Wyoming Rep. Lummis: Estate tax rise has some planning death

Casper Star-Tribune article "Wyoming Rep. Lummis: Estate tax rise has some planning death" (October 30th, 2010) discusses a cause that Corrections has championed for years but that has been relatively unreported in the media. The estate tax is set to rise from 0% this year to 55% next year for gifts in excess of over $3,000,000. Cynthia Lummis reports an unintended consequence of this tax hike.  She does not, however, note how the same incentives encourage murder.

U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31.

In terms of numbers, this most importantly captures small businesses and farms with high levels of capital that are transferred from one generation to the next (hence its mention in a local Wyoming newspaper). Remember that the business does not have to have revenues in excess of $3,000,000, but worth of over $3,000,000.  The death tax has several marginal tax rates, depending on wealth, as displayed graphically below.

If it hasn't earned it previously, the estate tax certainly earns its nickname "death tax" because of the manner in which it currently incentivizes death.  This will come in the form of both voluntary death, as the article notes, such as suicide, or involuntary death, such as a child murdering their elderly parents.  We can graph out the increasing incentive children have to murder their parents--upwards of $3,000,000, they gain about $1,500,000.  Certainly, when store clerks are murdered for less than $100 in a robbery, it is not overly difficult to imagine these incentives meeting a threshold for murder.  Below, we graph the "benefit to murder" created by a hike in the estate tax (click to enlarge).

We note that our analysis foregoes inclusion of the $1,000,000 exclusion allowed for in 2011. Our core point will of course remain the same.

Perhaps the most interesting note is not how much death taxes encourage murder, but how regulatory uncertainty motivates murder.  It could well be that the coming tidal wave of Republicans in Congress will roll back the estate tax.  However, this will occur after it is too late for prospective inheritors to murder their parents.  Therefore, it may be in their interest to pre-emptively murder their parents, even if they think a Republican congress will roll back the estate tax.  In this sense, not only will a hike in the estate tax cause murder, but we can also say that regulatory uncertainty kills.

How to Lose an Election Without Really Trying

New York Times opinion "How to Lose an Election Without Really Trying" (August 7th, 2010) discusses political "amnesia", a concept that sounds particularly non-economical. Corrections suggests an alternative model.

Betting on amnesia is almost always a winning, not a losing, wager in America. Angry demonstrators at health care town-hall meetings didn’t remember that Medicare is a government program, and fewer and fewer voters of both parties recall that the widely loathed TARP was a Bush administration creation supported by the G.O.P. Congressional leadership.

There may be a real reason for political "amnesia." We might take a "regime switching" model as an explanation. The republican party can take on two values. One in which most Republicans want to reduce government intervention, and one in which they do not.  Individuals do not know what state or "regime" Republicans are in, but have signals.  (regular readers will see the familiarity between this Regime Switching model and our earlier article introducing the Kalman Filter).

In any case, we can generate a random variable in which Republicans are in a "regime."  They have a 95% chance of staying in whatever regime they are currently in next period, and a 5% chance of switching regimes.  In our case, we have a signal with noise which broadly tracks the true regime (because of the noise, we can get "false" signals).  In this case, we observe the following signal.  As the blue line is close to one, we see high legislative activity and Republicans are likely to be in a pro-government mood, though they may or may not be.  Using the blue line, our probabilities, and a standard regime switching model, as James Hamilton outlines here (gated) and here (ungated), we can make a "best guess" of what our regime is.  Graphically below, we display our signal in blue and our "best guess" as a red dotted line.  The red line is the "probability"we assign to each state (click to enlarge).

A measure of our success is the following graphical display, in which we again graph the probability that we assign to each state, while also graphing the "truth" (something we wouldn't ordinarily observe) (click to enlarge).  We call this a 'Hamiltonian' Regime Switch simply because we're following Hamilton's outline, not in relation to the mathematical concept.  Note that times when our guess (red dotted line) spikes and our regime (solid blue) doesn't change  were noise that lead us to believe regimes switched when they did not.  Also note that we are (asymptotically) efficient with our estimator--linear weightings cannot do better, ex ante.

This modeling situation appears to be more appropriate than suggesting "amnesia."  We can extend this situation in the case of having no signal as well.  In the case of having no data and predicting what regime or state we are in, or the case of forecasting what state we will be in at some future period, probabilities will slowly converge to our unconditional probabilities--a 50/50 probability of being in Regime 1 or Regime 2.

This seems to be an adequate story for voter "amnesia."  Voters observe strong signals of the regime Republicans are in when they have legislative power.  This may be the Medicare Prescription Drug Improvement and Modernization Act of 2003, for instance.  In such a case, voters understand with a clear signal "where" Republicans are.  When they are out of power for a time, or with a noisy signal, they may be less sure than they were two years ago--they recognize the regime can switch.

Corrections suggests that this sort of model is more satisfactory and economical than a model positing "amnesia" in voters.

For Photographers, the Image of a Shrinking Path

New York Times article "For Photographers, the Image of a Shrinking Path" (March 30th, 2010) offers two quotes without rebuttal that deserve economic and statistical comment, and perhaps correction. The article describes how professional photographers have been hurt by declining demand due to the decline of printed material and an increase in supply from amateur photographers. It suggests first that amateur photographers have prices that are "too low," and second offers a comment that is true of any specific amateur but not of the aggregate.

“People that don’t have to make a living from photography and do it as a hobby don’t feel the need to charge a reasonable rate,” Mr. Eich said.

Corrections would suggest that most people are willing to pay to take pictures--pay in both their time and the money they spend on inputs (from the camera to developing film or other camera accessories. It is not beyond reason that some people would be willing to pay to have their pictures used. Were this the case, Corrections doesn't see why this is not a reasonable rate. For example, when the price of aluminium is very low, then one has to pay people (garbage men) to take one's aluminium cans away. When the price of aluminium is very high, individuals (recyclers) are willing to pay to take one's cans away. Corrections conjectures that there is no "reasonable price" for disposal of one's cans, just as there is no "reasonable price" for a picture.

Second, the Times offers a quote that concerns an individual photographer compared to a professional that is a fallacious argument.

“Can an amateur take a picture as good as a professional? Sure,” Ms. Eismann said. “Can they do it on demand? Can they do it again? Can they do it over and over? Can they do it when a scene isn’t that interesting?”

This may be true. However, if we have, at any given event, 1000 amateur photographers for one professional, then we might see the professional photographer beating the vast majority of those individuals. It is difficult for an amateur to beat the photographer once out of every hundred. However, because we sample from 1000 amateurs each time, even though any one is beaten by a professional, we expect ten total to have their pictures purchased over the professional's. It is wrong to compare one amateur to one professional--it would be more proper to compare the full alternatives--buy the best professional or the best amateur, and recognize we sample from the "amateur" bin more often.

Judges Consider New Factor at Sentencing: Military Service

Wall Street Journal editorial "Judges Consider New Factor at Sentencing: Military Service" (December 31st, 2009) waves its hands at, but fails to actually observe any externalities in military service that require the parallel justice system it describes. Specifically, it notes that military veterans coming back from foreign deployment have received special judicial treatment in light of their service.

As more soldiers return home from combat overseas and end up in the criminal-justice system, a number of state and federal judges are deciding to show former soldiers leniency in light of their service. Some veterans are receiving probation coupled with psychological treatment, generally for nonviolent crimes that normally would land them in prison.

The article gives an example of one judge's reasoning:

'We dump all kinds of money to get soldiers over there and train them to kill, but we don't do anything to reintegrate them into our society,' says John L. Kane, a federal judge in Denver. Earlier this month, Mr. Kane sentenced an Iraq war veteran convicted of bribery to probation instead of prison.

Yet Judge Kane's argument does not appear to have sound foundations, in the understanding of Corrections. The United States has a volunteer army. Individuals who sign up are doing so because the total discounted lifetime path of wages (cognitive and monetary) are higher than their next best alternative. If they were not, individuals would choose their "next best" (contradictorily, their best) alternative.

If the cost of joining the army, including the probability an individual survives, breaks down psychologically and commits crimes upon their return is too high, individuals will opt out of military service. They will do so until wages are increased or the future costs that cause them to commit crimes are decreased. This is the proper market solution to unfortunate military conditions. If military service is unattractive and unfortunate, fix it through wages, rather than through fringe benefits, like reducing disincentives on producing negative externalities to others (crime), an unsound economic proposition.

Individuals who perform military service are paid in a variety of ways. The public honors them as protectors of freedom. They are paid a wage. They gain fringe benefits through discriminatory governmental hiring practices. The military should make sure it is paying in the most efficient manner, and it is by no means clear that removing disincentives from criminal activity is welfare-enhancing.

The only case in which offering these fringe benefits to soldiers makes sense to Corrections is if ex ante the military has difficulty predicting the single individual of many to pay higher wages in the form of a light sentence, and ex post it can identify them, that the value of this benefit is high, and the moral hazard it poses is low, an unconvincing conjecture.

One might add that there could simply be sample selection in sentencing. Individuals with military service might be less prone to recidivism, incarcerating them less effective, and lighter sentences may be efficient. The article does not address this, though Corrections sees it as a possibility.

Starved watchdog

Houston Chronicle editorial "Starved watchdog" (December 16th, 2009) offers the unsupported asseveration that, in wake of several Houston-area industrial accidents, additional resources need to be given to the U.S. Chemical Safety and Hazard Investigation Board.

If only a few workers die in an industrial accident, we won't pry.

That seems to be the philosophy of the U.S. Chemical Safety and Hazard Investigation Board (CSB), the understaffed and underfunded independent federal agency charged with investigating plant and refinery mishaps.

Explosions at two Houston-area facilities within a single week have killed one, injured several more and alarmed thousands of residents near the Valero Energy Corp.'s Texas City oil refinery and the American Acryl facility in Seabrook.

Workers at these industrial facilities are free to move to other jobs. Houston-area industrial facilities are analogously free to put in higher and better safety regulations if the higher wage they have to pay to workers for taking the risk is greater than the cost of additional safety regulations.

But what if the additional safety regulations aren't worth the wage? Then we should see an increased number of deaths, and a higher wage. Corrections states, as a credenda, that individuals are able to decide what they prefer better than an ill-incentivized gallimaufry of their peers. Given a choice across multiple alternatives (one the market has an incentive to give if utility may be gained) a government intervention only hurts the very people they are ostensibly trying to protect.

Incidentally, this argument holds without a right-to-sue for a worker or their estate. A law allowing litigation for injuries or death ex post, rather than wages compensating the chance of injury or death ex ante only furthers the argument that government should not regulate as the Chronicle wishes.

Shrouded in secrecy, decision makers gambled and Harvard lost

Boston Globe article "Shrouded in secrecy, decision makers gambled and Harvard lost" (December 12th, 2009) makes two economic errors in his excoriation of Harvard's dealing with its endowment.

Harvard’s treasurer acknowledged that in hindsight, the university might have managed its investments differently. Yet, he noted, even with the downturn, the endowment grew over the past decade at a healthy annualized rate of 8.9 percent. True enough, but the Corporation manages not only Harvard’s balance sheet, but the expenses of the university as well. The 8.9 percent growth of the endowment wasn’t nearly healthy enough to cover the staggering growth in costs.


First, the touted 8.9% growth rate over a decade with the endowment's 30% fall still means vast growth over the decade. Indeed, the endowment is only around where it was in 2005. Second, it is not clear ex ante that the idea was poor ex post. We cannot say if Harvard failed to understand the probabilities in the bets it was making, or if the bets simply failed to materialize. We would be wrong to censure a man who loses millions on a bet that has 1:1 payoff and 90% chance of winning. He made the right decision, ex ante. The same may be true of Harvard--the world it expected to materialize as time went on may have been wrong, but that does not imply that it was wrong ex ante. Third, while the "staggering growth in costs" may be true, the University also gained from those costs. An increase in costs in and of themselves imply nothing. The difference between benefits and costs do.

A paradox of plenty - hunger in America

Brend Debusmann, writing for Reuters in his article "A paradox of plenty--hunger in America" (Nov. 24th, 2009), gives both a false analysis of equality in America, and offers a poor comparison of opportunity in America to opportunity in Europe.

After all, a bedrock belief in America held that this is the land of unlimited opportunities where every citizen has an equal chance to succeed and become rich.  That requires an assumption that the system is fair.  How many Americans still believe that?  Last summer, a pair of political scientists, Benjamin Page and Lawrence Jacobs, published a study whose findings included that just 28 percent thought the present distribution of wealth is fair.

The author's evidence has nothing to do with his claim.  Although more than two thirds of Americans may think that Bill Gates does not deserve his billions, that it is "unfair" that he is so wealthy, this in no way informs wether or not each of these displeased Americans had the opportunity to obtain, for example, the schooling necessary to become their own Bill Gates.  Drive, of course, is a pre-requisite to obtaining wealth.  Ex post inequality of outcome does not presuppose ex ante inequality of opportunities.

Also, the article falsely implies that the chance of joining the middle class for poor children in America is lower than in other European nations.

More evidence that the gap between myth and reality is shrinking comes from the American Human Development project, a research group which found that "social mobility is now less fluid in the United States than in other affluent nations...a poor child born in Germany, France, Canada or one of the Nordic countries has a better chance to join the middle class in adulthood than an American child born into similar curcumstances."

 To see why this is a misleading statistic, imagine that half of American children are poor, and half middle class.  Suppose also that assignment into adulthood social class is random, so that a poor child has the same chance as a middle class child of ending up either middle class or poor.  Then, the chance of ending up middle class is 50% for a poor child, just as it is for a child born in the middle class.  Suppose now that 80% of European children are middle class and only 20% are poor.  Then, suppose that class re-assignment is random, so that a poor child has a 80% chance of entering the middle class in adulthood.    We see that under such a random assignment, the chance that a poor child becomes middle class depends completely on the size of the middle class relative to the lower class.

In fact, middle classes may not be comparable.  For example, in Soviet Russia, the probability that a homeless child entered the "middle class" was likely quite large, but the child's living standard, quite low.  All of this implies that expected future income of poor children should be as relevant a measure of lower-class mobility as the probability that those children rise to the ranks of the middle class.  Given this information, we may find that a poor child would quite prefer to take a chance on more in America over less in Germany.