The Labor Wedge

The labor wedge is a difference between the marginal rate of substitution (MRS) between consumption and leisure, and the marginal product of labor (MPL).  That is, how willing you are to trade off leisure for consumption, and the degree to which you are able to do it.  If an individual may do so perfectly, then the labor wedge is zero.  It is given its name because all real taxes have distortionary effects, and most, if not all, have effects on labor.  If we look at measures of MRS and MPL, we can say "what tax rate explains this gap?"  This is what the labor wedge is:  essentially a structural "this is what taxes seem to be, given distortions in the economy."

Below, Corrections offers the labor wedge as offered in Rob Shimer's book, with data from Cociuba, Prescott, and Ueberfeldt (Simona Cociuba's website).  We graph two possible labor wedges:  one with a low Frisch elasticity of 0.5, and one with a Frisch elasticity of 4 (used for most macro settings).   The Labor Wedge is depicted graphically below (click to enlarge).

Job Search

The jobless don't seem to look for jobs very hard.  From Alan Krueger and Andreas Mueller's 2008 working paper, "Job Search and Unemployment Insurance: New Evidence from Time Use Data", it appears that jobless looking for jobs spend about 41 minutes a day looking.  Below, find the distribution of working time (given that they are looking) (click to enlarge).

Rather remarkable.

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.

High Court reveals anonymous donor paid men to grant bills of divorce

Haaretz article "High Court reveals anonymous donor paid men to grant bills of divorce" (September 21st, 2010) notes a curious and uneconomic practice in Israel. Female Jews married in Israel are not allowed to divorce men without their permission, but instead must obtain a "get." This distinction carries legal and not just religious consequences because there is no civil marriage in Israel, but only religious marriages (Christian, Jewish, and Muslim). Because men hold their wives "hostage," anonymous donors give money to the divorcing body, the Chief Rabbinate, to bribe the men to provide a get.

The rabbinical courts' administration already has an arrangement to pay men who refuse to divorce their wives in certain cases, as an incentive to grant the divorce. The money is budgeted by the state. However, the verdict shows that in 2004-2005 an anonymous donor gave the rabbinical courts money to pay off dozens of men and even a few women, to divorce their spouses.

The unintended consequences of paying off spouses are threefold. First, in the long run it's not clear that bribes to Jewish men to divorce their wives will change the equilibrium number of "trapped" wives. Potential wives will simply be free to choose a lower threshold of men to marry (private donors subsidize their gamble). Second, if they're monetary expected value maximizers it's in the interest of men to raise their asking price for a divorce by the amount the Rabbinical Court is willing to bribe them. Otherwise, they will raise their asking amount, though not necessarily by the exact amount. In this respect any donation may simply be a pure transfer to husbands without any change in outcome, and private donors subsidize "kidnapping" husbands. Third, it takes away motivation for any reform of Rabbinical Courts (such as allowing civil marriage or intermarriage in Israel) by reducing the benefit of a complementary good. That is, legal reform of Rabbinical power presumably is a bundled good--if bribes are successful, it reduces the benefit of reform.

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."

Health care reform bill 101: Who will pay for reform?

Christian Science Monitor article "Health care reform bill 101: Who will pay for reform?" (March 21, 2010) does not offer the full story on who will pay for Health Care Reform. It notes that the wealthy will pay:

Higher Medicare taxes on rich people

If you are an individual making more than $200,000 a year, or a married couple making more than $250,000 a year, get ready to pay more for your Medicare if health care reform passes.

Labor supply of the wealthy is elastic. When they are taxed, they work less--their labor supply decreases. When their labor supply decreases, the cost of that labor as an input increases. As the costs of normal inputs increase (which labor is) supply decreases. That decrease reduces consumer surplus as well as producer surplus, depicted graphically below (click to enlarge). The left diagram displays an increase in marginal cost (of labor). The right diagram displays the resultant shift in supply. The light blue box in the right diagram displays the loss to consumers from the taxation of the rich.

The Christian Science Monitor offers discourse on "who pays for reform" without noting how surplus-destroying taxes spread loss of surplus to everyone.

U.S. food stamp chief wants California to boost use

Reuters article "U.S. food stamp chief wants California to boost use" (December 18th, 2009) falsely supposes that a welfare-based program will improve total utility. Discussing the need for California to recruit more of its eligible federal food-stamp programs, the article includes the following quote from a nutrition analyst:

'There are economic benefits for everyone, for the entire state, if we increase participation [in the federal food stamp program]'

Likely, however, the economic benefits do not outweigh the economic costs for both citizens of the state and for the state.  Notably, a federal program providing subsidized food gets its funding from all US citizens (including Californians), and so increased participation anywhere only costs most Californians.  In addition, the state can easily be made worse off.  By subsidizing people who do not work, food stamp programs magnify the benefit to California citizens of remaining unemployed.  If the labor force is very responsive to changes in wages (or changes in non-labor payment, like welfare), then it is possible that enough people will stay out of California's labor force (at least in the short-run) to depress state tax revenues, as graphically depicted below (click to enlarge).  Californians working and paying taxes have a positive externality to all other Californians, and labor is inefficiently undersupplied as it is.  Placing a negative implicit tax on not working moves Californians further from an optimal equilibrium.

A Stimulus That Could Save Money

New York Times article "A Stimulus That Could Save Money" (November 17th, 2009) misses the forest for the trees.

The one highly visible success of the stimulus program has been the cash-for-clunkers program. It induced a boom in vehicle sales this summer that clearly would not have happened otherwise.

Presumably, the article is referring to the large increase in car sales during the Summer of 2009. Cars are a durable good, last around a decade, and cost around $28,000. With an average rebate of $4100, a 14% average price decrease, we should expect individuals who were going to replace next year to intertemporally displace their purchases to the Summer of 2009.

But this is just shifting purchases and is by no stretch of the imagination expansionary in the long run--what we gain now in sales is taken out of sales in the future. It was foolish to draw sales nearer to today at the expense of tomorrow in a negative sum game--far from a success.

The GOP's no-exit strategy

Washington Post editorial "The GOP's no-exit strategy" (November 19th, 2009) bemoans a spate of procedural delays in the U.S. Senate.

As of last Monday, the Senate majority had filed 58 cloture motions requiring 32 recorded votes. One of the more outrageous cases involved an extension in unemployment benefits, a no-brainer in light of the dismal economy.

Passing extended unemployment may be a very unwise decision, and certainly is not a "no-brainer". Individuals respond to incentives, and an extension of jobless benefits from six months by an additional thirteen weeks adds to the shadow price of taking a job now, causing people to take their time looking for a new job. Given that during a recession with relatively high unemployment we expect labor supply to be relatively inelastic with respect to wages (i.e. it's hard to find a good job), we must conclude that even in search model, which would normally predict greater placement efficiency due to unemployment benefits (i.e. the longer everyone looks, the better the jobs they find), it takes a great suspension of disbelief to think that lengthening unemployment benefits makes sense in this economy.

Proper economic solutions would avoid the large implicit tax that individuals face when deciding to accept work or put it off for the future (in a manner similar to fixes for the welfare trap--partial reduction in benefits when one works, rather than complete reductions).