Monday, March 31, 2014

Gun ownership and suicide

I've been doing some research on firearms and suicide rates across states and countries. It appears as though across states in the US, higher gun ownership is strongly correlated with higher overall suicide rates (and gun suicide rates). [1] This would suggest that either the people who own guns tend to be more suicidal (causality) or that suicidal people tend to own guns (reverse causality). 

However, there is no correlation between international gun ownership and international suicide rates. [2] For example, while Canada has a gun ownership rate far lower than that of the US, it has a near identical suicide rate. Additionally, countries like Japan have a suicide rate near twice that of the US despite have virtually no gun ownership. 

These conflicting results certainly are interesting, but the tendency for gun owners to committ suicide more often than non-gun owners could possibly be a correlation without a causation. For example, as (M.P) has noted in his book, 'The Conscience of a Young Conservative", the amount of country music played on the radio is significantly correlated with higher suicide rates even when gun availability, poverty, and other factors are controlled for. [3] Additionally, non-coastal western states have the highest suicide rates in the country. [4] Could it be that geography is driving the correlation? After all, rural living people tend to own guns and listen to country music more often than people living in urban settings. 

Overall, the causal relationship, or lack thereof, between gun ownership and suicide isn't entirely clear. However, even if increased gun ownership was proven to increase the suicide rate, would that be any justification for restricting it? I personally don't think so. If firearms caused people to kill themselves, than it still wouldn't be a public health issue and thus not a problem worthy of government intervention. Moreover, any intervention would necessitate the restriction of firearm ownership, which is inherently a violation of the 2nd amendment of the Bill of Rights and people's right to choose to own a firearm. 

What do you think?



Wednesday, March 26, 2014

Myth: Big government is good for the economy.

Nowadays, the media and college classrooms purport that government spending is an elixir which can magically increase a country's economic growth rate or pull an ailing economy out of recession. According to this sort of thinking, cutting excessive government spending will curb the extent to which the economy can grow. However, like most so called "common knowledge", the belief that government spending is good for the economy doesn't hold up under close scrutiny. The following analysis examines how the size of government affects economic growth.

First of all, how should the size of government be measured? There are two ways to do this, by measuring total government spending per person, or by measuring total government spending as a percentage of Gross Domestic Product (GDP). The latter methodology is essentially measuring the size of government relative to the size of the economy. 

According to the Fraser Institute, “The observation that higher income countries can afford more per capita government spending limits the usefulness of per capita government spending as a measure of public sector size, making government expenditure to GDP a more suitable measure” [1]. 

For example, the US government may spend more per person than the Egyptian government, but that is simply because the US economy is so much larger than the Egyptian economy. Because of this difference, the US government is comparatively richer than the Egyptian government and can afford to spend more per person. How much the government spends per person is not an indicator of the size of government, however, total government spending as a share of the economy is. Thus, nearly all empirical research on the government measures its size as government spending as a percentage of GDP (the economy). 

So, what does the empirical literature say about the size of government’s relationship to economic growth?

Building on the earlier research of James Gwartney et al. , scholars from Duke University and Wheaton college recently produced a study documenting the relationship between government size and economic growth between the years 1960 and 2010. The below graphs display their findings.

See citation #2

It is fairly obvious that the correlation between the size of government and economic growth is negative. However, this correlation does not include other control variables which may effect growth. Thus, the statistician's warning of "correlation does not prove causation" is noted. However, while this study did not include control variables, dozens of other studies have in order to isolate the effects of the size of government on economic growth. Even when controlling for other variables (such as inflation, demography, etc), the majority of research finds a strong negative correlation between the size of government and economic growth. 

According to a recent survey of the academic literature on this subject published by the Research Institute for Industrial Economics:

“The most recent studies [on the relationship between government spending and economic growth] find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate...When we singularly focus on studies that examine the correlation between growth of real gross domestic product (GDP) per capita and total government size over time in rich countries (OECD and equally rich), the research is rather close to a consensus: the correlation is negative.” [3] 

These findings don't prove but do provide evidence in support of the idea that the negative correlation is in fact driven by government spending causing lower economic growth. 

Even facing this evidence, proponents of large government may argue that the benefits of having a large government outweigh the costs of a slower economic growth rate. Here's the thing, the cost of a slower economic growth rate is tremendous and in the long run will determine whether a country is rich or poor. As economists Andreas Bergh and Magnus Henrekson have noted:

"[A]n annual growth rate of 2 percent means that the economic standard of living doubles in thirty-six years. But if the annual growth is instead 3 percent, a doubling of the standard of living takes a
mere twenty-four years." [4] 

In order to emphasize this point, let's examine how family incomes would have grown in the absence of large government. According to a study by Gwartney et al.: "If government expenditures as a share of GDP in the United States had remained at their 1960 level, real GDP in 1996 would have been $9.16 trillion instead of $7.64 trillion, and the average income for a family of four would have been $23,440 higher." [5] 

Based on these findings, one may ask, "what is the proper size of government?". In the economist's eyes, the proper size of government is the one which maximizes economic growth. The Rahn Curve (below) suggests that initially, government spending on public goods such as a legal system, infrastructure, and defense will cause the economy to grow faster. However, once the government starts spending too much, it will take money and resources away from more productive uses in the private sector, leading to slower economic growth. 

Most empirical research finds that for the average country, the optimal size of government is no greater than 25% of GDP. Take for example, a recent study by the Institute for Market Economics, which has stated:

"The evidence indicates that the optimum size of government, e.g. the share of overall government 
spending that maximizes economic growth, is no greater than 25% of GDP based on data from the OECD countries. In addition, the evidence indicates that the optimum level of government consumption on final goods and services as a share of GDP is 10.4% based on a panel data of 81 countries. However, due to model and data limitations, it is probable that the results are biased upwards, and the “true” optimum government level is even smaller than the existing empirical study indicates." [6]

Also, the optimal size of government for the United States may be even smaller. The Economic Inquiry has stated that, "The optimal government size is 23 percent [of GDP]... for the average country. This number, however, masks important differences across regions: estimated optimal sizes range from 14 percent (+/- 4 percent) for the average OECD country to... 16 percent (+/- 6 percent) in North America" [7]. Currently, the size of the US government is 40% of GDP, far larger than what is predicted to be the optimal size. 

In the end, it appears as though libertarians and classical liberals are right in believing that small government is much more conducive to economic growth than large ones. Additionally, these findings cast doubt on the claim that larger government is the salvation of the economy as well as of poor and working class Americans. The evidence indicates that larger government is in fact what is holding them back. While "progressives" see large government as the answer to America's problems, the reality is just the opposite. it is time to reverse the trend of growing government and restore it back to a size more in line with the intentions of the founders of our country. 


[7] Georgios Karras, "The Optimal Government Size: Further International Evidence on the Productivity of Government Ser­vices," Economic Inquiry, Vol. 34, (April 1996), p. 2.

Thursday, March 20, 2014

Should we ban "assault weapons"?

Would an assault weapons ban reduce the number of homicides?

The best way to figure out whether or not a ban on "assault weapons" and "high capacity magazines" would reduce crime is to examine how such a ban worked in 1994-2004 when the US banned both. A 2004 review on the research on the effects of the "assault weapons" ban found that academic studies "did not reveal any clear impacts on gun violence outcomes" [1]. 

The University of Pennsylvania found no statistically significant evidence that either the ban on "assault weapons" or the ban on high cap magazines holding more than 10 rounds had any effect on reducing gun murders [2]. Also, Economist John Lott studied the effects of the "assault weapons" ban and came to the same conclusion [3].

But then again, why would we expect gun murders to decrease in response to the "assault weapons" ban? According to the 2004 study submitted to the Department of Justice cited earlier:

"AWs [assault weapons] were used in only a small fraction of gun crimes prior to the ban: about 2%  according to most studies and no more than 8%. Most of the AWs used in crime are assault pistols rather than assault rifles" Additionally, "The AW provision [of the gun control legislation] targets a relatively small number of weapons based on features that have little to do with the weapons operation, and removing those features is sufficient to make the weapons legal." [1]
The DOJ study notes that crime with "Assault weapons" decreased following the ban but states that this effect was outweighed by criminals substituting banned firearms with non-banned firearms. This isn't surprising seeing as the non-banned firearms only differ from the banned firearms in cosmetics, not in function:

"Although the ban has been successful in reducing crimes with assault weapons, any benefits from this reduction are likely to have been outweighed by steady or rising use of non-banned semi automatics with large capacity magazines, which are used more frequently in crime than assault weapons. Therefore, we cannot clearly credit the ban with any of the nation’s recent drop in gun violence." [1]

This is unsurprising seeing as crimes with "assault weapons" are extremely rare. It's also worth noting that ALL rifles are only used to murder around 322 people in 2012, which is an extremely small number [4]. It's even smaller when you take into account justifiable killings by police and private citizens, which reduces it to 266 homicides in 2012. Also, most murderers don't need high cap magazines if their goal is to kill one person, never mind the fact that they could could get one illegally if they wanted. 

In fact, according to a Department of Justice report listed on Dianne Feinstein's (the creator of the last ban) website , “Specific data ... suggest[s] that relatively few attacks involve more than 10 shots fired" [5]. The report also notes, “the few available studies on shots fired show that assailants fire less than four shots on average, a number well within the 10-round magazine limit” [5]. Thus, banning magazines over 10 bullets isn't likely to effect crime much at all, even if criminals adhered to the law. Unsurprisingly, the DOJ study reports exactly that:

"Despite a doubling of handgun LCM [large capacity magazine] prices between 1993 and 1995 and a 40%  increase in rifle LCM prices from 1993 to 1994, criminal use of LCMs was rising or steady through at least the latter 1990s, based on police recovery data from four jurisdictions studied in this chapter. Post-2000 data, though more limited and inconsistent, suggest that LCM use may be dropping from peak levels of the late 1990s but provide no definitive evidence of a drop below pre-ban levels. These trends have been driven primarily by LCM handguns, which are used in crime roughly three times as often as LCM rifles. Nonetheless, there has been no consistent reduction in the use of LCM rifles either...the consistent failure to find clear evidence of a pre-post drop in LCM use across these geographically diverse locations strengthens the inference that the findings are indicative of a national pattern. " [1]

Overall, not only does a ban on "assault weapons" and high cap mags not do anything to deter murder, it infringes on tens of millions of gun owner's constitutionally guaranteed rights.



EDIT: The study also finds that the percent of firearms collected by police that are considered "assault weapons" decreased following the ban. However, the study also notes, "it is worth noting the ban has not completely eliminated the use of AWs, and, despite large relative reductions, the share of gun crimes involving AWs is similar to that before the ban. Based on year 2000 or more recent data, the most common AWs continue to be used in up to 1.7% of gun crimes." [1] 

Later in the study the authors write: "there has been no discernible reduction in the lethality and 
injuriousness of gun violence, based on indicators like the percentage of gun crimes 
resulting in death or the share of gunfire incidents resulting in injury, as we might have 
expected had the ban reduced crimes with both AWs and LCMs." This kind of contradicts their earlier statement that gun crime with AWs was reduced after the ban. 

Clinton vs. Bush

People love to compare how the economy performed under the Clinton and Bush administrations. There are a number of things both administrations did right and wrong.

Economic freedom: Clinton vs. Bush

Both changes in economic freedom and the overall Economic freedom ranking have been associated with faster economic growth. For example, De Haan et al. find:

"There are strong indications that liberalization, i.e. an increase in the EF index, stimulates economic growth." [1] 
Additionally, John Dawson uses Granger Causality tests to see whether economic freedom causes economic growth and concludes:

"The results [of the Granger tests] suggest that the overall level of economic freedom appears to cause growth, while changes in freedom are jointly determined with growth. Among the underlying areas of economic freedom, levels of freedom relating to use of markets and property rights appear to be driving the causal relationship between economic freedom and growth. These results emphasize the importance of economic freedom, in general, and the role of free markets and property rights, in particular, in fostering long-run economic prosperity." [2]
It is clear that economic freedom is important in fostering economic growth. Judging by these findings one would expect the Clinton Administration (1993-2001)to have higher economic growth rates. However, there are other factors that come into play which effect growth rates.

The Price of Gas: 

When the price of gas is cheap, people and businesses tend to consume more of it. This means that economic activities reliant on the price of gas will increase. Additionally, as gas becomes cheaper, people and businesses have more money to spend and invest elsewhere, expanding output in other industries. Low energy prices are great for the economy. So what was the price of gas under the Clinton and Bush administrations?

It is clear that the price of gas was at historic lows under the Clinton administration. Unfortunately for President Bush, the price of gas rose exponentially to near all time highs during his time in office. It appears as though President Obama is facing the same problem, which is probably a contributor to the slow growth recovery following the recent recession. These findings suggest that the Clinton Administration had the advantage of low energy prices in comparison to the Bush administration. 

Government Spending: 

Numerous studies have found a negative relationship between the size of government (measured as a % of GDP) and economic growth. According to Economists Andreas Bergh and Magnus Henrekson:

"When we focus on studies that examine growth of real GDP per capita over long time periods, the research is actually close to consensus: In rich countries, there is a negative correlation between total size of government and growth...[when controlling for numerous variables most studies find] that an increase in ten percentage points in tax revenue [or expenditure] is associated with annual growth between  one-half and one percentage point lower" [3] 
This is significant because a lower growth rate means that it takes much longer for a country to become more wealthy. Bergh and Henrekson note:
"An annual growth rate of 2% means that the economic standard of living doubles in thirty-six years. But if the annual growth rate is instead 3%, a doubling of the standard of living takes a mere twenty-four years" [3] 

[This graph shows a simple correlation between the size of government and economic growth- see citation #4]

How does this relate to the Clinton and Bush presidencies? Well, as you can see below, Clinton (1993-2001) shrunk the size of government (measured as a % of GDP) whereas Bush (2001-2009) increased it a few percentage points. If the empirical research cited earlier is correct, then one would expect the Bush administration to have a slightly slower economic growth rate holding other variables constant. 


According to the Heritage Foundation, the economic growth rates under Clinton improved after congress cut the capital gains and other taxes.

"Business investment skyrocketed after the tax cut, and the economy grew at an annualized rate of 4.4 percent (33 percent faster than after the Clinton tax hike) from 1997 through the end of the Clinton presidency. Real wages reversed their downward trend and grew 1.7 percent per year during the same time." [5]
However, it's worth noting that the NASDAQ Bubble was inflating during this time, and that Clinton's high growth rates could be attributed to that.

The Heritage Foundation continues, praising the Bush Tax cuts:

"In June 2001, President Bush signed into law the first wave of tax cuts. The relief included reductions of marginal income tax rates and tax relief for families, for example, doubling the child tax credit from $500 to $1,000. To reduce the budgetary impact, Congress phased in the tax cuts over several years.
Since the tax cuts were slow to go into effect, they were slow to help the economy. In fact, the economy continued to lose jobs after the tax cuts even though the recession officially ended in November 2001.
Realizing the error of its ways, in May 2003 Congress accelerated the tax cuts to make them effective immediately. In addition to reducing marginal income tax rates, Congress also lowered the tax rates on capital gains and dividends." [5]

There's no doubt that Clinton's economy created more jobs than Bush's economy did. However, Bush started his term with a recession brought about by the crashing of the NASDAQ Bubble. It is apparent that the economy was losing jobs until the second Bush Tax cuts occurred, at which point employment growth exploded. The Heritage Foundation also notes that there was a 24% increase in taxable income during Clinton's time in office in comparison to a 44% increase in taxable income under the Bush administration despite the tax cuts. Then again, who knows how much of Bush's success is attributed to the Housing Bubble? Credit bubbles are the equivalent of economic IEDs so one shouldn't be too hast to dismiss the gains made during the Clinton and Bush presidencies by attributing them solely to credit bubbles. 


In the end, Clinton did have a better economic record than Bush, but he also had the advantage of low energy prices and came into office during a strong economic expansion. However, Clinton shrunk the size of government and presided over a time period where American economic freedom was very high. Bush on the other hand, presided over a time where economic freedom declined substantially in the US and energy prices soared. While these are not the only factors that contribute to economic growth, they may explain the differences between the economic performance records of the Clinton and Bush economies. 







Tuesday, March 18, 2014

Rhode Island Gun Control.

Attempting to reduce firearm homicide by implementing gun control laws in Rhode Island is not only ineffective, but pointless. In Rhode Island in 2012, 19 homicides were committed with firearms. Of these 19, 7 were committed with handguns, 0 with rifles or shotguns, and 12 with unknown types of firearms (and these include justifiable homicides).

Judging by these statistics the chance that a person is going to be killed by a firearm in Rhode Island is 0.001809523% and the chance that a person is going to be killed by the dreaded "assault weapon" (more accurately known as a semi-automatic rifle) is 0%. Banning "assault weapons", is completely pointless in RI seeing as there is no evidence that they are used to murder even a single person per year. Yet, the House of Reps is going to vote on banning them anyway.

If the State is going to vote on restricting their own citizens constitutional rights, the least they could do is commit some time to researching whether or not homicide by firearm is even a problem.

Statistics from the FBI can be found here:

Monday, March 17, 2014

Myth: Wages have fallen dramatically behind productivity.

Opponents of the market often say that workers wages haven't risen with their productivity (as standard economic theory postulates). They point to evidence that average worker's wages (adjusted to the Consumer Price Index) have declined 7% since the 70's. Is this true? Not in the slightest.

Several researchers have challenged the validity of this claim and concluded that the people making it are using the wrong measures of inflation and the wrong measure of worker compensation.

1) Worker compensation

Wages are just one part of worker compensation. Other forms of worker compensation include fringe benefits like healthcare. In order to see how well worker's are doing over time, economists measure TOTAL worker compensation, not just wages. There are large differences between measuring worker compensation as opposed to worker's wages (both adjusted for inflation using the CPI) as seen in the graph below.

2) Measuring inflation

Many people think that the Consumer Price Index is a good measure of inflation. It isn't, and economists agree that it tends to overstate inflation. In fact, the Personal Consumption Expenditures deflator (PCE) is a better measure of inflation of consumer goods and it is thus the preferred measure of inflation for both the Federal Reserve and the Congressional budget office. Measuring worker compensation for inflation using the PCE brings it closer in line with productivity.

However, even this is misleading. Productivity is measured using the IPD (Implicit price deflator) and thus, so should worker compensation. Comparing productivity and worker compensation while using different price indexes for both yields an inaccurate relationship between the two. As Economist Don Boudreaux has stated:

"Different inflation adjustments give conflicting estimates of just how much the dollar's purchasing power has fallen. So to accurately compare the real (that is, inflation-adjusted) value of output to the real value of worker pay requires that these values both be calculated using the same price index."

When this is done, it can be seen that worker compensation has risen steadily with productivity (with a small decoupling beginning in the early 2000s which can be explained further).

Studies on this subject:

[1] From the National Bureau of economics research:

[2] Centre for economic performance:

[3] Article by Don Boudreaux:

Source for graph:

Should we ban "assault weapons"?

Many people think that semi automatic rifles are used frequently in homicides. The popular phrase among gun control advocates has become "why does anyone need an AR-15?".

While many gun control advocates may think that rifles are used in thousands of homicides a year (specifically in mass shootings), the reality is that homicides by rifle (any rifle) are extremely rare. According to the FBI, only 322 homicides were committed with rifles. Compare that to 1,589 with knives, 518 with blunt objects, and 678 with hands/feet. (NOTE: Some of these homicides are considered justifiable)

Thus, it simply makes no sense to institute a ban on "assault weapons", which are more accurately known as semi automatic rifles. Gun control` advocates who want to ban rifles simply aren't thinking rationally and most likely, their judgement is clouded by their irrational fear (or disgust) of rifles.


Friday, March 14, 2014

Taxpayers and Wal-Mart

Sometimes I hear people say that the taxpayers are subsidizing Wal-Mart by providing low-wage workers with government benefits (like welfare or the Earned income tax credit). I see this logic as fallacious for the following reasons:

Imagine a man starts a business and sells oranges. However, oranges fetch a low price because there is such a bountiful supply of them and he has many competitors. In fact, the income he derives from selling his oranges doesn't make him enough money to make ends meet, he reluctantly subscribes to government aid.

Now, would any rational person say that taxpayers are subsidizing the low prices of orange consumers simply because the seller of oranges does not earn enough money to make ends meet? Obviously not. However, somehow, when it comes to workers selling their labor to employers (consumers of labor), if the worker's wages does not pay all his/her bills then "the taxpayers are subsidizing the employer (ex. Wal-Mart)".

It's also worth noting that, if anything, Wal-Mart is saving the taxpayers money by employing low-wage workers. If not for these jobs, would the taxpayers be paying more or less money out in government benefits? The answer is obvious.

Thus, the claim that taxpayers are subsidizing the employers of low wage workers is nonsensical and logically fallacious.

Were the Robber Barons monopolists?

In the following article, Historian Thomas Woods correctly points out that the "Robber Barons" of the late 19th centrury controlled huge market shares of certain industries. However, contrary to the tales that these people were monopolists, they gained their market shares by lowering prices and expanding output. Basically they out competed their competitors by providing the lowest price and best quality. Dr. Woods points out a few examples:

"Andrew Carnegie, for instance, almost single-handedly reduced the price of steel rails from $160 per ton in 1875 to $17 per ton nearly a quarter century later. John D. Rockefeller pushed the price of refined petroleum down from more than 30¢ per gallon to 5.9¢ in 1897. Cornelius Vanderbilt, operating earlier in the century, reduced fares on steamboat transit by 90, 95, and even 100 percent. (On trips for which a fare was not charged, Vanderbilt earned his money by selling concessions on board.)"

Dr. Woods continues to write, “During the 1880s, when real GDP rose 24 percent, output in the industries alleged to have been monopolized for which data were available rose 175 percent in real terms. Prices in those industries, meanwhile, were generally falling, and much faster than the 7 percent decline for the economy as a whole. We’ve already discussed steel rails, which fell from $68 to $32 per ton during the 1880s; we might also note the price of zinc, which fell from $5.51 to $4.40 per pound (a 20 percent decline) and refined sugar, which fell from 9¢ to 7¢ per pound (22 percent). In fact, this pattern held true for all 17 supposedly monopolized industries, with the trivial exceptions of castor oil and matches.”

So while the history books present the Robber Barons as monopolists, there doesn’t seem to be much evidence that they were charging monopoly prices or reducing output. In the end, most economists recognize that a certain company can control a huge market share of a given industry without being a monopolist.


Thursday, March 13, 2014

Corporate taxation is a horrible idea.

Many people think that taxing corporations is the most efficient way to raise revenue. I mean, who would be opposed to taxing corporations to raise revenue for social programs?

The answer: Most economists.

Empirical research continually finds that corporate taxes significantly reduce investment and that this reduced investment reduces worker productivity growth and subsequently keeps worker's wages lower than they would have been in absence of corporate taxation.

This is best illustrated by a study titled, 'Tax Policy For Economic Recovery and Growth', which examined the effects of taxes on 17 OECD countries and found that "Corporate taxes most harmful [to economic growth], followed by taxes on personal income, consumption, and property." [1]

Another study titled 'The dynamic effects of personal and corporate income tax changes in the United States' published in the American Economic Review found that " A 1 percentage point cut in the average corporate income tax rate raises real GDP per capita by 0.4 percent in the first quarter and by 0.6 percent after one year." [2]

And according to left leaning economist Laurence Kotlikoff, "Fully eliminating the corporate income tax and replacing any loss in revenues with somewhat higher personal income tax rates leads to a huge short-run inflow of capital, raising the United States’ capital stock (machines and buildings) by 23 percent, output by 8 percent and the real wages of unskilled and skilled workers by 12 percent." [3]

In short, corporate taxes are bad for workers, bad for investors, and bad for the economy. Even left leaning economists accept this basic fact of life and realize that there are far better ways to raise revenue to fund government functions.





Sunday, March 9, 2014

Minorities and Poverty

Leftists love to say they care about minorities like blacks, but in reality, they have done nothing to help minorities move out of poverty. In fact, the policies which are most likely to help blacks and other minorities. These policies would include giving vouchers to students so they can attend a private or public school of their choice and abolishing the minimum wage.

School choice:

A Harvard study on the effects of school vouchers on college enrollment in New York City concluded:

"Our estimates indicate that using a voucher to attend private school increased the overall college enrollment rate among African Americans by 24 percent." [1]

Unfortunately, leftists will fight tooth and nail to protect public schools from competition and they refuse to give parents the choice to send their children to private schools, even when it is poor inner city minorities who would most benefit from such a program.

The Minimum Wage:

A recent study by Economists William Even (PhD.) and David Machpherson (PhD.) titled, Unequal Harm,  analyzed the effects minimum wage laws had on black teenagers in comparison to white teenagers. Using a dataset that spans 20 years and a recorded 600,000 observations, the economists find significant disparities in the disemployment effects of minimum wages laws. The study found that each 10 percent increase in the federal minimum wage reduced the white teenager’s employment rate by 2.5%. In contrast, the same increase in the minimum wage resulted in the black teenager unemployment rate declining by 6.5% (Even 1). The study concluded with the following statement:

“This study suggests that the minimum wage hikes are especially harmful to the employment prospects of young, low-skilled, black men. In the states where the federal minimum wage hikes of 2007-2009 were binding, the increases in the federal minimum wage did more damage to the employment prospects of black men than the Great Recession.” [2]

Marriage among minorities:

Leftists also tend to downplay the role of marriage in reducing poverty. The poverty rate among non-married families is very low for whites (3.2%), hispanics (13.2%),  and blacks (7.0%). On the other hand, the poverty rate among non-married families of these same groups is in the double digits, 22%, 38%, and 35% respectively.

In fact, the marriage rates for all these groups (especially blacks) has been declining since the War on Poverty began in the late 1960's. Indeed, blacks have seen the worst decline in marriage rates from around 65% of black families being married in 1970 to around 40% in 2010. [3] Unfortunately, 72% of black children are born out of wedlock compared to 53% for Hispanics and 29% for whites. [4]

Keep in mind that the child poverty rate among single female headed households with children is 37.1% in comparison to 6.8% for married, two-parent families. According to the Heritage Foundation:

"Father absence is another major cause of child poverty. Nearly two-thirds of poor children reside in single-parent homes; each year, an additional 1.5 million children are born out of wedlock. If poor mothers married the fathers of their children, almost three-quarters would immediately be lifted out of poverty." [5]

A leading contributor in this decline in marriage is welfare. According to a study published in the National Institute of Health:

"We find that welfare participation reduces the likelihood of transitioning to marriage , but only while the mother is receiving benefits...We infer that the negative association between welfare participation and subsequent marriage reflects temporary economic disincentives rather than an erosion of values" [6]

Additionally, a study by Georgia State University concluded:

"At least in some earnings ranges, the tax-benefit system discourages low-income people from investing in education and training, discourages labor supply, encourages fertility, and provides little incentive to marry or to remain so. To the extent that households are aware of and respond to such incentives, the tax-benefit system creates poverty traps rather than promoting behaviors that enable families to escape poverty"

There is tremendous evidence that left wing policies do absolutely nothing but harm the very people they are meant to help, despite the intentions of those who push such policies into law. If we truly want to help disadvantaged minorities we need to abolish or reform the obstacles that inhibit their ability to succeed (the minimum wage and the welfare system) as well as give them the opportunity to choose to go to a high quality private school.


[2] Even, William, Dr., and David Macpherson, Dr. "Unequal Harm." Employment Policies Institute, May 2011. Web. 16 Oct. 2013.

Wednesday, March 5, 2014

Child labor and Globalization

I support child labor in 3rd world countries because I think it is a better alternative than prostitution, starvation, and subsistence farming. People who think we should ban imports from countries or companies utilizing child labor need to realize that their perceived moral high ground comes at a tremendous cost, and that cost is to condemn 3rd world children and the families they belong to, to a worse fate than the one they currently face.

Take for example, in the 1990s, it was found that Bangledeshi factories were using child labor to produce clothing for Wal-Mart. In light of this fact legislation was proposed in the US to ban imports from countries utilizing child labor. According to Paul Krugman, "The direct result [of the proposed legislation] was that Bangladeshi textile factories stopped employing children. But did the children go back to school? Did they return to happy homes? Not according to Oxfam, which found that the displaced child workers ended up in even worse jobs, or on the streets -- and that a significant number were forced into prostitution." [1]

Obviously these children (and their families) were made significantly worse of as a result of the movement to ban imports from countries utilizing child labor yet opponents of child labor will sleep soundly believing they have somehow made those children's lives better off. People need to realize that children work in poor countries because their economy is so unproductive that it takes an entire working family to sustain itself. Contrary to what opponents of globalization and capitalism would have you believe, poor countries need more economic freedom, not less. As workers become more productive and subsequently earn higher wages, and as the economy becomes more productive leading to higher purchasing power for all, only then will families will be able to withdraw their children from the work force. It is no coincidence that the most economically free countries have the least amount of child labor and the most unfree countries have the most amount. [2]




Why everyone should like the Fair Tax.

It's no secret that our current Federal tax system is detrimental to economic growth. The system punishes savings and investment as well as income earned from work. But what are the true costs of our current tax system? A 2005 study by the Government Accountability Office reported that the compliance and efficiency costs associated with the federal tax system are large. When analyzing the compliance costs of the tax system, the study noted: 
"combining the lowest available estimates for the personal and corporate income tax yields a total of $107 billion (roughly 1 percent of GDP) per year" [1]
According to the Cato Institute, these costs may be as large as $200 billion per year. [2] And according to a study by economist Art Laffer (famous for the Laffer curve) et al. "U.S. taxpayers pay $431.1 billion annually, or 30 percent of total income taxes collected, just to comply with and administer the U.S. income tax system" [14]
 Additionally, the GAO study reports that the efficiency costs of the federal tax system are even larger:
"The two most comprehensive studies we found suggest that these costs are large—on the order of magnitude of 2 to 5 percent of GDP each year (as of the mid-1990s)." [1]
Keep in mind the GAO notes: "the actual efficiency costs of the current tax system may not fall within this range because of uncertainty surrounding taxpayers’ behavioral responses, changes in the tax code and the economy since the mid-1990s, and the fact that the two studies did not cover the full scope of efficiency costs" [2]
The waste and inefficiency of the current federal tax system is so obvious, that many individuals and organization have proposed alternative, more efficient, tax systems. Enter the Fair Tax, a 23% national sales tax on all new goods and services.The Fair Tax would repeal and replace the income tax, corporate tax, payroll taxes, capital gains tax, estate tax, etc while generating the same amount of revenue as under the current tax system. 

The current tax code punishes work, saving, and investment. Under the Fair tax, work, saving, and investment would be encouraged while consumption would be discouraged. Productive work and investment in new capital is the driving force behind economic growth and under the Fair Tax plan, it should be expected that these things will increase relative to the current tax system. Luckily, econometric studies have attempted to predict how the economy would change in response to the implementation of the Fair Tax. Most, if not all studies, find that the economy will perform better under a Fair Tax than under the current tax system. For example, Arduin, Laffer, and Moore Econometrics finds that growth in real GDP, employment, domestic investment, disposable income, and even consumption will increase fairly dramatically over the current system. [3]

One might be surprised that consumption would rise in response to a tax on consumption. However, real incomes are expected to rise under the Fair Tax plan and people tend to spend more when they perceive themselves to be richer. According to the study, "We estimate that following the implementation of the FairTax, consumption will grow in excess of the baseline growth path by 2.4 percent in the first year alone. The increase in consumption arises even though total savings (and investment) in the U.S. economy increases due to the growth in wealth and international capital flows"[3]
Similarly, an econometric study of the effects of the Fair Tax on the economy by the Beacon Hill Institute show that real GDP, investment, employment, and consumption will grow faster under the Fair Tax than the current system. In fact their study concludes with the following statement:

"There are few, if any, policy opportunities in the U.S. that offer such large gains to so many people. Moreover, households in all income groups would, on average, experience increased welfare under the FairTax" [4] 

Despite the economic efficiency of the Fair Tax, many people are against it because they think that it is regressive and will lead to the poor paying a larger share of their income in taxes than the wealthy. However, this is not the case. According to the Fair Tax website:

"While permitting no exemptions, the FairTax provides a monthly universal prebate to ensure that each family unit can consume tax free at or beyond the poverty level, with the overall effect of making the FairTax progressive in application...While everyone pays the same tax rate at the cash register, the prebate results in effective tax rates (annual taxes paid divided by annual spending) that increase as the level of spending increases a progressive tax rate structure. For example, a person spending at the poverty level has a 0% effective tax rate, whereas someone spending at twice the poverty level has an effective tax rate of 11.5%, and so on." [5] 

Other things likable aspects of the Fair Tax:

-The Fair Tax would likely encourage legal immigration as opposed to illegal immigration since only US citizens would be eligible for the prebate meant to reduce the tax burden on low income individuals and families. Illegal immigrants would effectively be paying the full 23% Fair Tax on news goods and services. 

-Former Senator Mike Gravel states the significant reduction of paperwork for IRS compliance and tax forms is estimated to save about 300,000 trees each year. [6] 

-Proponents believe environmental benefits would result from the FairTax through environmental economics and the re-use and re-sale of used goods (used goods aren't taxed). 

Econometric Studies and the Fair Tax:

-The Beacon Hill Institute estimated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3%, employment by 9.9%, real wages by 10.2%, and consumption by 1.8%. [7]

- Economists Laurence Kotlikoff and Sabine Jokisch reported the incentive to work and save would increase; by 2030, the economy's capital stock would increase by 43.7% over the current system, output by 9.4%, and real wages by 11.5% [8]

- Economist John Golob estimates a consumption tax, like the FairTax, would bring long-term interest rates down by 25–35% (as more money is saved, the cost of money (interest rate) declines, promoting investment which is actually supported by savings). [9]

-An analysis in 2008 by the Baker Institute For Public Policy indicated that the plan would generate significant overall macroeconomic improvement in both the short and long-term [10]

-The Beacon Hill Institute concluded that the FairTax would save $346.51 billion in administrative costs and would be a much more efficient taxation system [11]

-Princeton University Econometrics surveyed 500 European and Asian companies regarding the effect on their business decisions if the United States enacted the FairTax. 400 of those companies stated they would build their next plant in the United States, and 100 companies said they would move their corporate headquarters to the United States [12]

-A study by Kotlikoff and Sabine Jokisch concluded that the long term effects of the FairTax would reward low-income households with 26.3% more purchasing power, middle-income households with 12.4% more purchasing power, and high-income households with 5% more purchasing power [13]

Overall, the Fair Tax is a great idea worth pursuing. 




Monday, March 3, 2014

Convergence and Free trade

Free trade is universally promoted by economists of all stripes (except for Marxists, but they aren't really economists). According to New Keynesian economist Jeffery Sachs:

"On average, open economies [economies engaging in free trade] can be expected to grow 2.45% faster than closed economies. Investment-to-income ratios were higher as well for open economies, by an average of 5.4% compared to closed economies, thereby boosting growth indirectly. These findings confirm a basic truth of economics, one dating back two centuries to Adam Smith: open trade promotes growth."

According to Dr. Sach's study, real GDP growth per capita of developing countries that are not open to trade is 0.7% per year as opposed to the 4.5% per year of developing countries which are open to trade. 

He also notes that economic convergence only occurs in countries which are open to trade: 

"When we examined the subset of closed economies, growth in income per person was, indeed, the same in both developing and developed economies (about 0.7%). This suggests that poor countries are not catching up. In the group of open economies, however, income growth in developing countries was almost twice that of developed countries(4.5% versus 2.3%) Such sustained differences in growth rates work as powerful engines to diminish, over time, the existing gaps in income across countries. The key, it seems, is to adopt and stick with open trade policies."


Sunday, March 2, 2014

CEO pay

Random nonsensical claim: "CEO's making thousands of times what workers make is unfair!"

BCL response: CEO pay actually seems quite small when considering what they actually do. For example, a CEO's decisions can make a company tens of billions of dollars worth of profit, or his decisions could lose them that amount of money. Isn't it worth tens of millions of dollars a year to save or make billions?

The highest compensated CEO is Lawrence Ellison of Oracle corp. He makes around $100 million a year. His corporation makes over $10 billion a year in net income. If you were a shareholder in that company, wouldn't you think hiring a CEO that could bring in billions of dollars of additional profit was worth the money? It's also worth noting that CEO compensation comes often in the form of stock options. Thus, they make even more money when their company does well. However, their incomes are more volatile than the incomes of most people since the stock market rises and falls every few years.

Since the decisions of CEO's have large consequences and only a few people actually have what it takes to be a competent CEO, we can analyze CEO pay as a function of supply and demand. There is a very small supply of CEO's that would be considered the best of the best, additionally, every major company wants the best CEO they can find. So when multinational companies worth billions of dollars bid on a small supply of worthy CEO's, it's no wonder why CEO pay is enormous.

On the other hand, there is a huge supply of workers who are seeking entry level jobs and many times there is not enough demand for all those people to be employed. In this scenario, wages should fall in order for the quantity of labor supplied to equal the quantity of labor demanded. However, price floors like the minimum wage make this unable to happen in certain scenarios. In the end, simple supply and demand can explain the difference of compensation between CEO's and entry level workers (or highly skilled workers) and whether or not people think that is fair is irrelevant. A company paying their executives and employees based on fairness is sure to go bankrupt