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"Drill, Baby, Drill" The Slogan for Uber and the Sharing Economy? Print
Friday, 03 October 2014 03:49

In her Washington Post column Catherine Rampell raises an obvious but generally neglected point in discussions of Uber and Lyft. Many cities strictly regulate the number of taxis on the road with a medallion system. The cost of these medallions, which license someone to operate a taxi, typically run into the hundreds of thousands of dollars. Economists are prone to see this system as a form of protectionism, which is designed to increase the profits of the cab companies and perhaps to raise the wages of drivers. 

This view is correct, however it doesn't follow that we should necessarily want as many cabs on the road as possible. As I noted earlier this week, we may want to ensure that drivers can at least earn the minimum wage, which likely would involve some restriction on supply. 

However there also is a very important environmental issue. The more cabs we have sitting around waiting for passengers, or worse driving through the streets, the more will be the emissions of greenhouse gases (GHG). The effect will amplified by the fact that cabs will add to congestion, slowing down traffic and causing other cars to emit more GHG. Also, as Rampell notes, lower cost and more readily available cabs will encourage people to use taxis instead of taking public transit, walking, or riding a bike.

These externalities can be addressed with appropriate carbon taxes and subsidies for public transportation, but we don't have appropriate carbon taxes and subsidies for public transportation, nor are we likely to have them for the foreseeable future. Therefore, regulation of taxi services like Uber needs to take these externalities into account.

Failing to take these externalities into account is just bad economics, no matter how many prominent economists say otherwise.


More on Corporate Taxes Print
Thursday, 02 October 2014 04:59

Eduardo Porter has a good piece discussing the increasing problem of the evasion of corporate income taxes. At one point he notes that some people have called for eliminating the corporate income tax altogether and making up the lost revenue with higher taxes on the wealthy. 

Porter dismisses this idea by saying that it would be politically difficult to raise taxes on wealthy individuals by enough to make up the lost revenue. He then adds:

"Mr. Saint-Amans [the head of the OECD's Center for Tax Policy and Administration] said he feared that without the corporate income tax, income taxation would fall apart entirely as the wealthy could avoid taxation by becoming companies, inserting several corporate layers between themselves and their money."

This problem should be reasonably manageable. If there was some minimal annual fee that companies paid for tax exempt status (I had previously suggested $1 million but $250k might be sufficient), very few people would find it profitable to engage in such tax gaming. This should make it relatively easy for the I.R.S. to investigate the companies that file for this status and ensure that they are real companies and not just tax scams. The problem would not be qualitatively different than what the I.R.S. faces now with 501(c) tax exempt organizations.

This would also likely have minimal impact on real businesses. The small businesses that might not find this worthwhile likely would not be owned by people in top tax brackets anyhow, or alternatively have few profits to show in their first years. Many of these businesses are not now incorporated, so little would change in their situation. The point is that a real business of any size would have no problem paying this fee without impairing its operations.

The issue about the politics of raising individual tax rates is real, but it should be possible to design a system that would minimize the opportunities for gaming of the sort described here.

Krugman Too Generous to Germany: Wages Didn't Fall Print
Thursday, 02 October 2014 04:23

Paul Krugman had a short blogpost in which he criticizes Hans-Werner Sinn, the head of a prominent German think tank, for insisting that the southern European countries have to go through deflation in order to restore competitiveness, rather than Germany having somewhat higher inflation. Sinn effectively says that these countries must do what Germany did in the last decade.

Krugman then links to a post which shows that Germany, along with Japan, were the only countries in the OECD to see declining labor costs in the last decade, meaning that this is not easily accomplished. However there is a further point at issue. Germany had falling labor costs not because wages actually fell, but because they did not rise as fast as productivity growth. Germany could sustain healthy rates of productivity growth because the euro zone economy was growing at a healthy pace, driven by the booms in the peripheral countries.

While this boom both raised relative prices in the rest of the euro zone, thereby increasing Germany's competitiveness and creating a rapidly growing market, Germany is determined not to repeat the favor. The slow growth and high unemployment environment in which the peripheral countries find themselves is not conducive to investment and productivity growth. Productivity growth has been extremely weak across most of the OECD, in part due to weaker investment and in part due to the fact that many unemployed workers find themselves forced to take jobs in low productivity sectors (e.g. restaurants and retail).

With very low productivity growth, the only way the peripheral countries can gain competitiveness is to have actual wage declines, something that Germany did not do in the last decade. So Krugman is far too generous in implying that Sinn wants the peripheral countries to follow the example of a lone outlier. He is demanding they do something far more difficult and painful than what Germany did in the last decade.

Economists and Uber Print
Wednesday, 01 October 2014 04:22

Justin Wolfers tells us that economists are unanimous in supporting Uber and Lyft in a NYT piece this morning. He notes a survey of prominent economists which found that 100 percent either agreed or strongly agreed with the proposition:

"Letting car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements, but without restrictions on prices or routes, raises consumer welfare."

This seems like a proposition that it would be difficult to disagree with, albeit with a few caveats. First, I suspect that many economists would want to see some guarantees about handicap access including in the "equal footing" standard. Most cities require that taxi companies have some number of cabs that are handicap accessible. Uber and Lyft make no commitment to serve the handicapped.

Some economists might also like to see some rules on labor conditions applied to Uber and Lyft. For example, should their drivers be able to organize unions like employees? Also, should there be a guarantee that drivers earn at least the minimum wage after covering expenses? It seems rather foolish to have minimum wage laws if companies can just evade them by setting up their employees as independent contractors. (Some folks may claim that Uber and Lyft can't control what their drivers actually earn, but with modern technology this is not really a difficult calculation. If these companies have problems, then perhaps they can be replaced with more computer literate competitors.)

Finally, it is important to realize that at this point Uber and Lyft are largely not subject to the same safety and insurance restrictions as traditional taxis. The latter may be too stringent, but I really doubt that any of these economists would oppose uniform standards.

One last point on the wisdom of economists: how many of these people saw the economic crash coming in 2008?


Note: Typos corrected, thanks Robert Salzberg.

Silly Budget Reporting Goes to France Print
Wednesday, 01 October 2014 04:03

Regular readers of BTP know that expressing budget numbers without context is a pet peeve of mine. The practice is infuriating since almost no readers have any knowledge of the size of the total budget, so they have no clue what it means to cut food stamps by $40 billion over a decade or to spend $180 billion on transportation over the next six years. This problem can be easily remedied expressing budget numbers as a percent of the total budget or as per person expenditures. This would make these numbers instantly understandable to most readers.

I have raised this with numerous reporters and the NYT public editor, Margaret Sullivan. No one has ever tried to claim that these context-less numbers are meaningful to more than a tiny minority of readers. Ms. Sullivan actually embraced the cause and even got then Washington editor David Leonhardt to agree. But nothing seems to have changed.

Today the NYT ran an Associated Press piece that begins:

"France's Socialist government has detailed a 21 billion-euro ($26.5 billion) cost-cutting plan, the deepest-ever spending cuts in the country's modern history."

It later tells us the plan calls for cutting 3.2 billion euros from health spending and 700 million euros from family benefits. So everyone know how important these cuts will be to the French people and economy?

The article is not clear that these are one year cuts, but assuming they are, the 21 billion euro cut would be 1.7 percent of projected spending in 2015. The cut to the health budget would be a bit less that 0.3 percent of spending and the cut to family benefits would be roughly 0.06 percent of total spending. It might be nice to know how large these cuts are relative to total spending in these areas, but that would involve more work than I am prepared to do at this hour. 

Abuses of Patent Monopolies #45,764: Drug Company Payments to Doctors Print
Wednesday, 01 October 2014 03:50

If the government imposed a tariff on imports so that companies could sell their products at prices far above the cost of production, economists would predict there would be corruption as companies sought to maximize the amount of the product they sold. If the government imposes patent monopolies so that drug companies can sell their drugs at prices that are several thousand percent above the cost of production, economists would predict there would be corruption as companies sought to maximize the amount of the product they sold.

Okay, maybe economists would not be that consistent, since they seem to be fond of drug companies. But the NYT tells us about $3.5 billion in payments that drug companies made over 5 months last year to 500,000 health care professionals. That comes to an average of $7,000 per person or $16,800 on annual basis. Do you still think you're getting the best drugs for your health?

If the Fed had Bailed Out Lehman, Who Would Have Stopped Them? Print
Tuesday, 30 September 2014 04:57

We continue to be treated to stories of how everything about the housing bubble and the economic crisis caused by its collapse was simply unpreventable. None of the people responsible for this immense policy failure has been held accountable in any way. With few exceptions, all are now incredibly rich.

One of the items on the failure list that deserves immense ridicule is that the Fed did not rescue Lehman because it lacked the legal authority. (There is another question as to whether it should have allowed the whole cabal of Wall Street banks to crash in their own greed. No, it would not have condemned us to a second Great Depression -- save that fairy tale for the kids shows.) The NYT has a piece with the Fed Chair Ben Bernanke and Treasury Secretary Henry Paulson reasserting their position that the Fed lacked legal authority to bail out Lehman. 

The question that is never asked in this piece is, who would have stopped them? If Bernanke and Paulson had taken steps to rescue Lehman, did they think someone would file a suit in court to undo the rescue? If so, who would it be and what would the legal case look like?

That question makes the claim that they didn't save Lehman because of lack of legal authority look absurd on its face. Many of the actions taken by the Fed and Treasury during the bailout had questionably legal authority, yet no court case ever interfered with their actions in any important way. No one would have had standing to prevent a rescue of Lehman.

If Bernanke and Paulson had wanted to go the route of rescuing Lehman they undoubtedly could have done so. They chose not to rescue the bank and were obviously unprepared for the consequences. The story about lacking legal authority was clearly made up after the fact in the great Washington tradition of CYA. And in the great Washington media tradition of protecting the powerful, this story has been treated as credible for the last six years. 



Dax makes a very good point in his comment. We do know what a legal action against a Fed bailout of Lehman would like look, it would look like the suit now coming to trial over the bailout of AIG. In other words, Bernanke, Paulson, and Geithner want us to believe that they didn't rescue Lehman, even though they knew it was essential to the stability of the financial system, because they were worried they might face long shot legal suit six years later. That might sell at NYT and WaPo, but not among actually serious people.

Consumers Do Not Start Delaying Purchases If Inflation Crosses Zero: #65,786 Print
Tuesday, 30 September 2014 04:18

I guess this is one of those unsupported assertions that reporters think they just have to repeat to show someone they know economics. In fact they show the opposite. When inflation is near zero, many prices are already falling. Crossing zero, just means more prices are falling. So what?

Again, inflation is too low in the euro zone now. If it crosses zero, then it will be too low by a larger amount: end of story.

The Vicissitudes of the Market Would Be a Big Improvement Print
Monday, 29 September 2014 03:58

Bob Kuttner has a good column in the Huffington Post comparing the progress made in improving the living standards of ordinary people in the forty years following the New Deal with the deterioration of the last three decades. However the piece doesn't go far enough in contrasting the former period with the latter period.

After noting the lack of progress in recent years he comments:

"You wonder why people are turning away from the Democrats' proposition that affirmative government can buffer people from the vicissitudes of the marketplace? You wonder why millennials are attracted to the libertarian proposition that we're all on our own anyway?"

Of course the problem of the last three decades is not the "vicissitudes of the marketplace," but rather deliberate actions by the government to redistribute income from the rest of us to the one percent. This pattern of government action shows up in all areas of government policy.

For example an explicit goal of our trade policy is to put our manufacturing workers in direct competition with low paid workers in the developing world. This has the predicted actual result of driving down the wages of manufacturing workers and less-educated workers more generally. At the same time we deliberately depress their wages we largely protect the most highly paid professionals (e.g. doctors, lawyers, and dentists) from the same sort of international competition.

The government has strengthened and lengthened patent and copyright monopolies. This allows for absurdities like a treatment with the hepatitis C drug Sovaldi costing $84,000 when the drug would sell on the free market for less than $1,000. There would be no hand-wringing moral dilemmas about treating people with hepatitis C at less than $1,000 per person. If we just had a free market the government would not be putting people behind bars for 16 months for allowing people to download recorded material. 

The vicissitudes of the market would also not have bailed out the Wall Street banks, ensuring that many of the top 0.1 percent or 0.01 percent did not lose their fortunes due to their own greed and ineptitude. It also wouldn't exempt the financial sector from the same sort of taxes imposed on all other industries. And the vicissitudes of the market would not have a Federal Reserve Board that is prepared to raise interest rates in order to keep people from getting jobs and keep workers from having enough bargaining power to get wage increases.

In these and other areas the government is actively working to redistribute income from the rest of us to those on top. Under such circumstances, a libertarian view that reduces the power of the government likely looks pretty good to many people. Certainly in these areas, less government would be a very big victory for most of the population.


Steven Pearlstein Isn't Into Shorts Print
Sunday, 28 September 2014 08:18

Don't worry folks, this is a family-friendly blog. The issue is that Steven Pearlstein takes great offense at the possibility that people are manipulating the stock price of a biotech company by shorting its stock on a massive basis. Pearlstein is right to be angered about stock manipulation, he is wrong to imagine it bears any direct connection to shorting stock.

The issue here is that short sellers of Northwest Biotherapeutics (people betting against the company's stock) are supposedly spreading rumors to push down its price. This could be true, and if so, the perps should be nailed and jailed. But people often spread false stories to push up the price of stocks as well. This is every bit as pernicious. It means that suckers could pay high prices for stock that may have little or no value. This could deprive people of large portions of their savings. It also diverts capital from companies that may actually have worthwhile products to companies that don't.

It is much easier to manipulate the stock price of a small company than a large company, but this is true on both the short and long side. Shorts can serve a valuable function. Imagine that the investment banks had been shorted in a massive way in 2004 just as the housing bubble was really going crazy. It might have stopped the bubble in its tracks. There is nothing inherently pernicious about shorts. It is wrong to make an automatic connection between shorts and stock manipulation. There is none.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.