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.

Old age robs criminals' skill

Boston Herald article "Old age robs criminals' skill" (September 18th, 2010) offers a rarity for opinion editorials: an intellectually stimulating article and relatively original idea. The article's interesting question is: why does crime rise in some recessions, and fall in others? The article's proposed answer is recessions with high inflation drive crime because criminals see individuals as holding large amounts of cash now in anticipation for needing it in the future (implicitly, an economic "cash-in-advance" model). Recessions with low inflation will simply find individuals with less in their pockets, and therefore less to steal.

But in previous recessions, in the 1970s and ’80s, the crime rates went up. The difference perhaps was that those recessions were in times of high inflation, giving robbers an incentive to take your money while it still held its value.

Being broke, people don’t go out late and thus are less likely to be mugged. And if folks do travel, the thieves know they’re probably not carrying much of value.

If newspaper writers are going to undertake causal analysis or conjecture, it's enjoyable when they use good structure or thoughtful analysis. If the reflexive premises of the New York Times are that firms are evil and people are very dumb and easily tricked, this article argues that even criminals respond to incentives, and puts forth their testable conjecture--the pinnacle of a non-empirical opinion editorial.

As Corrections sees it, the testable prediction the Herald's conjecture offers is as follows: real goods, such as automobiles or jewelry, are relatively robust to inflation. Cash is not. If burglary and robbery are substitutes for one another, but inflation causes robbery to become relatively less valuable than burglary, then a difference-in-difference will bring out the causal link between inflation and crime.

That is to say when inflation changes from low to high, we should expect the difference between the change in robbery and the change in burglary to be negative. Below, we first graphically display the data: inflation rate, robbery and burglary rates over time (click to enlarge), from 1960-2003.

A graphical and first-approximation is to plot percent change in inflation on the x-axis and the difference between percent changes in robbery and burglary on the y-axis. As we can see from the positive slope, if anything an increase in inflation appears to lead to a relative increase in robberies, not burglaries, as the Herald's theory might predict (click to enlarge).

Of course, this is only a first-pass approach. Consumers, recognizing that inflation will cause more robberies, could reinforce their homes and cause less total robberies (due to security) that has a larger effect than inflation causing more robberies. However, the empirical evidence behind the Herald's theory appears weak--rather than burgling more inflation-robust assets when inflation increases, individuals are robbing more inflation-insecure assets when inflation increases.

Media’s mendacity should be news to all

Boston Herald article "Media’s mendacity should be news to all" (April 10th, 2010) by Bill O'Reilly discusses individual American's discovery that United States newspapers are politically biased, and appears surprised. Corrections suggests that far from being surprising, this is a natural occurrence, and we should see media bias in a different way.

While many Americans believe the national press is biased toward the left, a more damning charge is now being debated: Are U.S. media outlets actually corrupt? Those who believe they are point to the cheerleading during Barack Obama’s presidential campaign and to the recent reportage on the Tea Party movement.

As you may know, the Tea Party people have been branded in some media quarters as a bunch of racist, far-right loons. TV commentators on MSNBC and CNN have actually called the Tea Party folks dirty names on the air - all in an attempt to diminish the growing influence of the movement.

But a funny thing happened on the way to the gutter. Regular Americans have apparently opted to decide for themselves about the Tea Party, and the polling is interesting.

Corrections suggests that January 2010 Econometrica article "What Drives Media Slant? Evidence from U.S. Newspapers" by Jessie Shaprio and Matt Gentzkow has a more appropriate manner of examining media bias. In order to understand its relevance, we first note that in Shapiro and Gentzkow's 2006 Journal of Political Economy paper "Media Bias and Reputation", they posit consumers who do not know the quality of a news source with certainty. Their consumers have prior beliefs about the truth, read news articles, and sometimes the truth is revealed to them at a later time (so they can update, finding that the newspaper has deceived them, or not). The article finds that newspapers will optimally slant their news to their consumer bases's biases.

Returning to the original paper Corrections referred to, the authors find that, "consumer demand responds strongly to the fit between a newspaper's slant and the ideology of potential readers, implying an economic incentive for newspapers to tailor their slant to the ideological predispositions of consumers. We document such an effect and show that variation in consumer preferences accounts for roughly one-fifth of the variation in measured slant in our sample."

Corrections suggests that the cycle O'Reilly was referring to makes quite a bit of sense, in this light. First, individuals had some signal about Barack Obama as a Presidental candidate. News sources respond to that bias (and perhaps the two feed one another, though that conjecture is by no means clearly going to happen). Individuals vote for Obama, and perhaps discover, given a relatively monotonic downward trend, that they were deceived by media slant. Corrections offers Gallup Approval Rating Polling data below (click to enlarge). They bayesian update on the slant media stations have, just as the Tea Party, borne out of individual's discovery of deception by the media, occurs.



Corrections suggests that Mr. O'Reilly's article was not necessarily off-base, but was grasping at the model suggested by Shapiro and Gentzkow without explicitly mentioning it. It is in this clarifying manner that Corrections offers a clarification.

Reason to be cautiously bullish on America

Boston Herald article "Reason to be cautiously bullish on America" (December 5th, 2009) may be correct in its main point, that the beginning of the end of this recession may be at hand, but appears to use contradictory economic indicators to show it.

You may have to squint to see them, but there are signs of recovery - jobless claims are down for a fifth straight week, productivity is up, market indices are up, the economy began growing again in the third quarter.

New jobless claims are lower, but hiring has not risen past jobless claims, with a loss of 11,000 total jobs in the same period according to current government figures.

When productivity rises, and the absolute value of labor has gone down, it is unclear whether or not productivity gains are due to innovation or simply the fact that production with decreasing marginal returns to scale is at a lower overall level. Indeed, the all the figures cited but the last could be an indicator that production has been being scaled back. It is difficult to tell if the last is a "real" phenomenon or a product of government spending.