Saturday, November 19, 2011

Income Inequality

I saw an interesting tweet the other day, I forget by whom.  The tweet was short and to the point (not surprising).  Since I don't recall the exact words, I'll paraphrase: protesting against income INequality, or lamenting income INequality is somewhat strange since it supposes that there could ever be such a thing as income EQuality.

Could a world actually exist with pure income equality?  In other words, all income must be redistributed to others until their income is equal to yours? 

Is focusing on the concept of income equality even productive?  Would we be better off focusing on providing equal incentives for saving, investment, further income generation, equal across the entire range of income?  I think so.

Thursday, November 03, 2011

Occupy Wall Street Rolls Up (or out of) Into Greg Mankiw's Class at Harvard

The author of your textbook (for my current Macro students) is dealing with Occupy Wall Street.  See his reasonable reaction here.  Interestingly, a former student comes to the classes' defense here.

Saturday, October 29, 2011

Herman Cain's 9-9-9 Tax

How does the 999 plan affect income?  Here is the Tax Policy Center's score of the plan with respect to the tax change by cash income percentile.

Does it look fair?  Can you even interpret it?

Four Policy Mistakes

Greg Mankiw, here, outlines four countries that we do NOT want to emulate.  More specifically, we want to avoid their policy mistakes.  Some might argue that France is lovely, and the people of Japan are noble, but that does not mean their governments do not make some silly decisions.

Wednesday, October 12, 2011

Habit Audit

Keith McCullough, retweeting from Ancient Proverbs, said this on his twitter account:  "First, you make your habits.  Then your habits make you."  This quote isnpired me to examine the opportunity cost of my habits, i.e. how much I give up to engage in any particular habit. 

This isn't easy.  I don't have a readily available metric with which to measure opportunity cost.  Example: Option A: Workout for 1 hr.  Option B: Work 1 hr for $10/hr.  Opportunity cost is $10.00.  This dichotomy does not hold for most of us.  That is, your other option besides working out is probably not to go work for $10/hr somewhere.  So how do we measure opportunity cost?  You could try to guage the value of the next best thing you could do with your time.  So, if you wake up and watch an hour of Sportscenter, the opportunity cost of doing that is the most productive use of your time you can find (besides watching Sportscenter which you must feel is productive or valuable in some way).  For me, this probably involves studying or something similar that I'm not always motivated to do.

Now, the primary point here is that most of us engage in quite a few habitual activities without recognizing them as such.  This leads to an immense time and productivity drain if those habits are not productive, or not the best use of your time.

So, the Habit Audit is a way to get some control over where your resources are flowing.  How much time per day do you spend engaging in non-productive activities?  What habits could you replace with new habits, and what might be some measurable outcomes (example: an increase in your GPA)

Thursday, September 22, 2011

Who Pays More...?

Who pays more in federal income tax, your grandma the plumber/teacher of the disabled and infirm, or Warren Buffett?  Take a look at this link (from Greg Mankiw's Blog) to the Effective Federal Tax Rates based on income.

The lesson: The wealthiest pay 30.4 of their income to their government.  The middle income distribution pays 14.1.  So...billionaires already pay more than secretaries.

Saturday, September 17, 2011

Learning By Doing

Learning by Doing could refer to a particular class of models in the Macro literature, or it could just describe what humans do when they do stuff....  The last few days I've been preoccupied with the importance of, for lack of a better word, starting. 

Think of the time value of money and compounding interest.  It's important to start a retirement account as early as possible so that you can earn compounding interest over that time.  But money is not the only thing that behaves like this.  I generally expect things to be easy.  That is, because I find something conceptually easy, I often expect the details to be similarly easy; a silly assumption.  Example: planning a budget.  Seems easy, right?  It is, conceptually, but there are quite a few assumptions you have to make.  Do you count income earned in August, but paid in September as September or August income.  Not that this is too difficult, but you have to decide or things get confusing.  Also, when you project your financial positions 1, 3, or 5 years into the future, there is a bit of error.  You have to go back and plug in actual values in place of your estimations, and you have to recognize that this is what you are doing.  Again, not a complicated task, but it can make your spreadsheets look messy. 

My point is this: you may not know the optimal way to build your spreadsheet on day one, because you don't anticipate all the information you will need at future dates.  Building the optimal spreadsheet for your needs takes practice, time, and repetition.  If I had started budgeting on my 18th birthday, I would have a pretty solid understanding of how to build my optimal spreadsheet by now.

What other activities fall under this category?  Well....just about every activity a human undertakes, right?  The more complex the task, the greater the importance of starting early.  This train of thought led me to ask questions regarding where one chooses to live and economic growth.

I'm sure more rigorous thinking would lead me to abandon this line of thought, but let's entertain it.  The best way to develop expertise is to practice a specific task or occupation over and over.  The variety of tasks available for individuals to choose from is greater in urban areas than in rural.  Society's resources are optimized when every person specializes in something they have the lowest opportunity cost in pursuing (i.e., do the most valuable thing you are good at).  Growing up in a rural area limits the exposure one has to various occupations.  Consequently, one may not find that task that they have the lowest opportunity cost in doing, and thus society's resources may be allocated less than optimally.  But, does this mean we should encourage relocation to urban areas?  Does this happen naturally (small towns decline as economic opportunities decline)?  I'll leave the discussion for now, there is certainly much more to say and consider.  Readers' thoughts are encouraged.

Saturday, September 10, 2011

Social Security Fun

Here, Tabarrok outlines a couple of views on Social Security.

Person 1: Anyone who thinks SS is a Ponzi scheme is nuts.
Person 2: SS is a Ponzi scheme that WORKS!  A growing nation is the greatest Ponzi scheme ever contrived.
Person 3: SS is a Ponzi scheme...may or may not work. Tabarrok doesn't specify this person's view.
Person 4: SS is a Ponzi scheme that used to work great, now it has just gone flat and may even pay you less than you put in.

Persons 2, 3, and 4 are all Nobel Prize winners.

Oh, a Ponzi scheme is an investment scheme where people who invest initially are paid returns from money invested by other people (or their own money) not from any returns actually made through investing (think Bernie Madoff or Tom Petters (this guy dated my cousin!!)

So, is SS a Ponzi scheme?  For more info, read the links!

Wednesday, August 31, 2011

A Good Question

Russ Roberts asks a good question here.

Which is best for stimulating the economy?  1) If you have a bunch of unemployed carpenters, drop a bomb on a big city (evacuate the citizens first and put them up in rental homes), then employ the carpenters to rebuild that city.  2) Just give the unemployed carpenters the amount of money they would have earned working, but don't destroy the city.  3) Figure out why there are so many unemployed carpenters, then address that.

Many Keynesians argue that number 1 is the best idea.  Roberts, and I, disagree.

Thursday, August 18, 2011


NASA employs does Pennsylvania State University.  I'm sure this article is not an indictment of everyone working for these organizations; but, what these people are saying is stupid.

On second thought, they may have been joking, and it's the U.K.'s the Guardian that is making a fool of itself in the interest of promoting fear over global warming.

Most Econ 101 students should be able to provide one compelling reason why aliens are not likely to destroy the human race to prevent us from spreading greenhouse gasses to other planets....what would that reason be?  Go!!

Here's my guess: a race advanced enough to make interstellar travel reasonable (in terms of how long it takes to go from solar system to solar system) is probably advanced enough to have an energy source other than those that emit greenhouse gasses.  Or, they may still use such sources, but use it very efficiently.  So, rather than conduct a military operation, they might just shoot us a quick email about how to improve our energy usage (I'm assuming a race whose first instinct is to blow stuff up, including entire species and planets, probably wouldn't last long enough to achieve space flight...they might...but I doubt it.

Wednesday, August 17, 2011

How Not to Be Persuasive

...because, it makes you sound smart and thrills the multitudes of thought-hating, reason-eschewing (eschew: to shun) individuals that comprise your audience.

Joe Nacera, in his article here, accuses Obama and Conservatives of having offered no real solutions to high unemployment.  He argues that Conservatives continue to offer non-solutions based off of tax-cuts for the wealthy, despite mounds of evidence to the contrary.  For Joe, "mounds" of evidence consist of such brilliant and highly reputed sources like the Huffington Post, and The Atlantic.  One journalist with left-leaning political views citing other leftward leaning journalists does not make a strong case any more than would an academic citing only his or her own work in a paper. 

Joe should at least acknowledge that there is a certain level of corporate taxation that would push producers of goods and services from the market.  Once one admits this level exists (we may not know what it is exactly) then it follows that once beyond this level, a decrease in taxes will serve as an incentive for producers to reenter the market, and thus, lower unemployment.

What Joe should really concern himself with is whether we are beyond this level, or not.  That's where the debate is, and where contributions to that debate are useful.

Thursday, August 11, 2011

I was forced to... a cheeseburger the other day.  Don Boudreaux comments on Elizabeth Newton's stupid comments.  Some feel, often journalists, that their intellect is far enough above that of everyone else that they do not feel the need to think before they speak, or write in this case.  Newton's letter to the editor in the New York Times is an example of this.

On Defending the Profession...

When is no response to a criticism required?  Don Boudreaux opines.

Wednesday, August 10, 2011


Eugene Robinson writes in the Washington Post, here.  The thrust of Robinson's argument is that the S&P downgrade of US debt is due to Republican's threatening to not extend the debt limit.  My belief is that Robinson is using a tried and true political practice to sway the opinions of people who don't take much care in forming those opinions.  What is the tactic?  Robinson claims that a reasonable position is absurd, then argues in favor of the stupid position. 

To see what I'm talking about, look here.

Thursday, August 04, 2011

Should the U.S. Cut Retiree Benefits

Here is an enlightening article from Bob Samuelson.  Bob's first point is that the US over the past 50 years has undertaken a huge wealth transfer from working individuals to retirees.

This is unsustainable, but neither party addressed it in the recent debt negotiations; at least, it was not part of the public debate.

Wednesday, August 03, 2011

Parents' Values and Welfare

I loved Don's response.  I also loved the self-discipline he exercised in not responding to the emailer with sarcasm and disgust.  Soon, I'll post Greg Mankiw's "10 Statements that Most Economists Agree With"  But, for now, I'll just use one: people respond to incentives.

Imagine that you and your family are out of work, out of money, and nearly out of food.  Your options are to either take a job that you would never take during less trying circumstances, or apply for food stamps.  If I were given a choice between shoveling manure or collecting food stamps...I might just have a tough decision to make.  One thing we cannot deny, or ignore, is that the existence of food stamps increases the probability that we will not accept less favorable (difficult, embarrasing, etc) employment.

Wednesday, July 27, 2011

More on The Debt Crisis

I like Tyler Cowen's Post from Marginal Revolution.  I agree.

I have a friend in politics (minor politics) that I trust.  The impression I get is that both sides are done working on the debt deal.  Now, they are sitting around a table and going over the talking points that are necessary (from their perspective) to satisfy their constituents.  Both sides will come out and claim victory and present to the public why and how they defeated their opponents.  The debt deal is being revised, tiny details added, so that various members of the legislature can claim victory back at their geographical base.

This may seem obvious.  Why would anyone come out and say, "Yes, the Republican's/Democrats handed us our butts."  But most of the discussion in the blogosphere seems centered around why and whether the two parties can work together.  My guess, they already have.  Now they're just trying to solidify talking points.

Monday, July 25, 2011

Sunday, July 17, 2011

Some Thoughts on Wealth

Today, while listening to a podcast about Keynes and Hayek and their philosophical differences, some thoughts surfaced regarding the many conversations I've had in discussions (classroom, among friends, online with strangers) regarding justice, fairness, and equity in taxation.

Is our system of taxation fair?  Should the wealthy, say a married couple making 380k or greater, be taxed more because they can afford it, because they should want to help the poor, because they won the lottery, genetic or otherwise?  In short, questions usually center around how can we make society more fair, more equitable.

To answer, I like to think of the opening chapter in Greg Mankiw's undergraduate Econ textbooks.  He outlines 10 principles that the vast majority of economists agree with.  The relevant one here is that society faces a tradeoff between efficiency and equity.  An efficient economy rewards the best users of wealth (those capable of earning the greatest return on that wealth) by funneling capital to them.  This results in quite a bit of inequality.  A society focused on equality divides up wealth equally among its citizens, and any return earned that is greater than average is redistributed to equalize the citizens yet again. 

Does the equal society sound good?  There's a catch.  The totally equal society provides no incentive for anyone to put forth effort into earning a return on capital.  In other words, if you know that any profit you make will be taken if you earn an above average rate of return on your capital, then your incentive to earn that rate is reduced, or gone completely (no incentive to innovate, to cut costs, increase efficiency, etc). 

In a society completely focused on equal distribution and redistribution of capital, there is no incentive to create more capital.  The overall wealth of that society will stagnate, and over time, fall.  Politicians in both parties should be up front and admit that neither wants a totally efficient or totally equal society.  The ramifications of either would be unbearable.

Thursday, July 14, 2011

An Increasingly Common Misunderstanding

More and more often, lately, I hear people discuss wealth and income as if money is a finite resource that one can accumulate and restrict others from accessing.  Michael Moore, who I understand to be ideologically aligned with the left, argued that money is a national resource that should be controlled and distributed fairly.  During a recent Facebook discussion, someone lamented the plight of a country such as ours that allows one individual or group to accumulate great sums of wealth.

Moore’s explicit statement, and the Facebook discussant’s implication, is that wealth is something that can be horded, or accumulated, and once one does so, the effect of that money is removed from the economy, as if it no longer exists.

Why is this wrong?  Money is not some finite resource that must either go to citizen A, or citizen B, and once B possesses the money, A can not gain access to it.  Moore and FBGuy’s interpretation would have it so.  They might have a point, if B took vast sums of dollar bills and set them on fire, or put them under the bed.  But no reasonable person would allow their wealth to deteriorate (b/c of inflation) by holding money in bills under the bed. 

In short, money is constantly being created.  Person A may accumulate wealth, but that wealth is held in assets such as stocks, bonds, treasuries, or it is put in the bank.  Banks then lend out a portion of that money to individuals, person B for instance, who then find a good use for it (earning yet more money from a business, perhaps).  Person B then puts that money into stocks, bonds, treasuries, and a bank.  That bank then….and so on. 

This narrative conflicts with Moore’s and FBGuy’s views.  Money cannot be horded by wealthy individuals (unless they are fools, and typically they aren’t or they wouldn’t be wealthy) because they put their money in the form of assets that maintain value (stocks, bonds, interest bearing assets, interest paying bank accounts).  That money then funds corporations that conduct business (and hence pay employees), finances government spending (which often goes to helping those with low income), and allows banks to lend money to those who would like to purchase a home, car, vacation, or open a new business.

Even if wealthy individuals were as evil as some make them out to be, they would have no choice but to indirectly help those less fortunate than them by investing in assets and bank accounts that maintain the value of their wealth.

Wednesday, July 13, 2011

Increasing Taxes on the Wealthy Not A Panacea (Part II)

At the end of my previous post, I asked what should be taxed instead of luxury goods or services.  If a tax must be levied on a population (for whatever reason), ideally, it will be efficient.  That is, the tax will cause the least amount of deadweight loss (foregone economic activity) in society.  Generally, the most efficient tax is a lump-sum tax.  Why?  Look at what a lump-sum tax does to your incentive to purchase goods and services.  Can you avoid the tax?  No.  Does the tax make you substitute away from one good towards another?  No.  So, none of society’s resources are devoted to avoiding the tax.  You just pay it because you exist.

Margaret Thatcher toyed with implementing a “Head Tax” in Britain during the 1970’s.  It was met with strong resistance.  People found the idea of being taxed for literally having a head repugnant.  But, the tax was efficient, it would have caused the least amount of damage to society (did not distort incentives, did not cause deadweight loss) when compared to other taxes.  

Is there anything like the “Head Tax” in the United States?  Well…not exactly.  But, we do have an income tax.  While we do not get taxed for being alive, we do get taxed for trying to make that life enjoyable and not poverty-ridden.  However, as I’ll explain later, we still get a bit of deadweight loss associated even with an income tax, especially at higher levels of income.  

Tuesday, July 12, 2011

Increasing Taxes on the Wealthy Not A Panacea (Part I)

Public opinion is often in favor of increasing taxes on the wealthiest in society in order to, among other reasons, reduce government budget deficits, finance subsidies and transfer payments to the poor, and fund various public works programs.  Economists who oppose such increases are often painted in a harsh light and characterized as friends of special interests (Wall Street, particular industries, and perhaps even Republicans).  But, there are some fundamental economic principles at work that cause most economists to remain wary of looking to tax increases on the rich as a panacea for debt, reducing inequality, and public works funding.

A simple, often used, example of a justifiable tax on the rich is the imposition of a luxury tax on the purchase of yachts.  The justification is simple: if you can afford to buy a yacht, you can afford a 10% luxury tax.  The proceeds of the tax will then go to help the poor who can barely afford basic food staples, let alone a yacht.  Who would oppose such a tax?  Well, perhaps no one, not even the rich.  The problem: wealthy people do not have to purchase yachts.  Luxury items are easily foregone.  The wealthy, when faced with a 10% increase in the price of their luxury item, can easily forego the purchase of a yacht and instead will purchase some other luxurious item such as expensive vacations, more days off of work, nicer vehicles, jewelry, etc.  If the wealthy do this, substitute away from yachts in favor of some other luxury good, what will be the effect on the amount of revenue the government raises from the luxury tax on yachts?  The simple answer is that they will earn less than forecast.  Should this bother policymakers?  There is still some revenue coming in from individuals that could not live without a yacht, so why worry about it?  We should worry about it because of the amount of deadweight loss this causes in an economy. 

Deadweight loss is the amount of economic activity wiped out of an economy due to the imposition of a tax.  It is a measure of the inefficiency of a tax when compared to that most efficient of taxes, the lump-sum tax (a topic for later).  We know that the more easily someone can substitute away from the taxed item, the greater is the deadweight loss to society (the more inefficient the tax).  The wealthy are particularly good at finding the greatest use of their dollars (there are some exceptions of course, like some heirs and heiresses) and they also have the opportunity to substitute away from the taxed item due to the level of resources at their command.  Thus, luxury taxes often result in less revenue generation than predicted, result in relatively large deadweight losses (great inefficiency), and end up hurting the companies and labor involved in providing the good or service that is taxed.

What should be taxed instead?  There are still plenty of questions to ask, and answer, regarding this topic, which I will post on soon.