Tuesday, July 2, 2019

USDA move to KC could benefit Franklin County

by Levi A. Russell
Originally published by the Ottawa Herald on June 26, 2019

Big changes are coming to the USDA and to the Kansas City metro area. Last week, Secretary of Agriculture Perdue announced that two major arms of the U.S. Department of Agriculture, the Economic Research Service (ERS) and the National Institute for Food and Agriculture (NIFA), would be moving to the Kansas City area this summer. What does this mean for the KC metro’s economy? What about Franklin County farmers?

To answer the first question, we have to look at what we know about the move. Roughly 600 employees will be relocating from Washington D.C. to the Kansas City area, though we don’t know which side of the state line they will call their new home. The General Services Administration has put out a call for proposals for buildings in the area and, of the 6 buildings that fit their specifications, the closest to Ottawa is the Sprint office building in Overland Park.

Certainly the broader Kansas City area will benefit from the additional jobs, larger tax base, and economic activity from support services provided to these new-to-Kansas-City federal workers. Additionally, the federal government estimates that there will be a $300 million in federal government budget savings over the next 15 years due to lower building rent and other advantages from the relocation.

NIFA allocates grant funding for the bulk of the grant programs the USDA provides each year. Due primarily to our world-class Land Grant University in Manhattan, Kansas receives tens of millions of dollars each year in research funds from NIFA for a range of research efforts including crop and animal agriculture, agricultural economics, natural resources, food science, health, and education. I don’t think NIFA’s location change will mean much for Franklin County agriculture; grant funds will flow into and out of NIFA just as they did when the employees were housed in D.C.

However, I think there’s a possibility that Franklin County agriculture will benefit from ERS’s move to Kansas City. ERS is an in-house research division within the USDA. It houses a gaggle of economists who are trained in analysis of markets, rural economies, farm management, food and nutrition assistance, food safety, international trade, and other issues related to agriculture.

What I’m about to say is not intended to be a jab at ERS employees. I’m sure all of them are fine people, and the ones I’ve met over my short career as an agricultural economist were sharp, knowledgeable people who really want to help U.S. agriculture succeed. However, I think it’s possible that living and working in D.C. has a stifling effect on one’s broader perspective of agriculture. There’s nothing wrong with boutique organic stores and high-overhead-cost hydroponics operations, but these niche businesses don’t represent the backbone of agriculture.

I’ve written in this column before about Franklin County agriculture. We have a lot of cattle, corn, and beans around here. I think it will be good for the economists at ERS to be a little bit closer to the agricultural producers who feed our nation and the world. It just might broaden their perspective and increase their focus. If it does, Franklin County producers will benefit from more effective government policy driven by the analysis of the fine folks at ERS. I hope all our new neighbors working at the USDA will feel welcome in northeast Kansas.

Thursday, June 20, 2019

A Theatrical Marvel

Marvel hit a home run with their newest release of Avengers: Endgame.  It made nearly one million dollars more than their previous highest-grossing movie, Avengers: Infinity War, in the opening weekend.  This is impressive considering speculation about Disney increasing their movie releases from one or two a year to a whopping three a year since 2017.  While it is too soon to suggest that the law of diminishing marginal returns is taking effect on solo character movies, where the first is valued highly but that value decreases with each additional movie, it is clear that the collaboration movies like Avengers: Endgame, are seeing huge successes from this risk. 

Now that Disney has bought out Fox, hopefully they will be able to work some of their magic on the X-Men series.  Dark Phoenix came to theaters on June 6th, with a disappointing opening weekend.  Fox released the first X-Men movie back in July of 2000.  Since then, they have released twelve movies.  Fox definitely had the jump on the superhero scene compared to the Avenger series which began in 2008 with The Incredible Hulk and Iron Man.  Yet Disney has now released twenty-two movies and has had more consistent success.  Many of our favorite heroes and actors are from X-Men, like Hugh Jackman playing Wolverine.  And the storylines all originated with Marvel.  It raises the question, why was Disney able to do consistently better than Fox? 

One idea is the use of story lines on solo character movies.  Disney released five solo character movies before the first collaboration movie, Avengers, came out in 2012.  They had built up the characters in their own movies before bringing them together, causing people to already know and like (or in some cases dislike) those characters beforehand.  Disney also dropped key pieces of information into each movie in preparation for a larger storyline.  This caused a lot of binge watching for movie fans before big releases like Avengers: Endgame.  Alamo Drafthouse and AMC were just a few of many theaters who put on a sixty-hour movie marathon featuring all 22 movies. These marathons started on Tuesday afternoon and finished with the release of Avengers: Endgame on Thursday night.  Their ability to fill seats despite taking place during the week shows the true marvel of this franchise. 

Fox, it seems, went in the opposite direction of Disney.  They released five collaboration movies before they released their first solo character movie in 2013.  The idea may have been that X-Men is a team-based series, but when you look at the top five movies in the franchise, you would notice that three of them are character solo movies including Logan, Deadpool and Deadpool 2.  There are many fans who do enjoy the characters, hopefully Disney will be able to make them each shine before giving it another go around. 

Fox has not been able to pull off an overarching storyline for the series.  For Avengers: Endgame, each of the previous movies (we will let Incredible Hulk off the hook a bit for this one) came to play an important role in the finale.  It seems like Fox chose to stick with a consistent Professor Xavier versus Magento story line, and the solo character movies did not come into play at all.  Disney has a long way to go with bringing X-Men back into the light, but it seems like they have learned a lot from their successes, and yes, some failures, during their run with the Avengers franchise. 

Wednesday, June 5, 2019

What's wrong with economic freedom in Guatemala?

I am excited to be traveling to Guatemala with my wife and son in August! My wife helps run a non-profit called Education and More there where the organization contracts with local indigenous women to produce products that use the hand-woven fabric that has been made for centuries there. Generational poverty is an issue there where subsistence living is the norm. The proceeds from sales in the United States and donations fund a fair wage to the women in addition to private schooling for their children through high school and even college for those who go. It is a fabulous organization and please visit https://www.educationandmore.org/ to learn more and donate if you want to support what they do.

The Gwartney Institute investigates reasons why some countries are poor and others are rich. It turns out that Economic Freedom is highly negatively correlated with poverty. Countries with a high degree of economic freedom have less poverty. The Fraser Institute publishes the Economic Freedom of the World (EFW) Index each year, its lead author is Dr. Jim Gwartney for which our Institute was named. I was shocked to learn that the most recent ranking of Guatemala was 23rd in the world for economic freedom, tied with Finland! Income per person adjusted for purchasing power parity in Finland was $43,700 in Finland during this time while it was only $8,000 in Guatemala (it was $57,900 in the USA). The average income for countries in the top 25% of the EFW index is $42,500 and the average for the bottom 25% was $6,500.
This did not make sense to me, so I began to investigate why Guatemala is so poor relative to its high EFW ranking. I found a plausible reason for the discrepancy by diving deeper into the way the EFW index value is calculated and then reconciling it with Guatemala’s area scores. There are five primary areas of the EFW index; 1) size of government, 2) legal system and property rights, 3) sound money, 4) freedom to trade internationally, and 5) regulation. Within each of these five areas, data is collected from many objective external sources and then each area receives a score out of 10. A simple average is used to compute the overall score (click here for details). The beauty of this formula is that a single number now objectively reflects the compilation of 42 variables for every country with data available. However, this is precisely what causes some countries to be ranked higher than what seems they should.

A country that is weak in ‘Area 2 -legal system and property rights’ may not be very free at all. Is anarchy true freedom? No, freedom is not the absence of government. Individual freedom can only be achieved with proper constraints on other people’s behavior to do no harm to others. Indeed, “do whatever you want as long as you don’t hurt someone else” is a philosophy that contributes to individual freedom. While the simple average of the areas gives us a transparent way to calculate the overall EFW, I would argue that Guatemala presents a case that shows how important Area 2 is for low income countries. It shows how the EFW index can be used to determine policy recommendations to raise people out of poverty.

The other area of the index that makes Guatemala rank higher than it should is ‘Area 1 -size of government’. The index suggests to me that the government sector is too small, specifically the sub-areas of Government Consumption and Transfers and Subsidies are too low relative to other countries in the top 25%. As a free-market economist, I find this a bit difficult to write.

However, I think it makes sense given that Guatemala has the best score for both of those sub-areas of all countries in the top 25% which means they spend the least amount of money relative to country income. Those sub-areas simply look at the fraction of government spending to Gross Domestic Product. It looks to me that Guatemalan government needs to do more work on ‘legal system and property rights’ and this likely means more government spending in that area. There is an optimal level of government spending to maintain a healthy rule of law. If spending is too low, vital functions of the government are underfunded. By looking at the outcomes in Guatemala, they are apparently not doing enough to get the wealth-creating engine of capitalism going strongly.

I did a little modification to the sub-areas to see where Guatemala would rank if it was doing the average level of government spending done by countries in the top 25%. By replacing just these two numbers, Guatemala’s EFW overall score falls to 7.28 which drops its ranking to 54 (the 2nd quartile) which is sandwiched between the Slovak Republic and Italy. Since the average income in the 2nd quartile is $20,200, I am not sure it has dropped enough. The average income in the 3rd quartile is $14,300! 

That’s enough of the numbers, I don’t want your head to spin. The measurement of economic freedom is a complex topic but the general results we find from research using the EFW index paints a clear picture that economic freedom is key to getting the social outcomes we all desire. Where economic freedom is strongest, there is less poverty, better access to drinking water, longer life expectancy, lower infant mortality, better gender equity –the list goes on and on and is compelling. I hope that my visit to Guatemala will further inform me of other policy recommendations that can lead to more human flourishing there.

Thursday, May 30, 2019

China Tariff Battle Impacts Ottawa Kansas

by Levi A. Russell
This originally appeared as a column at the Ottawa Herald

When we read about the many aspects of the current trade war with China, it’s difficult to see how big international policy decisions affect us here in Ottawa. This week I’d like to discuss recent events in the trade war with China and how they might affect us. To do that, let’s take a big picture look at the trade war. Though there are many weapons in a trade war, tariffs are the primary weapon of choice for the Trump administration in its war with China. A tariff is a tax on an import, but as we will see, it’s a complicated tax.

Earlier this month, the U.S. Trade Representative imposed a 25% tariff on $200 billion worth of Chinese goods imported to the U.S. The 25% tariff is paid explicitly by importers of Chinese goods, but other parties are implicitly affected by the tax. In economics, we say that the incidence of the tax falls on the aforementioned importers, Chinese exporters, and U.S. consumers. The importer passes on some or all of the tariff in the form of higher prices for U.S. consumers. This higher price pushes down the quantity that consumers want to buy, resulting in lower revenue for Chinese exporters.

The tariffs will be applied to over 5,000 different products; some are consumer goods (i.e. goods we buy and consume directly) and others are intermediate goods, which are used by U.S. manufacturers to make other products. Some examples of goods that will be taxed under this tariff are grain, candies, pasta, beverages, minerals, ores, slag, ash, mineral oils, inorganic chemicals used in manufacturing, fertilizers, soaps, plastics, rubber, wood, fabric, stone, ceramics, flax, cotton, wool, aluminum, furniture, clocks, ships and boats, electronics, and many other goods. We can expect that the prices of many of the consumer goods listed here will increase here in the U.S. and the prices of other goods made from the intermediate goods will also rise to some extent (though not likely a full 25%).

A few days after the U.S. Trade Representative announced the 25% tariff, China retaliated with a promise to increase tariffs on $60 billion worth of goods exported to China. These tariffs will directly impact importers in China, but will also affect industries in the U.S. that export to China, as well as Chinese consumers. The broad categories of goods that will fall under these higher tariffs are food products, building materials, furniture, bedding, footwear, clocks, light fixtures, musical instruments, parts for locomotives, boats and yachts, electronics, and chemicals.

Here in Ottawa, the U.S. tariffs will likely have a bigger impact than the Chinese tariffs. Like the rest of the country, we will likely see a rise in the prices of many consumer goods. Some of the manufacturing and construction businesses in Ottawa will likely see an increase in their costs, especially if they buy raw materials or intermediate products directly from China. They will either have to pay higher prices for these inputs or find other sources either in the U.S. or another country.

Even though I am an economist, I will not try to tell you all of this is bad. The expected reductions in employment and GDP in the U.S. are mild, though they will likely be felt to a greater degree in specific areas of the country. These economic costs might be worth it if they result in policy changes that are favorable to U.S. interests. For all its improvements in the past few decades since it slaughtered tens of millions of its own people, China is still a Communist country. They still send Christians and Muslims to “re-education camps,” micromanage their citizens’ lives with an authoritarian social credit system, and support North Korea, which actively tortures its own people. China has repeatedly stolen our intellectual property and is increasing its spying efforts in the U.S.

The use of the term “trade war” is apt. The tariff battles may impact the economy in the short run, but winning the war is the goal. It’s up to us and our elected officials to determine whether the economic costs are worth the strategic and security-related benefits.

Wednesday, May 22, 2019

Market Solutions: Infrastructure Problems

Jacob C. Maichel 
It is hard to deny that healthy transportation infrastructure and support systems are paramount to economic growth and success. Unfortunately American roads and highways systems are crumbling more and more by the day and no matter how much the government spends the trend does not seem to shift. A study by the American Society of Civil Engineers determined that 32% of urban roads are in extremely poor condition, with Kansas having the 5th worst roads in the United States1! What can we do to fix our continually deteriorating roads? 
The right answer is not continuing to pour billions of federal dollars into infrastructure projects, atleast without private partnerships. The Trump administration in their 2018 budget proposal meetings began to increase federal spending on infrastructure by $200 billion which continued to undermine the power of American decentralization3. Federal spending and regulation will continue to hamper private responses to these problems if there is not a significant shift in federal policy.  
One of the first barriers is effect that the heavy red tape of regulation is having on development as a whole. Not too long ago in 1970 mandated reviews by the National Environmental Protection Act took an average of 2.2 years while today we are looking at around 6.6 years on the low end2! In the same timeframe we have seen environmental laws raise from only 26 to 70 in total when it comes to infrastructure development3. I am all for the environment but I am also for progress. Instead of the government pouring money into infrastructure perhaps they could spend it elsewhere to bolster environmental protections and cut back regulations allowing states or private industry take over. This way projects could be determined by supply and demand and the most pressing concerns can be addressed first by the people that use the systems, rather than bureaucracy! 
A major factor that prevents someone else from taking the reins from the federal government is the distortion caused by subsidies which reduces other projects return on investment. American investment banks and large pension funds seek to invest in infrastructure projects but often turn to foreign development particularly in Canada, Asia, and Latin America2. Instead of a top down approach the power should be given to states and allow private public partnerships. This is currently difficult to do as any project that receives any federal funds must return all the grant money if it decides to go private. States have also learned to become willingly helpless as they just hold out until roads become so bad the federal government has to pay for the repairs themselves. 
The fact of the matter is that private or local governments are able to do projects exceedingly more efficient. Federal projects have a long track record of having pork barrel spending tied to projects, usually a product of political favors completely removed from the people the project is meant to serve3. Not only have private projects both in and outside of the US been completed cheaper and faster they also remove all the risk from the taxpayer and shift it to the investors backing the project. These projects also create new revenue for the federal government instead of sucking out an ever growing amount of money.  
Something that should very seriously be considered is allowing all 50 states to collect toll revenue from interstate systems and use it to maintain the roads. This has worked incredibly well for India’s toll road which is one of the busiest systems in the world2. Allowing states to tap into this capital to modernize and maintain roads would be a very welcomed shift by anyone who uses these roads on their daily commutes. If the states also had the ability to team up with local innovators they could completely transform the way infrastructure is managed. Economies of scale can help private investors to offset large investments while trying to earn a return, incentivizing efficient allocation of resources.  
The fact remains that the more power is given to the private sector and smaller localized governments the better the results are. If the federal government was able to produce cheaper high quality infrastructure it would make sense for them to control all the means of production… which has failed in every socialist country in the history of humankind. State and local governments should be encouraged to collaborate with the same people they served rather than penalized for taking part in building up their communities. Page Break 

  1. Chris Edwards, “Privatization,” https://www.downsizinggovernment.org, Cato Institute, July 12, 2016.

Wednesday, May 8, 2019

Market Solutions: Transport Safety

By Jacob C. Maichel

Anyone who has flown within the last two decades understands how frustrating the process can be. Arriving hours earlier than takeoff to combat the setbacks that could prevent you from making your flight is frustrating. It seems the security model provided by the government has no alternative, but what if private industry had more freedom to do screenings? Surely companies with an incentive to outperform their rivals would be a more efficient solution than the Transportation Security Administration (TSA).

Previous to one of the most devastating acts of terrorism, 9/11, the majority of airport security was handled by private companies. The issue with the previous model was that the Federal Aviation Administration (FAA) oversaw the private companies. Before 9/11 the majority of the rules set in place by the FAA were to protect against plane malfunctions or natural disasters, as they had little desire to be a law enforcement agency1. After the attacks congress unanimously approved a fully federal screening system which created the TSA in 2001. By 2002 the TSA was based in the Department of Homeland Security and boasted the 4th largest budget in the building. A fully federal system was actually opposed by then president George W. Bush and the House of Representatives, who both pushed for private security with strict federal oversight.

There is a small program called the Screening Partnership Program (SPP) that meets much resistance from the TSA. The SPP program allows for airports to opt in for private screeners rather than the traditional TSA approach and currently 22 airports take advantage of this. One of the largest adopters of this is the San Francisco airport. A study by the House Transportation and Infrastructure Committee revealed in 2011 that screening inside of San Francisco International was 65% more efficient than federal screening at Los Angeles. Some of the factors that are attributed to this dominance is less employee turnover which leads to better workers, and more flexible staffing measures such as scheduling.

San Francisco really exhibited the benefits of being private during the recent government shutdown. During the shutdown TSA employees calling in sick increased 272%, while none of the 22 privatized airports had any delays. Being private also allows for more focus to be on the security of the consumer. In 2015 there was a test by the inspector general where 67/70 weapons made it past TSA screening points. If this happened to a private service provider the airline could simply switch to new security. For private screeners being effective is the only way to stay in the airports, as where TSA is guaranteed.

One of the most glaring flaws in this structure to me is that the TSA is self regulating. TSA has the task to give themselves their own rules which creates a conflict of interest. The TSA gets to choose what is and is not allowed on airplanes, what technology and screening procedures are used, all while being the same organization who implement the searches! With private screeners we could hold each company accountable, decrease operating costs, and most importantly increase security! While federal oversight is unquestionably important in aviation the security itself could be handled much better by the private sector. 

Monday, April 29, 2019

Market Solutions - Disaster Response

By Jacob C. Maichel

Economists such as Adam Smith, Friedrich Hayek, and Milton Friedman have proclaimed the pitfalls of central planning, but their message has not been heard with regard to disaster management. One of the most glaring shortcomings can be seen in The Federal Management Agency (FEMA). FEMA is the government organization tasked with coordinating and leading disaster relief efforts. While this sounds good, the relief programs operated by the government are often disasters themselves. We have seen time and time again where the private sector responds more effectively than the government. 

One of the first things to point out is the significant waste both monetarily and in relief supplies. After Katrina, we saw case after case of fraud that resulted in over $2 billion in taxpayer money being wasted in false claims. Examples such as a Texas hotel owner collecting $232,000 in bills for phantom victims or 1,100 prisoners receiving more than $10 million in rental and disaster relief highlight taxpayer money being taken from those who needed it. In 2018 we witnessed extreme mismanagement of aid that was intended for the victims of hurricane Maria in Puerto Rico. It was revealed there were government parking lots with food rotting in the boxes, which themselves were covered with rat feces. FEMA 91,000 tons of ice intended for disaster victims to the wrong state! The situation became so hopeless that Puerto Rican officials asked for aid to be exclusively in the form of money and personnel.

Most importantly the free market provides care for victims significantly better than the government does. Louisiana understands this better than most. In 2005 over 1,500 residents tragically perished in hurricane Katrina, many waiting on government alleviation from the flood waters or needed supplies. In 2016 when floods threatened Louisiana it’s people responded much different. Local efforts saved lives far before any government assistance ever arrived. Facebook groups sprang up to coordinate supply deliveries and rescue efforts. The “Cajun Navy” was created by people using private boats to rescue those in their communities. Phone applications with walkie talkie and GPS functions were utilized to help those who were in need.

Not only has FEMA been considerably less successful than private efforts, the organization significantly hampers non government relief assistance. During disasters it is commonplace to see miles of retail truck convoys carrying precious life-saving supplies stopped by FEMA as to not interfere with their government strategies. During Katrina buses belonging to private businesses who were relocating displaced victims were requisitioned and instead used to deliver people to the New Orleans Convention Centre. Many more deaths were caused by this as the convention center lacked many basic needs yet people were continually placed there by FEMA efforts. When left unhindered local businesses actions have been significantly more successful in getting much needed supplies into communities. When hurricane Sandy struck it hit 295 Walmart stores, 250 were open the next day. Local churches and charities are always the first ones of the ground to help the victims of catastrophe and support their communities.

Unfortunately FEMA even negatively impacts local efforts by disincentivizing charitable giving and creating free trade zones. Public aid creates the illusion that there is a diminished need to give to charities who act during disasters. The organizations that provide the most benefit are the same ones that FEMA hurts. Impact on local business should also be considered as well. FEMA creates free trade zones where normal market conditions vanish. Licenses and taxes which protect sellers and buyers are suspended and businesses have less motivation to provide needed goods and services. Business' motivation for helping may involve profit but being able to survive is priceless.

When FEMA leaves an area after a disaster, business’ drive for profit and free markets are largely responsible for rebuilding. Companies will sell raw materials to others begin to rebuild. Private businesses will repair homes and infrastructure while taking payment for this all while hiring displaced workers for these projects. It was in fact for profit app developers and Facebook that created the tools the Cajun Navy used in saving their own communities. Government responsibility in disaster should be to reopen infrastructure that supports trade and to continue securing property rights rather than be the hero that saves us. Historically we have been let down time and time again by FEMA’s efforts whereas the free market left to its own devices has helped communities come together and rise out of devastating situations.