Could US corporate taxes get any worse? How about a border adjustment tax?

The current US corporate income tax code is extraordinarily complex. It tends to favor larger companies. It also tends to favor companies who can squirrel away their profits overseas. Even worse, it really favors companies that can afford to hire lobbyists to create loopholes and to hire lawyers and accountants necessary to exploit the loopholes.

The US has the highest corporate tax rate in the developed world, which is especially harmful to mid-size and smaller firms. Even with the high tax rate, the US collects much less in taxes (on a relative basis) than its peers, as shown in the figure below.

A border adjustment tax would reduce (or eliminate) the corporate income tax. It would alter the current corporate tax structure by essentially imposing a tax or levy of 20 percent on all imports – including components and parts used in assembly – while exempting US exporters from any taxes. In other words, US companies would no longer have to report revenue generated by their overseas sales as taxable income. At the same time, they could no longer claim expenses incurred by importing goods and materials as deductible from their federal tax obligation.

The proposed border adjustment tax may be the most revolutionary idea in corporate tax reform in decades. If approved, it would transform the corporate income tax code into something similar to the European value-added tax or VAT. Overnight, the tax would create new categories of corporate winners and losers and will most likely drive up prices for US consumers.

  • Winners: Export-driven companies, including manufacturers of electronic equipment, machinery, aircraft, munitions, cars, and tobacco. Indirect winners would be small and medium sized business that benefit from a vastly simplified tax code.
  • Losers: Any business that relies heavily on imports including retailers, foreign car dealers, toy manufacturers, and oil refineries. Major retailers like Walmart and Target that get many of their products from Asia and other markets with cheap labor would be hard hit by the border adjustment.

There’s a chance that the BAT may be DOA. Republican senator Lindsey Graham has said that he can’t find even 10 votes in the US Senate for the current boarder adjustment tax proposal.

Nevertheless, the current US corporate tax system is a massive drag on business growth and doesn’t even do a good job at what it’s supposed to do – generate tax revenues. At this point it’s difficult to conceive of a scheme that could be any worse than the corporate tax system currently in place.

In case you were wondering … here are the top imports and exports by state. It seems Wisconsin spends a lot of money on imported sweaters.

“We haven’t seen numbers like this in a long time” – small business confidence soars

Small business optimism is at its highest level since 2004, according to a National Federation of Small business survey. Small businesses expect to see increased sales, hire more employees, and expand capital investment.

“We haven’t seen numbers like this in a long time,” said NFIB President and CEO Juanita Duggan. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.”

Source: Small Business Economic TrendsNFIB | NFIB

$5 million lawsuit alleges Raisinets boxes “recklessly” underfilled

Stuff like this gives lawyers a bad name.

A lawsuit filed Tuesday in a California federal court claims Nestlé packages some of its Raisinets in opaque movie-theater-style containers that lead customers to believe they are buying a full box, when in fact only 60% of the box contains chocolate-coated raisins.

The plaintiff—Sandy Hafer, a California resident who allegedly bought Nestlé’s Dark Chocolate Raisinets—claims that she and other candy consumers had relied on Nestlé’s “deceptive packaging” in deciding to buy the Raisinets. According to the suit, which seeks class-action status, had Ms. Hafer and others known the boxes weren’t full, they wouldn’t have bought the candy or would have paid significantly less.

Stuff like this gives regulators a bad name.

Federal law governing “slack fill”—or the empty space in a container—says a container is filled in a manner that is misleading if it contains slack fill that doesn’t have a functional purpose, like protecting the package’s contents.

The lawsuit seeks at least $5 million in damages that would include refunds for potential class members, plus any interest accrued. A 3½-ounce box of Raisinets sells for $1 at Target Corp. stores and has as many calories as a McDonald’s double cheeseburger.

Source: Raisinets Boxes ‘Recklessly’ Underfilled, Lawsuit Alleges – Law Blog – WSJ

Kenneth Rogoff: Four percent growth is not impossible

Kenneth Rogoff was the chief economist of the International Monetary Fund from 2001 to 2003.

[I]f the US economy really does have massive quantities of underutilized and unemployed resources, the effect of Trump’s policies on growth could be considerable. In Keynesian jargon, there is still a large multiplier on fiscal policy. It is easy to forget the biggest missing piece of the global recovery is business investment, and if it starts kicking in finally, both output and productivity could begin to rise very sharply.

Source: The Trump Boom? by Kenneth Rogoff – Project Syndicate

Wells Fargo meets the Wehrmacht: employee rewards and risky behavior

Employee of the Month. Sounds like a great idea. For the price of a cheap plaque and a good parking spot, bosses can motivate employees to deliver superior service. So the thinking goes.

Academics call it “status competition.” And sometimes it backfires.

Wells Fargo has been accused of opening millions of fake bank accounts. Employee compensation was tied to opening new accounts and workers could lose their jobs if they didn’t meet targets. They also had status competitions.

According to the Miami Herald, the east coast region for Wells Fargo was run by Laura Schulte for about five years. Staff recall her sales promotion called “Schulte’s All Stars.” A 2010 copy of the all star list obtained by Bloomberg ranked managers by a mix of metrics, all gauging volume in different ways. Some workers were on track to be in the “Schulte Hall of Fame.” Sure, targets were hit, but laws likely were broken.

What this have to do with the Wehrmacht?

Research published by the National Bureau of Economic Research highlights the tradeoff between the benefits of higher performance against the costs of risky behavior using an … um … “interesting” data set.

In World War II, the German air force had a version of employee of the month. It was a daily bulletin called the Wehrmachtsbericht, produced by the propaganda department and broadcast daily over the state controlled media.

Being mentioned by name in the bulletin was one of the highest forms of recognition used by the German armed forces. Only 1,200 of the 18 million men in the armed forces were mentioned by name in the bulletin.

German pilots would get mentioned for an extraordinary number of air victories. Here’s Hans-Joachim Marseille’s mention in the bulletin on June 18, 1942 (his second mention):

First Lieutenant Marseille shot down ten enemy planes in a 24 hour period in North Africa, raising his total score of aerial victories to 101.

The bulletin served two purposes. The first, as propaganda to raise morale among the German people. The second, was to inspire German soldiers to achieve top performance.

But did it work?

The researchers divided pilots into two groups: top-ranked pilots and everyone else. Top ranked pilots were in the top 20 percent of victories (number of enemy planes shot down). Everyone else was in the other 80 percent.

A statistical analysis of pilots victories found that performance overall improved in the periods after a pilot gets a mention in the bulletin. The highest ranked pilots saw a 20 percent increase in their scores while the lower ranked pilots saw a modest increase.

What’s the cost?

It’s safe to say that dogfights are a dangerous undertaking. To shoot down an enemy plane, the pilot has to put himself in harm’s way. A pilot seeking to increase his score is increasing the chances that he’s going to get shot down himself.

Top-ranked pilots saw no significant change in their “exit rate.” The other 80 percent of pilots saw their exit rate increase by 20 percent—and, in some cases, more than double.

Overall, the gain in “victories” from mentioning pilots in the bulletin was outweighed by the loss in pilots from taking additional risks.

There’s a management lesson: Incentives can spur superior service, but can also encourage risky action. Think through the implications of your incentives.

Research roundup: Hacking, gaming, working, reorganizing

  • On hacking, President-elect says, “I’ll tell you what: no computer is safe. I don’t care what they say.” He may be right. Even major law firms are getting hacked. [Wall Street Journal]
  • Pokemon Go was a big hit last summer. Super Mario Run is running out of steam. Mobile gamers don’t like to pay $10 upfront to play a game. [Wall Street Journal]
  • Fed researchers say an aging population and people staying longer in school are causing low labor force participation.  . . .  But are people staying in school because they can’t get jobs? [St. Louis Fed]
  • If a country’s economy is heavily dependent on agriculture, higher food prices may reduce poverty. [Marginal Revolution]

Signs are pointing to strong growth for the U.S. economy and that’s a big deal

Global growth will pick up faster than previously expected in the coming months as the Trump administration’s planned tax cuts and public spending fire up the U.S. economy, the OECD recently announced, revising its forecast upward from earlier this year.

In its most recent Economic Outlook, the Organization for Economic Cooperation and Development projected the U.S. economy would grow by 2.3 percent in 2017 and to 3 percent in 2018. Global growth is expected to accelerate from 2.9 percent this year to 3.3 percent in 2017 and reach 3.6 percent in 2018.

Markets have shown some early confidence that the economy will improve with the new administration. The Dow Jones Industrial Average is up almost 5 percent since election day and the S&P 500 is up more than 3 percent. Consumers seem to be sharing the confidence with early reports of strong retail sales for Black Friday and Cyber Monday.

During his campaign, Mr. Trump pledged to boost infrastructure spending by as much as $1 trillion, although the details of how that would be financed are sketchy. He has also promised to cut corporate and personal income taxes. In addition, changes to employment regulations and the Affordable Care Act are expected to spur hiring by businesses and bring more Americans into full time employment.

Costly and onerous overtime rules imposed by the Obama administration have been blocked by a federal judge and are likely to be overturned during the Trump administration. Changes to the ACA are expected to jettison mandates triggered by having more than 50 employees or by working more than 29 hours a week. Be prepared for more people working more hours.

Financial reforms are on the way with an expected overhaul of Dodd-Frank. House Finance Committee Chairman Jeb Hensarling and others in Congress have laid out the key principles they say will guide financial reforms: restoring rule of law to the regulatory process and allowing banks to regain control of their own lending and other business decisions so long as they are credibly taking risks with their own funds rather than relying on the protection of taxpayers. This may be the end of “Too Big to Fail.”

Rising interest rates will strengthen bank profits and provide a tailwind to encourage more lending while also slowing the growth in housing prices.

Does growth really matter? Yes, it’s a big deal

When economists talk about growth, they are trying to get a handle of how much better (or worse) off are we versus a year ago. Are we getting richer or poorer or just standing still? When we talk about growth, we talk about year-over-year percentage growth rates. But, what is a “good” growth rate?

Here’s some perspective, looking back in time.

Average incomes doubled from the bottom of the Great Depression in 1933 to the middle of the post-war boom of 1950—a space of just 17 years. Over that period, incomes grew an average of 4 percent a year. Incomes doubled in less than one generation.

It took another 27 years afterward (1950 to 1977) for incomes to double. The people watching the TV show Happy Days were twice as rich as the people portrayed in the show. That amounts to an average annual growth rate of 2.5 percent a year.

Then, after that, it took another 38 years (1977 to 2015) for incomes to double. Over that period of time, average incomes grew by 1.8 percent a year. It took almost two generations for incomes to double.

A difference of 1.5 percentage points in the growth is the difference between doubling incomes every generation or doubling every other generation.

Think of it this way. Since 2010, GDP growth has been about 2.2 percent a year. At that rate, it would take more than 30 years for incomes to double. If that growth can be boosted to 3 percent a year, incomes would double eight years faster. That’s a big deal. That’s one reason stock prices rise on even modest upward revisions to GDP forecasts.

Look on the flip side, regulations and taxes that stifle growth—even if by less than one percent—can have serious long run effects on our standard of living. When a politician says, “Well it’s just half a percentage point off the growth rate,” you should answer, “Well that’s another five to ten years we lose in income growth.” That’s a big deal.

So, let’s get out there and grow this economy. Your kids and grandkids will thank you for it.

Steep price hikes under Obamacare: Taking “affordable” out of the ACA


obamacare-exchange-oregon-2017Health insurance prices on the Obamacare exchanges have been published on, and it’s not good news. Higher premiums, higher deductibles, and fewer choices.

Fewer plansLast year, residents in Portland, Oregon had a choice of 87 plans. This year, we get only 37 plans from which to choose.

Higher premiums: For my family of 2 adults and 4 kids, the average premium has increased by $290 a month—that’s a 25 percent increase. The cheapest plan is $939 a month, but you pay $50 just to walk into the doctor’s office. That’s $50 per person, per visit. That adds up.

Higher deductibles: To make matters worse, deductibles have increased.

  • Last year, several plans had zero deductible. This year, only one plan has zero deductible (Kaiser Permanente KP OR Gold 0/20).
  • Last year, three plans had the highest deductible of $13,700. This year, 10 plans have a deductible of $14,300. If you have to burn through $14,300 of your own money before any meaningful health coverage kicks in, what the heck are you paying for?

Cheap plans are a bad deal. Bronze plans are sold as the most “affordable” plans. But they come with some high costs. The lowest deductible is $10,000. And, as noted earlier, the cheapest of the cheapest plans have outrageous copayments for primary care visits.

Let’s compare the plans. Look at the figure above.

Gold plans have premiums averaging $1,700-$1,800 a month (that’s more than $20,000 a year).

  • The cheapest Gold plans are all Kaiser Permanente plans, which means you have to haul yourself all over town to see your doctor and you have to get a referral to see a specialist. What you’re saving in money, you’re spending in time and frustration.
  • The next best alternative is a Moda plan with a $1,000 deductible for $1,732 a month (Moda Health Plan, Inc. Beacon Be Protected)

Much of the ACA attention is focused on Silver plans. Last year, I was able to get a zero deductible Silver plan for $1,100 a month. That was pretty good, but the provider pulled out of the Obamacare exchange, so that plan’s gone.

  • For 2017, the “best” Silver plan has a $4,000 deductible and a monthly premium of $1,261 and, again, it’s a Kaiser plan.
  • For $1,285, Providence offers a plan with a $5,000 deductible (Providence Health Plan Connect 2500 Silver).

Bronze plans are such stinkers that they are not even worth considering. For almost every Bronze plan, there is a Silver plan with a similar premium and a lower deductible.

That’s what happens when regulators load up scads of things as mandated “preventive services” (i.e., no out-of-pocket) and forbid insurance underwriting to manage risk. We end up with high premiums and high deductibles, when most people would prefer lower premium with “just in case” coverage.

Welcome to 2017: Fewer choices, worse choices, and higher prices. When November 1 rolls around, it might be worth checking out the plans available off the ACA exchange.

Ban the box backfires

“Ban the Box” laws prevent employers from conducting criminal background checks until well into the job application process. (“Ban the Box” comes from the check box on many job applications asking, “Have you every been convicted of a crime?”)

Proponents of “Ban the Box” claim that by ignoring an applicant’s criminal record until late in the application process, ex-cons would have better employment opportunities.

A secondary goal is to reduce racial disparities in employment.

New research suggests that “Ban the Box” has backfired.

We find that [Ban the Box] policies decrease the probability of being employed by 3.4 percentage points (5.1%) for young, low-skilled black men, and by 2.3 percentage points (2.9%) for young, low-skilled Hispanic men. These findings support the hypothesis that when an applicant’s criminal history is unavailable, employers statistically discriminate against demographic groups that are likely to have a criminal record.

Source: NBER

Global trade stalls while protectionism expands: Are you ready for a trade war?

Global trade is slowing and protectionism is growing. Trump and Clinton will make it worse. Are you ready for a trade war?

In October, our newsletter sent up a warning flag that growth in global trade seemed to be slowing down.

Now, it appears the growth in global trade has stopped.



In the U.S., it’s even worse. As shown in the figure above, U.S. exports have decreased by 4 percent over the past year. That’s a reduction of $95 billion.

Recent research finds world export volumes peaked and flattened in early 2015. The same finding holds for import volume and for total volume (export plus import). In other words, no matter how you measure it, world trade has come to a standstill. And, it’s a worldwide halt in trade growth. Both industrialized countries’ and emerging markets’ trade volumes have stalled.

So what?

Trade is a big deal and it boosts the U.S. economy. Yes, even trade with Mexico. Yes, even trade with China. Strong exports did more to pull the economy out recession than $830 billion stimulus blowout.

In 1960, 20 percent of homes in the U.S. didn’t have a phone and no one had a cell phone. Today, even the homeless have mobile phones. One big reason is trade that has driven down the price have having a phone.

As trade improves incomes in China, India, and other developing countries, that money will be spent on imports from the U.S. By 2020, per capita income in China is projected be $6,000 higher than today. That’s a billion or more people with huge increases in purchasing power.

There’s a national security component, too. Evidence is building that that the more trading partners a country has, the less likely it will be to engage in a war. That was the entire basis for the European Economic Community, which morphed into the EU.

Who’s to blame?

Research indicates protectionism is a big reason for stagnating trade. Across the world, countries have adopted policy initiatives harming foreign commercial interests. In recent years, protectionist measures outnumbered free trade measures by a 3-to-1 margin.

In the U.S., both Clinton and Trump have campaigned on anti-trade issues. Both Trump and Clinton have openly opposed the Trans-Pacific Partnership.

  • Trump says he’s against “bad trade deals,” but hasn’t named a trade deal that he think’s is “good.”
  • Clinton once praised TPP as the “gold standard” of trade deals, but has since reversed her position.

While we can never predict what will happen once Trump or Clinton enter the White House, it’s clear that pro-growth trade policies are not a priority for either Trump or Clinton.

There’s an old saying that protectionism is a politician’s delight: It delivers clear benefits to those that are protected, while spreading the costs across the public. In this way, protectionism is one of the worst forms of cronyism. Cronies can always get trade deals while the unconnected sit on the sidelines. Be prepared for a short list of winners and a long list of losers as world trade dries up.

The challenge to business, your business: How to make money in the age of protectionism, if you’re not a crony?

If you’re an importer, line up suppliers who won’t be subject to onerous trade rules. Or, set up a U.S. subsidiary who can technically satisfy the new rules. Yes, it’s a pain.

If you’re an exporter, find strategic partnerships in the countries with why you do business. A joint-venture with a local partner (such as a distributor), may allow you to satisfy “local content” rules without providing actual local content.

Economics International and Economics On Demand.

The world is facing rapid change and increasing uncertainty. But, every change presents an opportunity and uncertainty can be reduced.

Economics International Corp. brings common sense to complexity. We work on issues involving litigation, regulation, and public policy.

If you need an open mind and a fresh to review your business, Dr. Fruits will spend a half day or more learning your business and your markets and make himself available for consultation and research. It’s Economics On Demand. For a monthly fee, Dr. Fruits will be on-call to answer your questions, dig up research, crunch numbers, run workshops, or give speeches. Discount for up-front annual payment. It’s designed to be flexible, so you can pick anEconomics On Demand plan that’s right for your business. or call 503-928-6635 and we can discuss your needs.

Thriving in the face of change: 3 business lessons from Pokémon Go

Pokémon Go is a free-to-play location-based mobile game available on iPhones and Android devices.

The game allows players to capture, battle, and train virtual creatures, called Pokémon, who appear on device screens as though in the real world. It makes use of GPS and the camera of compatible devices.

The game’s been out a week, and it’s a huge hit. But, a lot of people – including business people – seem downright hostile to the game. Big mistake!

The unexpected success of this game provides three lessons for businesses faced with change and innovation.

Lesson #1 – Accept. It’s natural to have a gut reaction to new things. Often that gut reaction begins with “I don’t understand it.” The next gut reaction is, “I don’t like it.” My Facebook feed is filled with grumpy folks telling Pokémon hunters to go home, get a life, or get a job (or all three).

It doesn’t matter if you like Pokémon Go. It’s here. And it’s here to stay. It might be a summer fling, or it might be around for a while. Bell bottom trousers were a fad, but they were a fad that lasted a decade. May as well accept the fact that millions of people are playing a game that gets them out of the house and walking around the community.

Lesson #2 – Understand. How does this thing work? When an innovation hits the scene, don’t ignore it – understand it. Learn how it works, how it works for users, and how it can work for you.

Facebook was built for college students. When it first came out, most older folks didn’t understand it and couldn’t understand why anyone would use Facebook.

Today, the average Facebook user is about 35 years old. More than 1-in-4 Facebook users are age 50 or older. Almost two-thirds of Americans get their news from Facebook. Facebook has grown from a quirky website that no one understands (what the heck is a “poke?”) to a massive piece of Internet real estate that almost everyone uses.

Pokémon Go gets people out and about. People go where Pokémon go. People hang out where Pokémon hang out. “Lures” are goodies that attract Pokémon to a site for 30 minutes. Lures can be purchased for 99 cents. Think about it. Now think about it as a business wondering how to attract new customers.

Lesson #3 – Adapt. How can I profit from it?

Look at these signs seen in front of businesses once the Pokémon Go rage took off. Who do you think is making money off of this new innovation?

One business is turning away customers with a nasty message: “Pokémon are for paying customers only.” That’s another way of saying, “We don’t want your business.”

The other business has adapted and embraced a source of new customers by offering a discount. “This place seems cool, let’s take a break and have a drink.”

Still other businesses have found entirely new opportunities. For less than $2 an hour they can drop a lure at their business and get dozens of potential new customers. That’s pretty cheap marketing. And, yes, a lot of businesses like bars, restaurants, and coffee shops have used the game to lure new customers.

In Oregon, an Uber driver turned to Craigslist advertising $30 for a two hour ride during which he would “drive you around Portland Metro area while you play Pokemon Go.” The fee includes snacks and beverages along with stops along a route that includes “all the PokeStops and Gym Trainers.” This entrepreneur saw an opportunity and jumped on it. (Note: He’s probably not charging enough.)

Everyday, we’re faced with change. With change comes risk and opportunity. Accept, understand, and adapt and you may be able to profit.

Economics On Demand

The world is facing rapid change and increasing uncertainty. Every change presents an opportunity and risks can be managed.

If you need a set of fresh eyes and an open mind to review your business, Dr. Fruits will spend a half day or more learning your business and your markets and make himself available for consultation and research. It’s Economics On Demand.

For a monthly fee, Dr. Fruits will be on-call to answer your questions, dig up research, crunch numbers, run workshops, or give speeches. Discount for up-front annual payment. It’s designed to be flexible, so you can pick anEconomics On Demand plan that’s right for your business. or call 503-928-6635 and we can discuss your needs.

Britain’s exit from the EU will rattle the U.S. economy

U.K. voters elected to exit from the European Union. This is a major shake up for the U.K. and the rest of Europe and is almost certain to rustle, rattle, and otherwise jolt the U.S. economy.

The first impacts will be seen in foreign exchange markets as skittish investors pull out of U.K. and European markets to put their money in the safety of U.S. assets. Several economists predict the impacts of Brexit on the U.S. will be confined to our financial markets. Nevertheless, the result will be a rising dollar relative to the pound and the euro.

Many economists expect some ripples of Brexit hitting the U.S. economy. In which case, the next round of impacts will be seen in trade as a surging dollar suppresses demand for U.S. exports. In addition, economists are forecasting a slowdown in the EU economy, further depressing demand for U.S. exports. As a result, several researchers have cut their forecast of U.S. economic growth to less than 2 percent over the next year.

On the upside, a stronger dollar will reduce the cost of imports lowering U.S. production costs, boosting consumer buying power, and limiting inflation.

The U.K.’s exit from the EU may stifle cross-border merger activity as London is no longer seen as a gateway to European markets.

Brexit’s biggest unanswered question: What will happen to free trade?

While much of the U.K. vote to exit the EU was driven by concerns over immigration and hatred of the EU’s bloated bureaucracy, the Brexit campaign was suffused with protectionist undertones. Both Hillary Clinton and Donald Trump have clearly stated their opposition to free trade deals. If Brexit boosts protectionism worldwide, expect to see much slower growth—or recession—in the next few years.

The bottom line …

Pros: A strong dollar will reduce the cost of imports and keep inflation in check. U.S. importers and consumers will benefit from lower prices. It’s a good time to take that European vacation.

Cons: A strong dollar and EU economic slowdown will reduce demand for U.S. exports. Increasing protectionism will reduce opportunities of international trade. U.S. exporters will be harmed. Potential slowdown in already slow employment growth.

About that whole power pose thing, it’s BS

Remember when striking a power pose would solve all your problems?

With this “no tech lifehack,” anyone can “embody power and instantly become more powerful.”

Power pose promoters say all you need to do is to get yourself in the Wonder Woman stance, and *BOOM* you’ll get “elevations in testosterone, decreases in cortisol, and increased feelings of power and tolerance for risk.”

There’s a hitch, though … It’s B.S.

According to Tim Harford, the “Undercover Economist,” a later—and bigger—study found that high-power poses were correlated with slightly lower testosterone and slightly higher cortisol.

In other words, the opposite findings from what the Power Posers found. Not only opposite, but tiny and statistically indistinguishable from chance.

The lesson: Bad science leads to crazy conclusions that grab big headlines. Don’t let those headlines drive your decisions.

Should I stay or should I go? Labor market mobility and Millennial stress


Economists say too few people are moving away:

Labor market mobility in the United States has declined. Interstate migration is down (graph from Molloy, Smith, Trezzi and Wozniak) and so is in-state-migration, especially for the less well educated. Where once people responded to shocks by moving to opportunity now they are likely to stay put and retire early or take-up disability insurance.

Pop psychologists say too many people are moving away:

But the real change comes in the freedom of movement that has made it easy for people to leave families far behind. Studies have shown that having limited family in close proximity can lead to anxiety and depression. … One recent survey found that about half of millennials live away from their hometown. That’s a significant number.

Newsflash: Trump is wrong about undocumented workers

Donald Trump launched his Presidential campaign in June 2015 with the insult heard ’round the world:

When Mexico sends its people, they’re not sending their best. They’re not sending you. They’re not sending you. They’re sending people that have lots of problems, and they’re bringing those problems with us. They’re bringing drugs. They’re bringing crime. They’re rapists. And some, I assume, are good people.

Trump missed the biggest stereotype of all—undocumented workers work and they work a lot.

Research published by the National Bureau of Economic Research finds that undocumented workers tend to work more hours in a year than native born workers. On top of that, undocumented workers work longer hours at every wage level, according the to studies author, George Borjas:

This finding is consistent with a frequent conjecture that is made about undocumented immigration— that “undocumented immigrant men come to the United States to work.” It is clear that the data strongly support this conjecture. Undocumented immigrant men … work regardless of the surrounding economic conditions.

Just look at this graph adapted from the study (I overlayed two graphs, added some color, flipped the axes). It shows native born men (the red) can’t be bothered to work at low wages. At $5 an hour, the average native born man would work less than 20 hours a week. In contrast undocumented men work an average of 30 hours a week at $5 an hour.

To get native born men up to 30 hours a week, the wage needs to be more than $8.00 an hour. Yet, at $8.00 a hour, undocumented men work and average of 30 hours a week.

Looks like Trump is wrong on this one. Research shows that undocumented men come to the U.S. to work.

The scatter diagrams show the relation between the average annual hours worked (including non-workers) and the hourly wage of a particular age-education-year group, using the 1994-2014 CPS-ASEC files.


New study concludes: There are few things as expensive as free federal money

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Please download and read the new study: Impact of Federal Transfers on State and Local Own Source Spending.

“Free is a very good price” announced the 1980s pitchman for a local appliance store known for it’s buy-one-get-one offers. But, like most things in life, the BOGO offers had some hitches (Like you had to spend $399[!] on a 19-inch color TV in order to get a 12-inch black-and-white TV for “free”).

Regardless, almost 35 years later, “free is a very good price” is part of the Portland lexicon. But, Portland’s not alone. Throughout the U.S., state and local officials pick up the bullhorn and shout “free is a very good price” when the federal government dangles dollars in front of their faces.

We see this play out across the U.S. States that cannot afford their existing Medicaid programs have expanded coverage under the Affordable Care Act, thanks to the promise that federal funds will pay for a huge portion of the additional costs of coverage. Cities are building slow moving streetcar systems because federal dollars will cover half of the construction costs.

What’s often missed is a simple fact: Federal money isn’t free.

Money “from the feds” is money from those who pay taxes to the feds. Those people and businesses are in every state. If the feds didn’t take those tax dollars, you’d have those dollars in your pocket or your bank account. Sending the dollars to Washington, D.C. only to have D.C. send back a fraction of those dollars doesn’t make you richer, it most likely makes you poorer.

There’s another way in which federal money isn’t free. Nearly every single dollar sent to state and local governments comes with strings attached.

Research I just completed finds that each additional dollar of federal money sent to the states is associated with an average increase of 82 cents in new state and local taxes. Across all states, a hypothetical 10 percent increase in federal grants state and local governments would be associated with with approximately $50 billion in additional increased state and local taxes, charges, or other revenue sources, amounting to an additional government burden of $158 per person.

How does federal funding increase the state and local tax burden? The U.S. Government Accountability Office identifies two ways that strings attached to federal grants can increase state spending: (1) matching fund requirements, and (2) maintenance of effort requirements.

Many federal grants require state and local governments to match federal funding with their own spending in order to receive the federal dollars. This allows bad public policy to masquerade as good policy, simply because it appears to be cheaper than superior alternatives. Much like coupons try to entice consumers to buy something they don’t need, federal matching funds entice state and local governments to pursue projects that they don’t need or can’t afford. By drawing limited state tax dollars toward the priorities of D.C., these matching requirements put pressure on state and local policymakers to raise taxes and fees in order to fund existing priorities.

Of course, these federally-funded policies often fail to deliver on their promises, but that isn’t something D.C. tends to concern itself with. For example, the Feds will supply matching funds to build a project, but often leave the costs of operating the project to the state and local governments. For example, federal funds help build the Portland, Oregon streetcar, but nothing to operate it. Today, Portland’s streetcar operations run at a deficit of $4.5 million a year—and growing. That deficit is filled by diverting the city’s money from much needed road repairs and maintenance. To fill that hole, Portland is proposing a citywide 4-cents-a-gallon gas tax. Without the federal funds, Portland wouldn’t have a streetcar, which means it would have millions more dollars for road repairs and maintenance, which means it wouldn’t need millions in new taxes to fund road repairs and maintenance. Who would have thought that free federal money could be so expensive?

The GAO also points out that, in addition to matching funds, state and local governments are sometimes required to maintain spending in the future as a condition of receiving federal grants. For example, the federal stimulus package passed in the wake of the Great Recession required states to provide a minimum state appropriation to higher education. States failing to maintain higher education spending at pre-recession levels would jeopardize a large chunk of their earmarked stimulus money.

For example, a publication from the American Association of University Professors looked at state higher education spending data and found that the threatened loss of federal funds was a key driver of the higher education budget for many states. Spurred on by the pressure of federal money, states spent more on higher education than they otherwise would have in the face of a recession and shrinking state budgets. Some were forced to increase taxes. AAUP notes that it is no coincidence that Oregon set its higher education funding at almost precisely the cutoff amount necessary to avoid the threatened cuts. It is also no coincidence that the state passed the largest income tax increase in Oregon history during the time the federal stimulus program was in action.

Milton Friedman once said “Nothing is so permanent as a temporary government program.” The first annual cash grant to states was made under the Hatch Act of 1887. More than 125 years later, the Hatch Act is still in effect—distributing tens of millions of dollars to states every year (and requiring a dollar-for-dollar match from states receiving federal money).

Perhaps knowing that federal funding translates into pressure to raise state and local taxes, those in elected office will take the long view and reject the empty promises of “free” federal dollars. One can only hope for such leadership and vision from our elected officials.

Next time your local politician/policy wonk/whatever dangles federal dollars in front of you and says “free is a very good price.” Remind him or her of some other wisdom from the ages:

  • “If it sounds too good to be true, it probably is,” or
  • “There’s no such thing as a free lunch,” or
  • “You can’t get something for nothing.”

Or how about a new phrase: “There are few things as expensive as free federal money.”

For more information, please download and read the new study: Impact of Federal Transfers on State and Local Own Source Spending.


Obamacare 2016: Where even a Ph.D. economist cannot get a good deal on health insurance

As the calendar flips to November, the Halloween decorations go back to the garage and the Thanksgiving decorations come out.

Now, there is a new special day in between that takes a piece of both holidays.

November 1 is the day that the new Obamacare health insurance plans are unwrapped. In a tribute to Halloween, the premiums are quite scary. In anticipation of Thanksgiving, most of the plans are turkeys.

The website is still clunky. When I looked this morning, I could not log on, but I could look at plans.

The website said that 87 plans were available in my state (Oregon), but the site showed only 80 plans. Go figure.

The site lets you sort by premium or deductible, but shows only 10 plans per page. That makes it difficult to see what is “best” and what is “worst.”

Of course that drives us at Econ Minute crazy. All that money, and they still can’t do a nice visualization of all the plans. Ugh!

So, in two hours, Econ Minute has accomplished something the mighty federal government could not do with three years and hundreds of millions of dollars (and Oregon couldn’t do at all).

The graph below shows the Obamacare plans available in Oregon for me and my wife together, a couple in their mid-40s.


Some things really pop out once the data is plotted:

  • There is a wide range in premiums. From $764 a month to $1,824 a month, or $9,168 a year to $21,888 a year. By way of comparison, you can buy a new 2016 Nissan Versa for less than $12,000.
  • Lower deductibles mean higher premiums, and vice versa. On average, a $1,000 decrease in deductible is associated with a $30 increase in the monthly premium.
  • Some plans are real stinkers. PacificSource has some of the worst plans in Oregon.  PacificSource’s Standard Gold plan is a whopping $600 a month more than a Providence gold plan with the same deductible. A plan is bad if:
    • Other plans have lower premiums for the same level of deductible, and/or
    • Other plans have lower deductibles for the same premium price.
  • Even the cheapest plans are darn expensive and kinda suck. The cheapest “best” plan in the graph above costs $772 a month, has a $10,000 deductible, and it covers just about … nothing:
    • Primary doctor: $60 Copay after deductible
    • Specialist doctor: $100 Copay after deductible
    • Emergency room care: 50% Coinsurance after deductible
    • Generic drugs: $20 Copay after deductible

The marketing folks like to make a big deal out of the whole “maximum out-of-pocket” thing.

For most people that is meaningless. To the insurers its seems to be meaningless. The graph below shows that there is almost no relationship between maximum out-of-pocket and a plan’s premium.


What about the penalties for no health insurance?

In 2016, the penalties for not being insured really kick in. Nevertheless, for all but the highest income Oregonians, the penalty is still substantially less than the cost of Obamacare insurance.

Taxes, more taxes, and … “recreational” marijuana

With the ink barely dry on Oregon’s costly Low Carbon Fuel Standard law, Portland city commissioner Steve Novick bets than a 10-cents-a-gallon gas tax will be his ticket to re-election. Along the way, Ann asks the question: What if we can say how our tax dollars are spent?

We wrap with the one “sin” that’s not subject to a “sin tax.” That’s right, “recreational” marijuana in Oregon is not taxed. Who will be the first politician to come out of the ganja closet?

Here’s how you can hear more:

  • Listen on Podbean, the podcasting platform.
  • The podcast is now available on iTunes. Please subscribe to make the most of your weekly Econ Minute.

For blogging on the Portland City Council scene, check out TuesdayMemo.

For a minute or so of economics, read the EconMinute blog.

On Demand newsletter for October 2015

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