Friday, June 29, 2012

Not a good group to be in

Missouri among top states for corporate welfare.

It turns out that quite a number of firms have carved out special deals for themselves. One Missouri specialty cuts out the middle man: There "are just five programs allowing employers to keep 100 percent of employee’s state withholding taxes, and Missouri accounts for two of those — the Missouri Quality Jobs Program and the Missouri Automotive Manufacturing Jobs Act."

Corporate welfare has been shown many times to be a failure at helping a state's economy.  Most of the money is given to firms that would have stayed even without the money, but were able to convince the state otherwise.  But even if this weren't so, such welfare would be a bad idea because if you give money to one group of firms, you will have to raise taxes everywhere else.  Overall, these policies amount to a handful of politically connected large firms getting millions in exchange for illusory gains in employment, while the rest of the economy is soaked of resources that would have gone for actual employment. 

At least some of Missouri's lawmakers are beginning to see the light:
Earlier this year, the Missouri House Committee on Government Oversight and Accountability questioned leaders from the state’s economic development department after its own report showed that less than 6,000 jobs had been created, although more than 23,000 new jobs were promised.
Missouri Sen. Bill Stouffer, a Republican from Napton, told Missouri Watchdog he has become less enthusiastic about corporate subsidies, comparing the economic development practice to extortion.
“I think the legislature should foster a friendly business climate for everybody. That climate should be fair with an opportunity for growth,” said Stouffer, who has served the term-limited maximum of eight years in the Missouri Senate and is among three GOP candidates running for secretary of state.
“I don’t like blackmail. If we continue giving it away, we’re going to continue to get blackmailed.”

Wednesday, June 20, 2012

I think the Fed knows that it is impotent

There is a nice article in today's Post-Dispatch outlining the Federal Reserve's options for "providing further support for a slumping U.S. economy."  Notice this wording, which matches what the Fed has been saying for a while.  They are not looking to reverse or stimulate the slumping economy.  They merely want to support it, which is about all that it might be able to do. Because the slumping economy has nothing to do with monetary policy, there is nothing that the Fed can do to reverse the slump. Our problems are structural and can only be addressed by revising the tax code, stripping away onerous regulations, resolving the uncertainty about future policies, etc.

Is immigration the answer for St. Louis?

There is an article on the front page of today's Post-Dispatch describing a study by SLU economist Jack Strauss. According to an earlier post on stltoday, the thrust of the study is that "(i)f St. Louis hopes to thrive economically, it needs to attract more immigrants."  Further,
Strauss found that foreign-born residents of metro St. Louis, on average, earn 25 percent more, are 44 percent more likely to have a college degree and are 60 percent more likely to start a business than their native-born counterparts. They tend to cluster in growing industries like technology, healthcare and biotech, and if the region hopes to remain competitive in those areas, Strauss writes, we need to draw more of them into the local workforce.
I've taken a look at the study myself, and I think that it makes a classic error of logic. The basics of the study are: successful cities have lots of immigrants, so St. Louis needs lots of immigrants to be successful. This logic really mixes up cause and effect because immigrants, especially highly skilled ones, go to thriving cities. Thriving cities are not created from non-thriving ones after immigrants start moving there because a welcoming committee was set up.   

A city can't just decide that it wants more immigrants. Immigration is not one of the levers that policymakers have. Urban economists like myself have spent years studying why cities grow, and most of our intellectual effort goes into sorting out exogenous variables from endogenous variables. Endogenous variables, like immigration, are determined alongside economic growth, but do not cause it.  Exogenous variables like tax rates and education policy can cause growth. It is true that immigration reinforces the existing strengths of the local economy, but it does not create those existing strengths.

To understand the difference between endogenous and exogenous variables, think of local taxes. Tax rates are determined by policymakers (tax rates are not exactly exogenous, but lets take them to be so) and, depending on the strength of the economy, there is some amount of tax revenue generated.  Low tax rates might also mean faster growth. Now, I could look at tax revenue across cities and notice that tax revenue is highest in cities with strong economies. I could then conclude that what St. Louis needs is higher tax revenue to generate economic growth. But tax revenue is an endogenous variable and doesn't cause anything. It's simply determined alongside economic growth and are both caused by low tax rates.

Strauss's argument is similar to the tax revenue one. There are policies and natural disadvantages that result in St. Louis having slower growth than other cities. If I look at other cities, I might notice that fast-growing ones have a lot of immigrants and conclude that St. Louis needs immigrants to grow. But immigration is an endogenous variable that is determined alongside growth. It does not cause it. Immigration and growth are both determined by the fundamental exogenous factors of the economy, including policies.

As an immigrant to the United States and St. Louis, I can tell you what causes immigration: an offer of a high-paying job or the opportunity to get such a job. These opportunities are more prevalent in fast-growing cities, so it is these cities that see more immigrants. It's not the other way around.

Tuesday, June 19, 2012

Speak for yourself

UN Official: Western Nations 'Don't Need More Cars, More TV, Whatever'

I have several rooms without a TV and I won't be satisfied until that situation is taken care of.  And my one SUV is only a mid-sized one and sometimes I want to drive one that is a different color.  So, I need at least a couple more SUVs:  One large blue one and one mid-sized green one.  Oh, and also a silver Ford F-150 extended cab pick-up.  One of those Platinum ones.  And I won't stop until I get as much 'whatever' will fit in my house and vehicles.  Now that I think of it, I need a bigger house also.

Friday, June 15, 2012

Personal freedom > data > straw man

Greg Mankiw linked to an article arguing in favor of maintaining funding for the American Community Survey (ACS).  Mankiw and the article's authors make the silly claim that opposition to the survey has something to do with ideology.  The article even draws parallels with Argentina prosecuting those who estimate inflation to be higher than the official estimate, and Greece going after the head of its statistical agency for not cooking the books.

Not that they could be bothered to look it up, but opposition to the ACS arises because those selected to participate are required by law to do so, under threat of thousands of dollars in fines.  The survey asks for information that many would prefer to keep to themselves.  Other people simply resent being threatened with legal penalties if they refuse to participate.  Surely economists can recognize that there are limits to how intrusive their data collection should be, and surely they shouldn't be so ignorant as to think that economists' research needs trump personal freedom.

The ACS is a terrific resource and I'm glad that it exists. But we use many data sets (almost all of them, really) that were not collected under threat of legal penalty. Maybe we can make do with an ACS that is not so obnoxiously collected.

Latest economics research rankings in Missouri

RePEc is a website that acts as an on-line repository for economics research. They use the enormous amount of information they have to rank journals, people, and organizations. I don't put much stock in their rankings because they used oddly biased information in peculiar ways.

But, what the heck. They must know what they're doing because my institute continues to be highly ranked in Missouri, even though the rankings don't control for size. Here are the latest rankings of academic departments and economists, which I cleaned up a bit to remove retirees and the two Feds, because their rankings can be driven by double counting.

Update: Rankings for 2013

Sunday, June 10, 2012

Economic impact of St. Louis sewer improvements

An article in today's Post-Dispatch addresses the economic impact of the several billions the area must spend over the next few years to upgrade its sewer system.  I was quoted saying that the economic effect is negligible because it's simply taking money from consumers, who then decrease their consumption of other things.

Jack Strauss of St. Louis University says that the economic impact will be substantial.  It appears that he did an economic impact study finding an increase of 17,000 jobs.  I am reflexively wary of the words "economic impact study".  Such studies tend to overstate impacts because they fail to take account of all of the substitutions within the economy.  I couldn't find the study itself, but there is a description of it on page 20 of this document.  From what I can tell from the description, there is no reason for me to feel any differently about its methodology.  The input-output models that are used in impact studies are widely used, but are little-respected among many economists.  They're regionalized versions of Keynesian models of the national economy, which have not been generally accepted since Robert Lucas's eponymous critiqueHere's a nice assessment of input-output models versus the cost-benefit approach that I prefer.

Remember, this project involves no money from outside the region, and probably involves substantial amonts of money leaving the region to purchase materials, pay contractors, and hire workers.  The net benefits from an infrastructure project are the benefits from what is produced minus what it costs to build it.  A bridge, for example, decreases costs of transportation for everyone, thereby creating benefits.  The sewer project will do little to improve the region economically, but the region will have to pay billions of dollars for it.

The benefits of the sewer project are environmental, and a great deal of the benefits are for people downstream from us on the Mississippi.  We are being forced to undertake the project because our sewer system violates Federal law.  On the other hand, there is some slack in the local construction industry, which is why I think the economic effect of the project will be negligible rather than negative.  But, if and when the economy picks up, this slack will be needed in the rest of the economy to produce useful things.

Missouri's education problem

Missouri GDP growth in 2011 was 0.04 percent, which is pretty dismal even relative to the dismal national economy. Generally speaking, when you look at growth across states, the ones doing well are energy (oil and/or natural gas) states and those on the west coast, who are best poised to trade with Asia. Those doing the worst tend to be in the South and up through Missouri to Montana and Idaho.

My view about Missouri's slow growth is that it is largely about education. But not just overall educational attainment, which doesn't really capture the situation. Missouri's economy is dominated by two large metro areas whose core cities are served by absolutely awful school systems. This doesn't harm just those cities, but their metro areas as a whole. My view that education is the problem appeared in an article in the Post-Dispatch ("Mo. Economy Barely Grew in 2011. Why?" St. Louis Post-Dispatch, June 6).

The editorial board then used the quote in an editorial to bash the governor and state Republicans ("Editorial: Focus on Education to Jumpstart Missouri's Economy," St. Louis Post-Dispatch, June 10). I doubt, however, that they would use a quote from me to justify the specifics of improving education. Such a quote would include research results that money is not the problem and that school choice would help. It might even include a suggestion to dissolve the school districts altogether in some areas and to seriously consider eliminating tenure.

I was interviewed on KMOX, where I was able to give some of my broader views (Listen).

Friday, June 8, 2012

The economy should have been booming

IBD has a good rundown of a point I made the other day about how the tendency is for deep recessions to be followed by strong recoveries.  This was certainly well-known in 2009 when forecasters, including the Administration's, were predicting such a recovery.  The President and the head of his Council of Economic Advisors, Alan "Cash-For Clunkers" Krueger, now try to peddle the notion that the Obama recovery is the natural consequence of the Bush recession rather than their own horrifically ill-conceived policies.

Green jobs hokum

Not surprisingly, the Labor Department has a rather malleable definition of green jobs: school bus drivers, oil lobbyist, antique-book sellers, etc.

Wednesday, June 6, 2012

More dross about the minimum wage

The Rev. Dr. Martin Rafanan wrote in the Post-Dispatch that there is a moral imperative to raise the minimum wage in Missouri from $7.25 to $8.25.  According to him, "Raising the minimum wage is one of the most important actions we can take to improve pay for workers in this state and to ensure that those who hold down a full-time job are not forced to go home to a shelter at the end of the day."  He acknowledges that some people don't think it is such a good idea, but he dismisses these people because as simply trying to find the easy way out.
Still, some people oppose raising the minimum wage. These critics often insist that, because the economy functions according to its own laws and sets prices according to the natural balance of supply and demand, there is little we can do to directly improve the pay of low-wage workers. In fact, they say, policies like the minimum wage will result only in fewer jobs for low-wage workers by requiring employers to pay them more than their labor is worth.
I am not surprised to hear arguments like this. One of the easiest ways to back out of our duties to others is to pretend that there is nothing we can do in the first place. But the truth of the matter is clear: Unless we raise the minimum wage, workers in this state will continue to struggle to make ends meet, and we will continue to share in the responsibility for their hardship.
Really?? Research finding that the minimum wage results in higher unemployment for the poor and minorities does so only because the researchers want to back out of their duties?!

No one who is opposed to the minimum wage pretends that "there is little we can do to directly improve the pay of low-wage workers." How about education? If you want people to make more money, then make them more valuable as workers. What about the support among economist to replace the minimum wage with something like a negative income tax so that people get the income support they need without throwing the poorest out of their jobs?

The truth of the matter is clear, but not to you, Rev. Dr. Rafanan: Too many people have been deluded into thinking that government can wave a magic wand to make the laws of supply and demand go away. It is always the worse off among us who are harmed by this delusion. Public policy in this country would be improved if people did not to let their economic ignorance turn into moral ignorance.