The Cheap Cost of Cheating the Lowest Paid

New York Times editorial "The Cheap Cost of Cheating the Lowest Paid" (June 25th, 2010) makes a series of economic missteps in its analysis and diagnosis of wage injustice against immigrant workers.

Academic studies estimate that unscrupulous employers in New York City keep an extra billion dollars a year by defying New York State’s weak labor law and cheating timorous and ill-informed immigrant workers.

That doesn't mean they profited from it. Profit equals revenue minus cost. In a competitive market (which back-alley shops certainly are) producers make no profit--they compete it away. Even though employers may have saved a billion dollars in labor costs by cheating the law, more enforcement of the law would almost certainly just lead these employers to hire fewer immigrants. Most would agree that being paid $6 an hour leaves a worker better off than he would be without a job. If this many illegal workers are to be hired at all, they will be paid a low wage rate. Whether the net benefit to immigrants of an artificially higher wage is positive of negative remains an empirical question.

The article displays a general misunderstanding of what's good for immigrants. New immigrants will be attracted to a city in which they can find work, not to a city that already has a surplus of labor. So, if enforced, New York laws are not immigrant-friendly. A city without labor limits will attract the most new labor.

Financial reform: Who's happy, who isn't and why

Los Angeles Times article "Financial reform: Who's happy, who isn't and why" (June 26th, 2010) writes an article on one of the two major parties who will be hurt by financial reform, if it passes. The article speaks at length of how banks will be harmed. It does not, however, note that the individuals who lose the most due to financial regulation are likely to be low-income borrowers.

'This is a landmark, a true inflection point,' said Calhoun, president of the Center for Responsible Lending in North Carolina.

Since the mid-1970s, Calhoun has been pushing to get an agency that would look out for consumers' interests.

If one takes the typical narrative, shark-like banks waited in the wings for naïve, impoverished individuals, in order to get them to take out a loan they could not possibly repay to the bank. The bank would then work through months or years of foreclosure hearings to get a house worth less than the value of the loan, while individuals are living in a house they could not have otherwise afforded, and often never having to repay their loans, having declared bankruptcy.

This, of course, is a political narrative rather than a sensible one. It remains that some of the individuals who have benefitted the most from poor bank lending practices are the very people banks are accused of acting in a predatory manner towards (by giving them free housing for a period).

Financial reform seeks to end this relationship between the poor and banks that would lend them money for "unaffordable mortgages." Because Corrections does not see a paternalistic master-slave relationship between government and the poor as beneficial to the poor, we see this sort of legislation as hurting the people it claims to help, a party that shouldn't be happy, though the Los Angeles Times does not take note of these poor.

From Card Fees to Mortgages, a New Day for Consumers

New York Times article "From Card Fees to Mortgages, a New Day for Consumers" (June 25th, 2010) points to new legislation on mortgage payments. The article is wrong to claim that consumers are helped by some of the new rules. In fact, it is lenders who are helped.

The bill offers a number of new protections, many of which are a bit like closing the barn door after all of the animals escaped. Lenders, for instance, will have to check borrowers’ income and assets. Most lenders have learned that lesson by now or have ceased to exist.

A poor person renting a small apartment, living paycheck by paycheck was allowed temporary access to a nice home on which he paid almost nothing monthly and made no down payments. He knew that he couldn't possibly afford a home, and enjoyed the free-ride while it lasted. Eventually the home would be foreclosed upon and he (without any assets to worry about) would return to life just as it was before his free ride.

The lender--or whomever the debt had been sold to--was the one who lost big time by giving homes to poor people with no income or assets. As the article notes, these lenders have ceased to exist. One would presume that if they were making profits (rather than losses) by acting as they did that this legislation would not be so moot. Fortunately, the market has a way of correcting this absurd behavior and lenders stopped giving almost free homes to people years ago.

A smart bill to fight smoking

Los Angeles Times editorial "A smart bill to fight smoking" (June 22nd, 2010) offers another endorsement of another paternalistic bill that would increase deadweight loss in society. Specifically, it advocates the coverage of anti-smoking programs. It offers two ludicrous claims.

Some people might object that smokers choose their unhealthful habit. But since insurance covers the cancer and emphysema that result from cigarette use, it makes sense to help smokers when they decide to quit.

We should note that the above statement, while sounding innocuous, has an unintended consequence: it makes becoming addicted less costly. Corrections conjectures some subset of people who do not smoke, or try drugs such as heroin, because they fear the consequences of becoming addicted. If cigarettes were no longer addictive, then the cost of becoming addicted would be lifted, and we would observe more smoking from this crowd. Whether or not it is larger than the number of people who would stop smoking is an empirical question. Obviously, an insurance program serves the same purpose.

We can discuss whether or not more people being able to smoke would be a good thing--Corrections posits that if it were, then competitive insurance companies or cigarette companies would be willing to set such a thing up, and therefore our system is clearly less efficient, but the point is tangential.

We should further add another point the Times offers that is empirically contentious.

Less smoking means less chance of catastrophic illnesses that are much more expensive to cover; lower rates of disabilities that taxpayers end up footing the bill for; less secondhand smoke; and even less litter.

The first claim, that less smoking means lower insurance is unclear. Indeed, for the people who would quit because of the lower premiums, we should have seen them already quit, if insurance companies can discriminate on smoking behavior--this would therefore make the statement of the Times patently untrue. People who smoke also die younger and more quickly, and the costs/benefits to society appear to be a wash (for example, they pay to social security but do not collect as much as were they a nonsmoker).

We should finally add that such coverage is not free. Individuals will have to pay for it. The Times appears to pretend that by requiring insurance companies to pay for these new treatments, they are somehow "free" to consumers. Prices will rise, and there is no such thing as a free lunch.

Corrections recognizes that the set of benevolent or honest paternalists is zero--if Rothbard noted that government was "a band of thieves writ large," we would be benefitted by noting that paternalists are, to coin a phrase, "slavemasters with a smile." In articles such as this, the Times earns its paternalist credentials.

The gulf tragedy doesn't negate the fact that oil is a green fuel

Los Angeles Times editorial "The gulf tragedy doesn't negate the fact that oil is a green fuel" (June 15th, 2010) suggests that ethanol production causes more expensive food. Whether or not this is true isn't immediately clear to Corrections.

Ethanol production steals precious land to produce inefficient fuel inefficiently (making food more scarce and expensive for the poor).

An increase in the demand for ethanol likely an increase in the demand for, example, corn. Normally, one might associate an increase in demand for corn with an increase in the price for corn. However, if the supply of corn is perfectly elastic, we should expect that price will not rise. This situation is depicted graphically below (click to enlarge).



The idea of the above diagram is as follows: corn is supplied and sold to the highest bidder. If we are to have corn going to both corn feed and to ethanol production, then the prices must be the same--otherwise a corn producer would sell it to the higher bidder--law of one price holds. Therefore, price is set by combined demands and corn supply--price is projected back to individual demands and determines quantity.

This assumption as a long-term assumption is not necessarily absurd. We might add that productivity growth is endogenous and inputs into agricultural production have not risen over the last 60 years, while output has risen 150% (it is 250% of what it was in 1948, for the same inputs). We imagine that not only might land use be easy to scale, so might productivity. Data from the USDA on output, productivity, and inputs are displayed in the figure below (click to enlarge).

Parenting should be a nonissue in gay marriage debate

Los Angeles Times article "Parenting should be a nonissue in gay marriage debate" (June 16th, 2010) concerns itself with the issue of gay marriage. However, it cites a study that is incapable of properly identifying what the Times suggests it identifies.

And a key reason, one of the lawyers said, is that children fare best when raised by a married couple of opposite genders.

The premise itself is dubious. A longitudinal study published online this month in the journal Pediatrics found that the adolescent children of lesbian couples fare very well. In fact, they 'rated significantly higher in social, school/academic and total competence and significantly lower in social problems, rule-breaking, aggressive and externalizing problems' than others their age.

The study in question, "US National Longitudinal Lesbian Family Study: Psychological Adjustment of 17-Year-Old Adolescents" in June 2010 Pediatrics, by Gartrell and Bos, examines sons and daughters from 154 volunteer lesbian couples. The note that the children rated significantly higher should raise some alarms for the people at the Times, especially given the study's 7% attrition rate. Why would we assume volunteer lesbian couples would be representative of marginal lesbian couples who get married and have children because of a change in law?

That is to say, if we are to evaluate public policy, we should evaluate the individuals whose decision would change due to the law. However, we are by definition not examining these individuals in this study, and we are not identified. We might further imagine that a change in the law will change the "rules" under which the data was observed, further rendering the study irrelevant.

The Times is better served by its next, well-made point, that "The premise is also irrelevant," rather than unidentified studies.

Nobel Laureate Gary Becker says immigrants should pay

Daily Telegraph article "Nobel Laureate Gary Becker says immigrants should pay" (June 16th, 2010) suggests an interesting revenue-raiser for governments:

Professor Gary Becker will say that it would be up to individual governments to set a price, adding that a charge of $50,000 (£34,000) per immigrant could generate $50bn a year in the US.
The same sum could generate about £17bn a year in Britain, based on Office for National Statistics data which showed 503,000 immigrants arrived between October 2008 and September 2009.

The Telegraph's re-calculations from Becker's figures do not make sense if the Law of Demand holds. Once you raise the price of immigration (from $0 to $50,000), fewer immigrants will enter the country legally. Thus, the revenue to the government is strictly less than the number of immigrants times the entry price.

This policy may have two additional effects: 1) it may increase the number of illegal immigrants and 2) it may reduce the amount of discrimination against members of large immigrant minorities. The first point is simply because the cost of legal entry has increased, so some who were willing to go through the legal system before will be unwilling to do so now. They may instead substitute into illegal immigration. One positive spillover to illegal immigrants, however, will be that the perception of immigrants will improve, as Becker notes:

He said the programme would also reduce opposition to immigration, by eliminating the sense that immigrants were getting "a free ride"

Because it will be difficult to distinguish those getting a free ride from those not doing so, the reputation of all immigrants (legal or not) will improve.

No Closing Time for Income Taxes

New York Times article "No Closing Time for Income Taxes" (June 11th, 2010) cautions against relying on marijuana taxes as partial substitutes to income taxes based on America's experience with repealing prohibition:

Prohibition had been dead for three years, but the damnable taxes Pierre du Pont had expected to die with it lived on. Contemporary Californians indulging a fantasy of income tax relief emerging from a cloud of legalized marijuana smoke should realize that it is likely only a pipe dream.

However, the article gives no reason why the prohibition experience should generalize to marijuana. Specifically, the article notes a major confound to the repeal of prohibition--the New Deal--but maintains its position that the effects of taxing alcohol will be similar to those of taxing marijuana.

Roosevelt and Congress did respond to the repeal windfall by cutting income tax rates for workers earning less than $3,000 a year. But the New Deal had little sympathy for the wealthy, whose taxes actually increased over the next few years. Rather than the trade-off du Pont expected, the government used the excise income to expand.

Argument by anecdote, or by one historical experience confounded with everything else that happened at the time, should leave anyone unconvinced.  In a time of economic recovery, when the Republican party is gaining favor, why would we expect taxes to rise?  Certainly, this is not the same landscape as Pierre du Pont saw cloud his attempt at income tax relief.  History should be analyzed with its complexity in mind, not applied blindly.

We may, however, rehabilitate the point in an economic manner by suggesting that government spending obeys the law of demand: as the price of government taxation goes down, as it would by introducing a new good (an economic result from Ramsey's Optimal Tax), then we should expect consumption of government to go up.

Keeping Politics Safe for the Rich

New York Times editorial "Keeping Politics Safe for the Rich" (June 8th, 2010) misunderstands the idea of an implicit tax when writing about free speech. Specifically, it describes the idea of an implicit tax on political expression causing a "chilling" of freedom of speech to be "pretzel logic." The #1 standing of the Times in Corrections provides good evidence of familiarity with such logic.

The candidates argued that the matching funds “chilled” their freedom of speech because they were afraid to spend more than the limit that triggered the funds. A lower court agreed with that pretzel logic, but last month a panel of the United States Court of Appeals for the Ninth Circuit disagreed. It said the speech of the plaintiffs had not been chilled. “The essence of this claim is not that they have been silenced,” the panel said, “but that the speech of their opponents has been enabled.”

The actual causality of political victories and campaign spending is difficult for Corrections to discern (we expect, if political donations are a form of bribery or iterative bribery/wages, that the expected winner should be given more money, purely as a fact that he is expected to win, not because the money helps him win). However, even if we forego that qualm, the impact on political spending should look exactly like a tax.

The idea of the law is as follows.  Individuals can either be given a lump sum of money if they agree to forego large private campaign donations, or raise money but not receive the grant.  However, if an individual who raises their own money spends more than the lump sum amount the other individual has been given, then the lump-sum candidate gets some matching funds.  Corrections depicts this situation graphically below (click to enlarge): it is a graph of political spending ad effectiveness of that political spending for a donation-accepting individual.  As we see, our donation-accepting individual has an increasing effectiveness as he spends more money.  However, upon meeting the threshold, the effectiveness of his political spending declines, as his opponent is gaining matching funds to counter the impact of his commercials.

Our point, however, is that the same graph of effectiveness could have been produced by a simple system of taxation--say, 0% from $0 to the threshold, and 90% thereafter.  This is depicted graphically below (click to enlarge).  In this case, we would have to raise ten times as much post-threshold to have the same impact as we had before crossing the threshold--the response to individuals of Arizona's campaign finance system can be produced just as easily by an explicit tax on donations--surely a "chilling" of political speech and hardly "pretzel logic."

Is the internet making us quick but shallow?

CNN article "Is the internet making us quick but shallow?" (June 7th, 2010) offers results from a study on one measure of student achievement but ignores alternative (and more relevant) measure:

The cognitive penalties can be particularly severe for students. In one revealing experiment, researchers at Cornell University divided a class into two groups. One group was allowed to use their laptop computers to surf the web during a lecture. The other group attended the same lecture but had to keep their computers closed.

Immediately afterward, the students took a test measuring how well they remembered the lecture's content. The students who used their laptops performed significantly worse on the exam. It didn't matter, moreover, whether they surfed sites related to the subject of the lecture or unrelated sites. All the surfers performed relatively poorly.

The "daily-learning" metric for student performance that the article suggests is not the metric of performance over which students optimize. Students care about end-of-year performance, not daily learning. Students may find it optimal to learn at a time different than during class. In this case, those with computers may be maximizing their total learning over time by doing something else during class--by no means does this imply that they will have learned less at the end of the year than their counterfactual classmates who are forced to listen to an entire lecture. If there are increasing returns to studying later in the year, then students will optimally postpone their studying. If they are constrained to study more earlier in the year, then they may preform worse overall. For example, if a farmer is forced to pick low-hanging fruit from a tree early in the season, picking fruit is costly, and fruit picked early begins to decay, then that farmer will have less revenue from selling his fruit than a framer who optimizes his fruit-picking without constraints. Student performance should be measured by final output rather than by an intermediate step in a dynamic process.

Auctions for Overbooking

Wall Street Journal article "Auctions for Overbooking" (June 6th, 2010) suggests (wisely) that airlines have auctions for bumped seats--that if they overbook a flight by five people, they offer increasing amounts of money to someone who gives up their seat until five people have given up their seat.

The airlines also benefit because an auction may save them money over a set price or a government penalty. More importantly, United, American and the rest are assured that fewer passengers are unhappy at the end of the process. That's no small matter given the reputation for poor service that most airlines have with the public.

More than this, airlines are guaranteed to save money by selling bumps to the lowest bidders. In particular, if an auction is held to elicit five passengers to give up their seats, certainly the passengers who face the lowest cost for getting bumped will be the ones to accept the airline's offer first. This means that the airline will pay (at best) a total amount equal to the sum of the five lowest values of flying. However, if people instead know before they purchase a ticket for a flight that on average, some people are forcibly bumped, then they will shave the amount that they are willing to pay for a ticket by the probability that they are bumped times the cost of getting bumped. This means that the price of tickets falls from the marginal value to the marginal value minus the probability of getting bumped times the marginal cost of getting bumped. In general, this marginal cost will exceed the lowest costs of the passengers and so the airline will receive less total revenue when it randomly bumps passengers than when it holds an auction to buy back overbooked seats.

Can a Soda Tax Save Us From Ourselves?

New York Times article "Can a Soda Tax Save Us From Ourselves?" (June 4th, 2010) by Greg Mankiw offers an idea that appears clever at first glance, but ultimately fails empirical inspection, as far as Corrections can discern. Mankiw notes, quite correctly, that most "sin" taxes are rejected prima facie on the facile princeps of economics--they do not feature neither externalitites nor information asymmetries nor monopoly. He then offers the idea that smokers or soda-drinkers are imposing negative externalities on themselves, as a possible justification for a soda tax.

There is, however, an altogether different argument for these taxes: that when someone consumes such goods, he does impose a negative externality — on the future version of himself. In other words, the person today enjoys the consumption, but the person tomorrow and every day after pays the price of increased risk of illness.

This raises an intriguing question: To what extent should we view the future versions of ourselves as different people from ourselves today?

Corrections sees this as a theoretical possibility, but one that does not hold in reality. If individuals feel altruism, a love of others, then surely most feel a sense of philauty, a love of self. In such a case, we should expect to see transfers from individuals-now to individuals-tomorrow as much, or more, than we should see consanguineous transfers.

However, there is a deeper, Stiglarian point to be made here. All the necessary conditions for the Coase Theorem to hold are present, as far as Corrections can discern. There is no problem of enforcement, negotiations, or property rights. An individual will reach a Pareto optimal outcome without government intervention. They will be capable of bargaining with themselves in the future.

Furthermore, most individuals save. For individuals who are convinced that Americans do not save, net national savings (roughly adjusted for inflation to 2010 dollars) is depicted below (click to enlarge).

Before Professor Mankiw's idea is accepted, it must be explained why most individuals save, if individuals tomorrow are distinct entities from individuals today.  Should this be counted as charity?  Given that most save, if an individual knew that their future-self valued health at more than their now-self valued soda, they should simply have their future-self "pay" them to not drink soda by saving less--an efficient, Coaseian transfer.  Corrections conjectures that Professor Mankiw's idea is not robust to these considerations.  

Addendum: Corrections now recognizes that our point is robust even if an individual is not saving, so long as he can go into debt that his future-self must pay off. That is, the presence of savings is not even a necessary condition for Mankiw's point to collapse, as we first suggested.

We Might Decide to Fly

New York Times editorial "We Might Decide to Fly" (June 3rd, 2010) suggests that government regulation may improve the flying experience for consumers. Perhaps, but consumer surplus will fall.

The Obama administration’s new consumer protections for beleaguered airline passengers — including higher compensation for travelers bumped from oversold flights and prominent disclosure of all service fees — are much needed.

The airline industry is widely considered competitive, so airlines do not make profit, but instead charge each consumer the cost of providing his seat on the airlplane. If the government increases this cost, by requiring them to invest resources into making sure fewer customers are bumped from flights, for example, then the airlines will have no choice but to pass this cost increase directly to consumers. As shown in the graph below, total consumer surplus--the sum of benefit that all consumers receive from flying, will decrease from the entire shaded triangle to the yellow shaded triangle.

Even if we allow for the argument that airlines have some monopoly power, regulation may harm consumers more than it helps them. This is because monopolies also pass some portion of any cost increase to consumers. The amount of this increase depends on the response of demand to price changes. Again, as depicted below, consumer surplus will decrease. This will overwhelm the gains in service to consumers, due to the mechanics of monopoly profit maximization.

Small-brewery tax cut floated

Coloradoan article "Small-brewery tax cut floated" (June 1st, 2010) discusses a small-brewery tax cut that has been introduced as a bill in the U.S. House and Senate. It would reduce taxes for small breweries.

The bill stems from a prolonged effort in 1975 to get a tax differential between small and large brewers leveled. The largest brewer in 1975 produced about 40 million barrels of beer. Today they make more than 100 million barrels per year, thus the tax differential needs to be updated to maintain competition, Gatza said. 

"So this is really an attempt to bring up to date that original legislation from the mid-1970s to level the playing field," Gatza said.

While Corrections is in favor of reducing taxes under any circumstances, for any excuse, with any reason whatsoever, the reasoning behind the article is not immediately clear. Corrections offers a figure from the Brewer's Almanac 2009 that displays both U.S. Breweries over time as well as draught production in gallons (click to enlarge).

We may see from the chart that, since 1975, we have observed 3000% percent increase in the number of brewers. Most of this came in a matter of years, suggesting (though not definitively) a very elastic supply. Such an enormous increase in small breweries as well as a large elasticity of supply would suggest that there is little need to single out small breweries for a tax break. It would appear to be the product of political machinations rather than real concern for the industry.

Happiness May Come With Age, Study Says

New York Times article "Happiness May Come With Age, Study Says" (May 31st, 2010) speaks on research involving, as its main variable of interest, surveys concerning the states of mind of individuals of different ages.

A large Gallup poll has found that by almost any measure, people get happier as they get older, and researchers are not sure why.

This may be considered a more subjective and methodological correction, but Corrections considers such research to generally be invalid due to heterogeneity in responses by class. For example, wealthier people may simply respond to questions differently than poor people. Not because they are "happier," but due to some difference in type--rich people are likely different from poor people. Similarly, older people may respond to questions about happiness different from younger people.

There may be a saving grace for happiness research, exogeneous variation. For example, we might survey 1,000 individuals and discern their subjective happiness responses. We may then observe them a few months later--perhaps one has won the lottery or inherited some large sum of money. In this case, we can difference out his previous responses to his new responses, and attributed the difference to the large exogenous shock in wealth.

However, we can never get any such variation in age. We cannot take a young person and suddenly put them in an old person's body. The research, as Corrections sees it, is largely bound by the untenable structural assumption that old people's responses mean the same thing as young people's responses.