Tag Archives: NPR

Farm bill replaces conspicuous subsidies with inconspicuous subsidies

From consumers and taxpayers, the farm bill taketh. But to economics teachers, it continues to giveth.

The latest lesson comes courtesy of Ailsa Chang of NPR:

Also getting criticism is the newly-reformed crop insurance program. Now the idea was to protect farmers during bad seasons. The new bill expands that program with money saved from ending a system of direct cash payments to farmers. These are payments farmers would get regardless of their actual profits or even if they planted any crops. The payments amounted to about $5 billion a year. Democrat Debbie Stabenow who chairs the Sen. Agriculture Committee says now farmers will have to first incur losses before they get paid.

“With crop insurance, farmers don’t get a check. They get a bill. They may pay tens of thousands of dollars in premiums and never get a check in a year.”

But critics say farmers are just getting subsidized in a different way.

Ms. Chang is absolutely right to call crop insurance a subsidy in disguise.

Think of it this way:

Imagine that you make donuts and that in order for you to make donuts, you need to buy sprinkles. Now imagine that the government tells you that they will pick up 60 percent of your sprinkle bill. Yes, you still get a bill for sprinkles, but it is a much smaller bill than you would otherwise get. A normal person would call that a subsidy. Similarly, it only seems reasonable to say that when the government picks up 62 percent of a farmer’s insurance premium bill, it offers him (and his insurer!) a generous subsidy.

In many respects, however, crop insurance premium subsidies are worse than donut sprinkle subsidies because they encourage risk; they incentivize farmers to plant crops in flood or drought-prone fields. This is a lesson in moral hazard.

It’s also a lesson in political economy. Why are farm bill authors phasing out direct payments in favor of insurance subsidies and other complicated schemes like the “shallow loss” subsidy program that Professor Vincent Smith writes about? The answer is that direct payments are too conspicuous.

Nobel Prize winning economist Douglass North explained the logic in this piece from 1990:

[T]ransfer payments aside, unabashed redistribution is rare precisely because of its transparency. Farm price support bills in the US policy that simply paid the farmer not to produce never succeeded for just the reason that they were too transparent. And most legislation is not of this type. In most legislation redistribution is either concealed or a by-product of other objectives. In either case, not even the bill’s author may know all the consequences; much less the constituents.


Political espionage and government intervention

“To govern is to choose,” John F. Kennedy famously declared. And when governments intervene in markets, they inevitably choose to favor some business forms over others.

Sometimes this is obvious, as when a local government considers a regulation which conspicuously privileges one type of operator at the expense of another. Sometimes this is less-obvious, as when a licensing regime raises barriers to entry, privileging incumbent firms at the expense of those that might enter the market.

Sometimes the privilege is nearly hidden. Last year, I wrote about laws banning old-fashioned incandescent light bulbs. NPR’s Peter Overby had reported that major light bulb manufacturers actually liked the ban and spent money lobbying to maintain it. Why would a firm possibly want to limit its options? After all, it can make curly-Q light bulbs whether the old kind are legal or not. The answer seems to be that the ban benefited large, established firms because it kept customers from buying the older, cheaper alternative bulbs from rivals who weren’t as good at making the newfangled kind.

The point is that it is nearly impossible to formulate an intervention that treats all firms equally. Even a flat rate tax will fall more heavily on small firms because they lack the compliance resources that the big ones have. It goes without saying that this tendency is even greater when interventions violate generality.

When government policy can make or break a business, you can bet that the business will take an interest in policy. Very large sums of money are at stake when a city council considers a new regulation, when Congress considers requiring customers to buy a certain product, or when the FDA considers approving a new drug. It should come as no surprise, then, that some enterprising folks have set up firms that specialize in reading the tea leaves of government policy. These firms help their clients predict what new rules, regulations, taxes, subsidies, etc. might be coming down the pike. And firms are willing to pay pretty hefty sums for these prognostications, especially when policy is difficult to predict (as, for example, when it turns on the arbitrary beliefs of certain regulators).

Brody Mullins and Susan Pulliam write about just such a firm in a fascinating article in yesterday’s Wall Street Journal.

Naturally, lawmakers take a dim view of this activity. Senator Charles Grassley (R-IA) wants these “political intelligence specialists” to disclose their clients, activities, and fees: “We ought to know who these people are that seek political and economic espionage,” he says.

I have another idea. Rather than regulate the firms that are trying to figure out whom government is going to punish and whom it is going to privilege, why not eliminate discriminatory government policy? Why not limit government intervention in the market? And why not ensure that policy turns on predictable rules rather than arbitrary decisions?

If government cannot privilege some and punish others, then insider information will be worth next to nothing. If government interventions are limited, then firms will not live or die at the whim of politicians and regulators. And if policy is predictable and rational, share prices will reflect policy expectations, and there will be no way to profit from insider information.

If to govern is to choose some business forms over others, then sometimes the best option is not to govern and to let people choose for themselves.

Why Proper Pension Accounting Matters, Stockton Version

For the better part of two years, Eileen has tirelessly worked to help municipalities grapple with the true costs of their pension systems. As I have argued before, Eileen’s work should be seen as pro-worker since it stresses the need for honest accounting and since it relies on the assumption that when we cost out pension plans, we should plan to live up to our promises:

So, what does it mean when people argue for a high discount rate in valuing pension systems? It means that they don’t think it is very likely that we will actually honor our promises to public employees. Thus, they believe we should discount those costs accordingly. They won’t say this, but this is exactly what such an assumption means. Conversely, people like Eileen who feel it is more prudent to use a low discount rate are saying that we should count on actually having to pay these pensions; that we should plan to honor our commitments.

Of course, in many circles, she and others who think it prudent to use a low discount rate are often characterized as being anti-public sector worker.

This week, Stockton, CA, became the largest US city in history to declare bankruptcy. In a recent interview with NPR’s Tess Vigeland, Stockton Vice-mayor Kathy Miller talked about the causes and consequence of the bankruptcy. In so doing, she lent support to Eileen’s work (emphasis added):

I think the most important thing is for the people here, this pendency plan reinforces our commitment to not reducing services to the public any further. For the last three-and-a-half years it’s the residents and our current employees that have borne the brunt of our cuts. Our employees, their compensation has been reduced anywhere from between 9-22 percent. Our workforce is down — 23 percent of our police officers, 30 percent of our firefighters and 43 percent of our other non-safety public employees. That translates to a direct reduction in services that the people living here have already experienced. These people have already given. It’s my belief that if these very generous pensions and health care retiree benefits had been fully costed out at the time they were granted, it would have been immediately apparent that they were not affordable.

Why Would Light Bulb Manufacturers Want to Be Regulated?

Image courtesy of "posterize"

NPR’s Peter Overby had an interesting (pre-holiday) story on recently-passed legislation to save the incandescent light bulb. In Robert Siegel’s intro he tells us:

Last weekend, Congress passed a trillion-dollar budget bill. Among its provisions, plenty of things not related to spending. One of these so-called riders is aimed at saving the hundred-watt incandescent light bulb. But as NPR’s Peter Overby tells us, the move by Republicans is more about politics than light bulbs.

Here is Overby:

Old-fashioned incandescent bulbs waste a lot of energy. So under federal law, they’re being slowly phased out. And the first to go, starting on New Year’s Day, is that old reliable of home lighting: the 100-watt bulb. But what looked like energy efficiency when President George W. Bush signed to law four years ago now looks like oppressive big government to many conservatives.

So the conservatives made sure that the spending bill had a rider which says the Energy Department cannot spend money to enforce the phase out of the 100-watt bulb. Here is where things get interesting. Overby went and talked to industry representatives and found that few if any actually wanted to repeal the ban:

But from the perspective of the lighting industry, this rider is several years too late to make a difference, and they don’t want Congress changing things now….

companies long ago started changing their product lines from traditional incandescents to halogens, compact fluorescents and LEDs.

The National Electrical Manufacturers Association’s Joseph Higbee tells Overby:

Delaying enforcement undermines those investments and creates regulatory uncertainty.

So far, so interesting. The companies being regulated actually want the regulation and getting rid of it would create uncertainty. So, “the move by Republicans is more about politics than light bulbs.”

But is this really the whole story? I think it would be natural to ask just a few more questions. If the ban were lifted, nothing would keep the companies from making the newfangled bulbs anyway, right? So why in the world would a firm favor legislation that limits its options? Why would it expend scarce resources lobbying Congress to keep the ban? Overby says that they “spent months giving show-and-tell demonstrations to lawmakers.” That must have taken up a fair amount of company time. But why do it?

My guess is that it has less to do with the firms wanting to limit their own options and more to do with them wanting to limit the options of would-be competitors who haven’t made investments in the newer technologies. They must worry that there is still a market for the older bulbs and they’d prefer that other firms be forbidden from serving that market.

Economists will recognize this as a simple story of regulatory capture. As Barry Mitnick put it in his classic study, The Political Economy of Regulation:

Much relatively recent research has argued that regulation was often sought by industries for their own protection, rather than being imposed in some ‘public interest.’ Although the distinction is not always made clear in this recent literature, we may add that regulation which is not directly sought at the outset is generally ‘captured’ later on so it behaves with consistency to the industry’s major interests, or at least has been observed to behave in this manner.

When I used to teach capture theory to my students, I’d often encounter incredulity. It sounds like formalized conspiracy theory. Are we
really supposed to believe that all regulations come about because industries have somehow greased the palms of politicians? Well, no. Sometimes it’s that obvious. But often, it is subtler.

As the light bulb story illustrates, some regulations come about because some politician has some well-meaning belief that the regulation will improve lives. But once the regulation is on the books, it tends to favor incumbent firms. So even if it proves to be inefficient, the incumbent firms are willing to exert a great deal of pressure to keep it there lest the market be opened up to others with different business models.

For a helpful and enlightening compendium of observations about capture, see this post by my colleague, Adam Thierer. It is interesting to note that progressive thinkers have often been the first to uncover these stories.

Big Bank Profits and Government Intervention

Zachary Goldfarb had an interesting piece in the Washington Post this week. He writes:

President Obama has called people who work on Wall Street “fat-cat bankers,” and his reelection campaign has sought to harness public frustration with Wall Street. Financial executives retort that the president’s pursuit of financial regulations is punitive and that new rules may be “holding us back.”

But both sides face an inconvenient fact: During Obama’s tenure, Wall Street has roared back, even as the broader economy has struggled.…Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 21/ 2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show.…

Behind this turnaround, in significant measure, are government policies that helped the financial sector avert collapse and then gave financial firms huge benefits on the path to recovery. For example, the federal government invested hundreds of billions of taxpayer dollars in banks — low-cost money that the firms used for high-yielding investments on which they made big profits.

Later, Goldfarb was interviewed on NPR. Near the end of the interview, he says:

But the president has also refrained from taking some of the toughest actions that some economists and outside analysts would like him to have taken. For example, forcing banks or attempting to force banks to forgive the debts of homeowners, or partially forgive the debts of homeowners, or forcing banks to break up into pieces and end, definitively, the too-big-to-fail problem.

So in a sense, Obama has tried to strike a middle ground, harnessing frustration, sharing in frustration of the public regarding the financial sector, but not taking the fundamental actions that would radically restructure the financial industry and perhaps cause there to be more fairness across the country when it comes to the disparate treatment of Wall Street and the rest of the country.

In my view, a “middle ground” would be to a) not bail out banks, and b) not break them up or force them to forgive debts. Instead, the conventional wisdom holds that the moderate position is to a) bail out private firms and then b) force their hands.

Getting People Back to Work

Germany’s unemployment rate is only 6.2 percent today. This is pretty remarkable given the severity of the recent recession, the slow growth of Germany’s trade partners (including the U.S.) and the unfolding fiscal crisis in the Eurozone.

NPR’s Caitlin Kenney attributes Germany’s relative success to a number of reforms adopted a decade ago. Kenney reports:

To figure out how Germany got where it is today, you need to go back 10 years. In 2002, Germany looked a lot like the United States does now, they had no economic growth and their unemployment rate was 8.7 percent and climbing. The country needed help, so the top man in Germany at the time, Gerhard Schroder, the German chancellor, made in an emergency call to a trusted friend.

The friend was Peter Hartz, a former HR director whom Schroder knew from his VW days. Schroder put Hartz in charge of a commission, the mission of which was to find a way to make Germany’s labor market more flexible. The Hartz commission made it easier to hire someone for a low-paying, temporary job, a so-called “mini job”:

A mini-job isn’t that great of a deal for workers. In these jobs, they can work as many hours as the employer wants them to, but the maximum they can earn is 400 Euros per month. On the plus side, they get to keep it all. They don’t pay any taxes on the money. And they do still get some government assistance.

They also reduced the generosity of unemployment benefits:

Here’s what you get if you’re out of work for more than a year in Germany: 364 euros a month – that’s about $500 – subsidized rent and heat, and a job counselor. Before the Hartz commission, you would get around 50 percent of your last income indefinitely for as long as you were unemployed.

Kenney says that Hartz “wanted to make unemployment uncomfortable so that people would get off of it quickly.”

These changes haven’t made Peter Hartz a popular figure in Germany. His legacy is controversial. He was convicted of paying off union leaders at Volkswagen to go along with his cutbacks.

But no matter how people feel about Hartz, it’s hard to argue with the huge drop in the country’s unemployment rate.

One country’s experience is not dispositive. But a number of carefully designed studies — relying on more sophisticated models and larger data sets — have reached much the same conclusion. Generous unemployment insurance and regulations that add to the cost of employment tend to make for a static, unhealthy labor market. Though designed to make life better for workers, these policies may do them more harm than good.


What is a Job? What is Work?

On NPR’s Marketplace yesterday, NPR listener Shlomit Auciello offered this profound explanation:

Jobs provide pay and tax revenue, data for the Bureau of Labor Statistics and talking points for political candidates. Work — at least good work — provides needed goods or services, a sense of useful occupation and dignity, and a good night’s sleep at the end of a hard day. When the two come together, it is very good indeed.

This gets at the heart of a very common misunderstanding. Politicians of all stripes obsess about jobs as if the key to improving the human condition were simply to make sure everyone in the world had a job. But what if these jobs provided absolutely no useful goods or services to others? From the perspective of a worker, the point of a job is not simply to have a paycheck; it is to have a paycheck that permits one to buy useful goods and services. Imagine that a government program managed to employ 100 percent of the planet in a completely useless task (digging holes and filling them back up again). Then we would have nothing useful to spend our hard-earned money on and we would have wasted our time.

It is possible for a “job” and “work” to be the same thing. But as Ms. Auciello points out, the two concepts do not always come together.

Hurricane Irene and Walmart’s staff meteorologist

A very interesting piece from NPR. Big-box retailers began their hurricane prep well before Hurricane Irene was predicted to make landfall. Home Depot’s Command Central, which looks, “much like NASA Mission Control during a shuttle launch” has been busy anticipating the storm’s effects along the East Cost. Walmart has its own staff meteorologist. This pre-hurricane prep – which actually begins before hurricane season – is why the shelves were stocked with emergency generators in Puerto Rico and available for customers when the electricity went out.

Economist Steven Horwitz studied the response of Walmart after Hurricane Katrina. His research – part of the Mercatus Center’s Hurricane Katrina project – shows that Walmart was able to respond more adeptly and quickly than FEMA and state emergency services, providing people with basic necessities including medicines (in some cases, local store managers gave supplies away to those in need). Not only are they on the ground and in the community, their very business is to respond to people’s needs and wants quickly and on a daily basis.

Since Katrina, FEMA has been studying ways to work more closely with the private sector. Interestingly, Horwitz found that the U.S. Coast Guard and local emergencies services were also able to respond more quickly than FEMA during Katrina for a similar reason: they are are decentralized and closer to the ground.

Here is Professor Horwitz discussing Walmart’s Katrina’ response:


When Local Fiscal Troubles Turn Into a Miscarriage of Justice

A sad and sordid NPR story caught my ear.

As Thanksgiving approached three years ago, the Richardson family of Clarksville, Texas, had gathered to celebrate. Around 10:30 PM, their celebrations were abruptly interrupted when police charged through the door and arrested brothers Vergil and Mark Richardson and their half-brother, Kevin Calloway.

It turns out that unbeknownst to Vergil (the owner of the home), Kevin had been dealing drugs out of a shed in the back of the property.

There were a number of problems with the case, however. For one thing, the bust was executed before a search warrant had been signed. Moreover, there was no evidence that either Vergil or Mark Richardson knew anything about Kevin Calloway’s extralegal activities. (Calloway had confessed and said he was the only one responsible for his actions.)

Eventually, these facts came to light and Vergil and Mark Richardson sued the DA, the sheriff and the Clarksville police department in a $2 million civil rights lawsuit.

Given the mishandling of the case, the state’s attorney general office elected to drop the charges (“in the interest of justice”). Then things got really weird: the judge refused to let them do so.

State Judge John Miller refused to accept the attorney general’s decision to drop the case. The ruling was so unusual that it lifted legal heads around the state.

But the judge was just getting started. He told defense lawyers that he intended to replace the attorney general’s office and appoint a new special prosecutor, someone who would agree to prosecute all of the members of the Richardson family, not just their half-brother Calloway.

What was behind the judge’s unusual decision? One explanation may be race. The brothers are black while the judge is white. But one reporter has another theory:

Bill Hankins, a reporter for The Paris News in nearby Paris, Texas, who has been covering the story closely, thinks this case is about more than just race.

“You know, [Red River County] is a poor county … and I think … [Miller is] concerned about the lawsuit eating up funds that they don’t have,” he says.

Read the whole story.