Want to Reduce Inequality?

For liberals who want to reduce inequality, the answer is simple: Reduce the number of burdensome regulations, according to a Mercatus Center article.

The article, using an example of an entrepreneur who has created a popular phone app, makes a convincing case against regulation.

The app’s creator will earn profits over time as the app’s popularity and sales increase. However, her profits will eventually decline due to the process of creative destruction: a newer, better app will hit the market that pulls her customers away from her product, erodes her sales and forces her to adapt or fail. The longer she is able to differentiate her product from others, the longer she will be in business and the more money she will earn. … A lack of competition stretches out a firm’s life cycle since the paucity of substitutes makes it costlier for consumers to switch products if the value of the firm’s product declines.

Indeed, regulation–especially regulation that inhibits market entry–exacerbates inequality by dampening competition and allowing entrepreneurs to dominate a market longer than they would in a world with no or reduced regulation. The article continues:

Maintaining market power for a long period of time by restricting entry not only increases corporate profits, it also allows doctors, lawyers, opticians, and a host of other workers who operate under a licensing regime that restricts entry to earn higher wags than they otherwise would.

Occupational licensing is a huge problem. Indeed, lawyers and doctors–using laws that require inordinate amounts of education–artificially reduce the supply of doctors and lawyers, which increases their pay. Even if you favor occupational licensing for doctors and lawyers,  licensing for hair braiding is clearly ridiculous. In fact, the percentage of the workforce that is required to have licensing rose from 5% in the 1950s to 20% by 2000 and 29% in 2006. A lot of fields, as a result, have been closed to low-skilled workers, which makes it harder for them to rise above poverty. These laws protect the entrenched laborers and quash the newcomers; in other words, they worsen inequality.

The Mercatus article continues:

Throughout America’s history the economy has been relatively dynamic, and this dynamism has made it difficult for businesses to earn profits for long periods of time; only 12% of the companies on the Fortune 500 in 1955 were still on the list in 2015. In a properly functioning capitalist economy, newer, poorer firms will regularly supplant older, richer firms and this economic churn tempers inequality. … But this dynamism may be abating and excessive regulation is likely a factor. For example, the rate of new-bank formation from 1990 – 2010 was about 100 banks per year. Since 2010, the rate has fallen to about three per year. Researchers have attributed some of the decline of small banks to the Dodd-Frank Wall Street Reform Act, which increased compliance costs that disproportionately harm small banks. Fewer banks means less competition and higher prices.

While some degree of inequality will always exist in a capitalist economy, especially in a society like ours which is (historically, at least) hyper-meritocratic, there would always be a churn. People would rise and fall, and there would always be a degree of dynamism. But as regulation is hampering competition, fat cats have the ability to get fatter without adding anything to society. Ironically, regulations meant to curtail their power have actually increased it by wiping out their competition.

America deregulated throughout the 1980s and 1990s. We were more prosperous as a result. Now, the issue isn’t even about becoming wealthier; it is about defeating the entrenched upper-class and unleashing competition into the market place. The answer isn’t more regulation. It’s less.

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Boston University Study Says Regulation INCREASES Corporate Profits

Bernie Bros, listen up: Federal Regulations increase corporate profits. Unfortunately, Sandernistas refuse to acknowledge the true source of the problem–big government–in order to simply focus on “soaking the rich,” which would have deleterious impacts on our economy.

According to a recent Boston University study, “since 2000 much of the rise in profits is caused by growing political rent seeking.”

For those who don’t know what rent-seeking his, here is a definition: “Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the company.”

So how do more regulations enable rent-seeking behavior? Simple. The bigger the government, the more incentive a company has to invest in the government.

A more complex tax system works in favor of established businesses because smaller businesses and upstarts cannot afford to hire lawyers and accountants to sift through the rules, whereas big companies do have those resources.

Regulations benefit large companies as they can afford to not only incur the costs, but also have the influence to decide how they are written. Regulations harm small businesses that cannot incur the costs and, oftentimes, are written in ways meant to reduce competition from new up-and-comers.

Sandernistas, take note: Citizens United is not the source of the problem–big government is. And this is no longer just theory; there’s now evidence to prove it.

Has Financial Regulation Made the Financial Sector More Stable?

President Obama, in the wake of the financial crisis, passed a multitude of financial regulations aimed meant to reduce the risk of future financial crises. Paul Krugman, of course, gave Obama a raving review. He wrote:

Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.

While Krugman doesn’t think the regulation went far enough, at least it’s a start. And I actually agree: banks should hold more capital.  Even the Adam Smith Institute–which, just looking at the name, you can guess what their political leanings are–supports higher minimum bank capital requirements.

But, with all of these accomplishments, I wouldn’t call these new regulations “a success story.” Bank capital reserve increases are a positive, but do they outweigh the negatives?

An interesting study by the Federal Reserve Bank of Richmond finds that “61 percent of the liabilities of the financial system are subject to explicit or implicit protection from loss by the federal government.” Why is that a problem?

Because of simple incentives. If your money is insured, you are willing to take more risks with that cash than you otherwise wouldn’t. A risky loan or investment makes more sense if you can expect full or partial recompense from the government than if there were no (or less) insurance overall. If risky investments as a whole begin to go south, the economy will enter a collapse–like we did in 2008. Except this time will probably be worse, as interest rates are already close to zero and the Federal Reserve has fewer tools in its toolbox than it had in 2008.

It is impossible to know which effect will outweigh the other. Capital requirements make crisis less likely; Federal insurance, on the other hand, makes it more likely. Only time will tell whether or not these new rules will have any impact on the rate of financial crisis in this country.

As the evidence on the efficacy of these regulations is somewhat ambiguous, and there are known problems with these laws, we should consider changing–or outright repeal and replacement of–these laws.

Wharton School of Business on NAFTA

Despite Trump’s Wharton credentials, he seems to not share their view on free trade. The Wharton School of Business has a good article on the impacts NAFTA had on the United States. The article can be read here. Here are some of the highlights:

[T]wenty-five cents out of every dollar of goods that are imported from Canada to the U.S. is actually ‘Made in USA’ content, as are 40 cents out of every dollar for goods imported into the U.S. from Mexico… Mexico imports more from the U.S. these days than do all of the so-called BRIC nations combined – Brazil, Russia, India and China… [T]he United States has been $127 billion richer each year thanks to ‘extra’ trade growth fostered by NAFTA… And while the costs of NAFTA are highly concentrated in specific industries…the benefits of the trade pact (such as lower prices for imported electronics or clothing) are distributed widely across the U.S.

For example, according to a 2014 report by the Peterson Institute for International Economics (PIIE), the United States has been $127 billion richer each year thanks to “extra” trade growth fostered by NAFTA. ….the pure economic payoff was …$400 [per person].

…[S]ome 14 million jobs rely on trade with Canada and Mexico combined, and the nearly 200,000 export-related jobs created annually by NAFTA pay an average salary of 15% to 20% more than the jobs that were lost… [O]nly about 15,000 jobs on net are lost each year due to NAFTA… ‘[S]ince NAFTA’s enactment, fewer than 5% of U.S. workers who have lost jobs from sizable layoffs (such as when large plants close down) can be attributed to rising imports from Mexico… For every net job lost in this definition, the gains to the U.S. economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households

Stop Blaming Capitalism For Drug Price Increases

EpiPen has made headlines recently, putting pharmaceutical prices at the top of the political agenda. When Martin Shkreli hiked the price of Daraprim, progressives were outraged. “Capitalism is evil” was the leftist battle cry.

Now, with EpiPen raising its prices, progressive hero Bernie Sanders has criticized the company for valuing profits over people. Hillary Clinton, who comes off as a lifeless and heartless reptilian, even released a statement condemning the price increase.

But does the EpiPen and Shkreli scandal prove that capitalism is destroying our health care system? Ironically, it proves the opposite.

In my first day of introductory microeconomics, the teacher said that greed is never the problem. Whether our government is small or large, socialistic or anarchistic, tyrannical or benevolent, people are always as self interested as they always have been. Of course, we aren’t reptilian beings (like Hillary Clinton), and some individuals do have altruistic streaks. But, the simple fact is, humans usually look out for themselves (and those close to them) over a random person off of the street.

What really makes greed a good thing or a bad thing, the professor said, was institutions. In a world where the government is small and protects us from others–not ourselves–greed works out pretty well. In a world where there is stable money, freedom to trade, and a rule of law, greed works out great.

And we see this with drug prices. The problem is not that EpiPen is greedy or that Shkreli wants to make an extra buck; the problem is that the government has bad institutions–bad policies–that have constricted competition and made it easier for these individuals to hike prices.

A new article in the Wall Street Journal lays it out pretty clearly:

In a health care system notoriously resistant to cost-containment, generic drugs are an exception. Americans enjoy a huge range of generic medicines at-ever declining prices, largely thanks to robust competition among multiple manufacturers.

In 1984, the Waxman-Hatch Act slashed the regulatory hurdles for generic copies of patented drugs. Since then, generics have risen from 19% to 84% of all prescriptions. Their prices have fallen 70% over the past eight years, while branded prices have risen 164%, according to Express Scripts, a pharmacy benefit manager.

The main driver of those price declines is competition. A 2010 study found that within three years of the first generic launch, the average generic has 12 competing suppliers and its price has fallen 94%.

In the generic world of prescriptions, prices have fallen dramatically because of free market competition. The WSJ accompanied this article with the following graph:

Indeed, the generic market has a lot of competition and lower prices. The brand name market has no competition and thus has rising prices. Why is there no competition?

In large part due to the government. We have very strict approval rules, which makes it hard for generics to become commonplace. This is why many economists, like Alex Tabarrok, support reciprocity. What is reciprocity? According to Tabarrok, reciprocity is “if a drug is approved in Europe it ought to be approved here. … [all reciprocity does is allow the importation] of any generic approved as such in Europe to be sold in the United States.”

Essentially, he wants free trade in the realm of drugs to make it easier for more generics to enter the market more quickly, which forces both domestic and brand name medicines competing in the same market to slash costs. Reciprocity would dramatically reduce costs. In fact, Senators Ted Cruz and Mike Lee have been proponents of reciprocity for a long time now.

Of course, we shouldn’t allow reciprocity with every nation. I don’t trust the Chineese or Somalian approval process, for example. But we should make reciprocity agreements–like trade agreements–with nations who have a proven track record of approving safe drugs (e.g. Most of Western Europe, Canada, Australia, Japan, Korea, etc.)

Essentially, if you want lower drug prices, support more competition. The reason EpiPen and Daraprim cost so much is because they have no competitors, which makes it easy to hike the price with no consequences. Induce competition–in other words, let the market work–and drug prices will fall.

Obama Was Right to End Private Prisons

In my newest article, published in the Albuquerque Journal, I argue in favor of Obama’s decision to end the use of private prisons. Here are some excerpts:

While the Obama administration’s decision may seem antithetical to conservative beliefs, those who favor small government – who favor true privatization – should support the impending policy change.

So, what does “true privatization” even mean?

Conservatives believe when the government monopolizes a service (like roads), quality and efficiency fall while costs increase.

Compare this to the private marketplace, where inefficient enterprises go out of business (unless they’re bailed out by the government, of course). These market forces cause businesses to innovate, slash costs wherever possible (without reducing quality), and fire unproductive workers and administrators.

The government, however, rarely fires itself – it has no incentive to do so.

Indeed, government is generally less efficient than private industry. Private businesses have more of an incentive to produce high quality goods at low prices; governments don’t have such incentives.

So, if privatization is so great, why should conservatives support Obama’s decision to END the use of private prisons?

Easy: Private prisons aren’t very private. They don’t use market forces to provide goods and services. Instead, they rely on cronyism and unbalanced playing fields.

The current private prison complex is as crony as crony capitalism can get. The system has simply moved the monopolies around: Instead of a public monopoly, we now have private monopolies. Both are equally bad!

Private prisons receive legal and economic advantages conferred by the state a normal business would not – or, at least, should not – get in a free and open market.

Check out the full article here for more.

On The “Immigrants Do Jobs Americans Won’t Do”

Progressives frequently claim “[Illegal] immigrants do jobs Americans won’t do.” But the argument is wrong–really wrong. I support immigration. I support immigration reform. But, really, people have to stop using this argument.

Never say immigrants “do jobs Americans don’t do.” The argument is false; Americans would be willing to do those jobs if wages were high enough.

In reality, the argument should be “immigrants do jobs that wouldn’t otherwise exist without their labor.” Indeed, those jobs wouldn’t exist if wages were higher than they were. The only reason those jobs haven’t been outsourced or automated is because immigrants come here to do them.

A way to conceptualize this is to imagine a minimum wage hike. More Americans would be willing to work at McDonalds if the minimum wage was $50. Of course, a minimum wage of $50 would mean McDonalds would have fewer jobs to offer.

In the same way, immigrants aren’t stealing American farm jobs; they are doing jobs that wouldn’t exist if farmers had to pay their farm hands ludicrously high wages.

So the argument liberals like to use isn’t necessarily wrong. They are correct to say illegal immigrants don’t take jobs away from natives, but the phraseology is off. Way off.

And this isn’t the only reason why undocumented immigrants don’t “take” jobs.

See, it would be difficult for immigrants to steal jobs from natives just based on their educational composition. Immigrants are usually either really educated or not educated at all. Around 80% either have a PhD or are high school dropouts. Most Americans, by contrast, are somewhere in the middle (high school diploma through masters degree), meaning they don’t compete for the same jobs.

So how do immigrants affect the labor market? Well, when low-skilled immigrants come, they are usually not fluent in English and are uneducated, so they specialize in low-skilled manual labor. Companies now are able to have more manual oriented jobs–building houses, roads, cleaning yards, sewing clothes, etc. But, with more manual jobs, they also need more managerial jobs in order to keep things in order. These managerial positions are generally mid-education (HS diploma – master’s) and are usually filled by natives who are fluent in English. This means, for the average American, low-skilled immigrants benefit native workers. The theory that immigrants compliment, rather than supplement, American labor has been empirically demonstrated.

On the high-skilled end (generally these are the “legal” immigrants), these are the people who make businesses, innovate, and contribute to high-skilled labor markets. These people are pretty much universally considered “good” by most restrictionists.

In sum, when the phraseology of the popular “they do jobs you won’t do” argument is amended, the argument works well. And other arguments–like how immigrants don’t substitute American labor, but instead they compliment it, are also valid points. But please, stop saying immigrants do jobs Americans won’t do. It’s just flat out wrong.

The Affordable Care Act Isn’t So Affordable

Business Insider has a new interesting article summarizing the results of a recent Urban Institute report. The results shouldn’t surprise those on the political right, because it confirms what we have been saying all along: The Affordable Care Act (ACA) hasn’t made healthcare any more affordable.

The following image comes directly from the article.

obamacare premium map

While some states, including the state in which I currently reside (New Mexico), have seen a decline in premiums, the overall trend seems to be up. The average increase, according to the report, is 20%. 12 states have seen increases above that average, and sometimes significantly so (AK at 40%, OK at 41%, and TN at 38% are the most extreme examples).

The results of the report are similar to studies emanating from the Manhattan Institute, which also finds large increases in health care costs (see here and here).

The authors of the Urban Institute study conclude that the wide range of price changes can be explained by differences in competition. Business Insider writes,

“However, the most important factors associated with lowest-cost silver plan premiums and premium increases are those defining the contours of competition in the market,” the report concluded. “Rating areas with more competitors had significantly lower premiums and lower rates of increase than those that did not.”

Indeed, conservatives have a solution to this: By empowering the consumer and reducing barriers to competition, we can usher in a period of health care cost reductions while maintaining state of the art medical care.

An advanced copy of a new study by Dr. Scott Atlas has been released by the Hoover Institution. The report explains how to do just that: empower the consumer and increase competition.

Amnesty and Illegal Immigration

A common complaint against giving illegal immigrants “amnesty” (and, by the way, the recent “amnesty” proposals aren’t really amnesty), is that giving immigrants clemency will incentivize more illegal immigration. The logic is appealing: If immigrants aren’t punished for braking the law, others will be encouraged to keep breaking it. If there are no consequences, why not?

But these fears are not borne out in the data. A working paper by American University has concluded Reagans 1986 amnesty reduced the number of border apprehensions (a proxy for illegal migrant crossings).

Even if the conclusion of the report is disbelieved, research generally finds no effect between amnesties and illegal immigrant crossings.

Either way, demographic and economic factors influence the number of incoming migrants much more than any amnesty program ever could.

You Can Be In The top 1%, Too

Chelsea German, a Cato Institute scholar and editor of their new(ish) project, HumanProgress.org, recently wrote an article about the odds of making it to the top 1% in the United States. Apparently, the odds are pretty good.

German writes,

According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000) for at least one year.

11% is pretty good odds. Indeed, the reason, she argues, is because social mobility in the U.S. is high and turnover at the top of the income spectrum is also high. As she notes:

Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.

Now consider the top 400 U.S. income-earners — a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.

This echoes what American Enterprise Institute scholar Mark J. Perry has said elsewhere.

This also echoes Thomas Sowell’s claim that “people who were in the top 1 percent in 1996 had their incomes fall — repeat, fall — by 26 percent by 2005 … More than half the people who were in the top 1 percent in 1996 were no longer there in 2005.”

So there’s more than what meets the eye when it comes to income inequality. So be careful when pushing tax hikes for the “rich.” One day, you might become the “rich” you once demonized.