Episode #90 - Free-rider Friday - April 2016

Ron’s Topics

• “Who Was Ty Cobb? The History We Know That’s Wrong, Charles Leerhsen, Author, Ty Cobb: A Terrible Beauty (Imprimis, March 2016)

• “Former Maria Carrillo student founds tech startup Appsitude,” Diane Reber Hart, Towns Correspondent, April 22, 2016, Press Democrat

•  “The Truth about Trade,” Scott Lincicome, National Review, April 11, 2016 [paywall]

Scott Lincicome in an international-trade attorney, adjunct scholar at Cato Institute, and visiting lecturer at Duke. 

A recent study labor economists: “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” by David H. Autor, David Dorn, Gordon H. Hanson, NBER Working Paper No. 21906 was issued in January 2016.

Findings

• Recent surge in Chinese imports inflicted pronounced harms on the and labor-force participation of US workers in local markets.

• On the podcast EconTalk, Russ Roberts interviewed David Autor.

• US manufacturing jobs declined from 17.2 million in Dec 2000 to 12.3 million last year.

• Is this proof of needed protectionism?

Reality

• No evidence imports are primary driver of US manufacturing job losses

• Manufacturing slowly and steadily shedding jobs since late 1940s, long before NAFTA or China

• USA is second largest manufacturer, 17.2% global output, 3rd largest exporter

• USA is world’s top destination for Foreign Direct Investment $384 billion in 2015, more than double 2nd place Hong Kong, and nearly triple China

• Job losses mostly result of productivity gains and deep recessions, not trade,

• The paper says import competition only explains 25% of job loss between 1990-2007

• Free trade benefits by $2800-$5,000 additional income average American, $7100-12,900 average household. Benefits mostly middle, poor, some 90%

• More than ½ of all imports are inputs and capital goods consumed by other manufacturers

• Tariffs are a hidden tax that benefits mostly labor unions. Obama’s 35% tarrif on China tires equated to $900,000 per job saved

• Global value chains are incredibly complex. Almost 40% of all US exports involved in GVC; 34% of US exports contain inputs from China, Canada and Mexico

• Gordon Hason: “The problem is not trade liberalization…the problem is that labor-market adjustment too slow”

• Civilian labor-force-participation rate lowest at 62.5% since late 1970s

• Traded goods arbitrarily exclude services—legal , accounting, advertising, travel, telecom, insurance,  32% of US exports ($28 billion surplus with China 2014), $233 billion with world

• $30.5 billion (2015) trade surplus with Hong Kong, not counted as trade with China

Why less fluidity in the labor markets?

• Americans less likely to move where jobs are

• 60% Americans have less than $1,000 in savings (US tax policy has no tax-free savings, like Canada

• Health care, education cost are rising above inflation

• Tax code: education expenses deductible only for existing job, not new skills

• Employment protection laws erode employment-at-will doctrine

• Occupational laws limit opportunities for poor middle class to start businesses

• Minimum wage laws

• Employer provided health insurance creates job “lock-in”

• Extended unemployment benefits subsidizes non-work

• Social Security Disability Insurance—becomes permanent, very few reenter labor force. SSDI doubled from 1990-2014, from 2.3% to 5.1%

• Trade Adjustment Assistance notorious failure. Breeds misconception that trade is somehow different from other forms of disruption, such as business models, automation, etc.

Ed’s Topics

Dee Gordon of the Miami Marlins was suspended for 80 games for testing positive for PEDs (performance enhancing drugs). Ed posited the idea of eliminating the regulation against PED use in favor of a reputation based model. His idea would allow for PED use, but require, as a condition for employment, twice yearly testing in addition to random tests as well. The results would be reported and displayed on jumbotron screens along with other statistics. Follow the debate on this topic on Ed's Facebook page. 

Story on IBM’s Watson from Kidscreen: Watson teams up with Sesame Street to educate in pre-schools.

Presidential Race” www.Predictit.org, has Clinton at .64¢ and Trump at .35¢ for general election. Also, Iowa Electronic Markets.

Historian Rick Brookhiser: “The Presidency is not an entry-level political job, unless you’ve won a world war.” (Ike, Ulysses Grant)

Milton Friedman: “The point is not to elect the right people to do the right things. The point is to design the system so that the wrong people do the right things.”

Jean-Claude Juncker, primer minister of Luxembourg: “We all know what to do; we just don’t know how to get re-elected after we’ve done it.”

Here is the 1984 SNL video starring Billy Crystal that Ed mentioned.

Episode #89 - Interview with Dr. Mark Miller

Mark’s Biography

Oil & Gas and the Texas Railroad Commission: Lessons for Regulating a Free Society

$15.00

By Dr. Mark A. Miller

Buy on Amazon

Dr. Mark A. Miller, PE is a native-born resident of Texas. After graduating with a BS in Engineering from Harvey Mudd College, Mark began a career in the oil and gas industry as a petroleum engineer. Later receiving a PhD from Stanford University, he went on to teach petroleum engineering at The University of Texas at Austin for 18 years. After leaving UT, Mark established a worldwide petroleum engineering consulting practice and was a founder and CEO/CTO of a small company that provided software to the oil and gas industry. He is currently semi-retired and does occasional consulting.

Mark is married and has two sons and two grandsons living in Austin. 

Dr. Miller's background includes extensive knowledge and expertise in oil and gas. As an experienced PhD petroleum engineer and former UT petroleum engineering faculty member.

Mark is the author of Oil & Gas and the Texas Railroad Commission: Lessons for Regulating a Free Society, 2015.

Segment 1

In each segment below both the questions and answers are abbreviated and paraphrased for the purpose of the show notes. They are NOT direct quotes. 

Ed: What does a petroleum engineer do?

Mark: The PE is involved in the “upstream” part of the business, which starts at the reservoir and ends at the pipeline. It’s the production phase, not refining, transportation, or distribution. PE’s don’t get involved to much in exploration, which is what geologist and geophysicists do.

Ed: What did you teach at t.u. (Sorry, University of Texas)?

Mark: Reservoir engineering, how fluid flows inside of a reservoir, and forecasting. My subspecialty. It’s both an art and a science (e.g., reservoir modeling).

The field of geophysics is one of the most computer intensive studies. Most Cray computers were owned by oil companies for geophysical modeling.

Ed: Why did you leave teaching?

Mark: Getting itchy to get back out where the action was, at age 50. Got into consulting and started an oil and gas software company to help companies develop computer models to optimize their capital investment.

Segment 2

Ron: Is Peak Oil a myth or a reality?

Mark: A little of both. The idea behind it was developed by M. King Hubbert, a Shell geoscientist. He did not foresee new resource discoveries or new technology that allowed us to produce more. Texas peaked around 1972 near 10 million barrels a day, down to 3 million, but it went back up to 10 million.

Ron: Is fracking a technological revolution subject to Moore’s Law, where costs will continue to decrease?

Mark: Absolutely. Fracking boom started in 2012, wells would pay out in 6 months. Now that oil prices are going down, so are the costs. Efficiency is up, measured by capital spend vs. oil out of the ground.

Ron: Is fracking safe?

Mark: Fracking is absolutely safe. There are issues to be dealt with, but we have long experience how to deal with those issues.

Ron: The process of fracking, injection of wastewater, has found to be correlative, though not causative, to earthquakes and seismic activity.

Mark: It’s not the process of fracking, per se, it’s the injection of large volumes of wastewater near faults can cause earthquakes. They have been small with little damage, and no loss of life. Any damage can be covered by having companies post bonds or purchase private insurance.

Ron: You write in your book that as of 2012, 87% of the world’s energy is based on fossil fuels. The other 13% is mostly nuclear, hydroelectric, and 2% non-hydro renewable. Is green energy economically viable for a modern economy?

Mark: Not totally. Green energy is so subsidize we don’t know if it’s economically viable. We can move gradually, but it cannot take over completely.

Ron: I know you’re a proponent of Natural Gas. What are your views on nuclear energy?

Mark: I’ve always been pro-nuclear. We can figure out a way to deal with the waste. It’s the obvious solution if you are concerned with climate change, since it emits no C02.

Segment 3

Ed: Why would an oil and gas guy want to be the commissioner of railroads.

Mark: What Texans don’t know (fewer than 5% of Texas voters) that the Railroad Commission has nothing to do with railroads. It’s the regulatory agency for oil and gas.

Ed: What’s the reason for not changing the name of the commission?

Mark: Many, but they are all bad, such as the federal government has delegated certain authority and if we change the name we could lose that authority. Or it simply costs too much to change the stationary. Or it’s not a good time for the RRC to go through a big change when the industry is in dire straits. All excuses for bad government to continue.

Ed: Can you explain the difference between mineral rights and surface rights?

Mark: I wish we never allowed surface rights to be separated from mineral rights. You could own surface land while someone else owns the mineral rights, which theoretically goes to the center of the earth.

In Texas, by statute and precedent, mineral rights trump surface rights. You cannot stop a company from coming on to your property and develop. Some companies provide compensation, but they don’t have to, and you can’t stop them.

It’s the only industrial activity in Texas that has an absolute right to be conducted anywhere it wants to be. You can’t put a stockyard in the middle of Dallas, but they can’t stop you from drilling for oil and gas.

Ed: What about groundwater contamination and fracking?

Mark: It has to be dealt with. You can contaminate water, which is immoral and illegal. But we’ve been dealing with this issue for a long time. There is not widespread problems in this area, according to the EPA.

Ed: You are against subsidies for green energy. Are you also in favor of removing subsidies for the oil and gas industry?

Mark: Absolutely. Some are not really subsidies, but more like standard deductions (like depreciation in manufacturing). They are relatively small, but they still should be gotten rid of.

Ed: Is the notion of energy independence for the United States a good idea?

Mark: It’s a silly idea. We’ve talked about it since I started in 1972 and the world hasn’t collapsed. Why should we not be engaged in the worldwide market, like we are for everything else? Why not steel and sugar independence? Why is energy unique?

Ed: Yeah, should we be wine, cheese or coffee independent?

Segment 4

Ron: Has the Texas Railroad Commission (est. 1891) been “captured” by the oil and gas industry, even though it is directly accountable to voters who elect the commissioners?

Mark: They will tell you they are captured. They openly avow their dual roll of both champions of the oil and gas industry and regulators of the oil and gas industry. Railroad commissioners will talk about “our industry.” People complain about it, but won’t vote them out.

Ron: In your book, you distinguish between Command-and-Control (CAC) and Retribution-and-Restitution (RAR) regulatory paradigms. Can you explain the difference?

Mark: There is a role for regulation, almost a quasi-judicial role. CAC regulations are like stipulating that studs must be 18” apart. RAR regulations would say you have to build a good house, and if you don’t you’ll pay any damages. This would allow for experimentation and innovation.

Ron: Yes, you point that CAC regulations allows companies to say, “I followed the rules,” even if they built a crappy house. You also point to the BP Oil spill in Gulf Mexico 2010 as a good example of RAR regulations. We think reputation is far more effective than regulation.

Mark: It’s a good example. The industry was really pissed off at BP. Companies are now operating much more safely now.

Ron: Texas has a Sunset Advisory Committee every 10 years. Do you think the RRC should be allowed to close?

Mark: I don’t think it should be done away with it. Changes need to be made, there is an important role to play to protect competing rights, such as surface and mineral rights. We need to transform and streamline the commission, not do away with it.

Episode #88 - Do Corporations Pay Taxes? Economic Puzzles and Paradoxes

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

–Justice Learned Hand

The Incidence of Taxation

It is well known that corporations, buildings, automobiles, goods and services don’t pay taxes; only people pay taxes (who else is there?).

There are two fundamental principles of tax-incidence in any economy:

1. Inelastic agents bear the burden of taxation. Elastic agents tend to escape the burden of taxation.

2. Burden of taxation eventually falls upon Individuals.

Economists don’t look at who’s legally responsible to pay the tax, they look at who bears the burden. Most Americans are familiar enough with withholdings to know instinctively that you can bear the burden of taxes without ever writing a check to the government.

Corporate taxes fall on three major groups of stakeholders: Shareholders, Workers, and/or customers.

If businesses can pass along taxes in their prices, they will. However, only those businesses with more relative inelastic demand curves can achieve this. The consensus seems to be that workers bear the largest burden, then shareholders.

Kevin A. Hassett, Director of Economic Policy Studies and StateFarm James Q. Wilson Chair at the American Enterprise Institute (AEI), testified before the House Ways and Means Committee on February 2, 1016, discussing tax reforms. Hassett believes that over 90% of corporate tax burden falls on workers.

Also, check out Aparna Marthur’s article, from AEI, The bad and the bad of US corporate income taxes.

For a contrarian view that corporate taxes fall on shareholders, not workers, see the blog post from the Tax Justice Network: Corporate tax: the great incidence hoax.

Listener Questions

From Bryce:

Ron and Ed,

I've listened to several episodes of your show now where you guys attack the idea of professional licenses (for doctors, lawyers, etc.) because they impede innovation and decrease competition.

And you've slowly gotten me to agree with you.

Then the other day was talking about the immigration debate with a friend and realized something. Is requiring citizenship or a visa to the US to work here not the same basic problem as requiring certain professional licenses?

Are the same arguments for tighter immigration policies not the same as those for the "need" for licenses in the professions? Couldn't you then argue that citizenship requirements have the same ill affects on our economy (slowing innovation and decreasing competition)?

Perhaps this is something that's already been discussed. Your thoughts?

Bryce

Two Questions from BJ:

"How is it that no one gets paid on the Starship Enterprise?"

Answer from our friend, Robert Wood:

There isn't money per se in the Federation. You do your job because it's for the greater good. Captain Picard says "The economics of the future is somewhat different. You see, money doesn't exist in the 24th century... The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of Humanity." in Star Trek: First Contact (Yes I had to google to find the exact quote) However, there is still money it just seems the Federation doesn't use it. In Star Trek: Voyager, they discuss that the economy of Earth changed in the late 22nd century but didn't explain how. Basically it's a socialist utopia. There is talk at one point of energy credits for using transporters and replicators. But I don't recall Federation credits being explained very well. Theoretically this is a post scarcity economy since these technologies exist. There is currency though. The Ferengi use gold-pressed latinum, whatever that is, which also appears to be the currency for cross cultural trading.

"Is there a term for the double-thank you effect?"

There is now. Ed has coined: Dankenzweite which means "Second thanks" in German.

From Geir:

Hi Ron and Ed,

I'm listening to your podcast about "risk". It's a very interesting topic and you and Ed are discussing this in a brilliant way. Lots of examples and references. Your show notes are very useful also. My list of books to read gets longer and longer after every podcast. Puh! When will I have or take the time to read them? I really don't know!

Could you make a podcast on "witch great thinkers you should follow in years to come". Today, changes happen fast. New business models evolve over night. Where and how can we keep up on knowledge concerning innovation, tech, new business thinking, etc. The Soul of Enterprise is one source. Are there any others to recommend?

Cheers,

Geir

Answers: George Gilder, Deirdre McCloskey, Clayton Christensen, Gary Hamel, Don Tapscott, Daniel and Richard Susskind. Also, follow IBM’s Watson, and the entire Artificial Intelligence/Deep Learning movement.

Check out our interview with Deirdre McCloskey, George Gilder, and Daniel Susskind.

Episode #86 - Second Interview with Rabbi Daniel Lapin

Ed and I were honored to interview Rabbi Daniel Lapin for the second time (our first guest to make an appearance twice). Ron has been a big fan of the Rabbi, listening to his radio show, and reading his books, for over a decade.

We only had the Rabbi on for about 30 minutes, so we ran without commercials for the first half of the show.

We covered the following topics with him:

• His 2/6/16 Podcast on The Blaze Radio Network: “There Are No Poor People in America.”

• His thought experiment about paying $20 to prevent suicides, and the three Biblical punishments (Capital, Restitution, and Lashes), and why Rabbi supports all three.

• We discussed Father Sirico’s statement: “I value the truth more than my freedom.” Rabbi didn’t agree. This will be discussed more in the future.

• Does he think taxation is theft? Rabbi, “No, I don’t.”

Biography

Rabbi Daniel Lapin, known world-wide as America's Rabbi, is a noted rabbinic scholar, best-selling author and host of the Rabbi Daniel Lapin Podcast on The Blaze Radio Network. He is one of America’s most eloquent speakers and his ability to extract life principles from the Bible and transmit them in an entertaining manner has brought countless numbers of Jews and Christians closer to their respective faiths. In 2007 Newsweek magazine included him in its list of America’s fifty most influential rabbis. 

Before immigrating to the United States in 1973, Rabbi Daniel Lapin studied Torah, physics, economics and mathematics in Johannesburg, London and Jerusalem. He quickly became persuaded that God continues to smile on the United States of America and he became a naturalized citizen on what he describes as the proudest day of his life.

Rabbi Daniel Lapin was the founding rabbi of Pacific Jewish Center, a now legendary Orthodox synagogue in Venice, California. He implanted the community’s mission of demonstrating the relevance of traditional Faith to modern life.

Pacific Jewish Center, synagogue in Venice, CA, est. 1978 with Michael Medved, served as rabbi for 15 years

Books 

America’s Real War: An Orthodox Rabbi Insists that Judeo-Christian Values are Vital for Our Nation’s Survival (1999)

Buried Treasure: Secrets for Living from the Lord’s Language (2001)

Thou Shall Prosper: Ten Commandments for Making Money (2009)

Business Secrets from the Bible: Spiritual Success Strategies for Financial Abundance (2014)

Other Resources and Readings

Ron’s review of Thou Shall Prosper

Rabbi Lapin’s website: www.youneedarabbi.com and www.rabbidaniellapin.com, where you can subscribe to his weekly Thought Tools column, which contain Biblical principles on family, finance, faith, marriage, and relationships.

Rabbi Lapin’s Podcast on The Blaze Radio Network

Ed mentioned the article, A Plea for Culinary Modernism:  Why We Should Love New, Fast, Processed Food (pdf).  Gastronomica I (February 2001), 36-44.

Ed’s blog post on his grandfather, who used to sit on the porch and say, “I wonder what the poor people are doing?”