Saturday, August 11, 2018

Links: trade, housing, taxes

Three interesting links caught my attention today:

1) Prefab housing in Berkeley and Alex Tabarrok Commentary on Marginal Revolution.
Imagine a four-story apartment building going up in four days, and from steel. It happened in Berkeley, a city known for its glacial progress in building housing. 
Four days? Well, not really
The modules were stacked on a conventional foundation. Electricity, plumbing, the roof, landscaping and other infrastructure were added.
That didn't take 4 days. And
The project, initially approved by the city in 2010 as a hotel, then re-approved in 2015 as studio apartments, 
So, really, 10+ years! (In my personal one data point, getting permits can take as long as building.)

Housing should be manufactured. As Tabarrok points out, it is one place where productivity has not improved much. I gather Ikea is now moving in to manufacture housing (I lost the link). Economies of scale should make a big difference. Once Ikea does to housing what they did to the Poang chair, steadily refining it, they can bringing the price down a lot.

But, manufactured houses have to obey local building codes too, and planning review and design review, and inspections, and all the other little local obstacles. Getting a uniform code will be a big fight, but strikes me as necessary to reap those economies of scale.

The prefab houses are made in China, using steel. A bunch of obvious meditations follow.

As I understand it, we now have import taxes (tariffs) on raw steel from China, but not taxes on products made out of steel. Why does the Trump administration so obviously provide an incentive for manufacturing to move to China? I've read a lot of stories about keg manufacturers, steel locker manufacturers, and so on going out of business over this difference. Is there some part of trade law that I don't know about that forces this outcome, and forbids them to also tax steel content of imports?

It nicely illustrates the point, that if you don't let people come to the US, the capital can go there. Even homebuilding.

2) Greg Mankiw makes an excellent point about marginal tax rates.

Phil Gramm and Robert B. Eklund wrote a great WSJ oped pointing out that inequality in the US really is not as large as it seems, because most measures left out government transfers, even cash transfers. (They cite the CATO study by John F. Early.) Once you add transfers back in again, the US has a much flatter income distribution. We have a more progressive tax system than Europe, with no VAT and lower payroll tax rates, and we do a lot of income transfers.

Greg points out a clever implication of this fact. From the pre- and post-tax and transfer income distribution, we can measure the average marginal tax rate, including the loss of benefits due to program phase out with income:
The bottom quintile earned 2.2% of all earned income in 2013, but after adjusting for taxes and transfer payments, its share of spendable income rose to 12.9%... The second quintile’s share more than doubled, rising from 7% of earned income to 13.9% of spendable income. For the third quintile, middle-income Americans, the increase was much smaller, from 12.6% to 15.4%.
.. the effective marginal tax rate when a person moves from the bottom to the middle quintile is 1 - (15.4-12.9)/(12.6-2.2), or 76 percent.
76 percent! The average person in the lowest quintile of the income distribution who earns an extra dollar, gets to keep only 24 cents. Can you spot the disincentive to work, or get an education?

Greg says something about heterogeneity that I did not understand, but it strikes me that heterogeneity makes matters worse. Hetereogeneity means people are different. Some people are at a cliff: make one more dollar, lose medicaid or another service. Some people are not.

But if 76 percent on average means half the people face a 100% marginal tax rate and half face a 50% marginal tax rate, I think this means the overall disincentive effects are worse than if everyone faces 75% tax rate. In that circumstance half the people will not work at all. Sometimes in economics heterogeneity makes things worse, sometimes better. I think this is a case of worse, but I would be curious to know if there is a standard answer.

While we're on income transfers and disincentives, back to Berkeley
In lieu of providing affordable units on site, Kennedy will pay a fee to the city of Berkeley’s Affordable Housing Trust Fund, as required under the city’s affordable housing laws. The amount is around $500,000, he said. 
Someone needs to write an expose of "affordable housing" programs. Who gets them and how? And once in, disincentives to earn more money, or take a better job in another city must be immense.  It's also another hidden cross-subsidy driving up prices.

3) Back to trade, Tim Taylor the conversable economist has an excellent post on the Jones act. The Jones act is the law that requires all shipping between US ports to be on US made ships staffed by US merchant marines. (Tim builds on another Cato report by Colin Grabow, Inu Manak, and Daniel Ikenson.)

If you want evidence on whether protection makes an industry thrive, this is it
If susttained protection from foreign competition was a useful path to the highest levels of efficiency and cost-effectiveness, then US ship-building and shipping should be elite industries. But in fact, US ship-building and shipping--safely protected from competition-- have fallen far behind foreign competition, with negative costs and consequences that echo through the rest of the US economy--and probably diminish US national security, too. 
...After nearly a century of protection from foreign competition, costs of ship-building in the US are far above the international competition. 
"American-built coastal and feeder ships cost between $190 and $250 million, whereas the cost to build a similar vessel in a foreign shipyard is about $30 million. 
High shipping costs induce substitution
This shift away from water-based transportation to overland road and rail has a variety of costs, like greater congestion and wear-and-tear on the roads. It also has environmental costs like higher carbon emissions: 
Unsurprisingly, the high cost of shipping by water means that in the US, freight is instead shipped overland. Consider, for example, all the trucks and trains that run up and down the east coast or the west coast.  
A long time ago when I was a CEA junior staffer, I got to see a bright idea die. The idea: Let's allow the US to export oil from Alaska to Japan. (There was an oil export ban, part of the legacy of 1970s energy policies.) Then use the money to buy oil from Saudi Arabia to send to the east coast. It's the same thing as sending Alaskan oil to the east coast but much cheaper.  Everyone said great idea until the congressional liason said those ships from Alaska to the east coast are Jones act ships, and here is their list of threats if you do it. End of idea.

I hear even from formerly sensible correspondents now mad for tariffs that we need steel tariffs for national security, so we can fight WWII again, I guess. Well, the Jones act is a nice test case since much of its rationale is to keep a merchant marine going to staff all those liberty ships. Tim (and, really, Colin, Inu and Daniel) demolishes even the national security argument.
if that [national defense] is the goal, the Jones Act is sorely failing to accomplish it. Instead, the Navy can't afford the extra ships it wants, the number of available US civilian ships and the knowledgeable workers to run them is shrinking, and military operations have had to find ways to make use of foreign ships. Some anecdotes drive home the point: 
"When U.S. forces were deployed to Saudi Arabia during Operations Desert Shield and Desert Storm, a much larger share of their equipment and supplies was carried by foreign-flagged vessels (26.6 percent) than U.S.-flagged commercial vessels (12.7 percent). Only one U.S.-flagged ship was Jones Act compliant. In fact, the shipping situation was so desperate that on two occasions the United States requested transport ships from the Soviet Union and was rejected both times. ... At the time, Vice Admiral Paul Butcher, who was then deputy commander of the U.S. Transportation Command, remarked that without the availability of foreign-flag sealift, `It would have taken us three more months to complete the sealift ourselves.' ... 
As with steel, if the goal is national defense, let the defense department ask for appropriations to staff a mothball merchant marine, don't force a hidden cross subsidy into the price of everything else.


  1. The nutty huge marginal tax rates makes the case for Friedman's lump sum income - for all.

  2. CATO says that past restrictions on Canadian softwood lumber cost American consumers over a million dollars per American job "saved" PER YEAR. I have seen an estimate in the same ball park for Obama's restrictions on imports of tires.

    It will be interesting to see future estimates of the cost of the current round of restrictions on steel, aluminum and Canadian lumber.

    1. I'm amazed the number is positive, let alone the millions. It must be a million dollars per job saved in the protected industries. More jobs are lost in the unprotected industries, and thus the country as a whole. As politically attractive as it is though, economists should not count jobs. Jobs = number of people willing to work, at least in the longish run where this discussion is. The issue is wages, and the less efficient the government makes the economy, the lower overall real wages must be.

    2. "It must be a million dollars per job saved in the protected industries."

      Yes, that is what I meant.

    3. And even worse, the jobs "saved" were not enough to accomplish the stated goal, so the costs were borne for nothing.

      Look, it'd be one thing if we just banned Canadian lumber (and lumber products) altogether. The economic consequences would have been dire, but at least the U.S. lumber dependent regions would have remained economically vibrant. While I personally view that as a bad trade, at least there is some identifiable upside.

      What we did instead was impose just enough in the way of restrictions to ensure we "only" lose 1 out of 8 lumber jobs each decade. But this was every bit as unsustainable as losing all the jobs for logging communities, so what was accomplished? Arguably slowing the death spiral allowed some people to escape logging regions at a lower transition cost, but perhaps "ripping the band-aid" would have forced those communities to pivot into a new industry while there was still time (i.e., before all the young/educated, hard working people left).

      I do sympathize -- emotionally, if not economically -- with those who want to impose tariffs to save particular types of jobs that certain regions have built themselves around. What I cannot understand though is tariffs set at a level just large enough to ensure those regions die a slow death anyway. That seems the worst of both worlds.

    4. "What we did instead was impose just enough in the way of restrictions to ensure we "only" lose 1 out of 8 lumber jobs each decade"

      Based on what I see in the forest industry, productivity has been growing by about 3% per year for decades so the jobs will be lost even if the American harvest stays constant.

  3. I'm confused by Mankiw's math. The mean income of the bottom quintile is about $15,000. The mean income the middle quintile is about $60,000. How is it a marginal tax going from $15,000 to $60,000? Why isn't the marginal rate the tax on going from $15,000 to $15,001? Calculating a marginal rate on the different between the quintiles seems all together strange. What am I missing?

  4. "The bottom quintile ... its share of spendable income rose to 12.9%... The second quintile’s share ...[was] 13.9% of spendable income."

    Those numbers seem inherently implausible. They are too high. Maybe the devil is in the definition of "spendable income" that Mankiw is using.

    1. Why do you think they are too high? Sort of hard for anyone to clarify without knowing what disconnect it is that you see...

  5. "if you don't let people come to the US"

    Believe it or don't, and contrary to popular belief, the US does actually admit immigrants. In 2017, the United States hosted 49.8 million international immigrants, more than any other country. Saudi Arabia was second with 12.2 million. See figure 3 on page 6:

    Indeed, according to the Department of Homeland Security, approximately 264 thousand aliens obtained lawful permanent resident (LPR) status in the first quarter of Fiscal Year 2018 (FY18 Q1) alone. The US construction industry currently has about 260,000 job openings.

    I have no idea how many construction workers enter the US on extended kinship visas or through the lottery based upon national origin, but it would be hard to argue that these are superiod methods of addressing labor shortages as compared to the point-based immigration system that President Trump has proposed and is widely used throughout the world.

    1. "United States hosted 49.8 million international immigrants"

      But that almost certainly includes people who came to the USA in the 40s, 50s and 60s.


  6. "Toyota Throws More Weight Behind Its Homes Unit Steel-Frame Houses" By John Murphy

    "Why Are Japanese Homes Disposable?" by Greg Rosalsky February 27, 2014

    "In most countries, houses get more valuable over time. In Japan, a new buyer will often bulldoze the home. ... It turns out that half of all homes in Japan are demolished within 38 years — compared to 100 years in the U.S. There is virtually no market for pre-owned homes in Japan, and 60 percent of all homes were built after 1980. In Jiro Yoshida’s estimation, while land continues to hold value, physical homes become worthless within 30 years. Other studies have shown this to happen in as little as 15 years."

  7. Please do an analysis of the affordable housing burden. Add parks fees and the long list of taxes (like construction tax) and union/ prevailing wage requirements and costs of public street/ utility improvements. There is no housing crisis, the state and cities of California aimed at limiting construction of housing via growth control and greenlines. Combine the cost issues with land planning issue...equals our current condition and the massive wealth transfer you mention in the article.

  8. When I was the energy economist at CEA, shortly after John left, Bill Niskanen and I pushed (and had the State Department and Treasury on our side) to allow Alaskan oil to be sold to Japan. The nice thing is that it would not have afoul of the Jones Act because it would not have been shipped to a port in the United States. We didn't succeed.

    1. When we were both much younger... I should have clarified my story. The objection was from Jones-act American shippers and most importantly the US merchant marine, who understood perfectly that shipping Alaskan Oil to Japan would mean much less Jones-act US shipping.

    2. Exactly. I remember Boyden Gray, representing VEEP George H.W. Bush, weighing in heavily on the side of the union. His side prevailed.

    3. Darn those devious republic free marketers!


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