Wednesday, January 31, 2018

9 hour railway station

China builds a railway station in 9 hours (HT Marginal Revolution).

Yes, it's basically a propaganda video, but interesting nonetheless as a reflection on infrastructure.  The video does not say how long China spent on environmental review -- did it disturb wetlands, threaten various species, what's it's carbon footprint -- legal review -- is it paying prevalining union wages, was it bid with proper female and minority headed construction company set asides -- did it have community input, consistency with planning targets and so on. I doubt it was the oh, 10 years or so that takes in the US.

To be clear, I am not saying all that is useless. China has awful pollution,  and our reviews accomplish something.  China doesn't bother with the niceties of private property ownership, eminent domain proceedings, and legal challenges when they want to build a railway. These don't just triple or more the cost of projects, send vast sums of money to well-connected companies and lawyers and lobbyists, and delay projects for decades. But they also have that effect.

It's also interesting as a pin factory visit.  With that many people on a job, I would have thought they would be getting in each other's way. This video seems to deny the Q theory of investment! Some are standing, but a remarkable number are working hard. Of course, the video is edited.

When I watch US infrastructure projects, I see a lot of people standing around or "supervising" the one poor sob who is actually doing the work. That ratio seems a lot lower here.

There are a lot of machines.  The days of China substituting lots and lots of labor for capital are gone. The Chinese have taken Milton Friedman's advice. (On a visit to a dam, Friedman noticed people using shovels. He asked why they didn't use bulldozers. The answer was to give more people employment. Friedman responded, why then don't you make them use spoons?) This is not a new observation, but the video is a good reminder from afar.

Friday, January 26, 2018

News comments

The tariff and the wall were the big news this week, with some lessons for looming infrastructure.

The Tariff

30% on solar cells, 20-50% on washing machines. Since the ill effects of tariffs have been know for, oh, about 250 years, said again eloquently by the Wall Street Journal in Trump starts his trade war,  Let me try to offer some comments beyond the usual economist response -- comparative advantage, trade must balance, follow the money anything that goes overseas must come back, imported products are inputs too, solar cell installers need jobs too, blahdah blahdah blahdah.

Washing machines, a device unknown to the inside the beltway types, is how the rest of us clean clothes. So raising the price of washing machines is one more little sucker punch to people who wash their own clothes.

Solar panels are supposed to save the planet. Our government already subsidizes them heavily via tax deductions, credits, Solyndras, renewable mandates, and so on, with the purpose of lowering carbon emissions. If that is the purpose, then we want the cheapest panels around to compete with fossil fuels. If that means made in Malaysia, great. The planet does not care where they are made.

If the Chinese government wants to tax its citizens to send us artificially cheap solar panels, we should thank them for their generosity in helping us to save the planet. It's absolutely hilarious to see complaints that China is subsidizing its solar cell industry so merits retaliation, given how much subsidy they receive here.

Yet even Al Gore agrees that the tariff is a good idea and wants solar cells made in the US.

What's going on? I think there is a good lesson in political economy. Once a government starts subsidizing something, everyone lines up at the trough. If taxpayers are going to be on the hook, then every interest wants its share. So potentially sensible carbon policy ends up as one more boondoggle.

Related, this week I saw the brilliant post Solar panels cost twice as much to install in the US as in Australia. (HT marginal revolution.) The answer, as usual in what Mark Steyn calls the Republic of Paperwork, is the paperwork.

I loved the flowchart on what it takes to get solar installed. In particular, you see here a real person who has really done it. The rules just say ``get a permit'' but the actual process, laid out in the picture, takes many trips back and forth and negotiations with the permit granters, all on someone's paid time.

This is a lovely detailed example of a larger question -- just what is the cost of regulation? I've been having this back and forth with some liberal economist friends, who pooh pooh the idea that regulations cost a lot. And here the official paperwork act disclosures, pages of the federal register, and so on would not add up to much. Yet, it does add up, to double. And installing residential solar is pretty simple, and something governments say they want. If this example scales, than GDP is half what it could be with a simper regulatory system.

Back to tariffs. Just why is it so hard to grasp that tariffs are a bad idea? Well, it must be because it is hard, and illustrates perhaps why economics really is useful, and why "business experience" is not generally a good qualification for policy. Anything that reduces competition and drives prices up is good for an individual business. Business leaders know this. Take that business leader to Washington and he or she will quickly conclude that what's good for my business is good for yours. A tariff on everything! Reduce harmful competition everywhere! We call it the fallacy of composition. What is good for one business is not good for all businesses, because that one business is profiting at the expense of everyone else. Business or banking experience does not generalize to good policy.

(Update:) But it's not just the administration that is to blame. The trade law that the administration applies specifies that tariffs are to be imposed if  domestic companies are hurt by imports. That's an absurd blatantly protectionist standard. We have relied for years on the trust that  administrations would not be so stupid as to actually enforce the law as written."Well, if one comes along that is, perhaps it's time to rewrite the law. If the law said only that tariffs are imposed if american consumers are hurt by imports, or even the american economy as a whole is hurt by imports, much of this mischief would go away.

Congress can, and should fix this. Perhaps as with DACA, the Trump Administration actually executing the law as written by Congress will spur Congress to fix its absurd law. Get rid of the Jones act (all shipments to/from American ports on US built, operated, and staffed ships) while you're at it.

The Wall and infrastructure

A deal seems to be emerging, one that I advanced almost as a joke at faculty lunches. But it may happen. Give him his Wall, and get pretty much whatever you want in return.

From Trump's immigration offer
White House floated a proposal on Capitol Hill late Thursday that would offer legalization and a path to citizenship for some 800,000 so-called Dreamers in return for funding for President Trump’s wall at the Mexico-U.S. border and other changes to U.S. immigration law.
And arguments for taking the offer. From William A. Galston (One of WSJ's liberals)
In all, only 37% of Americans think adding a substantially expanded wall on the southern border is a good idea. But we have reached a point at which the sentiments of the majority are politically secondary. It is unimaginable that Mr. Trump will break faith with his supporters on this matter. Any deal, broad or narrow, will have to acknowledge this reality.
My view on this: 

Yes, the Wall is a bad idea on just about every policy-wonky (that's me) metric. What is it supposed to do? I guess, raise the wages of low-skilled american workers who compete with the kinds of immigrants who would cross a desert on foot illegally, and improve security, blocking the wave of Islamic terrorists who fly to Mexico, cross the border on foot, and stop to pick vegetables for a few years on the way to bombing things.  If you're worried about security, we currently spend $13 billion per year on border patrol, and $6 billion on the entire FBI. Another $25 billion on the border does not seem the crying need. (Though the FBI does seem to have time on its hands lately.) On either grounds, the wall is a colossal cost-benefit waste. 

But that is not the point. As Galston points out, the Wall is symbolic. President Trump campaigned on it, and wants very much to deliver some symbolic gesture to his supporters to say "I'm building the wall." Congressional democrats, centrist and never-Trump republicans can get pretty much whatever they want on policy if they will let the man have his symbolic victory. 

So that is the question for our time: Can our politicians let the other side have a purely symbolic victory, in exchange for a large policy victory? Or is denying the President a symbolic victory so important that no quiet policy victory is worth the price? 

My main new thought on this, which encourages me to agree with Galston -- take the deal -- is this: The Wall will never be built. 

I live in California, in which our governor, 8 years of the Obama administration, and the democratic super-marjority in the state legislature, has been devoted to building a high speed train. To my mind, it is a boondoggle equal to the wall, but ignore that -- the entire political power structure in California and the Federal government has been behind this thing for 10 years. And yet not one mile of the line yet exists. It took the Union pacific 4 years to build the transcontinental railroad from Sacramento to Utah, over the Donner pass, by hand. 

Such is infrastructure in the US today.

Can you imagine what will happen with the Wall, even if Congress appropriates $25 billion? It will instantly be in court. Start with environmental challenges. It will of course interrupt the migration path of the Eastern Arizona accelerati incredibilus. It will disrupt holy native lands and archeological sites. Mexicans are largely catholic, so suits will claim the wall is religious discrimination. Heck, infrastructure has to pass cost benefit tests, and good luck with that one.  The contracting was improperly done. State attorney generals busy suing the Trump administration will quickly add to this one.

As with solar cells, as with the second avenue subway, as with the high speed train, as with the Keystone pipeline, good luck building any infrastructure in America today -- and especially good luck building one that makes little sense and is a highly politicized hot potato.

If they gave the President all he wanted, tomorrow, this thing would not be out of court for decades, long after a democratic congress or administration kills it.

They can afford to give him a symbolic victory. If, well, they decide that they can afford politically to give him a symbolic victory. For that is all it will ever be. And frankly, even $25 billion of waste to fix immigration would not be a bad tradeoff. The waste to our country in the current immigration system is on the back of my envelope orders of magnitude greater than that.

Looking forward to infrastructure. 

As reported in the Wall Street Journal
U.S. Chamber of Commerce President Thomas Donohue last week was nearing the end of a speech urging Congress to rebuild the nation’s infrastructure when he offered another option: At least make it easier to build things when the money can be found.
“If we just fix the permitting thing this year, you would create an extraordinary enthusiasm about moving forward,” Mr. Donohue said,  
...Mr. Trump and his aides have cited studies suggesting that environmental review can often take a decade,  
 A Government Accountability Office study of the environmental review process in 2014 cited third-party estimates that reviews average 4.6 years. Outside experts say actual review times vary widely based on the scope of a project and other environmental factors.
If the average review time for, I guess, building a freeway cloverleaf, is 4.6 years, and often takes a decade, this makes my point -- don't worry about the wall!

The point of the article was that the Administration would like this to be reduced to two years. Good luck with that. The other point of the article is environmental groups lining up to fight any streamlining of the permitting process. Strategic delay rather than policy outcome is vital to them, apparently.

But the administration is right. If infrastructure is going to be built in the US, it strikes me that reforming the process for building infrastructure is the key. If home zoning and inspection requirements double the cost of residential solar cells, if prevailing wage, union work rules, and a hundred other impediments mean that subways cost billions of dollars per mile, many multiples of what they cost in France let alone China, and if permits take decades, and billions more of consultant and legal work, our problem with infrastructure is not finding the money to pay for it.

In the meantime, I offer a final suggestion to the Trump team: Offer to build a high speed train along the border instead! Just forget to put in any crossings.

(Update: I am just now reminded by a story on NPR that President Trump had, as a candidate, suggested coating the wall in solar cells. Truth is stranger than fiction.)

Friday, January 12, 2018

Right answer, wrong reason

Sometimes it is not good to get to the right answer for the wrong reasons. This thought comes to mind reading to recent WSJ articles, Walmart raises wages and Tax reform releases the bulls.
"Wal-Mart Stores Inc. said it would raise starting hourly pay to $11 for all its U.S. employees and distribute one-time bonuses, doling out some of the windfall it expects from the U.S. tax overhaul as it competes for store workers in a tight labor market." 
"Only 15 market days have passed since the Senate passed the tax bill, ensuring it would become law, and Wall Street analysts have already upgraded their consensus forward earnings for the S&P 500 by an unprecedented 4.6%. Is it any wonder that stocks have rallied?"
Two narratives compete for how corporate tax cuts might spur the economy: cashflows vs. incentives.  Washington and most pundits like to talk about cashflows, "trickle-down" if you will. Corporations (existing, large) don't have to give so much money to the government. So perhaps they will benevolently pass it on to their workers -- or perhaps political pressure is important to force them to this magnanimity.

Economists see the world through incentives. In this narrative, a lower corporate tax rate increases the incentive to invest, broadly construed -- to buy new investment goods, sure, but also to invest in worker skills, organizational improvements, new opportunities, and for new companies to spring up. That investment raises the productivity of labor and hence demand for labor. Competing to hire good workers, companies drive up wages. But companies no more voluntarily give workers bonuses out of extra cash than they voluntarily send money to the electric company on top of the bill.

National Fellows

Are you a young economist or other professor, and would you like to spend a year at Stanford with no teaching? The Hoover National Fellows program may be for you. Information and application instructions here. It's ideal for someone from a few years after PhD to a few years after tenure who wants a break to bring a research project to fruition.  Hoover prefers research with policy implications and people who will benefit from and contribute to the intellectual environment here.  Applications due Jan 30.

Tuesday, January 2, 2018

Property tax update

Every now again in writing a blog one puts down an idea that is not only wrong, but pretty obviously wrong if one had stopped to think about 10 minutes about it. So it is with the idea I floated on my last post that property taxes are progressive.

Morris Davis sends along the following data from the current population survey.

No, Martha (John) property taxes are not progressive, and they're not even flat, and not even in California where there is such a thing as a $10 million dollar house. (In other states you might be pressed to spend that much money even if you could.) People with lower incomes spend a larger fraction of income on housing, and so pay more property taxes as a function of income. Mo says this fact is not commonly recognized when assessing the progressivity of taxes.

SALT margins

I think most of the debate misses an important point about the state and local tax deduction -- incentives.

Suppose you are in the top, (roughly) 40% marginal federal tax bracket.  If you pay an extra $100 in state taxes, you deduct $100 from income, and pay $40 less in federal taxes. So, you really only pay $60 in state taxes. The federal government effectively transfers $40 to the state from taxpayers in other states.

That's a big incentive to raise money as deductible taxes from high-bracket tax payers! This incentive doesn't work if the state raises taxes from lower bracket taxpayers.

California's tax system, for example, seems to respond heartily to this incentive. California's income tax rate is highly progressive, topping out at 13.3%.  As reported in the Sacramento Bee
Nearly 90 percent of the money [income tax receipts]  comes from one-fifth of the taxpayers – those making $91,000...Forty-five percent of the state’s income tax money comes from the top 1 percent of filers – those with adjusted gross income of at least $501,000.
and, therefore, in the highest Federal tax bracket, and also likely to itemize deductions.