Wednesday, January 28, 2015
The Obama administration announced yesterday that it was dropping its proposal to tax distributions out of "529 plans," and in some ways that is too bad. (A 529 plan, for readers without college-bound descendants, is a tax-free savings vehicle whose proceeds can be used only to pay for higher-ed expenses). The program isn't particularly money well spent. Although many lower-middle-income families save for college in a 529 plan, they aren't able to put much money in, and their tax rate is too low to make the tax savings all that valuable. Higher-income families get the vast majority of the tax savings, and of course these are the families whose children were already going to be able to go to college. We don't have good data on how much of the tax savings are captured by colleges and universities, but it's probably at least some.
A less obvious problem is that the plans are run by states, and states discriminate against each other.
Monday, January 26, 2015
At the AEA meetings in Boston this January Robert Barro talked about global warming. He has a draft paper out, "Environmental Protection, Rare Disasters, and Discount Rates," where he argues that the biggest concern in global warming ought to be insuring against low-probability disasters, rather than remedying the more likely levels of warming which cause relatively little damage. William Nordhaus estimated the damage from unmitigated global warming of 3 degrees Centigrade at 2.5% of world GDP. (http://yosemite.epa.gov/ee/epa/eerm.nsf/vwAN/EE-0564-14.pdf/$file/EE-0564-14.pdf). That's a lot of GDP, but an ordinary recession has the same effect--- say, a 1% decline in GDP and 1.5% lost potential growth. Most recessions are followed by a bounceback to the trend line for potential GDP, but that doesn't always happen. Laurence Ball found that by 2013 U.S. potential GDP was still 4.7 percent below the trend before the Great Recession of 2009. (http://www.newrepublic.com/article/117976/us-potential-gdp-vs-gdp-shows-great-recessions-long-term-damage) Thus, we in the US have already experienced double the likely loss from global warming (assuming global warming resumes again after its 14 year halt).
What Barro points out (as Martin Weitzmann has been doing for some time) is that it's the improbably but disastrous downside that we should be looking at. This is even more true if you think the most likely scenario has changed to be a permanent stop to global warming rather than just a 14-year hiatus. Whatever the most likely scenario, we still should worry about the possibility that current science is wrong, and global warming will be much worse than anyone expects.
JOHN R. GRAHAM, Duke University, National Bureau of Economic Research (NBER)
MICHELLE HANLON, Massachusetts Institute of Technology (MIT) - Sloan School of Management
TERRY J. SHEVLIN, University of California-Irvine
NEMIT SHROFF, Massachusetts Institute of Technology (MIT) - Sloan School of Management
"We estimate that behavioral biases that influence firms to use the average tax rate for decision-making lead to deadweight losses that average $10 million for poor capital structure decisions and $25 million for suboptimal acquisition..."
Wei Jiang, Columbia Business School
Paper Topic: How Quickly Do Markets Learn? Private Information Dissemination in a Natural Experiment
Wednesday, January 21, 2015
I first encountered Professor Craswell's scholarship when I started studying the effect of judicial errors on people's incentives to obey the law. In particular, his joint works with John Calfee were quite illuminating. I have recently been informed about Stanford's conference in honor of Professor Craswell. I wanted to pass along the information:
A Festschrift in Honor of Richard Craswell
Monday, January 19, 2015
The Earned Income Tax Credit has the good intention of subsidizing the employment of poor people. A huge amount of it, though, is fraud, because the penalties and the chances of getting caught are small.
Raj Chetty gave the Ely Lecture at the AEA meetings in Boston in January 2015, and it was well worth listening to. He is very clear in his presentation, and he chooses interesting research topics. One paper he talked about was about how the Earned Income Tax Credit leads to a sharp bunching of people’s reported self-employment income at the level where the check from the government is highest--- $12,600, I think, at some point in time, with a ehceck of about $500 if you report no children, $3,000 for one, and $5,000 for two (http://www.foxbusiness.com/personal-finance/2014/05/29/cutting-down-on-tax-fraud-understanding-eitc/). That differs between states, though. In 1996, there was a lot of bunching in Texas, but not much in Indiana. By 2008, Indiana had a lot more. Chetty calls this information diffusion, but he really should make clear that this is diffusion of information about how to defraud the government, since the best explanation is the spread of fraud, both from tax preparers and from people who buy the social security numbers of other people so as to file fraudulent returns for them. I wonder how much organized crime is involved. This seems to be a substantial incentive for poor people to have children, though it’s probably easier just to claim children and not actually have to take care of them.
ALEXANDER GELBER, National Bureau of Economic Research (NBER), University of California, Berkeley
ADAM ISEN, Government of the United States of America - Department of the Treasury
JUDD B. KESSLER, University of Pennsylvania - Business & Public Policy Department
[Ed: A cool project linking a randomized NYC summer jobs program with massive tax and correctional administrative data to track the effects of admission to the program. The main payoff: "SYEP participation decreases the probability of incarceration and decreases the probability of mortality, which has important and potentially pivotal implications for analyzing the net benefits of the program."
Thursday, January 15, 2015
"This paper examines the effects of the 1942 Book Republication Program (BRP), which allowed US publishers to replicate science books that German publishers had copyrighted in the United States, on the production of new knowledge in mathematics and chemistry. Citations data indicate a dramatic increase in citations to BRP books after 1942 compared with Swiss books in the same fields.
Wednesday, January 14, 2015
"Critics have observed that optimal redistribution through tax may be politically infeasible, but have generally overlooked the rejoinder that the same political impediments to redistribution through tax will block redistribution through legal rules."
Tuesday, January 13, 2015
Monday, January 12, 2015
One of the AEA sessions in Boston in January 2015 was on illegal immigration and crime. A couple of the papers looked at the effect of the 1986 amnesty in the U.S. I learned that the amnesty was rife with fraud. It was supposed to just give amnesty to two groups: people who had been illegally in the country continuously for at least 5 years (1.8 million applicants), and people who had worked at least 90 days in agriculture in the past three years (the SAW program, 1.3 million applicamts). Interviews were required. The local offices recommended denial of 883,000 applicants (though there will still 300,000 pending at that time). Only 352,000 were actually denied though--- the higher-ups were much more generous. The 700,000 SAW applicants in California were actually twice as high as anyone’s estimate of the total agricultural work force in the state--- legal and illegal alike! David North says,
There was, for instance, a conscientious first-line interviewer who knew something about the rural life and who faced many SAW applicants who did not. She developed a loose-leaf notebook with no text. It consisted of pictures of, and dried leaves from, the kinds of crops that were grown in her area. If someone said that they had picked strawberries, she asked them to show her the strawberry plants in the book; if they could not properly identify them she recommended a denial.
I remember asking the Deputy Assistant Commissioner in charge of the SAW program why the CO had not instructed field offices to replicate what she had done, and he said, in effect, there was no political will for spending time and energy on such things when the courts were constantly ruling against INS....
Similarly, there was a gold mine of computerized information in the files of the California Department of Employment Security on wages paid to farm workers by growers; it related to the state’s temporary disability insurance program. There was no effort made by INS to verify claims by California SAWs that they had worked for a specific employer by checking the state’s tax records for that employer....
One nicely documented example of such a transfer was reported by Interpreter Releases, the immigration bar’s scholarly trade paper. An assistant INS commissioner announced that $50 million in what he termed excess SAW fees were going to be used to buy INS a whole new generation of computers.23 When I reported, during the Ford-supported research, that this money could have been, and should have been, used to identify fraudulent SAW applicants, that assistant commissioner (who will remain nameless) literally screamed at me; I had apparently touched a raw nerve....
In short, one of the reasons why there was so much fraud in the SAW program was because INS siphoned off $180 million or so away from fraud detection.
This one thing Congress needs to keep in mind when passing legislation, especially concerning immigration. The Executive and the Judiciary can turn a statute into something very different from what Congress intended.
David North (2010) “A Bailout for Illegal Immigrants? Lessons from the Implementation of the 1986 IRCA Amnesty,” http://cis.org/irca-amnesty.
Saturday, January 10, 2015
I heard a paper by Fowlie, Greenston and Wolfram presented at the AEA meetings in Boston in January 2015 on winterizing homes. Three questions addressed were:
1. Why don't poor people apply for free winterizing?
2. How much energy does winterizing save, and is it worth the cost?
3. Do people use more energy after winterization, given that less is wasted?
They spent $50 per household on encouragement of people to apply for the program--- 7,000 initial in-person house visits and 2,700 follow-up visits to help with enrollment, 23,500 robo-calls and 9,000 personal phone calls, for a cost of $445,000 for 8,648 households. This resulted in a 5% increase in the number of households participating in the program. That's 432 households. So the cost per household signed up wasn't $50--- it was about $1,000. It was hard to get people to sign up even though the average expenditure on fixing up houses for those who did sign up was about $5,000.
The energy auditors estimated an average of 46% reduction in people's gas bills. The actual reductions were about 12%. This meant the winterization flunks cost-benefit analysis, even putting in some extra nudges for global warming.
Friday, January 9, 2015
Thomas Piketty's Capital in the Twenty-first Century has got to be The Economics book of 2014. For those of you who have not yet managed to pull the 577-pager off their shelves, Piketty's account that increasing wealth inequality is a one-way ratchet: wealth inevitably concentrates in the hands of a few, gradually and over time. By "gradually," he means a long time: we are headed back to the vast differences in wealth in place at the beginning of the twentieth century, but that process has been slowed by two world wars and the Great Depression, which knocked everybody back, so that the world became more equal. Wealth inequality has not yet, by Piketty's account, recovered from those economic catastrophes, but will.
At this point, with the hullabaloo mostly over, it is worth wondering if there is anything new about Piketty's account. He has the benefit of much more data than earlier writers. For me, I find some interesting parallels with the late Mancur Olson's The Rise and Decline of Nations in which he described a one-way ratchet of increasing unemployment, stagflation, and the ultimate economic decline of nations. Over time, Olson argues, a country with a stable political environment allows special interest groups to develop. Special interest groups exist only to engage in rent-seeking – the achievement of favorable government policy that secures above-normal rents for members of the special interest group. Why else would members of special interest group pay dues, unless they expect the group to obtain benefits they could not obtain themselves as individuals? Drawing upon Olson's earlier magnum opus, The Logic of Collective Action, how else can one even explain the existence of special interest groups, given the potential for within-group free-riding?
The provocative result of Olson's work is that this decline is almost inevitable. Over time, special interest groups form, they secure enough above-normal wealth, and what is left over is below-normal wealth for everybody else. Once special interest groups gain a foothold, their influence over policy grows, and their gains at the expense of society accumulate. Exceptions to inexorable decline exist, but are uncommon. A large and sudden shock from a trade liberalization might scramble the economic order faster than special interest groups can form or mobilize. Or, disruptive technologies might lead to a creative destruction. But absent such serendipitous shocks, the die is cast.
While Olson is primarily concerned with allocative inefficiency and Piketty with distributive effects, it is striking to notice the parallels of their theses. Both see a one-way ratchet, not a cycle. Both see their stories as mostly inevitable, checked only by random, infrequent, exogenous shocks. Both see a narrow segment of society – Piketty's one percent and Olson's special interest groups (though there is clearly overlap) – garnering above-normal rents to the detriment of the broader polity.
Is it possible that Piketty and Olson are actually talking about the same thing? Certainly, Olson's stagflation and unemployment is integral to the g part of Piketty's now-iconic r > g relation. Ultimately, there is some link between the allocative efficiency Olson worried about and the inequality that Piketty worries about. That nature and extent of that link is unclear.
Wednesday, January 7, 2015
A Broader View of the Cathedral: The Significance of the Liability Rule, Correcting a Misapprehension
Guido CalabresiYale Law School; U.S. Court of Appeals for the Second Circuit
Law and Contemporary Problems, Vol. 77, No. 2, 2014
Yale Law & Economics Research Paper No. 503
Yale Law School, Public Law Research Paper No. 515
Tuesday, January 6, 2015
CONSTANTINE BOUSSALIS, Trinity College (Dublin) - Department of Political Science
YUVAL FELDMAN, Bar-Ilan University - Faculty of Law, Harvard University - Edmond J. Safra Center for Ethics
HENRY E. SMITH, Harvard Law School
Laws can be written along a spectrum of specificity, ranging from vague standards to more detailed rules with particular examples. Behavioral and legal scholarship each present conflicting views about the optimal degree of specificity with which laws should be designed. From a behavioral standpoint, specificity is important to help people understand their goals and use their cognitive resources in a focused manner. At the same time, ambiguity in the law can even encourage good people to engage in creative interpretations of legal requirements, allowing them to justify unethical behavior, with limited awareness of the meaning of that behavior. By contrast, theories of crowding out, trust, and cooperation suggest that specificity can create resentment and lead to under-compliance and under-performance. These conflicting views about the effects of specificity serve as the background for this experimental project. This paper studies the effects of specificity on behavior in response to a directive that shares important features with the law. First, we examine the effect of specificity on compliance (following a directive) versus performance (beyond a minimum threshold). Second, we compare the controlling, limiting effects of specificity with its instructive, informative effects by comparing the interaction between specificity and monitoring with the interaction between specificity and good faith. We hypothesized that the combination of specificity and monitoring enhances the effect of specificity on compliance but harms performance and trust, whereas the combination of specificity and good faith enhances both the informative goal-setting aspects of specificity and people’s sense of commitment. The study employs an experimental design in which subjects edit a document after being exposed to detailed (vague) instructions, with (without) a reference to good faith, and with (without) monitoring (through sanctioning). The assignments were designed in such a way that people could engage in various levels of editing (both required and not required, reasonable and more than reasonable), allowing us to measure distinctly both compliance and performance. Our results suggest that when participants require information and guidance, as in the case of editing a document, specificity increases performance even beyond what is required relative to a vague standard condition.
Saturday, January 3, 2015
I just attended a good American Finance Association session featuring prominent economists talking about the finance aspects of global warming (discounting, risk aversion, fat-tailed risk, insurance, etc.) Present were Kent Daniel, Robert Barro, Rajnish Mehra, Lars Hansen, and Robert Litterman. In preparation, I drank half a cup of Starbucks after not drinking coffee for two months, so I am hyper enough to write up a blogpost. Below are three unrelated ideas the session stimulated, on university portolios as hedging carbon risk, carbon wars and revolutions, and the free-riding problem.
1. UNIVERSITY PORTFOLIOS AS HEDGING CARBON RISK. Here's the question I asked out loud, with elaboration. Bob Litterman said that WWF has gone short on carbon-intensive stocks, those that would be hurt by a carbon tax. He said that this was because the market currently underestimates the probability of such taxes, so he can beat the market. That's OK--- with political and scientific issues like this, maybe he can. (Question, though: why is Wall Street so very wrong, when they have a lot of smart experts?) Then Bob Barro said he thought the reason to short was hedging, for insurance against high carbon prices. If carbon prices rise (or they don't, but warming hurts wealth severely and causes all stocks to drop), then carbon stocks will fall, but if warming turns out not to be a problem, carbon stocks will rise or stay the same. Thus, if the investor holds other wealth that will be hurt by high carbon prices or warming, he should hedge by shorting carbon stocks (also he should hedge because prices of consumption goods will go up).
But that's wrong, at least for university investors.
Thursday, January 1, 2015
Every year I send out with my Christmas cards a list of a dozen good things I discovered during the year. Not much law and econ, I'm afraid, but here's my list--- Happy New Year!
1. Sabrina (1954) is a movie with Humphrey Bogart, Audrey Hepburn, and William Holden, directed by Billy Wilder. How could it not be good?
Monday, December 29, 2014
From The New Yorker:
"Geim and Novosolev wrote a three-page paper describing their discoveries. It was twice rejected by Nature, where one [reviewer] stated ... that it was not 'a sufficient scientific advance.'"
"In 2010, six years after Geim and Novosolev published their paper, they were awarded the Nobel Prize in Physics" for the discoveries decribed in it.
Wednesday, December 24, 2014
The wrongful police killings that happen in America are mistakes: the policemen is careless, shoots a bystander, raids the wrong house, etc. There are also the wrongful killings that are not the fault of the policeman: the victim points a toy gun at him, or moves to pull something out of his jacket while being arrested. There, the solution is not to put the policeman in prison, but to make him personally liable for damages and to fire him. Trying to go the criminal route ends up with zero penalty instead, because it seems too extreme and because it is hard to convict for a mistake when the standard is beyond a reasonable doubt, particularly if the defendant is trying to to his job as opposed to recklessly enjoying himself. Moreover, the most important thing in such cases is to incapacitate the offender. That means firing him from his job as a policeman, so he won't get a chance to make the same mistake again.
It would be interesting to look at a random sample of killings by police and see what happens. We already know that there are very few convictions, and that doesn't tell us much. What is more interesting would be to find out how often the police department or policeman (or does he have immunity?) pays damages, either with or without a formal lawsuit, and what happens to the career of the policeman when he is at fault.
Wednesday, December 17, 2014
The United States can end the export ban and simultaneously stabilize the insolvent Highway Trust Fund. Bridges are collapsing and 18-wheelers are falling into potholes the size of Rhode Island, and we complain that Congress has not raised the gasoline tax since 1993. That tree-hugging pit of Marxism, the US Chamber of Commerce, has called for a gas tax increase.
IHS Energy, a consulting group headed by energy writer and wonk Daniel Yergin, released a report earlier this year advocating for an end to the domestic crude oil export ban. The IHS report, downloadable from this IHS page, reports that lifting a crude oil ban would create an average of almost 400,000 jobs between 2016 and 2030.
Surprisingly, and importantly ending the ban would lower gasoline prices by an average of 8 cents per gallon. This is because US gasoline prices are set by global crude oil prices not domestic production costs, and lifting a US export ban would add to the world supply by a significant amount. The only losers would be domestic refiners such as Valero, which has opposed lifting the ban. The Crude Oil Export Ban is a simple transfer payment from American motorists to domestic refiners.
So here is an idea: lift the ban, and at the same time impose a gas tax of 8 cents per gallon. The gasoline consumer is no worse off, because the gas tax only counteracts the lower gas prices resulting from ending the export ban, and generate about $9.7 billion annually for the Highway Trust Fund (135 billion gallons of gasoline were consumed in the United States last year, 13 billion of which were ethanol). Ideally, the crude oil export ban should be accompanied by an $9 per ton of CO2 carbon tax, but that's another story.
Enacted as part of the Energy Policy and Conservation Act of 1975, the crude oil export ban was meant to secure energy supplies in the wake of the 1973 oil embargo that shocked an energy-complacent United States. The actual legislation just provides that "[t]he President may, by rule, under such terms and Export conditions as he determines to be appropriate and necessary to carry out the purposes of this Act, restrict exports of -- ... coal, petroleum products, natural gas, or petrochemical feedstocks. .." Section 103 goes on to provide that the "President shall exercise the authority provided for in Exemption, subsection (a) to promulgate a rule prohibiting the export of crude oil and natural gas produced in the United States, except that the President may, ... exempt from such prohibition such crude oil or natural gas exports which he determines to be consistent with the national interest..." So it is pretty clear that the ban is a matter of executive discretion. It is just that Presidents Ford, Carter, Reagan, Bush, Clinton, Bush, and Obama have all decided that exporting oil was not in the national interest.
But that was 1975, and the United States is now one of the major oil producers of the world today. Much of the EPCA's provisions, aimed at insulating the United States from volatile global energy prices, still seem useful today, like the Strategic Oil Reserve and fuel efficiency standards for motor vehicles. But lifting the crude oil ban now has bipartisan interest.