Free Trade and the Political Milieu

Free trade is like virtue – it is widely approved, but hard to practice.  Carrier Corporation’s recent announcement that it is moving manufacturing operations from Indiana to Mexico illustrates this tension.

Carrier, a subsidiary of United Technologies, manufactures heating and cooling systems and related products.  It also claims the mantle of an environmental steward: “Whether it’s reducing our greenhouse gas impact, leading the phase-out of ozone-depleting refrigerants, or introducting many of the world’s most energy efficient building solutions, at Carrier, we incorporate sustainability in all that we do. To us, it’s only natural.”

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IEI Insight: Anticipation, not content, of Fed announcements may be driving markets

This IEI Insight is provided by Ryan Coughlin, a Gail Werner-Robertson Fellow and author of a forthcoming paper analyzing the effect of Federal Reserve announcements on market activity.

Previous research has shown that “surprise” portions of macroeconomic announcements have significant effects on financial markets. Further, the magnitudes of announcement effects are influenced by governmental monetary policy. Macroeconomic announcement effects follow a simple pattern: if the economy, as measured by the data in the announcement, is better than anticipated by the market consensus, equity prices are likely to trend upward for the day and bond prices are likely to head lower for the day. In other words, a macroeconomic announcement effect is the market’s reaction to incorporate unexpected historical data. However, the previous research on announcement effects was completed prior to the most recent economic downturn and the unprecedented Federal Reserve monetary policy that stemmed from it. After the implementation of monetary policies such as quantitative easing and near-zero interest rates, macroeconomic announcement effects differed from the conclusions of previous research.

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The Economic Milieu

Winston Churchill is often quoted for his observation, “The best argument against Democracy is a five-minute conversation with the average voter.” Or as some might say in these times, a fifteen-second sound bite from Presidential candidates as reported in the mainstream media.

The campaign so far has not generated much serious conversation about the serious budgetary challenges facing our country. According to a recent CBO analysis, the federal budget deficit this year will rise to $544 billion, about 2.9 percent of GDP, up from 2.5 percent of GDP in 2015. While federal revenues will grow at a respectable 3.9 percent, federal spending will grow by even more – 6.3 percent. This is not a path to fiscal soundness.

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IEI Insight: Who pays for a higher minimum wage?

This week’s IEI Insight is provided by Renato Morais, a Gail Werner-Robertson Fellow and author of a forthcoming paper on the Nebraska minimum wage.

When we think of increasing the minimum wage, many people believe it is going to help the workers most in need — that it is going to provide them a “living wage.” But who needs more help: those workers who already have a job but earn a low wage, or those who do not have a job at all? A minimum wage increase does not help the worst off of the worst off. It does not even help all of the minimum wage earners.

Who earns the minimum wage? Half of minimum wage employees are between the ages of 16 and 24. Of these, 79 percent are part-time high school students, college students, and entry-level workers — they are not the primary breadwinners of their household. Their average family income is $65,900, and only 22 percent of them live at or below the poverty line. The other half of workers earning the minimum wage — those 25 and older — have an average family income of $42,500, and only a quarter of them live at or below the poverty line. Thus, raising the minimum wage only “helps” a tiny portion of those who the public believes it is intended to help.

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IEI Insight: Employment Support is Good Medicine for Autistic Individuals

This week’s IEI Insight is provided by Joe Kreienkamp, a Gail Werner-Robertson Fellow and co-author of a forthcoming paper on autism spectrum disorders and employment.

The Centers for Disease Control and Prevention identify autism spectrum disorder (ASD) as the fastest growing developmental disability in the United States. Affecting 1 in 42 males and 1 in 189 females, ASD is five times more prevalent in boys than girls. The “developmental disability that can cause significant social, communication and behavioral challenges” can be problematic for individuals and their families.

There are both opportunity costs and financial costs of supporting an autistic individual. In a study conducted by JAMA Pediatrics, the national cost of supporting children with ASD was $61 billion dollars. For adults, the cost was $175 billion per year. As one study indicated, “the cost of supporting an individual with an ASD and intellectual disability during his or her lifespan was $2.4 million in the United States. The cost of supporting an individual with an ASD without intellectual disability was $1.4 million in the United States.” Furthermore, most families who support an autistic child must forfeit one parent’s income to support the child.

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The Problem of Cash

One area of my research involves payment systems and the role of financial intermediaries in fulfilling various government functions, including tax and criminal enforcement. When we use banks or credit card networks to pay others, we create electronic records that can be accessed by the government for various purposes. (The same is true when we use our cell phones, but encryption may make it difficult to access such information – a problem unfolding in the current controversy with Apple.)

Anti-money laundering (AML) rules impose some obligations on financial intermediaries to identify their customers, know something of their business, and report suspicious transactions. Tax reporting rules also require tracking and reporting of certain kinds of payments – including interest, dividends, and other revenue sources. This allows the government to “trust, but verify” positions taken by its citizens, ensuring that our voluntary tax reporting system remains functional. Continue reading The Problem of Cash

Primordial Brain Modules?

Dr. Michael Munger of Duke University delivered a very interesting lecture at the Heider College of Business on Friday, February 5. He explored problems associated with price gouging laws, which proscribe the practice of raising prices during a state of emergency. Those trained in economics are likely to understand that such laws are likely to harm those affected by emergency conditions. Prices provide important signals to the marketplace, allowing consumers to allocate scarce resources based on where they are valued most. Moreover, those higher prices are likely to trigger increased supplies, thereby providing the impetus for consumer demands to be met and lower prices in the near future. Obfuscating the price signal through legal constraints does not change Continue reading Primordial Brain Modules?

Temperate Climates and Human Capital Development

Today in Nebraska we are enduring a winter storm, with near blizzard conditions in many areas. This kind of weather tests our coping abilities. Visit a grocery store and you will find depleted inventory, as people stock up for what is likely to be a day or two of isolation. This kind of weather reveals the malleability of human preferences in the face of potential scarcity. What a great country where we ordinarily get so many choices!

These formidable challenges of living in a temperate climate may also produce higher economic output and development as compared with easier climates – at least in the case of our ancestors. Thomas Sowell outlines some of these advantages in his latest book, Wealth, Poverty, and Politics (Basic Books 2015).

Dr. Sowell explains how geography affects Continue reading Temperate Climates and Human Capital Development

The Elusive Quest for Income Equality

Institute scholar Ernie Goss posted an interesting piece at the Economic Trends blog, which can be found here In this post, “Taxing Rich More Heavily Gets Votes, But Ineffective in Reducing Inequality”, Dr. Goss discusses data involving the share of federal income taxes born by the top 10 percent of earners. It may not surprise you that the relative tax burden (measured by the share of income tax collections) born by that group has increased over time, while the share born by the bottom 50% has gone down. As Dr. Goss reports, many in the bottom 50% have negative tax rates, due to the Earned Income Credit and other refundable credits that function as transfer payments from the government.

Looking at the IRS Statistics of Income, it appears Continue reading The Elusive Quest for Income Equality

The Value of Information in Rulemaking

Earlier this month, the Treasury Department announced the withdrawal of proposed regulations dealing with the substantiation of charitable gifts of more than $250. Before you yawn and move on to the next topic, please stay tuned. This provides a valuable object lesson about the value of information in the hands of rulemakers — and its conspicuous absence in some cases.

Unlike the “Galaxy Far, Far, Away” that was the subject of my last post, people in the real world are in the process of getting materials together to complete their federal income tax returns. Charitable organizations are working to ensure that their donors receive appropriate receipts for their donations, which are required in order to claim itemized deductions on their tax returns. Those deductions Continue reading The Value of Information in Rulemaking