Thursday, August 30, 2012

The events of the past few days lead me to think about Herman Melville

From The Confidence Man, Chapter 7:

The stranger was a man of more than winsome aspect. There he stood apart and in repose, and yet, by his mere look, lured the man in gray from his story, much as, by its graciousness of bearing, some full-leaved elm, alone in a meadow, lures the noon sickleman to throw down his sheaves, and come and apply for the alms of its shade.

But, considering that goodness is no such rare thing among men--the world familiarly know the noun; a common one in every language--it was curious that what so signalized the stranger, and made him look like a kind of foreigner, among the crowd (as to some it make him appear more or less unreal in this portraiture), was but the expression of so prevalent a quality. Such goodness seemed his, allied with such fortune, that, so far as his own personal experience could have gone, scarcely could he have known ill, physical or moral; and as for knowing or suspecting the latter in any serious degree (supposing such degree of it to be), by observation or philosophy; for that, probably, his nature, by its opposition, imperfectly qualified, or from it wholly exempted. For the rest, he might have been five and fifty, perhaps sixty, but tall, rosy, between plump and portly, with a primy, palmy air, and for the time and place, not to hint of his years, dressed with a strangely festive finish and elegance. The inner-side of his coat-skirts was of white satin, which might have looked especially inappropriate, had it not seemed less a bit of mere tailoring than something of an emblem, as it were; an involuntary emblem, let us say, that what seemed so good about him was not all outside; no, the fine covering had a still finer lining. Upon one hand he wore a white kid glove, but the other hand, which was ungloved, looked hardly less white. Now, as the Fidèle, like most steamboats, was upon deck a little soot-streaked here and there, especially about the railings, it was marvel how, under such circumstances, these hands retained their spotlessness. But, if you watched them a while, you noticed that they avoided touching anything; you noticed, in short, that a certain negro body-servant, whose hands nature had dyed black, perhaps with the same purpose that millers wear white, this negro servant's hands did most of his master's handling for him; having to do with dirt on his account, but not to his prejudices. But if, with the same undefiledness of consequences to himself, a gentleman could also sin by deputy, how shocking would that be! But it is not permitted to be; and even if it were, no judicious moralist would make proclamation of it.

This gentleman, therefore, there is reason to affirm, was one who, like the Hebrew governor, knew how to keep his hands clean, and who never in his life happened to be run suddenly against by hurrying house-painter, or sweep; in a word, one whose very good luck it was to be a very good man.
I should note that my mother, a retired English Professor and Melville mavin, led me to read this, Melville's last, novel, many years ago.  My understanding is that it is not widely read, but it should be.


Wednesday, August 29, 2012

Chris Christie yearns to be run by the Medicis

Since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved.
Niccolo Machiavelli, The Prince

Monday, August 27, 2012

A California Renaissance?

Here is the preliminary job growth rate by state from July 2011-July 2012, according to the BLS.  States are those for which there was a statistically significant change in employment from July to July.

Note that California outperformed Texas.

Sunday, August 26, 2012

Orwell's six rules on writing.

From Politics and the English Language:

(1) Never use a metaphor, simile or other figure of speech which you are used to seeing in print. 

(2) Never use a long word where a short one will do. 

(3) If it is possible to cut a word out, always cut it out. 

(4) Never use the passive where you can use the active. 

(5) Never use a foreign phrase, a scientific word, or a jargon word if you can think of an everyday English equivalent. 

(6) Break any of these rules sooner than say anything outright barbarous.

The problem with the capital gains tax

Tax policy can be frustrating.  A major reason that Mitt Romney pays a lower effective tax rate than many working stiffs is that most of his income comes in the form of capital gains, which is taxed at a preferential rate (the top marginal ordinary income tax rate is 35 percent, while the long term capital gains rate is 15 percent).  It may therefore seem that the easy way to implement a "Buffet rule" would be to match the capital gains rate to the ordinary income tax rate.

There are three policy dilemmas here, along with a practical problem.

The first policy dilemma is that some capital gains are nominal--they don't reflect changes in purchasing power.  We recognize this problem in other places in the tax code--for example, we adjust tax brackets for inflation every year.  The problem could be solved using indexing--we could tax real capital gains at the ordinary income tax rate.

The second dilemma is perhaps more controversial.  In a Solow-Swan world of economic growth, more savings produce a larger and newer capital stock, both of which are key to growth (Barro and Sala-i-Martin have a lucid description).  If they are correct (and the consensus is that they are), then policies that encourage both savings and flexibility are good policies.  To some extent we do this with our retirement tax policies: so long as savings remain in a retirement fund, their returns go untaxed, even when securities within the fund are bought and sold.  With respect to capital gains policy, this implies that we should discourage the consumption of realizations of gains, but should encourage investment flexibility.  In other words, if someone sells her winners in order to buy a Jaguar, she should be taxed, but if she sells winners in order to reinvest somewhere else, she should not.

The second dilemma creates a third dilemma--the investor who makes smart decisions accumulates considerable wealth, which could lead to disproportionate political power.  Capital gains preferences accelerate this phenomenon.  This is particularly vexing.

Now for the practical problem--the statutory capital gains rate can be considerably different from the effective rate (my approach here follows the argument in Dave Geltner and Norm Miller's Textbook, Chapter 11).  Consider an investment that pays no dividends that grows in value at 10 percent per year in a world with a statutory capital gains rate of 20 percent.  Suppose the investor holds that investment for ten years, and then sells it.  To put some numbers on it, a $100 investment will grow to $259.37 in value.  The capital gains taxes will be $159.37*.2=$31.87, so the net to the investor after capital gains taxes with be $227.50.  The internal rate of return on the investment drops from 10 percent before tax to 8.6 percent after tax.  Consequently, the effective tax rate is not 20 percent, but 14 percent.

If we stretch out the investment horizon to 20 years, the effective rate drops to 10.3 percent; if we reduce it to 1 year, the effective rate matches the statutory rate of 20 percent.  The point is that regardless of the capital gains rate, investors have considerable discretion at determining their effective rate.  So it is almost certain that a behavioral response to a higher capital gains rate would be longer periods of time between realizations, hence lowering the effective rate.  When it comes to figuring out tax policy, nothing is easy.


Sunday, August 19, 2012

Trending is dangerous

Niall Ferguson is horrified at the prospect that total Chinese GDP will catch the US in 2017.  Let us leave aside for a second the fact that if China's total GDP matches the US', its people will still be less than 1/4 as affluent, or the fact that maybe it would be a good thing if the most populace country in the world had living standards comparable to ours.  So far as I can tell, his 2017 projection comes from assuming growth in China will continue over the next several years at the same pace it has experienced since 1989.  Such projections are always problematic.

Let me give one example.  From 1890 until 1920, Los Angeles population grew by about 11 fold, from  50 thousand to 576 thousand.  If one assumed that this would continue, Los Angeles' population 90 years later, in 2010, would have been 576,000*11^3, or about 766 million, which is a shade under the population of the entire Western Hemisphere.  Its actual population is around 4 million.

Is this absurd?  Of course.  But I have been seeing similar forecasts based on similar foundations since I was in college (when a very well-known professor projected that the USSR would have a larger economy than the US by the year 2000).    This kind of "analysis" has been driving me crazy for years.

For this first time ever, I have put a blog post on my syllabus

It is Yves Smith's review of The Big Short.  That I have just done this now probably shows how behind the times I am.

Thursday, August 16, 2012

Lall, Wang and da Mata find that reducing land use regulation in Brazil would increase the formal housing supply, but not necessarily reduce slum formation

I just finished a two day visit to Sao Paolo, where officials are concerned that constrained housing supply is exacerbating the size of favelas.  This lead me to read Lall, Wang and da Mata:

In this paper, we examine the effects of land use and zoning regulations on
housing supply and slum formation across Brazilian cities between 1980 and 2000. We
find very low price elasticities of housing supply in the Brazilian formal housing market,
which limits formal housing supply adjustments in response to demand increases, and is
linked with growth of informal settlements. The imputed Brazilian formal housing supply
elasticity is similar to those in Malaysia and South Korea, which have been regarded to
have restrictive regulatory environments.
We also find that land use regulations that manage densities – in particular,
minimum lot size regulations, have important effects in terms of housing supply and slum
formation. Contrary to conventional wisdom, lowering minimum lot size regulations do
not lead to a reduction in slum formation. If city population growth were exogenous and
households did not consider local regulations in their migration and residential location
decisions, then lowering minimum lot sizes would allow cities to accommodate more
residents into formal housing developments – and unambiguously reduce slum formation.
However, when we consider that regulations are a part of household migration
and residential choice decisions, the exact effects of lowering regulatory standards are not
obvious. In fact, our model suggests that the net effect of land regulations depends on the
extent to which new formal housing supply absorbs demand, both from current informal
sector residents and population growth induced by lowering regulations. Our estimation
strategy considers both effects, and we find that cities that lowered minimum lot size
regulations from the Federal stipulation of 125 m2 experienced higher growth in the
formal housing stock. However, this was also accompanied by higher population growth
from migration, and the resulting city population growth was higher than the formal
housing supply response, exacerbating the slum formation problem.
Local innovations that increase access to land for the poor – such as flexible land
sub divisions – are welfare enhancing as they allow houses with different specifications
to be available in the market, thereby allowing low income residents to benefit from
services that meet their preferences (and affordability). However, if some cities offer
improved access to land compared to their peers, these cities are likely to
disproportionately attract (poor) migrants. If the induced population growth is higher than
formal housing supply adjustment, informality is likely to grow. Cities that absorb
migrants increase welfare – and in this context the challenge is to identify strategies that
increase formal housing supply relative to population growth. The econometric results
should not be viewed as a failure of flexible zoning to reduce slum formation. Rather, the
focus should be on identifying pre existing distortions in the land and housing market that
reduce the formal housing supply response to additional demand. 
Two important issues for future research emerge from this analysis. First, to
understand why some cities deviated from the federally stipulated minimum lot
specification of 125 m2 to favor low income housing development. And second, to
identify sources of land and housing supply distortions that reduce the elasticity of formal
housing supply.

One fact about the Sao Paulo context: according to officials, the vacancy rate in the formal sector there is about 13 percent, suggesting excess housing supply.  But the construction cost of the minimum size house allowed under Brazilian law is simply too high for many Brazilians to afford.  Allowing smaller houses to be constructed would almost certainly improve housing welfare.

Monday, August 13, 2012

While I don't like the finding, I feel compelled to report that Matt Kahn finds liberals are more likely to be housing NIMBYs

I just caught up with his JUE paper on the subject.  The abstract:

Traditional explanations for why some communities block new housing construction focus on incumbent home owner incentives to block entry. Local resident political ideology may also influence community permitting decisions. This paper uses city level panel data across California metropolitan areas from 2000 to 2008 to document that liberal cities grant fewer new housing permits than observationally similar cities located within the same metropolitan area. Cities experiencing a growth in their liberal voter share have a lower new housing permit growth rate.
The paper is quite thorough, using a wide variety of specifications, and the results are quite robust. 

My research (and that of many others) shows that impediments to homebuilding are the largest cause of expensive houses.  By impeding home construction, liberals are contributing to the rent being too damn high.  Needless to say, this hurts low income households more than anyone else.

Sunday, August 12, 2012

Holmes and Watson teams--an entirely subjective judgment

Basil Rathbone and Nigel Bruce--not good
Nicol Williamson and Robert Duval--OK
Douglas Wilmer and Thorley Waters--Oy
Jeremy Brett and Edward Hardwick--great
Vincent D'Onofrio and Katherine Erbe--very good
Robert Downey and Jude Law--OK
Benedict Cumberbatch and Martin Freeman--really great
Jonny Lee Miller and Lucy Liu--kind of eager to find out

Transit Oriented Development in Thailand (h/t Hasan Ikhrata of SCAG)

Saturday, August 11, 2012

Why Paul Ryan is dangerous

I was on a panel with him at the University of Wisconsin last year.  Unlike his running-mate, he comes across as well-informed, and he knows how to play to his audience.  He is actually personally quite charming...just very, very wrong.

Sunday, August 05, 2012

Who should be held harmless for deficit reduction?

At some point, once the unemployment rate really starts to fall, the US needs to get on a steady-state path to deficit reduction.  A question worth asking is what part of the income distribution should contribute to this reduction.  Certainly the one percent should make the major contribution, but it is hard to see how it can close the gap by itself.

The current budget deficit is about $1.3 trillion.  According to IRS SOI data for 2009 (the most recent available), households in the top one percent paid income taxes of $318 billion in that year (see Table 5).  Because that was an anomalous year, let's go back to 2007, when the top one percent paid the most is had paid under current law, which was $451 billion. If we adjust that for five years of CPI growth, that translates to about $497 billion in current dollars.  This means that doubling taxes on the top one percent would get us less than halfway toward closing the budget gap.

Of course, lower unemployment will mean less money going to unemployment insurance, and will add to the number of taxpayers, and these will help reduce the deficit.  But the taxing the one percent alone will not be enough--so how low do we go?  I would certainly hold the bottom two quintiles harmless--whatever mix of tax and spending changes come along, that group should be left no worse off than before (because they received no net benefit from the policies of the past decade or so).  How one divides it up among the rest?  I am not sure.

Thursday, August 02, 2012

I don't understand Glenn Hubbard's Arithmetic

He says he wants federal spending to be reduced to 20 percent of GDP, along with "revenue-neutral" tax reform.  (I think revenue-neutral tax reform is code for reducing the after-tax income of the bottom half of the country further, because after all, Wall Street has suffered too much at the hands of ...well, never mind that for now).

The problem is that according to OMB, current revenues are less than 16 percent of GDP (see Table 1.2).  So is Hubbard advocating a steady-state budget deficit to GDP ratio of four percent per year in perpetuity?