Dan Sutter: Steroids and positional goods
Barry Bonds and Roger Clemens were recently not elected to the Baseball Hall of Fame in their final year of eligibility, reportedly over their use of performance-enhancing drugs (PEDs). The case illustrates some of the economics of rules and the nature of “positional goods.” The case for both Bonds and Clemens based on performance is overwhelming. Bonds is the career and single-season leader in home runs and won seven Most Valuable Player Awards. Clemens won 354 games, ninth all-time, and seven Cy Young Awards. Each was compiling Hall of Fame (HOF) careers before ever using PEDs. Baseball’s all-time hits leader, Pete Rose, is also not in the HOF, banned for life by Commissioner Bart Giamatti for betting on games while managing the Cincinnati Reds, making him ineligible for the Hall. Precedent exists to exclude greats from Cooperstown. But Pete Rose knowingly broke a rule for which a lifetime ban was a plausible penalty. By contrast, MLB never punished Bonds or Clemens for PED use. Indeed, MLB promoted the steroid-fueled home run chase between Mark McGwire and Sammy Sosa in 1998. PEDs are one of many ways players can improve their performance. We celebrate players doing everything they can to get better and gain advantage. We find the contests compelling because the players take them so seriously and perform at such a high level. Why ban some efforts to improve performance? Adverse health consequences provide an immediate answer. But on closer examination, other ways to gain competitive advantage harm health and are not banned. Most NFL offensive linemen weigh over 300 pounds. Every extra pound increases stress on the heart, and many players never lose this weight when finished playing. Many others adversely impact work-life balance. Aspiring tennis stars, for example, have long sacrificed any semblance of normal teen years. Why do leagues need rules to keep players from potentially damaging their health? Economics provides insight. Individually players achieve an advantage by taking PEDs. Yet only the top 750 players make the big leagues, and only stars sign $100 million-plus contracts. Two thousand aspiring big leaguers could take PEDs and be able to hit baseballs farther, but the number of available roster spots will not increase. If most players take PEDs or if all football linemen bulk up, the competitive advantage cancels out. Roster spots are what economist Robert Frank labeled “positional goods,” cases where position versus others matters. With widespread steroid use, players incur health risks without gaining a competitive advantage and not stop and risk their roster spot. League-wide rules are necessary to regulate PEDs and other undesirable efforts to achieve an edge in the quest for positional goods. And with a rule in place, penalties are justified because everybody knows the rules. What types of efforts at improvement should be banned? Given the numerous ways to improve performance, no alternative exists to letting leagues decide. Owners, management, and players have their interests (both physical and financial) at stake and can best balance benefits and costs. When steroid use began to diminish fan interest, MLB implemented penalties for positive tests. Because MLB did not implement penalties for steroid use until 2004, Mr. Bonds and Mr. Clemens were arguably not breaking the rules. Yet steroids were already technically banned in baseball in the 1990s. I say technically because Congress banned anabolic steroids in 1990, bringing them under MLB’s rules against possession and use of illegal drugs. PEDs in baseball demonstrate the futility of externally imposed prohibitions. Prohibitions can always be evaded. Psychologists know that behavior problems go unchecked until a person recognizes that they have a problem and need to change. Only a commitment from players and owners will result in prohibitions with teeth. I frequently extol freedom, but individuals will sometimes want to sacrifice some freedom to regulate competition for positional goods. Only clear rules demarcate vigorous competition from impermissible advantage. Baseball never punished Mr. Bonds or Mr. Clemens for PED use, so I disagree with HOF voters doing so. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: The organ shortage
Over 100,000 Americans await organ transplants and over 6,000 die annually while waiting. From an economic perspective the decades-long organ shortage has a simple cause: paying organ donors is illegal. Price controls predictably produce shortages. Payment for organs has been outlawed since at least 1948. The 1984 National Organ Transplant Act established the Organ Procurement and Transplantation Network to allocate donations by uniform criteria. Around 40,000 transplants occur annually, with over 80 percent of organs coming from deceased donors. A price ceiling is a legal maximum price imposed by government on a market. Selling for more than the set price becomes illegal. If the control is less than the market price (called the equilibrium price) and the law is enforced (price ceilings often produce black markets), a shortage ensues. Rent control is an example of a price ceiling. Prohibiting sales sets the price to zero, which must be less than the equilibrium price. The waiting lists and deaths are real-life results of the shortage. Lifting the ban on payment should increase the number of organs available for transplant. Buying and selling organs has been illegal and deviating from customary practice can make people cringe. This discomfort, though, is temporary; we should require a better reason to continue a deadly prohibition. Harvard’s Michael Sandel in What Money Can’t Buy notes two objections to “commodification,” or converting something into a good to be bought and sold. The first is fairness, or concern over being forced to transact due to necessity: “A peasant may agree to sell his kidney or cornea to feed his starving family, but … he may be unfairly coerced … by the necessities of his situation.” Fairness also involves whether only the rich could afford organs. The second objection is corruption, which holds that, “certain moral and civic goods are diminished if bought and sold.” Donation is no longer a noble sacrifice but a cash transaction. And monetary payment could crowd out voluntary donations. Whether desperate acts are voluntary is debatable. We sometimes do things because we “have” to, even if we acknowledge that no one pointed a gun at us. True voluntariness may require more than an absence of coercion. Yet money often improves desperate circumstances. Imagine a 35-year-old man providing sole support for a family dying suddenly and unexpectedly without life insurance. In addition to the emotional toll, the family likely faces financial hardship. Payment for the man’s organs could help support the family. Is making the family rely on charity better? Would only the rich get transplants with payments? Not necessarily. The Organ Network could make payments and still use the current criteria for allocating organs. But any wealthy persons buying organs for themselves would be off the waiting list. The corruption argument is based, I think, on a view of money as inherently corrupt. But money is just a medium of exchange, letting people buy whatever they choose. Money is a tool of voluntary market exchange, and exchange respects the moral value of all persons. I could try to obtain a kidney for transplant in three different ways. First, I could say, “I need a kidney, you have one to spare, let me have one.” I could cry, beg, and guilt the person into donating. Second, I could try to take one by force. Third, I could offer to give or do something in exchange. Beg, steal, or trade. Personally, I think that trade is the best way to proceed. Money just helps people reach mutually agreeable exchanges. If you oppose payment for organs, remember that simply prohibiting payment saves no lives. Suppose a person’s next of kin will not allow organ donation but would agree if offered payment. Without payment the organs go to the grave and persons awaiting transplant remain desperately ill. Opponents should offer a solution to the shortage, not merely block one they dislike. Marketing campaigns for organ donation have not worked. Should the government compel the harvesting of organs from the deceased? I think that paying donors provides a great solution to the shortage. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: Why are Americans avoiding work?
Inflation is currently America’s most pressing economic concern, but I believe that our disappearing workers pose a greater long-term challenge. Almost four million fewer Americans are working now than in February 2020 despite record job openings. Yet, the decline in work participation predates COVID-19 and is explored in a new Congressional Joint Economic Committee (JEC) report, “Reconnecting Americans to the Benefits of Work.” The starkest decline has been among men between the ages of 25 and 54. In 1955, nearly 98 percent of prime working-age men were employed or seeking work; by 2020, this stood at 88 percent. These age ranges should exclude impacts from increased college attendance or earlier retirement. As the report notes, this “represents a tremendous loss of economic potential.” The reasons for the decline matter because we may not have a problem here. If the AWOL men want to be homemakers or retire early, not working makes them better off. Statistics show, however, that only about 15 percent of disconnected men fit these categories. Economists explain market activity using supply and demand. We can distinguish then demand and supply side explanations for work disconnection. Employers are the demanders of labor, so demand factors include declining wages, the elimination of jobs through automation and international trade, and an education and skills mismatch. With a demand problem, businesses no longer want to hire the men who have dropped out. Although demand side explanations have received much attention, the JEC argues that they are not the main drivers. Wages adjusted for inflation were higher in 2019 than in 1973. Wages fell between 1973 and 1994, but the work exodus has continued with rising real wages. Jobs have been lost due to automation and trade, but other jobs have been created as a result. Jobs with better pay and benefits than fifty years ago still exist for lower-skilled workers. The disconnected men offer evidence against demand side explanations: “Three out of four disconnected men say they do not want a job.” Work participation declines have been concentrated among the less well educated (especially those with no high school degree), the native-born as opposed to immigrants, and individuals on disability (the SSI and SSDI programs). The formerly incarcerated account for about one-third of disconnected men. I fully support imprisoning persons for criminal acts, but not every felony should result in a life sentence. Gainful employment enormously affects recidivism, the likelihood of former prisoners committing additional crimes. Failing to employ ex-cons costs society their productive labor and the ensuing crime. The JEC blames government programs for disconnecting Americans from work. Policies create two impediments: artificial barriers to people working legally and public assistance, making work less attractive. The enormous work disincentives of safety net programs are well documented. Decreased assistance reduces take-home pay, just like high-income tax rates. The marginal tax rate, the amount of tax paid on the next $1,000 one earns, affects decisions to work more hours or pursue a raise. The top federal income tax rate is currently 37 percent; the effective tax rate for low-income Americans can exceed 100 percent. The report details legal and regulatory barriers to work. Occupational licensing and zoning receive particular attention. Licensing sets minimum criteria for people to work in a profession. Acquiring costly training or a college degree burdens low-income Americans. Zoning frequently restricts home-based businesses, which comprise a majority of all businesses with no employees. Perhaps the report’s most powerful takeaway concerns the many benefits of work. Work is the best anti-poverty program. Few workers make the minimum wage for long because businesses will train and promote dependable, reliable employees. Work has psychological benefits, like earned accomplishment, a sense of control over life, and greater happiness; not working produces depression. Working men have more social connections and are more eligible marriage partners. America’s AWOL workers should concern us all. We do not understand all the forces involved, but I think the government should do no harm here. Given the economic and psychological value of work, politicians who care about well-being should eliminate government-created barriers to work. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: Government jobs for all?
Modern Monetary Theory (MMT) offers some unconventional policy recommendations based on the United States’ monetary sovereignty. MMT proponents also advocate government-guaranteed jobs paying a living wage for all Americans. What would be the consequences of such a guarantee? The Public Service Employment program detailed in a 2018 paper from the Levy Economics Institute would be funded by Washington and administered by states. It would offer full and part-time jobs paying $15 per hour plus benefits. The program’s spending would be mandatory, like other entitlement programs. The jobs would “provide public services in nonprofit community organizations, public schools, and state and local governments.” The program could accomplish three distinct ends. The first is stabilizing aggregate demand during economic downturns. The second is instituting work relief in place of cash assistance. The third is implementing a “living wage” for all Americans. When the economy slips into recession, businesses lay off some workers and cut others’ wages. Reductions in these households’ spending produce second-round (and third-round) effects: landlords, for example, cut back their spending after not receiving rent. Many economists support macroeconomic stabilization. Stabilization works much better when automatic. Discretionary stabilization spending, like 2009’s American Recovery and Reinvestment Act, can take months to enact. Laid-off workers can start a guaranteed government job immediately. Today unemployed workers receive cash assistance. While I do not advocate government make-work jobs, work-relief has two advantages over cash assistance. First, work requirements effectively control fraud, as revealed by the 1990s welfare reforms. People working while on the welfare rolls never showed up for mandatory job training. Work-relief also denies recipients the leisure of staying home. People will compare the full value of their options. Suppose a person values the freedom of not working at $30,000 a year. If they also receive $10,000, only a $20 per hour job matches the full value of the cash assistance. The MMT jobs program also implements a living wage providing a “just” level of compensation. Economics shows how workers in a competitive labor market get paid the value they create for businesses. The “problem” of low wages is then inadequate job skills. The living wage is redistribution disguised as work. Market wages and salaries are not charity; the prices customers willingly pay for goods and services cover workers’ pay. Market-based salaries come entirely from voluntary payment, and workers earn their pay by helping produce goods and services. Guaranteed jobs effectively set a minimum wage because few Americans will work for businesses offering worse compensation packages (wages and benefits). Government jobs would be far more effective in assisting low-wage workers because a minimum wage ends up pricing many out of the labor market altogether. Government jobs paying $15 an hour plus benefits would likely cost $40,000 per job annually. MMT proponents project 15 million government jobs would be needed even when the economy is strong. MMT can advocate such a budget-busting program because, in its view, monetary sovereignty renders Federal spending costless under most circumstances. The biggest potential problem with the jobs guarantee, even at a lower wage, is whether people will have to work. What exactly is a government “guaranteed job”? The term job suggests a person must work satisfactorily or be fired. The guarantee suggests anyone fired must then be given another position. Government guaranteed no-show jobs would blow up the labor market. If you had a “job” paying $30,000 plus benefits not requiring work, how much would you need to be paid to take a real job? Guaranteed $15 per hour no-show jobs would effectively be a $30 or $40 per hour minimum wage. The United States is prosperous because we produce goods and services people want in large quantities. Yet production requires real work, not government make-work jobs. By diverting millions out of productive private-sector jobs, the MMT jobs guarantee seems guaranteed to impoverish America. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: Why is inflation costly?
Inflation exceeded 5 percent in June. Double-digit inflation burdened Americans in the 1970s. Although we treat inflation as bad, economists find its costs hard to pin down. The three economic functions of money help us think about inflation’s costs. Money’s first role is a medium of exchange, meaning a good way to conduct transactions. With barter, if you have oranges and want potatoes, you must find someone with potatoes who wants oranges. The second role is a store of value, or a way to avoid your oranges spoiling before you buy potatoes. Finally, money is a unit of account, or a convenient way to express prices. A pure inflation means proportional increases in all prices, including wages and salaries. Consequently, inflation should not make households poorer since incomes should go up about the same as expenses. Any stress on budgets should be temporary, due to some prices rising before wages. Rising prices reduce the dollar’s purchasing power, impairing money as a store of value. Suppose you plan to use $500 from a garage sale in August to buy Christmas presents. If the dollar loses half its value by Christmas, it is as if half your garage sale proceeds were stolen. This is a cost, but a modest one for inflation of 5 or 10 percent. Many assets besides money provide stores of value and earn interest or capital gains to offset inflation, so people should limit how long they hold cash. Do not put your savings in a mattress during inflation. Trying to hold as little cash as possible produces “shoe leather” costs, called this because in the 1970s, depositing or withdrawing cash required trips to the bank. Prior to deregulation, banks were open limited hours. Electronic banking has dramatically reduced shoe leather costs. Money still works as a medium of exchange with modest inflation because people can shift dollars into other assets after trading. Money stops working with extremely high levels of inflation, say thousands or millions of percent a year. This is called hyperinflation and is enormously costly; economists do not question the costs of hyperinflation. Changing prices can also be costly. Economists refer to these as menu costs, from the case of a restaurant having to print new menus when increasing prices. Restaurants will raise prices more frequently with 12 percent inflation than 2 percent. Yet menu costs have fallen sharply with electronically posted prices. Several other costs exist but also seem to be small. One potentially significant cost exists related to long-term contracts. Inflation benefits borrowers and hurts lenders. Fixed interest rate mortgages provide an example. My parents bought the home I grew up in in 1962 with a mortgage from a savings and loan. After inflation averaged 7.5 percent in the 1970s, my parents’ mortgage payments were, adjusting for inflation, only a fraction of what the lender expected to receive. The 1970s inflation ruined the savings and loans, even though most did not go bankrupt until the 1980s. Do we finally have a significant cost of inflation? Not necessarily. The wealth transfers result from contracts using nominal (or not adjusted for inflation) interest rates or wages. Economic theory predicts, and the evidence bears out, that nominal interest rates should be set based on the rate of inflation expected over the term of the loan. Accurately forecasting inflation can limit the wealth transfers, although forecasting is itself costly. But an even simpler fix exists: adjust the contracted interest rate using observed inflation. Make a mortgage interest rate be, say, 3 percent plus the inflation rate in the previous year. We began adjusting many contracts for inflation after the 1970s; Congress even began indexing income tax brackets to eliminate “bracket creep.” The costs of a modest inflation are normally small, and indexing contracts limits them further. The problem with inflation may be moral more than economic. To obtain money legally, people must either work or sell something of value. Counterfeiters do not earn their fake dollars, yet undetected counterfeit bills compete with ours to buy goods and services. Government-created money is like counterfeiting, and government should not be in the counterfeiting business. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: The cost of stopping global warming
In 2018 the Intergovernmental Panel on Climate Change set a new goal to limit global warming to 1.5 degrees Celsius. The costs and consequences of aggressive action against global warming basically exceed comprehension. Recent research in sustainability buttresses this point. Estimates put the level of energy use “compatible with avoiding 1.5ºC of global warming without relying on negative emissions technology” at around 7,500 kilowatt-hours per person per year. Americans currently use more than ten times this level, so our energy use would need to decline drastically. A new paper in Global Environmental Change examines whether adequate quality of life is possible with low energy use. The research uses six quality of life measures from the World Bank: life expectation, food consumption, safe drinking water, safe sanitation, education, and poverty. Acceptable levels of the six measures were specified. The 29 of 106 nations examined achieving all six life quality targets use at least double the sustainable energy threshold. Since adequately performing economies use too much energy, other research has formulated low energy consumption levels satisfying human needs. What would low energy life be like? For starters, an end to private transportation, not just switching to electric vehicles. People will have to rely on public transit and “active” transport (e.g., walking). A family of four could have a residence of not more than 650 square feet illuminated for 6 hours a day. People could have 9 pounds of new clothes and less than 200 pounds of clothes washing annually. (The clothes people typically wear weigh about 2 pounds.) Each family would be allowed one laptop computer and one refrigerator; everyone 10 years or older would get a cell phone. The society envisioned differs fundamentally from ours, and not just due to energy use. Markets involve voluntary exchanges between willing buyers and willing sellers. Anyone willing to pay can buy a second refrigerator to chill beer. In the economy designed to halt global warming, sustainability experts will tell us what we can have. Halting global warming also means ending growth: “Abandoning the pursuit of economic growth beyond moderate levels of affluence appears ecologically necessary.” I find this profoundly immoral. People work and sacrifice so their children and grandchildren can have a better life. Economic growth enables this better life. Modern prosperity enables a high quality of life. Consider life expectancy, which has increased in the U.S. from less than 50 years in 1900 to nearly 80 today. Medical research eliminated premature deaths from causes like pneumonia and heart disease. We could afford to train enough doctors that some could specialize in studying diseases. Prosperity gave medical researchers the needed tools, facilities, and resources. Medical research will further improve health if economic growth continues. Researchers’ ability to analyze DNA is yielding tremendous advances. Gene editing has cured a case of sickle-cell disease. Researchers have only recently begun studying the aging process to see if it can be prevented. Numerous criticisms could be raised against sustainability research. The energy use threshold mentioned above makes no allowance for differences in greenhouse gas emissions across energy sources. The threshold needlessly rules out “negative emissions” technologies to remove carbon dioxide from the atmosphere. And the 1.5ºC warming limit is ultimately political. The redesign of society is totally at odds with Americans’ stated willingness to spend to limit global warming. As Bjorn Lomborg notes, “while more than three-quarters of all Americans think climate change is a crisis or enormous problem, a majority was unwilling to spend even $24 a year on fixing it.” If we do not want to end modern life to combat global warming, now is the time to tell our elected officials. Although we might dismiss sustainability research as irrelevant academic scribbling, the government response to COVID-19 cautions against this. For years, some epidemiologists advocated using nonpharmaceutical interventions during a pandemic, although they figured such measures would never be tolerated in the U.S. or Europe. Given the right circumstances, seemingly irrelevant academic research can enormously change our lives. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: The NCAA cartel is collapsing
The unanimous U.S. Supreme Court decision in NCAA v. Alston portends change for college sports. This case involves education-related benefits and is separate from cases about athletes’ “name, image, and likeness.” The NCAA’s 100-year effort to not pay student-athletes is close to ending. Justice Neil Gorsuch authored the opinion, but Justice Brett Kavanaugh’s concurring opinion has garnered more attention. Justice Kavanaugh wrote, “The NCAA’s business model would be flatly illegal in almost any other industry in America. … The NCAA is not above the law.” He seems to accept that the NCAA is a cartel expounded by economists like the late Robert Tollison of Clemson University. A cartel in economics is a group of businesses (or universities) acting to restrict competition. The best-known cartel is OPEC, which tries to keep the price of oil high to increase oil-producing nations’ profits. Businesses also benefit from paying less for labor. The amateur status of college athletes fixes compensation at the value of a scholarship and related benefits. The NCAA began by enforcing common rules for college football to reduce the level of violence. Once college football began earning significant revenues, schools offered inducements to top players. The NCAA barred such compensation of athletes, although Professor Tollison contended that it became an effective cartel only once it could discipline violators through probation. The NCAA cartel illustrates via contrast the normal operation of labor markets. Economics shows that businesses can afford to pay workers up to the value their work creates. Competition between businesses for workers bids wages up to this amount. Colleges are not-for-profit businesses, but the same principle of revenue creation should still apply. If top recruits are worth $1 million and one school refuses to pay this full value, others will lure its recruits by offering payment. NCAA punishment halts the normal competition for productive players. Sports often feature such cartel behavior. Leagues generate enormous revenues, making stars worth millions per year. Yet most players’ best alternative work option outside of sports might pay $50,000 a year. Teams can potentially keep salaries way below market levels by not bidding for players. Major league baseball accomplished this via the reserve clause until the advent of free agency. How will the looming pay-for-play affect college football? I see three relevant considerations. First, can colleges afford to pay players, given that many athletics programs lose money on paper? I suspect so. Colleges are not businesses delivering profits to owners, and athletic departments are not stand-alone entities. Economics predicts that non-profit organizations will convert excess revenue (the $100 million-plus top athletic departments generate annually) into excessive costs. Excessive costs can be trimmed to allow compensation. A second issue is competitive balance. Schools generating the most revenue will be able to pay more for players. Large market teams similarly threaten competitive balance in pro sports, and salary caps and revenue sharing try to maintain balance. The rules on compensation will determine the threat to competitive balance. Payments to players may well reduce Alabama’s current domination of college football. Not paying individual players allows the Crimson Tide, given the juggernaut Coach Nick Saban has created, to offer a great deal to many five-star recruits each year: a proven path to the NFL and likely a national championship. Rivals need to offer extra compensation to be as attractive to recruits as Alabama. The third issue involves sustaining fan interest. Many fans strongly prefer college to pro football despite the NFL’s higher skill level. Economists have no skill in psychoanalyzing consumers. I can offer an observation. Improved coaching, strength training, and nutrition allow players today to realize more of their athletic potential. This significant element of professionalization has not reduced interest in college sports. Competition drives efficiency in our economy. The NCAA cartel has restricted competition. As college sports ventures into unfamiliar territory, remember that competition usually makes us better off. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: Discovery, COVID, and Policy
In early April, the Centers for Disease Control (CDC) changed its guidance on surface transmission of the SARS-CoV-2 virus. After more than a year of cleaning and disinfecting, the CDC now believes surface transmission is relatively infrequent. This case illustrates the role of discovery in public policy. The CDC says, “surface transmission is not the main route by which SARS-CoV-2 spreads, and the risk is considered low.” Most transmission occurs through respiratory droplets in poorly ventilated indoor spaces. (Outdoor transmission is also rare.) Contact with a surface contaminated with the virus has “less than a 1 in 10,000 chance of causing an infection.” We normally think of discovery as something which occurs in science, but all human knowledge must be discovered. The emergence of SARS-CoV-2 highlights the role of discovery in public policy. As a new virus, experts initially knew nothing about it with certainty. Such a position of complete ignorance is rare but illustrating. The fields of virology and epidemiology provided most discoveries about SARS-CoV-2. But economic knowledge must also be discovered and is more problematic than scientific knowledge. Economic knowledge generally depends on consumer preferences. The best car or computer can only be judged by users. Economists refer to this type of knowledge as subjective. Economic knowledge also depends on time and place, as economist Friedrich Hayek noted. The best, meaning here most profitable, way to produce things varies over time and at different places today. Auto factories used to employ thousands on assembly lines. Now robots do most of the work. Grocery stores pay workers to bag customers’ groceries where wages are low but use only self-checkout lanes in high-wage cities. Any society hoping to progress must discover new knowledge. Yet discovery provides a special challenge for a system where government experts’ recommendations get codified into binding rules. The argument for such paternalism is that the experts’ rules will lead us to make better decisions than we would ourselves. Government paternalism is controversial but ultimately only justified if it makes us, the citizens, better off. Let’s now consider the details of COVID-19 and surface transmission. SARS-CoV-2 was novel, but virologists began with knowledge acquired from studying other viruses, including coronaviruses. Viruses and bacteria can survive on surfaces, and “fomite” transmission does occur. Scientists discovered that SARS-CoV-2 does not persist on surfaces as well as other viruses. Discovery did occur. Yet, the rarity of surface transmission was discovered well before April; the new guidance cites research published in 2020. The CDC took months to change its message. Businesses have spent billions of dollars on cleaning supplies, employees’ time spent cleaning and disinfecting, and reduced hours of operation to allow cleaning. Paternalistic guidance needs to change as we learn, but government is frequently slow to change its rules. Discovery undermines the rationale for a system of paternalistic experts. Depending on the volume and frequency of discovery, the experts may not know much more than the rest of us. Of course, experts naturally downplay this and contend that they know enough to tell us what we should do. Trial-and-error is our most effective means of learning. Yet experiments generally require freedom, specifically permissionless and decentralized decision-making. Because countries like Sweden never closed their elementary and middle schools and states like Alabama reopened schools last fall, we learned that schools could reopen safely. We would not have learned if all schools stayed closed. In principle, paternalistic government expert systems can experiment, but in practice, little experimentation occurs. In part, this is due to experts’ overestimating how much they know. And many successful experiments in science and business were dismissed as hopeless. Nobody gives permission to conduct crazy experiments. We have repeatedly heard the refrain, “Follow the science!” Good scientists know that the discovery of new knowledge is imperative. And science requires freedom to experiment and question everything we think we know. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: Is this the start of government-guaranteed income?
The Federal government has issued three rounds of COVID “stimulus” checks and boosted unemployment benefits, first by $600 and now $300 per month. Is this the piecemeal start of a Universal Basic Income (UBI)? Under a UBI (also called a basic income guarantee), the government pays all Americans every month, say $1,000. Many would more than pay this back through taxes. Although I am a small-government libertarian, a UBI is attractive as a replacement for all current government assistance programs. Michael Tanner of the Cato Institute counts over 120 means-tested programs spending around $1 trillion, or over $20,000 for every American below the poverty line. The assistance our current system delivers costs a lot. The bureaucracies administering these 120+ programs contribute to this cost. Dispensing checks requires less labor than verifying recipients’ eligibility for housing assistance, energy assistance, food stamps, and other programs. Monitoring work requirements, which often amount to merely attending job training programs, is also costly. With a UBI, we could tax all income earned at a uniform rate. This would eliminate welfare cliffs, income levels where say, a $1,000 increase in earnings reduces benefits by more than $1,000; welfare cliffs provide massive work disincentives. A UBI would treat recipients with more respect. Many programs involve paternalistic elements, like restrictions on spending food stamps. Parents or guardians receiving a minor child’s UBI would be responsible for caring for children. Would enacting a UBI lead to elimination of abolishing all current welfare programs? Some liberals view a UBI as a generous supplement to the current array of programs. I do not like to prognosticate but see promise for a UBI only if it becomes our safety net. The major drawback of a UBI is its likely impact on work. Numerous observers fear that super-charged unemployment benefits are undermining the work ethic. I view this slightly differently. A market economy requires that people accept the necessity of working for a living; everyone need not work extremely hard. Those choosing to surf most of the time must accept their relative poverty. People accept working because they learn from childhood that this is how the world works. Children begin by learning that they must go to school every day. College lets young people delay joining the workforce. Work contributes to a meaningful life in addition to providing access to material necessities and luxuries. Psychologists recognize humans need earned success. Arthur Brooks stresses work as an important source of earned accomplishment; he argues that accomplishment drives happiness more than money. Additionally, economic progress, the division of labor, and automation create jobs that are rewarding. John Tamny writes, “the greatest gift of prosperity, beyond freedom from material want, is work that is engaging, absorbing, fulfilling – work that doesn’t feel like work.” But let’s also be honest. Work often sucks. Work involves following the boss’s orders; you cannot always tell the boss to “Take This Job and Shove It.” (There’s a reason this song was a #1 hit.) Beyond annoyance, many jobs are physically demanding, noisy, stressful, and dangerous. Women have faced sexual harassment on the job. Economic analysis shows that learning how to hold a job – e.g., not tell off your boss – is an important job skill. Employers can train workers, once they can hold a job, for more complicated and higher-paying positions. Yet our society emphasizes personal satisfaction, so the necessity of working for a living creates tension. Consumer society prioritizes us getting the things we want. And yet, the need to work relegates the most enjoyable life activities – golf, tennis, hunting, fishing, traveling – to weekends, vacations, and retirement. A UBI offers the prospect of life without the necessity of work. I suspect that even a modest guaranteed income will prove highly attractive to many. Government checks for all may be a Genie we will not easily get back into its bottle. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: Can we afford this spending?
Washington borrowed $4 trillion in 2021, and national debt as a percentage of GDP is higher than at the end of World War II. And the Biden administration is proposing spending trillions on infrastructure and families bills. Are our politicians bankrupting America? Economists Jason Furman and Lawrence Summers argue no. These prominent economists – Summers was Treasury Secretary under President Bill Clinton and Furman head of the Council of Economic Advisors under President Barack Obama – contend that the national debt, appropriately scaled, is not at an all-time high due to today’s historically low-interest rates. Their paper covers a lot of ground. I will start with interest rates and borrowing. Lower interest rates allow home buyers to get larger mortgages. Lenders compare the monthly payment and a borrower’s income. With lower interest rates, more of the monthly payment can go toward principal. The debt-to-GDP ratio does not consider the interest rate. Furman and Summers argue that the interest-to-GDP ratio (preferably adjusted for inflation) is a better measure, akin to monthly mortgage payment relative to income. The interest-to-GDP ratio is not historically high because of low-interest rates. Can interest rates possibly remain so low? To evaluate this, remember that real interest rates (meaning adjusted for inflation) are more relevant than the official rate. And the risk of a loan not being repaid in full, or default risk, must be priced into the real interest rate. Loans with high default risk, like payday loans, face high real interest rates. Economists refer to the risk-free real interest rate, what lenders would charge on a loan sure to be repaid. The risk-free real interest rate has been zero, and real interest rates have been trending downward since the 1980s across all major industrial economies. Furman and Summers argue that this must be due to fundamental economic factors. Might the Federal Reserve be keeping interest rates artificially low? As a matter of principle, almost all economists believe that money must be “neutral” in the long run. Neutrality means relative to production, which depends on real factors, things like labor, machines, raw materials, and technology. Dollars are ultimately green pieces of paper that cannot magically transform into cars or houses. Any impacts of money on production must be short-term. A thirty-year trend qualifies as the long run. Furman and Summers observe further that long-term interest rates are not anticipating an increase. Interest rates are market-determined prices based on the interplay of the demand for borrowing and the supply of savings. Markets are forward-looking and smarter than any one expert. Furman and Summers believe that at current interest rates, Federal debt of 400 percent of GDP (over $80 trillion) is sustainable. Economists who believe that markets work well, like me, must accept the market’s judgment on low risk-free interest rates. But although Treasury securities have always been the quintessential risk-free investment, Uncle Sam may not always qualify for this interest rate. Loans are voluntary transactions between willing borrowers and willing lenders. Lenders who think that politicians are bankrupting America can choose not to purchase Treasury securities at the risk-free rate. Furthermore, because our debt is always refinanced, investors must sell in Treasury securities to get out of the investment. Investors must believe that Uncle Sam is a good risk and that future investors will as well. The risk-free status of Federal debt depends on investor sentiment, not just economic fundamentals. Because markets are forward-looking, long-term interest rates on Treasury securities should start rising as soon as investors think the national debt is excessive. Markets show no sign of this, as Furman and Summers note. Political talk can be cheap; pundits predicting an impending Federal bankruptcy may still be invested in Treasury securities. Investors lend on favorable terms to the U.S. government because of its ability to tax us. Despite recent record deficits, investors still think that we are good for Washington’s borrowing. But investor sentiment can change far quicker than economic fundamentals. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: Reforming occupational licensing
Occupational licensing involves government-imposed requirements for practitioners in different professions or what critics call government permission slips to work. Despite a lack of evidence of benefits to consumers, licensing has been proliferating across Alabama and America, with the percentage of workers covered rising from 5 to over 20 percent. A new report from the Alabama Policy Institute and the Archbridge Institute offers some potential reforms. Not-So Sweet Home Alabama: How Licensing Holds Back the Yellowhammer State is written by Dr. Edward Timmons and Conor Norris of Saint Francis University. Dr. Timmons has extensively researched licensing, including a 2019 case study of Alabama barbers. The economic argument for licensing is consumers’ difficulty verifying expertise. Does a person claiming to be an electrician truly know this job? If you knew the trade, you could quiz or test them. Yet our economy is built on the division of labor, which is really a division of knowledge. Instead of learning how to repair a car, you hire someone who knows how. Markets can assure consumers of experts’ expertise. Reputation in various forms – including references, positive word-of-mouth, Yelp ratings, and brand names – accomplish this. Insurance also helps. An insurance company will only offer medical malpractice coverage to med school graduates. Yet skepticism about how well markets work leads to calls for licensing. A state licensing law establishes a board of experts to set education, training, and testing requirements. The board verifies applicants’ qualifications, and working without a license becomes illegal. Revoking licenses for professional misconduct weeds out bad apples. Research finds that licensing increases prices for consumers and incomes for professionals without improving the quality of services. Education and training requirements must produce higher prices to let doctors, plumbers, and hairstylists recoup their training and education costs. The lack of quality improvement implies no gains for consumers to compensate for higher prices. Licensing boards may enact unnecessary requirements to artificially restrict the number of practitioners and boost earnings. Enriching some citizens at the expense of others is not, however, a legitimate task of government. Public choice economics helps explain the proliferation of licensing. The return on political action to support or oppose a bill depends on the amount one has at stake. Licensing can boost practitioners’ incomes by thousands of dollars a year, while consumers pay a little extra when using a service, with the extra hidden in the overall price. Only professionals seeking licensing vote or make campaign contributions based on passage of the bill. Timmons and Norris offer two reform proposals. The first is for Alabama to accept other states’ licenses or reciprocity. Licensing reduces mobility because once licensed; a professional might have to incur significant costs to get licensed in another state. This imposes a heavy burden on some people, particularly military spouses. The spouse of a service member who gets stationed in Alabama may lose the freedom to work in their profession without incurring costs to obtain an Alabama license. Some licensed professions already have reciprocity agreements; this proposal would require all to do so. A second reform is sunrise review of new licensing proposals. Sunrise review is a variation of the sunset reviews required in Alabama and other states. Sunset review involves a study by a designated agency recommending either renewal or termination of a program, after which legislators must vote to reauthorize the program. Sunrise review requires an evaluation before establishing licensing. As Timmons and Norris explain, licensing is the most extensive way government can regulate a profession; less intrusive forms of regulation include certification, registration, and insurance requirements. An objective review of the evidence makes sense; extensive regulation should only be employed for serious market problems. Occupational licensing may improve the performance of some professional services markets. But licensing’s extensive application is likely due to the nature of legislative politics. We should seriously consider Not-So Sweet Home Alabama’s proposed reforms. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Dan Sutter: The freedom to use fossil fuels
The Biden Administration seems intent on renewing the war against fossil fuels to combat global warming. Before going down this path, I hope Americans will consider Alex Epstein’s argument in The Moral Case for Fossil Fuels. A moral argument requires a standard of value and Mr. Epstein’s is human life. As he explains, “I think that our fossil fuel use so far has been a moral choice because it has enabled billions of people to live longer and more fulfilling lives.” Many environmentalists do not share this standard. Mr. Epstein describes their standard as minimizing human impact on the environment. Environmentalist Bill McKibben desires a world where “Human happiness would be of secondary importance.” David Graber hopes, “Until such time as Homo sapiens should decide to rejoin nature, some of us can only hope for the right virus to come along.” Human life and well-being is a holistic standard embracing all people, not just an elite. It means far more than enriching oil and gas companies and demands considering benefits and costs, including pollution. The Industrial Revolution unleashed what economist Deirdre McCloskey calls the Great Enrichment, the enormous increase in standards of living and life expectancy of the past 250 years. Energy has powered the Industrial Revolution’s tractors, steamships, factories, and railroads. Fossil fuels specifically give humans low-cost energy, which is crucial. A tractor allows us to save time planting compared with working by hand. But we are not better off if obtaining fuel takes all the time saved. Fossil fuels also provide the energy to build machines and buildings. Electric power grids and natural gas systems also improve the quality of life. Previously people burned coal, wood, or animal dung in their homes, creating indoor air pollution and smog. Energy allows modern, sanitary water and sewer systems to deliver safe water to and remove dangerous waste from homes. Energy makes our planet more livable. Mr. Epstein notes that nature, “attacks us with bacteria-filled water, excessive heat, lack of rainfall, too much rainfall, powerful storms, decay, disease-carrying insects and animals, and a large assortment of predators.” Technology protects us from nature’s hazards. Hundreds of millions of people in Africa and Asia still lack electricity, clean water, and sanitation. Modern medicine also requires energy. A lack of affordable energy kills 3 to 4 million people each year. Mr. Epstein puts a human face on these statistics. He observed the impact on medicine of unreliable electricity visiting Africa: “A full-term infant was born weighing only 3.5 pounds. In the U.S. the solution would have been obvious and effective: incubation. But without reliable electricity … [t]his seemingly simple solution was not available to this newborn girl, and she perished needlessly.” Pollution harms human life and well-being and should be avoided if possible. Mr. Epstein suggests viewing pollution is as a by-product. We use fossil fuels to power factories and cars and then recognize that this causes air pollution. What do we do? Use human ingenuity to reduce the by-products. Inventing and installing pollution control technology on cars and factories yields prosperity and environmental quality. Global warming represents a similar by-product, although the harm is speculative and occurs primarily in the future. Banning fossil fuels is not the only way to address global warming. Alternatively, we could continue to use fossil fuels to make the world wealthier than today. With continued economic growth, world GDP per capita could easily increase by a factor of four by 2100. Even if global warming reduced world GDP by 25% in 2100 (a rather extreme estimate), the world would still be three times richer than today. The economic freedom and empowerment, including the freedom to use fossil fuels, has produced modern prosperity. Using more of this energy could soon extend this prosperity to billions more. If we care about human life, climate policy must acknowledge the enormous human value of fossil fuels. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
