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The American Scene

From the July/August 2008 Issue

The corporate tax-cut race; Wal-Mart to the rescue; the case for genetically modified foods; smoking bans; and more.

To Join the Tax-Cut Race?
Reducing the corporate tax rate would be a simple way to boost U.S. competitiveness.

Earlier this year we noted that the World Economic Forum had ranked America as the world’s most competitive economy. Unfortunately, the political winds seem to be shifting in favor of policies that would make the United States less competitive, such as curbing trade expansion and introducing excessive new financial regulations. 

We are encouraged, however, by the growing bipartisan consensus that America’s federal corporate tax rate should be trimmed. It currently stands at 35 percent; when the average state corporate tax rate is combined, the overall corporate tax rate jumps past 39 percent. Among developed countries, only Japan’s is higher. 

This is an issue on which Uncle Sam is trailing way behind the Europeans. As Bloomberg News reported back in May 2007, “A tax-cut war is spreading across Europe as leaders of the continent’s biggest economies give up criticizing smaller neighbors for slashing business rates and decide to join them instead.” 

AmSc-JulyAug-1.jpgIt’s a worldwide trend, really. As American Enterprise Institute economist Alan Viard has noted, “A survey by KPMG found that the average corporate tax rate in a sample of 86 countries had fallen from 38 to 27 percent from 1992 to 2006. The data in the AEI International Tax Database on a sample of 90 countries reveal that, from 1995 to 2004, 49 countries reduced rates while only 11 increased them, and the average tax rate fell from 32.2 to 27.7 percent. 

“Rate reductions have been particularly common in Europe. A May 2006 European Union (EU) report found that 22 of the 25 EU countries had reduced their statutory rates between 1995 and 2004. The unweighted average of the countries’ tax rates had fallen from 35 to 26 percent; when weighted by country size, the average rate had fallen from 43 to 33 percent.” 

Amid this global tax-cutting frenzy, Congress has dithered. As Cato Institute scholar Daniel Mitchell points out, “every Nordic nation”—including Sweden, Denmark, Norway, Finland, and Iceland—“enjoys a lower corporate tax rate than the United States. Corporate income in the United States is taxed at 39.3 percent, while the tax rate in Nordic nations is no higher than 28 percent.” 

Sources: Simon Kennedy, “Tax-Cut War Widens in Europe as U.K., France, Germany Jump In,” Bloomberg News, May 29, 2007; Alan D. Viard, “Three Cheers for the Decline of the Corporate Income Tax,” AEI Tax Policy Outlook, April 2008; Daniel J. Mitchell, “What Can the United States Learn from the Nordic Model?” Cato Institute Policy Analysis, November 2007.

It’s Not Easy Being Green
A Dartmouth study finds that voluntary corporate climate change initiatives often reduce shareholder wealth.

At any company, write Dartmouth economists Karen Fisher-Vanden and Karin S. Thorburn, “The board of directors has a fiduciary duty to shareholders.” In a recent study, they set out to determine “if environmentally responsible investments (ERI)—i.e., voluntary capital expenditure decisions aimed at reducing the pollution of the firm—and in particular investments related to climate change, conflict with this fiduciary duty.” 

Specific goals to reduce emissions led to a decline in stock price.

Fisher-Vanden and Thorburn “estimate the cumulative abnormal stock returns (CAR) for a sample of firms announcing their voluntary participation in one of two programs that involve commitments to environmental standards: the EPA Climate Leaders (CL) and Ceres. Contrary to earlier results related to compliance, we find that firms becoming members in Climate Leaders experience a significant drop in their stock price (on average -0.9 percent). Moreover, when firms as part of the CL program subsequently announce a specific goal for the reduction of their [greenhouse] gas emissions, their stock price declines further (-1.3 percent on average).” 

However, the firms joining Ceres “have insignificant announcement CARs, possibly because this program implies less stringent environmental performance goals compared to the Climate Leaders program,” the report finds. 

Source: Karen Fisher-Vanden and Karin S. Thorburn, “Voluntary Corporate Environmental Initiatives and Shareholder Wealth,” European Corporate Governance Institute Working Paper, April 2008.

Compensation Confusion
Confirmation that U.S. incomes have roughly kept pace with productivity growth.

According to Harvard economist Martin Feldstein, “the share of national income going to employees is at approximately the same level now as it was in 1970.” This finding contradicts an oft-repeated claim about “stagnant” incomes. 

AmSc-JulyAug-2.jpg“Two principal measurement mistakes have led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity,” Feldstein writes. “The first of these is a focus on wages rather than total compensation. Because of the rise in fringe benefits and other non-cash payments, wages have not risen as rapidly as total compensation. It is important therefore to compare the productivity rise with the increase of total compensation rather than with the increase of the narrower measure of just wages and salaries.” 

The second mistake is to use different price deflators to measure productivity and real compensation. This yields misleading results. Since 1970, Feldstein notes, productivity has grown at an average rate of 1.9 percent per year. Meanwhile, “Real compensation per hour rose at 1.7 percent per year when nominal compensation is deflated using the same non-farm business sector output price index. In the more recent period between 2000 and 2007, productivity rose much more rapidly (2.9 percent a year) and compensation per hour rose nearly as fast (2.5 percent a year).” 

Source: Martin S. Feldstein, “Did Wages Reflect Growth in Productivity?” National Bureau of Economic Research Working Paper, April 2008.

A ‘Windfall’ of Unintended Consequences
As motorists feel pain at the pump, a misguided policy gets another hearing.

Gas prices and energy company profits have both been soaring, which means it’s time for another round of populist flailing on Capitol Hill. In particular, the idea of a “Windfall Profits Tax” (WPT) is once again all the rage. And why not? Just look at how well it worked last time! 

AmSc-JulAug3.jpgWe’re kidding, of course. According to an oft-cited 1990 Congressional Research Service report, the WPT enacted in 1980 had the effect of reducing domestic oil production by 3 to 6 percent and increasing oil imports by 8 to 16 percent. Still, there seems to be a misconception that the only Americans hurt by a WPT would be rich oil executives and greedy fat cats. The truth is much different. 

In 2005, Senator Byron Dorgan (D-ND) sponsored legislation to slap a WPT of 50 percent on all oil company profits derived from oil sold for more than $40 per barrel. Later that year, economists Robert J. Shapiro, who served as economic policy director in the Commerce Department under President Clinton, and Nam D. Pham, founder and president of the consulting firm NDP Group, analyzed the effects of Dorgan’s tax proposal.

The Windfall Profits Tax of 1980 reduced domestic oil production by 3 to 6 percent and increased oil imports.

“Depending on the price of oil,” they concluded, “the tax would cost shareholders of oil company stocks an average of between $21.3 billion per year and $121.9 billion per year in foregone increases in the value of their stock and foregone dividend pay-outs. These foregone gains would represent between 2.7 percent and 10.9 percent of the total projected value of oil company stocks in 2010.” 

And, “since 41 percent of oil company stocks are currently held in various forms of pension plans and retirement accounts, retirees and those currently saving for retirement would bear much of the burden of those foregone gains. The foregone gains for all pension plans and retirement accounts would total between $8.7 billion a year and $50 billion a year, depending on the price of oil and inflation rate.” 

Sources: Salvatore Lazzari, “The Windfall Profit Tax On Crude Oil: Overview of the Issues,” Congressional Research Service, September 1990; text of S. 1631 (109th Congress): “Windfall Profits Rebate Act of 2005”; Robert J. Shapiro and Nam D. Pham, “The Economic Impact ofa Windfall Profits Tax For Savers and Shareholders,” Investors Action Foundation, November 2005.

Wal-Mart to the Rescue?
As economist Steven Horwitz shows, the retail giant played a critical role in post-Katrina relief efforts.

Given all that went wrong with America’s response to Hurricane Katrina, relatively little attention has been paid to what went right. In a new study, St. Lawrence University economist Steven Horwitz points to two underappreciated heroes: the U.S. Coast Guard and Wal-Mart. 

“A large number of people owe their lives to the thousands of Coast Guard rescues and the resources that private-sector firms such as Wal-Mart made available,” Horwitz writes, noting that a “decentralized organizational culture and relative political independence enabled the Coast Guard to grant a large degree of discretion to on-the-spot actors who could take advantage of their access to local knowledge. These same benefits of decentralization explain the success of private-sector firms.” 

‘Disaster-relief policy should remove the barriers that hinder the private sector from getting the job done.’

Wal-Mart’s post-Katrina response was “the largest” of any private-sector company, Horwitz observes, but other firms—particularly other big-box retailers, such as Home Depot—also played a valuable role. “Between August 29 [when Katrina made landfall] and September 16,” he reports, “Wal-Mart shipped almost 2,500 truckloads of merchandise to the affected areas and had drivers and trucks in place to ship relief supplies to community members and organizations wishing to help. Home Depot provided more than 800 truckloads worth of supplies to the hard-hit areas and also used buses to transport 1,000 employees from other areas into the region. Wal-Mart also provided a large amount of free merchandise, including prescription drugs, to those in the worst-hit areas of the Gulf Coast....Most importantly, Wal-Mart and Home Depot were able to get this assistance to the disaster areas almost immediately after the storm had passed, in comparison to the days—in some cases weeks—that residents waited for government agencies to provide relief.” 

At the time, local officials expressed their gratitude for Wal-Mart’s aid. The mayor of Kenner, a New Orleans suburb, said that “the only lifeline in Kenner was the Wal-Mart stores. We didn’t have looting on a mass scale because Wal-Mart showed up with food and water so our people could survive.” 

And yet, somehow, the story of Wal-Mart’s post-Katrina efforts has been largely forgotten in the three years since. Horwitz hopes to correct that. “If the lesson of Katrina is that the private sector is better at marshalling resources and delivering them quickly, then disaster-relief policy should remove the barriers that hinder the private sector from getting the job done.” 

Source: Steven Horwitz, “Making Hurricane Response More Effective: Lessons from the Private Sector and the Coast Guard During Hurricane Katrina," Mercatus Policy Series No. 17, March 2008.

A More Secure Work Place
Economist Steven J. Davis argues that there has been a ‘long-term decline in the risk of job loss facing American workers.’

As we went to press, it was unclear whether the U.S. economy had entered (or was approaching) a recession. The first-quarter GDP numbers showed anemic growth, but growth nonetheless. 

Whatever happens in 2008, many Americans believe that the risk of job loss facing the average U.S. worker has increased significantly in recent years. According to University of Chicago economist Steven J. Davis, a visiting scholar at the American Enterprise Institute, that’s just not true. 

AmSc-JulyAug-4.jpgDavis notes that there has been “a dramatic decline in new claims for unemployment benefits since the 1970s and early 1980s. New claims average 0.24 percent of employment per week from January 2004 to November 2007, slightly below the 0.26 percent average from January 1996 to December 1999 and well below any earlier period covered by the data.” Indeed, he argues that “a variety of indicators based on household surveys, establishment surveys, and administrative records show a long-term decline in the risk of job loss facing American workers.” 

So what explains the perception of growing insecurity? For one thing, says Davis, “Many observers interpret declines in the durability of employment relationships (e.g., declines in median job tenure) as evidence of an increased risk of unwelcome job loss and a decline in job security. This interpretation is unwarranted. Job tenure statistics do not inform us about job security or the risk of job loss for the simple reason that most employment relationships do not end with an employer-initiated separation.” Citing data from a Bureau of Labor Statistics survey, Davis reckons that “layoffs and discharges for cause account for only 36 percent of worker-employer separations in the 2001 to 2006 period.” 

In our view, the biggest cause of economic anxiety is rising consumer prices, namely, gas prices, food prices, and healthcare costs. Even if the risk of job loss has decreased over the long term, the risk of inflation has increased over the short term—something that Washington lawmakers and Federal Reserve officials should keep in mind. 

Source: Steven J. Davis, “The Decline of Job Loss and Why It Matters,” prepared for the Allied Social Science Associations meeting in New Orleans, January 2008.

Food Fight
Rising food prices have caused hardship in the developing world. Robert Paarlberg argues that it’s time to embrace genetically modified foods.

At a time of soaring global food prices, it is distressing to see such stubborn resistance to genetically engineered agricultural crops, also known as genetically modified organisms (GMOs) or genetically modified (GM) foods. These foods could help reduce hunger across the globe by increasing crop yields. Opponents often dismiss them as “Frankenfoods” that are unhealthy to eat and bad for the environment. But such criticisms are based on misplaced fears and shoddy science. In his new book, Starved for Science, Wellesley College political scientist Robert Paarlberg offers a useful corrective. “In both Europe and the United States,” he notes, “scientific authorities have repeatedly asserted there is not yet any credible evidence of new risks to human health or the environment from any of the GM foods or crops approved by regulators and placed on the market so far.” 

According to Paarlberg, “roughly 70 percent of all supermarket products in the United States have at least some GM content,” and “approximately 25 percent of all new drugs approved for the market in rich countries” are “recombinant drugs made from GMOs.” And consider this: “By 2006 farmers in the United States were using GM varieties on 89 percent of their acreage planted to soybeans, on 83 percent of their acreage planted to cotton, and on 61 percent of their acreage planted to corn.” 

‘Roughly 70 percent of all supermarket products in the United States have at least some GM content.’

Paarlberg ticks off a slew of well-respected agencies and scientific bodies that have endorsed GMOs. In 2000, for example, several hundred experts brought together by the Organization for Economic Cooperation and Development declared, “No peer-reviewed scientific article has yet appeared which reports adverse effects on human health as a consequence of eating GM food.” 

In 2002, the director-general of the World Health Organization (WHO) affirmed that “WHO is not aware of scientifically documented cases in which the consumption of these foods has negative human health effects. These foods may therefore be eaten.” 

Later that same year, the French Academy of Sciences said that “all the criticisms against GMOs can be set aside based for the most part on strictly scientific criteria.” 

In 2004, the United Nations Food and Agriculture Organization reported that “to date, no verifiable untoward toxic or nutritionally deleterious effects resulting from the consumption of foods derived from genetically modified foods have been discovered anywhere in the world.” 

Meanwhile, a study of 10 years’ worth of peer-reviewed research, published last year, concluded, “The data available so far provide no scientific evidence that the cultivation of the presently commercialized GM crops has caused environmental harm.” 

Source: Robert Paarlberg, “Starved for Science: How Biotechnology Is Being Kept Out of Africa” (Harvard University Press, 256 pp., $24.95).

Smoke and (Broken) Mirrors
According to new research, smoking bans have led to an increase in drunk-driving fatalities.

In recent years, state and local governments across America have passed measures to outlaw smoking in bars. The public-health rationale is simple: to protect bar patrons and employees from exposure to secondhand smoke. But according to economists Scott Adams of the University of Wisconsin-Milwaukee and Chad Cotti of the University of South Carolina, smoking bans have had some unintended—and deadly—consequences. Specifically, they have led to an increase in drunk-driving fatalities. 

Relying on “county-level data,” Adams and Cotti examined “states, counties, and municipalities that have individually passed bans at different points in time, the vast majority of which were implemented over the past six years. This presents a natural laboratory to demonstrate the effects of smoking bans.”

And what were those effects? “Our estimates reveal a significant increase in the danger posed by drunk drivers following the passage of bans,” they write. “Specifically, our preferred estimate indicates that fatal accidents involving a drunk driver increase by about 13 percent. This is approximately 2.5 fatal accidents a year for a typical county.” 

Drunk-driving fatalities increase because smokers drive to ‘nearby jurisdictions that allow smoking in bars.’

Adams and Cotti make clear that “these estimates are robust to the inclusion of controls for area and time fixed effects, changes in population, changes in other policies that may impact drunk driving behavior (e.g., beer taxes, blood alcohol content regulation), as well as changes in factors that may influence overall driving risk separate from drinking behavior (e.g., construction, weather, etc.).” 

What explains their findings? As Adams and Cotti conclude, “Our evidence is consistent with two mechanisms—smokers searching for alternative locations to drink within a locality and smokers driving to nearby jurisdictions that allow smoking in bars.” 

In an interview with THE AMERICAN, Adams said that he still supports smoking bans on public-health grounds. “The health benefits outweigh the health costs,” he explained. 

Cotti was less committal. “From a policy perspective, I don’t really have a stance,” he told us. “I would stress that any increase in drunk driving estimated in the paper will eventually have to be weighed against the potential positive health impacts of smoking bans. My instincts tell me that after all of the pros and cons are weighed, the net effect of smoking bans will be positive in the long run. Moreover, much of the concern about drunk driving raised in our paper could be alleviated if smoke-free communities increase DUI enforcement measures to provide drivers with appropriate disincentives.” 

Source: Scott Adams and Chad Cotti, “Drunk Driving After the Passage of Smoking Bans in Bars,” January 2008.

Illustrations by Robert Neubecker. Feature image by Getty Images.

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