Monday, October 12, 2015

Angus Deaton: Inequality and Good Intentions

Copyright, The New York Times Company

The recent book by today's Nobel Prize winner -- congratulations to him!! -- says good intentions are a barrier to equality and to progress among the world’s poor.

For most of human history, family incomes were barely enough to survive and life was short. But in “The Great Escape: Health, Wealth and the Origins of Inequality,” Professor Angus Deaton of Princeton writes that while economic progress allowed much of the world to escape poverty, “escapes leave people behind, and luck favors some and not others; it makes opportunities, but not everyone is equally equipped or determined to seize them.”

Professor Deaton also deals with the events after the great escape: that is, how the progress of some families and nations affects the prospects for progress of those initially left behind.

Imitation is one force and works in the direction of progress for all. The poor can look to the progress of others to embark on their own escape. Professor Deaton shows how the imitation of new methods has occurred, for example, with medical technologies that have allowed the residents of a number of poor nations to live longer than Americans did just a hundred years ago, and sometimes longer than Americans live today.

But new methods can harm those with vested interests in the old ones, and the vested interests can use their political power to block competition and progress. Professor Deaton explains how “the emperors of China, worried about threats to their power from merchants, banned oceangoing voyages in 1430,” adding, “Similarly, Francis I, emperor of Austria, banned railways because of their potential to bring about revolution and threaten his power.”

Progress begets inequality, and the resulting inequality can either encourage more progress or impede it, or both. Professor Deaton suggests that inequality in the modern United States has had both of these effects.

He points to a third influence of progress and inequality on outcomes for those left behind: good intentions. As part of the world becomes rich and no longer worries about day-to-day survival, it can look outward. Many residents of developed countries have a “need to help” those less fortunate.

But the attempts to help often – perhaps even usually – go awry.

As medical progress began to diffuse around the world, people stopped dying so young, and that made for an increase in population, especially in less-developed countries. Developed countries thought they would help poor nations by encouraging population control, based on the dubious proposition that more people means more poverty.

“What the world’s poor – the people who were actually having all these babies – thought about all this was not given much consideration,” Professor Deaton says, citing China’s continuing one-child policy as an example. He adds: “The misdiagnosis of the population explosion by the vast majority of social scientists and policy makers, and the grave harm that the resultant mistaken policy did to many millions, were among the most serious intellectual and ethical failures of a century in which there were many.”

Other types of foreign aid to developing nations have also been a disaster, he says, with “pictures of starving children being used to raise funds that were used in part to prolong war, or to N.G.O.-funded camps being used as bases to train militias bent on genocide.”

Professor Deaton’s book is primarily international in focus, and he insists that help for the American poor is different and more effective than aiding the world’s poor. Nevertheless, American readers may be left wondering how much aid to American poor, is, as Professor Deaton says, “more about satisfying our own need to help, and less about improving the lot of the poor.”

Sunday, October 4, 2015

Amazon began shipping my new book today!

It is full of examples. The effects of Obamacare on the workweek are shown with diagrams rather than equations, which now part of an optional appendix.

Spending on health care has grown faster than the economy itself, even while the share of the population without health insurance was increasing. The Affordable Care Act (a.k.a., Obamacare) intends to reverse these trends, but in doing so has economic side effects. Businesses are complaining about the ACA's new tax and regulatory burdens, whereas supporters say that it is a long-overdue "shot in the arm" that will promote entrepreneurship and a "more rapid economic recovery."

Positive and negative tax effects of the ACA are carefully documented. The book offers a comprehensive market analysis of the law that arrives at conclusions as to effects on work hours, productivity, and national income. It shows what the ACA means for economic performance in the years ahead, and explains why forecasters have yet to acknowledge many of the economic forces that have been put in motion.

The book contains numerous facts and economic insights that have been unnoticed by both supporters and opponents. Anyone interested in economic performance over the next several years has to understand the contents of the Affordable Care Act from a labor market perspective and this book is so far the only comprehensive and user-friendly introduction to the topic.

Friday, October 2, 2015

Employment per capita drops 3 out of the last 4 months

through September. Below uses the same methodology I displayed in the past in order to include self-employed workers too. The self-employed component is volatile ... it would be nice to have some kind of error bands on this series ... but that is still work in progress.

Thursday, October 1, 2015

In-kind Taxation in the News

Russia is now drafting soldiers.  Below is a new economic discussion of in-kind taxes, of which the military draft is a good example.

In-kind taxes – obligations of citizens owed in goods or services, rather than money – are some of the most important taxes in human history, and even in recent times are used in significant ways.  For example, according to The Military Balance, 59 percent of countries in the world in 1995 obtained military manpower by conscription: forcing citizens into military service.  More than six dozen countries, including the United States, have constitutional provisions for taking private land using the power of eminent domain. Eminent domain is also used to redistribute intellectual property, and may be employed more frequently in the future as that type of property becomes more valuable.  In-kind “public service” labor payments to local governments can be a major part of the tax burden faced by the poor in developing countries.  Another example: two dozen countries compel their citizens to participate in civic elections. 

Although public finance deals extensively with the question of cash versus in-kind transfers, in-kind taxes are almost completely neglected.  For example, neither of the public finance textbooks by Stiglitz and Rosen mentions in-kind taxes in general, or labor conscription in particular.  The purpose of this paper is to examine the efficiency properties of in-kind taxation (hereafter, IKT), with special emphasis on avoidance behaviors.

Behaviors for avoiding the Vietnam War draft are still famous today.  They include entry into protected occupations, obtaining political favors, moving to Canada, or embellishing medical conditions.  Quantitative work on avoidance behaviors has shown that the Vietnam War draft induced a significant increase in college enrollments (Baskir and Strauss 1978).  Desertion by conscripts can be rampant, and draftees are less likely than volunteers to reenlist when their required tour is finished.   Leon Friedman (1969, pp. 1545-6) describes evasion of the Union Army’s draft, “enrolling officers … were frequently lied to, avoided, and even physically attacked… new towns sprang up just across the northern borders in Canada … some men maimed themselves in order to fail the physical requirements for the army.”  Landowners are known to modify their property in order to avoid being targeted for condemnation or other limits on land rights.  Stroup (1997, p. 57) describes how landowners have reacted to the Endangered Species Act by “managing their land … in a way that almost assures that it will not be suitable for listed species.” 

Avoidance activities like these serve to restrict the quality and quantity of supply of resources to be taken, yet the small literature on the economics of eminent domain and military conscription typically takes the supply as given, emphasizing instead the purported tendency of in-kind taxation to distort comparative advantage (i.e., that the public project fails to be supplied by those most suited to do it) while it economizes on treasury revenue.   This paper treats IKT as a price-regulation phenomenon – the public recruiter is a buyer who has coercive power over its suppliers – and explicitly models the social costs, and private benefits, of suppliers’ avoidance behaviors.

In-kind taxation has been implemented in a variety of ways. Supplier compensation is one variable. Another is the granting of an option (if any) for suppliers to substitute a monetary tax payment for their obligation to supply under the IKT.  The price-control framework readily addresses various implementation options, offers new conclusions, and changes some old ones.  Under some conditions, “fairer” IKTs – those that do not accept monetary payments and thereby widely distribute the IKT obligation – are more efficient than less fair IKTs.  These results may help explain where and when various implementation options are exercised.

The IKT implementation options present a tradeoff between avoidance costs and opportunity costs.  IKT’s are capable of realizing many of the gains from comparative advantage, even while controlling prices.  This implication appears to match the reality in which the resources obtained through IKT are far from random.  Even among men born 1950-53 whose military draft eligibility was chosen by a random draft lottery, military enlistment was by no means random.  Angrist (1990, p. 315) refers to “the fact that armed forces selection criteria were not random ...” and reports that more than three-quarters of draft-eligible men in these cohorts did not serve in the military.   At the same time, roughly ten percent of those not draft eligible did serve. Although IKTs distort comparative advantage to some degree,  the price control framework suggests that comparative advantage distortions might enhance efficiency because they can alleviate incentives to avoid the tax.

Previous work on conscription has debated the nature of the relationship between monetary taxes and in-kind taxes.  Lee and McKenzie (1992), Ross (1994), and Warner and Asch (1996) claim that economizing on treasury revenue, as in-kind taxation is supposed to do, is socially valuable because of the deadweight costs of collecting monetary taxes.  However, these papers do not model the social costs of effort to avoid IKTs; real-world IKTs interact with income taxes, and the former may generate more deadweight costs because they are more concentrated.  Birchenall and Koch (2014) use a mechanism-design framework to look at the two types of taxes simultaneously, and conclude that IKTs may reduce overall efficiency by raising the marginal deadweight cost of income taxes.  This paper does not contribute to the money-versus-IKT debate, and just assumes that in-kind taxation reacts not only to the efficiency considerations noted above, but also to social or political preferences to regulate prices paid to suppliers.  

Section II begins with this paper’s conceptual point of departure: a model of avoidance behavior as a Tullock-style rent-seeking contest.  A simple, but critical, result is that the social  costs of avoidance are convex in the amount of avoidance.  Section III lays out the other dimensions of IKT policies, relates them to empirical observations of military recruitment schemes, and interprets them in an equilibrium context.  Section IV overturns some of the conclusions from the literature.  Section V looks at policy options for the mix of social costs, and suggests that comparative advantage distortions may not be the primary social cost of IKTs.  Section V concludes with some ideas of why the incidence and design of IKT tax policies vary over time, by country, and across policy domains.

Tuesday, September 22, 2015

The Market and the Safety Net: Update

The series below is an index of hours worked per person, seasonally adjusted.  I have also indicated two months when there were major changes in safety net programs.  Call the causality police if you want!

(The horizontal black line is just the average for calendar years 2012-13 and has no particular meaning).

Friday, August 7, 2015

Business Experience Is No Cure-All in Government

Because government and business are fundamentally different in their financing and their evaluation, good business practices can make for poor governing.

The election cycle regularly brings forth successful businesspeople who argue that voters should select them for public office over seasoned politicians because of the skills and experience they acquired in the business sector. In 1996, billionaire Ross Perot started his own political party to advance his quest for the presidency of the United States. Financier Mitt Romney was the Republican nominee in 2012. And now Carly Fiorina and Donald Trump are vying with politicians for the 2016 nomination, arguing, as the New York Post put it, that “America is in desperate need of a suave, successful businessperson like Trump — or former HP CEO Carly Fiorina — to solve what ails our economy.”

In their natural habitat, business leaders work with investors, customers and employees to create value. Each of their relationships is typically voluntary in that no investor is forced to provide funds, no customer is forced to purchase the product, and no employee is forced to work rather than pursuing some other opportunity.

The financing of government is unique in that the government can, and primarily does, force people and organizations to provide resources – these are taxes and takings. As a result, those at risk of taxes or takings change their behavior in order to reduce their exposure. A family may work less, in part because of the income tax burden that comes with working more. A business may cease to operate, or operate on a deliberately limited scale, in part because of the sales tax or regulatory burdens it faces while in operation.

Tax and regulatory avoidance behaviors are known in the economics profession as “excess burdens” because the burdens of taxes and regulations exceed the amount of resources that the government is acquiring. The family that pays $10,000 per year in taxes of course loses the $10,000, but it also has lost something in the adjustments it made – maybe working less – in order to avoid paying even more tax than the $10,000 it already pays. It makes tax-avoiding adjustments because it does not voluntarily pay taxes; rather, it pays them to prevent punishment, and it is perfectly legal to pursue less heavily taxed activities.

Some of the lost tax dollars might be recovered if the government spends it wisely – something like the dividend an investor would receive if he invested funds in a wisely managed business. But the losses due to tax-avoiding adjustments are irrecoverable and have no analogue in business, because unlike taxpayers, investors, employees and customers are voluntary contributors. As a result, a government leader ought to be less ambitious with his or her project ideas than a businessperson should, because government projects have their excess burdens.

The employer-employee relationship is also different in the public sector than it is in the business sector. Public-sector employees are five times more likely to be unionized than private-sector employees are. Moreover, the ultimate government employers are the elected officials, who of course cannot persist in their roles without being re-elected. As a result, a number of government employees are “asked” to participate in political activities that support their boss’s continued tenure.

Although past governing success is no guarantee of future performance in office, the next great president will likely have more experience in public office than business triumphs.

Update on Employment per Capita

through July. Below uses the same methodology I displayed in the past. The self-employed component is volatile ... it would be nice to have some kind of error bands on this series ... but that is still work in progress.

Thursday, July 2, 2015

Update on the employment rate

through June. Below uses the same methodology I displayed in the past. The self-employed component is volatile ... it would be nice to have some kind of error bands on this series ... but that is still work in progress.

Thursday, June 18, 2015

Is Obamatrade the same as freer trade?

The legal question du jour is whether Congress should allow special voting procedures (fast track) for international trade agreement agreements negotiated by the executive branch. This brings forth the age-old debate of the merits of free trade, as if free or freer trade is at stake with fast track.

But that is jumping to conclusions without reading the text of the trade agreements.

Experts jumped to conclusion, based on chapter titles alone, that the ARRA would help the economy recover, when in fact it prolonged the recession.

Experts jumped to the conclusion that Obamacare would create economic growth, when in fact it is hindering it.

Is Obamatrade another chapter in this saga, in which the federal government hinders economic growth and in the process convinces the experts to assert the opposite?

Reading the text of Obamatrade (specifically, the international trade agreements that would be fast tracked) is a better way of answering the question than extrapolating from the above historical pattern. But the text is secret.

Here are four educated guesses, that perhaps someday might be confirmed by reading the text.

  1. There are some begger-thy-neighbor policies that are implemented when nations act unilaterally. Because they shrink the world economic pie, one might expect such policies be restricted by multinational agreements.
  2. There are some internationally procompetitive policies that are implemented when nations act unilaterally. Multinational agreements set the stage for international collusion, which benefits the parties to the agreement but shrinks the worldwide pie and harms those not party to the agreement (the latter parties can be entire nations or parts of nations not represented).  Some of the nations harmed might be small nations and African nations.
  3. Rumor has it that financial services, which includes insurance, are part of the agreements. But there is no way that the Obama administration would allow foreign businesses to sell their health insurance products -- without politically correct elements like "free" birth control, deductibles ceilings, and regulated premiums. So expect the actual trade agreements to help prevent citizens from looking to foreign businesses to supply desirable products that are currently not supplied domestically.
  4. Among world leaders, there is a near consensus to do a lot of bad economics in the name of "public health." E.g., to dishonor patents on pharmaceuticals and medical devices.

In my view one should seriously consider the possibility that the new and secret trade agreements make trade less free, rather than more.

Tuesday, June 16, 2015

Piketty's Feast

Revealed preference speaks volumes. Admittedly, my hardcover version of Capital in the Twenty-First Century was delivered “for free” by the publisher of this periodical, but the opportunity cost of retaining it was extraordinary last spring when its publisher and distributors remarkably ran out of stock and the market for used copies was surging. I did more than retain it: I also purchased the electronic version so that I could search its contents readily and accurately and fit the 685-pager in a coat pocket.

More significantly, I read it, in some places carefully enough to dig into the appendices of its online appendices. The University of Chicago—my alma mater and employer—offered Thomas Piketty a faculty position in 1993, and to our disappointment he turned us down. For several years, Piketty’s (and Emmanuel Saez’s) inequality estimates have been used for teaching public economics at Chicago, and I have personally benefitted from his tutoring regarding the details therein. The students are hungry for data on inequality and its trends, and it is my privilege to help with the grocery shopping.

[read the rest at The Independent Review]