Category: Current Affairs

Open the Skies!

Here’s a list of the world’s top ten airlines:

  1. Qatar Airways
  2. Singapore Airlines
  3. Emirates
  4. ANA (All Nippon Airways)
  5. Qantas Airways
  6. Japan Airlines
  7. Turkish Airlines
  8. Air France
  9. Korean Air
  10. Swiss International Air Lines

The airlines in this list have at least two things in common: None of world’s best airlines are US owned and none of them are allowed to operate domestically in the United States. The two common elements are related because so-called “cabotage laws” prohibit foreign airlines from serving domestic travelers.

Imagine what international travel would be like if you could only fly on a US owned airline? Ok it’s not that hard to imagine. Restricting international flights to domestic airlines would make international travel much more expensive and more inconvenient. The US State Department rightly lauds the Open Skies Agreements that have brought competition to international flights:

Since 1992 the United States has pursued an “Open Skies” policy designed to eliminate government intervention in airline decision-making about routes, capacity, and pricing in international markets…Open Skies agreements expand cooperative marketing opportunities between airlines, liberalize charter regulations, improve flexibility for airline operations, and commit both governments to high standards of safety and security.  They are pro-consumer, pro-competition, and pro-growth, and facilitate countless new cultural links worldwide.

True! But US domestic flights fly on Closed Skies. Europe has opened up competition to all European airlines. Indeed, Europe is also substantially open to US carriers, but the US is closed to foreign carriers for domestic flights. Cabotage laws are, in effect, a Jones Act for the airlines.

In an good review, Scott Lincicome summarizes:

Europe’s deregulatory experiences—and our own—show that nixing cabotage restrictions would not only put additional downward pressure on fares but also likely improve route coverage and maybe even customer service.

Sadly swept from the headlines

Cost estimate, we hardly knew ye:

Joe Biden’s plan to cancel up to $20,000 in student loan debt for federal aid borrowers is expected to cost about $400 billion, according to the Congressional Budget Office...

About 95% of borrowers meet the criteria for forgiveness and about 45% of borrowers will have their balances completely wiped out, the CBO said.

Here is the full story.

The economy that is British

Risk of British default has not gone up.  Real interest rates are up.

To be clear, I don’t envy their current macroeconomic situation.  But again, the talk of how terrible this is seems much overblown to me.

Now you might be wondering how the five-year break even rates can be so well behaved.  Well, here is a dirty little secret: there is much less stimulus in the Truss plan than people are claiming.

I don’t mean to pick on Josh Barro, of whom I am a huge fan, but his pithy summary is so clear it allows me to summarize some of my disagreements on these issues.  Here is one excerpt from his Substack:

It’s a huge fiscal stimulus at exactly the wrong time. Truss is proposing over £160 billion of deficit-increasing policies over the next five years. To give you a sense of scale, since the US economy is approximately eight times the size of Britain’s, the equivalent would be if we implemented an additional $1.4 trillion, five-year stimulus package.

I agree this is expenditure, but by no means is all or even most of it “stimulus.”  As Josh notes, the energy price subsidies are the biggest part of this announced plan.  I am against that policy, but it is trying to absorb a contractionary shock rather than being stimulus per se.  The Truss plan is transferring much of that higher energy cost from the private sector to the public sector.  The real cost involved is mostly the preexisting problem from the higher cost of energy, which now is on the government’s books to an increasing degree.  Many people are speaking of that as “a cost of the Truss plan,” which it is in terms of nominal flows but not nearly as much in real resource terms (I would admit and indeed stress that the plan distorts relative prices, which is a big part of my objection to it).

That is probably one reason why the five-year break-even rates for the UK generally have been falling, not rising.

Then there are the tax cuts for the wealthy.  But those too are (mostly) not stimulus.  Dare I make a…Barrovian argument?  If you cut taxes, hold spending constant, and the tax cut recipients save most of that money, that satisfies the Barrovian neutrality theorem.  That also isn’t stimulus.  (Obviously government spending isn’t constant, but the main boost in spending, as discussed immediately above, is not itself net stimulus but rather a funny inefficient transfer that still leaves a net contractionary force partly in place, namely higher energy prices.)  You might object to the tax cut policy for distributional or other reasons, but you shouldn’t add it to “the stimulus pile.”  At least not most of it.  Furthermore, you can buy this argument without accepting the (Robert) Barro analysis for more general settings.

Again, people think there is much more “stimulus” in the new plan than there really is.

NASA Reduces Existential Risk!

Congratulations to NASA for a direct hit on an asteroid with the goal of shifting its orbit and proving the feasibility of protecting the planet. A great step for mankind!

Tyler and I use asteroid defense as an example of a true public good in our textbook, Modern Principles. Here’s the video from our textbook. Not quite so dramatic but funnier!

The overreaction to the Truss macro policy

It has been extreme:

I know an unpopular economic policy when I see one. And the consensus among economists about the tax cuts and deregulations announced last week by UK Prime Minister Liz Truss is almost universally negative. Larry Summers noted: “I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.” Willem Buiter described it as “totally, totally nuts.” Paul Krugman is skeptical. As Jason Furman summed it up: “I’ve rarely seen an economic policy that is as uniformly panned by economic experts and financial markets.”

That is from my latest Bloomberg column.  I certainly can see reasons why one might oppose the plan, but the skies are not going to fall:

I see no evidence that the markets are beginning to doubt the UK’s ability to repay its debts. The UK, and earlier Great Britain, has arguably the best debt repayment history of all time (though it did default on some of its debts to Italian lenders in the 13th century). It even repaid its extensive debts from the Napoleonic Wars, though they were more than 200% of GDP.

There are different ways you might measure the marginal cost of UK government borrowing, but I don’t see any measure where it is high and under many measures it is negative in real terms.  Remember when people used to tell us this meant there was no major problem on the fiscal side?

I do criticize the Bank of England for not doing more to reign in inflation, plus the government should have coordinated better with the Bank.  And don’t forget this:

The Truss plan offers many admirable deregulations, including an attempt to get the UK economy to build more residential structures, as it so badly needs. It is difficult to say now just how successful this plan will be, but it is definitely a step in the right direction, as are most of the other deregulations, including lifting the ban on onshore wind generators. By calling the Truss plan the worst thing ever, commentators make it unlikely that these ideas will get the approbation they deserve.

Recommended.

Petrov Day!

Today we honor Stanislav Yevgrafovich Petrov whose calm actions and general humanity helped to prevent a nuclear war on September 26th, 1983. The NYTimes reported the events on Petrov’s death in 2017.

Early on the morning of Sept. 26, 1983, Stanislav Petrov helped prevent the outbreak of nuclear war.

A 44-year-old lieutenant colonel in the Soviet Air Defense Forces, he was a few hours into his shift as the duty officer at Serpukhov-15, the secret command center outside Moscow where the Soviet military monitored its early-warning satellites over the United States, when alarms went off.

Computers warned that five Minuteman intercontinental ballistic missiles had been launched from an American base.

“For 15 seconds, we were in a state of shock,” he later recalled. “We needed to understand, ‘What’s next?’ ”

The alarm sounded during one of the tensest periods in the Cold War. Three weeks earlier, the Soviets had shot down a Korean Air Lines commercial flight after it crossed into Soviet airspace, killing all 269 people on board, including a congressman from Georgia. President Ronald Reagan had rejected calls for freezing the arms race, declaring the Soviet Union an “evil empire.” The Soviet leader, Yuri V. Andropov, was obsessed by fears of an American attack.

Colonel Petrov was at a pivotal point in the decision-making chain. His superiors at the warning-system headquarters reported to the general staff of the Soviet military, which would consult with Mr. Andropov on launching a retaliatory attack.

After five nerve-racking minutes — electronic maps and screens were flashing as he held a phone in one hand and an intercom in the other, trying to absorb streams of incoming information — Colonel Petrov decided that the launch reports were probably a false alarm.

As he later explained, it was a gut decision, at best a “50-50” guess, based on his distrust of the early-warning system and the relative paucity of missiles that were launched.

Colonel Petrov died at 77 on May 19 in Fryazino, a Moscow suburb, where he lived alone on a pension. The death was not widely reported at the time. 

That was then, this is now…

Six days after Traphagen’s visit, U.S. Customs and Border Protection confirmed that work on the border wall that began under Trump is revving back up under Biden. In an online presentation Wednesday, CBP — the largest division of the Department of Homeland Security and home to the Border Patrol — detailed plans to address environmental damage brought on by the former president’s signature campaign promise and confirmed that the wall will remain a permanent fixture of the Southwest for generations to come.

Here is the full story, median voter theorem blah blah blah, via the wisdom of Garett Jones.

A White Supremacist Under Every Bed

AlphaHistory: The Red Scare (1947-57) was a decade-long period of intense anti-communist paranoia in the United States. During this period, millions of ordinary Americans were paralysed by an irrational fear of ‘Reds under the bed’ – the belief that thousands of communist agents and sympathisers were secretly living amongst them, plotting or waiting to overthrow the government.

Today, we live under the White Supremacist Scare, the irrational fear that there is a white supremacist under every bed. An email sent to the parents of University of Virginia students, for example, warns that “events have occurred on Grounds that have been cause for concern” and “the nature and timing of these events have caused some to speculate that they are linked or part of a larger pattern of racially motivated crimes…”. Here is one such event:

Last weekend, several community members reported that a flag bearing a symbol that looked either like a crown or an owl, depending on how the flag is held, was left on the grass near the Memorial to Enslaved Laborers. That same person also left a check for $888.88 that was ultimately delivered, as a surprise, to a student’s room, and the check had the same symbol that was on the flag. As rumors swirled around this bizarre set of events, some speculated that the flag represented a white supremacist organization and that the check was somehow a targeted act of intimidation against a student of color.

A crown! An owl! A check for $888.88! Heil Hitler! It seems odd that giving a check to someone is “targeting” a person of color. But no matter. Logic isn’t important here. What else could this mean but white supremacy? Bear in mind that this is a university where streaking the lawn is a tradition and there are weird numbers, signs, and sigils all over campus.

The UVA police and the FBI—yes, the FBI!—were called in to investigate (n.b. there isn’t even a hint of any crime!). And they got the culprit! Of course, what they discovered was entirely banal. Does it even matter?

“…we discovered that he is part of an organization focusing on micro-philanthropy that occasionally engages in random acts of kindness to current students.”

Moreover, the UVA administration is advertising their investigation, as if how seriously they took this potential threat is a credit to the organization instead of an embarrassment of poor judgment and fevered imagination.

The Truss economic plan

On Friday [as indeed it happened], Ms. Truss’ government is expected to announce a series of tax cuts, including cutting taxes for new home purchases as well as reversing planned hikes in the corporate tax and cutting a recent increase in payroll taxes. It will also abolish limits on bonuses for bankers and allow fracking for shale gas across the U.K.

The measures come in addition to a big government spending plan to cap household and corporate energy bills this winter that could cost the U.K. government roughly £100 billion, equivalent to about $113 billion, over the next two years.

The goal is to spur growth in an economy facing weak growth and high inflation, partly brought on by an energy price shock from higher natural-gas prices from the war in Ukraine, as well as a U.S.-style labor shortage. Absent the government bailouts, economists warned that many Britons would be unable to pay their energy bills this coming winter and thousands of companies would go broke…

The government is also planning a deregulation drive, in particular in the finance sector, to try to bolster London’s role as a business hub.

Taken together, the Truss plan is a bold but risky gamble that the payoff from higher growth will more than offset the risks from a big expansion in the government’s deficit and debt at a time of high inflation and rising interest rates, which will increase the cost of servicing the debt and could shake investors’ confidence in the U.K. economy and its currency.

Here is more from the WSJElsewhere Ryan Bourne covers the tax changes in more detail:

    • the recent 1.25 percent employer and employee national insurance tax rises have been reversed;
    • the basic rate of income tax would be cut from 20 percent to 19 percent;
    • the highest 45 percent marginal income tax rate would be abolished entirely, making 40 percent the top official marginal rate band;
    • stamp duty (the property transactions tax) on all transactions up to home values of £250,000 and £425,000 for first-time buyers has been scrapped;
    • the planned increase in the corporate profits tax has been abandoned (so maintaining it at 19 percent);
    • full and immediate expensing in the corporate tax code for the first £1 million invested in plant and machinery would be made permanent;
    • new investment zones would be introduced, in which there would be a 100 percent first year enhanced capital allowance relief for plant and machinery and building and structures relief of 20 percent per year.

And on regulation:

  • new investment zones would encompass streamlining existing planning applications (and these are potentially big zones, if the councils and authorities in discussions are any guide – the Greater London Authority, for example);
  • environmental reviews would be shortened and reformed;
  • childcare deregulation proposals (probably on staffing and occupational licensing) are forthcoming;
  • new planning reforms for housing are forthcoming;
  • the onshore wind generator ban will be lifted;
  • the fracking moratorium has been lifted;
  • the cap on bankers’ bonuses will be abandoned;
  • agricultural regulation will be reformed;
  • the sugar tax and lots of other anti-obesity regulations will be abandoned;
  • the arduous tax rules on contractors known as IR35 will be scrapped;
  • all future tax policy will be reviewed through this prism of simplification;
  • there will be an expansion of the number of welfare claimants who must submit to more intensive work coaching with the aim of increasing their hours

The FT details the negative reaction from UK bond, equity, and currency markets.  Furman and Buiter are very negative, Summers too.  In my view, these are mostly good policies, but how will all that borrowing go over?  And is the Bank of England up to doing the appropriate offsets?  I will cover these policies as they unfold…

Taxing Mechanical Engineers and Subsidizing Drama Majors

In The Student Loan Giveaway is Much Bigger Than You Think I argued that the Biden student loan plan would incentivize students to take on more debt and incentivize schools to raise tuition with most of the increased costs being passed on to taxpayers through generous income based repayment plans. Adam Looney at Brookings takes a deep dive into the IDR plan and concludes that it’s even worse than I thought. Here are some of Looney’s key points:

  • As recently as 2017, CBO projected that student loan borrowers would, on average, repay close to $1.11 per dollar they borrowed (including interest). Borrowing was often perceived to be the least favorable way to pay for college. But under the administration’s IDR proposal (and other regulatory changes), undergraduate borrowers who enroll in the plan might be expected to pay approximately $0.50 for each $1 borrowed—and some can reliably expect to pay zero. As a result, borrowing will be the best way to pay for college. If there’s a chance you’ll not need to repay all of the loan—and it’s likely that a majority of undergraduate students will be in that boat—it will be a financial no-brainer to take out the maximum student loan.
  • The data shows that roughly half of Americans with some college experience but not a BA would qualify for zero payments under the proposal, as would about 25% of BA graduates. However, the vast majority of students (including more than 80% of BA recipients) would qualify for reduced payments.
  •  [A] lot of student debt represents borrowing for living expenses, and thus a sizable share of the value of loans forgiven under the IDR proposal will be for such expenses…A graduate student at Columbia University can borrow $30,827 each year for living expenses, personal expenses, and other costs above and beyond how much they borrow for tuition. A significant number of those graduates can expect those borrowed amounts to be forgiven. That means that the federal government will pay twice as much to subsidize the rent of a Columbia graduate student than it will for a low-income individual under the Section 8 housing voucher program…

Looney agrees that the incentive to increase tuition will apply to some graduate and professional programs but he thinks there is less room to increase tuition at undergraduate programs because borrowing is capped (currently! AT) at fairly low rates. But he offers an even more plausible but disheartening scenario that takes us in exactly the wrong direction.

Because the IDR subsidy is based primarily on post-college earnings, programs that leave students without a degree or that don’t lead to a good job will get a larger subsidy. Students at good schools and high-return programs will be asked to repay their loans nearly in full. Want a free ride to college? You can have one, but only if you study cosmetology, liberal arts, or drama, preferably at a for-profit school. Want to be a nurse, an engineer, or major in computer science or math? You’ll have to pay full price (especially at the best programs in each field). This is a problem because most student outcomes—both bad and good—are highly predictable based on the quality, value, completion rate, and post-graduation earnings of the program attended. IDR can work if designed well, but this IDR imposed on the current U.S. system of higher education means programs and institutions with the worst outcomes and highest debts will accrue the largest subsidies.

Looney does a back of the envelope calculation and estimates that typical graduates in Mechanical Engineering will on average get a 0% subsidy but graduates in Music will get a 96% subsidy, in Drama a 99% subsidy and Masseuses a 100% subsidy on average. This of course is exactly the wrong approach. If we are going to subsidize, we should subsidize degrees with plausible positive spillovers not masseues.

The problem is not just the subsidy but the encouragement this gives to create low-value programs:

  • …institutions will have an incentive to create valueless programs and aggressively recruit students into those programs with promises they will be free under an IDR plan….The fact that a student can take a loan for living expenses (or even enroll in a program for purposes of taking out such a loan) makes the loan program easy to abuse. Some borrowers will use the loan system as an ATM, taking out student loans knowing they’ll qualify for forgiveness, and receiving the proceeds in cash, expecting not to repay the loan….I suspect that such abuses will be facilitated by predatory institutions.

Overall, the student loan program, as currently written, is looking to be one of the most costly, inefficient and unwise government programs of the 21st century. As I said in my first post, “fixing” the program is likely to drive ever more increasing intervention into higher education much as has happened with health care. My guess is that no one really thought this albatross through.

Nigeria facts of the day

On the supply side, dollar revenues from oil have plummeted because of massive theft, pushing down official daily production of crude to 1.1mn barrels, far below Nigeria’s Opec quota of 1.8mn b/d. Angola has now usurped Nigeria as Africa’s biggest oil producer.

Nigeria’s petrol subsidy, under which its car owners enjoy among the cheapest fuel in the world ($0.40/litre), means the federal government receives less revenue. The higher the oil price, the bigger the gap between the real and the subsidised price and the higher the bill for the government. Nigeria will spend an estimated $9.6bn on petroleum subsidies this year, about 2 per cent of gross domestic product and almost 10 times the budgeted amount.

Here is more from the FT, in other words Nigeria is failing to benefit from much higher oil prices.

Interview markets in everything

Some job candidates are hiring proxies to sit in job interviews for them — and even paying up to $150 an hour for one.

In a recent Insider investigation into the “bait-and-switch” job interview that’s becoming increasingly trendy, one “professional” job interview proxy, who uses a website to book clients and keeps a Google Driver folder of past video interviews, said he charges clients $150 an hour.

The proxy was approached by Aamil Karimi, who works at cybersecurity firm Optiv as a principal intelligence analyst. Karimi, who posed as a job seeker to talk to the proxy, told Insider’s Rob Price that the “bait-and-switch” trend has been on the rise because of more work-from-home jobs and overseas hiring.

The “bait-and-switch” interview works like this: a job candidate hires someone else to pretend to be them in a job interview in hopes they will secure the job. When the job starts, the person who hired the proxy is the one to show up for work.

Here is the full story.  Let someone else say what your open browser tabs are!  For the pointer I thank the excellent Samir Varma.

The David J. Theroux Chair in Political Economy: Job Opportunity

The Independent Institute is seeking a capable intellectual leader with a deep and energetic commitment to classical liberal principles, an ability to communicate and connect with others, and the qualities and drive to help perpetuate David J. Theroux’s vision in the research program of the organization in the decades ahead.

As part of Independent’s commitment to excellence, continuous improvement and teamwork, the David J. Theroux Chair is responsible for ensuring that all research activities have intrinsic intellectual merit and would have a significant impact in the service of Independent’s mission to boldly advance peaceful, prosperous, and free societies, grounded in a commitment to human worth and dignity.

The Theroux Chair will ensure that Independent’s scholarship, research and peer-reviewed publications adhere to the highest scholarly standards; provide leadership in support of acquisitions, peer review, author relations, and editorial quality; collaborate with Independent’s other experts to ensure that research, content, and promotional plans and activities are appropriately aligned; and in broad terms sustain Independent’s reputation as a well-respected policy institute.

The Theroux Chair will network with scholars, academic and policy organizations, and professional organizations, in leveraging and promoting mutual efforts in advancing classical liberal analytical methods and aspirations. As opportunities present themselves, the Theroux Chair will organize conferences, symposia, and other events.

More information here.

What is the incentive here for investment in future capacity?

The EU is planning to raise €140bn from energy companies’ profits to soften the blow of record-high prices this winter in what would amount to a new bloc-wide levy in response to the crisis over Ukraine.

A proposed windfall tax on power companies that do not burn gas, the price of which has recently soared, would be accompanied by other measures on fossil fuel groups…

The commission proposal would set a mandatory threshold for prices charged by companies that produce low-cost, non-gas energy, such as nuclear and renewables groups.

Companies would have to give EU states the “excess profits” generated beyond this level, which the commission seeks to set at €180/MWh. But member states would be free to put in place lower thresholds of their own.

Here is more from the FT.