Fathers are drinking away their time with their children

It is no secret that growing up with an alcoholic parent is no fun. It is even worse for single parents. How bad this is is difficult to evaluate, as one would need data on alcohol consumption by parents and a measure of outcomes for children. Maybe some proxies can help here.

Gianna Claudia Giannelli, Lucia Mangiavacchi and Luca Piccoli take time spent with the children as a proxy for child wellbeing. They use a Russian survey and look at how much time each parent spends with the children, along with their alcohol consumption. They find that fathers care less about their children when they drink more, but there is no effect for mothers. In some ways, this reminds me of the paper by Siwan Anderson and Jean-Marie Baland that shows that mothers in Kenya use ROSCAs to keep money away from their (drinking) husbands, despite the fact that ROSCAs are a very inefficient savings technology.

But let us get back on topic. Is time spent with your children the best measure of child wellbeing? Certainly not, but it is supposed to be a proxy. But on theoretical grounds, I need a lot of convincing here. Indeed, if my parents had been alcoholic, I would have preferred, all else being equal, that they spent the least possible time with me. This would reverse the conclusion of the paper ("negative impact of fathers' alcohol consumption on child welfare," implying no impact of the mothers' alcohol consumption).

How not to model transition economies

In the nineties, Eastern European economies went through a profound and painful transformation. There were hit by two major shocks: A change in the price system from administered prices to market price, and an opening of the economies to competition from abroad. The first impact of these shocks were very significant drops in the wages and in all manufacturing indicators. As mentioned, these changes were painful, and one could ask whether something could have been done to help ease this transition, for example with foreign aid. It is difficult to imagine where this question could matter in the future (North Korea?), but anyway.

Mohsen Fardmanesh and Li Tan ask this question. They build a two-sector three-factor small open economy model with some particular features: capital never depreciates, trade is fully open, and firms maximize profits. To make model resemble in some way the pre-transition situation, they add a constant to the market clearing condition for non-traded goods to represent shortages. Removing this constant is supposed to represent the change that happened. Then the economy is a new state, and they analyze the impact foreign aid would have had.

This is completely silly. The object of study here is the transition from a steady state to another one. To do this properly, you need to model properly the dynamics. In this case this means: 1) model properly the command economy, showing the allocation of factors across sectors, and in particular modeling technology vintages; 2) model properly the market economy the model is converging to; 3) using the initial factor allocation, show how the economy evolves on the path to the new steady state (it is not instantaneous...) as factor need to be reallocated and in particular become obsolete as the economy is exposed to foreign competition; 4) it helps to model a labor market in order to say anything about wages; 5) introduce households so that anything could be said about the welfare impact of foreign aid, which is the research question after all.

Strategic tax auditing

There is a well published on tax competition between authorities, where the object of competition are tax rates and occasionally public services. But there is another neglected aspect: competition on the thoroughness of tax auditing. This is relevant in countries where local authorities are also in charge of collecting the taxes of the central government.

Alexander Libman and Lars Feld consider the case of modern Russia and find that indeed the willingness to audit depends on the strength of the Moscow. This has two channels: the first is about where audit revenues are directed and whether audit happen in the first place. If there were no audit variations, the share of revenue going to the local government should not vary across regions. Yet, Libman and Feld find that there are systematic variations that can be explained by the power structure, in particular during the loose administration of Boris Yeltsin.

How well does the flat tax work?

The debate about introducing a flat tax regularly flares up, but rarely is it based on a serious case study. The problem is that this debate is overly politicized and camps are formed on ideological lines, not an actual evaluation of the flat tax. Yet, there is data out there, as a flat tax has been introduced in Russia in 2001 and subsequently in six other Eastern European countries.

The flat tax in Russia was quite revolutionary. It is set at 13%, and replaced a system with marginal rates of 13%, 21% and 31%. So just looking at this, tax revenue has to decrease, yet it increased massively. This is not due to a Laffer curve, but rather to a drastic reduction in tax evasion, argue Yurly Gorodnichenko, Jorge Martines-Vazquez and Klara Sabirianova. Using micro data, they find that by measuring in a micro dataset tax evasion by the gap between reported income and expenses. They attribute most of the gain in tax revenue to changes in tax compliance, not to increases in economic activity. Russia's GDP grew by 5% in 2001, nothing unusual for the period.

What does this mean for a flat tax in OECD countries? First, the efficiency gains of such a reform do not seem to be that important. Second, tax compliance is already relatively high, for example in the US, which makes the gains less important in this respect. In the case of the US, a flat tax has, however, still the merit of simplifying an incredibly complex tax system that is the bread and butter of too many accountants.

Russia wants to host the new Wall Street

In his first economic speech, new Russian president Dmitry Medvedev makes it clear that the US are at fault for the current financial market mess and that Russia will establish itself as the new financial center of the world, the ruble becoming a leading currency. Dream on.

For a financial market to truly develop, let alone become the world leader, Russia needs to straighten a few things that are currently heading exactly in the wrong direction:

1. Fix corruption. It is estimated even by Russian authorities themselves that bribes currently amount to about a third of the government's budget, and it is increasing. There is no way a financial market can efficiently function, especially if Russia claims to be regulating better that the US, if corruption is so rampant.
   
2. Stop government meddling. Foreign businesses suffer from constant harassment from the government trying to influence them. Nowhere is this more obvious than in the energy sector, where the government is trying to create anew the old monopolies by pushing foreigners out. Most large firms are now again under state supervision.
   
3. Have a consistent immigration policy. You do not build a world leading financial sector without foreign labor, especially in a sector that has no tradition in the country. Thus, deciding to suddenly refuse any work permit application does not help.
   
4. Have a workforce that is savvy in Economics and Finance. While their is now an elite that can be described as such, the fact that the general population hates anyone making a profit is not encouraging.