A colleague points out a couple interesting features of the miracle jobs figures (raw data here; summary Google Docs spreadsheet here) for the Quarterly Census on Employment and Wages that the Walker administration is touting.

First, somehow or other, even though the new data show that private sector employment increased in 4Q 2011 over 4Q 2010 (+1.4%, itself nothing to write home about), the corresponding wage bill (even before adjusting for inflation) was down (-0.5%), hence the average private sector wage in Q4 2011 fell 1.8 percent year-over-year. The comparison to the previous year’s quarter may not address all seasonality issues with the data, so it’s possible there’s an explanation in calendar issues or something else that would work itself out in a proper seasonal adjustment process.[1] However, falling private sector wage payments usually occur only in periods of falling employment. Indeed, the previous episode of declining wages in Wisconsin was in the depths of the recession when private sector employment was falling at a rate of 5-6 percent year-over-year; the private sector wage bill had shown year-over-year increases from Q2 2010 through Q3 2011.

Second, even though jobs that can’t be located in a particular county are only 1.8% of total employment in Wisconsin, they account for 42 percent of the claimed employment increase. The average weekly wage for the jobs of undisclosed location also showed an especially large decline.

Regardless of the outcome of the election, the real QCEW data release later in the month should be interesting. The bottom line is, as Menzie Chinn observed at Econbrowser, that Wisconsin employment growth in the early Walker era has by any account lagged both the U.S. as a whole and the pace implied by Walker’s 250,000 job promise.

[1] There were much smaller year-over-year declines in the wage bill and the average weekly wage from Q4 2004 to Q4 2005.

Look out for the one with the pom pom.

South Pinckney St., Madison, Wisconsin, Feb. 19, 2011

Competition in (increasing) service quality doesn’t reduce costs:

Dane County’s two hospitals that deliver babies are each spending close to $40 million to spruce up maternity units and related facilities for a simple reason: Young women are key health care consumers, often deciding where their families will seek medical services for decades.

“If you don’t cater to women, you lose your market share,” said Kathy Kostrivas, Meriter’s assistant vice president of women’s health.

Many pregnant women tour both hospitals before choosing where to give birth, some bringing birth plans for each step of labor and delivery, said Holly Halberslaben, director of St. Mary’s family care suites.

“They really do their homework,” Halberslaben said. “It can be their first time in a hospital. You want to retain them.”

The somewhat buried exculpatory case for these investments is that the facilities have been operating near capacity, and the Madison area is the fastest-growing part of Wisconsin apart from some areas in the Twin Cities’ exurban fringe.  Nevertheless, the hospitals fairly evenly split a market of just over 7,000 annual births, so $80 million is not an insubstantial cost to recover.

I wonder how many expecting moms really are cross-shopping the facilities for compatibility with birth “plans.” [*] Many if not most of the births sort into the two hospitals on the basis of affiliations that send participants in several of the major local health insurance plans to one hospital or the other.  So even a modest amount of gold-plating can represent a large cost per birth on the contestable margin.  Granted, in addition to some Cadillac plan participants, the uninsured population has (Hobson’s?) choice as to where to give birth.  Though it’s messed up in a whole different way if the hospitals’ business plans would seek to recover a significant share of costs incurred to attract well-to-do moms to these facilities from the uninsured.

[*] When John was born, the plan was to have a healthy baby, which turned out to be the plan that was robust to complications that would have mooted any other plans.

Maynard at Creative Destruction has the optimist’s take on the reported tax cut deal:

[T]he deal supposedly struck between Obama and the Republicans is not too bad and better than was to be expected. We give the rich about $60 billion a year, and in return get about as much economic stimulus, focused on low- and moderate-income people, as we could hope to get.

I observe that the Republican positions include permanent extension of all Bush tax cuts, permanent repeal of the estate tax, and no (or no net stimulus from) UI benefits.  So I tend to agree.   The best policy and politics would have been to allow the Bush tax cuts to expire and force their replacement with something that was less damaging to the government’s long-term finances, but as long as I’m dreaming I might as well ask for a pony.

What would solidify my position would be news of associated side deals for (a) a suitable increase in the debt limit, since it’s clear that deficits really don’t matter (certainly in the near term), (b) no government shutdown in the next Congress, and/or (c) no fair doom-mongering any cashflow shortfall for Social Security due to the payroll tax holiday.  Did I mention that pony?

I was mulling this morning’s sucky employment report (which sucks, don’t get me wrong) and was curious as to the effects of the seasonal adjustment process.  You might expect a seasonal increase in non-farm payrolls for November from late holiday-season hiring, so it would make sense for the seasonal adjustment to knock the NSA figure down.  But how much?  Here’s the last three years of October-November employment change:

  • November 2008, NSA NFP -685K, SA NFP -728K, net adjustment -43K
  • November 2009, NSA NFP +80K, SA NFP +64K, net adjustment -16K
  • November 2010 (preliminary), NSA NFP +217K, SA NFP +39K, net adjustment -178K

There is, of course, no law of econometrics violated here.  The adjustment process is complex and doesn’t assume the effect is the same every year (a feature, not a bug).  For instance, the not-well-loved net birth/death adjustment is applied before seasonal adjustment and a note on the BLS website regarding the effect of the net birth/death model on seasonally adjusted payrolls basically says, “Don’t ask because we can’t tell you.”  So.  But still.

The Great Hangover

Over at Angry Bear, Ken Houghton recommends Steve Randy Waldman saying that economists of the liberal-technocrat school shouldn’t too-hastily dismiss Austrian-style “hangover theory,” and in the event you happen upon this but not Ken’s post, so do I.  Waldman:

Austrian-ish “hangover theory” claims, plausibly, that if for some reason the economy has been geared to production that was feasible and highly valued in previous periods, but which now is no longer feasible or highly valued, there will be a slump in production. It wisely asks us to consider not only the prosperity we measure today, but the sustainability of that prosperity going forward…The Austrians focus on unsustainable arrangements of real capital, while the Keynesians focus on unsustainable arrangements with respect to money, debt, savings, and income. I think both approaches are fruitful.

Grant that “real capital” may include human capital and there’s a sense in which, say, the idea that some of our unemployment is structural is not totally wrong: marginally competent house-construction laborers and housing-finance paper-pushers had their bullshit jobs in the middle of the zilches thanks to the housing bubble, and are not liable to return to similar jobs unless someone stupidly reinflates that bubble.  This doesn’t mean that the liberal technocrats are wrong to point out that a lot of other unemployment is collateral damage to the bubble deflation.

I have one other nit to pick: Waldman decries “vulgar” make-work Keynesianism as a dead-end, observing that “effort is not production.”  That’s true enough, but it’s important to remember that there are worse things than paying someone to dig a hole and fill it back in — what the Econ 101 student might take as the gold standard of useless make-work.  In fact, we can (and do) pay people to dig a hole, fill it with something valuable, set the contents on fire, and then not fill the hole back in.  (I’m looking at you, Afghanistan!)  If anything, the stimulus spending via ARRA has avoided make-work to a fault, a bug in the original concept that may be a feature — as long as Chris Christie’s army doesn’t pass up too much free money — both for dragging out the actual spending and for leaving behind actual valuable public capital.

An interesting (if not insidious) argument in Todd Zywicki’s much-discussed* paper [PDF] on credit-card interchange fees is the claim that two-sidedness of the market — in a nutshell, it’s necessary have both buyers and sellers get on a payment platform as a prerequisite to carrying out transactions — upends the traditional efficiency appeal of pricing at cost:

The claim that interchange fees are too high is also problematic as a matter of economic theory, as it fails to appreciate the “two-sided market” of credit card networks in which overall network efficiency arises from the interdependencies of the network’s various actors and the ability to reallocate costs among them in order the maximize the value of the system as a whole on behalf of the beneficiaries of that system as a group.

There’s already one sleight-of-hand here, in that the theory suggests that cross-subsidies from one side of the market to the other may be efficient but not that platform owners’ economic profits are innocent. Moreover, two-sided markets theory doesn’t specify which side(s) of the market get the subsidy as a general matter, so you can’t simply say “two-sided markets hence this subsidy.” I’m not suggesting that readers not believe in potential network externalities, just warning that there’s considerable risk of just-so storytelling.

To that end, I suggest a thought experiment. Imagine a world where the price on the supposedly subsidizing side were lower than it is now, and the subsidized side were higher, and the state of the market that implies. There’s a two-sided markets argument to make for additional subsidy if you would look at the resulting market conditions and say, “Wow, we really should impose a tax to bring up the subsidizing price to today’s level and provide today’s subsidies to overcome obvious network externalities!”

In the case of credit-card interchange fees, this state of the world isn’t terribly hard to imagine. Set the way-back machine to the early- to mid-1990s, and there are lower interchange fees, few rewards cards, and fairly high rates of adoption of credit cards. (The dominant forms of rewards cards at the time are oil company loyalty cards, which as Adam Levitin observes are a conceptually different form of “subsidy,” and airline frequent-flyer affinity cards charging cardholders above-average annual fees.) It’s 1991.  Should we impose a tax of a quarter or a half-percent on (at least) a portion of merchants’ receipts to give out cash or frequent-flyer miles to subsidize further credit-card spending?

My guess is that if I walked into a GMU law and economics seminar in 1995 and proposed a sales tax to give perks to the credit-card constrained** to overcome network externalities in payment markets that I’d have been laughed back to College Park. But then I’m just cynical.

* See, e.g., here, here, and here.

** Not necessarily the actual market outcome.

Kevin Drum suggests (modestly or “modestly”) that “everyone” should love the idea of trading the corporate income tax for carbon and financial transactions taxes.  I should just have a chuckle and leave it at that, but then again I get emails from the Tax Foundation that are remarkably lacking in irony.  Ezra Klein is happy with his policy-wonk hat on, but thinks there’s a political problem of giving fat cats an obvious break.  I argue that the problem is not just political.  Drum’s at least semi-serious claim is that taxing corporate income is bad because doing so is a drag on business and ends up getting paid by individuals anyway.  Neither necessarily militates against corporate income taxation in the real world.

Whether a “drag” on business or some other tax distortion that reduces private-sector activity (other things equal) is good or bad, on net, depends on the use to which the tax revenues are put.  In a world such as ours where public expenditures serve as public capital and intermediate goods in addition to government consumption, it’s straightforward to write a model where distortionary taxes are optimally set at non-zero levels.  (I once assisted the late Mancur Olson in doing so.)  These models do not even have to appeal to left-leaning aspects of reality such as the economic efficiency of negative-sum redistribution when marginal utility is declining and income and wealth are (very) unequally distributed.  So even if Drum’s switch is revenue-neutral and doesn’t stiff the government as such, it may still be improved upon — maybe not from the Tax Foundation’s perspective — by adding the distortionary tax on top of the efficiency-improving Pigovian taxes and spending the proceeds wisely.  Moreover, while we’re in tax policy fantasyland, the corporate income tax could be made more efficient without necessarily reducing its revenues by way of reforms that broaden its base and reduce the statutory marginal rates.

Second, merely noting the ultimate incidence of the corporate tax on individuals fails to consider significant issues of which individuals end up paying the tax.  Certainly, the tax may be passed onto individuals in part in their role as customers of businesses subject to the tax, but it will also fall on individuals as shareholders in the businesses to the extent the tax can’t be passed through.  Since shareholdings remain highly concentrated among the rich, this creates equity issues center-left wonks like Drum and Klein should be happy to entertain.

Moreover, eliminating taxation on corporate income would tend to have knock-on effects making the individual income tax system less efficient.  When tax system complexities create categories of income with preferential tax treatment, it creates opportunities for people who can choose how to realize their income to take their income in the low-taxed form.  This narrows the tax base and requires higher (and less efficient) rates to produce a given level of revenue.  In this case, untaxed corporate income gives retained earnings an indefinite tax deferral, so the incentive is to convert income from shareholdings such as dividends into unrealized capital gains (which also are tax-deferred).

The argument remains that making fat cats fatter is a small price to save for saving the planet for everybody else.  I can almost swallow that, but note that much of the noise over reforms seem to be geared towards masking the fact that people with ownership in existing corporations have as much or more to lose from climate and financial catastrophes than the rest of us suckers.


If only it were Tim Geithner or Barack Obama referring to some of our Bigger Problems, but here’s Dave Cieslewicz telling the Overture Center’s lenders to cuss off:

The banks “should take a very short haircut on this,” he says, referring to the swap agreements. “They took tens of millions in interest and fees over the life of the deal. They did very well.”

Kristin Czubkowski explains at the Cap Times* why the City thinks it’s off the hook for its guarantees of Overture debt, a question that was raised in our last visit to the subject. Turns out that the geniuses who ran Overture’s finances are no smarter than (indeed slightly dumber than) Larry Summers of the Harvard presidency era: they entered into interest rate swaps which now, with rates in the basement for the foreseeable future, have added millions of dollars to the guarantors’ annual obligations relative to the “worst case” scenarios as of the Center’s refinancing. The “slightly dumber” part is that nobody here’s been willing to pay to exit the swaps.

Czubkowski hands us over to the city attorney for an explanation of why the city thinks it’s off the hook even for the $1.95 million anticipated in the refinancing, let alone the $5 million plus including the swap payments:

[City Attorney Michael] May and Cieslewicz … say the decision to draw the swap payments from the firewall violates the original contract and the city’s agreement to back some of the Overture Center loan.

The rule in Wisconsin “is that a person who is owed the money cannot change the deal and hold the guarantor to their agreement without getting the guarantor to sign onto the changes,” May told the city’s Board of Estimates Monday night. “The rule is so strong that if they make the change and it increases our risk, that it releases any obligation” to pay even the previously agreed-to amount.

As a non-lawyer, I can’t evaluate the validity of this opinion.  As an economist, the rule May is describing would be a very good idea in the event it isn’t true: it’s saying that signing someone up to cover losses on bet A doesn’t automatically obligate them to cover the losses on bet B, which certainly would tend to avoid a lot of obvious opportunities for mayhem.

Still, there may be a contract-law question underlying this: what exactly did the city agree to?  It’s not that the world doesn’t have contracts whose terms can be altered unilaterally — credit card agreements being a notorious example, though even there the notionally agreed-upon original terms expressly allowed modifications.  Plus, those involve notice and opportunity (though not necessarily a costless opportunity) to decline the revised deals, we can only assume because even contract law is not such an ass as to let people define others’ obligations with total impunity.  So perhaps someone could obtain the actual agreement and run it past a real lawyer for comment.

* A nit to pick being that in describing the Overture trust concept, Czubkowski blames the trust’s problems on the “turbulent post-2005 stock market.” In fact, the fund’s problem was that it wasn’t invested in a period when any moron (like me, with my 401(k)) could have (and did) make loads of money; it was holding more than 60% cash, plus 30% stocks and 10% Bernie Madoff, back in 2006 with a targeted return of 8.25% to meet all obligations.

Matt Welch at the Reason blog takes credit for airline deregulation on behalf of libertarianism:

The “worldview” of libertarianism suggested, back in the early 1970s, that if you got the government out of the business of setting all airline ticket prices and composing all in-flight menus, then just maybe Americans who were not rich could soon enjoy air travel. At the time, people with much more imagination and pull than Gabriel Winant has now dismissed the idea as unrealistic, out-of-touch fantasia. They were wrong then, they continue to be wrong now about a thousand similar things, and history does not judge them harsh enough.

Mark Kleiman observes that transportation deregulation was more directly the progeny of 1970s Brookings-esque neoliberalism (though I’d grant Welch that libertarians got there first), though Kleiman doesn’t take issue with the basic claim that deregulating prices and service offerings “was, on balance, a good thing.”  This argument ultimately rests on the declines in airfares and resulting democratization of air travel that Welch cites; indeed that’s what the Brookings-esque neoliberals I know cite when they’re defending the deregulatory record.

The catch is that all such economic comparisons must be counterfactual: they must show an improvement not with respect to CAB-set fares of the late-1970s, but rather with respect to what reasonably competent regulation could have produced under the other circumstances of the deregulated era.  (This, FWIW, is one of Robert W. Fogel’s central insights into what makes economic history economic history.)  If the comparison exercise is tough by the (inappropriate) historical yardstick thanks to declines in (average) service quality and the airline industry’s trail of fleeced stakeholders, then the counterfactual comparison is going to be tougher still thanks to a couple of factors that should have produced large declines in airline costs and hence fares even in the absence of deregulation.

The factors of note are a pair of technological advancements — the development of high bypass ratio turbofans suitable for shorter-haul airliners and the demise of the flight engineer’s job thanks to cockpit automation, both of which have origins predating deregulation — and the long secular decline in oil prices through the deregulated era’s zenith prior the crash of the 1990s stock market bubble.   Since a regulator could have promoted adoption of the cost-saving technologies and passed the resulting productivity improvements and input cost decreases through to fare-payers using elementary regulatory technologies, deregulation must have produced substantial fare reductions relative to the late CAB era to have a claim to constituting a true improvement.

One of the airline industry’s problems is that it isn’t “revenue adequate” or able to recover its total costs including a normal return to investors.  If you thought airlines were incurring costs efficiently, then moving towards revenue adequacy would require more revenues and hence higher average fares.  On the face of things, that wouldn’t look good for a regulated alternative providing more secure revenues to the industry.  However, there are dynamic efficiency counterbalances to the apparent static inefficiency under regulation: revenue adequacy implies having money for efficiency-improving investments.  For instance, U.S. legacy airlines have somewhat notoriously kept relatively aged fleets in the air.  Partly, that was a deliberate strategy that blew up when the Goldilocks conditions of the late-90s ended, and partly they don’t have the money to turn over their fleets as fast as they arguably should.

The formerly regulated transportation industries shared, to one extent or another, cost structures under which an efficient carrier would go broke under econ 101 perfect competition with prices driven down to marginal costs.  So the question isn’t so much whether carriers will exercise such market power as they have in order to survive, but how.  Real firms might or might not do that better than a real regulator.  I do think there’s a good case to be made for some degree of pricing and service liberalization with regulatory policing of “excessive” use of market power; that’s a one-sentence version of the Staggers Act’s approach to the (very successful) freight rail industry.