The tax rebates are coming, and so are the new bonds

Now that the first "stimulus tax rebates" are appearing in bank accounts, people need to start thinking what to do with them. Conveniently, the US Treasury will start almost simultaneously issuing one year Treasury bonds. The first ones will become due in a year in early May, when the additional taxes will be back in (remember, the rebate is just an advance). The Ricardian Equivalence is complete.

Selling the homeland

Again and again, there is an outcry that foreigners are buying up land, real estate or firms. Again and again, politicians are asked to step in and stop this hemorrhage. This happened when the Japanese bought big on a strong Yen, when Western European bought capital in Eastern Europe, when Northern Europeans bought vacation homes in Southern Europe and the Alps. Now it is Turkey's turn.

In the six years since the start Premier Erdogan liberalization policy, 73,000 houses went into foreign ownership. This is quite a change for Turkey, as it took about eight decades before that to reach a similar number. The government is trying to deregulate foreign ownership further, but the opposition is quick to capitalize on nationalist sentiment.

But why resist foreign ownership? It is like foreign direct investment, which is courted everywhere. Revenues from sales can be used to obtain foreign goods (and even foreign real estate!). And in general, it is good to diversify anyway.

Still, there are complaints, especially in the case of foreign ownership of businesses, that profits would leave the country. If it is that profitable, why was is not sold at a higher price or kept in local hands? What if foreign ownership actually makes the business profitable? In the case of real estate, the complaints are more about "strange people" coming into long established communities. Openness to new cultures never hurts, and these foreigners are typically richer, and thus bring good business for locals. The fact that foreigners want to buy drives prices higher, and those that benefit from that are the locals (those that sell).

On economic grounds, there is no reason to limit foreign ownership. There are emotional reasons to oppose, but they are emotional. Once you think about it, it makes sense.

Mankiw on textbook costs

I have already posted twice about the excessive cost of textbooks, but today's post by Greg Mankiw needs a reaction.

Greg Mankiw, probably the economist that makes the most money off textbooks, and I suspect by far, argues that there is nothing wrong with the cost of textbooks. He claims that this is a market with free entry, and if the price is too high, others would enter and drive prices down with the increased supply. That would be correct if the market for textbooks would satisfy all the canons of perfect competition. But it does not.

First, students are a captive market. They have to buy the textbook the teacher assigns, a teacher who generally is unaware of the cost of the textbooks available. Also, the teacher is constantly courted by representatives of the publishers. Also, once you have prepared a class, there is little incentive to change it. This makes it remarkably difficult for a new publisher to enter the market.

Second, as the PoET website shows clearly, textbook prices show remarkably little variance, at least among the "mainstream" ones. That really looks like (open or tacit) collusion among publishers.

Third, the textbook market is twisted in a particular way: teachers tend to choose the textbooks that are easy to teach from, either because the teacher gets all sorts of teaching material, or because the material is (too) simplified. Mankiw's textbooks are a perfect example: There are lots of definitions and descriptions, but little substance in terms of intuition, and that substance is outdated (i.e., from when the teacher learned it). That is why they are so popular. The modern textbooks (the newcomers), however, struggle. That does not look like free entry to me either.

Taxing the Workalcoholics

Addictions are generally considered to have adverse consequences, then what about the workalcoholics? While they obviously work and do not mind, they can bring a contribution to society by producing more and letting others work less. However, as Daniel Hamermesh and Joel Slemrod point out, workalcoholism has health consequences on self (exhaustion, high blood pressure) and on others (enstrangement, divorce). Thus there may be negative externalities.

So, what are to do about it? It is difficult to distinguish this addiction from a genuine lack of preference for leisure. Yet, 30% seem to report themselves as workalcoholic, therefore we seem to face an important problem. Surveys show that those with higher education and income report more frequently to be addicted to work. They tend also to retire later. Thus natural ways to fight this addiction would to have progressive labor income taxation and a mandatory retirement age. One drawback of such policies is, however, that they prevent the exploitation of existing human capital accumulated on the job.

GDP is not everything

Too often, policy or discourse is focussed on GDP. But GDP hides a lot of things about the economy, in particular how it is distributed across its population. Is an economy with a higher per capita GDP necessarily better off than one with a lower GDP per capita but more even distribution?

Of course, an uneven distribution of income can be the consequence of individual choices. What really matters in the equality of opportunities, what Amartya Sen termed capabilities. The problem is to find a good measure for this. The Human Development Index is one way to approach this, but it looks only at proxies for equal opportunities like elementary education, and some basic health measures.

John Roemer has a suggestion that gets closer to opportunities: "Inequality of opportunity is the inequality between the different distribution functions of income of the various types, as opposed to the inequality within these distributions, which is attributed to differential effort."

Using this measure, he finds that 1% inequality of income is attributable to inequality of opportunities in Scandinavia, 7% in Southern Europe, and 30% in developing countries.

Panini stickers and economic literacy

Since the sixties, a very popular "game" in European schools is the trading of Panini stickers. The Italian company Panini would distribute ahead of important sporting events a free booklet, and then sell stickers randomly distributed in packets. The scheme is similar to trading cards, with the twist that they relate to events with a nationalistic twist. Currently, the stickers for the European Football Championships are all the rage.

Parents would always complain about the futility and the cost of these collections. Once the event is over, there is no residual value. While I agree it is rather costly to participate in this game (estimate for a complete collection: €500.00), it has definitely value in terms of economic literacy. Indeed, the kids learn about barter, and especially about the relative value of items. While every sticker has the same printing, home teams, stars, and the "shiny" stickers are typically valued higher. And it gives a chance to lower class kids to shine when they have a prized sticker.

Baseball cards follow a similar concept and also can improve economic literacy. However, they have a lasting value, and thus many adults are involved as well, which definitely makes it less fun for the kids. Stock market games are based on the same concepts, but they are not nearly as entertaining and involving as those sticker albums.

Zambia on the verge of a Dutch disease?

The New Zambia blog discusses the recent surge of the local currency. There are fears that this is sign of a Dutch disease: the country's industrial structure could be significantly shifted towards natural resource extraction as exchange rates make other exports impossible. Also, it is hypothesized this would also lead to a loss in remittances (contributions from expatriates) and foreign aid.

Zambia is nowadays considered to be a showcase of sound policies. Exchange rate appreciation may be a consequence of this, and it would sad if Zambia would suffer from this. However, there is evidence that foreign aid tends to reward good policy after the fact (Pallage and Robe) and that this is optimal (Isopi and Mattesini). Also, worker remittances are remarkably stable (Buch and Kuckulenz). Not too much to worry about...

Spain's defense minister

Zapatero's Socialist party won the recent elections in Spain, and he appointed a cabinet with a majority of women. Quite a feat in such a machist country. Or maybe because it is a machist country, Zapatero, who has championed equal rights, is acting like he preaches.

Where this cabinet really pushes the envelope is with the defense minister: Carme Chaón, is a woman, is young (37), and seven-month pregnant. To top this, she is a self-declared pacifist. How could we rationalize such a choice? Economics has something to say here.

Spain has been burned by the Iraq adventure, and clearly it now wants to find a way to commit to a different course. But that is difficult, because once in power a government gets dragged into decisions it would not have taken beforehand, what we call time inconsistency. There are two ways to counteract this: find a commitment device, or appoint a decision-maker who is biased against what you want to prevent. This is why central bank governors are typically biased against against inflation. In this case, we have a pacifist.

US environmental policy: going nowhere

So President Bush gave an "important" speech where he essentially concedes that something needs to be done about the environment. So what does he propose? Nothing that would bind anybody!

If you want to reduce emissions, you need to coax people and industry into that. Voluntary regulations do not work. The first best is to used market tools, like taxing emissions or having a market for emissions. The tax rate can be modulated to reach a particular emission level. Absent this, the second best is to regulate emissions for each entity individually, which can achieve the same emissions goal, although less efficiently.

President Bush does not even want to commit to an emissions target before 2025, and he still pushes his voluntary approach. But this is the whole problem: if everybody would be fine with reducing emissions, everybody would do it already. It is because we have a market failure here that the government needs to intervene, for everyone's good. Well, almost everyone, as there is no doubt about it, some will lose out. This is exactly why you want to regulate or tax.

Campaign for affordable textbooks

Just a short note this evening to encourage everyone to sign this petition and commit to using open textbooks when available. As mentioned before, textbooks have become far more expensive than can be tolerated.

Hat tip to Against Monopoly.

Does productivity growth reduce unemployment?

Is a higher growth rate of total factor productivity (TFP) associated with a lower unemployment rate? Theory does not help much here, as it depends whether new technology can be capitalized in existing jobs or not. If it is, then any improvement in technology improves the marginal return of labor, and more workers are hired. If it is not, labor and technology are essentially substitutes, and workers are displaced as new technology is adopted. Finally, unemployment is also impacted by how much technology is embedded in new jobs. Distinguishing between all these effects becomes an empirical matter.

Christopher Pissarides and Giovanna Vallanti show that the first story dominates: TFP growth reduces unemployment. They develop a growth model à la Mortensen-Pissarides with capital, different types of technologies (disembodied, embodied), and different wage equations. The vintage of jobs is important, as only new ones can benefit from one type of technology progress. A calibration exercise with extensive robustness analysis then gives a clear result.

This analysis is done at the aggregate level. There is no doubt that some technology improvements have led to some firings. A prime example is how typographers disappeared from printing plants within a few years of the adoption of desktop publishing. But this allowed to hire others, hopefully reconverted typographers.

About the food price crisis

As mentioned before, agricultural prices are very high right now. I some countries, affected poor people have rioted for their government to do something about it. So, what should it do?

Some governments in developing economies have already taken actions: price controls and export restrictions. Great, exactly what they should not do, attacking the symptoms: prices are high, and local production can be sold at such prices elsewhere and gets exported. But the root of the problem that creates this discontent is the poverty, not the high prices. Thus the answer is some sort of income support.

Why should prices not be prevented to increase? Because this will spur production. As Zimbabwe is dramatically showing currently, price controls dry up the supply. Why should borders be kept open? For the same reason: it encourages production, plus brings income home.

Talking up a recession

The latest numbers about consumer sentiment are in, and they are at a 26-year low. Looking at the economic fundamentals, is there anything that warrants such low confidence? Employment, GDP, inflation, consumption show nothing out of the ordinary. While foreclosures are high, they are in absolute numbers very low. So what is going on?

My hunch is that consumers are just following the scare mongering we see everywhere, with predictions of depression and doom. Bush is trying to say things are not that bad, but nobody listens. And if consumer confidence is in the dumpsters, a recession is sure to follow. This is called self-fulfilling expectations.

How do you get out of this mess? Talk up optimism. So, nothing to worry about folks, the fundamentals are sound, the world is not going to end, Spring is here, and enjoy the good life!

Why do people vote?

The most important concept in political economy is the median voter: the person giving the majority to a proposal or a political candidate. Given that the likelihood for anyone to be the median voter is very slim, and that voting involves some cost, it is a mystery why so many people vote.

The easy answer is that people have been drilled to perform their civic duty and vote. Thus, they just do it. Andrew Gelman and Noah Kaplan have a better answer: people do not vote just for themselves, they also proxy for the others. Therefore, the return of a vote becomes much larger: Even if the likelihood of being the median voter is small, the return in that event is not just the personal return, but it is multiplied by the number of people benefiting. In other words, voters do not only look for private returns but also for social returns.

There is plenty of evidence of such altruistic behavior in voting. For example, people do not vote selfishly on many referenda. When a proposal for a swimming pool passes a vote, do you really think more than half the voters would actually use it? When the electorate approves of the use of medical marijuana, despite the fact that only a minority will ever benefit of it, it is not thinking selfishly. When an all-male electorate gives the right to vote to women, it is clearly not just looking for its own gain. Imagine that, electorates sometimes even approve tax increases...

Why is gold valued?

With all the talk about recession, depression and doom, gold seems to be again in the mind of many people, and its price climbed significantly (with large fluctuations). So why would people rush to gold?

We live in a world of fiat currency, and if people stop trusting in the currency, they abandon it and by experience something else it used as money, typically another currency. This phenomenon of dollarization is based on the fact that people still trust the replacement currency, ofter the US dollar. But what if people do not trust that either, as some imply is likely?

Thus people fall back on gold. But gold is not a good currency for everyday transactions, as it is not possible to have small change in gold. This used to be a problem before fiat money, as discussed by Thomas Sargent and François Verde.

But whether gold is the optimal currency is not the question here, it is why people value it at all. It is rare, it is shiny, people like to look at it (although this may just be because it is highly valued). But it is not particularly useful. If you think about it, if society or the market collapses, there is not much you can do with a gold bar apart from hitting people with it or using it as a doorstop. Ammunition, tools, clothing, food are much more valued in such circumstances.

Is the value of gold just an illusion, as much as the value of fiat money? Why would people trust gold more than money? In fact, Dubey, Geneakoplos and Shubik argue that given that gold has no consumption value, it should not be valued. Cigarettes, however, are valued, and their value disappears once consumed.

1000th PHD strip

The only comic strip I follow religiously is Piled Higher & Deeper (PHD), which chronicles the life of graduate students. Started by en Engineering graduate student at Stanford for the school paper, it has now a global following and is published three times a week. It is a lot about procrastination, delaying graduation, job markets angsts, frustration with undergraduates/research/advisers/money, finding free food and spending holidays in the basement labs. Many can relate to all that.

Number 1000 is below, and click on the image to get to the site with the other 999.

Social security reform is possible

We have all heard the mantra that social security is going to hell. Whether this is true or not, it is now generally accepted that a fully funded social security system is superior to a pay-as-you-go system. The issue is the transition, as switching from the latter to the former leads to a generation missing out (the old one) or one generation force to save doubly (the young one). This is especially bothersome because of current demographic change.

The problem essentially is that while you have a Pareto improvement when comparing the two systems in steady state, such Pareto improvement is impossible during a transition. For example, the current old generation, whose retirement is currently funded by the young generation, would lose in a switch when the young ones suddenly contribute to their own retirement. Such a transition has somebody losing compared to the current status quo, so no Pareto improvement may seem possible.

Not so, say Juan Conesa and Carlos Garriga. If you combine social security reform with optimal fiscal policy one can obtain a Pareto improving transition. The key here is the ability to differentiate tax rates by age. Essentially, you want to subsidize labor income for older people during the initial phase of the reform, and then gradually get to a steady state schedule that assume almost identical tax rates across age groups. It is just the opposite for capital income tax rates. All flat and positive initially, and then decreasing with age in steady state, with subsidy for the older ones.

PS: This evening is the final of the men's NCAA basketball tournament. See what view you have for $275 tickets.

Scaming lecture notes to students

I am rarely upset by academics, but the post on Against Monopoly about University of Florida faculty making big bucks selling their notes and then supporting a suit against a note-taking service enrages me. Academics are working for the public good, they are vying to disseminate knowledge, they have ideals of public service. In the case related here, a professor is selling lecture note on a CD for US$80 a disk to large captive audiences. And it is required. Students have already paid tuition for the privilege to listen to him, they should not have to pay again. From what I can infer form linked articles, it is common practice on this campus. Disgusting.

On political feasability

I have received several comments by email (I wish they would be posted as comments online, you can comment anonymously) that some of my proposal may make sense but are politically not feasible. I think these comments miss the point.

Several of my proposals may indeed be politically difficult: increase gas taxes, impose a congestion charge, scrap agricultural subsidies, and lastly drop deductibility of mortgage interest. But they all make sense (well, at least I think so), and in most cases, once voters understand what is at stake, and what are the consequences, they would go for it. The problem is not the voters, it is the politicians.

Politicians are supposed to represent the preferences of the people who elected them. They are also elected to figure out the law and its consequences. In other terms, voters outsource the hard thinking to politicians that share their preferences. The politicians should thus do their job, and not go the populist way and oversimplify.

Call me an idealist. But if we just give up because something is good but not politically feasible, we cannot improve welfare. Economists have to go out of their way and explain to politicians what policies are good, given preferences.

Drop tax deductibility of mortgage interest

The New York Times has today an article describing how the last attempt at a tax reform in the United States included provisions that would rectify some of the absurdities coming from the tax deductibility of mortgage interest. This is obviously a political hot potato, but nevertheless I call for the abolition of this deductibility. Make it gradual if you want, but it has ultimately to go. Here is why.

Mortgage interest deductibility is regressive, as it favor rich house owners. That is bad. This deductibility discourages savings, as it encourages getting into debt. That is bad. Arguably, it also encourages holding assets, which is good, but it encourages holding the wrong assets, and this is particularly bad.

This political goal that every American should own his/her home may make sense for politicians, who dislike volatile populations that are not attached to a region. Once home owner, a voter becomes more conservative and favor the status quo. But let us put the interest of the politician aside and think about the home owner.

A household typically earns labor income in the very region where it is living. That income is risky: one may lose a job, one may face a pay cut, etc. How could this risk best be diversified? By holding assets with a return that is negatively correlated to one's labor income. Local real estate is not such an asset. Imagine a local business closing down: labor income is lost and because of this local real estate prices are down as well! A double whammy for the local home owner.

The solution: rent locally, own globally, in real estate and other investment vehicles. How do you encourage that? Lower taxes on investments in general, but certainly not by subsidizing mortgages in local housing.

PS: For the light (or scary) moment: Swimming at the edge of the Victoria Falls.

Sociologists on Economics

I stumbled on Soc2Econ, a new blog where sociologists try to teach economists how to properly do research (I paraphrase). A number of points are made:

Economists barely do a literature review in their papers. Fair, economists know little about their previous generation, but that is also because the tool set has changed (for the better), we have learned a lot in the meanwhile, and some problems where simply not addressed forty years ago. I would rather argue that this obsessions with literature reviews that sociologists have is not moving research much forward, but rather in circles.

Neo-classical economics works on perfect information. Only on problems where imperfect information is not critical to answering the research question. There is ample literature that deals with imperfect information, in fact this is what all of game theory, principal-agent theory, and much of industrial organization, contract theory, law and economics, public economics and even macroeconomics is about!

The core of PhD schooling is not history of economic thought. While is it certainly interesting to learn how Economics got to where it is now, Economics is about concrete current problems, not philosophizing about past motivations of scholars with limited tools and data. Not disrespect to scholars of economic thought, but solving development problems does not hinge of our understanding of the debate between Ricardo and Malthus.