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The subsidies will undercut their biggest selling point

Yesterday I asked whether Big Labor was turning on Obamacare, after the Roofer's union called for its repeal.  This morning I got to talk to an expert who pointed out that the roofers are in a particularly unattractive position.  Roofing companies are mostly small shops, which makes them hard to organize.  And it just got much harder, because now open-shop roofing companies are essentially getting subsidized health insurance for their employees.

Under Obamacare, small firms don't have to provide insurance to their employees.  That probably describes most of the non-union roofing firms in the country.  Meanwhile, non-union roofers are going to be eligible for heavily subsidized insurance on the exchanges.  Union workers get the health insurance, but no subsidy.  This will mean one of two things:

1.  Union workers will get paid less than non-union workers, as wages are diverted to cover the union health plan.

2.  Union firms will have higher costs than non-union firms, as they cover the extra cost of an unsubsidized union health plan.  

Countdown to Obamacare

Is Labor Turning Against Obamacare?

A union is calling for the law's repeal

I've been hearing for a while that unions are becoming increasingly disenchanted with Obamacare.  Multi-employer union health plans cover an estimated one in six private sector workers, so they're a big enough market presence to worry about.  And as with pensions and other union benefits, the structure of multi-employer plans is unique enough that they need special rules to cover them.  For example, employees are not given health insurance based on the number of hours a week they work; instead, you qualify by working a certain number of hours in the quarter.  

Some unions are worried that Obamacare is taking away some of the tools they use to control utilization and costs.  There's also a lot of concern that these plans are going to get hit by the "Cadillac Tax" on generous health benefits.  The unions are unhappy about this, and not just because health insurance is tax advantaged; they view the generosity of their benefits as both an organizing tool, and a form of social engineering.  It takes the same number of hours worked to qualify for health benefits whether you're a single or a family, and the unions like it that way.  They're fairly socially conservative organizations.  And besides, the spouses like the benefits, which keeps 'em in the union.  

Obamacare did very little to accomodate the multi-employer plans.  Perhaps that was due to be hashed out in the final bill, but of course, we didn't get a final bill, because the election of Scott Brown threw everything into chaos.  Instead they hastily passed what was basically a draft bill, which had done virtually nothing about the MEPs.  The unions supported it anyway, undoubtedly because they were assured by the Obama administration that the problems would be fixed later.  From what I understand, they still haven't been.

But until now there hasn't been an outright break, just a lot of behind-the-scenes grousing.  That changed today, as the 22,000 member Roofer's union has just called for Obamacare's repeal.


Rogoff and Reinhart Respond

Macro is hard

After yesterday's fracas, the two economists offer a lengthy response to the FT.  My takeaways:

1.  The coding error is confirmed.  That by itself raises the mean growth rate of high-debt countries from -0.1% to 0.2%.  So the negative growth result is gone.

2.   Rogoff and Reinhart offer what is to me a convincing defense of their decision to omit the immediate postwar data from New Zealand, Australia, and Canada, which is that in 2010, when the paper was published, they had just gotten the postwar data from these countries, and had not yet had time to clean it up.  I find this convincing because they have subsequently published using the omitted data.

3.  Reinhart and Rogoff make a fairly strong defense of their decision to weight by country, rather than country year:

A much-cited figure on debt and growth comes under fire.

Bit of a bombshell in the econoblogosphere yesterday.  Several economists from the University of Massachusetts are contesting one of the key findings by the authors of  This Time is Different, a landmark study of financial crises and debt dynamics from Carmen Reinhart and Ken Rogoff.  At issue is their observation that once the debt-to-GDP ratio passes 90%, growth slows down dramatically.  

We should be careful about what we're actually refuting.  Since this critique broke, there's been a bit of strengthening up Rogoff and Reinhart's claims in order to beat them down--claiming, for example, that Rogoff and Reinhart asserted that high debt mechanically causes low growth.  I've interviewed both of them about their work, and they've always been most modest in their claims, emphasizing that they've isolated an empirical regularity, not causality.  While the paper under question does speculate about possible vehicles for causality, its claims are more modest than both its critics, and those who have bandied about the 90% statistic, would have you believe.

Why are there thresholds in debt, and why 90 percent? This is an important question that merits further research, but we would speculate that the phenomenon is closely linked to logic underlying our earlier analysis of “debt intolerance” in Reinhart, Rogoff, and Savastano (2003). As we argued in that paper, debt thresholds are importantly country-specific and as such the four broad debt groupings presented here merit further sensitivity analysis. A general result of our “debt intolerance” analysis, however, highlights that as debt levels rise towards historical limits, risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs. Even countries that are committed to fully repaying their debts are forced to dramatically tighten fiscal policy in order to appear credible to investors and thereby reduce risk premia. The link between indebtedness and the level and volatility of sovereign risk premia is an obvious topic ripe for revisiting in light of the more comprehensive cross-country data on government debt.

Of course, there are other vulnerabilities associated with debt buildups that depend on the composition of the debt itself. As Reinhart and Rogoff (2009b, ch. 4) emphasize and numerous models suggest, countries that choose to rely excessively on short term borrowing to fund growing debt levels are particularly vulnerable to crises in confidence that can provoke very sudden and “unexpected” financial crises. Similar statements could be made about foreign versus domestic debt, as discussed. At the very minimum, this would suggest that traditional debt management issues should be at the forefront of public policy concerns.


Why Are Attacks Like Boston So Rare?

It would be easy to kill lots of people every day in a place as open as America. How come it doesn't happen?

As soon as I saw the news yesterday, I called my father.  Dad moved to a little town north of Boston a few years back, and for all I knew, he'd driven down to the marathon to take in the running on this beautiful spring day.

He picked up his home phone.  "Are you all right?" I asked, then realized.  "Of course you're all right.  You're in the house."  

He had no idea it had even happened.  We reassured each other for a few moments, then I hung up.  

I didn't write about it yesterday because I didn't know what to say.  The air was full of indescribable suffering and questions for which I have no answers.  Who did this terrible thing?  Why?  

Get rid of the corporate income tax. It's not worth it, and there are better ways to collect the money.

James Livingston, historian and author of a book on consumerism that I didn't like very much, has taken to the op-ed pages of the New York Times to suggest that we ought to get rid of payroll taxes and replace them with corporate income taxes.  It is a festival of bad statistics:

So, by slashing corporate income taxes and forcing a new reliance on payroll taxes to finance government spending, we have redistributed income to the already wealthy and powerful. Our tax system has actually fostered inequality.

The fiscal problem we face is not, then, a lack of revenue sources. We can finance any amount of transfer payments and “entitlements” by taxing corporations’ profits in the same way we tax personal income, using a progressive formula. If necessary, give them a mortgage deduction — they already get something like it in the form of accelerated depreciation allowances on their purchases of capital equipment — but make them pay higher taxes on their income. Do that, and the federal deficit goes away.

The now-familiar objection to a tax increase on corporate profits is that it will discourage private investment and thus dampen job creation. The retort is just as obvious: since when have tax cuts on corporate profits led to increased investment, faster job creation and higher per capita consumption out of rising real wages? It didn’t happen after the Reagan Revolution, it didn’t happen during the Clinton boom of the 1990s, and it sure didn’t happen under George W. Bush.

As the government debt gets higher, it's harder for the central bank to raise interest rates

Carmen Reinhart has a very good, very sobering interview with Spiegel about government debt and central bank independence:  

No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis.

She adds:

But it is certainly more difficult for a central banker to raise interest rates with a debt to gross domestic product ratio of over 100 percent than it is when this ratio stands at 39 percent. Therefore, I believe the shift towards less independence of monetary policy is not just a temporary change.

Market Environmentalism

How Markets Cope With Disappearing Bees

Colony Collapse Disorder was decimating hives. So the market built more.

You may have read about Colony Collapse Disorder, the mysterious condition in which honeybee colonies abandon their hives (and, presumably, die somewhere in the wild).  No one knows what causes it, though the leading candidates currently seem to be pesticides, some sort of imported parasite, or both.  But it's obviously a big problem for beekeepers--and by extension, for the billions of dollars worth of crops that rely on pollination services from commercial beekeeping operations.  

However, a new paper from PERC argues that it actually isn't as big a problem as the media coverage has suggested.  Despite the problems, the number of hives hasn't fallen since CCD first showed up in 2006.  In fact, it's risen slightly.


Why?  Because beekeepers have responded to the loss of hives by creating new ones.  This isn't free--the cost of pollinating some crops has definitely risen.  But these are not crippling price increases.  In fact, they're rather modest compared to increases that occurred before CCD reared its ugly head. The market has taken a big shock entirely in stride, adjusting prices to help keep pollination services flowing with no interruption.  

Wipe that smile off your face. That big tax refund is bad news.

As I write this, April 15 looms. Not for me, mind you—we took our taxes to the accountant weeks ago. But for millions of Americans who will be driving madly to the post office at the last possible minute, dropping their returns in the slot, and hoping a sizable tax refund. Many of you have been looking forward to that refund for weeks, planning all the great stuff you’re going to do with it.

This is all wrong.

No, not the last-minuteness of it all. Oh, sure, you should probably do your tax returns a few days early, so that you won't have the worry of traffic and fender-benders in the post-office parking lot. But that’s a personal choice I won’t hector you about. If you don’t have anything better to do with your Monday evening, who am I to judge?

Tax Day

Dressed as the Statue of Liberty, Sonia Joaquin holds a sign to remind passing motorists of the deadline for taxes in Tigard, Oregon, in 2010. (Don Ryan/AP)

Gosnell is accused of grisly crimes that I didn't want to think about.

Kermit Gosnell, a Pennsylvania abortion doctor, is on trial for a lurid series of lurid crimes at his clinic. I can't bring myself to describe them, so I'll let Kirsten Powers do it.

Infant beheadings. Severed baby feet in jars. A child screaming after it was delivered alive during an abortion procedure. Haven't heard about these sickening accusations?

It's not your fault. Since the murder trial of Pennsylvania abortion doctor Kermit Gosnell began March 18, there has been precious little coverage of the case that should be on every news show and front page. The revolting revelations of Gosnell's former staff, who have been testifying to what they witnessed and did during late-term abortions, should shock anyone with a heart.

NBC-10 Philadelphia reported that, Stephen Massof, a former Gosnell worker, "described how he snipped the spinal cords of babies, calling it, 'literally a beheading. It is separating the brain from the body." One former worker, Adrienne Moton, testified that Gosnell taught her his "snipping" technique to use on infants born alive.

Obamacare's Cost Control: Too Little. Hearing About It: Too Late

Sarah Kliff has a nice little piece on health care advocates getting together to figure out how to control costs.  "Obamacare Expanded Health Access" read the title. "Now supporters want another bill to tackle costs."

[T]he Partnership wants to start putting political muscle behind the ideas that already exist — and, after it does that, pass legislation that would control health-care costs in a way the Affordable Care Act doesn’t.

“One of the things we’ve all learned from decades of painful experience with health-care reform is that these are very powerful interests,” Families USA Executive Director Ron Pollack says. “If they’re not bought in, we’re not going to achieve significant change.

“What we think we’re doing that’s unique is we’re going to reach out to those key parties and key sectors. If we’re successful, we’ll lay the basis for a comprehensive, thoughtful approach to dealing with costs and quality.”

The Future of Retail

The Real Lesson of JC Penney: Sometimes, You're Stuck

It's fun to blame Ron Johnson, but it's doubtful that anyone else could have saved the ailing retailer.

This week, JC Penney's board fired the firm's CEO: Ron Johnson, the former retail genius who bought you the Apple Store.  The post-mortems have been pretty brutal.  Johnson seemed to think that what worked for Apple would work for JC Penney: he canceled sales and tried to lure buyers instead with specialized in-store boutiques and similar buzzy fare.  

This was pretty much entirely disastrous.  "Always low prices" works for Wal-Mart because it is, far and away, the low cost supplier of pretty much everything it sells, and for Apple because it sells a product that can't be bought at a discount anywhere.  It didn't work for JC Penney, which sells middling quality goods to a cost-conscious demographic which has been especially squeezed over the last five years.  As Virginia Postrel points out, this got rid of the old reason that people used to stop into Penneys, but didn't give them enough of a new one to get them through the doors.  

This certainly demonstrates that you should never put too much stock in genius (your own, or anyone else's).  Some of what looks like superlative performance may just be the luck of the draw.  Ron Johnson did a very good job launching Apple's retail stores.  But it doesn't follow that he can therefore make anything work, even an ailing department store brand whose consumers are cutting back sharply on their spending.  

But by the same token, we shouldn't give in to the temptation to think that Ron Johnson is some sort of idiot who would have been able to save Penneys if he wasn't so stupid.  Johnson's bold moves didn't work, to be sure . . . but it's not clear what would have.  Large retail stores in malls are not a very good business to be in.  And if you have to be in that business, because you happened to get into the business 80 years ago when it was a license to print money, JC Penneys market segment is about the last one you'd pick.  It's vulnerable on about every front.  

Virtual Economics

Why Bitcoin is a Bubble

Currency is liquid. Bitcoins aren't.

My friend Tim Lee says that critics of Bitcoin need to do a better job of explaining why bitcoins--the virtual currency that has been soaring to impressive heights--are in a bubble.  Tim writes:

When people dismiss Bitcoins because they can’t think of how they’d use it, they’re missing the fact that Bitcoin is a platform, not a product in its own right. When ordinary users started buying computers, it wasn’t because they thought it would be cool to own a computer. They did it because they wanted to do spreadsheets or word processing or email. Similarly, ordinary users aren’t going to start using Bitcoins just because it’s a cool technology. If normal users start using Bitcoin, it will be because they’re interested in gambling, or cheap international money transfers, or some other applications that hasn’t been invented yet. And Bitcoin’s intermediary-free architecture means that many more people can try their hand at building the platform’s killer app.

I haven't written about bitcoin before, but here's my stab at why it's fair to say that bitcoins are frothy: eventually, the novelty will wear off, the state will get involved, and the costs will be found to outweigh the advantages.

The problem isn't that I can't imagine how I'd used bitcoins.  I can imagine exactly how I'd use them: to evade government surveillance of my financial transactions.  This potential use seems to have tickled the imaginations of many, many bitcoin fanciers. The problem is, the government also has an imagination. 

It barely raises any money. It won't discourage people from buying corporate jets. So why does the president spend so much time talking about it?

The administration is due to release its budget later today, at which point I'll dive in emerge sometime later with a trenchant analysis clutched in my teeth as I swim madly for the shore.  

Meanwhile, a note on something we know will be in the budget: deficit reduction via elimination of the perfidious "tax breaks for corporate jets".  The president seems to have been obsessed with corporate jets at least since The Audacity of Hope, and continues to argue strongly against them at every opportunity; they were a cornerstone of his stump speeches.  And have continued to be even after the election ended.   In February, for example, he told a Kansas television station that "they don't need an extra tax break, especially at a time when we're trying to reduce the deficit. Something's gotta give."  

This is a bit weird given that President Obama rides on what is essentially the nicest corporate jet in the world.  To be fair, the President is quite right that companies do not need a tax break to buy corporate jets.  But since they don't really get a tax break for buying corporate jets, we probably don't need to spend this much valuable presidential time worrying about this non-problem.  

Should Google and Facebook employees pay taxes on all that free food?

Yesterday, the Wall Street Journal reported that the IRS is eyeing one of the many fabulous perks of working for a high-tech company: free food. If the Journal is right, Googlers and Facebookers could soon be paying taxes on their consumption of all those luscious free meals.  

Should the IRS really treat those meals as compensation? My colleague Daniel Gross doesn't think so. On the one hand, those meals really are pretty great; I've eaten in the Google cafeteria in D.C., and it rivals the offerings of the more expensive local eateries. On the other hand, the companies argue that this is essentially a part of creating their unique corporate culture. Keeping the staff in for lunch boosts productivity (no time wasted walking or driving to a restaurant), and perhaps more importantly, it keeps your employees eating together, bouncing ideas off each other and fostering creativity.  

The one argument that they can't make is that the free food helps them attract and retain top-notch workers. The IRS has a term for tools that help you attract and retain workers: they call them "compensation." And they want someone—either you, or your employer—to pay taxes on any such attractive amenities.

The core problem is that the IRS cannot look into the hearts of companies and see which of them really needs to provide free lunch to their employees in order to have a healthy, vibrant company, and which of them is doing this in order to provide a tax-free boon to their workers. There is a reason that the tax code was amended to make it harder for employers to expense employee meals: prior to the 1986 tax code reform, when all meals were deductible to the employer, but not taxable to the employee, corporate dining rooms and expense accounts were in fact frequently used as a form of supplementary tax-free compensation. Since the IRS can't tell which companies are mostly interested in the productivity benefits, and which are mostly interested in giving their employees a little something extra on the side, they have to rely on some very crude rules, like "Is it physically feasible for you to leave the premises in order to eat?"

About the Author

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Megan McArdle

Megan McArdle is a special correspondent for Newsweek and The Daily Beast covering business, economics, and public policy. A former senior editor at The Atlantic and writer for The Economist, Megan has a diverse work history including three small startups and a disaster recovery firm at Ground Zero.

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