Wednesday, August 14, 2013

The airline merger

Commentary this morning on the DOJ's challenge to the US Air-American Airlines merger has been economically illiterate. The assumption journalists make is that if airline mergers were approved before, this one should be too. But conditions are not the same.

The airline industry faces strongly pro-cyclical demand. The price elasticity of demand is quite high for the industry as well as for individual firms. Fixed costs are high, and marginal costs are low. There are substantial entry barriers, mostly in the form of limited airport capacity. For the last 30 years or so, these conditions have meant that when the economy was weak, airlines would get into very severe price wars, and most of the firms would lose money. Bankruptcies and mergers were very common. The industry was in serious trouble, and the government was hard-pressed to come up with a solution. From the 1930s until the early 1980s the industry was regulated like a public utility, but nobody wanted to go back to that situation. Industry executives tried to engineer a system of coordinated prices, but when this became public, there was too much outrage to sustain the effort.

In the last few years, the situation has changed. The number of competitors in the industry has been reduced. The industry culture has changed, away from rivalry and price wars. New ways have been found to extract revenue from the customers, using sophisticated price discrimination and piling up ancillary fees. Capacity has been systematically reduced. The new situation has meant that the industry has remained profitable even in the weak economy of the last few years.

Under these conditions, a further concentration of the industry is unnecessary, and indeed is likely to prove harmful to the interests of customers. (And remember, most of the customers are businesses, not consumers traveling for leisure.) DOJ is clearly justified in asking that this merger be rejected.

Saturday, May 18, 2013

The Vienna-Chicago nexus

There is an excellent article by Corey Robin in the May 27 issue of The Nation on the roots of Austrian School economics in Menger and Hayek, and how it differs from the utilitarian philosophy of the English marginalists like Jevons. It helps clarify for me some of the puzzles about the differences between Austrian and Chicago economics, and the turn in American conservatism toward the Austrian view. Chicago-style economists believe in efficiency, and hence in equal opportunity. They are therefore unlikely to oppose the estate tax, and for a long time it was not an issue for conservatives. Hayek and other Austrians, on the other hand, did oppose the estate tax, because for them the heroic visionary, the entrepreneur or artist, is the figure to be encouraged and rewarded, the figure whom the economy is designed to serve. Hayek, Schumpeter and other Austrians believed that such a person is likely to come from an established aristocracy, not the common workers. This perspective has its roots in the thinking of another Austrian, Nietzsche. It is also reminiscent of the novels of Ayn Rand, which are enjoying a new popularity in this country.

In the U.S., the conservatives have become very adept at de-emphasizing such differences in philosophy and outlook, for the sake of achieving political victories. However, Robin's piece makes it clear that there are some very important issues here. They are not only essential to understanding the recent history of the conservative movement in the U.S., but also understanding where it might be trying to take us. It is not a utilitarian vision in the Chicago mode, but neither is it truly libertarian. In this new Austrian vision, conservative economics is turning away from the goals of equality of opportunity, of prosperity that is broadly shared, and of a democratic polity in which all are invited to participate, regardless of wealth or class.

Monday, November 26, 2012

Common Sense and the “Fiscal Cliff”



The "Fiscal cliff" is a byproduct of stubborn, myopic, and undisciplined government institutions, both in the executive and legislative branches, in the last 12 years or so.

Common sense, active agency, and effective participation and responses are seriously expected from the political players in the two chambers of the congress and the president.

Here are examples of what the government should consider:

1. Raise the income tax rate gradually, let's say at 1% every other year over the next 4-6 years, on people earning more than a quarter a million dollars, to a maximum income tax rate of 37% to 38% at the end of this process. A transparent and long-term tax plan should reduce businesses' uncertainty/anxiety, and increase the level of transparency, which in turn, increase spending and production and enhance sustainable economic growth.

2. Eliminate tax exemptions gradually (over the next 4-6 years) on income between $.25 million and 1 million. Eliminate all tax exemptions on incomes higher than 1 million dollar. In addition, all tax loopholes must be closed/eliminated.

3.  Reform the entitlement programs.  Americans are living longer! Ongoing medical inventions and advancements, and higher standards-of-living lengthen life expectancy; however, at increasing costs. Medicare and Social Security benefits should be reformed, to ensure their sustainability and the sustainability of the US government budget, national debt, and the U.S. economy. One example of the proposed reforms is the gradual increases in the retirement age that correspond to the increase in life expectancy.

4. Reduce/reform the excessive regulations that discourage firms (U.S. and foreign firms) from hiring or expanding in the USA. This policy should expand the U.S. economy, and switch expenditures and production from foreign goods and businesses to U.S. goods and businesses, respectively. The energy sector is a good candidate for such a reform.

5. The Federal Reserve Bank should stop injecting more money into the market through the ongoing $40 billion monthly purchases of MBS (mortgage-backed securities). The effect of injecting more money into the market is diminishing over time. There is already more than enough money supply in the market.  The increase in money supply in the U.S. market is offset by a drop in the velocity of money in the U.S., such that the effective money circulation in the economy is almost constant. The Fed’s challenge is not to increase money supply, but to increase the circulation (lending and borrowing) of money.
  
The above policy suggestions/ recommendations should have little to no recessionary effects; a much better scenario than the expected free-fall from the “fiscal cliff”. In the best scenario, the above policy suggestions can lead to a long lasting economic expansion, higher employment rate, and lower unemployment rates in the near future and long run. In addition, they should reduce the budget deficit and reduce the rate of increase of national debt (and even switch the deficit into a surplus and therefore lower the national debt, in the near future). Furthermore, the increase in net exports (through the expenditure switching effects of lowering business regulations) should reduce the U.S. current account deficit.

These are examples of policy instruments/actions that both Democrats and Republicans should debate, not only to avoid the fiscal cliff, but also to sustain economic growth and to improve the quality of life of the people in the U.S.

Monday, June 11, 2012

The Buffett Rule


Judge William Whitbeck argues in his guest column (Grand Rapids Press, June 3, 2012, p. D4) that the "Buffet rule" should not be adopted because life is unfair. This is a poor excuse for an argument. While life is undoubtedly unfair (though it's not really clear that Whitbeck believes that the rich do not deserve their high incomes), we nevertheless expect that our laws and tax policies will be fair. That an appeals court judge would not understand this is appalling.
 
The basic principle of justice or fairness is that equals should be treated equally. Our current tax code does not do so. People who work for a living are taxed at a higher rate than people with the same incomes who do not earn their income from work, but receive it from investments. This is a failure to treat equals equally. It is fundamentally and transparently unjust and unfair.
 
There are additional reasons for the perception of unfairness. Traditional Judeo-Christian values privilege work as a source of income, and cast suspicion on "making money off of money." See for example the biblical prohibition of usury. Our tax code turns this on its head by privileging investment income over wages. The degree of inequality in our country has increased dramatically over the last thirty years. If our economy could grow and prosper in the fifties and sixties with much less inequality, why do we tolerate this greater inequality now?
 
Eliminating this rate differential would not make the tax code "even longer, more complicated, and more monstrous," as Whitbeck claims. Taxing all income at the same rates would make the code simpler and make compliance easier, as anyone who has filled out a Schedule D could testify. This move would return us to the principles of the 1986 Reagan tax reform.
 
The Buffet Rule would raise revenue in the long run, contra Whitbeck. Changing capital gains rates result in temporary shifting of capital gains realizations between years, but when rates are steady, higher rates yield higher revenues. This is a help in dealing with our federal deficit problem.
 
It is hard to feel sorry for the "rich people in their gated communities who already pay" a large proportion of our taxes. The taxes they pay are not that large compared to their share of national income, or the benefits they receive from our system of political economy. They have lately come under the illusion that they can buy their way out of society with their private security, private jets and helicopters, skyboxes, private schools, "concierge medicine", and the like. But they still need the rest of us, and if we're not treated fairly, it will become increasingly difficult to make our system work. That will hurt everybody, even the one percent.

Wednesday, April 18, 2012

Food Deserts?

The existence of food deserts, and their connection to urban obesity is part of the social-science/food activism canon, and yet some new research calls this consensus into question.  Apparently, previous research has not clearly established the story food activists (and politicians) have been telling.

That said, I have not examined the quality of these new studies, or of the old ones.

Tuesday, March 13, 2012

Year-Round Schooling Publicity

Our paper that is forthcoming in the American Economic Journal: Economic Policy just got some publicity on one of the Wall Street Journal blogs.  All publicity is good publicity, maybe, but good publicity is great.

Wednesday, February 8, 2012

Stephen Moore's idea of fairness

I am more and more disappointed by the quality of the stuff that get printed on the opinion pages of the Wall Street Journal. A particularly egregious example is the piece by Stephen Moore called "A Fairness Quiz for the President" that appeared on Tuesday. It includes some plainly inaccurate statements. For example, he claims that "in 27 states workers can be compelled to join a union to keep their jobs." This was outlawed in 1947. Workers may have to pay a fee to the union for representing them in negotiations with the employer, but they are not forced to join. And of course, they are not forced to work in a unionized workplace at all. His assessment of the administration's economic policy takes 2007 as its benchmark, when Obama did not take office until January 2009. On energy subsidies, he takes the very not-conservative view that tax expenditures (special industry breaks and loopholes) are not subsidies when they benefit the oil industry. He claims that most Americans are "denied the free choice" to send their children to elite private schools as the Obamas do. But anybody with the money can send their kids to private school (I'm sure the Obamas pay), and financial aid is available for many without the money. Tax dollars are not being used to subsidize those who now can't afford to repay their mortgages, as Moore claims. You have to be current on you mortgage to get benefits under any of the current programs. You'll find more howlers like this if you look.

But worse is the twisted idea of fairness that Moore seems to hold. He claims it is unfair that the richest 10% of Americans pay 65% of the income taxes. But of course they should pay a disproportionate share, because they receive a disproportionate share of the income, and have an even more disproportionate share of discretionary income. He claims it is not fair for people to pay estate tax when they die. But what exactly is supposed to be fair, or even economically efficient, about people inheriting millions of dollars that they did nothing to earn? The estate tax is one of the fundamental foundations of capitalism. It preserves the incentives for the scions of wealthy families to work and save and contribute to the economy, rather than becoming leeches on their families. It also prevents the emergence of a hereditary aristocracy, and the revival of a feudal political and economic system. It promotes equality. It is the essence of fairness.

Is it fair that those who work pay taxes to support unemployment benefits? Is it fair that young people have to pay into Social Security? Of course it is! Workers paying those taxes now will need those benefits if and when they are laid off or retire. They are paying a premium for a form of social insurance that the market will not provide.

If this strange notion of fairness is common now (and almost 4000 people recommend this article on the WSJ website), I fear for our country. True moral understanding is vanishing among us, beginning with elementary truthfulness, but including democracy and equity.