Sunday, October 31, 2010

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.

Saturday, October 30, 2010

Don't judge the jobless

USA Today article "Don't judge the jobless" (October 27th, 2010) discusses "99ers", individuals who have collected extended unemployment insurance for 99 weeks and are about to run out. The author, while attacking Robert Barro who "doesn't know what it's like to be unemployed for this long," claims:
My story isn't unusual for young professionals.
It actually appears to be quite unusual. In order to see why, we can take general U.S. statistics as a first pass. Two questions are important to finding out if someone will be a "99er." The most important is "what are the chances an individual finds a job in a given month?" (Alternatively, "how long does it take to find a job?") We can examine the job finding rate per month as approximately equal to the number of unemployed re-entering the workforce. This isn't an exact statistic, as individuals may move from job to job, but it will be rather close. The number of jobs found in a given month over the number of unemployed for that month is displayed graphically below, and is known as the "job finding rate" (click to enlarge).

How might we interpret the above graph? As of August 2010, the number of hirings/unemployed was 0.32. That is, 1/3 as many people were hired as were unemployed. Extending this logic and making a few assumptions (homogeneity, only the unemployed are hired, both assumptions we shall defend as simplifying, but not result-altering later) that only the unemployed are hired, then the average individual should spend 3 months unemployed, or 13 weeks unemployed. 33% will spend one month, 22% will spend 2 months, 15% will spend 3 months, 9% will spend 4 months, and so on. To spend 22.77 months unemployed (99 weeks) comes with a very small probability-- 0.02%. Two hundreths of one percent is rather uncommon indeed. But this is slightly wrong for a number of reasons, though it is relatively accurate as a first pass. Say 30% of those new hires come from people moving jobs. We still have the probability 0.4%, or about half a percent.

First, the author notes that they were re-hired for a four-month stint before becoming unemployed again. We can ask a similar question: "What are the chances (making similar assumptions) that someone who was hired will last for four months?" We can find this from the "job loss rate", calculated as the number of fires, or separations (depending on your preference) displayed graphically below (click to enlarge).

In any given month, about 1.75% of currently-working Americans are fired, and about 3% separate from their job (for the interested, this gives about a 33-month average for a given job, reasonable when teenagers and young adults are added to the picture). In Correction's recollection, adults spend something approximating double that on a given job. What are the chances the author will be fired within four months of finding a job? Making similar assumptions, there's a 93.2% chance that an individual will not be fired before four months. That is, the chance the author would be fired within four months (or less) was 6.8%. While not as small a probability as a hundredth of a percent, this still puts her in a very small minority.

Corrections recognizes that these calculations assume a homogeneity that is not present. However, in the author's case, we actually think these assumptions have helped her. The inability to find jobs has fallen primarily on men, the uneducated, and construction workers. The author, formerly in the information industry, a woman with a college degree, will be less, not more common. Rather than attacking Robert Barro, who "doesn't know what it's like to be unemployed for this long" for a reason, and who wrote the (text)book(s) [1] [2] [3] on modern macroeconomics, the author would be better served by spending time looking for work. Her plight does not seem as common as suggested, and it appears rather difficult to rack up 99 weeks of unemployment, especially if one is college-educated and not in construction.

There is further data about unemployment insurance that Corrections has mentioned before ("Loss of Jobless Benefits Could Lower Unemployment Rate" July 6th, 2010). Even in the depths of Pittsburgh's recession in the early 80's, where local unemployment was higher than it is now nationally, individuals suddenly found jobs when their unemployment insurance ran out (click to enlarge):

Saturday, October 23, 2010

Hidden costs to tax cut

Boston Herald article "Hidden Costs to Tax Cut" (October 23rd, 2010) talks about the benefits of a tax cut as if it would be a direct transfer from government coffers to consumers. However, they would potentially gain much more.
Each voter must decide if that 3 cents per dollar savings is worth more to them than what they would lose in cuts to public safety, schools, roads, senior programs, health care, libraries, housing.
Because taxes create deadweight loss, for every three cents transferred from government is more transferred to them. Indeed, it could be much more. This is depicted in a competitive constant marginal cost case graphically below (click to enlarge). However, it could be extended to a monopolistically competitive case--this would make Corrections point even more strongly, as tax incidence may sum to more than 100% for monopolies, as they transfer the loss of the tax to the consumer inefficiently, so to speak.
Put in the way the Herald is arguing it, individuals may be losing one cent of government services for every three they get back in sales tax. Additionally, they are gaining not only what they lost, but what they never bought because of the tax wedge. They gain the amount they were taxed as well as the distortion, the tax wedge, brought on by that tax.

Sunday, October 10, 2010

The most conservative court? Hardly

Boston Globe article "The most conservative court? Hardly" (October 10th, 2010) discusses the leanings of the Supreme Court over the last few years. What it lacks is the recognition that the average justice's opinion is not what makes up a court--it is the median Justice's opinion. Corrections offers a simulation of the median and mean of a court composed of 9 justices (though the number has changed, the spirit of the simulation remains). It is important to note that all that follows below is a simulation.

Presidents are elected every 4 years with a 50/50 split in expectation between parties. Each President picks up his party's preferences with a small deviation of his personal preference. If a Justice leaves, one is appointed with the current President's ideology plus a noise term. If a Justice does not leave, he changes his opinions slightly from last period in a random walk. Each Justice has a 5% chance of leaving in any given year.

Then for 9 seats from a simulated ~235 years, we can plot the ideology of the person sitting in that seat, depicted separately for each seat graphically below (click to enlarge).

Similarly, we can merge all the Justices into one graph, if it helps understand the magnitude of individual shifts (click to enlarge):

But what is important for the court is the median Justice, not the mean, and not any individual. We present the President's ideology along with the mean and median Justice ideology below (click to enlarge):

In the simple simulation above, for most reasonable parameter values, the median Justice, in part because the parties differ much more than the personality noise for Presidents and the ideology noise for their Justices. Indeed, in any number of most simulations we ran, the median variance was much greater than that of the mean. This is an important distinction that the Globe's discussion of individual Justices did not encompass (though its discussion of decisions remains relevant).

Sunday, October 3, 2010

On the Pulpit, Rabbis Earn More Than Christian Clergy

Normally, Corrections avoids old articles.  However, Jewish Daily Forward article "On the Pulpit, Rabbis Earn More Than Christian Clergy" (September 15th, 2010) wonders aloud why rabbis are paid, on average, more than christian clergy. It comes to no firm conclusions. Indeed, Corrections spent some time thinking on the curious problem: Catholics and Protestants appear to be paid between $25,000 and $40,000, while Reform and Conservative Rabbis appear to be paid between $137,000 and $147,000. A rather large gap.

Corrections came to the weak conclusion that the story was about opportunity cost and relative wealth status. However, the same publication came out, two weeks later, with the article "Rabbi Searches Are Tough, but Are They Illegal?" (September 29th, 2010). This article mentions nothing about pay, and merely describes the theological implications of a cartel of Rabbis:
The RA requires synagogues to enroll exclusively in its search process, filters the selection of candidates the congregations may interview, and prohibits candidates and congregations from finding each other directly. Any Conservative rabbi who seeks a pulpit outside the RA’s centralized process, and any congregation that interviews candidates from other movements, will be penalized.
It bespeaks either a deep ignorance of economics or a willing deception of their readers that the Forward did not connect the two. To note that Rabbis have a firm cartel with punitive powers on the one hand, then wonder why Rabbis are paid so much on the other is ludicrous.

Cartels artificially limit supply to raise prices. It utterly clear to Corrections that the Rabbinical Assembly is a cartel of Rabbis that artificially constricts supply and raises wages. The Rabbinical Assembly's cartel also possibly increases quality above what the market would demand to further drive up price, though there is no evidence for this either way (merely a likely possibility). A depiction of what the Rabbinical Assembly is practicing may be found graphically below (click to enlarge).

Saturday, October 2, 2010

The New American Normal

New York Times article "The New American Normal" (September 27th, 2010) states that there may be heterogeneity in the ability of traders to make money during various market conditions. Corrections doesn't see this as being the case. We expect that a trader has an equal opportunity to have a positive expected value on a trade whether the market is highly volatile or not.
Fragmentation holds sway. The stock market used to be a fair proxy for the state of the economy. Now it’s a market of traders, not investors. They want to know what the spread is today and tomorrow; they can make money on the way up or down; they care far less about U.S.A. Inc.

So the market goes where it goes — up of late but largely directionless (which makes it harder on those up-or-down traders) — while out on Main Street the struggle to make family payroll continues. People work longer hours, they juggle how to cover their kids’ needs, how to de-leverage just a little — and they’re still meant to “consume” for the economy’s sake.

First, for the ill-defined class of "up and down traders", we might consider they do better when the market is highly variable. However, a quick view of the 30-day average S&P 500 price variance dispels this notion rather quickly (click to enlarge). If anything, Corrections expects that the average trader did better in the low volatility areas than the high (NBER recession dates are colored in grey).

Either way, it's ludicrous to claim that traders like one market environment over another, unconditional on their current assets. Unconditional on current assets, a trader who believes the market will be constant will be able to make money off selling a put below the current price (believing a stock won't go below the sum of strike price and premium) and selling a call above the current price (believing a stock won't go above the sum of the strike price and premium). A trader can flip sides on the trade if he thinks volatility will be high. If the market is undergoing a constant increase, then demeaning by the expected trend yields the same trading strategy. Whatever the market conditions, it's rather simple to construct trading strategies that require simple adjustments. The level, rate of change, and volatility won't matter.

The only manner in which changing market conditions may matter to a trader is an increase in the cost of capital (for deals requiring leverage) a decrease in their ability to utilize specific knowledge or expertise (analysis of mergers and acquisitions may presumably require expertise and contain a cyclical trend), or if the trader already owns positions in the market and does not want those to decline--distinctly separate (though difficult to distinguish without data on specific trends) from their ability to make money off present market conditions.

The Campaign Disconnect

New York Times editorial "The Campaign Disconnect" (October 1st, 2010) defines and interprets wealth and income dispersion in the United States. Corrections has a different take:
In an era of extreme economic inequality (which is another way of saying economic unfairness) [...]
We forgo analysis of the ludicrous definition of "fair" Bob Herbert uses. What the Times does not note is that high dispersion in wealth and income might be better termed "opportunity" and "motivation." Take the extreme example: complete equality in wealth. There is no opportunity for wealth to increase, and therefore no motivation to work or be creative.

In this respect, while it seems a concern for wealth and income dispersion "equality" is ubiquitous, it appears to miss inequality as a motivating factor in human creativity.

Friday, October 1, 2010

A Best Seller as 4 Films Tied Together With Talk

New York Times movie review "A Best Seller as 4 Films Tied Together With Talk" (September 30th, 2010) concerning the Freakonomics movie is in error in its report on an experiment in public high schools run by John List and Steven Levitt. It gets the payment method wrong in multiple ways.
The Grady-Ewing vignette, filmed in a vérité style, follows an experiment in which ninth graders at a Chicago high school were paid to improve their grades: $50 for every grade above a C and the chance to win a $500 lottery.
To qualify for payment, all students had to have all grades be C or higher, no in-school or out-of-school suspensions, and no more than one unexcused absence. If they qualified, 50% would be paid $50. The other 50% would be given a 10% chance at $500. Further, for 50% of either group, the parents would be paid. For the other, the students would be paid. (That is, there were four treatment groups and a control).

The Times gets the threshold wrong, eschews the payment of parents, and gets the payment doubly wrong.