 27, 2009 column in Business Week entitled "The Power of Pushback," Jack and Suzy Welch praise the benefits of divided government. Included in their argument is an interpretation of California voters recently rejecting all of the proposed increases in state revenues in order to fund the government services provided:

Californians voted overwhelmingly to block further tax-and-spend mayhem....Finally, people are saying, "Enough!" to financial irresponsibility. In fact, if the 2-1 margin means anything, it suggests that California residents are shouting to make their voices heard.

The Welches imply the California vote was a mandate for less government. We will see how Californians respond to the upcoming deep spending cuts that will affect education, police, and firefighting services. I think a more reasonable interpretation is that many people are unrealistic, selfish, and short-sighted. They do not want fewer government services, but rather just do not want to pay for them. Others are reluctant to pay for services they do not benefit from directly. Yet, someone benefits from every type of government spending. And it is difficult to reach a consensus on what qualifies as wasteful government spending. This explains why the federal government accumulated about $10 trillion in debt between 1981 and 2009. Politicians are reluctant to reduce government services, because they are widely popular. Yet, tax cuts are popular, too.

Any Libertarians Looking for a New Place to Live?

"Freedom in the 50 States" is a February 2009 study by William P. Ruger and Jason Sorens that creates an index of personal and economic freedom for each state in the nation. According to its executive summary:

This paper presents the first-ever comprehensive ranking of the American states on their public policies affecting individual freedoms in the economic, social, and personal spheres. We develop and justify our ratings and aggregation procedure on explicitly normative criteria, defining individual freedom as the ability to dispose of one’s own life, liberty, and justly acquired property however one sees fit, so long as one does not coercively infringe on another individual’s ability to do the same.

This study improves on prior attempts to score economic freedom for American states in three primary ways: (1) it includes measures of social and personal freedoms such as peaceable citizens’ rights to educate their own children, own and carry firearms, and be free from unreasonable search and seizure; (2) it includes far more variables, even on economic policies alone, than prior studies, and there are no missing data on any variable; and (3) it uses new, more accurate measurements of key variables, particularly state fiscal policies.

We find that the freest states in the country are New Hampshire, Colorado, and South Dakota, which together achieve a virtual tie for first place. All three states feature low taxes and government spending and middling levels of regulation and paternalism. New York is the least free by a considerable margin, followed by New Jersey, Rhode Island, California, and Maryland. On personal freedom alone, Alaska is the clear winner, while Maryland brings up the rear. As for freedom in the different regions of the country, the Mountain and West North Central regions are the freest overall while the Middle Atlantic lags far behind on both economic and personal freedom. Regression analysis demonstrates that states enjoying more economic and personal freedom tend to attract substantially higher rates of internal net migration.

The data used to create the rankings are publicly available online at www.statepolicyindex.com, and we invite others to adopt their own weights to see how the overall state freedom rankings change.

Visual Evidence of the Lack of Economic Growth in North Korea

This satellite image of North and South Korea provides striking visual evidence of the difference in economic growth between the two countries. North Korea has such little electricity that it appears dark.

Florida Amendment One - Property Tax Reductions for the Less Affluent Have Been More Than Offset By Increases in Fees for Services

Today I received a bill from the city of Jacksonville for $111, comprised of 2009 fees of $51 for solid waste and $60 for stormwater. In 2008, the bill was just the $60 stormwater fee. Prior to that, these fees did not exist. They are a direct response to the January 29, 2008 passage of Amendment One to the Florida Constitution. According to the Florida governor´s web site:

Specifically, the constitutional amendment:
1. Doubles the homestead exemption for almost all homeowners, providing an average savings of about $240 annually. The new exemption applies fully to homesteads valued over $75,000, and partially for homesteads valued between $50,000 and $75,000. This new exemption does not apply to school taxes.
2. Allows portability: The Governor has heard from many Floridians that they feel trapped in their homes. Portability allows homeowners to transfer their Save Our Homes tax benefits from their current home to a newly purchased home within any Florida county. Portability applies to homes purchased in 2007 and later, and the benefit is capped at $500,000.
3. Provides an assessment cap of 10 percent for all properties not previously capped: While homestead properties are already capped at three percent, now all other properties, including rental properties, second homes, and business properties, will be protected from huge tax increases. This new exemption does not apply to school taxes.
4. Creates a new $25,000 exemption for business property, including office furniture, computers, machinery and equipment.

The amendment was marketed to the public as a guarantee of lower property taxes. Yet, the advocates failed to sufficiently explain that because the amendment reduces government revenues from property taxes (by allowing landowners to exclude more of their property from taxation), it has necessitated increases in other taxes and fees to allow local governments to provide the services (such as police and fire protection, schools, and garbage collection) that citizens expect. If one considers all sources of revenue for local governments, the effect of the passage of amendment one has been to shift the tax burden away from the rich (because they can exclude up to $500,000 of property value from taxation with the portability provision) to the less affluent.

Tax Reform

I am willing to consider reforms of the tax system. I have attended rallies for the "flat tax," the "fair tax," and a few others. One thing they have in common is that EVERYONE in attendance (that I talked to) thinks he or she will pay less under the proposed new system, despite claims that the proposals are revenue neutral. The rich, middle-class, and poor all think they will pay less. But they cannot all be right if the new tax will generate the same revenue as the taxes it replaces. So who is being deceived? My bet (and that of most economists) is that the poor and middle-class are being mislead (again). The wealthy and powerful have a potent propaganda machine.

Wasteful Government Spending

I can think of no politician who publicly opposes the reduction of "wasteful government spending." But what seems wasteful to some appears essential to others.

Jacksonville used to be the home port of the USS John F. Kennedy, the last conventionally powered aircraft carrier built by the U.S. Navy. The ship was expensive to operate and needed extensive repairs. In 2005, the Department of Defense (DOD) proposed saving taxpayer dollars by decommissioning the Kennedy. The response by Florida politicians (including conservative Republicans who claimed to advocate the reduction of government) was that the Kennedy was essential to national defense. (It was finally decommissioned in 2007.)

A similar event is occurring now. In April 2009, the DOD proposed to cease buying new F-22 Raptor fighter jets. So many states are producing parts for the aircraft that politicians do not want to support the Navy's own recommendation for curbing its expenses.

So how do we get past this?

See also "Reductions in Defense Spending?"

Can we eliminate federal budget deficits by reducing spending and not raising taxes?

Many opponents of tax increases claim we can reduce government budget deficits and pay down the public debt just by cutting government spending. Is this a reasonable assertion?

The federal budget defIcit for the current fiscal year is estimated to be more than $1.8 trillion. I think we would be extremely hard-pressed to find 51 U.S. Senators who would agree to cut federal spending by anything close to that amount. We can try to elect more fiscally responsible leaders. But in the meantime, what do we do? As it stands, we are passing trillions of dollars of debt to future generations. I think that is morally and ethically wrong. So, yes, I do favor raising taxes now (while still trying to reduce government spending). And, yes, I think we should extract most of that from the wealthy. I do not agree with the assertion that if you tax the rich they will just leave. Mississippi has substantially lower taxes than Massachusetts, but I don´t see most of Boston making that move.

President Bush blames insufficient regulation for economic downturn

In a May 28, 2009 speech to The Economic Club of Southwestern Michigan at Lake Michigan College, President George W. Bush blamed the current economic recession on insufficient regulation of financial markets:

He talked about the economy, blaming "a lack of responsible regulation" in the lending industry for the recession and said that the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corp., or Freddie Mac, shouldn't have engaged in certain financial practices.

As mentioned in an earlier post, markets are amazing. Yet, markets are not perfect. Most economists believe it is appropriate to regulate markets to improve their social outcomes. President Bush seems to agree. Despite his claims to the contrary, he is not a supporter of free markets, which are by definition free of government regulation and interference.

Is taxing the rich a misguided policy?

A May 27, 2009 article in the Wall Street Journal entitled "Millionaires Go Missing" decries taxation of the rich:

Here's a two-minute drill in soak-the-rich economics:

Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.

No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey (see here).

The Maryland state revenue office says it's "way too early" to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It's easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: "Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it's easy for them to change their residency."

All of this means that the burden of paying for bloated government in Annapolis will fall on the middle class. Thanks to the futility of soaking the rich, these working families will now pay Mr. O'Malley's "fair share."

The article IMPLIES that the increase in Maryland´s taxation of the wealthy caused rich people to move elsewhere and thus dramatically reduced government revenues. One might assume an intended inference is that by reducing taxes on the wealthy, tax revenues would increase. Yet the article admits that the primary cause of the loss of millionaires is the recession. Many people who earned more than $1 million in recent years have less income now. These are not people who moved out of Maryland because of its tax policies. Despite the inferences of this article, it provides conjectures, but no evidence, of a detrimental effect of higher taxes.

Government Policies to Save Energy May Include Painting More Things White

According to a May 22, 2009 article by Agence France Presse entitled "US wants to paint the world white to save energy"

LONDON (AFP) - US Energy Secretary Steven Chu said Tuesday the Obama administration wanted to paint roofs an energy-reflecting white, as he took part in a climate change symposium in London.

The Nobel laureate in physics called for a "new revolution" in energy generation to cut greenhouse gas emissions.

But he warned there was no silver bullet for tackling climate change, and said a range of measures should be introduced, including painting flat roofs white.

Making roads and roofs a paler colour could have the equivalent effect of taking every car in the world off the road for 11 years, Chu said.

It was a geo-engineering scheme that was "completely benign" and would keep buildings cooler and reduce energy use from air conditioning, as well as reflecting sunlight back away from the Earth.

For people who found white hard on the eye, scientists had also developed "cool colours" which looked to the human eye like normal ones, but reflect heat like pale colours even if they are darker shades.

And painting cars in cool or light colours could deliver considerable savings on energy use for air conditioning units, he said.

Speaking at the start of a symposium on climate change hosted by the Prince of Wales and attended by more than 20 Nobel laureates, Chu said fresh thinking was required to cut the amount of carbon created by power generation.

He said: "The industrial revolution was a revolution in the use of energy. It offloaded from human and animal power into using fossil fuels.

"We have to go to a different new revolution that can severely decrease the amount of carbon emissions in the generation of energy."

To what extent should the government promote policies such as this? This is at the heart of one´s belief in the appropriate roles for government.

The Economics of Facebook

Social networks, such as Facebook, are generating vast amounts of data that could be valuable to businesses - especially in terms of marketing and advertising. A May 22, 2009 Business Week article entitled "Learning, and Profiting, from Online Friendships" by Stephen Baker claims:

"Companies are working fast to figure out how to make money from the wealth of data they're beginning to have about our online friendships."

Is Obama a Socialist?

A survey suggests many Americans, including critics of President Obama, do not know the difference between capitalism and socialism.

According to a May 22, 2009 Business Week article entitled "Socialism? Hardly, Say Socialists,":

"Some conservative commentators have even likened Obama's economic stimulus and regulatory initiatives to a Soviet-style takeover of the country. In February, syndicated radio host Rush Limbaugh accused Obama of waging war on capitalism. "That's his objective. He wants to destroy capitalism," Limbaugh told a caller. "He wants to establish a very powerful socialist government, authoritarian. He wants control of the economy."

But real Socialists would vigorously disagree. They say if the Obama Administration were establishing a true socialist state, we'd have at least a $15-an-hour minimum wage (instead of the current $6.55 federal minimum) and 30-hour workweeks. Every American would be guaranteed employment and health-care coverage. Oh, and homeless people would be occupying vacant office buildings in cities and vacant McMansions in the suburbs.

In fact, many Americans appear to be confused about what socialism actually is. In a poll of 1,000 adults conducted Apr. 6-7, Rasmussen Reports found that 53% of Americans said they prefer capitalism to socialism, while 20% said they prefer socialism. More than one-quarter, 27%, said they're not sure which system is better. Another poll conducted this month by ConservativeHQ.com found that 70% of self-identified conservatives consider Obama's political philosophy "Socialist" or "Marxist," with 11% calling it "Communist."

Socialists say the policies Obama has pursued are hallmarks of "democratic capitalist" states, not socialist ones. "None of the societies of Western Europe are socialist, but the political influence of their strong Labor, Social Democratic, and Socialist parties make their form of capitalism much more humane than our own," says Frank Llewellyn, national director of the New York-based Democratic Socialists of America (DSA), the largest U.S. Socialist party."

Should Christians Quote the Old Testament to Oppose Gay Marriage?

In response to an earlier post asking if gay marriage is an economic issue, a former student sent me a link to the clip from an episode of The West Wing in which the President responds to a radio host who quotes the Old Testament to denounce homosexuality as an abomination.

A Wikipedia episode description says:

In its second season episode "The Midterms", President Bartlet admonishes fictional radio host Dr. Jenna Jacobs for her views regarding homosexuality at a private gathering at the White House. Dr. Jacobs is a caricature of radio personality Dr. Laura Schlessinger, who strongly disapproves of homosexuality. Many of the president's biblical references in his comments to Dr. Jacobs appear to have come from an open letter to Dr. Schlessinger, circulated online in early May 2000.

Is it fair and reasonable for Christians to cite parts of the Old Testament as justification for beliefs while ignoring other parts? Do the messages of love, compassion, and forgiveness in the New Testament contradict the vengefulness of the Old Testament?

U.S. consumer confidence sees biggest jump in 6 years

U.S. consumer confidence sees biggest jump in 6 years

By Pedro Nicolaci da Costa
Tue May 26, 10:17 am ET
NEW YORK (Reuters) – U.S. consumer confidence soared in May to its highest level in eight months as severe strains in the labor market showed some signs of easing, though Americans' moods remained depressed by historical standards.

The Conference Board, an industry group, said on Tuesday its index of consumer attitudes jumped to 54.9 in May from a revised 40.8 in April, the biggest one-month jump since April 2003. Economists had been looking for a much smaller rise to 42.0.

Fewer Americans said jobs were "hard to get," the survey found, with that measure slipping to 44.7 percent from 46.6 percent. Those saying jobs were plentiful climbed to a still meager 5.7 percent, but that was still higher than April's 4.9 percent.
"Consumers are considerably less pessimistic than they were earlier this year," said Lynn Franco, director of The Conference Board's Consumer Research Center.

The data was in line with other evidence suggesting that, while the economy continues to contract in the current quarter, the pace of deterioration has abated somewhat.

U.S. stocks extended their rally after the data, with the Dow Jones industrial average up 120 points or 1.5 percent.

The survey offered mixed messages regarding Americans' propensity to spend money. The proportion of those who said they planned on buying a car over the next six months rose to 5.5 percent, its highest in at least a year.

But fewer intended to buy homes -- only 2.3 percent, a tough break for one of the hardest hit sectors in the country's economic crisis. A separate report on Tuesday revealed U.S. home prices dropped 18.7 percent in March compared to a year earlier.

(Reporting by Pedro Nicolaci da Costa, Editing by Chizu Nomiyama)

What is the Appropriate Economic Policy for the Dairy Industry?

Global milk glut squeezes dairy farmers, consumers

By CHRISTOPHER LEONARD, AP Business Writer
Monday, May 25, 2009

BARNHART, Mo. – A collapse in milk prices has wiped away the profits of dairy farmers, driving many out of business while forcing others to slaughter their herds or dump milk on the ground in protest. But nine months after prices began tumbling on the farm, consumers aren't seeing the full benefits of the crash at the checkout counter.

The average price for a gallon of milk at grocery stores last month is down just 19 percent from its peak of $3.83 in July. Farmers, on the other hand, got $1.04 a gallon in April — 35 percent less than they were paid last fall. This winter, wholesale prices were down as much as 45 percent.

Price disparities are a fact of life both for farmers and anyone who shops at a supermarket, but the nature of milk — how it's stored, priced and sold around the world — makes the gap all the more dramatic. In fact, the price that farmers get has been wildly volatile for years, creating a succession of booms and busts felt from pastures to the grocery store.

With each turn, proposals are floated to end the pricing seesaw, which at one extreme squeezes the profits of farmers and the other squeezes dairy processors. Any fix that boosts the price of milk runs the risk of bumping up how much consumers pay, too.

Today, frustrations are spilling over as the price crash creates widely divergent fortunes within the milk industry, boosting profits for the middlemen like dairy processors while pushing farmers to the edge of bankruptcy.

Darrell Kraus, a dairyman in Barnhart, spends almost as much today on hay and other supplies for his herd of 160 cows as he did a year ago, but he's getting paid less for a gallon of milk than his father in the 1970s. He blames middlemen who buy the milk from the dairies, process it and sell it to grocery stores at higher prices.

"Somebody's getting a cut of this, but it's not the dairy farmer," he said. "It's sad, but they're going to see a lot of dairy farms go out of business."

At a grocery store in Fayetteville, Ark., Katherine Thacker noticed how milk prices were slowly falling — but not as drastically as last year's price hikes. She was surprised to learn that the lower wholesale milk prices were being absorbed by dairy processors.

"That's kind of criminal, isn't it?" she said.

Milk processors and supermarkets see it differently.

Last fall and summer, they swallowed losses because of high wholesale milk prices and government-mandated ceilings on what they can charge. They're now recouping some of what they lost and anticipating a rise in prices this winter, said Mike Nosewicz, vice president of dairy operations at Cincinnati-based Kroger Co., which operates its own dairy processing division and sells milk through 2,400 supermarkets.

At the heart of the problem is the nature of milk. Unlike grain farmers who can hold out for better prices by storing crops in a silo, dairymen must sell raw milk to processors or else it spoils. And cows keep producing whether the economy's expanding or in recession.

The price paid by processors to farmers is set by the U.S. Department of Agriculture based on commodity markets, which rise and fall with global demand. Some of the raw milk is processed into milk for stores as well as butter, yogurt and other products for U.S. consumption. The rest becomes powdered milk, cheese and whey for international and domestic markets.
U.S. milk exports soared last year and demand grew in countries like China while supplies dropped from Europe and Australia. U.S dairy exports jumped to $3.82 billion, or 11 percent all milk production in 2008 according to the U.S. Dairy Export Council. Wholesale prices jumped.

Dairies responded to the demand by increasing production.

But once the global recession accelerated last fall, demand, particularly exports, fell off a cliff.

U.S. farmers were suddenly faced with too much milk and too many cows. Wholesale prices crashed. Farmers found themselves spending more to maintain their herds than they were being paid for raw milk.

"It's an inequity that cries out for attention, consideration and action," said Sen. Robert Casey, a Democrat from the dairy stronghold of Pennsylvania. Casey projects that 25 percent of his state's 7,400 dairy farms could disappear because of the crisis.

Casey said most lawmakers are focused on short-term solutions — loans or subsidies — to help farmers bridge the period of depressed prices. But he said Congress should also explore why processors and retailers are keeping their prices high while wholesale prices collapse.

Farmers also are lobbying for a bill that would change the USDA pricing system for milk so that wholesale prices reflect what they pay for feed, fuel and other supplies.

If that happens, milk would be the only commodity of its kind to have a government-set price determined in part by the cost of production, said Scott Brown, dairy analyst at The University of Missouri's Food and Agricultural Policy Research Institute.
"Anytime you put in place a policy that raises farm-level prices, those are going to get passed along to the consumer," he said.
U.S. Secretary of Agriculture Tom Vilsack also said he is not eager to remake the USDA milk pricing program. Instead, he wants to see if a range of recent actions might buoy wholesale prices. USDA recently donated 500,000 pounds of excess powdered milk to needy countries to reduce U.S. supplies, and a new program will pay farmers to slaughter more than 100,000 dairy cows.

Some farmers say faster action is needed. They're dumping their milk on the ground to draw attention to the crisis.
Jan Morrow, a farmer in Cornell, Wis., dumped milk on May 4 to protest the lowest whosesale prices she's seen in 25 years of farming. If prices don't rise, she says she may have to sell her cows.

Eddy Lekkerkerk, a 42-year-old dairy farmer outside Filer, Idaho, planned to participate in another milk dump on May 31. But he fears he may not be in business that long. For five months, he hasn't made payments on the roughly $800,000 he borrows annually to buy feed for his herd of 1,000 cattle. He said his bank is forcing him to sell his herd to pay his debt.
He predicted many of his neighbors will have no choice but to follow him off the farm.

"It's going to be ugly. This is historic stuff going on," he said. "The dairymen are nervous, and they are scared."