Pethokoukis, Economics, U.S. Economy

These 9 states are the corporate welfare kings of America

101515subsidies

Many good charts in this Mercatus report on states giving subsidies to business. From the study by Veronique de Rugy:

While corporate welfare, whether in the form of subsidies or bailouts, is more often associated with the federal government, state governments also regularly use generous, targeted subsidy packages to entice corporations to locate within their borders. …

Targeted state subsidies to private businesses are often promoted as a “market-friendly” means to boost growth, jobs, and development. However, the empirical studies on state subsidies find that these programs have little to no effect in producing their intended goals.

What’s more, as Christopher Coyne and Lotta Moberg write in their recent Mercatus working paper, “The Political Economy of State-Provided Targeted Benefits,” these subsidies are often ultimately damaging. Targeted state subsidies misallocate scarce public resources while encouraging rent-seeking, regulatory capture, and cronyism. To encourage sustainable state economic growth, policymakers should shift their focus away from tailoring policies to benefit specific firms toward policies that create a general environment in which all can flourish. The first step is to end the practice of targeted state subsidies.

Pethokoukis

While the greens have been focusing on regulation, taxes, and scarcity, US free enterprise system just innovated a fusion reactor

America will need more energy in the future. So will the world. Civilization needs a high-energy planet. So this is good, good news, via Reuters:

Lockheed Martin Corp said on Wednesday it had made a technological breakthrough in developing a power source based on nuclear fusion, and the first reactors, small enough to fit on the back of a truck, could be ready for use in a decade.

Tom McGuire, who heads the project, said he and a small team had been working on fusion energy at Lockheed’s secretive Skunk Works for about four years, but were now going public to find potential partners in industry and government for their work.

Initial work demonstrated the feasibility of building a 100-megawatt reactor measuring seven feet by 10 feet, which could fit on the back of a large truck, and is about 10 times smaller than current reactors, McGuire told reporters.

In a statement, the company, the Pentagon’s largest supplier, said it would build and test a compact fusion reactor in less than a year, and build a prototype in five years.

Score one for the Skunk Works! And some more details from Aviation Weekly:

The early reactors will be designed to generate around 100 MW and fit into transportable units measuring 23 X 43 ft. “That’s the size we are thinking of now. You could put it on a semi-trailer, similar to a small gas turbine, put it on a pad, hook it up and can be running in a few weeks,” McGuire says. The concept makes use of the existing power infrastructures to enable the CFR to be easily adapted into the current grid. The 100-MW unit would provide sufficient power for up to 80,000 homes in a power-hungry U.S. city and is also “enough to run a ship,” he notes.

Lockheed estimates that less than 25 kg (55 lb.) of fuel would be required to run an entire year of operations. The fuel itself is also plentiful. Deuterium is produced from sea water and is therefore considered unlimited, while tritium is “bred” from lithium. “We already mine enough lithium to supply a worldwide fleet of reactors, so with tritium you never have too much built up, and that’s what keeps it safe. Tritium would be a health risk if there were enough released, but it is safe enough in small quantities. You don’t need very much to run a reactor because it is a million times more powerful than a chemical reaction,” McGuire notes.

Economics, Pethokoukis, U.S. Economy

Stocks are falling. Don’t worry. Unless these 2 things happen. Then worry

A new report from Capital Economics carries this title: “Market moves hard to square with solid economic fundamentals.” But maybe the fundamentals are not so solid, not so sound. Maybe falling stocks are telling something we don’t really want to hear right now. MKM economist Mike Darda offers some useful perspective:

Retail sales growth disappointed in September after surprising to the upside in August. However, real retail sales are up 2.7% year-to-year, above the 1.9% average going back to the late 1960s.

If financial market turbulence is going to have broad-based macroeconomic repercussions (shocks to the money demand function not accommodated by the Fed), we would look for it to show up in confidence and jobless claims data. Claims will tend to rise 20% year-to-year on a four-week moving average basis heading into a recession whereas the Conference Board’s Present Situations Index tends to fall 15 Index points or more.

We are nowhere near these levels and don’t expect to be for some time to come.

Of course, this assumes the Fed is watching the precipitous decline in long-term inflation expectations carefully. Unless the Fed wants to continue to undershoot its inflation target and thus return to the ZLB on short rates the next time a shock/recession hits, it should make it absolutely clear that no tightening will occur with expected inflation below the Fed’s target. In other words, the bubble hawks that have seemed to shift the consensus toward a mechanical / calendar based tightening of monetary policy sometime next year need to literally be taken out to the woodshed. 

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

Pethokoukis

Yet again, Obama shows he doesn’t quite ‘get’ why free enterprise is so important. So let me explain

Image Credit: Global Panorama (Flickr) (CC-BY-2.0)

Image Credit: Global Panorama (Flickr) (CC-BY-2.0)

President Obama recently gave a speech at Northwestern University’s business school in which he offered his philosophical insights into government and economic freedom:

There is a reason why I came to a business school instead of a school of government.  I actually believe that capitalism is the greatest force for prosperity and opportunity the world has ever known.  And I believe in private enterprise — not government, but innovators and risk-takers and makers and doers — driving job creation.

But I also believe in a higher principle, which is we’re all in this together.  That’s the spirit that made the American economy work.  That’s what made the American economy not just the world’s greatest wealth creator, but the world’s greatest opportunity generator.  And because you’re America’s future business leaders and civic leaders, that makes you the stewards of America’s greatest singlet asset — and that’s our people.

So as you engage in the pursuit of profits, I challenge you to do so with a sense of purpose.  As you chase your own success, I challenge you to cultivate more ways to help more Americans chase their success.

See, it’s stuff like that make folks on the right wonder if the president really “gets” the true value of the free enterprise system. Free enterprise doesn’t just make us a richer people — it doesn’t just “deliver the goods” – it makes us a better people. The pursuit of profits, often at the same time the pursuit of a dream and of personal meaning, can be high purpose.

First of all, economic freedom goes hand-in-hand with political freedom. As Milton Friedman wrote in “Capitalism and Freedom”: “Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.” 

Note that Friedman uses the phrase “competitive capitalism.” That means businesses living and dying based on their ability to generate consumer-relevant value, not their ability to lobby government for support and favor. Competitive capitalism is not crony capitalism or corporatism where Big Business works hand in hand with Big Government.

Second, free enterprise enriches life beyond material riches. Economist Deirdre McCloskey, from her bookThe Bourgeois Virtues: Ethics for an Age of Commerce“:

I claim that actually existing capitalism, not the collectivisms of the left or of the right, has reached beyond mere consumption, producing the best art and the best people. People have purposes. A capitalist economy gives them scope to try them out. Go to an American Kennel Club show, or an antique show, or a square-dancing convention, or to a gathering of the many millions of American birdwatchers, and you’ll find people of no social pretensions passionately engaged. Yes, some people watch more than four hours of TV a day. Yes, some people engage in corrupting purchases. But they are no worse than their ancestors, and on average better.

Participation in capitalist markets and bourgeois virtues has civilized the world. Richer and more urban people, contrary to what the magazines of opinion sometimes suggest, are less materialistic, less violent, less superficial than poor and rural people. Because people in capitalist countries already possess the material, they are less attached to their possessions than people in poor countries. And because they have more to lose from a society of violence, they resist it.

The richer, more urban, more bourgeois people, one person averaged with another, I claim, have larger, not smaller, spiritual lives than their impoverished ancestors of the pastoral. They have more, not fewer, real friends than their great-great-great-great grandparents in “closed-corporate” villages. They have broader, not narrower, choices of identity than the one imposed on them by the country, custom, language, and religion of their birth. They have deeper, not shallower, contacts with the transcendent of art or science or God, and sometimes even of nature, than the superstitious peasants and haunted hunters-gatherers from whom we all descend.

They are better humans—because they in their billions have acquired the scope to become so and because market societies encourage art and science and religion to flourish and because anyway a life in careers and deal making and companies and marketplaces is not the worst life for a full human being.

As the economist and philosopher Amartya Sen puts it, “The freedom to exchange words, or goods, or gifts does not need defensive justification in terms of their favorable but distant effects; they are part of the way human beings in society live. . . . We have good reasons to buy and sell, to exchange, and to seek lives that can flourish on the basis of transactions.” He instances the liberation of women worldwide through access to markets.

Capitalism has not corrupted the spirit. On the contrary, had capitalism not enriched the world by a cent nonetheless its bourgeois, antifeudal virtues would have made us better people than in the world we have lost. As a system it has been good for us.

Capitalists ended slavery and emancipated women and founded universities and rebuilt churches, none of these for material profit and none by damaging the rest of the world. Bourgeois virtues led us from terrified hunter bands and violent agricultural villages to peaceful suburbs and lively cities. Enlightened people such as Voltaire, Montesquieu, Adam Smith, and Mary Wollstonecraft believed that work and trade enriched people in more than material things. They believed that a capitalism not yet named broke down privileges that had kept men poor and women and children dependent.

And for the soul they believed that labor and trade were on the whole good, not dishonorable. Work is “rough toil that dignifies the mind,” wrote Wollstonecraft, as against “the indolent calm that stupefies the good sort of women it sucks in.” Commerce, the French said, was a sweetener: le doux commerce. Commerce may have lowered the spirit of the proud noble, Voltaire noted with little regret, having suffered literal beatings at his behest, but it sweetened and elevated the rude peasant.

I guess I would like to see a little more of that in Obama’s musings on free enterprise, a bit more poetry and wonder, rather than the perfunctory boilerplate and box ticking he typically offers before transitioning to his core message about “higher principles” where he urges his audience to transcend the pursuit of lucre for more enlightened purpose. Actually, creating a prosperous society where as many people as possible have the means and opportunity and freedom to pursue happiness as they see it is high principle and high purpose. Full stop. The president may understand this, but you wouldn’t know it by listening to him.

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

Pethokoukis, Economics, U.S. Economy

Survey: 81% of top economists disagree with the Piketty inequality argument

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Perhaps you recall French inequality researcher Thomas Piketty’s blockbuster book,Capital in the Twenty-First Century.”  In it, the economist argues that when the return on capital exceeds the growth rate of the economy, inequality will increase. As AEI economist Michael Strain explains, “Because under this condition income generated from capital will grow faster than non-capital income, like wages. Wealth, therefore, will grow faster than take-home pay, the rich will get richer and richer, and we will end up in a world of vast inequality.”

The above chart from the University of Chicago’s IGM Forum shows Piketty’s fellow economists remain, by and large, unpersuaded that r>g is the most important force driving inequality. Among the comments:

– “Theoretically and empirically the case that r-g is a major determinant of inequality or even top inequality is weak.”

– “Many other factors affect inequality including technological change, globalization, increasing returns to education, and others.”

– “Don’t find r-g a particularly useful summary of anything (doesn’t really capture role of technology, training, tax policy)”

– “A glance at the biographies of the truly rich shows most came from upper middle class families. Good luck and some skill produced the wealth.”

– “Argument has poor theory & negligible empirics.”

– “Is this an inside joke? BEA estimates show little change in rate of return.”

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

Pethokoukis

The rise of cosplay and escapism from America’s New Normal economy

My recent The Week column,Why the rise of cosplay is a bad sign for the U.S. economy,” may be the most read piece I’ve written strictly for the internet.

It may also be the most misunderstood. Based on the comments and Tweets I’ve received, the most common misunderstanding is that I was arguing the increase in “costume playing” — primarily based on Japanese anime and manga, as well as similar American media — is somehow responsible for the anemic economic recovery. (Lots of comments by cosplayers about how the money they spend on costumes actually helps the economy or how some even turn their hobby into a small business.) 

And for that, I partly blame this io9 story on my column: “Apparently The Economic Downturn Is Cosplayers’ Fault.” Or to be more specific, I blame the io9 headline. The actual piece by Rob Bricken, though hyperbolically and theatrically critical, acknowledges that I am saying just the opposite of the headline. Bricken:

To be fair, despite the headline and subhed that seems to indicate that cosplayers are in fact responsible for the sluggish growth of America’s economy, Pethokoukis states it’s the opposite: “It’s not to say that all or even most cosplay aficionados are struggling to find work. It’s only to say that any rise in people fleeing reality for fantasy suggests problems with our reality.”

Bricken goes on to wonder why I am focusing on cosplay as opposed to other possible diversions:

If our economy is driving people to escape from reality, then perhaps television, movies, sports, books, alcohol, drugs, and videogames might be somewhat more recognizable factors than cosplayers. And if that’s the case, then I also have to wonder if maybe — just maybe — this desire to escape is true of people of all ages who are being f—-d over by the lacks of jobs and job growth, people struggling to find jobs and to hold them, who resent their lack of advancement, or more likely their lack of anything resembling job security.

The reason isn’t because I have something against cosplay. As a comics guy with kids who are into anime and manga, I actually think it’s pretty cool and understand all kinds of people participate for all kinds of reasons. The reason I chose cosplay was because I was making a comparison between the Japanese and American economies. From my column:

Indeed, Japan’s Lost Decades have coincided with a major spike in “people escaping to virtual worlds of games, animation, and costume play,” Masahiro Yamada, a sociology professor at Chuo University in Tokyorecently told the Financial Times. “Here, even the young and poor can feel as though they are a hero.

So perhaps, to some degree, the rise in cosplay here — at least more recently — similarly reflects escapism from a depressing economic reality for some cosplayers (not all, of course), particularly 20somethings facing a depressed labor market. So that’s the theory. Connecting cosplay with escapism doesn’t seem like a huge conjectural leap, as Bricken concedes. Neither does io9′s sister publication Kotaku. From its 2013 pieceCosplayers Are Passionate, Talented Folks. But There’s A Darker Side To This Community, Too“: “Perhaps not surprisingly, there is also an element of escapism to cosplay.”

Now the Kotaku story wasn’t talking about escape from a bad economy, but it is well known — even commonsensically — that we humans look for diversions during tough times.  As the consultancy Euromonitor put it in a 2009 report:

With the global financial crisis hitting home for many, all consumers really want is to do is flee from reality: just as they flocked to see Fred and Ginger movies during the Great Depression, consumers are turning to products and media that take their minds off the daily doom and gloom. This new report examines how leisure trends are changing in the face of recession and ongoing digitalisation, how much consumers are spending and what the impact of these changes will be going forward.

Escapism, then, is perhaps a soft metric that reflects sustained economic weakness. And for some, cosplay serves as economic escapism. And from that perspective, cosplay’s increased popularity is a bad sign for the US economy, as it is for Japan’s — though, on the bright side, at least there is something positive to escape to.

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

Economics, Pethokoukis, U.S. Economy

Here’s how superfast, gigabit internet might change our lives

Image Credit: Shutterstock

Image Credit: Shutterstock

I recently wrote how a recent New York Times piece frets that communities lucky enough to get Google Fiber superfast internet don’t yet know what to do with all that blazing bandwidth. Now as a new, must-read Pew Research analysis notes, “Gigabit connectivity (1,000 Mbps) is still quite limited in the United States; while average speeds vary greatly, gigabit connections are 50-100 times faster than the average fixed high-speed connection.”

But superfast internet is coming. And I assume that as far as applications go, it will be a “build it and they will come” sort of thing. As Pew points out, ” Historically, every major advance in bandwidth has facilitated innovation that has brought new services and applications to digital life.” So just what might those advances be? Pew asked a number of experts for their speculation. Here are a few that jumped out at me:

Jason Hong, an associate professor in the School of Computer Science at Carnegie Mellon University: “Odds are high that there will be breakthroughs. My best guesses would be: a) far better telepresence, in terms of video quality, audio quality, robotic control, and time (for example: open all the time rather than just a short time for viddeo conferencing); b) a few people starting to use life – logging technologies to capture eve rything in their lives (with some people choosing to share those); c) higher adoption of telesurgery and remote medical support; d) some new kind of entertainment, possibly including new kinds of social media; e) more sensor data being continuously capture d and stored, including those embedded in the city (for bridges and buildings), cars, smart phones, portable home medical devices, and toys; f) better search for multimedia, especially videos; g) more cloud – based apps, offering far richer software as a service than we can do today. Examples might include more thin – client netbooks with all of the backend stored in the cloud, or full apps that are currently desktop apps offered as a cloud service (think Adobe Creative Suite, games , or Microsoft Office fully in the cloud)/

Bob Briscoe, chief researcher in networking and infrastructure for British Telecom: “Telepresence will be available in business environments. By 2025 it is unlikely to be realistic and natural, although sufficiently realistic to be usable. It will also be becoming available in personal and residential settings. It may become possible for an individual to project into more than one presence at once, given that young people have learned to cope with partial attention on multiple threads of interaction.”

Hal Varian, chief economist for Google: “The Internet of Things is real. Internet-enabled devices that interact with the physical world will be the norm. They will learn on their own, with some verbal instruction by their users. The big story here is continuous health monitoring … It will be much cheaper and more convenient to have that monitoring take place outside the hospital. You will be able to purchase health-monitoring systems just like you purchase home-security systems. Indeed, the home-security system will include health monitoring as a matter of course. Robotic and remote surgery will become commonplace. Lasik is just the beginning. Tools for artistic creation such as animated videos and interactive games will become much more powerful and enable collaborative creation.”

JP Rangaswami, chief scientist for Salesforce.com: “It will be classic William Gibson ‘future’s here’ stuff. The focus will shift from just thinking about live, very high-quality, video based apps to [experiences] that create lots of data to be moved around, sometimes synchronously, sometimes asynchronously. Having a personal healthpod you strap yourself into daily will become normal; wearing clothes that are tailor-made for you every day, 3D-printed at home, will also become normal, with the previous day’s clothes recycled efficiently; the school day will disaggregate into a number of learning sessions, so me at home, some in the neighborhood, some in pairs, some in larger groups, with different kinds of facilitators.”

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

 

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

Are Paul Krugman and other progressives assuming the debt doesn’t matter — and will never matter?

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Paul Krugman on America’s budget situation and outlook:

But isn’t the falling deficit just a short-term blip, with the long-run outlook as dire as ever? Actually, no. Falling deficits right now have a lot to do with a strengthening economy plus some of that “mindless austerity” the president condemned. But there has also been a dramatic slowdown in the growth of health spending — and if that continues, the long-run fiscal outlook is much better than anyone thought possible not long ago. Yes, current projections still show a rising ratio of debt to G.D.P. starting some years from now, and uncomfortable levels of debt a generation from now. But given all the clear and present dangers we face, it’s hard to see why dealing with that distant and uncertain prospect should be any kind of policy priority.

Well, let’s see what the nervous Nellies at the Congressional Budget Office have to say. The above chart is CBO’s extended alternative scenario, which assumes “certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified.”

It also tries to incorporate the economic impact of continually rising debt. As you can see, by 2039 — just 25 years from now —  we are perhaps looking at a publicly-held debt of 183% of GDP vs. about 75% today and half that before the Great Recession. So basically a quintupling of the debt in a generation. And a more heavily indebted and poorer American than otherwise. And the longer we wait to make structural spending reforms, the more dramatic those changes will need be.

I would guess that Krugman, and many others on the left, would like to increase spending on all kinds of things: infrastructure, expanded healthcare subsidies, and universal pre-k among other “clear and present dangers.” So that’s where they want the public’s focus to stay. And when the time comes to address the growing debt, grab a VAT off the shelf. Or maybe that day will never come. Left-liberal economist Brad DeLong has speculated on a scenario where rates stay low forever:

 … we may well find ourselves in a situation in which the U.S; government can simply borrow and borrow and never have to pay it back because the economy grows faster than interest accrues. In which case the U.S. government looks much more like the Renaissance Medici Bank–an organization you are happy to pay to keep your money safe, rather than a debtor from whom you demand a healthy return. The treasury becomes a profit center for the government rather than a cost.

I wonder how much the Medici Bank scenario is fueling the left’s blasé attitude about the debt.

Pethokoukis

‘What happens when dropping bombs isn’t enough?’

Dexter Filkins in the New Yorker:

Disaster is looming in Syria, again. Fighters from the Islamic State in Iraq and al-Sham, the fanatical group that has conquered swaths of the country, are pushing into Kobani, a Syrian town with a mostly Kurdish population that sits near the Turkish border. Thousands of Kurds have fled, but thousands remain. American and Turkish officials have said that Kobani probably can’t be saved.

This is precisely the sort of debacle that President Barack Obama appeared to be aiming to stop when he announced, last month, that the U.S. military would begin carrying out air strikes against ISIS targets in Syria. (It had been bombingISIS in Iraq since early August.) American jets have begun hitting the group’s trucks and compounds in Syria, including targets near Kobani, but these attacks have not stopped the ISIS advance. Why is the situation turning out so badly? …

But the real problem for Kobani is American policy. In August, when President Obama announced that he would launch air strikes to “degrade and destroy” ISIS, he emphasized that he had no intention of sending American combat troops into Syria. What is happening now is a classic problem of diplomacy: a mismatch between means and ends. President Obama wants to destroy ISIS and save the Kurds (and the Yazidi religious minority, and the Iraqi government in Baghdad), but he is willing to do no more than drop bombs. What happens when dropping bombs isn’t enough?

In Kobani, it seems, we are about to find out.

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

Economics, Pethokoukis, U.S. Economy

Right now, the US is a 1% growth economy – JPMorgan

President Obama has been worrying about the wrong “1%.” More attention should be paid to a US economy where potential GDP growth may have fallen to levels more commonly associated with sclerotic Europe and Japan. The one-handle. From JP Morgan economist Robert Mellman:

A 2013 Special Report by J.P. Morgan examined the prospects for US potential real GDP growth (how fast the economy would grow without putting downward pressure on the unemployment rate), and concluded that it was probably slowing to only 1.75%. This was calculated by combining a 0.5% potential growth rate for the labor supply and a 1.25% growth rate for labor productivity.

This still seems to us like a reasonable forecast of potential growth over the next several years, but labor supply and labor productivity growth have fallen below these estimates, both over the past year and over the past three years. The actual performance of the economy suggests that potential GDP has been increasing at a pace below 1.25%.

The supply side of the economy has disappointed already-modest expectations. Whatever the adverse effects of slow potential growth, it has allowed a rapid decline in the unemployment rate despite only middling real GDP growth. From the point of view of improving job prospects for those looking for work, weak labor force growth (less competition for jobs) and weak labor productivity (strong growth of labor demand relative to real GDP) has proved to be a very helpful combination.

 

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