Messaging millennials on the economy: An uphill battle

As college students make plans for graduation (and I make plans to teach a summer session at Portland State University), I am reminded how much the world has changed since I graduated college. The typical graduate this year was born sometime between 1990 and 1993. According to the Beloit College Mindset List, here’s how their worldview is different from mine:

  • MTV never featured music videos.
  • The Simpsons has always been on TV.
  • Microbreweries have always been ubiquitous.
  • There has always been an airline going into, or coming out of, bankruptcy.
  • Stadiums, sporting events, and music tours have always been sponsored.
  • Global warming has always been a crisis.
  • 9/11 is a meme (“jet fuel can’t melt steel beams”), rather than a national tragedy.
  • The Soviet Union never existed and there has only been one Germany.
  • Google has always been a verb, and Milli Vanilli has always had no meaning.
  • They have never used a floppy disk and they don’t know why CC stands for carbon copy.

But, here’s one that the Mindset List has missed:

  • Today’s college graduates do not remember a time that the economy was booming.

The last time the economy was booming with rapid employment and income growth, today’s college grads were early teenagers, watching the first Harry Potter movies while their parents were scandalized by Brokeback Mountain.

Then, as they were getting ready to leave high school and enter college, employment dropped. Their parents may have lost a home or a job.

As they began to see and understand the world around them, they saw recession bordering on depression. They saw job opportunities fade away. And they gained the feeling that the only way to “make it” in the world was in high tech, entertainment—“Apps and Raps”—or high finance. It seemed that success depended less on your skills and what you knew and more on who you knew and how you could game the system.

So, now, the Republican message of making it on your own through smarts and hard work is rejected as cynical when it comes from silver spooners like Mitt Romney. And the Democratic message of income equality is rejected as cynical when it comes from the Clintons who make 10 times more from giving a speech then the average family makes in a year.

And that’s the challenge in promoting economic opportunity through the free market.

Today’s college grads can’t remember a world where hard work, education, and the freedom to make money meeting the market were almost certain to produce prosperity.

The economic booms during the Ronald Reagan and Bill Clinton presidencies are ancient history to today’s young adults.

Older generations may say, “Remember what happened to the economy when we cut taxes and reduced regulations?” They don’t know that airline deregulation gave us cheap plane tickets. They don’t know that trucking deregulation paved the way for next day delivery. They don’t know that railroad deregulation is why we can get fresh produce all year ’round.

Today’s young adults will answer, “No. And we don’t believe you.” They only remember recession and sluggish recovery. They only remember failed solutions like the Stimulus, Cash-for-Clunkers, Recovery Summer, and Quantitative Easing. To them, nothing has worked, which means nothing will work. Only Charlie Brown will come back to the football after it’s been pulled away so many times.


Chinese wines are getting better and heading here soon, but what did the military have to do with it?

A few years ago, I did some consulting and testimony regarding a land use matter for a vineyard owner and winemaker. He bought 1,600 acres of wheat land in the Walla Walla Valley American Viticultural Area—home to some of the best red wines in world. He wanted to subdivide the wheat land into 40 acre vineyards that he would sell off. Because of Oregon’s one-of-a-kind land use laws, the process required a major hearing with expert testimony.

As we were touring his existing vineyards, the winemaker told me to keep an eye on China and Chinese wines, because someday they’d be big in the U.S. His thinking went like this:

  • Anywhere you can grow apples, you can grow grapes.
  • In the 1980s, China shrunk its military considerably to free up resources for economic development, nearly 1 million men were rotated out of the military. Because of the one child policy, there was a shortage of potential brides, so the Chinese government determined that these ex-military guys needed gainful employment.
  • Many of the former military men were given agricultural land and trained to run apple orchards.
  • As their agricultural skills improved, apple orchards were converted to vineyards.
  • Winemaking is a natural extension of vineyards, and the Chinese would quickly learn how to make good wines.

Now, it looks like that someday for Chinese wines is almost here.

The Wall Street Journal reports that China now accounts for nearly 11 percent of the land devoted to vineyards in the world, ranking second behind Spain.

On top of that, WSJ says that quality of Chinese wines is improving and have begun to win awards outside China. In addition, French luxury-goods conglomerate LVMH Moët Hennessy Louis Vuitton has built a winery in a place called Shangri-La in the Himalayan foothills that aims to produce China’s best, and probably most expensive, wine. Moët Hennessy, the LVMH unit that makes Dom Pérignon Champagne, already produces sparkling wine in Ningxia, with a bottle selling for $27.

You’ll know when Chinese wines have really hit the U.S. market when you see them on the shelves of Costco or Trader Joe’s.

Podcast – The worst solution to homelessness, Millennials and their parents, and a taste of Chinese wines



This week’s Econ Minute Podcast spans the globe and crosses generations.

First we have what may be the one of the worst solutions to urban homelessness. Cities across the globe go to great lengths to get their homeless population out from under bridges and away from railroad tracks. Progressive Portland turns that goal on it’s head. The city’s mayor is finalizing a deal to purchase some land under a under a bridge and only few feet away from an active railway line. His goal: Move some of downtown Portland’s homeless population to a place where they are out of sight and out of mind.

Next we follow up on our look at millennials and see how their parents are changing TV programming.

We end with a story of a bold prediction that came true regarding China’s burgeoning wine business.

The podcast is now available on iTunes. Please subscribe to make the most of your weekly Econ Minute.

A very Portland solution to homelessness: Give up

Sometimes you wish some of the things coming out of Portland City Hall were really just a bad Portlandia skit.

Like now, when the mayor’s solution to a downtown homeless camp is buy some land under a bridge where the city will relocate the homeless population. And get this:

  • The bridge is a very Portland bridge. Cars and trucks are not allowed, only mass transit, bikes, and pedestrians.
  • The bridge is called Tilikum Crossing: Bridge of the People. Yes—really—Bridge of the People. The mayor wants to put a homeless camp under the Bridge of the People.

But, it’s not a bad skit, it’s a bad idea. The following is an editorial, co-authored with Ann Sanderson and co-published on the Tuesday Memo blog.

Industrial Zones are No Place to Live

Late last month the Mayor’s office and Commissioner Amanda Fritz proudly announced that they were finalizing a deal with the Oregon Department of Transportation to purchase a half-acre lot near the landing of the new Tilikum Crossing Bridge of the People.  Once the deal is completed, the mayor intends to relocate the Right 2 Dream Too (R2DToo) homeless population, which has been camping illegally on property at the entrance of downtown Portland’s Chinatown.

Fifteen years ago, when Charlie Hales was a city commissioner, a group of homeless men and women set up camp under the west end of the Fremont Bridge. They claimed the space was their “Dignity Village.” The were eventually moved to city owned space seven miles away from downtown. Fifteen years later the temporary camp is now a permanent settlement whose population is now out of sight and out of mind of Portland’s polite society.

Once relocated, Right 2 Dream Too would be deep in the heart of the Central Eastside Industrial District. Walk a quarter mile in most directions and you’ll be walking through industrial zoned land. Except west. If you walk west for a quarter mile, you’ll end up in the Willamette River.

While the Central Eastside Industrial District has changed a lot in the past few years, it has been and remains primarily an active hub for distribution and manufacturing, consistent with its industrial zoning.

The main purpose of zoning laws is to separate incompatible uses. The goal is to limit the impact of negative externalities and spillovers. When we think of incompatible uses and industrial land, we tend to focus on the noise, vibrations, and traffic associated with industrial uses. These noise, vibrations, and traffic disrupt homeowners and renters, so zoning keeps industrial and residential uses separate.

But, the spillovers go the other way, too. For example, increased pedestrian traffic creates a hazard in an active industrial area with heavy trucks and freight trains in action day and night. If people believe that they have a right to unimpeded access to an industrial area 24/7, accidents, including fatal accidents, can be expected to increase.

Last year in Multnomah County alone, 10 people were killed or injured while trespassing on railroad property. The site selected by Mayor Hales and Commissioner Fritz is only a few feet away from an active railway line. Even worse, residents of Right 2 Dream Too would have to cross the railroad tracks order to access the Eastbank Esplanade, Springwater Corridor, or to access a bridge crossing the Willamette River.

After years of industrial use, the land may be contaminated with toxins rendering the space unsuitable for a camping. Residents may have only a sleeping bag between themselves and the potentially contaminated land. Emissions from diesel electric trains and diesel trucks could cause or exacerbate respiratory illnesses in a population that is already subject to opportunistic diseases. What is the city’s long term liability for moving a homeless population to a potentially contaminated site? Will Portland taxpayers foot the bill when someone from Right 2 Dream Too claims that his or her lung cancer or emphysema came from years of living on city property next to the railroad tracks.

However, the real question is not where to put Right 2 Dream Too. The question is why? What went wrong with our city’s approach to it’s at-risk population that homeless camps like Right 2 Dream Too or Dignity Village became the preferred solution?

The city claims Right 2 Dream Too’s move is a temporary solution to a long term problem.  So was Dignity Village. As we’ve already seen after 15 years of Dignity Village, the structures may be temporary, but the camp has lived on for years. A tent city under a bridge is not housing and in no way does it represent an acceptable permanent solution to homelessness.

While immediate services and housing options need to be made available for Portland’s most vulnerable citizens, institutionalizing homeless by shifting residents to city-owned land is an admission of failure: It says “this is the best we can do.”

Portland calls itself The City that Works. We can do better. We must do better.

This post was co-authored with Ann Sanderson and co-published on the Tuesday Memo blog.

MTV learns a Millennial lesson: Parents are OK

A recent Econ Minute Podcast featured a clip from Matt Edlen‘s presentation at the Portland State Center for Real Estate Annual Conference.

One of the more mind blowing revelations (at 9:13 in the podcast) was that the GenY / Millennial generation shares many of the same values as their parents and they and their parents actually like each other. So much so, that many make an effort to live close to their parents.

A weekend feature on Vox re-enforces this point:

A distinctive characteristic of the millennial generation is that we’re closer with our parents. The president of MTV announced in 2013 that the network is overhauling its content because young people today are “not rebelling against their parents at all. They’re moving in with them. They don’t want to leave.” A therapist wrote in The Atlantic a few years ago that she keeps seeing clients who call their parents their best friends.

Too bad no one cares about GenXers anymore …

Confessions of an Uber economist: Politicians and their crazy contradictions on crime and safety

Portland, Oregon is a contradiction wrapped in a mystery inside an enigma.

We are transportation innovators. We began the streetcar revival that has infected cities throughout the US. But, we still can’t pump our own gas—too dangerous, you know.

We have mandatory minimum sentences for certain crimes. But, if certain legislators and city commissioners have their way, it will be illegal for employers to ask job applicants if they’ve been convicted of a crime.

We are a high tech hub—the self-proclaimed home of the Silicon Forest. We bent over backward to get Google Fiber in our city. We even made our own Google Fiber beer. But, until a week or so ago, we couldn’t use the Uber or Lyft ridesharing services, because several city commissioners admitted that they didn’t understand the technology. (And, it’s well known that one commissioner still doesn’t have a smartphone.)

All these contradictions played out in the small space of one week. Last week, in fact.

Monday of last week I applied to be an Uber driver. The first step was to submit my background check. I also had to submit a copy of my driver’s license, my vehicle registration, my insurance information, and my City of Portland business license.

Oh, and I had to get my vehicle inspected to make sure it was safe and that there was no visible damage.

Now the background check is important, or so it seems. In fact, one of Portland’s city commissioners explained her fear of ridesharing by remarking that her mother always told her not to take a ride from a stranger. Yes, she really said that.

The car inspection was a snap. In fact, it took about 30 minutes and Uber paid for it.

The background check happened to be the biggest bottleneck. Turns out that the third party vendor Uber uses has a bit of a backlog from all the people who want to drive.

Nevertheless, just after noon on Friday of that week, I received text message from Uber saying that I was approved. Yes … a text message.

Fifteen minutes later, I picked up my first fare, which I detailed earlier on the Econ Minute blog.

That same day, a community activist and one of my former students was thrown off the Portland Streetcar for complaining that a vent in the streetcar was leaking water and smelled of smoke.

After complaining a few more times, the rider was thrown off the streetcar for making a disturbance and issued a citation.

Streetcar management dismissed the rider’s complaint as a disturbance to the driver and other riders. They explained that the leak was due to the aging car, which gets smoky and leaks when it’s hot outside. But streetcar management said even their smoky leaky cars are safe to ride in.

Keep in mind that the oldest car in the fleet is about 15 years old. (By the way, the average age of the planes used by Southwest Airlines is 19 years.) Also keep in mind that it wasn’t that hot outside. The high that day was 73 degrees. If that’s “hot,” then Portland’s streetcar would be expected to smoke and leak about five months out of the year.

Now let’s get to the contradictions.

We have a city commissioner who is afraid that Uber drivers might commit some sort of violence against their passengers.

At the same time, the city commission and the state legislature are pushing “ban the box” laws that would make it illegal for a business like Uber to ask whether their drivers have ever been convicted of a crime.

We have rules that require all rideshare car to pass a safety inspection. Yet the city runs streetcars that would fail the same sort of inspection to which Uber cars are subjected.

And we have a city in which African Americans complain that they can’t get a cab or get thrown off the streetcar, yet my first two Uber customers were young African American men—both Five Star riders.

And that is this week’s visit to the contradiction wrapped in a mystery inside an enigma that is Portland, Oregon.

Can education pass the economic development smell test?

Economic growth is probably the single most studied topic in economics, dating back at least as far as Adam Smith’s 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations.

After almost 250 years of study, you’d think we have the answer to what causes the wealth of nations.

But, alas, science is never settled, so economists keep coming up with new answers.

For example, the idea of microlending has been all the rage lately. Especially after Muhammad Yunus was awarded the Nobel Peace Prize for his work in microcredit.

But, does it really matter?

Harvard development professor Lant Pritchett describes a “Eureka!” moment when he realized that maybe micro efforts produce only micro results.

Pritchett was in West Bengal with a World Bank team researching a program that built and financed women’s self-help groups as a means of increasing women’s productivity and incomes. At one point, one of the women asked: “You all are from countries that are much richer and doing much better than our country so your country’s women’s self-help groups must also be much better, tell us how women’s self-help groups work in your country.”

That’s when it hit him:

We all looked at each other blankly as none of us had any idea whether there even were at any time in our countries’ history such a thing as “women’s self-help groups” in our countries (much less government program for promoting them). We also had no idea how to explain that, yes, all of our countries are now developed but no, all of our countries did this without a major role from women’s self-help groups at any time (or if there were a role we development experts were collectively ignorant of it), but yes, women’s self-help groups promote development.

Think about that for a second.

A bunch of First World experts are telling a bunch of women in a Third World country that microlending is a path to economic development. But, the “experts” don’t know of any such lending in their own countries. If the US, UK, Germany, New Zealand, and other “developed” countries advanced so far without microlending, why would anyone expect microlending to be the path to economic growth for developing countries?

Pritchett’s “Ah Hah!” moment led him to develop a four-fold “smell test” for determining what is important to development:

  1. More developed countries must have more X (e.g., natural resources, access to warm water ports, educational attainment) than less developed countries.
  2. The developed countries must have more X than when they were less developed; in other words, they unlocked some potential.
  3. Recent development successes must have more X than development failures.
  4. Countries that are developing rapidly must have more rapid growth of X than those that are developing slowly.

Economist Paul Romer jumped on this observation and applied the “smell test” to urbanization. He concludes that urbanization passes the smell test, meaning that urbanization is important to economic development.

Can education pass the smell test?

Here at Econ Minute, we decided to perform our own “smell test” on education and economic development. We chose education because there is very little debate that greater educational achievement is associated with better economic growth. Because it is relatively uncontroversial, it’s a good test of Pritchett’s Smell Test.

We used data from the World Bank on education and per person gross national income see the relationship between lower secondary education completion and per capita GDP. (Details of the data—including why education completion rates can be greater than 100 percent—are available from the World Bank.)

The first figure (below) shows the education completion rate and gross national income per capita. The figure shows the strong correlation of education completion with GNI per capita.




The second figure (below) is the same as the first, only GNI is on a natural logarithm scale because economists love natural logs. As with the first figure, the figure below shows the strong correlation of education completion with GNI per capita.




The third figure (below) shows one simple way to get at the cross-sectional variation, by looking at only a single year, 2012. That year was chosen because it was the most recent year with many observations. The data suggest that in 2012, more development countries had higher education completion rates than lesser developed countries.




The fourth figure (below) looks at the changes over time. For each country, over the interval 1970 to 2013, it shows the 10-year percentage point change in educational completion and the 10-year percent change in GNI per capita.

As noted in Romer’s post, this kind of relationship measuring changes is less tight than the relationship in levels, but the simple correlation is still positive, and a fitted curve that allows for constant plus a nonlinear relationship suggests that the association between the two is particularly strong for countries that experience a rapid growth in the secondary education completion.

In other words, the figure suggests that countries that have a bigger increase in GNI per capita also tend to have a bigger increase in secondary education completion.




The fifth figure (below) provides an overlay of China’s experience. In contrast to Romer’s analysis, the World Bank data begins in 1990 for China, so we do not have the clear before- and after-reform break. Also note that what appears to be a big jump simply reflects missing data between 1997 and 2007, so what appears to be a big jump is actually a 10 year jump. Nevertheless, increases in China’s GNI per capita have been accompanied by increases in educational completion.




At this point, you begin to hear a chorus of voices turn to shouting, “Correlation is not causation!”

And, the chorus is correct. Indeed, one could make a very good argument that improving incomes cause greater educational attainment. As incomes improve, family can afford the time and money it takes to better educate their children. As a country’s national income improves, greater resources can be devoted toward public education.

Nevertheless, this exercise was not meant to end the debate, but really to start a conversation about what matters in economic development and how to measure it.

Economic forecasting: Comfort blanket or wet blanket?

God made economists to make weather forecasters look good.

Hear enough economic forecast speeches, and you’re bound to hear this old joke. And, yes, I’m guilty of using the joke more than once.

Two recent articles put the joke in to perspective.

First the Wall Street Journal editorial board complained that the Fed has history of overly optimistic economic growth forecasts. They note that “Economic forecasting isn’t easy, but it’s striking how consistently the Fed has been wrong in a single direction.”

Remarking on the Fed’s spotty track record at forecasting first quarter growth, the WSJ snarks, “Economists always blame the cold weather, but it is not news that winters are cold.”



In another article, Ireland’s Independent newspaper, pokes at the economics profession:

At one level, it is clearly absurd for the Department of Finance to begin to predict what will happen to the economy over the next five years. After all, the department missed the last financial crisis—along with almost every other conventional forecasting organisation.

However, the paper provides some much needed context, quoting economist Tim Harford (a/k/a The Undercover Economist):

“Economists have allowed themselves to walk into a trap where we say we can forecast, but no serious economist thinks we can,” he writes. “You don’t expect dentists to be able to forecast how many teeth you’ll have when you’re 80. You expect them to give good advice and fix problems.”

Society has always craved certainty—when there is no such thing. We know forecasts can be wrong, but the question we need to ask is whether the forecasts on which we rely so much are just a comfort blanket or whether they are a dangerous delusion.

Many economists have an incentive to provide a “comfort blanket,” while others have an incentive to be wet blanket.

It’s up to an educated public to tell the difference and weigh the evidence.


Confessions of an Uber economist

Uber (and other ride-sharing services, like Lyft) have all the things economists love: Rampant competition, disruptive technology, and—of course—people. So when Uber came to Portland, the Econ Minute economist decided he had to be a driver.

Signing up to be a driver was a snap. Scan and upload your driver’s license, vehicle registration, and city business license. Then, head off to a (free) vehicle inspection. Then, patiently wait for the background check to go through.

I began the process on Monday morning, and just a little after noon on Friday, I got a text from Uber welcoming me aboard as a driver.

I fired up the Uber driver … I mean “partner” … app, and 20 minutes later I had my first fare.

Uday (not his real name, but close enough) was about 7 minutes away from the Econ Minute world headquarters. When the order came in, I jumped in my car and put the Uber logo in my window ($1,000 fine for not displaying the logo when on duty).

Uday was on the corner eating his bento box lunch waiting for me and flagged me down. He got in with his delicious smelling lunch and told me where he was going. He said I didn’t need Uber’s driving directions because it was an easy straight shot up MLK to the salon where he was getting his hair cut.

He had a million questions about Uber in Portland and noted that I seemed to be the only Uber driver working on a Friday. He knew I was new and guessed it was my first day. I informed him it was actually my first hour.

I learned that Uday was originally from Sierra Leone and has lived in Portland about five years. He’s a soccer player and works around the Lloyd District.

We didn’t have much of a chance to chat, because the ride was so short. I dropped him off, shook his hand, and he wished me luck.

Here’s the rundown of my first Uber ride:

  • Total fare (price to rider): $8.80.
  • Driver revenue (money to me): $6.24.

Total round trip for me was about 30 minutes, door-to-door, so that works out to about $13.00 an hour.

But, I should also subtract out the cost of mileage (or should I?), which would cut that amount in half.

The next experiment is a full-day on the Uber clock.

Secret, Pixar, Schumpeter, and Louis CK: The world’s shortest economics lesson

Flash-in-the-pan smartphone app Secret, has announced it’s shutting down after just 16 months and after raising $35 million from investors.

Secret allows users to post anonymous comments and read anonymous comments by others. Add in location services, and users can post and read comments to other people near them. Yes, it’s a bit creepy, but Secret is not alone in the creepy secret business.

Co-founder, David Byttow, made the announcement in a blog post:

Secret, Inc. still has a significant amount of invested capital, but our investors funded the team and the product, and I believe the right thing to do is to return the money rather than attempt to pivot. Innovation requires failure, and I believe in failing fast in order to go on and make only new and different mistakes.

In a world where hi-tech investors are treated as easy marks for fast-talking Millennials, Byttow shows a bit of class with his promise to return the money (although, one wonders if he’ll keep his Ferrari).

More important is Byttow’s acknowledgement that innovation requires failure. Pixar’s John Lasseter puts it best:

Be wrong as fast as you can. Mistakes are an inevitable part of the creative process, so get right down to it and start making them. Even great ideas are wrecked on the road to fruition and then have to be painstakingly reconstructed.

Lasseter’s wisdom is a version of economist Joseph Schumpeter’s concept of creative destruction in which the creation of new technologies destroys older technologies. While some may regret the loss of older technologies, the creation of new technologies pulls the economy forward in ever increasing prosperity.

And, if you don’t want to believe an economist, you can trust a comedian.

Podcast – Millennials, affordable housing, and taxing star scientists


What are Millennials and what do they want?

Econ Minute answers that with a clip from Matt Edlen‘s presentation at the Portland State Center for Real Estate Annual Conference. Get inside the minds of the mysterious Millennials and learn how they and their parents will change the world.

Next, we spend a few minutes on affordable housing and look at how it’s a problem worsened by policy.

We end with a look at income taxes and the role they play in attracting scientists to a state … or driving them out.

Housing affordability: A problem self-inflicted by policy

Take a stroll through the housing markets along the East Coast and West Coast (and many places in-between), and you’ll hear talk of “affordable housing.”

During the housing boom, incomes were growing fast, but home prices and rents were growing faster. Because housing prices were growing faster than income, conversations turn to the lack of affordable housing.

Throughout the housing bust and the associated recession, rental rates continued to rise while home prices dropped. But, because incomes dropped and credit froze up, the affordable housing conversation continued.

Now, the economy is in recovery. Home prices are rising and so are incomes. But, home prices are rising faster than incomes, so even the recovery won’t make the affordable housing problem go away.

The Portland area is a curious case where land use policies have thrown gasoline on the affordable housing fire.

Oregon Public Broadcasting reports that Portland has a shortage of about 20,000 affordable housing units. About 30,450 very low income households in Portland should be spending in the ballpark of $500 a month or less on housing, only 10,420 units are available in the city within that price range.

But, it looks like things will get worse.

Oregon’s land use laws severely limit the expansion of residential development to outlying areas. The result is a region where development is limited to a virtual island surrounded by agricultural and natural resources uses. Because development cannot spread out, it must spread up. And, when consumers don’t want to buy in to high rise density, single family and low-density residential housing prices have only one way to go, and that way is up.

Gerry Mildner, the director of the Center for Real Estate at Portland State University notes (PDF, followup PDF) that the local government’s application of the state’s land use laws “pay only lip service to housing affordability.”

His analysis finds that under current policies, by 2035, Portland area rents will rise “roughly equal to levels in Los Angeles, San Diego, or San Francisco, eroding an important comparative advantage for the region.”

That’s why it’s been noted the declining housing affordability is often a self-inflicted wound caused by misguided policies.

Taxes matter: The migration of star scientists

Drop in on an Econ 101 class and at some point in the term, you’re bound to hear the economics professor say, “If you want less of something, tax it.”

That’s one reason for “sin” taxes. The hope is that high enough tax on liquor, tobacco, or—more recently—marijuana, will reduce consumption of these sinful products.

Taking it a step further, one way to have fewer rich people would be tax higher incomes at a higher rate.

But there is a rip roaring debate in economics and policy circles about whether this basic rule of economics actually applies to income taxes.

On the one hand, there is a large body of evidence that differences income taxes are associated with the migration of individuals—especially high income individuals—from high tax areas to lower tax areas:

  • Research using data from the Panel Study of Income Dynamics, find that both higher tax rates and increased tax rate progressivity decrease the probability that a head of household will move to a better job during the coming year, slowing the potential for household income growth.
  • The existence of a state income tax influences migration patterns and that higher state income tax levels have resulted in reduced per capita income growth over time.
  • Income taxes have an effect on migration for most races and age groups, and that individuals move from states with high income taxes to states with low income taxes.
  • The Public Policy Institute of California (PDF) finds that Californians of all incomes leave California for states without income taxes. Among highest income households, 36 percent more leave than arrive in California.
  • Approximately 1.5 million New Yorkers left the state between 2000 and 2008 due to “high costs and taxes,” and that those that left were selectively higher income households.
  • Studies from other countries with variable, internal regional tax rates support the hypothesis that US state-to-state migration would also be affected by tax policy. For example, research finds that newly-educated individuals, in particular, migrate in response to tax differences. A one percentage point increase in the tax rate change effects a 2.8 percentage point increase in the net out migration rate.

On the other hand, Warren Buffett once claimed that he’s never worked with anyone who mentioned taxes as a reason to forgo an investment opportunity that he offered.

A working paper recently distributed by the National Bureau of Economic Research seems to support the traditional view.

The authors look at what they call “star scientists,” whom they define as scientists with a large number patents—in the top 5 percent of those with patents. Based on the patent applications, they identify the scientists’ state of residence in each year over a number of years. With that information, the researchers can see whether a scientist has moved, which state they moved from, and which state they moved to. Then they link that information with data on each states top tax rates for individuals and business and and statistically analyze if taxes played a role in the move from state to state.

The results are interesting and indicate that tax rates are factor in attracting and keeping top scientific talent:

  • Star scientists’ moves from state to state are sensitive to changes in the top marginal tax rate on individuals.
  • Corporate income taxes affect state-to-state moves among private sector “star scientists” with no statistically significant effect for moves by academic and government researchers.

Count this as another piece of evidence that, “If you want less of something, tax it.” And it even applies to top scientists.

Weekend commentary: Two stories of speech, money, and power

Within the space of week, two commentaries have been published that highlight some strange ideas of how democracy and markets work and how fragile freedom of speech can be.

Robert Reich, former Labor secretary under President Clinton, complains that “Big Money” folks won’t open up their wallets for him.

He notes that a college president invited him to give a lecture that the school’s board of trustees would be attending. According to Reich, the president requested: “I’d appreciate it if you didn’t criticize Wall Street”—because several of the trustees were investment bankers.

Reich then relates the story of non-profit group devoted to voting rights that decided it would not launch a campaign against big money in politics for fear of alienating the group’s wealthy donors.

He wraps up his op-ed by suggesting that museums of science and natural history are being influenced by energy companies and—of course—the Koch brothers.  Reich argues that this is because “such institutions don’t want to bite hands that feed them.”

As the saying goes: He who pays the piper calls the tune. Yet Reich seems surprised and outraged that people won’t pay for tune they don’t want to hear.

A few days after Reich’s piece made the rounds, the Wall Street Journal published an op-ed by Pepperdine professor Pete Peterson regarding a Democratic congressman’s abusive campaign against seven academics who have challenged some of the conventional wisdom regarding climate change.

The congressman’s office arranged additional pressure by notifying national and local media that these professors were under “investigation.” On the day the letters went out, the Washington Post blared: “House Dems: Did Big Oil seek to sway scientists in climate debate?”

The congressman’s campaign is a stark contrast to Reich’s complaints about “big money” donors.

Reich is upset that donors won’t financially support a message that they disagree with. But, that’s a fundamental principle of free speech, and a clear demonstration that money is speech. In contrast, the congressman is abusing the power of his office in an attempt to stifle speech that he disagrees with.

In the marketplace of ideas, the soft power of financial support is superior to harsh power of coercion.

Referral-based hiring: Better workers, better pay

Firms often use referrals from existing employees to hire new workers. About 50 percent of US jobs
are found through informal referral networks and about 70 percent of firms have programs encouraging referral-based hiring. One can argue that the social networking site LinkedIn is mostly a referral-based job board with more than 250 million users.

Although referral-based hiring has boomed in recent years, there is little quantitative evidence that reliance on referrals is any better or worse than traditional methods of hiring.

Research published in the Quarterly Journal of Economics finds some measurable benefits to referral-based hiring (paywall-protected published article; free pre-publication working paper):

  • Referred applicants are more likely to be hired and more likely to accept offers, even though referrals and nonreferrals have similar skill characteristics.
  • Referred workers tend to have similar productivity compared to nonreferred workers on most measures, but referred workers have lower accident rates in trucking and produce more patents in high-tech.
  • Referred workers are substantially less likely to quit and earn slightly higher wages than nonreferred workers.
  • In call centers and trucking, the two industries for worker-level profits can be calculated, referred workers yield substantially higher profits per worker than nonreferred workers. These profit differences are driven by lower turnover and lower recruiting costs for referrals.

If businesses want better employees and workers want better jobs, it may be time to ditch the job board (even if it’s the best job board out there), and hit up the modern version of the Rolodex.


Podcast – Gridlock, Painkiller Abuse, Jobs, and Free Speech

This week’s podcast looks at how gridlock could be good for state budgets and economic growth.

Then we’ll check out new research suggesting that Medicare’s expansion in to prescription drug benefits has caused a boom in painkiller abuse.

On the job front, we’ll examine new evidence that referral based hiring is better for business and better for workers than the traditional methods of sifting through stacks of resumes and applications.

We’ll wrap thing up with commentary on two very different views of how free speech works in a world of free markets.

Part D pill popping: Did Medicare expansion cause a painkiller epidemic?

Opioids are painkillers like Vicodin and Oxycontin and opioid abuse has increased hugely since 1999. In this case, abuse is measured by substance abuse treatment admissions and deaths involving such painkillers.

As shown in the figure at the top of this post, these drug-related deaths spiked by 20 percent between 2005 and 2006. That happens to be the time that Medicare Part D added a prescription drug benefit making such painkillers much cheaper for seniors.

Recent research published by the National Bureau of Economic Research examines whether the introduction of the Medicare Prescription Drug Benefit Program in 2006 may have contributed to the increase in prescription drug abuse by expanding access to prescription drug benefits among the elderly.

Using data from the Drug Enforcement Agency, and shown in the figure below, they find painkiller distribution increased faster in states with a larger fraction of its population impacted by Part D.


They also find that this relative increase in opioid distribution resulted in increases in painkiller-related substance abuse treatment admissions.

Interestingly, these states experienced significant growth in opioid abuse among both the 65+ population and the under 65 population, even though those under 65 were not directly impacted by the implementation of Medicare Part D.

The authors do not provide an explanation for this observation.

But, maybe, just maybe, the older folks are engaging in a bit of prescription pill arbitrage: Getting painkillers at a low price subsidized by Uncle Sam, then selling them at a higher price to the youngsters.

In fact, last year, the Office of the Inspector General at the Department of Health and Human Services noted “questionable” usage of HIV drugs—including painkillers and concluded:

While some of this utilization may be legitimate, all of these patterns warrant further scrutiny. These patterns may indicate that a beneficiary is receiving inappropriate drugs and diverting them for sale on the black market.

A spokesman from the Centers for Medicare and Medicaid Services has said that the agency “takes this problem seriously and is taking steps to protect Medicare beneficiaries and the Medicare Trust fund from the harm and damaging effects associated with prescription drug fraud and abuse.”

The minimum wage debate in 20 short minutes

Legislatures in many states are considering bills that would raise the minimum wage as high as $15 an hour.

Proponents have argued that raising the minimum wage would reduce poverty and pull workers off of public assistance.

Opponents point out that a steep increase would reduce employment opportunities and that much of the wage increase would get eaten up by taxes and higher prices. Plus there’s the basic principle that if someone wants to offer their labor services for $5 an hour, why should the government say they can’t do that.

The 20 minute (or so) video above hits most of the pros and cons, just click “Play” to watch the show.

Click here to listen to the show as a podcast (right-click to download)

Single party rule and state spending: Discipline through disagreement

Ask a politician what the goal of their party is and they will tell you: To dominate the government.

Democrats and Republicans alike would like nothing more that to totally eliminate the other party from the legislature.

That may be good for the party, but new research says its bad for the budget.

A paper published in the Quarterly Journal of Economics finds that political competition reduces overspending by state legislatures (paywall version; free working paper).

The authors develop a model of legislators, some whom have a bias for overspending. In other words, these legislators want to boost current spending and put off any spending cuts.

Their model predicts that when unanimity is anticipated—for example, under one-party rule—legislators give in to the temptation to overspend.

  • On the one hand, if unanimous support for high spending is expected in future legislatures, legislators know that low spending today cannot stop policymakers from raising spending in the future.
  • On the other hand, if unanimous support for low spending in the future legislatures is expected, legislators can spend today and knowing that future legislatures will clean up the mess.

This seems to cross party lines. It was the Republican-dominated Congress that pushed the infamous Bridge to Nowhere.

But, the researchers argue, as legislature gets closer to a 50/50 split of those that are fiscally responsible and those that are spendthrifts, the possibility of gridlock increases. With gridlock, the status quo prevails and spending will not increase as much as the high spenders would like. In that way, political competition leads to fiscal responsibility.

Neat idea, but can you prove it?

The authors do not provide any statistical evidence supporting their model, but past research seems to be consistent with their model.

For example, statistical analysis published in the Review of Economic Studies finds that increases in political competition are associated with:

  • Lower tax revenue as a share of state personal income, meaning residents have greater disposable income;
  • A higher level of infrastructure spending by state governments; and
  • A higher probability that a state uses a right-to-work law, which makes it easier for employers to hire workers and easier for job-seekers to get work.

Thus, there is some evidence that greater political competition is associated with higher growth rates of state personal income per person.

Competition: It’s good for business and good for government.