Thursday's health care ruling was a surprising victory for the middle class. I went to bed Wednesday dreading waking up, only to be awakened by a phone call that the law had been upheld. Most of the story is well-known, and summarized in the President's speech: six million young adults under 26 who have gained insurance, children now (and adults starting in 2014) can no longer be denied insurance due to pre-existing conditions, an end to terminating people's insurance when they get ill, closing the Medicare donut hole, etc. I want to focus on one provision the President mentioned in passing, the $1.1 billion in insurance rebates that 12.8 million Americans will be receiving August 1.
The rebates are due to the medical loss ratio or "80/20" rule that insurance companies cannot spend more than 20% of premium dollars on "administration, CEO pay, and profits," as Health Care for America Now (HCAN) summarizes it. The requirement is 85% spent on actual medical care for firms in the large group market, according to healthcare.gov.(via HCAN). Of the $1.1 billion in rebates, $393.9 million will be in the individual market, $386.4 million in the large group market, and $321.1 million in the small group market.
Although $1.1 billion in rebates is not a lot of money in the multi-trillion U.S. health care system, it is enough to provide noticeable rebates to millions of consumer before the November election. Consumers Union has a state-by-state breakdown of which insurance companies owe rebates in each state, and how much. Three patterns emerge from these data: First, some companies routinely failed to meet the 80/20 rule in state after state after state. Second, Blue Cross/Blue Shield companies, which were once largely non-profit but were converted to for-profit corporations mostly in the 1990s, are now frequent violators of the medical loss ratio rule. Third, some states, most notably Texas, have such lax insurance company regulations that violations of the rule are rampant. The data below come from the Consumers Union link above.
1) Multiple violations by individual companies: The poster child for gouging consumers and spending premium dollars on things other than health care is Golden Rule Insurance Company (since 2003 a subsidiary of UnitedHealthcare), which operates solely in the individual market, and not in either the small group or large group health care markets. According to the Consumers Union data, Golden Rule owes rebates in 23 states where it operates. Comparing the CU data with Golden Rule's website on where it operates, we find that in only nine states where it operates does it not owe rebates. We also learn that two Golden Rule subsidiaries also owe rebates, American Medical Security Life Insurance Company in Utah in the individual market, and Oxford Health Plans of New Jersey Inc. in the large employer market, bringing Golden Rule's total to fully 25 states where it owes rebates under the medical loss ratio rule. In a number of states (Alabama, Florida, Indiana, Kentucky, Maryland, Michigan, Mississippi, and West Virginia) , Golden Rule owes more money than any other insurer in the individual market.
Furthermore, UnitedHealthcare subsidiaries carrying the UHC name owe rebates in 28 states in the small business market, large business market, or both.
I don't mean to single out UnitedHealthcare for overcharging: depending on the state and the market, Aetna, Connecticut General, and Time Insurance Company, among others, owe substantial rebates to their customers as well. But Golden Rule and UnitedHealthcare failed to meet their 80/20 tests in so many states that they really stand out.
2) In many states in which Golden Rule does not owe the highest rebates in the individual market, Blue Cross/Blue Shield does. This includes states like Arizona, Missouri, Oklahoma, South Carolina, Tennessee, and most notably, Texas. This represents a complete repudiation of the historical BC/BS ethos, which included non-profit incorporation and community rating (i.e., not penalizing people for getting sick). But that's what happens when you turn non-profits into for-profits in health care.
3) This brings us to lax insurance regulation, as in Texas. Blue Cross/Blue Shield of Texas owes $89.9 million in refunds, all of it in the individual market, which by itself exceeds all the refunds in the much bigger California economy, where total refunds only amount to $73.9 million. Total rebates in Texas will total $167.0 million. The only other state with rebates exceeding $100 million this year is Florida, at $123.6 million. However, a number of states have higher average rebates, led by Vermont at $807. I believe both the total and average rebates should be examined for evidence of weak insurance regulation.
To summarize, the Supreme Court's decision was a great one for the middle class. On top of all the provisions that expand coverage and economic security, 12.8 million consumers will see refunds from their insurers to pay back for their price gouging.
This is not to say that we don't have a long way to go to complete health reform. As Aaron Carroll points out, there is a great deal more that needs to be done to our $2.7 trillion health system, including making coverage universal and getting cost increase under control. But upholding the Affordable Care Act is a step in the right direction.
Saturday, June 30, 2012
Tuesday, June 26, 2012
Lost Output Over $3 Trillion And Rising
Still traveling, so just a quick post, but this really can't be emphasized enough. Andrew Fieldhouse at the Economic Policy Institute reports that the Congressional Budget Office now has cumulatively reduced its estimate of 2017 gross domestic product by 6.6% since the beginning of the recession in December 2007. As Fieldhouse points out, that doesn't sound like much, but when it's 6.6% of a $15 trillion economy, we are looking at about $1 trillion (with a "T") of lost income in 2017. To put it another way, that is well over $3000 of income per person that year. That is on top of $3 trillion in potential GDP already lost since the recession began, according to Fieldhouse.
The culprit, of course, is the lack of further stimulus to the economy. After the totally inadequate $800 billion stimulus package in 2009, we have had essentially nothing. At the end of 2011, Republicans had to be shamed into approving a payroll tax cut they previously favored. Indeed, as Thomas Mann of the Brookings Institute and the Norman Ornstein of the American Enterprise Institute have pointed out, it is not the case that both parties are getting more partisan. As they put it, "Let's just say it. The Republicans are the problem." It is the Republicans in Congress who are blocking further stimulus measures. Electing a new Congress that will not pass a stimulus bill will cost Americans thousands of dollars out of their pockets.
We are a long way away from George Wallace's famous claim that there was not "a dimes' worth of difference" between the two parties.
The culprit, of course, is the lack of further stimulus to the economy. After the totally inadequate $800 billion stimulus package in 2009, we have had essentially nothing. At the end of 2011, Republicans had to be shamed into approving a payroll tax cut they previously favored. Indeed, as Thomas Mann of the Brookings Institute and the Norman Ornstein of the American Enterprise Institute have pointed out, it is not the case that both parties are getting more partisan. As they put it, "Let's just say it. The Republicans are the problem." It is the Republicans in Congress who are blocking further stimulus measures. Electing a new Congress that will not pass a stimulus bill will cost Americans thousands of dollars out of their pockets.
We are a long way away from George Wallace's famous claim that there was not "a dimes' worth of difference" between the two parties.
Friday, June 22, 2012
Why Not Infrastructure Spending?
Why are we not doing infrastructure spending today? Here's what the federal government started in the midst of the Great Depression:
Photo credits: Personal photos, June 21, 2012
Hoover Dam was commemorated in 1935 and completed in 1936. The dam presently provides electricity to 1.3 million people in Arizona, Nevada, and California (via Wikipedia). There is no shortage of infrastructure needs today and plenty of unemployed workers. The problem, of course, is political, not economic.
P.S. Limited blogging for the next ten days.
Friday, June 15, 2012
Why the World Should Care About America's Middle Class
Tim Worstall, in his Forbes blog, attacks my series (here and here) on whether globalization is good for America's middle class. Not on the basis that he disagrees with my conclusion (though he does), but because, he argues, there are much more important facts about globalization than a decline in the economic well-being of the middle class in America and Europe. In particular, he points to the great decline in poverty among developing nations that have embraced globalization:
Here is the crux of Worstall's argument:
And second, we should care about the U.S. middle class (and Europe's, for that matter) because how they react to their situation politically will have enormous consequences for the world economy and world politics. If the U.S. comes up with a "Smoot-Hawley" response to its economic problems, that would undo a lot of the gains Worstall sees as flowing from globalization, a point made recently by Dani Rodrik (via Mark Thoma). Even more ominously, in both the U.S. and Europe, we see increasing political polarization and the rise of nationalist political parties and movements, as noted by Paul Krugman. Economic decline is a scary thing, and people's reactions to it can get downright ugly, to put it mildly.
For both of these reasons, then, what happens to the middle class in the U.S. and Europe will have repercussions far beyond those acknowledged by Worstall.
This growth in incomes, in wealth, has been uneven, this is true. Largely speaking those places which have been taking part in globalisation, Indonesia, China, India, have been getting richer. Those that have not been, Somalia perhaps as an example, have not been.Let's leave aside the fact that these successful countries are hardly poster children for the kinds of so-called "free-market" policies that Worstall espouses, a point made particularly well by Dani Rodrik. And in the spirit in which Worstall granted my claims for the sake of argument, let's grant his as well. (But if you want to get down into the weeds on the extent to which poverty reduction claims may be overstated, take a look at Robert Wade's work.)
Here is the crux of Worstall's argument:
So I would actually posit that whether the American, or European, or rich world, middle class benefits from globalisation is actually an incomplete question. Incomplete enough to be the wrong question. Almost to the point that the answer is “who cares?”.
The correct question is what is the distribution of all of the costs and all of the benefits of globalisation? To which my answer would be that a generation, perhaps even two generations, of stagnating lifestyles for the already rich, those middle classes, looks like a reasonable enough cost to pay for the other thing that is happening: the abolition of absolute human poverty in the rest of the world.First, I think we should certainly care when hundreds of millions of people are suffering unnecessarily. Yes, unnecessarily, because contrary to Worstall's claim, we are not trading off reduced economic well-being for hundreds of millions of middle class people for the lessened poverty of billions of other people. Indeed, the two are happening simultaneously, but as Ronald Rogowki pointed out in Commerce and Coalitions, it is perfectly feasible to have rich country winners compensate rich-country losers and still have all of them be better off from trade. Politically, it is a hard row to how, as Rogowki pointed out: the winners from expanding trade increase their political power as a result of their increased income, making compensatory policies less likely. But ending globalization's harm to the middle class in rich nations does not require us to take anything away from poorer people, not if you accept the theory of comparative advantage and the Stolper-Samuelson Theorem. It does require us to figure out a political solution to the problems faced by the losers, which as we can see in the United States is made more difficult by the decline of unions and by the Citizens United Supreme Court decision.
And second, we should care about the U.S. middle class (and Europe's, for that matter) because how they react to their situation politically will have enormous consequences for the world economy and world politics. If the U.S. comes up with a "Smoot-Hawley" response to its economic problems, that would undo a lot of the gains Worstall sees as flowing from globalization, a point made recently by Dani Rodrik (via Mark Thoma). Even more ominously, in both the U.S. and Europe, we see increasing political polarization and the rise of nationalist political parties and movements, as noted by Paul Krugman. Economic decline is a scary thing, and people's reactions to it can get downright ugly, to put it mildly.
For both of these reasons, then, what happens to the middle class in the U.S. and Europe will have repercussions far beyond those acknowledged by Worstall.
Wednesday, June 13, 2012
Is Globalization Good for America's Middle Class? Part 2
In Part 1, I examined what economic theory has to say about the winners and losers from trade. The main conclusion is based on the Stolper-Samuelson Theorem: Because the United States is labor scarce in a global perspective, an expansion of trade will reduce the real wages of labor. As we have seen, this theoretical prediction has been borne out as real wages remain below their peak level for the 39th year running.
In this post, I analyze what I consider to be the other main element of globalization, the expansion of the mobility of capital. Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens).
Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives. In this blog, I have previously discussed the case of Boeing's establishment of a Dreamliner plant in South Carolina and admitting it was due to workers in Washington state exercising their right to strike, a form of retaliation that was a prima facie violation of the Act.
Similarly, we have seen how companies have used the threat of relocation to extract subsidies from state and local governments. Sears, with its $275 million (nominal) retention package from Illinois, is just the most egregious in recent years. That package alone could support 550 state jobs at $50,000 a year for 10 years (assuming no raises, something pretty common for state workers lately though unlikely to last 10 years). And remember, Sears did this in 1989 as well, when it got $178 million not to move out of state.
More generally, who should win and who should lose from the growth of capital mobility? One possibility is that it would simply speed up the effects of trade. If Mexico had needed to wait for the growth of domestic entrepreneurs, it could not have expanded its exports to the U.S. nearly as rapidly as in the actual situation where U.S. companies could provide the money. In that case, we would simply expect the effect of heightened capital mobility to be the same as the Stolper-Samuelson Theorem.
But this would not explain why European labor appears as opposed to globalization as U.S. unions. Western Europe is labor abundant, so we would expect western European worker to benefit from the expansion of trade. Yet one does not have to look hard at all to see that European unions are not in love with globalization. The right answer now might be that those who are mobile win in the global economy, while those who are immobile lose. While capital is mobile geographically, governments are bound to their location. Workers, even where they have significant legal opportunities to move, as in the European Union, are still restricted in their mobility by their language abilities or lack thereof, and by the common desire to live near their families (another way in which corporations are not people, by the way). And it is not as if European capital can only be invested in the EU.
This is consistent with studies of the effect on home country labor of foreign investment (see Richard Caves' Multinational Enterprise and Economic Analysis): reduced employment because exports are replaced with foreign production, some possible increased employment due to supplying goods and services to foreign subsidiaries, but at best the result is a wash and more likely the net effect is negative.
If this is right, U.S. workers may have the worst of both worlds: they are harmed by expanding trade, and they are harmed by being less mobile than capital. While this does not explain the political changes that have happened in the U.S. since 1970 (though it is certainly relevant), it gives us a pretty good handle on the economic market pressures that the middle class needs to address politically. I will have more to say about these issues in future posts.
In this post, I analyze what I consider to be the other main element of globalization, the expansion of the mobility of capital. Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens).
Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives. In this blog, I have previously discussed the case of Boeing's establishment of a Dreamliner plant in South Carolina and admitting it was due to workers in Washington state exercising their right to strike, a form of retaliation that was a prima facie violation of the Act.
Similarly, we have seen how companies have used the threat of relocation to extract subsidies from state and local governments. Sears, with its $275 million (nominal) retention package from Illinois, is just the most egregious in recent years. That package alone could support 550 state jobs at $50,000 a year for 10 years (assuming no raises, something pretty common for state workers lately though unlikely to last 10 years). And remember, Sears did this in 1989 as well, when it got $178 million not to move out of state.
More generally, who should win and who should lose from the growth of capital mobility? One possibility is that it would simply speed up the effects of trade. If Mexico had needed to wait for the growth of domestic entrepreneurs, it could not have expanded its exports to the U.S. nearly as rapidly as in the actual situation where U.S. companies could provide the money. In that case, we would simply expect the effect of heightened capital mobility to be the same as the Stolper-Samuelson Theorem.
But this would not explain why European labor appears as opposed to globalization as U.S. unions. Western Europe is labor abundant, so we would expect western European worker to benefit from the expansion of trade. Yet one does not have to look hard at all to see that European unions are not in love with globalization. The right answer now might be that those who are mobile win in the global economy, while those who are immobile lose. While capital is mobile geographically, governments are bound to their location. Workers, even where they have significant legal opportunities to move, as in the European Union, are still restricted in their mobility by their language abilities or lack thereof, and by the common desire to live near their families (another way in which corporations are not people, by the way). And it is not as if European capital can only be invested in the EU.
This is consistent with studies of the effect on home country labor of foreign investment (see Richard Caves' Multinational Enterprise and Economic Analysis): reduced employment because exports are replaced with foreign production, some possible increased employment due to supplying goods and services to foreign subsidiaries, but at best the result is a wash and more likely the net effect is negative.
If this is right, U.S. workers may have the worst of both worlds: they are harmed by expanding trade, and they are harmed by being less mobile than capital. While this does not explain the political changes that have happened in the U.S. since 1970 (though it is certainly relevant), it gives us a pretty good handle on the economic market pressures that the middle class needs to address politically. I will have more to say about these issues in future posts.
Saturday, June 9, 2012
Is Globalization Good for America's Middle Class? Part 1
In this blog, I have frequently documented economic trends that have been bad for the middle class: Declining real wages, steadily falling bang for the healthcare buck, stagnant educational attainment, the gigantic cost of tax havens, etc. With this post, I want to begin exploring one possible reason for the economic insecurity of the middle class, namely globalization. Today, we will look at who wins and who loses from international trade, one of the key elements of globalization.
In some circles, one is likely to see a variant of the claim that "everybody" is better off because of freer trade. Even according to the most mainstream economic theory, this is simply false. The workhorse theory for determining the distributional effects of trade (i.e., who wins and who loses) is called the Stolper-Samuelson Theorem, first enunciated in an article by Wolfgang Stolper and Paul Samuelson in 1941.
To understand this theory, you need to know that economists think about national economies in terms of the amount of land, labor, and capital they have compared to all other countries in the world. These "factors of production" can be in relatively high supply compared to the rest of the world, in which case they are referred to as "abundant," or in relatively low supply compared to the rest of the world, in which case we call them "scarce."
The theorem can be stated in quite simple terms, but its consequences are not at all simple: As trade expands, owners of abundant factors of production benefit, and owners of scarce factors of production are harmed. Here, "benefit" means their real income increases, while "harmed" means their real income decreases.
Remember, trade can expand for two main reasons. First technological innovations can reduce the cost of transportation, making it first possible, then cheaper, to send goods long distances. For example, political scientist Ronald Rogowski, in his great book Commerce and Coalitions shows how the introduction of the steamboat made it possible to export North American wheat to Western Europe, displacing wheat from Eastern Europe. Second, policy changes like the North American Free Trade Agreement (NAFTA) or the trade agreements embodying the World Trade Organization (WTO) reduce or eliminate costly barriers to trade and lead to its expansion.
The grain example helps show why trade creates winners and losers. The Midwest U.S. and Canadian Prairie provinces are a gigantic breadbasket made possible by low population density, which implies abundant land and scarce labor. Expanding trade gave these farmers new markets and higher incomes. In much more densely populated Europe, the reverse is true: labor is abundant and land is scarce. As a result, expanding trade in grains meant more import competition and lower income for European farmers..
Fast forward to today and we can ask what U.S. factor endowments are currently. As a rich country internationally, the United States is necessarily a capital abundant country. As a comparatively low population density country, it is land abundant but labor scarce. The answer is to our initial question is then quite clear: expanding trade is harmful to U.S. workers because imports of labor-intensive products and services from abroad create competition for American workers, reducing their real wages. As I have discussed before, U.S. real wages have remained below their peak for 39 straight years, just as the Stolper-Samuelson Theorem would predict.
What about all the cheap goods we now buy at Wal-Mart? It doesn't change this story at all, because the lower price of imported goods is already reflected in the inflation rate we use to calculate real wages.
Rogowski's book also argues that we can expect certain pattens of political coalitions to form, with the winners from trade on one side and the losers on the other. NAFTA illustrated this well, with capital and agriculture generally in favor of the agreement (minus a few small specialty agricultural products like oranges), while labor was strongly opposed. And of course, this only helps us understand economic reasons for support or opposition to trade agreements; for non-economic reasons such as the environment, we have to look elsewhere. Although beyond the scope of this post, Rogowski's analysis of the entire world through phases of rising and falling trade (i.e., the Great Depression) lends strong credence to his claims. You should definitely read his book sometime.
Economists are divided over how big this effect is. In the 1990s, when I first started teaching, the most common view of economists was that technological change was the driver increasing the premium for high skilled labor while reducing wages for low-skilled labor. Adrian Wood's 1994 book, North-South Trade, Employment, and Inequality, argued that trade was in fact the main culprit, (a good, ungated analysis is Richard Freeman's "Are Your Wages Set in Beijing?"). Although this met with a lot of resistance at the time, Wood's view has gained a lot of traction among economists based on developments over the last 15 or so years. Paul Krugman, a particularly noteworthy example due to his Nobel prize, has gone from being a fanatic adherent of free trade to someone who sees trade as a big problem, though even today he is not quite willing to pull the plug on free trade.
One important point Rogowski makes (and Stolper and Samuelson did before him) is that the theory of comparative advantage tells us that the winners from trade gain more than the losers lose, which makes it possible in principle to compensate the losers and have everyone be better off. But he also argued that those who benefit economically from trade will see their political power increase, something that has certainly been borne out in the United States in the more than 20 years since his book was published. This makes it less likely that such compensation will occur, and we certainly haven't seen any policy in the U.S. that comes close to making everyone better off as a result of trade.
One small bit of comfort comes from Paul Krugman's book The Conscience of a Liberal (pp. 262-3). He provides us some reason to think that the Stolper-Samuelson Theorem isn't necessarily destiny, as he shows that the United State and Canada, two countries with the same factor endowments as each other, have distinctive differences in political outcomes, particularly with regard to unionization rates.
Overall, unfortunately, it looks like the answer to today's question is clear: freer trade has harmed, and is harming, the American middle class. But globalization is more than trade, and I will continue to analyze other elements of globalization in my next few posts.
In some circles, one is likely to see a variant of the claim that "everybody" is better off because of freer trade. Even according to the most mainstream economic theory, this is simply false. The workhorse theory for determining the distributional effects of trade (i.e., who wins and who loses) is called the Stolper-Samuelson Theorem, first enunciated in an article by Wolfgang Stolper and Paul Samuelson in 1941.
To understand this theory, you need to know that economists think about national economies in terms of the amount of land, labor, and capital they have compared to all other countries in the world. These "factors of production" can be in relatively high supply compared to the rest of the world, in which case they are referred to as "abundant," or in relatively low supply compared to the rest of the world, in which case we call them "scarce."
The theorem can be stated in quite simple terms, but its consequences are not at all simple: As trade expands, owners of abundant factors of production benefit, and owners of scarce factors of production are harmed. Here, "benefit" means their real income increases, while "harmed" means their real income decreases.
Remember, trade can expand for two main reasons. First technological innovations can reduce the cost of transportation, making it first possible, then cheaper, to send goods long distances. For example, political scientist Ronald Rogowski, in his great book Commerce and Coalitions shows how the introduction of the steamboat made it possible to export North American wheat to Western Europe, displacing wheat from Eastern Europe. Second, policy changes like the North American Free Trade Agreement (NAFTA) or the trade agreements embodying the World Trade Organization (WTO) reduce or eliminate costly barriers to trade and lead to its expansion.
The grain example helps show why trade creates winners and losers. The Midwest U.S. and Canadian Prairie provinces are a gigantic breadbasket made possible by low population density, which implies abundant land and scarce labor. Expanding trade gave these farmers new markets and higher incomes. In much more densely populated Europe, the reverse is true: labor is abundant and land is scarce. As a result, expanding trade in grains meant more import competition and lower income for European farmers..
Fast forward to today and we can ask what U.S. factor endowments are currently. As a rich country internationally, the United States is necessarily a capital abundant country. As a comparatively low population density country, it is land abundant but labor scarce. The answer is to our initial question is then quite clear: expanding trade is harmful to U.S. workers because imports of labor-intensive products and services from abroad create competition for American workers, reducing their real wages. As I have discussed before, U.S. real wages have remained below their peak for 39 straight years, just as the Stolper-Samuelson Theorem would predict.
What about all the cheap goods we now buy at Wal-Mart? It doesn't change this story at all, because the lower price of imported goods is already reflected in the inflation rate we use to calculate real wages.
Rogowski's book also argues that we can expect certain pattens of political coalitions to form, with the winners from trade on one side and the losers on the other. NAFTA illustrated this well, with capital and agriculture generally in favor of the agreement (minus a few small specialty agricultural products like oranges), while labor was strongly opposed. And of course, this only helps us understand economic reasons for support or opposition to trade agreements; for non-economic reasons such as the environment, we have to look elsewhere. Although beyond the scope of this post, Rogowski's analysis of the entire world through phases of rising and falling trade (i.e., the Great Depression) lends strong credence to his claims. You should definitely read his book sometime.
Economists are divided over how big this effect is. In the 1990s, when I first started teaching, the most common view of economists was that technological change was the driver increasing the premium for high skilled labor while reducing wages for low-skilled labor. Adrian Wood's 1994 book, North-South Trade, Employment, and Inequality, argued that trade was in fact the main culprit, (a good, ungated analysis is Richard Freeman's "Are Your Wages Set in Beijing?"). Although this met with a lot of resistance at the time, Wood's view has gained a lot of traction among economists based on developments over the last 15 or so years. Paul Krugman, a particularly noteworthy example due to his Nobel prize, has gone from being a fanatic adherent of free trade to someone who sees trade as a big problem, though even today he is not quite willing to pull the plug on free trade.
One important point Rogowski makes (and Stolper and Samuelson did before him) is that the theory of comparative advantage tells us that the winners from trade gain more than the losers lose, which makes it possible in principle to compensate the losers and have everyone be better off. But he also argued that those who benefit economically from trade will see their political power increase, something that has certainly been borne out in the United States in the more than 20 years since his book was published. This makes it less likely that such compensation will occur, and we certainly haven't seen any policy in the U.S. that comes close to making everyone better off as a result of trade.
One small bit of comfort comes from Paul Krugman's book The Conscience of a Liberal (pp. 262-3). He provides us some reason to think that the Stolper-Samuelson Theorem isn't necessarily destiny, as he shows that the United State and Canada, two countries with the same factor endowments as each other, have distinctive differences in political outcomes, particularly with regard to unionization rates.
Overall, unfortunately, it looks like the answer to today's question is clear: freer trade has harmed, and is harming, the American middle class. But globalization is more than trade, and I will continue to analyze other elements of globalization in my next few posts.
Sunday, June 3, 2012
New Report Highlights Flaws of North Carolina Mega-Incentives
My new report for the North Carolina Budget and Tax Center, Special Deals, Special Problems--An Analysis of North Carolina's Legislature-Approved Economic Development Incentives, has just been published. It covers a range of issues I've emphasized here before as well as some basic considerations reporters really need to pay more attention to.
North Carolina has some of the best economic development practices in the country, in terms of online transparency, performance requirements, use of clawbacks for non-performance by companies, sunset clauses for tax expenditures, hard caps for many tax credit programs (see my report on these points), etc. The state publishes an economic development inventory I consider to be of very high quality and consistent with international definitions of a subsidy. The most recent edition shows that in the 2008-9 fiscal year the state spent about $1.2 billion on economic development, enough to hire 24,000 people at $50,000 a year in wages and benefits.
At the same time, however, the state has persistently had problems in overvaluing potential investments and consequently offering wildly excessive subsidies for them. The best known case is Dell in 2004, when Virginia offered the company a $37 million incentive package, while the state and local bid from North Carolina came to almost $300 million on a nominal basis ($174 million present value). Other deals discussed in the report are Google ($260 million nominal value, $140 million present value), Apple ($321 million over 30 years nominal value, no present value calculation available), and a provision in a 2011 special incentives bill to allow Alex Lee Inc. to keep $2 million it should have forfeited for not keeping job promises. This last case illustrates how special legislative deals weaken the state's performance requirements; this case will make future companies think that there may be no penalty for non-performance.
Reporters take note! This publication describes useful techniques for comparing the size of incentive packages regardless of project size or payout period of the incentive. From the European Union I borrow the term "aid intensity," which measures the size of the incentive relative to the amount of the investment or the number of jobs created. The idea is that a $1 million incentive would be large for a call center but a rounding error for an automobile assembly plant. As a result, we need a standardized way of comparing incentives.
While in this country one can sometimes find cost per job analyzed for some subsidy packages, the EU actually uses the subsidy/investment metric as its primary measure of aid intensity. In my last post I discussed a mall redevelopment which could conceivably have an aid intensity of 96%. For comparison purposes, we should note that the highest aid intensity allowed for large firms anywhere in the European Union, is 50%, and that is only allowed in the poorest regions of the EU, mainly in eastern Europe. (Richer regions have lower allowable maxima.) A region's maximum is cut by half for large projects over 50 million euro, and by 66% for spending over 100 million euro.
The other important concept is present value, a familiar one to accountants and economists, but not widely understood among the general public. The basic idea is simple: receiving a dollar today is worth more than receiving a dollar next year, which is worth more than receiving a dollar in two years, etc. Since incentive packages can pay out immediately (with a cash grant) or over a period of 30 or more years, we need to use present value to properly compare the size of incentives with different payout periods. This requires finding a a "discount rate" by which to reduce future payments. We then use the present value as the numerator in calculating aid intensity to be able to compare across different sizes of projects.
Using Google as an example, this $600 million project will receive $260 million over 30 years and create 210 jobs. As mentioned above, this is its nominal cost, before discounting the future dollars. Following the practice of a 1990s study by the Organization for Economic Cooperation and Development to compare subsidies among its then 23 members, I used a discount rate equal to the 10-year Treasury bond yield to come up with a present value of $140.6 million. Then the aid intensity is $140.6 million/$600 million, or 23%, and the cost per job at present value is $669,489. We can then use these two measures of aid intensity to compare the incentive to that given for other projects and inform our judgment of whether it was a better or worse deal than other states have made, in the current context where states make such deals all the time. Of course, I believe there should be limits placed on state and local governments so we can sharply reduce net incentive spending, which has few national benefits--but that is a long time in the future.
North Carolina provides an intriguing case study because it does so much right in economic development, but it makes special deals outside its statutory incentive programs. The result is high costs and weakened bargaining position in the future. It's a case we can learn a lot from.
North Carolina has some of the best economic development practices in the country, in terms of online transparency, performance requirements, use of clawbacks for non-performance by companies, sunset clauses for tax expenditures, hard caps for many tax credit programs (see my report on these points), etc. The state publishes an economic development inventory I consider to be of very high quality and consistent with international definitions of a subsidy. The most recent edition shows that in the 2008-9 fiscal year the state spent about $1.2 billion on economic development, enough to hire 24,000 people at $50,000 a year in wages and benefits.
At the same time, however, the state has persistently had problems in overvaluing potential investments and consequently offering wildly excessive subsidies for them. The best known case is Dell in 2004, when Virginia offered the company a $37 million incentive package, while the state and local bid from North Carolina came to almost $300 million on a nominal basis ($174 million present value). Other deals discussed in the report are Google ($260 million nominal value, $140 million present value), Apple ($321 million over 30 years nominal value, no present value calculation available), and a provision in a 2011 special incentives bill to allow Alex Lee Inc. to keep $2 million it should have forfeited for not keeping job promises. This last case illustrates how special legislative deals weaken the state's performance requirements; this case will make future companies think that there may be no penalty for non-performance.
Reporters take note! This publication describes useful techniques for comparing the size of incentive packages regardless of project size or payout period of the incentive. From the European Union I borrow the term "aid intensity," which measures the size of the incentive relative to the amount of the investment or the number of jobs created. The idea is that a $1 million incentive would be large for a call center but a rounding error for an automobile assembly plant. As a result, we need a standardized way of comparing incentives.
While in this country one can sometimes find cost per job analyzed for some subsidy packages, the EU actually uses the subsidy/investment metric as its primary measure of aid intensity. In my last post I discussed a mall redevelopment which could conceivably have an aid intensity of 96%. For comparison purposes, we should note that the highest aid intensity allowed for large firms anywhere in the European Union, is 50%, and that is only allowed in the poorest regions of the EU, mainly in eastern Europe. (Richer regions have lower allowable maxima.) A region's maximum is cut by half for large projects over 50 million euro, and by 66% for spending over 100 million euro.
The other important concept is present value, a familiar one to accountants and economists, but not widely understood among the general public. The basic idea is simple: receiving a dollar today is worth more than receiving a dollar next year, which is worth more than receiving a dollar in two years, etc. Since incentive packages can pay out immediately (with a cash grant) or over a period of 30 or more years, we need to use present value to properly compare the size of incentives with different payout periods. This requires finding a a "discount rate" by which to reduce future payments. We then use the present value as the numerator in calculating aid intensity to be able to compare across different sizes of projects.
Using Google as an example, this $600 million project will receive $260 million over 30 years and create 210 jobs. As mentioned above, this is its nominal cost, before discounting the future dollars. Following the practice of a 1990s study by the Organization for Economic Cooperation and Development to compare subsidies among its then 23 members, I used a discount rate equal to the 10-year Treasury bond yield to come up with a present value of $140.6 million. Then the aid intensity is $140.6 million/$600 million, or 23%, and the cost per job at present value is $669,489. We can then use these two measures of aid intensity to compare the incentive to that given for other projects and inform our judgment of whether it was a better or worse deal than other states have made, in the current context where states make such deals all the time. Of course, I believe there should be limits placed on state and local governments so we can sharply reduce net incentive spending, which has few national benefits--but that is a long time in the future.
North Carolina provides an intriguing case study because it does so much right in economic development, but it makes special deals outside its statutory incentive programs. The result is high costs and weakened bargaining position in the future. It's a case we can learn a lot from.
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