Bastiat’s Bastions

The L.A. Times reports some of the problems with the new homeowner $8000 tax credit in this story.  Besides fresh ground for tax cheats to exploit, this tax credit may not be worth getting.

In my introductory economics class, we just finished looking at how taxes get passed forward to buyers in higher prices or back to the sellers in reduced prices received.  What we saw in class was that if the buyers faced few alternatives, while the sellers had many, most of the tax gets paid for by the buyer in the form of a higher price.  If the sellers have few alternatives, but the buyers have many, the sellers pay most of the tax in terms of a lower received price, while the buyers pay only a little more than the original price. 

Of course, if the government subsidizes buyers in a market instead of taxing them, the same thing happens, but in reverse.  Subsidies are only negative taxes, so a subsidy to buyers in a market just raises the amount the buyers are willing to pay to the sellers.  Consider the $8000 tax credit to home buyers.  This tax credit merely raises the amount buyers will pay to sellers.  And since the buyers have many alternatives while the sellers, often facing foreclosures, have few alternatives but to sell, have few alternatives but to sell, the price the buyers pay ends up rising almost by the amount of the tax credit.  Few new homes are being built in response to the tax credits.  So mostly, the tax credit for buyers boosts the prices received by those facing losing their homes in a foreclosure, where only the bank receives the money. 

So those considering buying a home before the December 1st deadline because of the tax credit should probably think twice.  Most of the tax credit will go to the sellers. 

But even if some of it goes to the buyers, shouldn’t it be worth the buyer’s effort?  The answer is maybe, but  maybe not.  One provision of the tax credit is that the buyer has to live in the home at least three years, or the buyer must repay half of the tax credit, or $4000.  If the buyer faces the possibility of losing her home, facing repayment of $4000, while having to pay $7000 more for a house and getting an $8000 tax credit may not be that good of a deal.   

-MC

Was it Yogi Berra that said “I’m having deja-vu all over again”?

Back in October of 2006, I was rather peeved at listening to the morons on TV talk about how “clutch” Derek Jeter was. Later, they maligned Alex Rodriguez, and how “un-clutch” he was. I objected at the time, and wrote a post, which you you can read here. Take a look before you continue.

The point there is the same point here – it is difficult to make inferences based on small samples. A few post season games and a couple dozen at bats are indeed a small sample. If you flip a coin 12 times, sometimes it comes up 8 heads, even if the coin is “fair”. Sometimes heads comes up 4 times in a row.

Part of my motivation then (and now) is that I rather dislike Jeter — he gets a bit too much love from the media in my opinion. And part of my motivation then (and now) is that I think A-Rod gets too little love from the media. But so that you know that “fair is fair”, I’d like to revisit the issue again. After the recent “clutch” performance, I am equally peeved that the same morons are now calling Alex Rodriguez a “clutch” player!

The announcers on Fox clearly missed my original post. Might they suggest that whomever is “hot” now is “clutch” and forget that this same person was not “clutch” before? Is A-Rod a better player now in the post-season? Or is it simply random variation? I’ll go with the latter.

As I wrote before:

We could all disagree about exactly what is meant by “clutch”. Perhaps late in close games? Bottom of the ninth? Or simply in the playoffs? But even if we settle this disagreement, it is still very difficult to tell who is a clutch player, because by the nature of these situations, there are very few “clutch” situations during a season (or even a career).

…

Dr. Jahn Hakes and Dr. Skip Sauer (both economists at Clemson while I was in graduate school) have done some work on identifying clutch hitting in major league baseball. For an example of their work, click here. What do they find? They cannot find statistical evidence of persistently clutch hitters.

…

Why is that a couple of sports nuts economists, armed with PhDs from top schools, years of play by play data, and tons of computing power can’t find evidence of consistent clutch hitting, but the talking heads on Fox know it? Hmmmn.

I suggested in that old post, that if you like this type of stuff, read a book called Moneyball by Michael Lewis. It’s about how the GM of the Oakland A’s (Billy Beane) listened to scouts (announcers?) less and started doing more statistical analysis in drafting baseball players. The A’s have been quite successful despite their relatively low payroll. It’s an awesome book for someone interested in baseball, statistics, economics, or even business in general.

And for you amusement, I provide you two more tidbits.

Tidbit #1:

For those of you who don’t like baseball statistics, OPS is a measure that is pretty much the gold standard for measuring the productivity of hitters. OPS = On base % + Slugging %. The bigger the number, the better the player.

Jeter’s career regular season OPS = 0.847
Jeter’s career post-season OPS = 0.858

A Rod’s career regular season OPS = 0.965
A Rod’s career post-season OPS = 0.977

Uncanny, isn’t it? That difference (about 0.012 in both cases) is roughly one additional single per every 100 at bats! Quite a difference, eh?

Tidbit #2:

I have taken the worst 15 game stretch of Jeter’s post-season career and the worst 15 game stretch of A-Rod’s career and added up the stats. Can you tell which is which?

A: 15 games, 0.167 BA, 0.470 OPS, 0 SB, 5 R, 1 HR, 4 RBI
B: 15 games, 0.119 BA, 0.445 OPS, 1 SB, 3 R, 0 HR, 0 RBI

Neither one is pretty — which is the point! Prediction: A-Rod has a ho-hum World Series.

–CT

Player A is Jeter, Player B is A-Rod. But nobody ever told you about the ugly stretch for Jeter, eh? It started in the ALDS in 2001 and ends after game 7 of the 2001 World Series. Are they really so far apart?

With the mapping of the human genome, it isn’t difficult to conceive of the day when we might diagnose mere embryos with congenital diseases or unhealthy predispositions.  Such power creates a dilemma: Would it be a better world if couples were to simultaneously create multiple embryos (through in vitro fertilization of stored eggs and sperm) and allow for the genome of each embryo to be mapped for selection purposes.  Coupled with a better understanding of the genetic sources of congenital disease, such a system of embryonic sampling would allow couples to put their better genes forward in virtually every pregnancy.  The result would be a healthier lot of babies and parents.  Diseases such as autism often place an irrevocable strain upon affected families, as evidenced by the exceptionally high divorce rate among parents of autistic children.  If it became a medical possibility, many parents would likely value the ability to identify and unselect “pre-autistic” embryos among a larger set of embryos. 

Of course, embryonic sampling based on DNA mapping would, by design, lead to large-scale abortion.  However, large-scale abortion already occurs in the case of in vitro fertilization.  In the current procedure, doctors select the best embryo or set of embryos based on such factors as cell count and symmetry of growth and discard the others.  Embryonic sampling based on DNA mapping, should it become viable, would not be any sort of modern eugenics project.  Couples would still choose with whom they wish to combine their DNA.  Embryonic sampling would merely allow them the option of a better expected expression of that combination.

-SS

Some months ago I was asked to find someone who could determine the feasibility of a device reinvented by a local fisherman.   The machine was an alternator driven by a bicycle that charged a car battery bicycle.  An electric motor hooked up to the battery turned the wheel of the bicycle.

The claim was that the device produced electricity.  Of course, it produced a charge, but used more energy than it produced—a perpetual motion machine.  Such machines have been invented and reinvented for hundreds of years.  And well-meaning garage inventors reinvent perpetual motion devices with every up-tick in energy prices.   But physics triumphs and we know that the law of conservation of energy and matter still rules.  Only part of the energy from the battery gets converted to work, with the rest being converted into friction and heat.  Energy is not created out of nothing.

In trying to reinvent the health care delivery system, Senator Baucus seems to have invented a perpetual financing device , but one that will only push up prices and inhibit real innovation.  What Senator Baucus wants to do is to tax the very providers of health devices, such as heart stents, artificial hips, and diagnostic machines in order to help pay for the new health care system that the federal government is reinventing.

There is a slight problem with all of this.  Taxes collected from businesses are only partly paid by the producers, with the rest of the tax paid by the buyers in the form of higher prices.  The easier sellers can move to something not taxed to sell, the more the tax gets passed along to buyers.  The more these taxed items are covered by insurance, by other people paying the bill, the more the tax gets passed along to the buyers.  If buyers have many non-taxed alternatives and find it easier to switch to them than the sellers can switch to non-taxed goods to sell, then less of the tax gets passed to buyers and the sellers will have to pay more of the tax.  Of course, if sellers find switching easier than buyers, the taxed gets passed on to the buyers.  In other words, the side of the market that can avoid the tax the easiest by switching what they have been doing will be the side that contributes less to paying the tax.

With medical devices, it is very likely that the sellers find it easier to go from making wheel chairs to making non-taxed items than wheel chair users can switch to some non-taxed item.  Still, to the extent that the tax is borne by sellers, it reduces profits in these industries and reduces innovation as well.

What looks like will happen with this financing plan is that the tax will be passed along to buyers including Medicaire and insurance, who will raise taxes and raise premiums to pay for the higher priced devices which will lead to higher prices for the medical devices, higher premiums and higher taxes.  Of course, after a while, the increasing out-of-pocket expenses reduce purchases along the way.

This financing scheme looks as if it were designed by the same guy who hooked up a car battery to an electric motor, a bicycle and an alternator.  The problem is that both of these end up coming to halt and are unsustainable schemes.  Genius at work?  Not!

-MC