Wednesday, October 27, 2010

2010 Gus Rankings: Week 8

Here are the Gus Rankings after last week's games; yesterday's Boise State/Louisiana Tech game will be included in next week's rankings.

Tuesday, October 26, 2010

Pittsburgh's devil is in the details

I just got back from a lunch meeting outlining, among other things, the financial problems facing the city of Pittsburgh due to their pension program. Some details:

- There are a number of reasons that this problem has surfaced; one of them is that the population of the city of Pittsburgh has seen a remarkable decline over the last half-century. Pittsburgh proper's population was about 600,000 in 1960; Census projections put the figure at about 300,000 for the current Census.

That people are leaving city center's is not a Pittsburgh-specific problem. However, many other cities annex nearby locales and grow their land area-- some of them to a pretty remarkable extent. Houston went from about 150 square miles in 1950 to nearly 600 square miles today; you could say much the same about Phoenix as well.

Why can't Pittsburgh pull the same tricks? The way that the Pennsylvania state code is written to deal with this issue is that both the annexing and the annexed city would need to pass a referendum vote on the issue. That's not easy to do. The last time Pittsburgh annexed a nearby city was around 1930.

I'm not saying that annexation is a good thing...but that's been the outcome.

- Another reason for the shortcoming in Pittsburgh comes from the city's inability to control a tax revenue stream that comes from companies doing business in Pennsylvania using out-of-state casualty insurance. The revenue was designed for cities with financial troubles that were having issues funding their pension system. For the first five years of the tax, it served the Pittsburgh pension system quite well-- but then the law was reinterpreted to allow for cities with decent finances but poorly performing pension systems to secure revenue from this source as well. What's this create the incentive to do? Cities with fine finances can structure their pension system so as to qualify for need-based assistance. Some cities stopped contributing to their pension system altogether to claim their share of the funds. So Pittsburgh's share of tax revenue dropped by about 50%-- they're currently at about $20M-$30M per year less than where they'd be without the reinterpretation of the statute.

Again, not saying any of this is desirable...but that's the been the outcome.

- Pension systems use some sort of metric to determine the level of pay once retirement hits. The Pittsburgh system-- like many others-- use some sort of average of income earned over the final years of employment. The intention is to get a feel for the traditional income of an employee, and then the pension provides the appropriate level of replacement income. Well, this also creates the incentive for individuals to take on as much overtime as possible over the last few years of employment to maximize the pension payment. It's a process known as pension spiking. Once more, it's a process of the letter of the law not accurately reflecting the spirit.

Again, not arguing for publicly-funded pensions...but that's been the outcome.

- One of the solutions proposed for the pension shortfall has been to sell the parking assets of the city of Pittsburgh to the Pittsburgh Parking Authority (PPA). The PPA would then issue a bond to cover the sale, then using the increased parking revenues to pay the bond off over the coming decades.

Alright...but guess who owns the PPA? It's mostly a city of Pittsburgh enterprise. (There was a question concerning this at the meeting; somehow it's not entirely a public enterprise, but the mayor appoints the board of directors and they can float public bonds. I'm still a bit confused by this.) And guess what else? Issuing bonds to cover pension shortfalls are subject to taxes that bonds to cover asset purchases aren't. So while it's no small secret that this proposal is, in effect, a bond issuance to cover pension debts, the IRS won't see it as such.

Again, not arguing for any further debt for the city of Pittsburgh, bond or otherwise...but that's been the outcome.

Basically, you could make the argument that the pension troubles that exist today (as well as one of the potential solutions) are at least partially a function of laws written in a way so at to be open for interpretation or re-interpretation by groups looking to grab what they can.

Thursday, October 21, 2010

Bargaining or "Expecting Too Much"?

Tyler Cowen reports:
Some Americans: "I expect my government to solve Problem X (fill in the blank, the list is a long one) without raising my taxes, and in the meantime I will refuse to countenance a tax increase. To support this attitude I am willing to sound fiscally unreasonable, if necessary."
Do read his post to get the proper context.

I frequently hear others deride the fact that voters want more public services but will not support the appropriate tax increase that is necessary to finance them. They tend to view people like this as irrational or ignorant.

By contrast, I think this is the default way of thinking in a market-based society. You go to the bargaining table as a buyer, and you want everything for nothing. The seller plays the role of a counterbalancing force wants to give you nothing in exchange for every penny you have. These competing tensions are reconciled to a mutually beneficial exchange of money and services. Consumers are not ignorant hypocrites for going to the bargaining table with this set of initial demands.

If you think of voters as buyers and the public sector as sellers for government services, then I see no reason for buyers to deviate from what they are accustomed to...start by demanding everything for nothing. Who truly knows what the cost of public provision is any how? Might as well push them as hard as you can for a lower price. All subsequent problems that follow from that mentality are really problems that are already identified in a broader public choice analysis.

Data Alert! IRS Historical Data

Lots of cool stuff, summarized by TaxProf.

Click here for the 1863 Report of the Commissioner of Internal Revenue!

Wednesday, October 20, 2010

You Were Warned

Free checking accounts are disappearing, thanks to new laws and regulation. I recall Don Boudreaux, among others, warning this would happen when these laws/regs were first passed.

Tuesday, October 19, 2010

What I've Been Writing

"Will You Stop That Infernal Racket!?!' Externalities and The Simpsons." This is a working paper version of a chapter forthcoming in a book edited by Joshua Hall, titled Homer Economicus: The Simpsons and Economics. I place a great deal of emphasis on the distinction between pecuniary and technological externalities, as well as externalities as a failure of institutions to create property rights.

"Assessor Incentives and Property Assessment." This is forthcoming in the January 2011 Southern Economic Journal. The punchline is that political incentives matter.

"Robustness and Volatility of Community Irrigation Systems: The Case of Taos Valley Acequias." This is forthcoming in the Journal of Environmental Economics and Management, and is a co-authored piece with Michael Cox, who defended his dissertation under Elinor Ostrom. Michael is on the job market this year, and his dissertation is a superb contribution to the Bloomington School of Political Economy.

Here is my portion of a Point-Counterpoint debate in the IndyStar over putting property tax caps into the state constitution. This will likely pass the November elections and serve as one of Governor Daniels (R) biggest political victories. I argue against it, as I foresee this as the first step in a takeover of local government functions by state government. In my book, that increases the size of government, contrary to the opinion held by Indiana Republicans.

"Does State Spending on Mental Health Lower Suicide Rates?" This is forthcoming in the Journal of Socio-Economics with Pavel Yakovlev and Fatima Carson. We find that it does after correcting for endogeneity bias, but the effect is very small and is not statistically significant. In fact, spending on welfare has a comparable effect in magnitude terms.

Finally, Josh Hall and I have a paper now published at Public Finance Review on Yardstick Competition and the adoption of local school district income taxes in Ohio. I am adding the emergence of school district income taxes as a piece of a much grander puzzle I have in mind for the economics of local public finance, which will be my first post-tenure project.

Sunday, October 17, 2010

2010 Gus Rankings: Week 7

Ahead of today's initial BCS Rankings, here are this week's Gus Rankings.

A few notes:

- The top two teams this week-- Auburn and LSU-- square off next Saturday. Gus likes Auburn.

- Oregon, anticipated to be the #1 team in the human polls any minute now, is the lowest ranked undefeated team in the Gus Rankings, at #30 with 6 points. Many remember the win over Stanford (good for 4 points), but wins over Arizona State (1), Tennessee (1), New Mexico (0) and Washington State (0) don't help too much.

- On the other end of the spectrum, San Jose State sits at 0-5 but with -3 points, easily the highest rated team without a win at #78. Of course, those five losses-- to Wisconsin (lose 1 point), Utah (0), Nevada (1), Boise State (0) and Alabama (1) -- don't hurt too much.

Friday, October 15, 2010

Starbucks Slowdown

Starbucks is making news by telling its employees to slow down and not make coffee so quickly. Isn't it a drag on the bottom line when employees are too productive?

I'd expect Stabucks to continue to do a good job running their business, and simultaneously that this rule to be difficult to enforce within their company. Will employees tolerate already edgy-before-their-caffeine customers watching them make one drink at a time, and hence the wait time for their beverage to increase? I don't see it happening. I'm predicting a spurious correlation-type statement in 6 months from Starbucks saying that 1) business has improved, 2) we've incorporated this take-more-care policy, thus 3) people care a large deal about the craftsmanship of their morning mocha-- after all, our bottom line proves it.

I'm curious to see how it all shakes out, both in the aggregate and at my neighborhood location.

Wednesday, October 13, 2010

2010 Gus Rankings: Week 6

Here's the Gus Rankings for Week 6. LSU tops the list, followed by Auburn, Michigan State and Oklahoma at #3, and Boise State and TCU at #5.

The lowest ranked undefeated team? Utah, coming in at #29. And that's just five spots ahead of the highest ranked team with a losing record, Iowa State, the team they just defeated last weekend.

Bringing up the rear? Again, the Mean Green of North Texas prove to be tough to dislodge from the bottom of the list.

Tuesday, October 12, 2010

Happy Birthday to Charles Tiebout!

Here is his Wikipedia page, and here is his internet museum at the University of Washington. Here is Fischel's "Footloose at Fifty" essay in honor of his 1956 classic A Pure Theory of Local Expenditures. Note that the title is a parody of Paul Samuelson's theory of public expenditures, which was published in 1954. In political science, he is just as well known for his 1961 piece with Vincent Ostrom and Robert Warren on polycentricity in metropolitan areas, where they argue against the metropolitan form of public administration favored at the time ("Gargantua" as they refer to it).

His 1956 piece has about 8,000 citations according to Google Scholar, and it is from this piece that "Tiebout Competition" emerges as a basic theory of local government. The idea of Tiebout Competition is so well known that his original paper is probably not read by a large fraction of the authors who cite it, which accounts for the significant number of papers which somewhat inappropriately cite Tiebout (1956) as actually claiming that local governments will compete on the basis of public good provision and taxes.

Monday, October 11, 2010

Local Control and the Indiana Property Tax

Here is my recent op-ed in the IndyStar, which is part of a point-counterpoint debate in the Sunday Edition over putting property tax caps into the state constitution.

My argument against this is that it will lead to a bigger government, though its proponents (mostly Republicans) think the opposite is true. They could be right, but I think it is much more likely that the state will increasingly take over local government functions due to the volatility of non-property tax revenue sources of income. The operating budget of local schools have already been overtaken by the state as part of the quid pro quo for this policy, and there is discussion that the state might start pushing for a consolidation of smaller school districts to lower costs.

My preference is for locals to retain these functions where they make decisions on the basis of property taxes, rather than less salient sales or income taxes.

Private Sector Corrections of Externalities

That is a poster from Scotty's Brewhouse in Bloomington. Note that, if people who take shots are less likely to get a flu shot than those who do not, then this could be a more efficient correction of externalities than, say, a small percentage discount of their next meal. Essentially, it could be a form of tagging in lieu of a Pigouvian subsidy.

Thursday, October 07, 2010

The Perils of Time Inconsistency: Kitty Edition

When my girlfriend’s parents visited this summer and started feeding two stray cats on my back porch, I knew I was in trouble. Soon we were buying mouse-shaped toys and a laser pointer to spend our time outside in the evenings playing with our new furry friends. Most people would have probably had only warm and fuzzy thoughts while dangling the mouse-on-a-string. But, as you already know, we here at TPS are not most people. Surveying the scene, I couldn’t help but think of the two-word phrase that scares me more than any other: time inconsistency.

We both preferred the cats stay outside. They are a lot of fun—we like playing with them. But neither Astrid nor I were interested in trading the fur-free couch and scratch-free dining table for cat-filled accommodations—especially since it was so nice outside and most of the playing-with-them benefits were already accruing. (Yeah, yeah. We are heartless utility maximizers. Blah, blah, blah.) However, I was pretty confident that Astrid would change her tune as the weather became less pleasant. There is absolutely no way she would be able to look into those soft but-I’m-so-cold eyes day after day without eventually giving in. (I know: this means I am more heartless than she is. No surprise there.) And since dU(Will)/dU(Astrid) > 0, I would naturally want to reduce her discomfort by agreeing to take them in.

I didn’t know exactly how long it would take. But I was confident that, if not sooner, snowy paws would put those cats indoors. We could not credibly commit to keep them outside forever. So what should we do?

If it were merely a matter of putting out food a few times a day and playing catch-the-mouse, it would not have mattered when we brought them in. We were already doing those things anyway. But we needed also to consider the litter box training. I’m no cat expert, but I’d imagine—like most things—training is more easily accomplished early before bad habits set in. So despite our preferences to keep them outside, our inability to credibly commit to this strategy forever and the gains from training early meant that we should just bring them inside while it was still nice and sunny.

But—like so many in time inconsistent situations—we persuaded ourselves that we would be able to commit. “It’s fine. They are wild animals,” I told myself. “They’ve been surviving for thousands of years outside.”

Fortunately for us, it got cold relatively early this year.

Wednesday, October 06, 2010

Private provision of traditional public sector services

TPS friend Jeremy Segall sends along this story and the ensuing debate. Long story short: Local town charges for fire protection, local man that didn't pay didn't have the fire department show up when his house was on fire, local man thought "they'd come out and put it out, even if you hadn't paid your $75, but I was wrong." How's that for a credible signal to pay your bill?

Naturally, the improved matching of user cost to user benefit makes me happy. As it's set up now, this scenario would work best in a rural setting, where spillovers are minimized (as highlighted in the article). In a more urban setting with houses closer together, I'd imagine groups buying fire protection as a unit, not unlike a condo association.

Tuesday, October 05, 2010

2010 Gus Rankings: Week 5

Here are this week's Gus Rankings. Oklahoma tops the list, followed by TCU.

There was an interesting development in the Gus Rankings after this weekend's games, involving two of the more important games, that would happen only with great rarity in the traditional human-based polls. Florida lost to Alabama, yet remains ranked higher (3 vs. 4), and Stanford lost to Oregon, yet also remain ranked higher (14 vs. 18). How'd that happen? Florida's (and Stanford's) past opponents had a better weekend than Alabama's (and Oregon's). It's probably not likely to persist-- all four of these teams will probably win a vast majority of their remaining games, and these games will likely contain a large percentage of common opponents (with regards to the pairings above). So no large point advantage there. The advantage gained from last weekend's winners, however, is that they get additional points every time last weekend's loser wins another game. So in the long run, Gus pieces it out-- but the short-run effect is nonetheless interesting.

Art Carden requested a listing of the most overrated teams-- since that's a matter of relativity, I'll simply eyeball the largest differences (10 spots or greater) between the AP poll and the Gus Rankings, contingent on both teams being ranked. Feel free to compare yourself; I'll split it into two categories:

Gus likes, humans dislike:

- Virginia Tech (19 spots)
- Kansas State (15)
- Oklahoma State (13)
- Michigan (12)
- Missouri (12)
- Northwestern (12)
- Florida (11)
- Baylor (10)

Humans like, Gus dislikes:

- Arkansas (34 spots)
- Miami (FL) (25)
- Utah (22)
- Wisconsin (22)
- Oregon State (16)
- Oregon (15)
- USC (15)
- Nebraska (14)
- Ohio State (14)

It's interesting to look at-- there's 4 Big 12 teams on the "Gus likes" list, and 3 Pac-10 teams on the "Humans like" list, and Utah's joining that conference next season. Virginia Tech's difference may well be explained by the fact that Gus does not track games against FCS teams.

Actually, now that I've finished the list, I'd love to keep these groupings of teams in mind and see which group shakes out better over the course of the season.

The intersection of interests in my life

Since I'm a Pirate season ticket holder and a fair amount of my research efforts go to gambling markets, I appreciated this bit from Deadspin; the original post is here. It's about an individual whose gambling strategy for the entirety of last season was betting against the Pirates. Here's the spreadsheet showing the results. It's a mixture of run line and money line bets; nonetheless, at the end of the season, he posted a 9.98% gain. Vegas didn't value the Pirates low enough!

Property Rights in India

My close friend and colleague Shruti Rajagopalan has an article at the WSJ on the Allahabad High Court's recent decision concerning the Babri Mosque. Here's an excerpt:
With such a precedent, state legislatures are too feeble to prevent similar disputes in other religious sites where Hindus and Muslims pray together, such as Mathura and Varanasi. In a land of 820 million Hindus who worship several hundred forms of God, the danger of expropriation in the name of faith is real and imminent.

Sunday, October 03, 2010

Cornering the market

The typical example is the Hunt Brothers and their actions in the silver market. Here's a better example-- China and rare earth elements. Note that once China attempts to exploit a monopoly position, they simultaneously eliminate the strength of that position.

Hey-- how about that?! Markets work!