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Brooks Wilson's Economics Blog: July 2011

Friday, July 29, 2011

Barro on the Fiscal Crisis and How We Got Here

Robert Barro is one of those economists whose ideas deserve careful consideration.  In “Robin Hood Can't Lead Us Out of the Debt Hole,” he provides a summary of how the United States got into the current economic mess, the relative effectiveness of government actions, and provides thoughts on policy that would help clean up the mess.  I particularly like his ideas on tax reform, which I quote in part.
One possible package of reforms would include setting the U.S. corporate and estate tax rates permanently to zero. These taxes are inefficient and generate little revenue. Also, to restore a more efficient allocation of capital across the economy, we should phase out—gradually—tax preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits. Marginal income tax rates should also be lowered across the board. Finally, to raise additional revenue to meet entitlement obligations, we could adopt some kind of broad-based, flat-rate consumption tax such as a value-added tax of the kind used in Europe. In this country, a rate of 10% with few exemptions should raise around 5% of GDP annually.
The political danger of a value-added tax is that it is so efficient at raising money it will encourage governments to grow even larger. That's why it only makes sense as one component of a fiscal reform, including reductions in the long-term path of entitlement outlays.

Lowering the corporate to zero makes sense for at least two reasons.  First, there is a difference between the incidence of a tax, who writes the check and the burden of that tax, who ultimately pays it.  In the long run, that burden falls mostly on consumers.  Lowering the corporate tax rate to zero would acknowledge that economic fact.  Second, it would take an arrow out of the political quiver of corporations that benefit the most politically entrepreneurial business leaders.  A similar arrow would be removed from politician’s quiver.  Politicians would lose some ability to bribe or extort businesses to further a politician’s or group of politician’s policies.  Investment decisions would more closely be linked to the fundamental profitability of projects. 

Lowering estate taxes to zero would free estates to allocate funds to the best possible investments not the best investment given tax treatment.  Again the economic efficiency would increase.  

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Friday, July 22, 2011

Trade-offs: Germany’s Choice for Power Generation

(HT Watts Up With That)  In response to disasters at Chernobyl and throughout Japan, the German government led by Chancellor Merkel is replacing nuclear plants with coal and natural gas powered plants.  The phase out will be completed by 2022.  One small irony is that the government will finance the conversion using funds designated for projects promoting “clean energy” and “combating climate change” (“Germany to fund new coal plants with climate change cash”).

A spokeswoman from the Economics Ministry said that the new plants would not affect Germany’s goal of reducing greenhouse gas emissions by 40% by 2020. 

We all face trade-offs, including governmental officials.  Nuclear power plants are vulnerable to occasional releases of radioactive gasses into the atmosphere.  Coal, and to a lesser extent natural gas, release carbon into the atmosphere and many believe that these emissions dangerously warm the earth.  The damage of radioactive gas releases would largely be confined to Germany and her immediate neighbors but the damages of carbon releases would be shared with the world.  Wind and solar plants use vast tracks of land and German climatic conditions are not suited for their production.  Excluding external costs, coal and natural gas plants generate electricity most cheaply.  Cheap electricity is necessary for Germany to maintain its healthy manufacturing sector.

Reading the tealeaves, and with the understanding that I have no special insights into German politics, I conclude that the Merkel government has chosen jobs over the environment, but in a somewhat subtle manner. Government officials have chosen to discount the costs of global warming relative to a nuclear plant meltdown perhaps from a reassessment of the relative costs of each, perhaps from a heightened sense of nationalism that focus on national external costs rather than world external costs associated with global warming. 

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Saturday, July 16, 2011

Schwarz on Pay-for-Play

Draft quality NCAA football and basketball athletes are underpaid to the tune of several hundred thousand dollars per year (reference).  I believe that the difference between the competitive wage and the actual wage is sufficiently large to constitute exploitation.  Walter Byers, a former NCAA president (1951-1988) agrees. In his book “Unsportsmanlike Conduct: Exploiting the Student-Athlete” goes further labeling the NCAA scholarship system a “neo-plantation belief that the enormous proceeds from college games belong to the overseers (administrators) and supervisors (coaches). The plantation workers performing in the arena may only receive those benefits authorized by the overseers (reference).” 

From the pages of ESPN, Andy Schwarz cogently argues that the NCAA could step aside and allow top athletes to earn a competitive wage (“Pay-for-play -- the truth behind the myths”).  I quote from his opening statement and then list the myths he busts.  His selection of myths could be taken from my class discussions on the NCAA and labor markets.  To learn his answer to the myths, you must to read the linked article.   
It happens so often that it's barely even scandalous anymore.

Some college or its boosters are caught giving "extra benefits" to college football players. In some case the allegations range into the tens or hundreds of thousands of dollars, as was the case with Auburn quarterback Cam Newton and Ohio State's Terrelle Pryor. Economically, these scandals are clear evidence that the NCAA's level of compensation for athletes is so far below the market rate that cheating is irresistible. Despite this, it seems inevitable that well-intentioned columnists, coaches and sports legends weigh in, saying it would be great to pay players, but a long list of impediments makes impossible anything except the NCAA's scholarship-only system.

Every one of those reasons is wrong. Join me on a tour of the top myths about paying college athletes.

Myth 1: It's too hard to figure out how to pay players fairly.

Myth 2: Title IX outlaws paying players.

Myth 3: Pay will ruin competitive balance.

Myth 4: Paid athletes can't be real students.

Myth 5: Paying athletes means that fans won't watch.
I have two additional points to make, one positive and the other normative.  If the NCAA allowed universities and colleges to determine wages for players, it is likely that athletes playing football and basketball would be paid much more.  Compliance costs should plummet but probably less than wages increase.  Colleges and universities are likely to cut athletic programs that lose money. 

A student of economics need not believe that universities and colleges should increase wages of athletes.  They are not free to deny empirical evidence that college and university athletes playing football and basketball are paid significantly less than the competitive wage. 

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