Archive for the ‘USA’ Category


It was big news when Democratic Sen. Wendy Davis held a filibuster to block new abortion regulations in Texas. The Washington Post writes that “a woman living along the Mexico border or in West Texas would have to drive hundreds of miles to obtain an abortion if the law passes”.

This kind of raises a question:

What extent of a decline in values does it take for some people to make a decision about whether or not to have an abortion based on whether or not they have to spend a few hours in the car?

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life of the law

One of the best quotes on law I have found so far, by former Associate Justice of the Supreme Court Oliver Wendell Homes Jr.:

The life of the law has not been logic; it has been experience. The law embodies the story of a nation’s development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics.

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As unpopular as it may seem, professor of economics Greg Mankiw published an article that is now forthcoming in the Journal of Economic Perspectives:

Defending the One Percent

If you take from a theory only the conclusions you like and discard the rest, you are using the theory as a drunkard uses a lamp post – for support rather than illumination.

The key issue is the extent to which the high incomes of the top 1 percent reflect high productivity rather than some market imperfection.

The most natural explanation of high CEO pay is that the value of a good CEO is extraordinarily high.

In the end, the left’s arguments for increased redistribution are valid in principle but dubious in practice.

The same logic of social insurance that justifies income redistribution similarly justifies government-mandated kidney donation. No doubt, if such a policy were ever seriously considered, most people would oppose it.

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More than four years have passed since President Obama signed into law the American Recovery and Reinvestment Act (ARRA) of 2009. The stimulus package came at a cost of more than $830 billion, or about 22 percent of annual federal spending. It was supported by many Keynesian economists although criticized for being ‘too small’.

Although it seems unpopular to look back and ask whether policies of the past have actually worked, let us have look at the effects of the ARRA.

In a 2010 study, John Cogan and John Taylor have found little evidence in favor of the stimulus package:

The implication is not that ARRA has been too small, but rather that it failed to increase government consumption expenditures and infrastructure spending as many had predicted from such a large package. A consideration of the counterfactual event that there had not been an ARRA supports the hypothesis that state and local government borrowing would have been higher and purchases would have been about the same in the absence of ARRA.

Atif Mian and Amir Sufi have published another study in the prestigious Quarterly Journal of Economics in 2012. They estimate the effect of the Cash for Clunkers Program and exploit variation across U.S. cities in exposure to the program. They conclude:

We find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

James Feyrer and Bruce Sacerdote also examine the effect of the ARRA in their 2011 NBER Working Paper. They use state and county level variation and find that each job created came at a humongous cost:

A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000.

This finding is in line with a paper by Daniel Wilson published in the American Economic Journal in 2012:

Cross-state IV results indicate that ARRA spending in its first year yielded about eight jobs per million dollars spent, or $125,000 per job.

It is also in line with much of the previous research, as documented by Valerie Ramey in a meta study published in the Journal of Economic Literature in 2011:

I assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate: a temporary, deficit-financed increase in government purchases. I conclude that the multiplier for this type of spending is probably between 0.8 and 1.5.

This would translate into something like $120’000 to $200’000 per job created.

By the way, these figures are not surprising since most economists estimated the ARRA to ‘save’ about three million jobs at most. At a cost of $831 billion, this suggests about $300’000 per job. I wonder whether the public support would have been large had Obama sold the program with this price tag.

Greg Mankiw has also been following the so-called recovery ever since the financial crisis. Instead of focusing on unemployment his focus is on the share of the population which is working. This takes into account that some people have simply stopped looking for work. During Bush’s presidency, the employment-population ratio increased slowly from 62 to 63 percent. In the recession of 2008-09, this ratio dropped to 58.5 percent. And ever since then, it has stagnated at this low level. (see figure here)

Finally, it is also worthwhile to reconsider Econ Stories’ 2011 video featuring Keynes and Hayek:

Spending is not free, that is the heart of the matter. Too much is wasted as cronies get fatter. The economy is not a car, there is no engine to start. No expert can fix it, there is no ‘it’ at all.

The question, I ponder, is who plans for who. Do I plan for myself or do I leave it to you? I want plans by the many, not by the few.

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Earlier this month I wrote about the minimum wage law (here). Adding to this, Bryan Caplan, Professor of Economics at George Mason University, argues that there is yet another logical fallacy with the minimum wage:

The Myopic Empiricism of the Minimum Wage

Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment.  The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

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Discussions about minimum wages are often tedious. On his blog, Greg Mankiw uses a very simple argument to counter recent claims for higher minimum wages:

Why $9?

Presumably, the president’s economic team must believe that the adverse employment effects become sufficiently large at some point that further increases are undesirable.

The fact of the matter is that a higher minimum wage ultimately surpasses the productivity of some workers. At this point the least productive people will lose their jobs. So unless we know everyone’s productivity, any claim for a higher minimum wage

  • either assumes that all workers create enough value per hour (to make it profitable to hire them at the minimum wage)
  • or neglects that the weakest members of the society will no longer find a job.

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Great summary by former U.S. President Ronald Reagan:

Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

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Adding to my recent blog posts on democracy and federalism, I’d like to share an article by Charles C.W. Cooke, published in the National Review:

Repeal the 17th Amendment

It is liberty, not democracy, that is America’s highest ideal.

The Senate was not intended to be the people’s representative body, but that of the states.

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what limits public debt

The fiscal cliff is coming back. If no agreement is reached prior to March 1, $85 billion in automatic spending cuts will take effect. That is just 2.3 percent of the total federal budget but enough to cause a stir.

Thus it might be of interest to review a study by two Swiss economists, Eichenberger and Stadelmann, in the Review of Law & Economics.

How Federalism Protects Future Generations from Today’s Public Debts

Their paper deals with a phenomenon called ‘capitalization’ and goes back to an article by Wallace E. Oates in the Journal of Political Economy in 1969 (link). The idea is that demand for property is negatively affected by taxes. That is to say, in areas with high taxes, property prices should be lower. And since taxes have to grow with the public debt burden, property prices should be lower in communities with higher debt. This observation has been described as government debt capitalizing into property values.

Eichenberger and Stadelmann argue that this debt capitalization in property values is more pronounced in case of local government debt (as compared to federal debt). This is because people can move to another community more easily than to another country. Thus, if a community is highly indebted, property prices have to decline substantially for people to decide to live and work there (they know that the government must raise taxes in order to pay for the debt). As a result, people who own property and pay taxes to their local community have a smaller incentive to vote in favor of debt-financed government expenditures.

The study concludes:

Debt capitalization provides for a natural and more effective brake for government debts at the local than at the central level. Thus, decentralized countries with a larger local budget share can be assumed to be less prone to opt for deficits and debts than centralized countries.

The United States, however, has moved away from being a nation of fifty fiscally individual states. Since 2000, government expenditure as a share of GDP has increased by only 1 percentage point at the state level, while growing 7 percentage points at the federal level (source). If this trend continues, the next fiscal cliff is just around the corner.

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Beforehand, sorry for the rather long time without any new blog posts.

When criticizing current politics it is often argued that in a democracy the voting majority has supported various government interventions and that this ought to justify the interference.

Ayn Rand argues the opposite:

I object to the idea that people have the right to vote on everything. The traditional American system was a system based on the idea that majority will prevail only in public or political affairs and that it was limited by inalienable individual rights.

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