Thursday, November 11, 2010

Automatic Registration and Permanent Mail Ballot with Tax Filing

The Democrats will be able to pass little or nothing over the next two years, so especially now it's best to focus largely on the long term and structural:

1) Make it far easier to vote – This is so crucial to Democratic success; you really wonder why they never pushed for it more. My specific idea is a law to make it so everyone, when they submit their income tax form, is automatically registered to vote – and put on the list to be permanently sent a mail ballot for every single election, no matter how small. And the same would be done when getting a drivers license, or with any filing with government. This would result in virtually 100% voter registration, and virtually 100% receipt of easy, convenient, no driving anywhere or waiting in any line, mail ballots, for every single election, no matter how small.

This would be an enormous boon to the Democrats, as Republicans vote disproportionately by a large margin – the older you are the more you vote, and seniors have all the time in the world to vote; moreover, the passionate, the whipped up by outrageous propaganda, (and the insane), are very motivated people; they'll make the time. It's far easier to vote if a ballot arrives in your mail, with a prepaid return envelope. And the ballot arriving in the mail makes it hard to forget an election. This could tremendously increase relative Democratic turnout. You can put a law like this on referendums all over the states, as well as trying to push it through nationally when you control congress.

2) Plan now for how and when you will end the filibuster, and build support for it behind the scenes now – try-and-see is far kinder to good ideas, ideas that are good for the vast majority, and far harsher to bad ones, thus try and see is a great ally of the Democrats and a great enemy of the Republicans and their best friends ignorance and deception – nothing decimates lies and misleading like try-and-see. And ending the filibuster tremendously increases the odds of try-and-see. If we had try-and-see we would have had, for example, Medicare-for-All and Cap-and-Trade permanently a long time ago. For more on this see here.

3) Push for the Presidential popular vote plan, where an electoral majority of states commits its electors to chose only the winner of the national popular vote. This would result in the winner of the national popular vote always winning, no matter what, unlike in 2000. So it would, for all practical purposes, end the Electoral College. Like suggestion1 above, millions of DNC money could greatly increase the odds of its success.

You wonder why the Democrats never put much effort or money into these things when they can do such great good long term. As an economist, it just doesn't seem very efficient or utility optimizing.

I should add that one good big thing that the Democrats might get by the Republicans, perhaps the only one, is free trade agreements. So now would be a good time for Obama to really push for them, and he seems to understand this. I would love to see a free trade agreement between NAFTA and the EU, a GFTA, which could later be joined by Japan, and with momentum, the vast majority of the world. But that's pretty ambitious for the next two years.

Thursday, October 7, 2010

Do We Really Prefer Winner-Take-All Races?

In a recent post, Ezra Klein talks about the founding of Facebook and makes some important, relatively rarely considered, economics points. The following is a long drop quote, but please read it; the points are  important, and the ones I will make after depend on it:
At the same time, of course, Friendster, MySpace, Orkut, and a variety of other social networking platforms were swirling about. After all, technological advances had made these things simple enough that even college students could pull them together in a few weeks. If it hadn't been Zuckerberg, it would've been someone else. Maybe Goldberg.

This is a rather common phenomenon: It's called "simultaneous invention," and it happens all the time: Technology advances to the point that the next step is obvious to multiple people, and so they all take the next step at approximately the same time. In the end, one of them gets the patent, or the market share, and so squeezes the other out and becomes synonymous with the invention. That's what happened with Alexander Graham Bell, who in all likelihood invented the telephone after Elisha Gray -- and both of them came after Antonio Meucci. Amusingly, the discovery of "simultaneous invention" was another case of simultaneous invention, with multiple thinkers and researchers publishing on the phenomenon all at once. "Unjust Deserts," by Gar Alperovitz and Lew Daly, has a good discussion of this.

What does this have to do with the movie? Not that much. Insofar as the film implies that only Zuckerberg could've invented Facebook, that's wrong. But since the movie is mainly a character study of Zuckerberg, it's a bit churlish to criticize it for focusing on his characteristics so intently. Alperovitz and Daly, however, would argue that it has a lot to do with how we should think about inequality. "Differences between individuals are almost negligible compared to the influence of the resources, infrastructure, and most important of all, the knowledge an individual has at his disposal," they write.

In other words, the difference between Mark Zuckerberg and Adam Goldberg was very small, while the difference between Mark Zuckerberg and the smartest college kid in 1999 was huge. It was the advancing storehouse of human knowledge, not the advancing capabilities of particular humans, that made up the difference. But humans tend to think about things in terms of other humans, and so we overestimate the impact of personalities (autistic genius) and underestimate the importance of technology (all sorts of people could suddenly build social networking platforms in under three months). That also makes it easier for us to believe people deserve* enormous, inconceivable monetary rewards for their inventions, as we tend to attribute the entire value of the product to them, as opposed to attributing the incremental difference between that product and whatever was right behind that product to them.

"There's a different argument that assuring people astronomical profits for creating useful things makes them more likely to create useful things. That argument makes more sense."
Ezra finishes up with this:
Note the word "deserve." There's a different argument that assuring people astronomical profits for creating useful things makes them more likely to create useful things. That argument makes more sense.
It does to some extent, but you can be way past the optimal point on that.

Consider this situation, which is analogous to the entrepreneurial, innovational example Ezra discusses:

You're in a race with 100 other people (or considering entering one). To have any chance of winning, you have to train for a year full time, so you can't work and make any other income besides what you may win in the race. Everyone has very close to the same odds of winning, about 1%. Even if you're most likely to win, your odds are still only 3% of winning and 97% of losing.

There are three ways the race's prizes can be structured that all cost the same to the races sponsors; let's call those sponsors society:

A) The Winner-Take-All Way – the winner of the race, first place, gets $100 million; everyone else gets zero.

B) The Very-Low-Taxation Way – the winner of the race gets $99.55 million. Second place gets $100,000. Third place gets $70,000, and the other 97 competitors get $20,000 – and this is for a year's work.

C) The Strongly-Progressive-Taxation Way – The winner of the race gets $30 million, and the other competitors divide up the other $70 million in a not extremely uneven way: Second place gets $2 million, third place $1 million, fourth place $700,000, and so on, so that even the 100th place competitor still gets $40,000, so he can at least afford to keep his family's health insurance and not lose their house.

Now really think about this:

1) Suppose you were able to enter this race, and chose either A, B, or C. Which would you prefer – even if you knew you were the most likely to win, even if you knew you had the 3% chance?

2) Do you really think you'd have that much less incentive to train hard for the race if the highest potential winnings were only $30 million, like in C, as opposed to $100 million, like in A (and keep in mind that in C you still have a strong incentive to train hard even if you think you have no chance of getting first, just because 90th pays a lot more than 100th)?

3) If the race were set up like A, would you even risk spending a year to train to enter? Would you even risk trying? And would you be (far) more likely to enter the race, to risk trying, if instead the race were structured like C?

So, the moral of the story is the vast majority of us are far better off, both ex-ante and ex-post, with highly progressive taxation in "winner-take-all" type situations, and such situations are common in the ultra high economies of scale, ideas/information based, modern high tech world. In addition, rather than decreasing the incentives to make an effort, take risks, and innovate, progressive taxation (if not taken to a ridiculous extreme; no one in power in the Democratic Party wants communism) increases incentives to make an effort, take risks, and innovate. And it funds the widespread education, public resources, and seed funding that makes widespread effort and high utilization of human productive potential possible.

As the world becomes more and more "winner-take-all" with ever greater increases in economies of scale, technology, and importance of zero marginal cost ideas/information, greater progressivity of taxation will become more and more important to maximizing growth and total societal utility.

Monday, September 13, 2010

The Optimal Level of Governemnt Investment in the High-Tech World of 2010, not 1810

In response to Stephen Williamson's opus magnum last week, I left a series of comments that actually exceeded his word count. I encourage you to read them and the whole discussion. I think there are a lot of important points and insights. But I especially think the following part is important, and so I have reprinted it here, with modifications and expansions.

David Andolfatto asked:

    Would you mind elaborating on this:

    Due to externalities, especially positional/context/prestige and carbon, asymmetric information, the zero marginal cost of idea/information use, high transactions costs, great economies of scale and the problems of monopoly power, inability to price discriminate well leading to inefficient provision, and much more, the current level of government spending, insurance, and especially investment is far below the optimal level.

    Do you have any way of quantifying the importance of these "externalities" you highlight above? And what is the "optimal" level of government spending, investment, taxation, etc.?
Here is my reply (again, modified and expanded from the original comment):

David (and Stephen),

This is a very big question. A good complete answer can be book length (or books length). It's far from a few simple statistics and p-values. And I'm especially short of time right now, but I think I can give you some big important indicators that I hope will encourage you to really think about this – logically utilizing all of the evidence you've seen in your lifetime, not just the fraction that's considered "formal". As the great growth economist and perennial Nobel shortlister Paul Romer of Stanford said:
In evaluating different models of growth, I have found Lucas's (1988) observation, that people with human capital migrate from places where it is scarce to places where it is abundant, is as powerful a piece of evidence as all the cross-country growth regressions combined. But this kind of fact, like the fact about intra-industry trade or the fact that people make discoveries, does not come with an attached t-statistic. As a result, these kinds of facts tend to be neglected in discussions that focus too narrowly on testing and rejecting models.

Economists often complain that we do not have enough data to differentiate between the available theories, but what constitutes relevant data is itself endogenous. If we set our standards for what constitutes relevant evidence too high and pose our tests too narrowly, we will indeed end up with too little data...

My greatest regret is the shift I made while working on these external effects models...I suspect I made this shift toward capital and away from knowledge partly in an attempt to conform to the norms of what constituted convincing empirical work in macroeconomics. No international agency publishes data series on the local production of knowledge and inward flows of knowledge. If you want to run regressions, investment in physical capital is a variable that you can use, so use it I did. I wish I had stuck to my guns about the importance of evidence like that contained in facts 1 through 5.
– Journal of Economic Perspectives, Volume 8, Number 1, Winter 1994, Page 20.

That said, let's lay out some big chunks of evidence:

Stephen, regarding asymmetric information, you talk about contracts and credit markets, but asymmetric information (or just lack of information – or, as is often forgotten by economists, the lack of expertise to evaluate it well in a very advance complicated world, expertise that can take years or decades of full time study to obtain) is far more extensive than just this kind of thing.

Here is a a 2009 Eureka Alert. It notes a large scale survey which found 97% of climatologists who are active in research think that human activity is a significant contributing factor in global warming, but only 58% of the public thinks this.

And there's this AP poll from July which found that 59% of Americans would oppose any climate bill if it would cause their electricity bill to rise by even $10 a month.

Now that's what I call asymmetric information!

But this is asymmetric information that, David, will lead to massive government underinvesting in basic scientific research related to alternative energy, as well as related infrastructure, and as well as undertaxation of carbon (either direct or indirect).

But there's more than this; how many people understand the underlying economics, that the free market alone isn't the most efficient at all for providing many things (especially after the constant and massive disinformation efforts of the Republicans)? How many people understand the list of potential market problems referred to in the beginning of this comment? And how many people can you expect to have the time or willingness to learn this much economics, when the vast majority have careers that are in very different areas, and they have historically little free time?

Or foreign policy: How many people really understand the extent of the effect a declining price of oil has on positive change for some of the worst authoritarian and terrorist sponsoring regimes in the world (including the old Soviet Union in the 80s), where terrorism costs us trillions per decade in increased security costs, let alone the loss of life.

How many understand that that $10/month, or $100/month, on average, progressively applied, will essentially not make their monthly budgets any tighter after a period of adjustment (see here).

So this should give you an idea of the true extent of asymmetric information, and the magnitude of a large source of government underinvestment.

But now let's look at another huge one.

Cornell economist Robert Frank in 1999 wrote:
A cautious reading of the evidence suggests that we could spend roughly one-third less on consumption--roughly $2 trillion per year--and suffer no significant reduction in satisfaction. Savings of that magnitude could help pay for restoring our infrastructure, for cleaner air and water, and a variety of other things.
Now let's think about this.

I'm 47. I spied on David's vita and found he finished his undergrad degree in 1985, so he's probably around 47, and Stephen has admitted to 55. So all of us should remember 1978 very well.

Disco was sweeping the country and real per capita GDP was $25,503 (from the BEA, in 2005 dollars). In 2009 it's up to $41,890, for a difference of $16,387. Multiplied by the current population of 308 million, that's $5.05 trillion per year (and keep in mind here the yearly GDP figures are adjusted very little for increases in quality, like increased effectiveness of medical treatments).

Now, let's compare how people lived in 1978, their happiness, their utility, to how people live today. Have we added that $5.05 trillion per year efficiently from the standpoint of optimizing total societal utils? (and I care even less about the Pareto definition of optimality or efficiency than Stephen. What's Pareto optimal can have tragically comically small total societal utility).

In 1978, I lived like a pretty typical member of the middle class, in a three bedroom suburban house in Oak Park Michigan. Our floors were all carpet except for the kitchen and bathrooms which had nice linoleum. Our kitchen countertops were linoleum too. It was carpet and linoleum, not wood, stone tile, and granite. But for all that our home was much smaller and less expensive than a comparable one today, from my human experiences, our family (like those of our peers) found it just as beautiful and just as high quality as a comparable one with comparably middle class families today.

Now, there's no t-statistic here, but I can take assumptions just as mild as those on which t-statistics typically are based, or milder, and construct a logic chain showing that it's extremely unlikely that my experiences throughout 47 years in many cities and neighborhoods, with many people, were completely unrepresentative of the population as a whole – and that's what they would have to be to not conclude that a huge amount of that $5.05 trillion was positional/context/prestige utility, of zero sum game at the societal level. This is as opposed to intrinsic utility like increased incidence of air conditioning since 1978, or improved medical effectiveness – which is a quality increase little included in that GDP statistic.

As Paul Romer said, things that don't come with a t-statistic can be a lot more valuable pieces of evidence. And I'd add that their logic chains can be just as rock solid and anchored to assumptions as mild – or far milder – than those behind the t-stat, or other formal empirical evidence.

Now, today total government spending on basic scientific and medical research is approximately $34 billion per year. That includes all of the government spending on basic scientific and medical research on curing cancer, arthritis, backaches, headaches, obesity, robots building robots, solar power, everything. [Calculation: National Science Foundation data, table 2, 2007, the sum of columns E,H,N,O, and W, 2000 dollars adjusted to 2009 via GDP deflator]. And these are things well known to be usually provided more efficiently by the government, either directly, or largely indirectly, say through sponsorship, or purchase from the private sector – Paul Romer quote time:
As just one example, recall that the increasing returns to scale that is implied by nonrivalry leads to the failure of Adam Smith’s famous invisible hand result. The institutions of complete property rights and perfect competition that work so well in a world consisting solely of rival goods no longer deliver the optimal allocation of resources in a world containing ideas.

Think about the basic science that led to the discovery of the structure of DNA. There are some kinds of ideas where, once those ideas are uncovered, you'd like to make them as broadly available as possible, so everybody in the world can put them to good use. There we find it efficient to give those ideas away for free and encourage everybody to use them. If you're going to be giving things away for free, you're going to have to find some system to finance them, and that's where government support typically comes in...Because everybody can use the idea at the same time, there's no tragedy of the commons in the intellectual sphere. There's no problem of overuse or overgrazing or overfishing an idea. If you give an idea away for free, you don't get any of the problems when you try and give objects away for free. So the efficient thing for society is to offer really big rewards for some scientist who discovers an oral rehydration therapy. But then as soon as we discover it, we give the idea away for free to everybody throughout the world
– 2001 interview with Reason magazine.

Now, can you imagine how much faster, over the long run, science and medicine would advance if we increased this ten fold? One could easily see it advancing multiples as fast over the long run. At the end of this commentary, I'll leave references to some formal studies that do some quantifying, but for now I'll just leave this from the abstract of a 1998 Quarterly Journal of Economics paper by economists Charles I. Jones of Stanford and John C. Williams of the San Francisco Fed:
Is there too much or too little research and development (R&D) [This is all R&D combined together, not just basic scientific and medical research. It includes basic scientific and medical research, plus applied research, plus product development (even if it's for products of little or no intrinsic utility, but high positional/context/prestige externality, like "silky smooth transmission" or geo gravitational adjustment for a $100,000 mechanical watch for 0.1 seconds per month better accuracy, but still less accuracy than a $30 atomic clock radio-controlled watch) The estimated total for all of this is $308 billion per year from all sources combined, government, business, and non-profit, NSF data, table 1, column C, adjusted by the GDP deflator]? In this paper we bridge the gap between the recent growth literature and the empirical productivity literature. We derive in a growth model the relationship between the social rate of return to R&D and the coefficient estimates of the empirical literature and show that these estimates represent a lower bound. Furthermore, our analytic framework provides a direct mapping from the rate of return to the degree of underinvestment in research. Conservative estimates suggest that optimal R&D investment is at least two to four times actual investment [emphasis added].
– Vol. 113, No. 4 (Nov., 1998), pp. 1119-1135

A ten fold increase in government research spending is about an extra $304 billion per year, about 1/17th of our $5.05 trillion increase from 1978. Now you don't think if we channeled 1/17th of the increase since 1978 into this we'd produce much higher total societal utility over the long run? We went 1/17th of the way back, less giant wheels on cars, but they seem just as high quality and prestigious because everyone's wheels are smaller, do you really think an average person with a new 1978 Cadillac, with the crushed velvet and pile carpeting, got much less pleasure (or any less) out of it than their counterpart with a 2010 Mercedes of equal societal rarity and affordability? And technological advancement is very little in the GDP, so you can also compare such a Mercedes to the pleasure you'd get from one 2.1% less expensive ($304 billion divided by the current GDP of about $14.6 trillion), but it was just as rare and prestigious and high quality seeming because everyone else's car cost 2.1% less too? And remember, in return you get a ten fold increase in government basic scientific and medical research, and since 54% of basic scientific and medical research is government [same NSF data as before], that means an over five fold increase in total basic scientific and medical research from any source.

Think about it.

Or look at it this way: According to Berkeley economist Emmanuel Saez's data, the top 1/10th of 1% of earners in the United States in 2008 got 5.37% of all income including capital gains. U.S. GDP in 2008 was $14.6 trillion (2008 dollars), so depending on Saez's definitions and calculations, that 5.37% is in the neighborhood of $800 billion. And given that very few people are in the top 1/10th of 1%, his data estimates that that group makes a minimum – minimum – of $9.1 million per year. Now, suppose we take our $304 billion to increase government basic scientific and medical research ten fold and total basic scientific and medical research from all sources, government, business, and non-profit, five fold, from their $800 billion, so they all have about 3/8ths less, so they earn a minimum – minimum – of about $5.6 million per year.

But they all maintain their same relative position, same relative prestige, same relative feel of quality for what they have. Instead of making $9.1 million per year, it's $5.6 million per year. Instead of $91 million per year, it's $56 million per year. Instead of $910 million per year, $560 million per year. Do you really think there will be much of a loss of utils for these individuals, especially given that they will have the exact same level of prestige because all of their counterparts lose an equal proportion of income, the exact same feeling of quality for what they have?

And don't tell me the pie will shrink because they'll work less. They’ll only make $5,000 per hour after taxes instead of $8,000, so that's not enough incentive? Anyway, we all know the income and substitution effects. Stephen in his post just assumed a tax increase would get people to work more hours due to the income effect. In fact, tax rates in anything but a very extreme range have little effect over the long run on work hours, especially if they are constructed smartly to allay psychological effects (like a VAT with progressivity from using the proceeds progressively like for free universal pre-school and bachelors degree). From an expert well versed in this literature, MIT economist Jonathan Gruber:
Changes in tax rates appear to have relatively modest effects on total gross income; the total amount of income actually generated through work or savings does not respond in a sizable way to taxation.
–  "Public Finance and Public Policy", 2nd edition, 2007, page 734

I even got Scott Sumner to admit this! (see the comments of this post)

So again, I ask you, do you really think there will be much loss of utils for these super wealthy individuals with this 3/8ths diversion to basic scientific and medical research?

And you have to decide one way or another here. However happy you are with your data and evidence, not making a choice, or the status quo, is a choice. And one that must be justified with the data and evidence you have – not fancy non-existent data and evidence that you'd like to have – because the theory is not determinate due to all of the market imperfections of the invisible hand that are well acknowledged in economics, that are referred to at the start of this comment.

Do you really think that this little intrinsic utility loss per person – over this tiny an amount of people – would outweigh, over the long run, the utility gained from a ten fold increase in government basic science and medicine, which is a five fold increase in basic science and medicine from all sources, government, business, and non-profit combined?

Again, you have to choose a level of government investment too, based on the same data and evidence that I do. The data and evidence is no more formal and fancy for you (although I'll give some additional strong formal data and evidence at the end). You have to rely on the same data and evidence that I do to justify your decision if you say we should keep the level of government investment the same, if you say we should cut it, or if you say we should cut it by 99%. The theory is not specific. It's clear due to externalities etc. that government investment shouldn't be zero and it's clear that it shouldn't be 100%. To find out what it should be in between you have to use the data and evidence you have, and it's well established in statistics that it's inefficient to throw away data and evidence. Now, I hope to illustrate this with a little parable:
A snobby empirical economist is hiking with a friend who eats a berry off a bush and immediately keels over and dies. The snobby economist thinks to himself, well it's just a sample of one berry; you can't draw any conclusions from a sample of one. It's just anecdotal evidence. And being hungry himself, he eats a handful, keels over, and dies.

Moral of the story: It's very inefficient, and perhaps very dangerous, to ignore abundant a priori information at your disposal, even if that information is not formal, but still logical – the logic chains are completely solid – and based on relatively realistic assumptions. You just currently don't have a formal version of it.

It wasn't hard at all to put together a completely solid logic chain showing those berries were poisonous using common, but informal, a priori knowledge about biology, human physiology, evolution, similarity across humans, and extremely realistic assumptions.
Now, I think I could put together a similar case here with regard to the magnitude of positional/context/prestige externalities, the magnitude of the effect of the zero marginal cost of idea/information usage, etc., etc.

In any case, this is plenty for now. As I said at the start of this, a good complete answer can be book length (or books length), and I can't write that here, but I hope what I have written gets you to really think about this.

Before leaving you with a sample of strong formal evidence, I'll tie this post to it's title with this comment I recently left on the blog of Richard Green:
I think a big point is that as a country advances more technologically, high return government investment of the kind the free market will grossly or inefficiently underprovide (due to long established in economics market problems like externalities, etc.) becomes more and more important.

In 1810, there was little need for education. The vast majority just did low tech farming and there was not much to learn in school. Medical costs were tiny because there wasn't much for a doctor to learn and there wasn't much he could do.

As a country advances the need for these social investments increases and we've fallen far behind this increase over the last generation in California and in the country as a whole.
Now, I'll leave you with that sample of strong formal evidence:

Robert Barro and Jong-Wha Lee, "Educational attainment in the world, 1950–2010", Vox,

Charles I. Jones, "Sources of U.S. Economic Growth in a World of Ideas", The American Economic Review, Vol. 92, No. 1 (Mar., 2002), pp. 220-239

Charles I. Jones and John C. Williams, "Measuring the Social Return to R & D", The Quarterly Journal of Economics, Vol. 113, No. 4 (Nov., 1998), pp. 1119-1135

Zvi Griliches, "Productivity, R and D, and Basic Research at the Firm Level in the 1970's", The American Economic Review, Vol. 76, No. 1 (Mar., 1986), pp. 141-154.

Tuesday, August 31, 2010

Was it cautious or "cautious"?

You often read that Obama was too cautious in the size of his stimulus, making it too small (for example here). But really in this context the word cautious should be in quotation marks.

Having a smaller stimulus may have been what seemed cautious to many, or what was considered cautious by Washington conventional wisdom, but it was actually much riskier politically for Obama and the Democrats – and for the country.

The truly cautious thing was actually doing the opposite -- erring on the side of making the stimulus too big (assuming you could pass a bigger one).

Making the stimulus substantially bigger than the estimated expected amount needed was the cautious thing. Making it much smaller was the "cautious" thing.

Sunday, August 29, 2010

Positional/Context/Prestige Externalities

In an open letter to his students at Berkeley, that I encourage everyone to read, Michael O'Hare wrote last week:
The budget deficit that’s paralyzing Sacramento is about $500 per person; add another $500 to get back to a public sector we don’t have to be ashamed of, and our average income is almost forty times that.
Here's something extremely important - and neglected:

Many middle class people (and poor) will say, hey, an extra $1,000/year will bankrupt me, or will be very hard. I'm barely paying my mortgage, and day care, and student loans,

First off, the tax increase should be highly progressive, so the wealthy pay, say, $4,000, and the very wealthy and super wealthy $10,000, or much more. The solidly middle class might pay $500 (about $40/month), others less, or a lot less.

But what they, and too many economists, really don't realize is this:

It's not that you just pay $500 and that's it; $500 is gone and nothing changes in return. Your student loans would have been lower with this kind of – progressive – tax raise used for smart investment, and your children will require less money from you to go to college. You may get universal pre-school, saving a great deal in pre-school/day care cost, free, or inexpensive, high quality public recreation, and so on.

But here's a huge thing that is tragically neglected in economics, and public discourse in general, positional/context/prestige externalities. If you have $500 less to spend on your house, so do your peers, so housing prices, and your mortgage payment, drop accordingly – maybe the house has more carpet instead of stone or wood floors, but if your neighbors' houses have the same decrease, then there's no feeling like your house is cheap and unprestigious, or low quality, and the intrinsic utility difference is tiny and perhaps negative (I think intrinsically carpet is more comfortable, versatile, and better. I think it provides higher utility when there's not a positional/context/prestige externality).

If you have $500 less to spend on your car, then so do your peers, so you feel you should spend  less on your car, and your car cost drops accordingly – maybe it has a few less horse power, less "silky-smoothness" to its transmission, or less giant wheels, but if your neighbors' cars have the same decrease then there's no feeling like your car is cheap and unprestigious, or low quality (think of how high quality and prestigious the solidly middle class thought their cars were in the 1960s with not even power windows, inexpensive hubcaps, and plastic and fabric, not wood and leather), and the intrinsic difference is tiny, and in some cases, for some, it's negative (I find leather in a family car less comfortable, and it's hot in the summer and cold in the winter. I find this super rigid expensive suspension so you can take a sharp turn at 50 miles per hour with little lean – but you never will do anything like that – less comfortable for the driving most people actually do in a family car, even though it's more costly, thus making it more rare, and gets the car magazines to say the car is prestigious.)

The upshot of this is that people will find if everyone, not just them, has $500 less, then their finances don't really get much tighter – or any tighter – after a period of adjustment. This is why families of a generation or two ago with incomes the same or a lot lower felt a lot more financially comfortable and prosperous, and had much less financial distress. Their homes had carpet and linoleum, not wood and granite, but they felt just as beautiful and prestigious because that's what their neighbors had too – and they had a lot more free time to enjoy those homes – and their families.

What's left, after all of this, is that now you have a massive increase in the quality of your state – in education, infrastructure, parks and recreation, quality of life, as well as higher growth due to greater university investment in science, a more educated populace, and more productive infrastructure – and your finances, your family budget, is the same, or more secure, because your expenses dropped along with the tax increase because of a commensurate drop in the costs of positional/context/prestige externalities.

So much of what we spend on today is what Cornell economist Robert Frank calls conspicuous consumption, things of relatively low intrinsic utility and relatively high positional/context/prestige externality utility. This is as opposed to inconspicuous consumption, such as scientific and medical research to, say, cure cancer, back pain, headaches, or my favorite, so we can eat as much as we want without gaining weight, spending more time with our families, having a cleaner environment without monumental risk of global warming, and a safer one, so children can play freely outside the way they used to, and having better social insurance for the hard working, so they and their families aren't nonetheless financially ruined by a job loss.

One of the most tragic flaws of economics today is the neglect of positional/context/prestige externalities.

Sunday, May 23, 2010

Why Libertarianism Doesn’t Work, Part N+a

But first – Why Regulation can Work, Part M+b (Part M+a is here):

Nobel Prize winning economist Paul Krugman just had a post, "Why Does Regulation Work?".  In reply, a commenter wrote, "Oil is washing up on Louisiana's beaches, yet Paul Krugman declares that 'regulation works'."

O.k., let's talk about this.

First I would note that if there were no regulation at all it would be far worse. These disasters would be far more frequent and severe. Fly-by-Night drillers would be setting up everywhere, and good luck suing them; they wouldn't have nearly enough assets to pay for their massive damage.

But a huge point is not that regulation always works well (overall), but that we have the option of it working well (overall). This is an option voters have, and it's very important that voters know their options. If they don't want regulation to work well, if they want it to work horribly, and be dismantled, then vote for the party that wants it, and government in general, to work horribly and be dismantled, the Republicans. They'll appoint Brownies, political hacks, cronies, and others who will make the regulation as ineffective as they can get away with. And, at the same time, they'll pass laws to just dismantle the regulation directly.

But, we do also have the option to vote for the other major party. And if we do, then there's a long history of strong regulation being highly successful, and implemented in a competent, objective, professional way.

There are myriad examples from the New Deal until the start of the modern Republican era in 1980. Perhaps most notable is the strong regulation of finance that led to the great moderation, and an era of unprecedentedly high evenly spread growth that created the great middle class.

Another example is one Krugman brought up:
Well, here’s the thing: regulation demonstrably does work where tort law doesn’t. Consider the environmental issue: in reality, the perpetrators of oil spills never pay most of the cost; but in reality, environmental regulation has led to much cleaner air and water. (Look up the history of Los Angeles smog or the fate of Lake Erie if you don’t believe me.)
So, we can have regulation that works; it's our choice; the option does exist; all it takes is voting Democrats into power. When we choose to vote Republican, regulation (and government in general) works far worse; it's severely degraded. When we vote Democrat it works, overall, well, or very well. And history shows this.

Now to Why Libertarianism Doesn’t Work, Part N+a (which is related to the above):

In Part N+1, Krugman wrote, "A few days ago I put up a post about how libertarians say we don’t need government regulation, because tort law will do the trick..." He then pointed out, "in practice, politicians will find ways to shield the powerful, as illustrated by the $75 million cap on damage payments from oil spills."

I'd like to really get into the meat of this with another example: vaccines.

The no regulation / just litigation, libertarian approach says, don't force people to get polio vaccinations, or subsidize them, just sue the person who gave you polio.

Ok, first it's almost surely impossible, or nearly impossible, to prove in court someone gave you polio. And, it also may be incredibly costly to prove this in court even if you could. There are lawyer costs, investigator costs, your time costs, and all of the court costs; judges, jurors, facilities, security, enforcement of rulings, etc.

And, as if that's not enough, second, the person who gave you polio probably doesn't have anywhere near enough money to fully compensate you for the costs and misery of a lifetime of polio.

By contrast, requiring that all children have polio vaccinations before they can attend school, and/or the government paying the cost of the vaccination, is very easy and inexpensive.

Remember the old saying, an ounce of prevention is equal to a pound of cure? The libertarians essentially want no prevention (regulation, subsidization, etc.) and only cure (litigation), even for things that are impossible to cure, or incredibly expensive to cure, but relatively cheap to prevent.

Sunday, April 18, 2010

The VAT is not the only simple consumption based tax

In a post on Friday Bruce Bartlett wrote:
That being the case, it makes sense to raise those revenues, which will be raised in any event, in a way that is least damaging to the economy. Hundreds of years of analysis show that a broad-based tax on consumption is the best way to do that and a VAT is simply the best form of such tax ever invented.

No economist I know of denies this.
Well, then Mr. Bartlett doesn't know of many economists, or a very wide range.

First, the vast majority of economists expert in this area (real economists with PhDs) will tell you that the least economically harmful way to tax is to tax negative externalities and activities, like pollution and cigarettes. Here the harm from the tax is negative. The tax does good in addition to raising money; it increases efficiency and total societal utility. Here's an example of an obscure economist few have heard of speaking in favor of externalities taxes, Nobel Prize winner Paul Krugman.

Second, many economist don't like that the VAT, unlike the income tax, is completely unprogressive. And you just absolutely don't have to be unprogressive to have a tax that is consumption based and simple. This can be done with a straightforward direct consumption tax, as explained by another obscure economist, New York Times Economic View columnist and Cornell professor, Robert H. Frank. In a 1999 Washington Post Op-Ed Frank wrote:
...We can do this in a powerful yet unintrusive way by scrapping our current income tax in favor of a more steeply progressive consumption tax. Such a tax would be straightforward to administer: Each family would pay tax not on its income, but on its total spending--as measured by the simple difference between its annual income and its annual savings.
And precisely because this tax is (steeply) progressive, it also accomplishes point 1: It increases efficiency by taxing externality costs, chiefly those of the colossal positional/context/prestige externalities. In fact, this is the key point Frank makes in the Op-Ed I cite above. Mr. Bartlett, if you really are open minded as you say, then you should read it.

For more on taxation, I suggest starting here.

Saturday, April 10, 2010

Come on! You don't give the same discount rate to insurance as stock, and that includes global warming insurance!

Paul Krugman recently had a long New York Times article on the economics of global warming. The vast majority of it was very good for laypeople, as you would expect from the great Nobel Prize winning economist, but this part I really didn't like:
The policy-ramp advocates [most notably William Nordhaus with his DICE model] argue...costs that far in the future should not have a large influence on policy today. They point to market rates of return, which indicate that investors place only a small weight on the gains or losses they expect in the distant future, and argue that public policies, including climate policies, should do the same...As a professional economist, I find this debate painful. There are smart, well-intentioned people on both sides — some of them, as it happens, old friends and mentors of mine — and each side has scored some major points.
This argument should not be given nearly this much respect. Krugman often chastises economists for not understanding things from intermediate undergrad econ. Well, the argument above shows a lack of understanding of finance 101, or at least an unwillingness to apply it on a societal level, or a lack of understanding of the significant catastrophic risks that are the consensus of the top climate scientists.

The rate of return demanded is dependent on the risk of an investment. You expect, and demand, the stock market rate of return for an investment that is as risky as the stock market portfolio, not for any investment. If the investment is less risky, then it's still a good deal even with a lower expected return. If the investment is even better than zero risk, that is if it decreases the existing risk you have, like insurance, then it can even be worth it even if it has a negative return.

And people practice this all the time. Almost everyone buys homeowners insurance or car insurance even though the expected return is negative, and this is the case even when it's not required by law or lender. The reason is that it's so decreasing of catastrophic risk that it's still well worth it. It's still considered a great investment.

Obviously, significant odds of planetary devastation is a catastrophic risk, so obviously insurance against this is not just low risk, it's negative risk, so the required rate of return should be far lower than the required rate of return for a diversified stock portfolio. It should, in fact, be negative. With such an appropriate required rate of return, any credible model clearly shows we should be spending far more on anti global warming measures – and right now.

I made this point in my blog action day post last October, but it's not being made nearly enough. This should be said vociferously every time someone says we should use the market discount rate, or anything close to it, for global warming insurance.

Let me be clear here: What is the required rate of return used by William Nordhaus, the most prominent proponent of the ramp, with the most prominent model, the DICE model?

The approach in the DICE model is to use the estimated market return on capital as the discount rate. The estimated discount rate in the model averages 4 percent [real, inflation adjusted] per year over the next century. (page 19)
So his model then says we should spend relatively lightly on global warming at this time (relative, that is, to a model like Nicholas Stern's of the London School of Economics). But imagine how much his model would say we should spend if we used a negative rate of return like that accepted by almost everyone for car and homeowners insurance. The planet is, of course, our home, and the home of our children, our grandchildren, and their grandchildren.

Monday, March 22, 2010

Wow, the Stock Market likes Socialism!

According to top Republican operative Larry Kudlow, “Stock markets are the best barometer of the health, wealth and security of a nation”

So what did the stock market think of the passing of the Democrats' socialist health care program?

The Dow closed up 44 points.

Wow, the stock market must like socialism, or communism, or fascism!

Yeah, I guess they must, because according to this major study published in finance's most prestigious journal:
The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The difference comes from higher real stock returns and lower real interest rates, is statistically significant, and is robust in subsamples. The difference in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium...Using data since 1927, we find that the average excess return of the value weighted CRSP index over the three-month Treasury bill rate has been about 2 percent under Republican and 11 percent under Democratic presidents -- a striking difference of 9 percent per year! This difference is economically and statistically significant.
-- "The Presidential Puzzle: Political Cycles and the Stock Market", abstract and page 1, The Journal of Finance, 2003

Anyway, at least it's official now, the Democrats have finally laid, "the cornerstone of their Socialist utopia" .

No wait, didn't we already lay the cornerstone of the socialist utopia when we passed Medicare in 1965 – universal single payer health insurance for all seniors?

No, we did it when we passed Social Security for our seniors in 1935.

No wait, we've been socialist for at least 100 years with the passing of free schooling for our children.

Boy, the Republicans really have a lot of work repealing stuff to make us no longer socialist.

Tuesday, March 16, 2010

Really expert, thorough fact checking just isn't profit maximizing, but what if it was?

Ezra Klein writes on David Brook's recent column today:
As for the prescription drug benefit? The prescription drug benefit didn't go through reconciliation. It was passed through the normal order.
Brooks is simply wrong on this.To recap, Brooks argued that reconciliation is being used more frequently, and that past reconciliation bills, like Bush's tax cuts and prescription drug benefit, were significantly bipartisan. Reconciliation is, in fact, being used less frequently, past reconciliation bills like the tax cuts were not significantly bipartisan by any stretch of the imagination, and the prescription drug benefit did not go through reconciliation.
Wow, I wonder if this column would have ever been published in anything like its current form if the New York Times had mandatory careful, thorough fact checking of columns by a well paid, well staffed, large, highly expert force. Of course, I guess that's too expensive for them to do and stay in business (or make their profits as large as possible). But what if it wasn't? Hmmm.

Sunday, March 14, 2010

How to shift the profit advantage away from Fox News reporting

Former executive editor of the New York Times, Howell Raines, writes in a Washington Post op-ed today:
Why has our profession, through its general silence -- or only spasmodic protest -- helped Fox legitimize a style of journalism that is dishonest in its intellectual process, untrustworthy in its conclusions and biased in its gestalt? The standard answer is economics. Some prominent print journalists are now cheering Rupert Murdoch, the head of News Corp. (which owns the Fox network) for his alleged commitment to print, as evidenced by his willingness to lose money on the New York Post and gamble the overall profitability of his company on the survival of the Wall Street Journal...

Under the pretense of correcting a Democratic bias in news reporting, Fox has accomplished something that seemed impossible before Ailes imported to the news studio the tricks he learned in Richard Nixon's campaign think tank: He and his video ferrets have intimidated center-right and center-left journalists into suppressing conclusions -- whether on health-care reform or other issues -- they once would have stated as demonstrably proven by their reporting. I try not to believe that this kid-gloves handling amounts to self-censorship, but it's hard to ignore the evidence. News Corp., with 64,000 employees worldwide, receives the tender treatment accorded a future employer.
Wow, look at that last line. Former New York Times editor Howell Raines appears to believe there's a reasonable case that reporters at the mainstream outlets are, "suppressing conclusions -- whether on health-care reform or other issues -- they once would have stated as demonstrably proven by their reporting.", at least in part because they fear losing their jobs due to inadequate profits, and then needing a job at the highly profitable Fox, which, like the rest of the right wing machine, holds a grudge, intimidates with revenge, and generously rewards loyal cronies.

Now, let me ask you a question. What if there were a very large tax credit, like 50% or more, refundable with some limitations, for the monumental positive externalites of serious investigative and research reporting? a tax credit for expenses like fact checking, investigation, research assistants, on-staff and on-retainer experts in economics, government, and science, travel expenses to war zones, and so on.

How would this affect the profit equation, and the relative profit equation?

First, it would make it much more profitable for serious, unbiased (relatively, and the bias that exists is towards the right, with the mainstream media constantly not calling them on their lies and misleading) news organizations to not lay off serious reporters, editors, and related staff (as has been happening en masse), and to, in fact, hire many more – I'm talking about a tax credit of 50 to 80 percent that's refundable (with sensible limitations), something big enough to have a huge impact, not a tiny little effect around the margins.

Second, this tax credit would benefit serious unbiased (relatively) news outlets more than Fox type news outlets. This is because at Fox it's not about serious investigation to find the truth and be accurate. It's much more about selling opinions, disinformation, and outright fabrication. They therefore have a much lower relative expense for research, fact checking, expert help, and serious investigation.

The result then, is that with such a tax credit reporters at serious news outlets would be a lot less fearful of losing their jobs and having to get new ones at Fox, or similar outlets, greatly allaying Raines' fear. I would like to note here that Raines' conjecture is stunning, but he is a former executive editor of the New York Times, so we should think about it seriously.

And, of course, in addition to greatly decreasing any intimidation of reporters by Fox, such a tax credit would address positive externalites that are simply colossal. A tremendous amount of good would come from greatly increased spending on journalistic research, investigation, fact checking, debunking, expert support, etc. For more on this see here.

Monday, January 18, 2010

If our health care system really is more efficient than the Europeans', then why...

We spend about $100 billion per year on medical research, public and private combined (see here).

We spend about $2 trillion per year on health care delivery, the doctors, hospitals, administration, etc. If we adopted a European style system, cutting our spending per person in half, as in European countries (that I think the evidence shows have about as good or better health care and results anyway; see for example here), then we would save about $1 trillion per year.

Now, what if we spent that $1 trillion in savings on medical research? It would increase medical research spending more than 10 fold.

Even if delivery did get a little worse, even if we did get a little bit less of our brightest and best becoming doctors due to lower pay, it seems like this would be totally outweighed over the long run by tremendously more advanced medical understanding and treatments due to the 10 fold increase in medical research spending (or more, as some advanced universal healthcare countries provide comparable health care to the US at about a quarter of the cost per person) .

So it looks like if you want better medical results, better treatment, breakthroughs in rejuvenation, better odds of surviving cancer, you name it, you should support going to a European style system, and using the immense savings to increase medical research more than 10 fold.

So if our health care system really is more efficient than the Europeans, then why is it possible to make such a vastly favorable trade?

If the Republicans really care about our children and grandchildren so much why don't they do this, so in 50 years they could have medicine as advanced as it would take perhaps 150 years to achieve with our current system. I don't care how bad you imagine European health care to be, you cannot think a European medical center of today is less effective than even the Mayo Clinic of 100 years ago, when penicillin and polio vaccines hadn't even been invented.

Sunday, January 17, 2010

Why government regualtion of finance can work and how to make it a lot better

Mark Thoma writes today:
Adam Smith believed that competition was the best regulator of economic behavior. You can't trust government to intervene and protect people because the rich and powerful will bend government to satisfy their needs [although Mark himself favors finance regulation].
Ok, this is a point you often hear from anti-government people. But if it's really a good enough excuse always, we should have no government at all. Obviously, sometimes the good of government outweighs this cost.

And why does it sometimes, and in fact often, outweigh this cost in America. Because we have a highly democratic country, so the vast majority does have a strong say with their ability to vote. Obviously, we aren't completely democratic. The fact that Wyoming gets as many senators as California (and the District of Columbia gets none with a population larger than Wyoming's) means that a bill desired by representatives of 90% of the population can be stopped by representatives of 10% of the population. But we still are a highly democratic country, so there still is a strong incentive to not do anything that looks too bad to the public.

And we've seen that regulation and government can work very well for generations. Post World War II through the 70s we had effective banking regulation that led to the Great Moderation and a golden age of extremely high economic growth evenly spread that built the great middle class. But then we elected a party that didn't want government to work, and we've paid a very high price for that over the last generation (see here, here, here, and here).

So regulation can work in spite of the oversized influence of the wealthy and corporations. We saw that it could for decades. But how to make it work better? Two crucial steps are needed, and both would make our country far more democratic:

1) Eliminate the filibuster, which has not been with us as a de facto supermajority requirement since inception. It's only very recently that it's been used that way.

2) Greatly increase public campaign finance and/or corporate donation limits. If limits don't work because of Republican Supreme Court Justices and/or loopholes, certainly the government giving candidates and parties more campaign money than they could ever raise from corporations and private parties would destroy the incentive to cater to them for donations (they get the government money only if they decline private money). This is the idea behind (large) public campaign finance.

Some would say they support (2) but not (1), but it will be extremely hard to get a strong (2) without doing (1) first. In fact, it will be extremely hard to do any great good, from truly strong climate change action to truly strong finance reform, without doing (1) first. For more on why I support (1), please see here.