Redistricting, the Constitutional Equivalent of Fermat’s Last Theorem

The French mathematician, Pierre de Fermat, in 1632 wrote about a problem whose roots went back to ancient Greece. Everyone knew that a squared number could be broken down into two squared components.  Fermat’s Theorem was that it was not possible to do that with any number raised to a power greater than 2.  Fermat’s Theorem withstood being solved until 1994 when a Princeton professor, Andrew Wiles, provided the proof.

What has that to do with redistricting?  The Supreme Court has accepted several gerrymandering cases which creates a problem as complex and difficult as Fermat’s Last Theorem. Article 1, sections 2 and 4 gives state legislatures authority over elections and simply establishes that there will be one representative for every 30,000 people in the states.  

In a review of redistricting by the Congressional Research Service stated that “The goal of redistricting is to draw boundaries around geographic areas such that each district results in “fair” representation.”  However, since districts are drawn by political bodies– state legislatures–it is virtually impossible to eliminate politics in seeking fairness.  The Supreme Court recognized this previously when it ruled that if partisan gerrymandering is extreme, it is unconstitutional.  In 2006, the Court referred to “partisan symmetry” meaning that parties have an equal opportunity to win elections which conflicts with the less than extreme gerrymandering standard.

Partisan symmetry seems to be a simple and straightforward concept.  It is anything but.  How much partisan bias is too much?  Candidates are not necessarily of equal quality and voter intensity is not necessarily equal.  There are no objective metrics for deciding when the line is crossed between acceptably partisan and extreme gerrymandering.  In ruling on the cases before it, the Court could rule narrowly in a way that is case specific or it could rule in a way that gives legislatures constraining criteria for drawing congressional districts.  No matter how it rules, gerrymandering will continue. Legislatures are made up of politicians; not angels.  And political parties that control redistricting will continue to seek to maintain its political control.

Suggestions for redistricting may make the process less partisan but will likely fall short of achieving fairness.  Three approaches have been suggested, none of which are without some degree of political bias.

One popular idea is to use independent commissions instead of legislatures to redraw the districts. However, this solution has the flaw that most humans act in their own self-interests which includes political interests.  

Some have suggested that computer models be used. Although models can be developed in ways that incorporate political biases, models can be tested to determine the “efficiency”—the extent to which votes are wasted—of projected outcomes.  

A Cornell University paper proposed a technique modeled after the “I cut, you choose,” method of sharing. Applied to redistricting, each party would take turns proposing divisions and freezing districts. The controlling party would divide the state into the appropriate number of districts, satisfying all legal requirements. The second party freezes one of those districts and then divides the unfrozen parts into new districts. The first party then freezes one of the new districts, redraws the remaining ones and returns it to the other party. This iterative process continues until all districts have been frozen.

Since the Constitution assigns the redistricting responsibility to state legislatures, they do not have to accept either commission or model results.  The “Cut and Choose” approach probably offers the best approach to achieving relative fairness.

Like Fermat’s Last Theorem achieving redistricting fairness is going to take a lot of time and hard work.

Beware of Guardian Angels

According to the Wall Street Journal, the CEO of CVS justifies the merger with Anthem by saying the “ultimate goal is to reduce health care spending by steering patients to lower cost settings.” That would be laudable if it was the real justification. Students of economics know that the primary duty of a CEO is to increase shareholder value which comes via increased profitability.

The two objectives do not have to be in conflict but there is reason for not being convinced that the delivery of lower cost is the primary driver. Although the Justice Department approved the merger, Judge Richard Leon apparently is not convinced which is why he is reviewing Justice’s approval. Although judges routinely approve such mergers once they have DOJ approval, Judge Leon has made clear that he has concerns and wants to make sure that the merger is in the public interests.

Health care costs have been rising faster than inflation and over the past 5 years increases have ranged between 5% and 7%. In part this is due to the health care delivery system and in part due to the incentives created by employer provided insurance. In addition to mergers that are increasing concentration, physicians aligned with hospitals are referring patients to in-house labs for tests and patients are less concerned about total costs of tests and prescriptions than their out of pocket costs.

Dr. Scott Atlas of the Hoover Institute has cited data showing that the “monthly cost of common drugs could vary by more than a factor of 10 in the same city.” That would not happen in a competitive market with transparency. .

The CVS-Anthem merger and Cigna’s acquisition of Express Scripts, one of the nation’s largest pharmacy benefit manager, are signs of the increasing concentration. A study by this Commonwealth Fund found that the health care markets became more concentrated after 2010. It concluded that “As market concentration in the health care system accelerates, more consumers and employers across most of the country are left with higher prices and fewer choices.”
This provides a context for Judge Leon’s review. The potential effects of the vertical integration reflected in CVS acquiring Anthem and Cigna acquiring Express Scripts could be a way to wring costs out of the system. But there could also be anti-competitive reasons that allow the firms to increase profits while pushing higher costs on to third party providers. Nobel Laureate George Stigler identified three reasons for vertical integration—to practice price discrimination, put an obstacle in the way of potential entrants, and to eliminate monopoly.

In the CVS case, the merger with Anthem allows for price discrimination and creates an obstacle to competitors. Pharmacy Benefit Manager firms like CVS’ Caremark negotiate discounts with drug producers and then pass these discounts along to insurance companies, either up-charging the drugs or retaining portions of the discounts in order to secure profit. Since CVS Anthem now captures the entire discount, it is in a position to underprice competitors that have not merged. Increased concentration is not likely to be in the consumers best interest because according to one economist “eventually these mergers will make it harder for new insurers to enter the market since they won’t be able to negotiate lower drug prices than larger firms. That reduces competition, and having fewer competitors often leads to prices going up.”

So, beware of guardian angels who claim that they want to save you money.

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Bipartisan Politicization of EPA

Environmental organizations have been unrelenting in their criticism of the Trump EPA.  Most of the criticism is because agency biases that favored their positions are being corrected. Politicizing EPA didn’t begin in 2017 and it won’t end anytime soon unless Congress acts responsibly, which is not likely.

The most recent criticism is EPA’s decision to allow 15% ethanol in gasoline year-round is an exception.  There is no environmental justification for increasing the ethanol percentage in gasoline.  Indeed, there is no justification for requiring ethanol.  It has always been a payoff to the farm lobby.  In the case of the 15% mandate, EPA is attempting in part to offset the damage of the President’s wrong-headed tariffs and trade war with China.  The major reason is pure 2020 politics.

Criticism of the agency’s roll back of the Obama CAFÉ rule, its revised guidance for committee membership, and changes in how health benefits are measured are actions that simply correct abuse by EPA during the Obama years. Lisa Jackson and Gina McCarthy took politicization of the agency to new levels. 

CAFÉ, a response to the 1973 oil embargo, was intended to boost miles per gallon so that cars would use less gasoline and emit fewer pollutants. Using CAFÉ as an instrument to reduce CO2 emissions was a tortured interpretation of the Clean Air Act made possible by a bad Supreme Court decision. Congress had previously decided against using the Clean Air Act to regulate CO2 emissions.

Changing the guidance for participating on EPA committees corrected an abuse that had been going on for years.  Recipients of EPA research grants were put on committees where they would be judging their own work and the work of fellow committee members. The unwritten understanding among committee members was you don’t criticize my work and I won’t criticize yours. Conflicts of interest were rampant.

EPA models, research, and assumptions were all biased to produce worst case results and justify over regulation.  There is no basis in science for the “one hit” model or using epidemiological research to assert small health effect benefits that are beyond accurate measurement.  A computer modeler who left the agency during the Obama years pulled back the curtain on how regulations were being justified.  He summarized his perspective this way, “I realized that my work for the EPA wasn’t that of a scientist …It was more like that of a lawyer. My job, as a modeler, was to build the best case for my client’s position.” 

EPA has a long history of being politicized by its pandering to environmental organizations and by promoting regulations that centralize control in Washington.  Its credibility has been eroded by subservience to the environmental lobby.  Since most of the major environmental problems that justified the creation of EPA have been solved or on their way to being solved, it is time to restructure EPA’s mission.  It should focus on research, being totally transparent, providing guidance to states for achieving regulatory or legislative requirements, and being an information resource for environmental compliance.Cabinet level departments and agencies should be subjected to independent reviews every 15-20 years as a way of shaking up the bureaucracy and making sure that their missions are aligned with important national priorities

Test the Theory

There are an increasing number of reports about the business community’s growing support for a carbon tax.  Americans for Carbon Dividends, CERES, and the CEO Climate Dialogue along with several environmental groups are urging Congress to pass legislation that would put a price on carbon—CO2 emissions.

According to Axios, 69% of republicans are concerned that “their party’s position on climate will hurt them with younger voters and 43 % …said that their concern about climate change has increased in the past year.”  David Doniger at the Natural Resources Defense Council told Axios…“They see a rising public demand for action and they’re smart enough to know this extreme denial of the Trump era will not last and may be coming to a halt in 2020.”

Maybe they are right and a turning point has been reached but don’t bet on it.  The recent election in Australia is one piece of evidence.  Voters there had a clear choice between pro-growth policies and policies of higher taxes and income distribution.  Growth won.  One way to test the public’s receptiveness for a carbon tax is for Congress to propose and try to pass something like a 25 or 50 cent increase in the gasoline tax since that would apply directly to CO2 emissions.

The reason for skepticism is the reality of how voters are reacting to proposals to raise state gasoline taxes.  Proposals in Ohio, Missouri, and Minnesota for example have run into to fierce resistance from voters.

A study by two European economists captured the reality well.  Given concerns about climate change, “the option of raising gasoline taxes has received greater consideration in the American public policy debate. Gasoline tax increases remain nevertheless highly unpopular. Public resistance to them is at least partly explained by their adverse distributional effects. In developed economies gasoline is generally a necessity good in household consumption. Therefore, gasoline price increases tend to affect the poor more than the wealthy in relative terms. That is, they tend to be regressive.”

While the rhetoric surrounding a carbon tax might initially produce public support, especially given promises returning some proceeds to individuals in the form of cash dividends, the realities of carbon taxes can only be hidden for so long.  The public would soon realize that the taxing mechanism would give Congress another way to feed its spending appetite, would not be as simple and straight forward as promised, and would be gamed by crony capitalists.

So, if Congress can get the public to buy into a gasoline tax increase that would set predicate for moving onto a carbon tax in spite of the fact that it is a scam.  The impact on global CO2 emissions would be trivial since they are increasing as a result of coal fired power units being built by China, India, and other countries while US emissions peaked in 2005. 

A Time of Greater Peril?

The majority of democrats running for president have embraced the Green New Deal or something like ot to address the claimed impending climate catastrophe. Vice President Biden got roundly criticized when it was suggested that he would propose a moderate climate agenda—rejoin the Paris Accord, promulgate emission reduction regulation, and support nuclear power, and natural gas. He quickly backtracked and now is promising an environmental revolution.

The fact that these people are babbling no nothings doesn’t mean much when the climate narrative is being pushed more aggressively than ever. Senator Schumer wants to keep the focus on climate because it is the one issue where democrats are seen to have a big advantage for the 2020 elections.

A poll by Engagious and Focus Pointe Global found general agreement that weather is getting weirder and that President Trump should do more on clean energy innovation and carbon emission reductions. According to Axios a “poll by the Yale Program on Climate Change and George Mason University found that the “alarmed” segment of the American public is at an all-time high of 29% — double the size in a 2013 survey.” These results are not surprising given media coverage, regular “science” reports and the media conflating extreme weather with climate change.

Support in polls is not surprising since polls can be structured to produce almost any result and climate change is being talked about more than almost any time in the last two decades. The strength of public opinion will be tested when the price tag on Green New Deal like actions is better known along with climate facts.

As proponents and many economists discovered several decades ago when they were championing Contingent Valuation to assess the value of environmental values, there is a big difference between what people say they are willing to do or accept and how much they are willing to actually pay. Look at the public reaction to proposals to raise the gasoline tax. As the price of actions favored by democrat candidates becomes more apparent and as people better understand the disconnect between model results as policy drivers and the real climate system, their level of support and enthusiasm are likely to shrink.

The reason that this is a time of greater peril is the fact that republicans do not have a credible alternative to the progressive’s narrative. What could such an alternative consist of?
• To the extent that CO2 emissions are a problem, the problem is a global one that won’t be solved as long as China, India, and other countries continue to rely on coal for electric power generation. Increased exports of energy technology could cost-effectively reduce emissions
• Nuclear power can be an important source of future energy if the problems of cost and public fear can be addressed.
• Any barriers to natural gas replacing coal need to be removed,
• The Dutch have demonstrated that there are practical solutions to the problem of sea level rise.
• Increasing R&D on energy and mitigation technologies.
• Focusing research on areas where it is clear that there are real problems in understanding climate change—reducing the range for estimated climate sensitivity, improving our understanding of natural variability and solar impacts, determining if it is possible to make climate models more accurate, and correcting the well documented problems with temperature and weather data.

None of these actions or others that could be added are attention grabbers are easily achieved but they demonstrate that the alternative is not a radical agenda that is economically destructive or doing nothing. Polarization is the enemy and the real reason why common sense, scientifically defensible policies are not being pursued.

The End of the Oil Age Keeps Getting Postponed

Oil production in the Permian Basin dates back to the 1920s although production data from the Texas Railroad Commission only goes back to 1940 when production reached 84 million barrels annually.  The Permian Basin is one of the oldest as well as one of the largest and thickest deposits of sedimentary rocks in the country, covering the western part of Texas and eastern portion of New Mexico.

Annual production grew to about 550 million barrels in 1957 and then began a decline that took about a decade to get back to the 1957 level.  It continued to increase and didn’t peak until about 1975 when it hit 750 million barrels.  The 70s were a time of price and wage controls and a belief that domestic oil production was on the verge of exhaustion.  By 1998, oil production had fallen to less than 400 million barrels annually.  

Today, as a result of horizontal drilling and “fracking”, production has reached almost 4 million barrels a day meaning that  it exceeds its 1975 production peak in a little more than 6 months. Not only has technology unlocked a tremendous amount of output, it has also helped to lower the breakeven cost per barrel from $60 to $33.  This will permit high levels of production under any realistic crude oil price scenario.

EIA’s Annual Energy Outlook projects continued increases in domestic production rising above 15 million barrels per day by 2022 and staying above 14 million all the way to 2040.  The main driver—the Permian Basin.  At the beginning of the 21stcentury, most oil and gas companies believed that Permian was past its prime and were shifting investments to more promising areas.  That has all changed thanks to advances in technology.

Renewable fuel and climate change advocates like to assert that the oil and gas industry is going the way of the horse and buggy.  A survey by the UK Sustainable Investment and Finance Association claims that there is “there is growing consensus of the threat of climate change-related financial risks to investments in Integrated Oil Companies unless they change their business model within 10 years. In spite of predictions that the end is near, energy companies are demonstrating that science and engineering will continue to make oil and gas fuels of choice for decades to come.  The threat is not wind, solar, and electric vehicles, it is wrong headed government policy predicated on a climate catastrophe that is always in the distant future.

Muddle Thinking

Democrats running for President are selling a narrative of growing income inequality that is being exacerbated by the Trump tax cuts, deregulation, a favoritism toward big business. There is what I call a political truism—the stronger the rhetoric, the weaker the factual foundation. The media rarely challenges these assertions or drill down to discover underlying facts. If it did, it would discover that the allegation contains a lot of sloppy work that embellishes the reality. Income inequality is not a myth, but the reality is not well defined, nor is how much is too much. If we can’t accurately answer those two issues, we’ll never find an answer.

Income inequality is inevitable and some forms are accepted without question. Gardeners make a fraction of what professional athletes make. So, what is the dividing line between acceptable inequality and unacceptable? Democrat candidates will never articulate an acceptable level but forcefully assert that today’s situation is unacceptable.

What do we know about income inequality and the underlying data?

In an article, Never Mind the 1 percent, Let’s Talk About the 0,01 Percent, Howard Gold makes the following points.” Some argue that income needs to be distributed more equitably, while others say governments should focus less on taking actions that could inhibit top earners and more on addressing the reasons others aren’t as successful. … As the debate continues, members of the 0.01 percent continue on their course.” According to the Tax Foundation, about 1.4 million tax returns were filed by the top 1%, meaning that the top 0.01% represented about 14,000 returns. To qualify for the top 0.01%, someone needs to earn about $2 million annually.

Economists who have studied data pertaining to the top 0.01% whose income has risen faster than the rest of the 1% have concluded that they “are most likely benefiting from what economists call “skill-biased technological change”—the increasing return on certain skills in an economy driven by technology and globalization.” Under established theory, a shortage skills in-demand will raise the price of those skills. Professional athletes and celebrity entertainers would have little trouble exceeding the $2 million entry point. I doubt that Elizabeth Warren and her fellow confiscator candidates would openly advocate tax penalties on Tom Brady, Tiger Woods, Tom Hanks, or Angelina Jolie. It’s the other unnamed rascals that they are after, whoever they are. But that does nothing to improve the lives and well-being of those in the middle and low income categories.

Two major factors contributing to income inequality are technology and globalization. Technology contributes to economic growth by increasing labor efficiency. But it also makes some employees less employable as technology substitutes for labor. Training and education helps mitigate the adverse effects of technology. And, globalization obviously results in companies outsourcing some production because they can get goods at a lower cost.

Although income inequality is real, its extent is being exaggerated by data problems and analyses relying on that data. The Congressional Budget Office report, The Distribution of Household Income, 2014, provides a detailed examination of income inequality by assessing virtually all changes to after-tax government benefits. Government redistribution of hundreds of billions of dollars from taxes on the rich to low income households is minimized in discussions of inequality. It concluded, “Under the adjustments, the top 10 percent income share seldom strays more than 5 percentage points away from a century-long average of about 35 percent.”

In addition, Phillip Magness in his paper The Myth of Spiraling Inequality pointed to the impact of flawed and outdated statistics—”… the widely reported explosion of inequality in the past three decades is likely a myth built upon outdated and flawed statistics. … These problems are sufficiently severe that they call into question the accuracy of the century-long inequality pattern at the heart of the U.S. policy discussion.”

Although income inequality is not a myth, it is likely far less severe than asserted by candidates for president. Debate would be better served by focusing first on the accuracy of measurements, the quality of data used in assessing inequality, and realistic policies that can help to lessen it..

Too Big to Fail?

The commercial aircraft manufacturing industry is dominated by Boeing and Airbus.  Until recently, not much thought may have been given to potential unintended consequences of this dominance .  That perhaps is changing.  Airbus bet on plane—A-380 that no one wants to fly and Boeing bet on one—737 Max—that no one wants to fly.

Perhaps the current situation is just a temporary bump in the road. But in a rapidly changing world, it could also be that Boeing and Airbus suffer from holding too much of the market captive, from too cozy relationships with government, and from the unintended consequences of being too big.

The following chart shows the significant concentration in the current aircraft manufacturing industry.

This data can be slightly misleading since it includes all sizes of commercial aircraft.  When it comes to large commercial planes—seating capacity of 140 or more, Boeing and Airbus control over 90% of the market.  Both firms have worked hard to achieve their current dominance which is aided by their activities in the pollical market place.  The latter pays off handsomely. Boeing, for example, receives about 40% of Export-Import Bank funding. 

In addition, economics makes it difficult for competitors to gain inroads. Beyond, the high cost of developing a new plane, airlines have incurred large sunk costs for maintenance facilities, training, and parts.  Changing from one manufacturer to another is very expensive which make airlines reluctant to do so.

The cost of bringing an aircraft to market and the time required to develop one represent a significant market barrier.  Given the challenge of predicting the market and consumer tastes, investors have little incentive to commit billions to develop a new aircraft. There are a few exceptions.  One of which is projected shifts in passenger demand.  The International Air Transport Association estimates that over the next few decades, half of new passengers will live in Asia.  This represents a potential opening for the Chinese and perhaps the Russians to gain a substantial foothold in emerging markets.  In addition, regional jet manufacturers Bombardier and Embraer are moving into the large commercial aircraft market. While both are likely to occupy only a small share of the global market in the short run, if their new aircraft prove to be as cost efficient as promised and Boeing and Airbus continue to stumble, they can become strong competitors in the large commercial jet segment.

Boeing’s problems are not limited to the 737 Max, it is also experiencing problems in the manufacture of the Dreamliner.  It could be that the Airbus-Boeing duopoly along with substantial barriers to entry may have led to complacency, hubris and carelessness in manufacturing quality.  If that is the case, changes in the market place and a loss of confidence by the flying public may significantly weaken Boeing’s market share.

What’s Surprising About the Rise in Gasoline Prices?

Last year around this time the average retail price of gasoline was about $3 per gallon.  It then began a steady decline and reached about $2.40 in December and slightly lower in January.  Since then, it has been steadily rising, reaching $2.74 this month. Some have speculated that $3 per gallon will be reached in the near future, perhaps around Memorial Day.  We should be grateful that the price is not higher.

Since December the average price of crude oil has risen almost $20 per barrel, from $45 to $64. That alone would translate into a 45 cent per gallon increase, which covers the price increases since the start of the year.  Crude oil prices are the major driver for prices at the pump but not the only ones. In addition to the effects of supply and demand imbalances, the price of ethanol comes into play as does the regulatory requirement to produce summer gasoline to counter smog formation and spring refinery maintenance.  

For anyone who doesn’t remember the formula for summer or reformulated gasoline (RFG) was written into the Clean Air Act Amendments of 1990.  The legislative specifications covering oxygenates, benzene levels, olefins, sulfur, and evaporation were included to mask the ethanol mandate. Since producing RFG is more expensive, it normally results in an increase of about 10 cents a gallon during the summer months.  All other things being equal, the price of gasoline prices should be higher.

Although Russia and Saudi Arabia appear to be adhering to the OPEC agreed production cut back, adherence by other members is always problematical.  Production has been exceeding the stated 30 million barrel per day quota because as crude prices rise, members have an incentive to cheat. And even though production by some members has declined recently, those reductions won’t last long except for Venezuela.  Most OPEC members like to get while the getting is good.

US shale production is up 25% from this time last year and will continue to increase as prices do.  The loss of Venezuela heavy crude imposes additional costs on refiners.  The next best source is Canada but the lack of pipeline capacity and efficient distribution alternatives limits supplies to US refiners. Constraints of Canadian distribution will be removed in the coming years as a result of increased pipeline investments. 

While OPEC and Russia would like to see crude oil prices around $80 a barrel, the downward pressure from a slowing global economy, cheating, increased domestic production and increased crude from Canada will likely keep that price target from being achieved absent some unknown and unpredictable event.

Resort to Principles of Economics

According to the Wall Street Journal, neither the Federal Communications Commission (FCC) nor the Federal Trade Commission (FTC) have been capable of reigning in the increasing annoyance of robocalls, scammers, etc. The only thing that the Telephone Consumer Protection Act seems to have accomplished is proving the ineptness of the bureaucracy in enforcing it.

Since 2015, the FCC has levied over $200 million in fines for violations of the Do Not Call Registry. That would be a deterrent if collected but to date the FCC has collected less than $7000 or .00004%. The FTC has obtained court judgments of $1.5 billion since 2004 in civil penalties for robocalls or violations of the Do Not Call Registry. It has done better than the FCC in collections but only because the FCC success rate is so pathetic. The FTC has recovered an unimpressive 8% or $121 million.

The FCC claims that it lacks enforcement authority and has to rely on the Justice Department. The FTC told the Journal that it was proud of its “strong enforcement.” No wonder that the number of robocalls has soared. Robocalls to mobile phones reached 50 billion last year according to the Pew Center.

Carriers are supposed to be working on verification systems that will help consumers decide if calls are legitimate. Of course, those systems won’t prevent the annoying ringing of calls that seem to always come at the worst of times. Consumers can purchase equipment or apps that will block unwanted calls but devices for landlines can cost over $100 and while some mobile systems are free, subscription apps cost at least several dollars a month. While apps provide some level of protection they’re not fool proof. There have been estimates that no service flags more than two-thirds of calls because many robocalls spoof their identities.

A professor at the University of Texas, Roger Meiners, suggests that economic principles might provide a better answer. Namely, if you want less of something, in this case robocalls, etc., raise its cost by imposing a tax on calls. Meiners has proposed the Penny for Sanity Tax. A I cent tax on 50 billion calls would raise $500 million annually. He makes the point that since the tax applies to all calls, it would avoid litigation over discrimination and would be very difficult to avoid.
According to the Pew Center, the average adult cell phone owner makes and receives around 5 voice calls a day. If we assume that average holds for land lines as well, assuming 3 calls made per day would cost 3 cents or less that $1 per month. At 5 cents, the monthly cost would be slightly less than $5. While $60 a year is steep relative to other options, it probably is more effective. Many would gladly pay a reasonable price to avoid the annoyance. Congress ought to be able to find a creative way to make that tax deductible or authorize consumer rebates to significantly reduce the burden on all of us. Congress has an incentive to do so because it is voters who are receiving these calls.