Would New Orleans levees hold for a second Katrina?

Christian Science Monitor article "Would New Orleans levees hold for a second Katrina?" (August 29th, 2010) offers only a partial discussion of the costs and distribution of destructive floods.

The Corps says the reinforcements are built to provide a defense against a 100-year storm surge, which means protection against flooding that in any given year, may have a 1 percent chance of taking place. For a peak storm surge, such as one that may occur once every 500 years, the system is designed to allow overtopping, where a storm sends waves over the top of the wall.

[...]

Mr. Barry says the levees should be constructed to withstand a 1,000-year flood, adding that Holland enjoys a 10,000-year protection standa

The article should have, but did not, recognize and discuss the nature of the flood distribution that a levee system has to protect against. Specifically, we can imagine that a number of floods or hurricanes occur in New Orleans every year. Each flood's destructive power is drawn from some distribution.  (Note that our general point will hold for any exponential distribution, which includes the normal, gamma, Weibull, binomial, Poisson, and more). What we need to be concerned about is not the distribution itself, but the distribution of the maximum for a given year.

To illustrate our point, we can imagine hurricane density distributed as a normal with mean 5 and standard error .6.  Each year ten floods are sampled from this distribution.   This maximum will be distributed as a Type-I Gumbel Distribution.  These two are depicted graphically below--a single flood's distribution in blue, and the maximum of that season in red (click to enlarge).

The important thing to note is how the distribution of the maximum positively skews the probability distribution we're considering to a long-right-tailed maximum flood, and that this is the distribution we need to consider when making optimal flood insurance decisions.

In this light, the article's discussion of 100, 1,000, and 10,000-year floods should be interpreted--as costs of protection rise, the benefits of protection become dramatically smaller.

What happened to all that anger over CEO pay?

Christian Science Monitor article "What happened to all that anger over CEO pay?" (July 12th, 2010) claims that CEO pay is too high:

In 2008, the CEOs of major US firms were paid more than 300 times the wage of the average American worker. Last year, they were paid just under 300 times average pay, according to new research by Mr. Pizzigati. Now that most of those firms have paid back the government, they're setting their own compensation levels again.

Those levels would astonish the bosses of top corporations in the late 1960s. Those CEOs got about 30 times the average wage of US workers.

Are today's bosses 10 times more capable? Is there a shortage of able managers? Nope and nope, says Pizzigati. "There is more management talent today than ever before."

This argument is riddled with flaws. First, no economic model could possibly imply that CEO pay is set by looking at the ratio of their wages to those of their employees. LeBron James is paid significantly more than his towel boy, so what? They perform completely different tasks, requiring completely different skills, in completely different environments. The question is not "are CEO's 300 times better that their employees at stocking shelves?" Rather, the question is "is the market for CEOs competitive?". The article itself suggests that there are plenty of qualified CEOs to choose from when starting a company.

Quarterly Journal of Economics article "Why has CEO pay increased so much?", by Xavier Gabaix and Augustin Landier model CEO pay. They match the best CEOs with the largest firms, and note that even when CEO talent is not very disparate across CEOs, small differences in talent can lead to very large difference in pay because of firm size. For example, the top CEO (in terms of talent) can increase the value of his company by only 0.016% relative to the 250th talented CEO, but this translates to paying the top CEO 500% more than the 250th CEO because of firm size. In particular, the authors find that

The six-fold increase in CEO pay between 1980 and 2003 can be attributed to the six-fold increase in market capitalization of large U.S. companies during that period. When stock market valuations increase by 500%, under constant returns to scale, CEO “productivity” increases by 500%, and equilibrium CEO pay increases by 500%.

In this light, high CEO pay makes sense. When a company's value increases greatly, the decisions of a CEO require him to handle more and more money. While the value of the company increases, his productivity increases. Meanwhile, individual workers on the factory floor do not handle more and more responsibility or produce more output as the firm grows, and should not be paid as though they do.

The 2010 Census and Latinos: What race are we?

Christian Science Monitor opinion editorial "The 2010 Census and Latinos: What race are we?" (April 6th, 2010) asks a simple question but fails to answer it. The author complains that various latino nationalities are not given their own categories.

It is Question 9 that has confused Hispanics. It asks one’s race, and the possible answers are White, Black, American Indian, Chinese, Filipino, Japanese, Korean, Vietnamese, Native Hawaiian, and Samoan. Responders are allowed to check as many boxes as they like.

Excuse me, but when did nationalities like “Japanese” and “Korean” become a race?

To answer the author's question, "Japanese" has been a racial term in the U.S. Census since 1870. "Korean" was first used in 1930, but has been intermittent. "Chinese" has been on the Census since 1860. "Mexican" was used in 1930. The author's lack of information could have been easily corrected.

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.

Within healthcare reform, a push to tax the rich

Christian Science Monitor article "Within healthcare reform, a push to tax the rich" (March 13th, 2010) describes as an incidental note a mastodonically foolish piece of the Obama medicare reform. It notes that one of the administration's new taxes is a tax on capital gains.

Obama would boost the Medicare tax by 0.9 percentage points for households with incomes over $200,000 for singles and $250,000 for joint filers. In addition, he’d impose a 2.9 percent tax on these same people on interest, dividends, annuities, and most other investment income. While the official Obama summary does not say so, the new tax would apply to capital gains as well.

Individual households supply capital. They enjoy consuming today rather than tomorrow. They are only willing to put off consumption today until tomorrow if they are paid for it--otherwise, they consume today. This is due to their discount rate, a primitive that is largely taken as given. Their discount rate does not change, and therefore, household supply of capital is perfectly elastic. If this is the case, then the whole incidence of a tax falls on the firm. However, both households and firms are able to relocate. In this case, government taxation of capital is optimally zero as it only harms production and raises little in taxes. The drastic impact taxation can have when both supply and demand are relatively elastic is graphically displayed below (click to enlarge).




This result is given relatively robustly by Andrew Atkeson, V.V. Chari and Patrick J. Kehoe, in "Taxing Capital Income: A Bad Idea" (Federal Reserve Bank of Minneapolis Quarterly Review, 1999). To quote the paper, "The intuition for why optimal source-based taxes are zero is that with capital mobility, each government faces a perfectly elastic supply of capital as a factor input and therefore optimally chooses to set capital income taxes on firms to zero."

In the hamartiology of economics, there are cardinal and venial sins. The taxation of capital is a cardinal sin.

When athletes praise God at the Super Bowl and other sports

Christian Science Monitor opinion "When athletes praise God at the Super Bowl and other sports" (February 9th, 2010) ignores possible utilitarian concerns in its invective against Drew Brees praise of god on national television.

'God is great.'

So said Drew Brees, the most valuable player in last Sunday’s Super Bowl, after leading the New Orleans Saints to an upset victory over the Indianapolis Colts.

Such comments have become commonplace on American television, where athletes routinely thank God in postgame prayers and interviews.

Is this a problem? I think it is. And to see why, try to imagine if Brees had made a slightly different statement: 'Allah is great.'

It is worth noting that approximately 76% of the United States are Christians. Corrections imagines that among Super Bowl watchers, and American sports fans, it's likely higher (and more intense).

In a purely felicific calculus, average gain that individuals who watch may get from hearing a praise of their chosen deity multiplied by their number is likely greater than the average loss from individuals who watch and don't like hearing praise of god. The author's comparison would make the transition from somewhere between a 3-to-1 and 9-to-1 christian-to-other watcher, to a very small minority-to-a large majority, if an Islamic prayer were said.

The author's comparison is false, if we examined it on Benthamian felicific calculus, or any reasonable weighting to achieve a comparison between aggregate benefit and aggregate cost.

Supreme Court ruling: Do we really trust corporations more than elected officials?

Christian Science Monitor commentary "Supreme Court ruling: Do we really trust corporations more than elected officials?" (January 22nd, 2010) contains two troublesome ideas. First, while describing a corporation's political messages as worthless, the article neglects to observe information effects that may balance incentive issues. In addition, the article assumes public choice incentives are aligned properly.

But if we cannot identify low-value speech, can we at least identify low-value speakers? Corporations would seem to be pretty obvious candidates. One thing we should be able to agree on is that speech will generally seek to promote the interests of the speaker. That’s fine if the speaker is a person; the government should respond to the interests of the people.

Corporations also know more than third parties the intricacies and costs within the industry. To silence corporations would be to lose information. The claim that a political action committee with a regulatory agenda is better for a citizen base as a whole than a corporation which seeks to maximize profits is, in most cases, ludicrous.

The Supreme Court has told us that we should trust corporations more than our elected officials. Right or wrong, it is a sad comment on our democracy.

Corporations certainly may have their incentives aligned better than politicians to serve customers--for an understatement, as Milton Friedman once surmised, "everything the government does, private enterprise can do for half the cost."

Supreme Court opens the money gates

Christian Science Monitor article "Supreme Court opens the money gates" (January 21st, 2010) argues that the fact that members of Congress limited campaign financing by corporations proves that even they believe that corporate donations to politicians are morally troublesome.

But even members of Congress, whose energy is increasingly diverted to fundraising, have long recognized the potentially corrupting effect that big money can have on them. More than 100 years ago they banned corporations from donating directly to federal candidates.

Government has power to create monopolies, adjust prices, and tax, and wields considerable other anticompetitive powers. It is in the interests of corporations to bribe politicians to benefit them at the cost of consumers. Framed another way, politicians have a franchise with which they accrue the monopoly rents they create for firms through bribes. If a law creates $10 million for a corporation in excess rent, then a politician should be able to gain up to $10 million in bribes, as firms compete for the rent.

Let us imagine that this legislation prevents future competition and allows firms to gain full monopoly rents in the future, rather than politicians. In such a case, long-lived corporations would be willing to pay the full net present value of monopoly profits today. In other words, we might imagine that short-lived politicians one hundred years ago sold their franchise at the expense, not of consumers, who lose the same amount either way, but of future politicians.  The transaction  is displayed graphically below (click to enlarge).

Just because politicians banned their future selves from doing something does not mean that they thought it immoral--it can simply be them selling their franchise for donations today.

Recession's silver lining: falling divorce rate

Christian Science Monitor article "Recession's silver lining: falling divorce rate" (December 7th, 2009) seems celebratory about what appears to be, by its own reckoning, a loss of aggregate utility.

These tough economic times may have at least one positive side effect: they might be encouraging greater family solidarity.

The evidence for this? The US divorce rate fell during the first full year of what might be called the Great Recession. That's the first such decline since 2005.

'Many couples may be rediscovering the long-standing sociological truth that marriage is one of society's best social insurance plans,' said W. Bradford Wilcox, a sociology professor and director of the National Marriage Project at the University of Virginia, in a new report on the state of US marital unions.

In other words, individuals who would have divorced haven't, because they are now too poor to be able to afford the loss of income. The argument for why this impoverished marriage is not welfare improving goes as follows: in a Coaseian sense, no divorce should happen unless the combined desires of both parties are for it to happen--if one partner desired divorce a little (we could say it give them an extra $30,000 a year in happiness) , and the other was vociferously against it (the loss of their partner would cost them $70,000 in unhappiness), then they would simply transfer between $30,000 and $70,000 to stop the divorce. Now, if divorce only happens when both parties gain from a divorce, and we believe that divorce is a normal good (so that people purchase more "divorce" when their income increases), it is true that reducing their income simultaneously reduces the divorce rate and reduces their utility.

The revelation that the Christian Science Monitor offers is that fewer people get divorced in poorer times. This is akin to celebrating individuals switching to public transportation rather than buying cars when they lose their job--those individuals are unambiguously worse off.

Boomerang kids: recession sends more young adults back home

Christian Science Monitor article "Boomerang kids: recession sends more young adults back home" (November 24th, 2009) makes a claim that is neither backed up by empirical evidence nor necessarily by economic theory. The article suggests that America's youth will pay for today's government borrowing tomorrow.

But some analysts say the youngest generations are being hit twice by this recession: once up front with the tough labor market, and again later as they’ll pick up a big share of the taxpayer costs of government programs to rescue the economy. This year’s stimulus spending package and other strategies by presidents before Obama have involved buoying the economy with borrowed money. [Emphasis added].

Parents care about their children. If government agents are acting against the wishes of the elderly and transferring money from their children to them in the form of government debt, then parents are free to transfer it back to their children in other forms--such as paying for their children's rent (allowing them to move home). It is possible for the introduction of Social Security to have no impact at all--parents who are getting more than they and their children desire can transfer their income back to their children. So too with all government spending programs. Of course, as with all government spending programs, deadweight loss is added, as offspring will be taxed in the future.

Nonetheless, the central point remains: it is unclear that children are the ones being harmed by taxes that have to be paid 40 years in the future.  If parents have their children's budget constraints in their preferences, then it could simply be this generation that pays for future taxes through monetary transfers now.  These transfers can come in the form of educating children, or allowing them to move back home.

Turn America into a nation of savers

The Christian Science Monitor's opinion editorial "Turn America into a nation of savers" (November 9th, 2009) wishes for the U.S. savings rate to go up.

Deciding that America needs to save, Mr. Cramer advocates government spending:

For the next few years, we should expect the federal government to continue to spend more than it takes in. This will be a good thing as it solves the troublesome "paradox of thrift," where reduced economic prosperity leads to sudden declines of consumer spending, which accounts for two-thirds of the economy.

But once the economy recovers, a high savings rate still will be essential to financing the investments American business must make to improve efficiency and avoid the looming prospect of inflation. And the more Americans of all classes save, the less dependent the country becomes on foreign creditors to buy our debt.

1) This article implies that savings are good. No course in economics would dare to make such a claim. If not saving makes people happy, then they shouldn't save!
2) The existence of a "paradox of thrift" is not clear. A fall in consumption and increase in savings will cause both prices to go down and interest rates to go down, both of which encourage consumption. Unless we believe in a multiplier, there's no paradox.
3) Ricardian Equivalence should take place when it comes to simultaneous government spending and consumer saving. The governmental budget constraint is the aggregate consumer budget constraint.

The only Paradox of Thrift that Corrections can see is the Paradox of consumers spending more (as individual taxes raise) while saving more (as individual bank accounts rise).