I like the Daily Comet editorial page…

And yet I am fickle…

Check out this editorial, on a proposed law that would revoke the (government provided portion of) pensions of public service officials convicted of stealing from tax payers. Apparently, some Louisiana lawmakers are proposing such a law. And the Daily Comet isn’t completely on board.

Take for example, this quote:

The idea is the product of an understandable sentiment, but taking away so much of a public employee’s pension might be an unfair penalty on top of whatever fine or jail time he or she owes.

Unfair is a normative term — let’s talk positive economics for a moment.

As an example, let us take the case of someone like Tim Whitmer (the now resigned former Jefferson Parish Chief Administration Officer). Mr. Whitmer is under federal investigation — if he is convicted of a crime, he of course will have additional penalties to contend with. But consider that the pension he is slated to receive is in the neigborhood of $150,000 per year. If he received this pension in perpetuity (he won’t live that long), assuming an interest rate of say 8% (I’m being conservative here), the present value of this pension would be rougly $1.875 million.

Economists model criminal behavior as rational — criminals weigh the expected benefits of the crime with the expected costs of crime. Of course, the expect costs of the crime are probabilistic — they consist of the probability the person will get caught multiplied by the penalty if they are caught.

If the law that was being suggested was passed, the penalty, conditional on being caught would increase. This would increase the expected costs of a potential crime. And thus, holding the benefit of crimes constant, would reduce the number of crimes that were rational for criminals to commit.

Further, think of the types of people for which this additional penalty would be particularly costly. Most pensions are a function of time served and the average salary earned. Thus, pensions (and thus the penalty if one lost their pension) would be higher for high earning, long-time politicians. Would it not be nice that those with perhaps the best ability to steal would also have the most to lose?

Back to the editorial. Here is another quote…

Still, the wrongdoers should forfeit only the money that was gotten illegally. For instance, a state employee who works without incident for years before committing a crime should not lose all the state pension benefits he or she earned while doing the job legitimately.

Surely they don’t mean the first part of that. Wrongdoers should forfeit only the money that was gotten illegally?

So say the only I crime I commit is to steal $10 dollars. The expected benefit of my crime is $10.

Suppose when I I am caught, they fine me $10. So long as the probability I get caught is less than one (I get away with it some time), the expected costs of the crime are less than $10. Therefore, the expected benefit is greater the expected costs, and it is rational to commit the crime. In non-econ terms, if you ever got away with one, you’d come out ahead.

Now surely that is not exactly what the editorial means (is it?). They understand there will be jail time and other fines — but I’m back to the the original point? Wouldn’t increasing the penalty be a good thing?

Perhaps the good people at the Daily Comet (and those of my readers who don’t understand the term) should look up the term “treble”.

Now back to the normative. Do you think it is really unfair that people lose their pension if they commit the crime? What is unfair about that?

Am I missing something?

–CT

(I don’t know the answer. I’m asking you.)

 Such specials are beneficial to Subway in that they allow the restaurant to draw in additional customers without sacrificing much profit from “picky eaters.”  The specials allow Subway to maximize the sum of profits from two market segments.

-SS

First, is the rather misleading video of the CBS report by John Blackstone that aired 2/16/2010 on manufacturing in the U.S.  Note that the declines mentioned are measured in jobs rather than in output.

Now here is an article by Dan Ikenson of the Cato Institute that appeared in National Review Online in August, 2009 where he busts the myth that “We don’t [make things] any more — at least, not like we used to.” 

Along the same lines is a little longer is another article by Ikenson, “Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade,”  from 2007.

In an email (via a list I am on) from Ikenson I got Feb. 17^th, Ikenson writes:

The manufacturing jobs number (which, by the way, peaked in 1979 and has been on the same downward-sloping trajectory since then) masquerades as a barometer for the health of manufacturing, which has been setting all kinds of records with respect to output, value-added, revenues, profits, return-on-investment year after year (with the exception of the recent recession, which affected all sectors of the economy similarly). 

American manufacturing remains the world’s most prolific manufacturing sector accounting for 20-24 percent of global value-added; China accounts for about half that.  People ask: How can that be when most shelves in retail stores are loaded with products made in China, and ”Made in USA” labels are nowhere to be found?  Part of the explanation is that products labeled made in China are only 35-50%, on average, Chinese value-added.  (Apple iPods, which each register in our trade stats as a $150 import from China, contains about $4 of Chinese value-added–that’s only 3%!)  “Made in China” often means “snapped together in China” from components made in Japan, Taiwan, Singapore, Korea, and the United States.  Another part of the explanation for the dearth of “Made in USA” products on retail shelves is that U.S. manufacturing doesn’t make a lot of products sold on retail shelves.  Pharmaceuticals, chemicals, sophisticated componentry, airplane parts, and technical textiles aren’t sold through retailers, and those are some of the high-value products made in America.

Michael McKee writes this article at Bloomberg.com (Bloomberg News) from November, 2009, also busting the myth of U.S. manufacturing declines.

Finally, take a look at this February 17, 2010 op-ed article from the New York Times by W. Michael Cox , director of the Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business.  Cox writes here on the huge and growing size of U.S. production and exports of services.  I should point out that Dr. Cox is the former chief economist of the Dallas Federal Reserve, and even though I never had a class with Dr. Cox (he arrived my second year of graduate school), I still learned a good bit from him in our twice-a-week seminars at Virginia Tech.

 -MC

(A note to my students looking to get comment points–you will need to show that you looked at the video and have read the articles linked and cited above, or have done other reading on the subject–and link to your sources.)

Notice that Mr. Zakaria thinks he has Greenspan and Paulson in a “gotcha moment,” claiming that they fail to live up to the ”courage of their convictions”  by not supporting immediate repeal of the Bush Tax Cuts.  The problem is that Zakaria is a poor listener.  We face two problems, the recession, which is short term and acute, and the deficit which is long term and chronic.  Notice that Paulson says that the deficit is a long-term problem.  Zakaria is missing a vital point in this discussion.  Reducing deficits, either by raising taxes or cutting spending, during downturns are widely thought to exacerbate recessions.  Paulson and Greenspan both suggest that now, because of our current recession, is not the time to be raising taxes, but they never rule out raising them at some time in the future.

Zakaria later points listeners to a Feb. 4, 2010 article in Time by Jeffrey Sachs, a leading economist at Columbia University, whose work on something called the “natural resource curse” has captured my recent research attention.

The current budget deficit runs about 10% of our national GDP (US  tax receipts are currently at 15% of GDP while spending is at 25%).  Sachs writes in his article that closing up the Bush tax cuts on the rich would only amount to .4% of GDP, which means that the Bush tax cuts account for only 4% of the deficit.  Sachs states: “even with rollbacks of tax cuts for the rich, the fiscal gap will remain enormous.  The Bush cuts in rates hardly account for the biggest part of the current deficit, as Zakaria claims.  Zakaria is not only a poor listener, he is also a poor reader.

Take a look at this picture of Federal Spending and Receipts in millions of dollars:

Here are those same figures but as percentages of GDP:

I should point out that there were actually two Bush Tax Cuts, one enacted in  2001 after 9/11 and the other in 2003.

Note that tax revenues rose faster after the 2nd Bush tax cuts than they did in the Clinton era, with the tax revenue growth coming to an end in 2007 at the beginning of the recession.

More importantly, notice that starting in 2001, public spending as a percent of GDP started to grow again after shrinking, as it had over the Clinton era.  While we should avoid post hoc thinking, we should also note that while the  tax cuts may have led to revenue declines, there were also large increases in government spending that started at the beginning of the Bush era.  The Bush spending programs included a generous pharmaceuticals program for the elderly, an increase in Homeland Security spending, an expensive war in Iraq in 2003 and allowing Republicans in Congress to spend heavily in their districts to increase their reelection chances.

It is the growth of entitlement spending that is at the heart of our future deficit problem, and in the very near future, growth in entitlement spending, from Social Security to Medicaid to Medicare, will be the drivers in our deficits.  Driving these spending figures are an aging population and rising health care prices.  One of the biggest reasons for the rising health care prices is that we have an aging population, boosting the demand for health care goods and services.  Increasing entitlements, through the health care bills that have gotten approval in the House and the Senate are destined to push projected deficits even higher.

A more realistic, as well as more pessimistic, view of the growing defict is reported in this ABC article.  The article reports the findings of the Peterson-Pew Commission on Budget Reform.  One of the commission’s publications is the testimony of Alice Rivlin.  Rivlin, an economist who was appointed by Johnson, Carter and Clinton to various government posts, recently testified before the Senate Budget Committee.  In her testimony, she states “In the next decade and beyond, federal spending, driven by the impact of an aging population and rising health care costs on Medicare, Medicaid, and Social Security, will rise substantially faster than the whole economy can grow–faster than the GDP.  Revenues, at any likely set of tax rates, will grow only slightly faster than the GDP.  The gap between spending and revenues will keep widening.” Obviously, repealing the Bush Tax Cuts, as Zakaria suggests, will do little if “revenues, at any likely set of tax rates,” will grow more slowly than the promised spending from Medicare, Medicaid, and Social Security.

Recently, my daughter and her roommate drove from Natchitoches, LA to Monroe, LA and followed her roommate’s global positioning device.   The car’s GPS routed them through Shreveport, doubling the usual time through Winnfield and Ruston.

As bad as the advice my daughter and her roommate got from the auto GPS, it did get her to her destination.  Zakaria’s suggestion that repealing the Bush tax cuts, or allowing them to expire, would put us much closer to erasing the deficit is just seriously misleading.   Zakaria’s GPS does not even set us on the right path.  Perhaps if Zakaria would listen more carefully and read the articles he suggests to his listeners, he might be worth listening to.

And this just in, President Obama has created a bi-partisan commission to come up with ways to deal with the deficit crisis.  From what I understand, the commission’s proposals would come before Congress to be voted on, yes or no, without amendments.  Unlike Zakaria’s suggestion of dealing with the Bush Tax Cuts (which should be on the commission’s table), President Obama has put us on course to effectively dealing with the long-term deficit problem, looking at both the spending and the revenue side of the deficit problem.

-MC

For example, suppose that a stock begins the day at a price of $1.01 and rises steadily throughout the day to a closing price of $1.10. A brokerage firm has 10 limit orders, each of which asks to buy one share of the stock. One order places an upper-limit of $1.01 on the purchase price. Another order places an upper-limit of $1.02. This pattern continues such that there is one order at each of the following limits: $1.01, $1.02, $1.03,…, $1.10. Suppose that trading for this stock opens at $1.01 a share, and the brokerage has an opportunity to fill one of the orders at this price (Assume that the market for this particular stock is thin or low-volume in nature.). Which order will the broker fill first? Will he choose randomly? Will he fill the first order placed? A price-discriminating broker who wishes to fill the most commissioned orders will begin with the $1.01 limit order. Such a broker will do so because he may be able to fill any of the other orders at a later time should the share price subsequently rise. However, he does not have this luxury with respect to the $1.01 limit order. If he does not execute this order in the first round of trading and the share price then goes up, the order will go unfilled. Thus, one might pay a hidden cost for the convenience of a limit order. Market orders, on the other hand, are less convenient but betray no information to the broker as to one’s spot willingness to pay for a particular share of stock.

-SS

Suggesting that we use a VAT instead of a straight-up sales tax to finance anything in this country, even a reduction in the corporate income tax, signifies either a lack of understanding of basic public finance or a willingness for the federal government to increase taxes on American buyers in ways unperceived by most voters.  While a VAT would be more visible than running deficits, which is another form of unperceived taxation, a regular sales tax would be far more visible by tax payers and works better in other respects, as well.

Sachs is right that a national VAT is sort of a national sales tax. With the VAT, instead of charging a flat rate on every dollar of retail sales, that same rate is collected from producers on the difference between the cost of the goods that they sell and their sales revenues, that is, on the value that they add to goods at each stage of production, from raw materials producer to manufacturer to wholesaler to retailer. Take the case of a loaf of bread that sells for a dollar. In the process of making the bread, a wheat farmer sells wheat to a mill which sells flour to a bakery which sells bread to a store which sells it to the final customer. The wheat that went into the flour that went into a loaf of bread sold for a quarter, while that much flour sold for a half dollar while the baker sold the bread to the retailer for 75 cents. Each producer adds a quarter at each of the four stages of production. If each producer is charged a 10 percent VAT, each of the four pays a tax of 2 1/2 cents, which adds 10 cents to the cost of the bread. The price of the bread ends up going up by 10 cents, the same amount as it would if there were just a national sales tax of 10 percent. Who ends up paying for this tax? It is the same person who ends up paying the sales tax, mostly the consumer.

This does not mean that there is no difference between these sales taxes and the VAT. Since most areas of the country already have some sort of sales tax, a national sales tax would cost little extra to collect. With a VAT, we would have to add a huge bureaucracy of accountants to check the cost of goods sold and the sales at each stage of production. This is a very costly tax to collect. With a sales tax, however, we could, in most states, piggyback collection and enforcement efforts on state and local government efforts.

Another difference is that the burden of a sales tax on the poor can be eased by putting exemptions on certain classes of goods, such as groceries, utilities or medicine, because the poor spend a larger portion of their income on these items than wealthier citizens. With a VAT, producer groups can be excluded, not consumer groups. Instead of easing the burden on certain consumers by exempting certain items such as groceries and medications from the sales tax, the VAT can only exempt certain producers.  This not only makes it difficult for the tax to be eased on the poor, but also makes it more likely that many producer groups will be lobbying in Washington to get their group excluded from the tax. Special interests do not lobby as much for exemptions from sales taxes because it is harder for consumer groups to organize than it is for producer groups. For Sachs, who rightly complains of the influence of special interests in Washington, to give special interests a greater incentive to lobby in Washington means that he does not understand the political incentives posed by certain forms of taxation.

A national VAT differs from a national sales tax in another important way. With a sales tax we see what we pay in these taxes at the cash register. The consumer never sees the bill for a Value-Added Tax, though the consumer ends up paying for the tax since it is mostly passed forward to the buyer. The lack of visibility of the VAT has prompted some critics of this tax, including me, to call it the Stealth Tax, because it hits the taxpayer/voter before she ever sees it coming. If there is a tax increase to pay for some new spending program, the tax increase is passed on as a price increase, and the buyer tends to blame the seller instead of the government.  But when the taxpayer/voter sees the bill for big government, she starts to question whether the spending is necessary. But when we don’t perceive the costs, we seldom question the value of the spending program.

The problem of the lack of visibility of a tax was first pointed out in 1903 by the Italian economist, Amilcare Puviani (as we see in this Richard Wagner paper), and then popularized among English-speaking economists by one of my professors, Jim Buchanan, a problem that has been called “fiscal illusion.” As voters, we are more likely to ask for new spending programs if we never notice how much it costs.   Importantly, Buchanan and others have noted that tax cuts and deficits fail to “starve the spending beast” of government, as many conservatives have proposed to deal with government spending, and instead reduce the visibility of the cost of spending to voters. Voters, then, become more supportive of almost every new spending program that comes along.  If the problem we are tackling with the VAT is the deficit, a very visible national sales tax makes a better weapon against the deficit than the stealthy VAT.

Sachs is quick to remind us that the VAT is widely used in Europe. This is true. And the Europeans have tackled the regressivity of the VAT buy introducing many spending programs to help the poor.  If we are facing a deficit problem, it would seem that additional programs to help alleviate tax regressivity unnecessarily add to the deficit by increasing spending on uncontrollable entitlements.

We should also note that the Europeans arrived at their VAT by their own peculiar history. Their VAT evolved from their former business tax, a tax on gross receipts at each stage of production. In our bread example, a 10 percent tax would collect 2 1/2 cents from the farmer, a little more than a nickel from the miller, about 8 cents from the baker and about eleven cents from the retailer, adding up to more than 21 cents. The Europeans quickly found that businesses could avoid the tax by combining the various stages of production into one business which would lower their taxes considerably, giving vertically integrated firms an advantage over those there are not.  It should also be pointed out that the Europeans already had a system in place to tax at each stage of business sales rather than a retail sales tax bureaurocracy.

So, if we are to go down the road of a new national tax on spending, we should note that a true national sales tax is superior to a VAT at every step, from being more visible and more of a deterrent to federal spending sprees, to being better suited to being shaped to help protect the poor from tax regressivity, to being less prone to being shaped to the liking of special interests, to being cheaper to administer.

-MC

(Note: I have written more than once about the Value-added tax, or VAT, and have repeated some of my own words from past articles, especially see “Vat for financing health care proposals still a bad idea.”)

Conan may be preferred to Letterman, who in turn is preferred to Leno by the young viewers of late night talk television.  At the same time, we see Leno (J)  preferred to Letterman (D), who in turn, is preferred to Conan (C) among older viewers.  Instead of the left to right competition in the spatial competition among candidates, think of viewers, arrayed young to old, and viewers with four types of preference profiles: 1) C>D>J viewers; 2) D>C>J viewers; 3) D>J>C;  4) J>D>C, where “>” means “preferred to.”  If there are more type 1s than 2+3s and more type 4s than 2 +3s but still more 1 + 2 +3s than 4s and more 2+3+4s than 1s, then Dave may dominate each in a head to head but be the loser in a 3 way race.  This is straight from a Hotelling’s spatial competition (along a single dimension), though I do not think Hotelling did the 3 competitor case.

Here is a numerical example with made-up numbers.

Customer types

& market shares

1) C>D>J; 42%                               D v J                  D v C               C v D v J

2) D>C>J; 10%                            62% v 38%           58% v 42%         42% v 20% v 38%

3) D>J>C; 10%

4) J>D>C; 38%

With the distribution of customer types that we have in the example above, Dave Letterman dominates both Leno and O’Brien in head-to-head matchups, with 62-32% with Leno and 58-42%.  However, in a three-way battle for late night talk show viewers, it would be quite possible for Dave to go from first to last if Conan on Fox and Leno on NBC compete in the exact same time slot as Dave.

If these were candidates, then things become very unstable, as the left- and right- wing candidates maneuver toward the middle, making the moderate candidate’s position unsustainable, and she gets driven from the campaign.  Late night comics, though, have a more difficult time shifting positions, changing their appeal to different audiences.

I should mention that it would also be possible for Letterman to continue to dominate the other two, if there were more of the middle two types than the two extremes.

-MC

While thinking about Robertson’s remarks on a drive to north Louisiana, I came to the conclusion that on Haiti, Pat Robertson is correct, figuratively, though not literally. On a disaster that has claimed the lives of thousands upon thousands of mostly good and innocent people of Haiti, that sounds about as outrageous as Robertson’s remarks.

While a Haitian pact with Satan himself is absurd, people often support or at least abide and enable corruption among their public officials. Haiti has long had very corrupt leadership, and corruption in Haiti is widespread. The Haitians may, from time to time, get rid of corrupt leaders, but they have always seemed to replace corrupt leaders with other corrupt leaders. (There is an excellent discussion of this phenomenon in a memorable chapter in Hayek’s The Road to Serfdom, “Why the worst get on top.”) While many Haitians are sure to be good, moral people, their feelings of helplessness and fatalism have left them very apathetic, allowing corruption to be pervasive in their society.

In surveys of perceptions of corruption, Haiti ranks near the bottom of all countries as shown by the rankings from Transparency International “Corruption Perceptions Index”, where Haiti ranks 168th out of 180 countries ranked by TI, tying with 5 others. It is also the lowest of the Americas, ranking ahead of only Uzbekistan, Chad, Sudan, Iraq, Afghanistan, Myanmar and Somalia, meaning that Haiti is perceived to be more corrupt than the notoriously corrupt Nigeria.

In a paper that came out in July of 2007 in the interdisciplinary social science journal, Public Choice, Monica Escaleras, Nejat Anbarci and Charles Register examine the interaction of natural phenomenon, earthquakes, with the social phenomenon of public sector corruption and show how when these two occur together, the death tolls are higher. They develop a theoretical model and then examine 344 quakes between 1975 and 2003 and find more deaths from earthquakes that occur in more corrupt countries. Their result holds even after the researchers account for other factors related to deaths from earthquakes, such as the magnitude of the quake, its proximity to population centers, the country’s level of development or how poor people are in the country, and several other factors.  Their main explanation is that inspectors of buildings and other infrastructure are more likely to take bribes in such societies and look the other way with some cash in an envelope. Poorer building code enforcement (for buildings, roads, bridges, port facilities and airports) results in more deaths from a given quake.

So, due to apathy, people allow venality to survive and spread, especially among those in the public sector, Haiti’s pact with or surrender to the devil. The corruption leads to more deaths from earthquakes, just as if there had been some sort of curse. I am not suggesting that Pat Robertson is literally correct, just that venality is to allowed to survive, people curse themselves, their loved ones and their fellow citizens.

Hmmm. I seem to recall voter acceptance and support for corrupt public officials leading to more deaths from a natural disaster somewhere. Could that have been here in Louisiana?

-MC

Opinions expressed here are the author’s alone and do not necessarily represent the views of Nicholls State University.

Why, then, has Ricky Williams shown an ability to defy the rule? Essentially, he followed his own path. Williams removed himself, more or less, from professional football on two occasions and for a total of almost three seasons. His chief objective in doing so was to smoke copious amounts of marijuana. However, Williams’ path had the unintended consequence of allowing him not one but two separate recuperative periods during his professional career. This outcome may have broken the reinforcing cycle of wear that so many backs experience. Will Ricky Williams get more from his career by having taken breaks from the action? It is impossible to know the answer to such a question. However, we can be reasonably confident, by comparing him to similar players, that he is a better 32 year old running back for having done so. It is at least interesting to consider that Williams’ model—at least the legal parts of it— may be beneficial to a young NFL running back in need of longer-term healing. 

-SS