No need to ban incandescent lightbulbs

It is sometimes difficult for a shopper to understand all the consequences of purchasing choices. Take lightbulbs, for example. The variety in price is large, and so is the variety in expected life or energy consumption. When more efficient lightbulbs came on the market, they were massively more expensive than existing bulbs, yet in the long run worth it thanks to much lower energy consumption. Consumers did not seem to understand that, along with what this entails for pollution, hence the old bulbs were banned. Was this really necessary?

Hunt Allcott and Dmitry Taubinsky exploit two randomized experiments to look into this. The first is computer based and gives participants a budget and different information about lightbulbs. The second is a field experiment at a home improvement retailer where shoppers where given different information and discount coupons. They find that people do not undervalue energy costs that much, meaning that only minor, if any, subsidies were necessary to win them for next-generation lightbulbs. Once more, it looks like a ban is outdone by the nudging that the price mechanism can do with appropriate subsidies or taxes. They also find that there is a large fraction of shoppers that wants to stick with incandescent lightbulbs, indicating a substantial welfare loss from a ban that is similar to standard rationing. One more piece of evidence that bans need to be banned.

Paid maternity leaves are regressive

Quite a few countries guarantee paid leaves for new mothers that not only allow them to get back the same job they left, but also gives them the financial wiggle-room to well take care of their new offspring. This time at home without worries is good both for the mother and the child, although one can suspect that this time off work can have adverse implication on human capital and the future career path for the mother. Paid maternity leaves are also often promoted as a way to conduct social policy across all social strata, as they apply to everyone.

Not so fast, say Gordon Dahl, Katrin Løken, Magne Mogstad and Kari Vea Salvanes. They look at Norwegian data, where the paid leave was increased from 18 to 35 weeks between 1987 and 1992. As it did not crowd out unpaid leave and expanded the time spent at home for the mothers, we should see some positive effects on child development in the country. None of that seems to have happened, not even on parental earnings, labor market participation, fertility, marriage and divorce. So it seems to be a rather useless reform. Worse, this expansion redistributed resources the wrong way. Indeed, in the absence of crowding out unpaid leaves, the reform corresponds to a pure leisure transfer to upper and middle income families (lower income families tend to have fewer working mothers in Norway). The reform is thus regressive. And we have not mentioned that there are obvious costs to someone for paying mothers while they do not work.

Do clean-car subsidies disguise protectionism?

The US has complained for decades that Japan is making it difficult for American companies to export cars there. The complaints were about regulation, prices, and subsidies. Japan has had a rather easy time dismissing these complaints with the mere fact that US car companies are very reluctant to build right-hand driven cars, which are required for driving on the left side of the road in Japan. The latest US complaint is about subsidies for clean cars, which again are supposed to favor Japanese cars. I would answer that the US could maybe build cleaner cars, but let us have another look at the issue.

Taiju Kitano studies the current Japanese subsidies and the American proposal on how the subsidies should be structured. The subsidy is for scrapping old cars for replacement by fuel-efficient ones. At issue is the method for determining which fuel-efficient cars qualify. Japan has its own method for setting fuel efficiency, but this is not calculated for cars with low production or imports, like US models. That disqualifies them for the subsidy. Later, foreign ratings have been accepted for qualification, but the US complained that its city-driving standard is used, while a city/highway combination were more appropriate. Japan claims its standard is close to the city standard in the US.

The use is not solely about calculation of fuel-efficiency standards, it also about potential market shares. Kitano thus estimates an oligopolistic model to determine demands in each market and thus demanded quantities under different policies. If the goal is to improve overall fuel efficiency, both policies score equivalently. The US one would be, however, much cheaper because new cars become eligible and they substitute for cars that command larger subsidies. The US is thus mainly helping Japan reduce its expenses, while having no impact on pollution or even a positive one on profits of Japanese car makers.

Why is the agricultural sector still protected in the US?

While most industrialized economies are strong advocates for free trade, they somehow manage to make an exception for the agricultural sector. I cannot think of one country that would not subsidize its farms in some major way and this despite the facts that we are far from witnessing a food shortage and that the agricultural sector by now constitutes a voting block that can safely be called small. So why do elected official keep pandering to farmers?

Marc Bellemare and Nicholas Carnes look at this question in the case of the United States. Using roll call votes from the US Congress and congress member ratings by the Farm Bureau, they find that electoral incentives in fact still do matter, while personal preferences and lobbying are less important. Could it be that the median voter is a farmer? I do not think this is what the paper is saying. Indeed, the variable "electoral incentive" is based on the proportion of the electorate that works in the agricultural sector. But it is above half, or approaching this, in few districts. In fact, Bellemare and Carnes restrict the variable to farm owners and managers, who are the ones really benefiting from the subsidies, and they comprise a tiny portion of the electorate in every district. (Of course, this measure is correlated with the total farm population.) For this influence of such a minority to still carry the vote, it must be that there is still lobbying going on, and of the sort that is not captured by the agricultural political actions committees that the authors use to control for lobbying. Maybe individual donations? Somehow, it always boils down to lobbying in the United States.

Do we want to curtail internal tax competition?

I mentioned only a couple of days ago that tax credits for economic development do not work. Yet, politicians cannot help it to grant such credits, in part because they want to show they are doing something to help the economy, and in part because they genuinely think it works. And obviously, they do not take into account that other politicians do the same thing, and thus a competition emerges that gives away more and more tax credits for no local gain and certainly no aggregate gain. How could this vicious circle be broken?

Timothy Hubbard and Justin Svec have a proposal. The idea is that these tax credits create a negative externality on other jurisdictions. Thus one could apply the same strategy as for pollution, where a limited number of pollution permits are sold or distributed (the former being the preferred way). Here politicians would have tax credit permits, which they could trade as well. The Federal government would provide these permits and could even determine a socially efficient number of them. Next: name-calling permits for bloggers.

Tax credits for economic development do not work

Every government, from the most local to the national one, touts its success in attracting business and creating jobs through well targeted tax credits. The latter obviously come at a cost, but that is supposed to be well-compensated by new tax revenue from increased income in the particular jurisdiction. Or so these public officials think.

Luc Behaghel, Adrien Lorenceau and Simon Quantin study the French tax credit initiatives that were supposed to bring more economic activity in some rather deserted rural areas. These tax credits were implemented in various ways across time and firms, which allows to estimate their impact. And no way which way you look at the data, there is nothing to be found. That is pretty bad. In they had found an impact, one could have discussed whether it was large enough to generate increased public revenue to fund the tax credits. But there is none of that. Pure waste.

How to encourage research into neglected diseases

There a few things that infuriate me about the pharmaceutical industry: the obscene returns on investment it gets, how it games the patent system, and how it neglects some important infectious diseases. But the pharmaceutical companies just respond to a poor institutional setup, where patents are too generously given and governments favor them too much compared to consumers (and the government itself, as in the USA). As for neglected diseases there is simply no money to be made as these are limited to poor developing countries.

Frank Müller-Langer studies how the discovery and provision of drug preventing and treating currently neglected infectious diseases could be improved. He distinguishes push and pull subsidies. Push programs are those that subsidizes the inputs, such as lab equipment or manpower. Pull programs subsidize results. The question is what to use. Basic research should quite obviously be helped with push programs. This is typically done in an academic environment where rewards come from publication, all you need is the means to conduct research, the will is there. The next phase, development and implementation, should more be helped with pull programs. Incentivizing results is more important there and could lead to surprises. I am thinking here, in a very different context, about the Ansari X Prize that rewarded with $10 million the first non-governmental organization to successfully launch a space shuttle. The prize seemed low compared to the costs, yet 26 organizations participated. Something similar should work for malaria, yellow fever, etc.

Air conditioners on the rebound

The various cash for clunkers programs during the last recession had two objectives in mind: create aggregate demand (or shift it from good to bad times) and improve the stock of capital. In the case of cars, it was expected that this would lower pollution. Other programs outside of recessions have had the same goal, for example subsidies to replace light bulbs or appliances for more energy efficient ones. But it does not always work out as expected.

Lucas Davis, Alan Fuchs and Paul Gertler look at a recent and large appliance renewal initiative in Mexico. A staggering 1.5 million households changed their refrigerator or air condition units for better ones, with again the goal of reducing electricity consumption. But it seems to have backfired for the AC units. Indeed, they seem to have been so much more efficient that people feel less guilty of running them, increasing the total energy consumption in the process. This is called the rebound effect, which has already been discussed here. And once again, nothing beats taxing energy use instead of subsidizing alternative energy, or alternative energy uses.

When is the US going to reach its fiscal limit?

Most western economies currently show large public deficits. Whether they are sustainable is subject to much debate, and if they are not there is also much debate when action should be taken, and how radical it should be. One important part of the debate is the measurement of public deficits and debt, which makes any discussion of possible scenarios difficult. And these scenarios have to make heroic assumptions about the future evolution of the economy, which may in fact be endogenous to policy. All this is very complicated, and pundits do not help at all in this.

Richard Evans, Laurence Kotlikoff and Kerk Phillips take a different approach. Take the current policies, assume they persist forever. Calculate the fiscal gap, that is, the tax rate required to balance the current debt plus the sum of discounted future non-interest liabilities less future taxes. Feed this into a DSGE model and see when it violates feasibility (when the current generation has incomes lower than the tax necessary to close the fiscal gap. In their simulations, it takes a century for the US economy to reach its fiscal limit, although there is a 35% chance this could happen within 30 years. This results fits well within Kotlikoff's decade-old message that every economy is on an unsustainable fiscal path, message he repeats on his platform as a candidate for the US presidency.

Getting back to the model at hand, I do not quite understand the result. To me, this implies that there is somewhere a dynamic inefficiency, or some transversality constraint is being violated. But I do not see where this would happen in the model economy. There is a lump sum transfer from the young to the old in each generation that corresponds to 32% of wage income. To it corresponds a promise for future transfers that may be more difficult to satisfy were the economy to be hit by adverse shocks. Thus, it seems difficulties arise accidentally when the economy is hit by a series of bad shocks and continues forging ahead without any adjustment. That seems unlikely to me.

How to design public block and matching grants

In most countries, there are three levels of government: national, regional and local. In Europe, there is even a fourth one, the European Union. In many instances, higher level authorities provide funds to lower levels, either through block grants (allocations for a general purpose) or matching grants (allocations that requires matching funds from the grantee). How this should occur is not well studied, especially when one considers that these funds can be used to build local public capital.

Heng-Fu Zou makes an attempt at this, with a cascading Stackelberg structure from national to regional and local governments. I do not want to mention the conclusions, though, because I think the paper is fundamentally flawed. The most interesting aspects of the problem are bypassed here: first, there is a strong redistributive aspect to block grants, hence taxation need to be part of the model, but it is only modeled as a fix lump sum payment here. Second, the very reason why there are block grant for specific purposes instead on general grants is that lower governments may be tempted to put it all in public consumption. That variable is absent from the model, everything flows into public capital.

Third, the utility function is assumed to be log-linear in all public capital and expenditures individually. This implies that all of them are essential (a government can for example not take over responsibilities from another) and in particular that private consumption or investment is completely useless. As a consequence, it is always good to increases taxes, no matter their current level. Other results also derive directly from this assumption about the utility function. Fourth, the matching grant is so poorly set up that it allows the author to claim in all seriousness that capital can go instantly to infinity if the higher authority matches at 100% the local investment. Fifth, capital does not depreciate, which matters immensely when you write about the long run. Etc.

Interesting question, horrible execution.

Should small businesses be encouraged?

Small businesses are thought to be rather inefficient because of fix and because of other issues that hamper the exploitation of increasing returns to scale in their size range. Yet, policies keep popping up that try to protect them. Why? Is it nostalgia, throwing us back to times were "better?" Or do we want to protect (inefficient) employment? Even this may be moot according to a previous post.

Ben Craig, William Jackson, and James Thomson claim that small businesses should be encourage because they have an inherent disadvantage on credit markets: there are information problems, more acute in downturns, that make access to credit more difficult for small businesses. Thus, it is good for a government agency to provide loan guarantees. Still, this does not address why we would want to have small businesses in the first place. If inefficient firms are getting rationed on credit markets, I am fine with that.

Progesa: a success story thanks to academics

I have written a few times about the frustration when policy makers ignore the advice of economists. Yet, there are a few cases where economists were given free reign over the design of policy interventions, which not only allowed to obtain positive outcomes but also useful information for further study.

Nora Lustig reports about Progresa, the Mexican cash transfers program designed to elicit parents to send their kids to school and make sure necessary health check-ups were attended. From the start, the program was designed and administrated by people with an academic background. Progresa has worked remarkably well, to the point that it was not only not scrapped, as is usual, with presidential changes, its coverage also kept increasing. The only setback was a name change to Oportunidades. The critical ingredient to this success was the scholarly involvement, that not only designed it for success, but also provided the tools to measure this. And along with that a wealth of data that has allowed to understand even better what makes good intervention in practice.

Should we encourage business ownership?

Politicians claim left and right that small business owners are critical to the success of an economy. They woo them with various tax credits and by turning a blind eye to their opportunities to hide income from taxation. Yet, politicians also rewards large companies with generous tax abatements, especially when the relocate or just promise not to move away. So, in the end, who should be encouraged. the small business owner or the big conglomerate? In part, this is a question about whether it is better to have many self-employed workers or many employed workers.

Mirjam van Praag and André van Stel address this question by trying to determine the optimal business ownership from a sample of 19 OECD countries over 26 years. They proceed by estimating a Cobb-Douglas production function augmented with a business ownership rate, its square, tertiary education, as well as interactions of the latter with the formers. This is not a production function that has an interpretation for factor shares, it is rather a test of some relationships in the data. And by the implied non-linearity, it allows to computed from the regression coefficients what the optimal business ownership rate would be. On average, it is 12.5%, which is definitely not high, and it declines over time.

Furthermore, van Praag and van Stel find that countries with a higher proportion of workers with tertiary education enjoy a lower optimal business ownership rate, converging towards 11% when everyone has a university education (no gravediggers?). The interpretation they offer is that better educated people run larger firms. As business owners are a minority in a developed economy anyway and only the top business owners really matter for economic performance, I am not quite convinced by this argument, but it is apparently supported by microeconomic evidence. I would have rather thought that a more educated workforce is more specialized, and under such circumstances it is more difficult to be a business owner. The only exception are start-ups, which then either fails or are gobbled up by a larger firm.

Does it make sense to subsidize biofuels?

Ina relatively short time, biofuels have become remarkably popular, especially as an additive to regular petroleum based fuel. This is at least in part due to massive subsidies from the US to fuel and corn producers. As biofuels compete with food, this has lead to major price increases for corn and sugar, with adverse consequences for importing countries. This begs the question: is it actually a good idea to subsidize biofuels? I mentioned previously that it is preferable to tax other energy products rather than subsidize alternative energies (1, 2), but let us revisit this issue.

Subhayu Bandyopadhyay, Sumon Bhaumik and Howard Wall use a general equilibrium trade model and confirm that if there is a Pigovian tax on conventional fuels, subsidies are not needed. But if the Pigovian tax is not available or too low (as is the case in the US), then a subsidy for biofuels makes sense, But if the country in question is large, there are other implications through increased worldwide demand for food. In that case, a food exporter wants to subsidize biofuels and tax conventional fuels. A food importing country would only want to subsidize biofuels if the pollution reduction effect is large enough.

Hector Nuñez, Hayri Önal, Madhu Khanna, Xiaoguang Chen and Haixiao Huang look more specifically at the interaction of policies in the US and Brazil, the two largest producers of biofuels. Indeed, the US imposes a special tariff on the importation of biofuels, in particular the more advanced sugarcane based one from Brazil. Brazil is also the largest producer and exporter of beef. The paper uses a multi-country, multi-good model, unfortunately with a partial equilibrium, but it takes into account possible crop rotations and different categories of land. It concludes that eliminating the tariffs would significantly reduce biofuel production in the US, with the latter importing biofuels from Brazil and exporting corn. While this reduces producer welfare compared to the status quo, it increases consumer welfare. Given the political system in the US, guess what will happen.

Transfers to mothers may hurt children

It is conventional wisdom in policy circles that if you want a policy intervention to benefit children, transfers have to be paid out explicitly to the mother. The understanding is that mothers care more about their children than men, and thus are more likely to use the funds for them, directly or indirectly. There is really not reason to this backfire, but as two recent papers show, it can, in fact.

Matthias Doepke and Michèle Tertilt build a series of non-cooperative bargaining models of the household and show that things can go wrong with targeted transfers or women empowerment in general. Indeed, for transfers to have an impact on the intra-household allocation of public goods, there needs to be some kind on friction. The specifics of this friction have a large impact. For example, if women are hard-wired to prefer spending on children, then transfers targeted to them may lead to over-spending on children and under-spending on other public goods that also benefit children (say, shelter), reducing child welfare. Or: if the difference between men and women is in the market wage, women will naturally tends to more time intensive activities in the household, such as child rearing. Empowering women leads them to spend less time at home, hurting the children. If empowerment implies that women have access to more private goods (such as bars or entertainment), they will focus less on public goods that also benefit children. While these examples seem a bit convoluted, they highlight that things are not so simple.

Olivier Bargain and Olivier Donni show in another series of models with altruistic parents that targeted transfers may not work as well as targeted price subsidies. They demonstrate that price subsidies have an income effect and a substitution effect, something we teach undergraduates. But they reinterpret the substitution effect as a "targeting effect." Naturally, transfers only lead to an income effect. Thus subsidies are better at improving children welfare, but they are more expensive as they apply to everyone. So it all depends on elasticities, and depending on the situation, transfers or price subsidies could be preferred.

Does hosting Olympic Games matter after all?

Is seems to be common knowledge that attracting big sports events is good for business and especially tourism. I have never found this argument particularly compelling, after all it is mostly local residents who attend such events. And previous research I reported on gives me right: in the case of the Atlanta Olympics, the impact was very short-lived and limited to the tourism industry. But maybe there is more and better evidence.

Markus Brückner and Evi Pappa take a different approach form the traditional impact study: they look at macroeconomic aggregates and focus on the anticipatory effect during the bidding process for the Olympic Games. The fact that a country is bidding gives people an indication that aggregate demand may increase in the future, especially if the country is selected into the last set of candidates. This anticipation can increase economic activity right now. Brückner and Pappa study a panel of 184 countries over 57 years. They find higher GDP growth during the five years before hosting, peaking at four years when the next host is announced. As expected, the impact fades quickly for unsuccessful bidders. And results are robust for World Exhibitions, but strangely reversed for Football World Cups. In all that, I wonder whether bidding for such large events is in fact exogenous. Indeed, you only want to bid if you have a healthy economy, especially if the event is large like the Olympic Games.

Paying farmers for landscaping

Switzerland has had for centuries a rather unique system of communal land tenure for the alpine areas. Indeed, cattle owners send their livestock up from the villages for the Summer season, and these grazing areas are commonly owned and rights to them are inherited. The returns of agriculture in the mountainous areas are, however, far from competitive in this era of globalization, and Switzerland has resorted to compensating farmers for keeping the cows up there. The reason is that cows and some other farming bring landscaping benefits, for example keeping the grass short improves snow management for avalanche prevention and skiing, or preserves biodiversity and prevents invasive plants to take foothold. These direct payments are very close to making farmers civil servants. Note that payments depend on the size of the farm, its location, the treatment of animals and the general ecological friendliness of the business.

A pair of recent papers analyze the new situation for farmers in the Swiss Alps. Chiara Calabrese and Gabriele Mack used an agent-based model to study how incomes of a large number of heterogeneous livestock farmer families would evolve until 2020. Different scenarios are explored (a not described status quo, more subsidy for summered livestock and lump sum subsidy to all alpine farmers proportional to farmed area). Results are not unexpected (no change, more summered livestock and income, less of both). Prices are assumed to grow at a steady rate unknown to reader. Give the recent wide fluctuations for food, that needs to be made more explicit and additional scenarios are needed. Also, this study basically assumes that the government does not face a budget constraint and will always be willing whatever it takes to maintain a policy. At least the costs of the program should be reported.

The other study by Nadja El Benni, Stefan Mann and Bernard Lehmann looks at how these direct payments to farmers influence the distribution of incomes. Due to the terrain, farms are small almost everywhere in the country, and Gini coefficients for farmer income have been rather low compared to other countries. The new policy increased the Gini coefficients even though the payments were implemented in part to redistribute income and they constitute now 79% of a farmers income. The reason is that the disparities in market income have increased tremendously and direct payments are tied to farm size after all.

How not to encourage home ownership

Many governments try to encourage home ownerships by various means. I am not convinced this needs encouraging, as it leads to over-acucmulation of residential capital. Additionally, it is a myth that home ownners are happier and better citizens, as I reported previously. But suppose, for a moment, that a government really wants to increase the home ownership rate. How could this be best achieved. Two recent papers look at this.

First, Emre Ergungor compares mortgage interest subsidies to mortgage down-payment subsidies, and finds the latter work better. It is clear that down-payments are a significant hurdle for first time home buyers, and the recent crisis has at least partly been attributed to too easy down-payments, so one needs to be careful with this result. This is why Ergungor looks at loan performance for low to middle incomes. He finds that a one percent interest reduction is equivalent to a $3200 down-payment subsidy in that it leads to a 75 point reduction in default rates, and the latter is much cheaper to implement.

Second, Christian Hilber and Tracy Turner make the point that the tax deduction of mortgage interest makes mortgages more affordable but also raises house values. So in the end who benefits? Apparently only higher incomes in markets with few regulations. Hilber and Turner do not try to explain why this would happen, but I suppose this has to do with the high marginal rates on tax expenditures for high incomes, although I cannot explain the regulatory impact. In any case, there is more evidence that this type of subsidy should be abandoned.

How to raise government revenue: tax bling bling, but subsidize hip hop?

Lost in the debate on how governments could be raising much needed revenue in our difficult times is that there are some goods that are just begging to be taxed: diamond goods. These goods are valued solely because they are expensive. The money spent on these goods is independent of their price. Thus taxing them all the way to infinity makes them even more attractive, as very little of the diamond good needs to be produced for the same satisfaction. Thus, everybody should agree diamond goods must be taxed heavily: the buyers because of the prestige of the high sticker price, the others for the tax revenue.

Per Engström adds a little nuance to this argument. Suppose there is a strong complement to the diamond good, like hip hop music is a strong complement to bling bling. As the diamond good constitutes a free lunch for the social planner, the latter would want to subsidize it. But that beats the purpose of taxation. However, one can subsidize the complement, which encourages the consumption of the diamond good.

Engström mentions other pairs of goods. Entry to the Sex and the City should be free and designer shoes should be taxed to the hilt. The same for James Bond movies and champagne. Any other examples?

Free university does not improve achievement equality

There are a lot of notions floating among education professionals that are actually wrong, and this has done a lot of harm as to how policies are set and how budgets are spent. The prime examples are that every classroom needs a computer, that smaller class sizes are better, or that the poor benefit more than the rich from subsidized college education. In the latter case, the underlying issue is that rich kids tend to get education for a much longer time than poor ones, and thus they benefit more from the subsidy, even after accounting for the taxes their parents pay. But would free college tuition at least enhance the accessibility of college for poor families.

Not even, claims Kevin Denny, who uses a natural experiment in Ireland, where university tuition was abolished in 1996. The explicit goal of the policy was to create more equality in access to university. Its consequence, though, to remove the small advantage lower incomes had, as they enjoyed asset-tested education grants that were abolished. In other words, the big winner was the middle class. The real equality of access problem originates much earlier than at entry into university. Lower class children have much weaker achievements in school, They need support all the way to pre-school, not university.