Economics, Pethokoukis

Competition, disruptive innovation, and men’s razors

Competition spurs innovation, even in low-tech industries. Take shaving, for instance. The Wall Street Journal reports that Procter & Gamble has created a new flexible razor mounted on a ball bearing. Sounds to me like a version of a Dyson vacuum. Anyway, BloombergBusinessWeek explains how a new competitor is forcing both a product and business model change:

But here’s the true innovation: Gillette’s new razor will use P&G’s current blades, a total departure from the notorious razors-and-blades model that has characterized the segment since Civil War beards went out of style the first time. The razor has typically been just a cheap vehicle to sell expensive blades, locking customers into a proprietary platform. … But that brilliantly simple business model may finally have worn thin, thanks to e-commerce startups such as Dollar Shave Club and Harry’s. With a heavy dose of humor, some cheap Asian suppliers, and sharp customer service, these companies started convincing consumers that razors were a commodity, not high science. In October, Dollar Shave Club had 330,000 members and gathered another $12 million in venture capital.

Meanwhile, Gillette’s revenue from its grooming segment—mostly razors and blades—dropped in its last fiscal year for the first time in five years. … Which is exactly why Gillette’s new ball-bearing device is so fascinating. Its launch suggests those cheap blade subscription services have been trimming the brand’s business. Gillette has even cobbled together a razor-blade subscription service of its own via retail channels such as Amazon.com and Drugstore.com.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Economics, Pethokoukis, Regulation

The terrible economic burden of occupational licensing

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One way government stymies entrepreneurs, particularly low-income ones, is through illogical and burdensome occupancy licensing laws. These laws and regulations are more about limiting labor supply and competition than ensuring the public’s health and safety. Cronyism meets cartelism.

As documented by the Institute of Justice, an emergency medical technician is required to get an average of 33 days of training. Yet in a 2012 analysis of license requirements for more than 100 low- and moderate-income occupations across America, IJ found 66 jobs with greater average licensure burdens than EMTs, including interior designers, barbers, cosmetologists, and manicurists. The average cosmetologist, for instance, spends 372 days in training.

These requirements to spend months in education or training, take exams, and pay fees make it “harder for people to find jobs and build new businesses that create jobs, particularly minorities, those of lesser means and those with less education.”

In a piece over at Vox, Evan Soltas, working off research by Alan Krueger and Morris Kleiner, notes that 30% of US workers are now covered by licensing schemes. As union membership has gone down, licensing has increased — with an interesting effect on inequality:

Connecting the stories of unions and licensing makes sense. Both are institutions workers created to raise wages — and occupational licensing seems about as effective as unions, raising wages by about 15 percent relative to what similarly-skilled workers earn in states where they’re not protected by licensing from competition.

Yet there’s something unions did that occupational licensing doesn’t, and that’s reduce inequality, Kleiner and Krueger find. Whereas unions tend to push up wages at the bottom and restrain them at the top, compressing the wage distribution, there’s no such effect for occupational licensing. Wage dispersion within a given trade is not effected by licensing.

In other words, the most successful workers will find that occupational licensing recreate the wage gains that unions once provided. But licensing seems to do little to help the bargaining power of the most vulnerable workers.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

Is the the US patent system hindering economic growth?

Over at Forbes, Bret Swanson nails it:

Slow economic growth since the Great Recession has been devastating for employment, middle class incomes, and federal and state budgets. Worse, many economists are predicting slow growth for the next generation. A number of policies — from tax and immigration reform to more innovation friendly regulatory treatment of the health, energy, finance, education, and communications sectors — could help launch a much needed new boom.

But another often-overlooked but persistent drain on the economy also needs attention. Intellectual property (IP) was written into the Constitution and ever since has been a key to U.S. inventiveness and entrepreneurship. Over the years, however, the system has broken down in a number of ways. An overworked Patent and Trademark Office issued too many patents of questionable quality and in markets (software is the prime example) where the very idea of patentability is questionable. An explosion of low quality patents ignited an explosion of litigation, and today the legitimacy of IP itself is under assault

Real intellectual property embodied in true inventions and innovations is crucial to our economy. But faux IP, embodied in obvious and overly broad claims and backed by fierce litigation, is triply bad. It discourages small innovators and new market entrants. It artificially boosts prices and thus harms consumers. And it gives true IP a bad name, undermining a foundation of our knowledge economy.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

By one key measure, income inequality is actually dropping

JPMorgan

JPMorgan

Great catch here by one of my favorite Wall Street economists, Michael Feroli of JPMorgan:

One of the principal strengths of the usual weekly earnings report is the demographic details it contains regarding wage growth. In particular, the 90-10 ratio compares earnings of workers in the top decile with those in the bottom decile and is sometimes used as a proxy for income inequality.

When the series began in 2000, workers in the top earnings decile earned 4.4 times as much in a usual week compared with workers in the bottom decile. The 90-10 ratio then steadily increased until it topped out at 5.3 in 2012Q3. Since then the ratio has come back down to 5.0 last quarter.

As we noted last year (“Is income inequality near a turning point?”) income inequality tends to be countercyclical, with wages exhibiting greater inequality in bad times and less inequality when the business cycle improves. With labor markets continuing to firm and slack being reduced in most measures, it is reasonable to expect further compression of the 90-10 ratio in coming quarters.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

Airbnb shows what’s right about the US economy, and what’s wrong

Airbnb, the home-rental company, is a great story about the Internet economy and disruptive innovation. It and Uber are examples of new firms that have, as BloombergBusinessWeek puts it, “upended traditional business models and allowed creators of content to connect directly with their audience.”

But disrupters make enemies of powerful disruptees, the incumbent firms in their space. Privately-held Airbnb just raised $450 million from a group led by private-equity firm TPG. The company wants to expand globally and add more services for travelers. And here is one other thing, according to the WSJ, that it want to do with the dough.

Airbnb also needs financial ammunition to battle a powerful hotel industry and scrutiny from regulators, and to cover costly damages from thefts and vandalism. Hotels argue that the company’s rentals unfairly skirt lodging taxes and should be held to the same fire codes and other regulations. Regulators, meanwhile, are concerned about safety, oversight and tax collections.

So whose side will government be on, that of consumers and disruptive startups or entrenched interests?

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

America’s anemic, above-average recovery

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The good news about the current economic recovery is that it is continuing. GDP is rising, jobs are being created. Of course, the pace has been quite slow. From the WSJ:

The National Bureau of Economic Research, the semiofficial arbiter of business cycles, judges that the U.S. economy began expanding again in June 2009, just over 58 months ago. That means the current stretch of growth, in terms of duration, is poised to drift past the average for post-World War II recoveries.

Yet after almost five years, the recovery is proving to be one of the most lackluster in modern times. The nation’s 6.7% jobless rate is the highest on record at this stage of recent expansions. Gross domestic product has grown 1.8% a year on average since the recession, half the pace of the previous three expansions.

So is it a case that slow-but-steady wins the race? The history of US expansions suggests slow growth actually raise the risk of recession. There is less cushion to absorb economic shocks. Sputter speed often turns to stall speed. Research from the Federal Reserve finds that that since 1947, when year-over-year real GDP growth falls below 2%, recession follows within a year 70% of the time.

Of course there is no reason to accept that this is the best the US economy can do — especially given tax and regulatory policy more focused on subsidizing incumbent players than promoting competition and innovation. And as I say today over at National Review, monetary policy is hardly optimal for meeting whatever potential GDP growth is right now.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

Please, enough with the state film subsidies

This New York Times headline “Hollywood Begs for a Tax Break in Some States, Including California”  was all I needed to read about this notorious and indisputably bad idea. From the Center on Budget and Policy Priorities:

State film subsidies are a wasteful, ineffective, and unfair instrument of economic development. While they appear to be a “quick fix” that provides jobs and business to state residents with only a short lag, in reality they benefit mostly non-residents, especially well-paid non-resident film and TV professionals. Some residents benefit from these subsidies, but most end up paying for them in the form of fewer services — such as education, healthcare, and police and fire protection — or higher taxes elsewhere. The benefits to the few are highly visible; the costs to the majority are hidden because they are spread so widely and detached from the subsidies.

State governments cannot afford to fritter away scarce public funds on film subsidies, or, for that matter, any other wasteful tax break. Instead, policymakers should broaden the base of their taxes to create a fairer and more neutral tax system. Economic development funds should be targeted on programs that are much more likely to be effective in the long run, such as support of education and training, enhancement of public safety, and maintenance and improvement of public infrastructure. Effective public support of economic development may not be glamorous, but at its best, it creates lasting benefits for residents from all walks of life.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

‘Without abandoning principles, we need practical policies based on moral empathy’

Image Credit: Patrick G. Ryan

Image Credit: Patrick G. Ryan

My boss Arthur Brooks tells New York Times readers what he learned from the Dalai Lama in Dharamsala, India, and what the Dalai Lama can teach Washington. Read the whole thing, of course, but this I think is the main takeaway: “Without abandoning principles, we need practical policies based on moral empathy.”

Policymakers need to (a) deeply understand the actual problems faced by their fellow citizens, (b) carefully formulate plans with potential to ameliorate those problems, and care enough to push those plans in the face of special-interest opposition. Oh, and all of the above needs to be informed by values. Which values, exactly? Well, these would be a great start …

Pethokoukis, Economics, Taxes and Spending, U.S. Economy

Jacking up investment taxes to reduce income inequality is a bad idea

The New York Times

The New York Times

New York Times columnist Floyd Norris hates that investment income gets special tax treatment. He just doesn’t see a persuasive reason for it. So Norris counts it a good thing how the 2013 tax hikes on investment income will narrow the gap in tax rates between “the superrich and the very rich.” And if he had his way, investment income would be taxed at the same rates as labor income:

Of course, ordinary Americans also are eligible for preferential tax rates on dividends and capital gains, and for most of us they remain at 15 percent. The catch is that few of us have a lot of investments in taxable accounts and therefore derive little benefit from those breaks. … If Congress ever gets serious about increasing tax revenue enough to pay for the spending bills it passes, the big tax advantage given to unearned income may have to be reduced, if not eliminated.  … This year, that tax advantage has been reduced, even if only for some of the highest-paid Americans. It is a start toward a tax policy that no longer discriminates against people who have to work for a living because they do not have dividend checks to support them.

Here’s the thing, though: The capital gains preference reduces some key distortions and inefficiencies in the tax code: the lock-in effect (investors retain assets they would otherwise sell because of high tax rates), the bias against equity-financed investment by C corporations versus debt financing, and the penalty on savings. Indeed, many economists think shifting the US to a consumption tax, which would not tax investment income, would boost economic growth. Another possible, pro-growth reform–one I am surprised Norris fails to mention–would be to tax at ordinary rates an individual’s investments gains as they accrue and then match that with an elimination of the corporate income tax. Finally, if you are worried that the tax code discriminates against wage earners, why not expand capital ownership whether through expanded entrepreneurship, Social Security reform, or government-seeded personal stock portfolios. Lots of the doomsaying on inequality assumes weak economic growth. Let’s not accidentally make that a self-fulfilling prophecy.