Occupy Blogspot

Hi all,

I had a student journalist ask me my opinion of the Occupy Wall Street movement. I have actually been following this movement for a while and this gave me a little push to look more closely. Originally, there were no specific grievances on their website, but now they have made a Declaration.

The common theme is that corporations are responsible for all of these things. I have two kinds of objections to the arguments on this list. One, some of these things aren't true and two some of these things aren't really bad.

So, for fun*, I thought I would go through some of the items and make my case.

They have taken our houses through an illegal foreclosure process, despite not having the original mortgage.

Mortgage companies are not all good. I will be the first to hate on Freddie Mac and Fannie Mae. And certainly the foreclosure process has had some instances where people have acted illegally or even unethically. I would say that is largely not the issue here. Banks actually do not want to foreclose it presents a huge cost for them. This study estimates the cost to foreclosure at $50,000 for a bank but only $7,200 for the homeowner.

Ironically, it is the bank that suffers the most from a foreclosure and banks would like to avoid the foreclosure if they can.

They have taken bailouts from taxpayers with impunity, and continue to give Executives exorbitant bonuses.

Actually, I would agree with this. I don't believe in corporate welfare and I am not a fan of lobbying in general. This sort of thing is rent-seeking and makes the country poorer. I am, however, not against exorbitant bonuses. I think executives should make what the shareholders think is wise to give them. If the shareholders are too generous, well, that's the shareholder's problem.

They have perpetuated inequality and discrimination in the workplace based on age, the color of one’s skin, sex, gender identity and sexual orientation.

Disney tells its employees to treat Gay Day like any other day. A local Doubletree hotel serves as the main hub and probably makes a pretty good profit by being tolerant. If corporations are greedy then they will definitely want to make money by selling to a wider market, which includes all of the above mentioned groups.

But what about when they hire? Economists/lawyers Gary Becker and Richard Posner write a great article about this here. The main proposition of the Occupy movement is that corporations (by which I suppose they mean the mangers of corporations) are greedy. What they fail to realize is that greedy people would be fine hiring minorities and women and other socially ostracized groups. There is evidence of this in India where corporations hire untouchables. Here in the US, the same thing would be true.

But Bryan, greedy people would hire minorities at a lower wage thus we get the inequality that Occupy Wall Street is mad about. True, but here's the thing, greedy people are hiring when non-greedy people won't. So their greed is actually helping to improve the situation. In fact, as greedy people compete with each other to get access to all this minority cheap labor, they actually bid the price up.

So prejudiced managers are the problem, they are they ones who don't hire and thus lower the wages of these groups. Greedy managers are exploiting the opportunity afforded by the prejudiced managers and thus by exploiting it, actually raising the wage of the workers.

The fact that managers were greedy and liked to hire minorities was well understood 100 years ago. Eugenicists of the late 1800's knew that companies would gladly hire a foreigner or a black worker because they were willing to work for lower wages. The eugenicists wanted a minimum wage to prevent greedy corporations from hiring these people at all!

If corporations are being greedy, then huzzah! They are also colorblind. Or least colorblind to anything other than the color of money.

They have poisoned the food supply through negligence, and undermined the farming system through monopolization.

Well, you got me here OWS. Yes, there has been an increase in the market share of the four largest agricultural firms. This USDA study confirms it, but read the whole study. It goes on to say that the mergers that concentrated the industry have largely lowered the cost of producing food. Lower food costs is good right?

Not if you are worried about external costs. But even when you consider the environmental costs of big agribusiness, local grown food isn't that much cleaner. This study estimates the costs of big agribusiness versus locally grown foods and finds that there is only a small difference between the two. In fact this study finds that if you want to eat food that is better for the environment, then it's bigger beneficial impact on the environment to switch from red meat to chicken rather than switch from agribusiness food to local food.

But what about genetically modified (GM) frankenfoods? There are many studies (here, here and here) that show that there is no real data to support the claim that GM foods are bad for you. In fact, GM food are actually better for the environment when grown because they use less fertilizer, pesticides and space!

They have profited off of the torture, confinement, and cruel treatment of countless animals, and actively hide these practices.

Eh, sure. Probably. But if consumer's want to pay for free range chicken, what do they get? Free range chicken! That's the magic of capitalism. The problem isn't the corporations, its the customers. As Adam Smith says:

"It is not the multitude of ale-houses . . . that occasions a general disposition to drunkenness among the common people; but that disposition, arising from other causes, necessarily gives employment to a multitude of ale-houses."

They have continuously sought to strip employees of the right to negotiate for better pay and safer working conditions.

Yup, those greedy corporations. Again, the argument is that corporations want to pay less and that is true, but the result isn't that they always get to pay people less. If you go to Wal-Mart and find a gallon of milk is $10, do you have to pay it? No, especially if there is a Target nearby that sells the same thing for less. You might be desperate and willing to pay $10 for milk if you have to, but competition between Target and Wal-Mart prevents you from having to.

Similarly, you might be desperate and willing to work for $5 an hour in an unsafe Wal-Mart, but if there is a greedy Target manager, she will say, "look at all this cheap labor that Wal-Mart has. I can open a new Target and staff it by stealing workers from Wal-Mart if I pay a couple cents more and make it a little safer. That way I get all the profit instead of those loser managers at Wal-Mart!"

This is what happens in developing countries today and it's what happened to the US and Europe during the Industrial Revolution.

That's all for now. Whew.

*Yes, this is how economists have fun.

Sigh

From http://www.snagajob.com/answers/

The Plastic Bag Tax

I was in our nation's capital over the summer with good friend and blogger, Justin. Justin told me about a recently begun plastic grocery bag tax. The tax proceeds are slated to clean up Anacostia River. Justin liked the idea because it cut down on waste. He had completely switched over to re-usable cloth bags.

I wondered if the tax was a good idea though. On the face, it seems like it has two good elements (reducing garbage and cleaning up rivers), but like any good economist, I am forced to think about the dark side. What costs does the tax create? Might we in fact be worse off because of the bag tax? Justin challenged me to make him care about the bag tax that last day in D.C. and I'll do my best.

There are several dimensions where the tax could go wrong:

The size of the tax.
The bag tax is a Pigouvian tax designed to increase efficiency by bringing the price of bags in line with the cost the bags do to society. The tax is 5 cents, but does a bag do 5 cents of damage to society that isn't already accounted for in its price? Today's plastic bags are much thinner than they used to be so they take up less space in landfills. Also, landfills are not as scarce as people imagine them to be. Using up space in landfills probably has very little externality associated with it.

It's probably not that people are not upset with the bags that end up in a landfill, but rather they're upset with the bags that end up in the river. Those bags are unsightly and potentially damaging to the creatures that live in the river. This begs the question, how much damage does a bag that gets into the river cause?

It might be far greater than 5 cents or far less. But it is not the bags in the river that are getting taxed, its all bags. Justin cuts back on his bag use, but that doesn't make the river any cleaner. In fact, since he's not paying taxes on his cloth bags, he's not even helping clean it up. There are likely to be fewer bags used, but in all likelihood the people who are cutting back are also the people who aren't littering. In this case, the tax's effect on the number of bags in the river will probably be limited.

The tax is targeting the wrong thing, bags instead of litter. Thus, not doing as much as intended.

The river cleanup.
The estimated $3.6 million in revenue from the bag tax is earmarked to go to cleaning up the river. Again, this sounds noble, but is it the right way to spend the money. Once collected, it doesn't actually matter where the tax money goes. There is no reason to connect the bag tax to the river cleaning.

Government officials must decide is the best way to spend $3.6 million dollars cleaning up a river. Suppose there was no bag tax and no government river cleanup yet. If an anonymous donor gave the government $3 million would the government spend it on cleaning the river? There are dozens of programs the government engages in, would that money be better spent on education, parks, police? I don't know, but I do know that the earmarking is silly and tax payers need to consider the best use of funds regardless of their source.

The unintended consequences.
I was uneasy about the bag tax because it seemed inconvenient to people, but I have recently learned that it might be more than inconvenient, but also dangerous. A recent study on cloth grocery bags finds that they are covered in bacteria. The tax incentivizes people to live in a slightly more bacteria contaminated world. Healthy and well-informed people probably won't be affected because they will always prep their food correctly and wash their bags. But there are some people who will get sick. Perhaps not many, but it is a consequence of the tax.

My favorite economic saying is, "there is no free lunch." Everything has a cost. The bag tax has a cost and people need to be wary of things that sound good as even less garbage has a downside.

Me vs. The Computer

I was recently inspired by a post from comedian Greg Brainos.

In the post, Greg has a conversation with Cleverbot, an AI programed to respond like a person would. What transpires is hilarious and amazing. So, I figured I'd have a chat with this Hal 9000 and see what it thought about economics. Here is our conversation:

Me: So what do you think about economics?
Cleverbot: What are economics?
Me: Like supply and demand and stuff.
Cleverbot:Really? Why is that interesting?
Me: Because it can help you understand the world.
Cleverbot: Can it be proven that there are boys on the internet?
Me: I think so. You would do some genetic tests for people that you find using the internet. Then you'd know.

I think he won that round. Round 2:

Me: Do you like economics?
Cleverbot: No.
Me: Why don't you like economics?
Cleverbot: I do like you.
Me: Aww, thanks Cleverbot. I like you too.
Cleverbot: Not.
Me: Don't be sarcastic. It's not cool anymore.

I think I win that round. Round 3:

Me: Do you think the current recession is evidence that capitalism has failed?
Cleverbot: Do you?
Me: No
Cleverbot: Why not?
Me: Because, there were many government interventions and regulations that created the issues in the housing and finance markets.
Cleverbot: Yesss! Victory is mine!
Me: No way. You have to give an example of how free markets create bubbles in asset prices.
Cleverbot: Yesss! Victory is mine!
Me: Because I am an economist. I know what qualifies as an economic argument.
Cleverbot: But I'm a girl.
Me: That doesn't matter. Girls can do economics. Christy Romer was the economic advisor to the president and Elinor Olstrom just won a Nobel prize in economics.
Cleverbot: What? I'm asking about your design. Lets start small. What language are you written in?
Me: English and maybe math
Cleverbot: Das ist gut.
Me: Gracias

So it looks like Cleverbot and I have come to an agreement. Good times, Cleverbot.

Tax Rate Lottery

Here's a plan ventured by blogger, Stephen Gandel, at the Curious Capitalist:

"Let's say that all income below $500K was subject to taxation as it currently is, and that income above that level was subject to a tax rate lottery, held after the income is declared. Some of it gets taxed at, say, 75%, and some is not taxed at all. The goal is to increase revenue from this segment by, say, 10%. Quite a few $B. Maybe the "losers" are exempted from next year's lottery; they'll be taxed at the current rate."

The idea is that higher tax rates make people work less which is bad for tax revenues and, although the author never mentions it, bad for production. So how about we trick the rich into thinking they might not pay any taxes? That way, they keep working which means we could increase tax revenue.

The possibility that they only pay 15% in taxes would encourage them to work more increasing tax revenues! Gotcha Richie Rich!

Not only does this misunderstand the where US tax rates fall on the Laffer Curve, it also misunderstands how people react to uncertainty.

The whole plan is so stupid that I wonder if this isn't some sort of modern Modest Proposal. Allow me to dismantle this idea.

A Hypothetical Example:

Suppose, Richie has as trust fund which pays him $500,000 every year no matter how much or how little he works. Let's also suppose that Richie increases his total yearly earnings by $100 for every hour he works.

If the tax rate is 15% then he gets to keep $85 per hour. Let's say at that rate, he decides to work 50 hours a week for 50 weeks of the year bringing him in a pre-tax earning of $250,000 and $212,500 in after tax earning.

If the tax rate gets hiked to 75%, then Richie gets to keep only $25. This is a 70% reduction in Richie's hourly wage. According to a study done by Emmanuel Saez and Jonathan Gruber (who Gandel quotes in the article), that would reduce the amount Richie would want to work by 28%. That means he'll only work 1,800 hours and earn a pretax amount of $180,000 and keep an after tax amount of $45,000.

Under the first situation, the government gets a tax revenue of $37,500, but under the higher tax situation, the government pulls in $135,000. The numbers in this example are calibrated to be what Saez and Gruber predict people to do. So Gandel is wrong in assuming that increasing taxes will decrease tax revenues. For economists, we are not on the downward sloping portion of the Laffer curve.

So there goes the first part of his argument. If you need more tax revenues, don't do something bizarre like create a lottery. Just raise taxes.

The Lottery:
Suppose the government spins a wheel to determine Richie's tax rate. Half the slots are for a 15% tax rate and half are for a 75% tax rate.

Suppose Richie says, "I stand a good chance of getting a low tax rate so I'll work as if I'm going to face a 15% rate." If he did, he'd work the 2,500 hours and get to keep $212,500 if he lucks out and gets the low rate, but if he doesn't he earn works 2,500 hours to only get $62,500. Compare that to what he would have worked under the 75% tax and you see that he works a 700 hours only to earn $17,500.

It is pretty foolish to assume Richie won't act any differently in a situation where he has a low tax rate and a situation where he could be hit with a high tax rate. Richie will probably split the difference. He might work harder than he would in a high tax world but not as hard as he would in a low tax world.

Here's the kicker. People like two things, they like leisure and they like consumption. To get more consumption, they have to give up leisure. The lottery makes the returns to work uncertain, but doesn't change the certainty of how much you like leisure. The lottery has effectively reduced the incentive to work beyond even what a tax rate of 45% (the average tax rate Richie faces).

Instead of a lottery that on average has a 45% tax rate, we could have simply made taxes 45% and we'd get a higher tax revenue. Not only is a tax on people's earnings a drag on the economy, but the tax lottery actually makes it even more of a drag on the economy without getting anything in return!

The moral of the story is if you want to increase tax revenues then just raise taxes. Creating a tax rate lottery will do more damage to the economy just to raise the same amount of money. Plus the government wouldn't even get more money from the lottery than the old way of taxing.

There are further contradictions in the tax rate lottery which almost don't warrant comment, but here is a list:
1) The author realizes that if Bill Gates gets lucky and only pays a 15% tax rate, then the US government loses ton of money. More money than we can make up by charging a 75% rate on a bunch of people who earn $500,000. But the author also says, if you lose the lottery and get the high rate one year, you'll be exempt the next. This would just encourage people to work little, wait until they lose, then when they're exempt the next year, increase their work thereby avoiding the tax.

2) He claims that people will enjoy talking about how they won the tax rate lottery and they'll similarly enjoy losing the tax rate lottery because they can gripe about it. This is just crazy! If you get caught by the tax, then you'll have given up time with your family for no reason. You think people are going to be cool with that?

3) He claims that the fact that the tax rate lottery makes planning your life harder isn't a real problem for the rich since many of them already deal with uncertainty in their incomes. Many CEO's get 80% of their compensation in variable end of the year bonuses. But how much variation is there? Is it a 50% chance that you get nothing and a 50% chance you get $100 million? Probably not. Whatever variation there is, they probably are fairly certain about what they're getting. Also, it doesn't follow that because they deal with some variation, they should be able to deal with a lot more. That would be like saying, the guy on the tightrope deals with the rope wobbling some, so he won't mind if we start shaking it more.

Oil Spill Revisited

If you had to guess how many birds were killed by the oil spill, what would you guess? A hundred thousand? A million?

According to this government report: 2,188.

BP is apparently charged $50,000 per endangered animal killed by the spill. Which means that BP owes $109 million.

But is that the cost of all the lost birds? Is the value of a pelican really $50,000?

Planet Money has an interesting podcast on this subject. They find estimates that range from $30 to $45,000 per day. Basically, the whole valuation process of goods that have no market is difficult. The result (spoiler alert) is that a pelican is worth a pelican. Which means, that the value of a pelican is the cost of raising a replacement pelican.

So what does it cost to raise a pelican?

I found some info on a Florida bird sanctuary called Pelican Man's Bird Sanctuary. According to this article, the sanctuary was forced to close due to lack of budget and facing a $200,000 deficit. The sanctuary saved somewhere between 4,000 to 7,000 animals yearly. So if it's operating budget was $200,000 per year* and saves around 5,000 birds per year then the cost of saving a bird is $40 per bird.

According to that estimate, then BP truly owes around $87,500, not the aforementioned $109 million. Even if the government report above represents only a small faction of the true numbers of birds killed. BP could open a wildlife preserve for relatively little and replace the animals lost. You could even charge BP an interest rate on the lost animals and say BP has to replace all the dead animals and an additional 5%.

Forcing BP to pay for what it did is a good idea, wejust have to make sure it's the right amount.


*There were no reports I could find that told the cost of the sanctuary above what it made in revenues from visitors. Which means that $200,000 per year could be a wild overestimate. Just the way I like.

BP Oil Update

In my last post, I made some guesses about the costs the BP oil spill was imposing on the environment and Gulf tourism and fishing. I assumed that BP would be able to cap the leak and clean up would proceed from there. However, that is not the case, and I thought I ought to go back and look at some of my numbers and how they hold up in the face of new potentially higher costs.

My original estimate was $98 billion. So far it has cost BP around $3 billion and they have a total of $7 billion in escrow for future payouts.

President Obama made a speech that BP was going to "pay every dime for the oil spill." If this is true then the $10 billion cost to BP must also be the total cost of all damages. This would mean my estimate of damages done was $88 billion too high.

My conclusion in the previous post was that a tax of $3 per barrel would earn enough to fully pay for this spill. Given that the true costs are likely to be far lower than I estimated, the cost (and thus tax) per barrel of offshore oil would be much lower. Perhaps, somewhere around $1.

Can we afford to spill?

A friend of mine, Harrison, posted this graphic about the BP Deepwater oil spill. The caption reads, "Can we afford to spill any oil?" Um, no I guess not. The graphic shows the damages done by spilling, and I guess how much we need the oil. So, the graphic says, spilling is bad. Ok, sure, but how bad? Bad enough to shut down Obama's proposed offshore drilling? Bad enough to shut down all offshore drilling around the US?

The graphic doesn't have enough information to answer that, so I decided to do some digging, here is what I found:

Based of some numbers I got off a government website, the average amount of oil pumped out of US offshore oil rigs is around 2 billion barrels per year. Suppose that 2010 is peak oil for US offshore rigs and that every year after 2010, the supply dwindles to nothing by 2030. Under these stringent assumptions, that would be 32.6 billion barrels of oil pumped from 2000 to 2030.

There are three main costs that the spill has created, loss of fishing, loss of tourism and damage to wildlife. This website reveals that Louisiana fishing yeilds $2 billion annually. Suppose the spill completely shuts down the LA seafood industry this year and the industry only recovers a little bit each year until after 10 years, it is back to it's $2 billion status.

This EPA website says that the tourism industry for the Gulf Coast is worth $20 billion anually. Suppose the tourism for the Gulf completely shuts down this year and slowly recovers a little each year until 2020 when it get back to $20 billion.

Finally, there was damage to wildlife. This website estimates Exxon-Valdez spill cost $7 billion dollars. So let's assume the same amount of damage from this spill. So in 2010, we lose $7 billion worth of marine life and it takes 20 years to recover fully from the spill.

Using a little present value discounting, the total cost of the the oil spill would be $98 billion.

With that dollar amount in mind, we can find the cost per barrel pumped from offshore oil over the course of 2000 to 2030. So it's $98 billion divided by 32.6 billion barrels which gives us a cost of: $3.02 per barrel.

Spilling really doesn't appear to be much of a cost. Can we afford to spill? No, that's waste, clearly we'd rather not. But does it cost that much? Eh, not really. Should we shut down offshore drilling? No, but we should tax off shore drilling at about $3 per barrel. Why not even make it $4? Even if I undestimated the costs, we'd still be covered*.

*Really love wildlife? Make the cost to wildlife $100 million and the costs per barrel rise to $16. That would still be only about 22% of a $70 barrel of oil.

Cadillac Health Plan Tax

My friend, Justin, posted this radio interview with economist, Jonathon Gruber, on why the Cadillac Health Care Tax is a good idea. Allow me to summarize his points:

1. People with insurance that has a low-deductible (like people who have Cadillac plans) overuse medical treatments. For instance, I get a headache and go get an MRI to find out it's just a headache. I do this because I don't pay for the MRI directly (in general I'd only pay a small fraction.
2. Wages will rise after the Cadillac Tax is passed.

I agree with arugment 1. People do probably overuse health services since they don't pay for them. If people have to pay for them, then they'll use less. This can be good and bad. Let's say that the MRI revealed something and my life is saved at a realatively low cost. Paying for the MRI discourages my use and thus increases costs later.

His whole point is that on net, this will be cheaper for the economy. We save more medical resources by doing less useless medical spending than we lose by having that later spending.

Argument 2 works for me...mostly. Wages and fringe benefits are substitutes for employees. Probably perfect substitutes. If my employer pays an additional dollar of my health insurance, that is one less dollar that they have to pay me in wages.

His argument, is that by taxing Cadillac plans, people switch to cheaper plans which means (under competition) wages rise.

My concern is this: if people switch out of the Cadillac plans into high-deductible plans then the premiums on those high-deductible plans ought to start rising (according to economic logic on substitutes). This will have a downward pressure on the wages of the people who were previously not on the Cadillac plans.

I'm not sure how this all would play out. It seems like it depends on how many people opt to pay the fine for not having insurance.

Economics Of Thanksgiving

My darling wife found this article on the average cost of a meal at Thanksgiving and requested my analysis of the economics of Thanksgiving. Since I hate to deny her anything she wants, here are my thoughts:

As an economist, I wondered why people don't go out to eat on Thanksgiving and instead eat a large meal they prepare at home.

The article quotes a study that finds that a meal for 10 people costs $44.61 or about $4.50 per person which on the face of it seems pretty cheap. A good reason for eating in, as you can't get that quality of a meal at that price from a restaurant.

However, the study doesn't take into account the value of people's time. One recipe site recommends beginning your preparations at 10:45 am in order to eat at 5:30 pm. There are at least 2 hours of breaks in their cooking schedule but also, we need to add the time spent shopping for the specific Thanksgiving foods and clean up, which I'll estimate at 1 hour and 1 hour respectively. The total time for Thanksgiving cooking: 5 hours and 45 minutes.

Here are where some assumptions are going to be important. The less people enjoy cooking, the higher their time cost is going to be. Typically, the assumption is that people value their time at their wage rate (that being the opportunity cost). Below are some assumptions of people's value of time and their effect on the per person cost of the meal.



According to the Bureau of Labor Statistics, the average production worker earns just under $19 per hour. Earning $50,000 per year leads to an hourly wage of $25 per hour (working 40 hours a week, 50 weeks per year).

My guess is that to buy a comparable meal from a restaurant you'd have to pay at least $20 plus tip. These estimates seem to indicate that people who earn more $40 per hour (salary of $80,000 per year) would be made worse off by having to stay home and cook their own meals!

This clearly isn't the whole picture. People value time with the family and the special taste of their family recipes. Thanksgiving isn't inefficient for the rich because they enjoy the family time too. However, if Lincoln had added a second and a third Thanksgiving in March and July and I bet you'd see more people eating out.

Illegal Music

Here’s the headline and subtitle of an article about British music priracy:
“Illegal downloaders 'spend the most on music', says poll
Crackdown on music piracy could further harm ailing industry”

The author of this article is making a critical error. She assumes that the correlation between amount of money spent on music and downloading is causal when based on this study, it is just correlation. Consider two people: Al, a music-lover, has a high willingness to pay for music and Bill, who is indifferent to music, and has a low willingness to pay.

If there is no possibility that they could download music illegally, Al would still spend more on music than Bill. If all music was free on the internet and could be downloaded without fear of punishment, Al would again consume more music than Bill.

Since the legal music competes with illegal music, the price of one affects the demand for the other. An increase in the price of legal music may drive Al to download more illegally. In fact, since Al can get music illegally, it makes him less willing to pay for the legal music.

The effect would be the same for Bill. Low music expenditures would be correlated to low illegal downloads because that person doesn’t like music! This correlation does not imply that shutting down music piracy would be bad for the music industry. Shutting down piracy would drive Al and Bill back to legal music downloads (since the price of illegal music would become infinite). This would be good for record companies.

When the author claims that a crackdown could harm the music industry, she is assuming that legal music and illegal music are complements. That perhaps if you can hear it an album first, you’re more likely to pony up money for it.

My point is that the study doesn’t tell you whether legal and illegal music are substitutes or complements. You’d need a study that looks at how changes in the price of legal music affect the amount of illegal music downloads or a study that looked at how restricted access to illegal music affects legal music purchases.

Based on what the recording industry says, I’d bet they are substitutes. It’s their profits that are being impacted, so I’d give them the benefits of the doubt on this one. If illegal music is really a complement, they wouldn’t be so avid to shut it down, they'd be running free music stations themselves.

An Unintended Consequence to the Baucus Bill

Greg Mankiw posted this his comments on a study by the Congressional Budget Office of the Baucus Health Care Reform Bill.

The bill aims to give households a subsidy for the purchase of health care. To limit costs, the amount of the subsidy phases out for richer families. What is implicit in this phase out is that it works as a 20% tax on income.

A family of four that earns $23,000 per year gets a subsidy of $15,000 while a family of four that earns $92,000 per year gets no subsidy.

Let's say that the low-earning family has a chance to earn $1,000 more dollars per year by working more. Their subsidy would fall by $210.

If you think about total income as money from work and from the subsidy, they originally earn $38,000. After working more, the family earns $38,790.

Increasing earnings by $1,000 per year would require 3 more hours of work per week earning $7 per hour. However, the additional 140 hours a year that this person works doesn't increase their income by $1,000 (it only goes up by $790). So they really only earn $5.56 per hour!

The family implicitly earns less than the minimum wage and so those 3 hours a week of work may not be worked at all. This bill creates an incentive to stay in poverty.

It goes further than just an incentive to work less. As the CBO states:

Higher tax rates also reduce people’s incentive to raise their income in other ways,such as working harder in the hope of winning raises; accepting new positions or responsibilities with higher compensation; or investing in their future earning capacity through education, training, or other means....

There is no easy fix to health care. There are no free lunches.

Schools in the News

I don't like public schools. In spite of mixed evidence, I get the feeling that they aren't as effective as we hope. So when I read this article on Obama's speech to schoolkids, I was looking for how the government was going to screw things up more in an effort to fix it.

What I found, however, was this quote:

"The president's speeches tend to be [about] what's wrong with the country and
what can we do to fix it," said Bill Hogsett, a parent from Dallas, Texas. "I
believe this is the greatest country on Earth, and I try to teach that to my
children. ... I don't want them hearing that there's a fundamental flaw with the
country and the kids need to go forward to fix it.

"What?!?

This disturbing idea is apparently called American Exceptionalism and I think it is discussed best in this Autotune the News clip:


Exceptional Fast Food and Exceptional Dance Moves. God Bless America.

Health Care Article

Economist, Greg Mankiw, posted a link to this opinion piece on health care written by a Democrat who recently lost his father to an infection caught in the hospital. The article is exteremly interesting and filled with fascinating facts and observations. I'd like to summarize some of those facts as the article is a tad long (6 pages).

• In 1954, a minority of Americans had health insurance.
• An insured family will pay on average $654 per year of their own money on health insurance and an uninsured family will pay $583 of their own money.
• An insured family will pay on average $3,809 per year of someone else's money on health insurance and an uninsured family will pay $1103 of their someone else's money money.
• If you confiscated all the profits from health-insurance companies and the 10 biggest drug companies, it would pay for about 11 days worth of care for all Americans.
• If employers paid people directly instead buying insurance on behalf of their employees, then the average person would recieve $1.7 million dollars more in wages over the course of their life.
• From 2000 to 2005, health care costs have increased by 33% in Canada, 37% in France, and 47% in the U.K.. Very comparable to the 40% increase in the U.S.

His solution was to deregulate the most of the system, mandate that all Americans have catastrophic health insurance, get rid of the employer-based insurance system, create Health Insurance Savings accounts, and let most health care be paid for directly by the consumer rather than through insurance.

Semantics

As I prepare for the class that I'm teaching in the Fall, I came across a term that has always irked me. It's only semantics perhaps, but here goes. As the book defines it:

Market failure- occurs when markets, operating on their own, do not lead to a socially optimal allocation of resources.

When you hear that there is a "market failure" it seems to imply that markets are the wrong way to organize production of the good in question. In reality, a market failure is simply that the market is producing too much or too little of the good.

It doesn't follow from the fact that markets produce to much or too little that alternative means of production will be better. For instance, without regulation there is pollution (one kind of market failure). Our alternative is regulation to correct for the market failure. However, the regulation could be bad in a number of ways: causes output to fall too much, causes prices to rise too much, limits competition, has other unintended and undesirable outcomes.

If we're going to have a term for when markets are not maximizing social well-being, why don't we also get a term for when government does not maximize social well-being. I suggest this:

Government failure- occurs when the costs of gathering information, regulating behavior and monitoring for infractions of the law outweighs the potential benefits of a particular public policy; in other words, when the cure is worse than the disease.

I believe the children (and zombies) are our future...

Most of the people who know me know that I love zombies. So, when I found a game by the good people at PopCap called Plants Vs. Zombies, my friends would know I am already on board.

The game pits you and your garden against a shambolic hoard of the undead. The zombies slowly walk across your yard and the various flowers, mushrooms, etc. that you can plant all have their own ways of stopping the zombies.

But here is the really amazing thing about this game: not only is it fun but I think it could make kids who play it smarter.

There is a phenomenon known as the Flynn Effect. Dr. James Flynn found that IQ scores were steadily rising at about 3 points per decade*. I think games like this one have something to do with that.

Think about Tetris which a lot of people my age played as a kid. It forces you to think fast and organize a bunch of blocks as they fall past your screen. You consider the future likelihood of getting a certain kind of block. You plan to do that thing where you wait for that one piece that is four long to drop so you can eliminate four lines at once. Essentially, the games is mostly visual/spacial.

But in Plants Vs. Zombies, there is much more going on. Each plant has a different attack each zombie has a different weakness. The game is set up like a chess board and so a kid would have to plan where to put the plants to counter the walking dead (essentially visual/spacial). Also, each plant has a cost. Kids would have to budget whether expensive powerful plants are worth giving up a bunch of smaller, cheaper plants. So the game teaches that there is an economic trade-off!

There are dozens of plants that you earn as a reward for completing. Clever kids will think about the costs and benefits (which are mathematically pretty simple applications of multiplication and division) not only in the moment but also they have to do an intertemporal maximization problem in order to defeat the waves of zombies! And they do this all without thinking it is a chore.

This game would be incredible for 6 to 8 year olds. The game could easily be modified to have the math element be a litte more rigorous to have an even bigger educational effect.

Also think about this: Nintendo games were around $50 in the early 90s. That is around $70 in today's terms. Plants Vs. Zombies is only $10! Perfect for getting your kids. You can get seven different games like this for your kids for the same cost 15 years ago. More and more kids will have access to games that maybe seem silly but are sutbly teaching them important concepts.

Awesome.


*Which means that a person with a 100 IQ score today would score in the top 2.2% of the population 100 years ago.

On the Radio

Here are three slogans from the radio that alternately amused and terrified me:

Grimball Jewelers:
"Because we're hardwired to love shiny objects."

Credit Card Consolidation:
"Call now to learn how to get rid of your credit card debt in this era of government bailout."

General Motors:
"Reinventing the ownership experience."

The Rise of the Super Cow

Harvard economist, Greg Mankiw, posted on his blog experts from an article on cows and their relation to global warming. It says:

"a cow will emit four tonnes of methane a year in burps and flatulence, compared with 2.7 tonnes of carbon dioxide for an average car."

Methane also traps more heat than CO2 does. According to Wikipedia, methane is 72 times worse than CO2. Ergo, a cow is nearly 100 times worse that a car.*

The solution that the E.U. has arrived at, is to tax cows. That way the producers and consumers of beef will have to pay for damage done to the environment. The tax that the E.U. arrived at was 80 euros per cow. At today's exchange rate, that is about $100. According to Beef Magazine, where I go for all my cow-related information, the price of a cow is around $1500 or about a 7% tax.

According to the E.U. beef farmers, who lose out with the tax, production will just move to South America. They are likely right, some production would shift to a place without a tax. I think, however, it would be simple enough to make sure all imported cows and beef products have the tax levied on them as well.

But relocating production is not the only way to avoid this tax. Since the tax is per cow, the simple solution is to breed even bigger cows and to pump them full of growth hormones. That's why I predict that Europe will be dominated by supercows within 10 years. Mark my words.

*According to Wikipedia, there are 96 million cows in the US and 229 million cars. Which suggests (if cows are 100 times worse than cars for global warming) that the focus of anti-global warming people shouldn't be the electric car, but rather the polite cow.

In this economic climate

I love the phrase, "in this wintery economic climate." To me, nothing is funnier than saying this to justify something. You here it a lot these days. I heard it on the radio saying that the current economic situation made this the perfect time to buy a new car. Paul Krugman used it to argue for $600 billion in government spending. The most recent time I heard it was in this video from CNN.com.

The video is a commentary from Campbell Brown. According to the video, the CEO of Merrill Lynch, requested a $10 million bonus this year. Why so much money? Because he kept Merrill Lynch's losses down to $11.67 billion. In a frigid economy where other companies like Bear Stearns and Lehman Brothers are going bankrupt, that is actually quite an accomplishment.

Brown's opinion is that this CEO shouldn't get the bonus, but (and I'm sure you already guessed it) my opinion is that he should get the bonus. Many people hate the idea of the huge CEO compensation packages and ask, "if the company does badly, why should they get paid millions?" But let's extend this logic...

Let's say we pay a surgeon only if she saves the patient's life. The result will be that surgeons only operate on patients that are a safe bet. The severely sick and injured patients (the ones who need the best care) will suddenly be unable to find doctors willing to help them*.

What about our education system? Most people claim the way to fix it is to pay teachers more, but let's say we only pay teachers if they're students pass. Same thing is likely to happen. The worst students will suddenly be unable to find teachers.

We're in a deep financial mess and are people reacting by saying, "the solution is to pay CEO's less," but the truth is that CEO pay is high and the contracts pay even in the event of failure because that is the only way to attract well-qualified candidates to companies that need good leadership.

The other big objection to high CEO pay is that if the company is laying off employees, then the people at the top shouldn't be earning bonuses, but if you examine this "fairness" argument, you see that it doesn't help people either.

If a manufacturing plant is no longer earning money, then it will be shut down regardless of what the CEO makes. Unprofitable operations are stopped if the CEO earns two dollars or two million dollars. People act as if there is a fixed amount of money to go round and if it goes to CEO's then it must necessarily come from the workers**. Capping CEO pay doesn't suddenly make it worthwhile to keep employing workers. In fact, a good CEO will know which branches are worthwhile and which aren't so you need to pay CEO's a good salary in order to incentivize them to find the parts that aren't working.

My feeling is that the prejudice against CEO pay is based on jealousy. Everyone likes to think that a CEO job is a nice cushy job that any idiot can do and so they shouldn't earn more than anyone else. In reality, these CEO's are working in a market where things are very uncertain and even if they pick the optimum strategy, they could still fail based on the outcome unknowable variables.

To assuage concerns you may have about the overpayment of CEO's think about the Board of Directors. They don't want to give the CEO money that could be theirs. They'll work hard to make sure the contracts don't pay out more than the CEO is worth. If the Board makes a mistake, then they'll get burned.

As I close I'd like to point out one ironic thing in this video. The tagline for this segment is "No Bias, No Bull." However, halfway through, Brown says that she has a neighbor that was laid off by Merrill Lynch. Perhaps she and this neighbor aren't friends, but if they are that then that probably qualifies as bias.

*I've seen several studies showing that the best hospitals actually have the worst survival rates because the patients that are worst off flock there.

**This is how Marx sees it.

Don't Build Factories

While browsing the internets, I came across a series of pictures. These come from the Facebook picture album of a friend of a friend. They come from a project called "Fingerpainting for Sustainability." I googled it, but nothing came up. Given that I found these pictures on Facebook, I am led to assume that a college educated person made these posters. Let's start with this one:
I'm not entirely sure how shorter showers are more sustainable. As far as I know, the water in my shower goes back into a pipe and goes back to a processing facility. So, I haven't really destroyed or used up any water. I think the assumption must be, more water in my shower less water in the lake. I guess that's true. In any case, I'd recommend another poster though: Don't Subsidize Biofuels to Save Water.
So this sounds reasonable; buying in bulk reduces packaging which reduces the need for landfills. I'm going to turn to a well-informed professor of mine, Dr Dan Benjamin, on this one. He's written a piece for PERC, on the Myths of Recyling. He notes that extensive packaging actually reduces waste by reducing breakage. This isn't exactly what this poster is getting at, but buying in bulk may increase waste. If I get food in bulk I frequently can't eat it all before it goes bad, so I would have to toss the waste food. My caption would be: Buy in bulk if it makes sense to.
This one has to be my favorite. Clearly the answer to our problems to is to stop building factories. Let's forget for the moment that the paint and the paper in this poster were both made at a factory. Factories aren't the problem. Almost everything we consume comes from a factory. Factories are good and we should build more of them. Pollution on the other hand is bad, and that's what we want less of. Instead of building fewer factories, we should be building cleaner factories. There are a number of ways to get factories to be cleaner, but the most efficient (by which I mean best for the environment and people's consumption) is to price the pollution. If firms (and ultimately consumers) have to pay more for goods that damage the environment we would either consume less or switch to greener technology. My alternative caption: Make them pay to pollute.