Tuesday, December 16, 2014

Interesting Thoughts on the Health Care Cost Curve

...from friend of the blog Alan Weil, the editor at Health Affairs.


Worth a read!

December 16, 2014 | Permalink | Comments (0)

Wednesday, December 10, 2014

Quotes on Lucky Generals and Tariff Mothers

I wonder if any readers can help me track down a couple of quotations.

1. Napoleon said something like "I choose my generals because they're lucky, not because they're smart." I googled around and found lots of variants (and not just because of translation differences), no French original, and the most precise source saying he said it in 1813. Anyone know anything more?

2. "The tariff is the mother of the trust". Havemeyer in June 1899 testimony before the "Industrial Commission"-- said something like this, but not so neatly. He said, "The mother of all trusts is the custom-tariff bill". Quoted in: BYRON W. HOLT, THE TARIFF THE MOTHER OF TRUSTS. DELIVERED BEFORE THE CHICAGO CONFERENCE ON TRUSTS, Sept. 14, 1899. Anybody have any further insights?

December 10, 2014 | Permalink | Comments (0)

Tuesday, December 9, 2014

The New York Times on What Happened in Ferguson

  I'm still interested in comment on police  use of force in the hypotheticals I blogged about a couple of days ago. If we turn to the actual Ferguson situation, the other question is (a) what the facts actually are, and (b) how we interpret them. I was pleased to see that the New York Times reported the facts, though not completely without selection. The Times says: 

"Michael Brown and Dorian Johnson leave Ferguson Market and Liquor. Surveillance video shows Mr. Brown stealing some cigarillos....Officer Darren Wilson arrives, alone in his police vehicle. Speaking through his window, he tells the two men to move to the sidewalk. He sees that Mr. Brown fits the description of a suspect in a convenience store theft....Officer Wilson makes a call to the dispatcher about the two men. He positions his S.U.V. to block the the two men as well as traffic....There is an altercation between Officer Wilson and Mr. Brown, who is standing at the window of the vehicle. Officer Wilson fires two shots from inside the vehicle, one likely grazing Mr. Brown’s thumb, and the other missing him. Mr. Brown runs east.... Examiners found Mr. Brown’s blood or other DNA outside the driver’s door, outside the left rear passenger door, inside the driver’s door, on the upper left thigh of Officer Wilson’s pants and on Officer Wilson’s shirt and weapon....A medical examination indicated that Officer Wilson had some swelling and redness on his face.

Continue reading

December 9, 2014 | Permalink | Comments (3)

Sunday, December 7, 2014

Handy Stats on Poverty Aid and on Medicare

I heard a talk by Prof. Peter Schuck of Yale Law School on why the government performs poorly solving problems at Harvey Mansfield's government seminar the other day. The talk was short on facts, with a lot of talk in the vein of "It's a very complicated problem and there are no easy answers". I asked something like, "I know you want to be a moderate, as do we all, but really intellectuals have the responsibility to propose radical, politically impossible solutions, because practical people can't be the first to propose them. So what would you think of banning labor unions? It wouldn't affect the private sector much, since international competition has done a lot to weaken unions there, but it would help government, where most of the unionized workers are now" (not quite that; I've improved my question). He didn't really have an answer-- the thought was too far outside his thinking.

Anyway, he did raise some interesting points, and I looked up some numbers later, since they depend on details. Here are some useful numbers:

Medicare: Spending was $523 billion for 47 million people in 2010. That's $11,000 each. If the average person lives till 77, that means 12 years of Medicare, $133,000. (Wikipedia, Medicare (United States). Would you prefer the insurance, or that sum of money as a lump sum?

Poverty: 46 million people are below the poverty line. Spending is $525 million from just Medicaid, earned income tax credit, and food stamps ($125 million excluding Medicaid; adding other programs in housing, legal aid, job training, etc. might add $100 million, at a guess). That's about $11,000/year/person, just like Medicare. For a family of 4, that $44,000/year in government aid. Median household income in America is $51,000 (though maybe that excludes fringe benefits such as pensions and health insurance). So a household earning $7,000/year would rise above median income if it got the average poverty spending (Forbes, 2012, http://www.forbes.com/sites/timworstall/2012/09/13/if-the-us-spends-550-billion-on-poverty-how-can-there-still-be-poverty-in-the-us/print/; Census Bureau, http://www.census.gov/prod/2013pubs/acsbr12-02.pdf)

December 7, 2014 | Permalink | Comments (0)

It's Useful to Have Lawyers Involved in Quantitative Studies of Law

I go to a lot of conferences that feature econometric studies of legal outcomes.  These conferences are usually fun and I always learn a lot.  I also, probably, need blood-pressure medication by the end of most of them.  I'm not sure how many times I've said things like, "Just because the statute says that, doesn't mean that's how the law is enforced" or "Did you check to see whether that provision is actually judicially enforceable?"  (The latter comes up frequently in panels on state constitutional budget rules, whose state-by-state variation presents a tempting diff-in-diff design, but many of which have been ruled non-justiciable by courts).  

Put another way, understanding the institutional context of what you're studying matters.  I mention this today because of a fivethirtyeight post breaking down, law school by law school, the composite ideology scores of  the justices each school's graduates clerked for.  The headline, picked up by our blog overlord and others, suggests that this is a meaningful measure of the ideology of the schools themselves.  (It's not just the headline, either: the article suggests that in a couple of places, too).  And, sure, if you see Berkeley at the far left, you think: makes sense to me.

But it doesn't.  For example, notice that Yale's center of mass is just right of center.  Supreme Court clerkships are not representative samples of the student population.  They're typically a produce of close ties, often personal, between justices and recommenders.  What we're measuring, then, is the political leanings of the professors who are best positioned to refer clerks to the justices.  U.Va. has a nunmber of former clerks for conservative justices on their faculty, and one of the high court's premier right-leaning feeder judges occasionally teaches there.  

A trivial instance, to be sure, but a useful reminder that even lawyers without a lot of quantiative training can have important information to contribute to social science research.  

December 7, 2014 | Permalink | Comments (0)

Saturday, December 6, 2014

Two Hypotheticals on Police Use of Force

In light of recent news events, I  have a couple of hypotheticals for police behavior I'd like to see readers address.

1. A policeman in a car sees a couple of large 18-year-olds walking down the middle of the street. He rolls down his window and says, "Hey, you shouldn't walk in the street." One of them, who seems much stronger than the policeman, comes over to his car and punches the policeman, who draws his gun and shoot at the boy. The boy runs away, but then turns around and starts running towards the policeman. The policeman backs off, at first. The boy comes closer. What should the policeman do?

2. A policeman sees a large and strong man, much bigger than himself, though maybe a bit fat, selling cigarettes illegally on the street. He calls back-up police, and goes up to the man and tells him he's being arrested. The man argues back vehemently rather than coming with the policeman. The backup police arrive. The man keeps arguing and refusing to leave with the police. What should the policemen do?

   I genuinely would like to hear answers. We have to be realistic, of course-- "shoot him in the leg" is, I am told, totally impractical advice to give to a terrified policeman, who very possibly will miss the other person entirely.  We also have to take the hypotheticals as hypotheticals--- that there is some chance the person will be high on meth, some chance he has a weak heart, some chance he has just committed a major crime, etc. But advice based on equipment  or training is OK-- use a taser, use a billyclub,  use judo.

December 6, 2014 | Permalink | Comments (2)

Thursday, December 4, 2014

Section 179 and Bonus Depreciation in the House bill

David Super has an op-ed in yesterday's New York Times on the push by some Republicans to extend a stimulus tax incentive, a "bonus depreciation" provision that allows businesses to deduct the full purchase price of qualifying equipment, essentially deducting it as a business expense (like a luncheon or business travel) up to, in some cases in the past, 50% of the value of the equipment. Professor Super calls this provision, which as part of a tax extenders package in H.R. 5771 passed the House yesterday 378-46, "outrageous." In comparison, the maximum deduction for higher education expenses would be capped at $4,000 for an individual whose maximum adjusted gross income can be no more than $65,000 (or $130,000 for joint filers). That's a deduction of up to $500,000 for business equipment -- office furniture, software, trucks with a gross vehicle weight exceeding 6,000 lbs -- that's all qualifying property for section 179.

However, there is something else that is moving forward as part of H.R. 5771. Even before you get to bonus depreciation, under section 179 of the Internal Revenue Code businesses can take a first-year deduction of up to $25,000. That means that business, whatever and whoever they are, can expense up to $25,000 of equipment right away. The limit had been, as part of a 2008 economic stimulus package lifted up to $250,000 on capital equipment having a total value of no more than $800,000. That generous limit expired, and House Republicans are now seeking to lift that limit from the current level of $25,000 up to $500,000. Combined with section 179, that means that up to $1 million of capital equipment can now be expensed. In case you're keeping score, that's $1 million for business capital, $4,000 for higher eduction.

There is actually a website, Section179.org, that spells everything out for anybody, most prominently small businesses, to figure out exactly how the bonus depreciation works. It is not complicated. For qualifying capital equipment, you can basically expense anything up to $25,000, which becomes $1 million if the House package becomes law.

What is the effect of these tax provisions? These provisions have gone up and down over time, and Eric Zwick and James Mahon have looked at these provisions and their effects on business investment, and how changes in these rates over time have changed investment from year to year. They found that bonus depreciation raised investment by 17.3 percent from 2001 to 2004 and 29.5 percent from 2008 to 2010. They carry out a number of robustness tests, leading them to conclude that these provisions really do work. In fact, insofar as the up-and-down movement of the limits of section 179 and bonus depreciation create "kinks" in the optimal investment levels of firms, firms are observed to be investing right up to the kinks, in effect taking full advantage of these provisions. Firms tend not to take full advantage if they do not have the ordinary income against which to take these deductions (though bonus depreciation has, in past years, been used to create losses which can be carried forward to offset income in future years).

That said, what kind of capital are we subsidizing, and what good is it doing? Even if we ignore the distributional impacts of this disparity between funding business equipment and higher education, what good is this increased business investment doing? Presumably we subsidize capital because we believe there is capital-labor complementarity, and that this will create jobs. But does it? Does it instead make it cheaper to substitute capital for labor? And what kind of jobs does it create, if it does? This we do not know.

December 4, 2014 | Permalink | Comments (1)

Monday, December 1, 2014

"The Superiority of Economists": Two Sociologists' and an Economist's View

 "The Superiority of Economists," by sociologists Marion Fourcade, Etienne Ollion, and Yann Algan[correction: Algan is an economist]. Working paper. Max Planck Sciences Po Center on Coping with Instability in Market Societies Sciences Po | 27 rue Saint-Guillaume | 75337 Paris Cedex 07 | France. http://www.maxpo.eu/pub/maxpo_dp/maxpodp14-3.pdf

 This is an interesting paper (h.t: Glenn Weyl). I'll give a few quotes, and then my comments to the authors.

"With the empirical revolution in the 1990s and 2000s, this function has shifted toward a hard-nosed approach to causality, focused on research design and inference, and often extolling the virtues of randomly controlled trials (for example, Angrist/Pischke 2010). Although this move has not escaped criticism (for example, Leamer 2010; Sims 2010), it represents a significant departure from the now disparaged “over-theoretical” orientations of the 1970s and 1980s....

First, the theory of action that comes with economists’ analytical style is hardly compatible with the basic premise of much of the human sciences, namely that social processes shape individual preferences (rather than the other way round)...

As sociologists know well, this dynamic is characteristic of unequal situations: those in a central position within a field fail to notice peripheral actors, and are also largely unaware of the principles that underpin their own domination (Bourdieu [1979]1984). Instead, they tend to rationalize power and inequality as a “just” product of merit,...

The field is filled with anxious introspection, prompted by economists’ feeling that they are powerful but unloved,..."


Comments:  Nice paper. A comparison with physics or biology would be nice, on hiring. Also, I bet in sociology, as in English, etc., connections matter more for placement--- someone at a lower-ranked school with a weak candidate can still call a friend and get him placed. That is--- the placement officer doesn’t matter, nor the dissertation, but the advisor does, compared to economics.

Continue reading

December 1, 2014 | Permalink | Comments (0)

Sunday, November 30, 2014

Shopping for Possible Meanings of "Established by a State"

I went grocery shopping today, and as I looked up at the Star Market sign I realized another reason the government should win King v. Burwell, the ACA subsidies case. 

Like supermarkets, health insurers are regional businesses.  Most sell in only a handful of states, and have adapted their products and methods to the regulatory and other peculiarities of those states and their corresponding insurance regulators. 

My argument is that this regionality helps us to understand the language that the Supreme Court will have to interpret, “an exchange established by a state.”  The plaintiffs argue that the term “established by a state” has to be interpreted to rule out exchanges that are currently run by the federal government.  That suggestion, as Abbe Gluck and others have pointed out, is hard to reconcile with other provisions of the act, which use very similar language to cover both federally- and state-run exchanges. 

But the plaintiffs seem to have struck a chord with some commentators in their claim that reading the clause to cover both kinds of exchanges makes the “by a state” phrase surplusage.  Why would Congress have put those words in there, they ask, if the same rules apply to both kinds of exchange?  I think regionality could answer that question, but not in a way that necessarily helps the plaintiffs.

Let’s rewind to 2009, when the ACA was being drafted.  The “exchanges,” of course, were a key component: each was to be a basket of approved insurance plans from which consumers could shop, and consumers below 400% of the federal poverty level could obtain subsidies to offset some of the plans’ costs.  Proponents of “single payer” urged that the Act establish a single nationwide exchange, with the idea being that the federal exchange regulators would have monopsony-like power to negotiate with insurers.  The House-passed bill actually did just that.

State regulators and insurers hated that idea.   Insurers, again, were largely regional, and believed that their products would be a poor fit for a national basket of customers (and that existing national players, such as Blue Cross, would have a large head-start in adapting).   State regulators thought that the federal exchange would undermine their authority.   Together, they battled to make sure that any exchange, even one run by the federal government, would have only a regional scope.  As a compromise, the final version passed by the Senate (and then accepted by the House) does allow states to enter into agreements to set up multi-state exchanges, but that leaves it up to regulators whether to cede their authority, and so far none have.

The phrase "established by a state" prevents the federal government from operating a national exchange.  Section 1321 of the ACA at first glance appears to allow the feds to operate an exchange "within a state" if the state doesn't.  But that could be a single exchange common across all states that don't operate their own.  But section 1311 defines an exchange as a governmental entity or nonprofit "established by a state," and 1321(c) says that, if the states opts not to act, the feds must "establish and operate such Exchange" (emph. added).    That is, the feds can only set up a state exchange, not a national one.    

And that, in turn, ruins the interpretive syllogism that the Burwell/King plaintiffs rely on.  Again, their position is that “established by a state” would be purely wasted ink if it allowed for subsidies to both state and federal exchanges.  Therefore, they say, it must be meant to exclude federally-run exchanges.  But, as we’ve just seen, that phrase has another possible meaning.  It might not be the most natural reading, but once you know the economic rationale behind it, it’s a reasonable one.  And that’s all the government, which is legally entitled to deference to any reasonable interpretation of the statute, needs to win.

November 30, 2014 | Permalink | Comments (0)

Thursday, November 27, 2014

A Link to the Ferguson Grand Jury Documents

The Ferguson murder grand jury documents, transcripts of hearings, police interviews, videos of media reports, autopsies, photos of the scene,  are up on the web at: 
http://www.ksdk.com/story/news/local/ferguson/2014/11/25/ferguson-grand-jury-documents/70100296/ . It's a good case for discussion of the function of grand juries and of prosecutors. 

November 27, 2014 | Permalink | Comments (0)

Saturday, November 22, 2014

A Lengthy Post on the Effects of Immigration on National Wealth and Income Distribution

This is a very long post, but skip on to the next one if you get bored. I got interested in immigration and am trying to work my mind around a chapter in George Borjas's 2014 book, Immigration Economics. Paragraph (0) is about law and the President's recent decree, but you'll find its ideas in many other places and liberals will probably find it unpalatable, even if they feel uncomfortable with expanding executive power. Paragraphs (1), (2) and (3) are more analytic. They about the economics of immigration, expanding on the idea of "the Borjas triangle" to do back-of-the-envelope estimates of the surplus gains and redistributional effects of increasing the labor force by 15% via immigration. They're simple enough that you can plug in your own estimates of the size of immigration and the inverse elasticity of labor demand and see what happens.

(0) I'm still trying to figure out the legality of Obama's immigration amnesty. Congressional leaders considered relaxing immigration laws, and there weren't the votes, so they didn't even bring a proposal to vote. Then the November elections were a clear repudiation of immigration relaxation and the President's party. So he unilaterally decreed a change in the law:

"So we’re going to offer the following deal: If you’ve been in America for more than five years; if you have children who are American citizens or legal residents; if you register, pass a criminal background check, and you’re willing to pay your fair share of taxes — you’ll be able to apply to stay in this country temporarily, without fear of deportation. You can come out of the shadows and get right with the law. . . ."

Prosecutorial discretion means that the President has broad powers. He could decide not to enforce the tax laws against Democrats, for example. He could even tell the entire Border Patrol to stop patrolling and take a holiday, or, indeed, give the entire army mass home leave. But here it seems he is going further. He isn't just refraining from prosecution; he's got an entire new statute, it seems, complete with detailed requirements and claims that it removes an illegal alien's illegality. Except Congress never voted on it and both House and Senate would would vote against it if it was brought before them. At the same time, what judicial remedy is there? Impeachment is appropriate in cases like this (or the non-taxation of people in the President's party), but the Democrats would block it. So is there any present or future legal structure that could be used to prevent a President from nullifying a statute?

November 24 Update:  The Christian Science Monitor has a good q-and-a article on the law involved. It is the only article I've seen that explains the work permit aspect; apparently the statutes do allow the President to grant green cards to illegal alients whose deportation is deferred. The statute didn't envision his doing that with 4 million of them, of course, but if the newspaper is correct, that says Obama's within his authority--- at least if Congress has the consitutional authority to delegate the immigration laws to the executive completely, which is dubious.

(1) I was just reading George Borjas's new book, Immigration Economics, after a discussion of immigration at lunch at the econ department yesterday. The Borjas immigration-gain triangle on p. 151 (apparently first shown in a 1995 article of his) is good. It's like the 1954 Harberger triangle for monopoly. The gain from immigration can be seen in a supply and demand for labor diagram. Make labor supply inelastic. The social gain is one half the reduction in the wage times the increase in the quantity of labor. The increase in labor is 15%, Borjas estimates, and the inverse elasticity of labor is .3 (the elasticity of demand for labor is about 3), meaning that wages fell about .3(.15), which is 4.5%. Thus, the increase in social surplus in the labor market is .5(.045)(.15)= 0.34% (not 34%). Since labor income is 70% of national income, the increase in social surplus from a 15% increase in the labor force is 0.24% of national income. It's small because it's a triangle. The loss to American workers, though, is the 4.5% reduction in wage times the initial amount of labor--- a 4.5% loss in income. As a fraction of GDP, that's 3.2%. (Borjas has 2.7% because he's using post-immigration GDP; I'm using pre-immigration GDP, which is smaller).

American capital gains what labor loses, plus the triangle, so it gains 3.4% of GDP.

If no-immigration GDP would have been $13 trillion (post-immigration it actually is about $15 trillion), then the gain in American social surplus from immigration is (13)(.0024) = 31 billion dollars.

The loss to American labor is .034(15) = 442 billion dollars. American capital benefits by 473 billion dollars. Capital was receiving 30% of national income before immigration, by our earlier assumption of a 70-30 labor-capital split, and it has gone up to 33.4%. That's an 11% increase in the total return to capital. So we can see why American employers are so strongly urging increases in immigration but why their pleas have gotten nowhere in Congress despite the support of the Republican and Democratic leaders (who are more responsive to contributions than the backbenchers).

Borjas notes that in the long run more capital will enter the U.S.--- from domestic sources and from abroad--- so the long run gain will be zero, since the return to capital must be equalized between home and abroad.  By the same reasoning, the long run loss to labor and gain to capital will be zero.

(2) Something I wondered about was how the gain to consumers figured into this. It is implicitly included, because this is a model about real returns to factors of production, not nominal returns. But I think it's useful to break it out. Let's use a simple quantity theory of money where the quantity is 1, so the price of the single output good is P = 1/Q. We also need a link between the extra 15% labor from immigrants and Q. The increase in output will be less than 15%, since capital is fixed. Suppose output rises by 10%. Then the price drops by about 9% too, since P_1 = 1/(1.1*Q_0). This allows us to think about how nominal wages and returns to capital have changed.

Recall that we have labor losing 3.2% of GDP in real terms (from a 4.5% wage decline) and capital gaining 3.4%. Since prices are falling by 9%, this means that nominal wages must fall by 13.5%. In the same way, the gain of 11% in capital's earnings will arise from a mere 2% increase in the nominal return. Am I right in concluding that if split the distributional analysis into three groups rather than two, we would say that labor suffers a 13.5% loss, capital gets a 2% gain, and consumers get a 9% gain? I think this is legitimate. The typical worker wears a separate hat as consumers, just as he wears a separate hat as capitalist--- since the typical worker has a pension plan and a house, even if his capital earnings are much lower than his labor earnings.

Update, November 24. I now think this discussion is misleading. What it says about shifts in nominal income and prices is fine, but it doesn't capture the effect of immigration on consumer welfare. That can't be done in this simple model, because demand for goods  is inelastic (which I suppose is because supply of labor is inelastic).  What happens in the real world is that immigration lowers wages, as analyzed here, but in the product market, the extra output from the immigrants reduces the price of output, and creates real consumer surplus that way (while having a further effect of reducing demand for labor). To buy the extra goods, consumers would increase the amount of labor they supply.  It would be nice to put together a model on this order of complexity that could separate out the consumer effects. 

I wonder what the pattern is of labor and capital earnings for Americans at various levels of income. It's complicated by changes over the life cycle. Almost everybody is a 100% capitalist when they are old, and a 100% worker in his teenage years, putting aside the additional complication of bequest wealth.

Immigration thus has had an important effect on the distribution of income. If I remember rightly, the biggest change has not been an increase in the share of income of the average member of the top 10% of the population, though, or even the top 1%, but of the top 0.1%. Is that because even the median member even of the top 1% derives most of his income from labor, not capital? I don't know--- I would have thought that the top 1% included a lot of small business owners and people in their 60's who had piled up substantial savings. Still, even people as rich as business school professors expect to spend less in retirement than in their last decades of working years, and that implies, I think, that their capital income in those last decades is less than their labor income. So perhaps it is plausible that an increase in the return to capital and a decrease in labor shifts income to the top .1% while leaving the share of the median member of the top 10% unchanged and reducing the share of the bottom 90%. (Don't trust my numbers here; I'm just wandering--- though I'd appreciate corrections in the comments.) Of course, it's important to remember that the bottom 99.9% is still doing better in absolute terms, despite a lower share, since (a) technical change keeps income per capital growing, and (b) the rich pay far more than their share of taxes.

We have been assuming there is only one kind of labor, however, or, equivalently, that immigrants have the same distribution of skill as natives. Now, let's relax that assumption.

(3) It's also useful to think of this thinking of the particular type of labor provided by immigrants. Gardeners, professors, and engineers suffer from immigrant competition; lawyers, schoolteachers, and bank clerks do not. Suppose we guess that 25% of the labor force is in jobs with significant immigrant competition. We will call this group "unskilled labor" for convenience, without snark towards engineers and professors (that's paralepsis, of course). Then, the unskilled labor force has increased by 60%, not 15%. We can redo the calculations.

Now the wage response is .3(60) = 18%, which is the loss to the American unskilled workers. They were getting .7*.25 =$17.5% of the old national income so they have lost an amount equivalent to 17.5*.18, about 3.2% of the old national income. The triangle gain, in terms of old GDP, is (since unskilled labor was .7*.25 of national income), .7*.25*.5*.15*.6 =
0.8% of GDP, much larger than in the original example, though still small relative to GDP. It is no accident that both the redistribution effect and the increase in social surplus are much bigger under these assumptions. When social surplus increases, it's because there's been a big wage response, and that's what makes the redistribution effect bigger too.

The distributional effects are more complicated, because now we have other kinds of labor as well as capital. I've assumed that in each job, only one kind of labor is combined with capital; the increase in immigrant labor has no effect on the real wages of any labor except the unskilled. Here, it is crucial to think of wages in each sector as being paid "in kind"; in the skilled sector, workers have the same marginal product as before, and so they get to keep exactly the same amount of the output they produce as before.

As we've seen, the unskilled wage falls 18% in real terms. Capital in the unskilled sector is gaining the new surplus triangle of .8% from immigrant production plus a rectangle of .7*.25*18, about 3.2% of old GDP, for a total of a 4% gain. It goes from 30% to 34% of the old GDP level, an increase of 13.3% of 30%.

Compared with when immigrants had the same skill pattern as natives, the loss to labor is exactly the same, whereas the gain to capital has grown. Now, however, the loss to labor is concentrated on just 25% of the labor force.

What about the price effect? The amount of unskilled labor has increased by 60%, but the increase in output will be less. Diminishing returns to unskilled labor because capital is constant will be much bigger with a 60% increase than with a 15% increase, so our discount should be more than the 1/3 used earlier. Suppose it's 1/2: output rises by 30% in the unskilled sector. Unskilled labor used to produce 1/4 of the economy's output, but now it's 1.3*.25 = .325, so total output has risen by .075 to 1.075. Prices therefore fall to 1/1.075= .93, a 7% decline.

Now we can look at nominal changes. Unskilled labor's nominal wage falls by 25%, skilled labor's wage falls by 7%, and capital's return rises by 6.3%. Consumers are better off by 7% due to the fall in prices. It's interesting that capital's nominal gain triples from the 2% from matched-skills immigration. That's due to a combination of prices falling less and the real return to capital rising more. The real return to capital--- that is, including the capitalist's role as consumer--- rises by 13.3% compared to 11%. But see the November 24 update above-- I now am dubious about the value of my output price analysis. 

November 22, 2014 | Permalink | Comments (0)

Thursday, November 20, 2014

Why the U.S.-China Climate Deal Could Be A Tipping Point

The Obama administration announced a climate agreement with China last week, which was immediately criticized as giving away the store. However, this climate agreement may be a turning point.

As I wrote three years ago, and international climate negotiations are, above all, a game-theoretic process. For an international climate agreement to be durable, there must be sufficient confidence on the part of all parties that all of the other parties are committed to mitigation of greenhouse gas emissions. For any individual country, it is likely that the benefits of mitigating greenhouse gas emissions are much greater than the costs. However, this is predicated on other countries also performing their own self-interested cost-benefit analysis and arriving at the same conclusion. It is a fragile agreement indeed, when there are numerous parties, all of which must trust that all of the other parties will reach the same conclusion and will refrain from free-riding. Ironically, a country that makes great strides in mitigation or geo-engineering may actually undermine cooperation, as this would sow doubt among potential partners that such a country may reach the conclusion that given plausible alternatives, the benefits of reducing greenhouse gases may not exceed the costs. In an environment of such fragile cooperation, signaling is extremely important. This US – China deal may just be the strongest signal yet that the two largest emitters in the world recognize that the benefits of climate policy exceed the costs.

November 20, 2014 | Permalink | Comments (0)

Monday, November 17, 2014

Malum in se, malum in lex

  In my last post I deliberately contrasted "malum in se" with "malum in lex".  The usual term for the second phrase is "malum prohibitum".  That is better Latin, I think, and customary, but it is not parallel and does not have a nice ring to it.  Should we say "malum in lege"? Not as crisp, but better grammar, I think, since it's in the ablative then. I just checked on the web, and maybe "malum in legibus" is best, for sound and grammar in tradeoff--- "wrong in the laws". 

November 17, 2014 | Permalink | Comments (0)

When Should You Feel Guilty about Copyright Violation

 I came across some old notes of mine on how  wealth maximization would construct a norm for when one should feel guilty about violating copyright. Such violations are situations where  malum in se and malum in lex differ often. The question I pose is what norm we would like instilled in everyone. That, I think, is quite compatible with Christian morality; we can use it as a tool to figure out what "Thou shalt not steal" means.

Some suggestions: 

1. There should be no guilt over copying if the person would not have bought the product because of the inconvenience of purchase.

Example: You copy a journal article for a class and would not have done so if you'd had to find out how to get permission.

2. There should be no guilt over copying if the person would not have bought the product because of the price.

3. You should feel guilty if the cost of copying is greater than the transactions cost of buying, and you would have bought the product if copying were not possible.


November 17, 2014 | Permalink | Comments (0)

The U.S.-China Climate Deal

President Obama announced a bilateral agreement between the United States and China for the United States to reduce emission 26 to 28 percent below 2005 levels by 2025, and China will peak its emissions by 2030. Those are the central pieces of the deal. There is also agreement to jointly pursue carbon capture and sequestration, funding for a new US-China energy research center, and other feel-goodies, but clearly something that speaks directly to emissions is the big deal.

Congressional Republicans are quick to dismiss the deal as being one-sided. Which is true, but the alternative is no deal at all. The issue really is that what matters more is the level at which China peaks than when it peaks. Importantly, though, a 2030 peak will likely keep China below a BAU baseline. It also represents a step in that China is moving away from an intensity target -- which is no cap at all -- to a mass-based cap.

Everyone who reads the newspaper understands the inherent caution and conservatism of Chinese foreign policy, which is driven by the Chinese Communist Party's Politburo Standing Committee, the real decisionmaker, and which makes decision by consensus and under strict Chatham House rules. Policy changes slowly in China. It is unclear when a cap might be announced, so that there will be a "how much" and not just a "when," but it is clear Chinese climate policy will be made in steps.

November 17, 2014 | Permalink | Comments (0)

Sunday, November 16, 2014

Land Use Law and Disability

Robin Paul Malloy's Land Use Law and Disability: Planning and Zoning for Accessible Communities has just been published by Cambridge University Press. Malloy argues that Land Use Planning should take greater account of people with mobility impairments and other disabilities that interfere with access. Planning with universal access design guidelines is superior to the de facto litigation-driven process of land use planning for accommodating persons with disabilities.

November 16, 2014 | Permalink | Comments (0)

Monday, November 10, 2014


 PORTIA: By my troth, Nerissa, my little body is aweary of this great world.

NERISSA: You would be, sweet madam, if your miseries were in the same abundance as your good fortunes are: and yet, for aught I see, they are as sick that surfeit with too much as they that starve with nothing. It is no mean happiness therefore, to be seated in the mean: superfluity comes sooner by white hairs, but competency lives longer.

PORTIA: Good sentences and well pronounced.

NERISSA: They would be better, if well followed.

PORTIA: If to do were as easy as to know what were good to do, chapels had been churches and poor men's cottages princes' palaces. It is a good divine that follows his own instructions: I can easier teach twenty what were good to be done, than be one of the twenty to follow mine own teaching. The brain may devise laws for the blood, but a hot temper leaps o'er a cold decree: such a hare is madness the youth, to skip o'er the meshes of good counsel the cripple.

   Why is exhortation helpful? ---it's a matter of limited attention, and, especially, the tyranny of the urgent over the important. 

Preachers, as in the quote above, are notable for telling their congregation things they already know--- don't sin.  But it is useful nonetheless, to be reminded, forcefully. 

Mothers exhort constantly. "Don't forget your mittens!" The child "knows" this already, but needs the reminder. 

   I thought of this because one of a lawyer's main uses  is  reminding  clients to do things such as write or revise a will. Doctors, too, do this--- lose weight and get exercise are things everybody knows but needs to hear from their doctor. 

Can this be usefully fit into our theoretical models? I don't know. 


November 10, 2014 | Permalink | Comments (0)

Sunday, November 9, 2014

Direct Air Capture Plant Coming Online in 2015

"Direct Air Capture" (DAC) is a term that has been used to describe a technology that seeks to suck carbon dioxide out of the ambient air, and therefore provides a form of a policy to address climate change. DAC contrasts with "carbon capture and storage," (CCS) which seeks to either suck carbon dioxide out of the flue stream of a fossil fuel combustion process, or to de-carbonize coal before combustion.

DAC has never been a mainstream technology, in large part because so much has been invested politically and economically in CCS technology. Senator Lamar Alexander once said "w[e] should launch another mini-Manhattan Project and reserve a Nobel Prize for the scientist who can get rid of the carbon from existing coal plants, because coal provides half our energy." But it would appear to deserve some attention, as an effective post-combustion technology could buy some time. David Keith, who moved from the University of Calgary to Harvard a few years ago, has been the primary agitator for this technology, and even founded his own startup company, Carbon Engineering, which counts Bill Gates as one of its investors. It is a Carbon Engineering pilot project that will begin operations in Squamish, British Columbia, next year. Keith claimed in 2009 that carbon dioxide could be captured at a cost of "closer to $100 per ton than $500 per ton." The American Physical Society came out with a withering criticism, offering its own less sanguine estimate of $600 per ton, at the very least. The physical problem with direct air capture is that carbon dioxide comprises such a small fraction of our ambient air -- 0.04% -- so that capture from ambient air is inherently less efficient than, say, capture near the source (a coal-fired power plant). Nevertheless, I'm going to borrow my Governor's go-to line when faced with uncomfortable scientific facts: "I'm not a scientist." Let's see how this pilot plant in Squamish does.

The politics of direct air capture are simply that no politician has heard of it, and that David Keith or Carbon Engineering is not yet a major political or campaign contributing source. It has to get picked up by an AEP or a Duke. But given the century-long atmospheric life of carbon dioxide, this technology has to be seriously considered.

The one downside of this technology is highlighted in an article I wrote in 2011: that success would ultimately decrease the pressure to reach an international agreement to reduce emissions. Research on direct air capture could allow say, China and India, to simply free-ride off of the research efforts of Canada and the United States. We could build the massive carbon dioxide collector arrays, and China and India would then go on building coal-fired power plants and emitting. That might be politically unappealing.

November 9, 2014 | Permalink | Comments (1)

Friday, November 7, 2014

Supreme Court to hear the King v. Burwell case: challenge to Obamacare's premium tax credits

The news is abuzz with the Supreme Court having agreed to hear the appeal of the King v. Burwell case.  If successful, the challenge would gut major provisions of Obamacare in many states, potentially generating outcomes much worse than what existed prior to Obamacare.

I thought I would take this opportunity to remind readers of my prior writing on the merits of this challenge (or lack thereof) and also the prior debate over these issues on this blog, between myself and Eric Rasmusen.  For further reading, Michael Cannon has developed a reference guide to the issues in dispute. 


November 7, 2014 | Permalink | Comments (0)

Wednesday, November 5, 2014

Spinoffs and Incentive Pay: A Puzzle

eBay is putting PayPal up for sale, which raises some interesting questions.  First, will eBay put a big timer on its home page announcing how many minutes are left in the auction?  (Readers who suspect this entire post is just an excuse to make that joke are not entirely wrong).    And second, well...why?

Researchers have known for a while that spin-offs are quite good for the newly freed firm.  You can imagine a few stories here.  One is that the spin-off business was a neglected child whose old managers didn't "focus" on it enough; allowing for spin-offs extends the market for corporate control down into the firm, increasing efficiency.  Or maybe the opposite -- managers are really good at identifying diseconomies of scope (the classic example is the baby food company owned by the pesticide firm), and spin-offs create value by eliminating the baggage.  Finally, maybe for some reason investors can't accurately value firms when they're stuck together--for example, because firm disclosures report aggregate results--although if so, one wonders why firms wouldn't voluntarily disclose sub-unit data.   

Another interesting recent theory, from a working paper by a young Wharton prof, not publicly available but reported recently in the New Yorker, is that it's some combination of incentive pay and moral hazard in teams stories.  Firms that use stock of the parent firm to reward all their employees are, in effect, paying everyone based on the average productivity of all the sub-units.  Spin-offs allow more precise pay for performance, and, in the case of the high-performing spin-off (like PayPal) probably help retention.

Except that theory makes no sense, does it?  Why the heck would the firm use a single pay instrument for everyone?  Couldn't you just use bonuses instead, designed to track the value of the unit that would otherwise be spun off?  Firms already construct compensatory stock "units," which are pay contracts that mirror the economics (but not voting rights) of the underlying equity shares.  Why not do that  for the sub-unit?  I suppose there are transaction costs, but given the enormous value implied by the spin-off studies, those costs have to be small in comparison.  If there are other good fundamental reasons to keep the firm together, splitting up over the bluntness of the stock-as-incentive-pay instrument seems a bit nutty.

Probably there are subtleties to the story that are impossible to capture in a 1,000-word column.  But what could they be?

November 5, 2014 | Permalink | Comments (0)