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.

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!

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.

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.

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.

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.

Are Zombies an Economic Indicator?

Source and story: Wired

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.

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.

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.

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.

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.

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.

ATSRTWT.

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!

Stand-Up Economist at 2010 AEA Meeting

Assorted thoughts

1. In what's becoming an annual event, Alberto Contador, the current Tour de France champion, has tested positive for a banned substance. Contador blames tainted meat, which has to be the worst possible excuse out there. If he knew ex ante that the meat could trigger a positive test, it just doesn't make sense to eat it. (From a competition/drug testing perspective, not from a why-would-you-ever-eat-something-described-as-tainted-meat perspective.) If he didn't know ex ante that it could cause a false positive, what in the culinary world has changed over the last months to determine this? I'm being facetious-- nothing that I know of, anyway-- but even if it did, who's to say that it couldn't have been something else he ate? If the answer to that is "It's known that meat can have this impact," we're back to square one.

Cycling and drug scandals are a fantastic example of diminishing returns-- at this point, believe the marginal impact to cycling from additional positive rider are as close to zero as possible.

2. I get the sense that the number of people in a dining party is a function of the quality of the restaurant. I think this because every time I run down to the McDonald's near the office, it's generally pretty busy, but the single diners outnumber the groups by a healthy margin (even comparing the total number of people dining in each). When I go to a restaurant, I rarely see people dining alone. If dependent variable is simply the average/expected group size as a function of restaurant quality, I'd expect it to rise to a point then fall-- you generally don't take consistently larger groups to particularly high quality resturants. (Perhaps I'm mistaken.) If the dependent variable is simply the number of groups vs. the number of single diners, maybe that's increasing over the entire range. I'm not perusing the highest quality eateries, I'll spare you my likely incorrect assumptions.

Maybe it's because there aren't many places to sit that would accomidate a larger party? Possibly, but larger parties could still exists within the current framework at most fast food eateries.

I'm not certain if Tyler Cowen's said anything about this, but this seems right in his wheelhouse.

3. I just made it through Exile on Main Street; I'm still a bit baffled as to the critical acclaim this album continually gets. (I do understand part of that may have been drumming up interest for the recent re-release.) I think part of the reason is that the Rolling Stones is a fantastic band that wasn't particularly adept at making good albums, and people can't seem to handle that disconnect. They have to choose something as a flagship effort, and Exile seems to be it.

Los Angeles Crime Database

The L.A. Times, in conjunction with the Los Angeles Police Department and the Los Angeles County Sheriff, has developed a new real-time crime database. Check it out here. The data itself is useful, of course, but I'm curious what (if any) behavioral response will come from this. Could people make day-of decisions based on the weekly crime in potential neighborhoods they were thinking of going to, say, for dinner? If that happens, do criminals adjust and move their criminal activity so as to counter the avoidance?

When one thinks Los Angeles, one thinks (among many things) traffic. I wonder what traffic rates have to do with crime in the Los Angeles area.

Spatial folks, get after it!

Not from the Onion: Judge from Intercourse (PA) Hands out Acorns with Hidden Condoms Inside

Here is the link, no excerpt due to copyright, but I'm betting you'll click on the link.

Doctoral Programs Rankings

The National Research Council has released their rankings on 5,000 doctoral programs over 59 programs for the first time in 15 years. CHE has a useful online tool to help sort through the data here. Happy scouring!

Addendum: Here's the discipline-by-discipline data.

2010 Gus Rankings: Week 4

Here are this week's Gus Rankings. The SEC (4, including the top 3), Pac 10 (3) and Big 12 (3) are well represented in the Top 10. At the low end, Eastern Michigan has wrested control of the bottom spot.

Lowest ranked BCS team: Purdue (110)
High ranked non-BCS team: TCU (5)

2010 Gus Rankings: Week 3

Here are this week's Gus Rankings, just in time for tonight's game when Miami visits Pittsburgh. (Gus has no opinion; both teams are at #69 this week.) Bob Lawson's Auburn Tigers top the list with Texas, Arizona is third and seven teams claim the fourth sport. Look for the winner of Auburn/South Carolina to make a big jump next week.

And bringing up the rear...Ed Lopez' North Texas Mean Green.

Kill Whitey?

In Wired is a fascinating set of studies on race, politics, and "The Trolley Problem." In a classic psychology experiment, people are asked if they should flip a switch that detours a trolley away from running over five people to another rail that runs over a single person. The intention is to get at whether people are morally utilitarian or consequentialist. Other variations include pushing someone in front of the train.

The article covers research on introducing race and political leanings of the participants, with many fascinating findings. The conclusion (at least suggested by the article here) is that people adopt their moral reasoning ex-post, rather than employ it ex-ante:

So we’ll tell a child on one day, as Pizarro’s parents told him, that ends should never justify means, then explain the next day that while it was horrible to bomb Hiroshima, it was morally acceptable because it shortened the war. We act — and then cite whichever moral system fits best, the relative or the absolute.

2010 Gus Rankings: Week 2

Here are the first Gus Rankings of the 2010 season.

Of note:

- No team has two points, which is the same as last year. I think this is a fairly strong piece of evidence that teams don't want to maximize the quality of opponents early in the season, independent of what coaches or athletic directors may say. Yes, there is a factor out of your control in getting to 2 points through Week 2, but you'd expect that to wash out over multiple teams sitting at 2-0. You'd think someone would get there if enough teams tried to.

-Three teams-- Arizona State, Ball State and Indiana (Hi Justin!)-- have yet to play a FBS opponent.

- Gus has slated Eastern Michigan and UAB as the worst teams through only two weeks of games.

Blockquoting X

X = Fidel Castro, in response to a question on whether Cuba's economic system is still worth exporting to other countries:

The Cuban model doesn't even work for us anymore.

Wow. I used this video in class recently. The saddest thing: the average Cuban could not utter that same phrase without fear of state action.

Boettke links to other communist admissions.

What I'm Writing

Roger Koppl and I are currently working on a book chapter titled "Animal Spirits and Cognition in Macroeconomics." I'll post the full draft shortly. Here's a snippet on rational expectations which (at least I hope) takes aim at the typical presentation of the assumption (you know: the Phillips curve assumes expectations are unchanged; then Friedman and Phelps said that was stupid; and Lucas, building on Muth, discovered rational expectations as the logical conclusion to the argument of Friedman and Phelps--as if no one had thought of it before):

It is historically inaccurate (and, to the extent one knows otherwise, intellectually dishonest) to claim the rational expectations assumption was discovered in the 1960s with Muth. The theoretical power behind the assumption of full and complete expectations had in fact been known for some time. Among others, Hicks (1936, p. 241) had expressed the basic idea in admitting it “unrealistic to assume that an important change in data—say the introduction or extension of a public works policy—will leave expectations unchanged, even immediately.” Rational expectations was not discovered, but rather rediscovered in the 1960s because earlier theorists had explicitly rejected the assumption. In the case of Hicks, it was assumed that “there is a psychological unknown, affecting the magnitude of the impact effect” and, as such, “[w]e must not expect the most elaborate economic analysis to enable us to see very far ahead” (p. 241). Earlier economists were aware of rational expectations and, as Meacci (2009, p. 1) describes, saw the assumption primarily as “a device […] to conceal the link between the disappointment of expectations and the theory of fluctuations.” It was not a lack of knowledge that had left the assumption largely unemployed, but the feeling that it was wholly inappropriate to use in addressing a topic so intimately linked to the process of time.

The comments are open. I'd love to hear what you think.

New Data: Social Assets and Vulnerability Indicators

My fellow data lovers might be interested in this interesting range of data collected by SAVI. It is a "dynamic community information system" hosted by the Polis Center at IUPUI, and it allows you to map, compare, and store data about Central Indiana communities from a wide range of data sources.

The amount of data available is impressive, with geographic information on subsidized housing, air quality, communicable diseases, birth defects, etc. You can find a complete listing here.

IU We're All For You

That's the title of SPEA graduate and rock comedian Brian Smith. He gives a shout-out to SPEA in the video, but in a way that does not flatter our image on campus among the undergraduates. The video is funny, so even if you've never seen IU, you will probably enjoy it.

When Should the Government Exploit the Salience Bias in Taxation?

This paper is provocative enough for it to automatically appear on my reading list for doctoral public finance. By Deborah Schenk, of NYU, and titled "Exploiting the Salience Bias in Designing Taxes" but the theme is closer to the title of this post. Here is the abstract:

In making decisions, individuals rely on certain heuristics or cognitive biases. One of these is salience, which generally refers to visibility or prominence. Individuals are likely to focus on items or information that are prominent or salient and ignore those that are less visible. This paper develops an argument for exploiting this cognitive bias in designing or changing taxes. Most commentary assumes that the intentional use of low-salience taxes by the government is undesirable and that increased salience is always required; to do otherwise is to take advantage of the cognitive bias that causes individuals to ignore taxes that are not prominent or salient. Although increasing salience is often desirable, there is a political economy argument for intentionally exploiting this bias by incorporating low-salience provisions into tax design. In developing the argument that utilizing this bias may be an appropriate fiscal tool, the paper begins by setting out the differences between transparency, complexity, and salience, which are often confused in the literature. The paper then makes a normative case that it is appropriate for legislators to design a tax by intentionally exploiting the cognitive bias that causes individuals to ignore information that is not prominent. The paper differs in two ways from past literature discussing salience. First it considers salience with respect to federal income taxes. Most commentators have explored salience in connection with consumption or commodity taxes. Second it considers the salience of discrete provisions, rather than merely the salience of the tax itself. It concludes with a case study where the use of low-salience tax provisions are justified and effective, i.e. where Congress finds it necessary to minimize the prominence of the tax because politically it cannot increase marginal tax rates.

Bumper Stickers at SPEA

An intelligent group parks here:


And no, I don't know the owner of the car.

Before there was Enron, there was Orange County

That's the title of this article in Public Budgeting & Finance (couldn't find an ungated copy), by David Matkin. I share it primarily because the title is so good:

Recent financial scandals in some of America's largest corporations have prompted popular speculation that a similar crisis may occur within the public sector and, therefore, that government and nonprofit organizations should be required to adopt financial oversight practices similar to those that are mandated of publicly-traded corporations in the Sarbanes-Oxley Act of 2002. One of those mandated practices—the use of financial-oversight committees—is already a common practice in public organizations, though little is known about its effectiveness. This study uses a national sample of local governments to examine whether financial-oversight committees improve financial control and strengthen stakeholder confidence in financial reporting. The findings provide preliminary support for the use of financial-oversight committees as an effective tool to improve financial accountability in local government.

Get ready for some more Gus!

My apologies for the sparse appearances here at TPS-- worry not, the experts still come here first.

I wanted to drop a quick note and let everyone know that, as the college football season gets underway tonight, the Gus Rankings will be in full force again this year! For the uninitiated, the Gus Rankings are TPS's simple method of ranking college football teams-- nothing more than counting wins and losses. Here's the original post that outlines the methodology, and here's everything Gus related on this blog.

Remember, Gus can't generate a ranking until teams play at least two games, so expect to see the first rankings after the weekend of Saturday, September 11. Don't expect to see a large degree of variation in the rankings until 5 or 6 weeks in--then again, it's always fun to see who rises to the top early in the season. (Like Washington at #1 in Week 3 last year.)

An Empirical Test of the Division of Labour

Forthcoming in JUE:

This paper provides supportive evidence to the notion that the division of labour is limited by the extent of the (local) market. We first propose a theoretical model. Its main prediction is that scarce specialists occupations are over-represented in large cities. Using census data for French cities, we find strong empirical support for this prediction.

Haven't read it, but it is on the "when I have the time" pile of papers.

Regulating Away Equality

Tax Notes Today (I think it might be gated, sorry) provides readers with 10 Executive Compensation Mistakes for firms. Most of them are details on how to structure contract details to conform with regulatory and accounting requirements. This one is particularly interesting in the second paragraph:

4. Treating everyone the same. It has long been standard operating procedure at many companies to treat all employees the same, for a host of reasons. Foremost among those reasons is that many companies find it hard to make distinctions among rank-and-file employees or senior executives.

However, current trends and regulatory reforms are forcing companies to distinguish some employees from others. Companies are now required to expense stock option awards, meaning that making option awards available to all is simply not financially feasible. Not everyone can be treated the same; not everyone can get big option or restricted stock grants.

Government mandated accounting standards and disclosure requirements are not the only reason to differentiate among employees. There are the important questions of incentives and retention: A company must provide a reward structure to motivate its employees to perform and to stay with the company. Each company must ask and answer why it cares about retaining a given person and how it plans to do so. Inevitably, employees are clearly going to be treated differently. Companies will have to learn how to manage the process of creating and calibrating an incentive structure.

Paging Professor Stigler

From Wired:

“An Act to Ensure That A Local Government That Competes with Private Companies in Providing Communication Services Has The Support Of Its Citizens” was sponsored by a prominent state lawmaker and backed by incumbent ISPs, including the cable lobby. But it’s not like those ISPs actually wrote the now-discarded bill, right?

[...]

When the I-Team asked him if the cable industry drew up the bill, Senator Hoyle responded, “Yes, along with my help.”

Why would anyone have expected different?

Rent-Seeking Fail

A twofer:
Rent-Seeking Fail #1: The New Jersey education commissioner gets caught in a lie over a paperwork error that probably cost the state a $400 million grant from the Federal Government.

Rent-Seeking Fail #2: This prompts a call for his resignation from the governor, and responds by saying out-loud what is only to be implied:

Schundler said he was asked to resign, but he requested to be fired instead so he could collect unemployment insurance.

"I have a mortgage to pay and a daughter about to start college," he said.

Hat Tip to KipEsquire for the find.

Death By PowerPoint

I assume Claudia will ensure that Aidwatch will be all over this. From Wired:

Consider it a new version of death by PowerPoint. The NATO command in Afghanistan has fired a staff officer who publicly criticized its interminable briefings, its over-reliance on Microsoft’s slide-show program, and what he considered its crushing bureaucracy.

Have you centrally planned your war economy today?

Markets in Everything: Dowry in Bangladesh

From the QJE (ungated 2007 version, I haven't checked compatibility):

We explain trends in dowry levels in Bangladesh by drawing attention to an institutional feature of marriage contracts previously ignored in the literature: mehr or traditional Islamic bride-price. We develop a model of marriage contracts in which mehr serves as a barrier to husbands exiting marriage and a component of dowry as an amount that ex ante compensates the groom for the cost of mehr. We investigate how mehr and dowry respond to exogenous changes in the costs of polygamy and divorce, and show that our model gives a different set of predictions than traditional models. We show that major changes in dowry levels took place precisely after the legal changes, corresponding to simultaneous changes in levels of mehr.

A Room With Two Views

Editorial from WSJ (gated), titled "The IRS Targets Incompetent Tax Preparers: That's The Good News. But the Agency is Going Overboard."

The article describes the new regulations to be unnecessarily complicated and burdensome for the more "legitimate" establishment.

I would like this to be a taste of their own medicine. Tax preparers are among the special interest groups that pressure for a complex and evolving tax code so that they keep plenty of business. However, it is more likely that this will devolve into a bootlegger and baptist story.

Finally, I would like to suggest that another way of making tax preparers less incompetent is to make the tax code less complicated, thereby reducing the need for specialists.

The Deadweight Loss of NY Sales Tax: Sliced Bagels

From WSJ (HT: KipEsquire):

In New York, the sale of whole bagels isn't subject to sales tax. But the tax does apply to "sliced or prepared bagels (with cream cheese or other toppings)," according to the state Department of Taxation and Finance....Kenneth Greene, the owner of 33 Bruegger's Bagel franchises throughout New York, says the state demanded that he start charging taxes on all bagels, except for those that remain intact and are consumed off premises, and forced him to pay a "significant" sum in taxes that the state estimated he owed.

Declaration of Independence: "Too late to apologize"

In apparent envy of the Hayek-Keynes rap, political economists and political scientists rally behind equally-cheesy video.



Stick around until the end. It gets even cheesier.

Blockquoting X

X = Lawrence H. White (1977):

Though all [Austrian economists in 1977] presumably share a subjectivist perspective on the nature of economic discourse, we can expect the future development of Austrian views on the proper methods of economics to be marked by disagreements both between generations and within the younger generation on the finer points involved. Such controversy is merely a healthy sign of intellectual progress. It is also, as we have seen with respect to the earlier generations, very much a part of the Austrian tradition.

Are Housing Prices Clearing? Timing and Matching v. Clearing

As someone who studies local housing markets, I have a hard time understanding what this question is supposed to mean when discussing national aggregates. Nevertheless, from the NAR we learn that:

Existing home sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest since May 1995.

Felix Simon comments:

The number is so low that it looks like a statistical aberration: let’s hope it is. Because if it isn’t, the news is gruesome. It means that despite record-low mortgage rates, people aren’t able to buy houses: essentially all the benefit from those low rates is going to people who already own their homes and are taking the opportunity to refinance.

The news also means that there’s a big gap between buyers and sellers: the market isn’t clearing. Sellers are convinced that their homes are worth lots of money, or will rise in price if they just hold out a bit longer; buyers are happily renting, waiting for prices to come down. And entrepreneurial types, whom one would expect to arbitrage the two by buying houses with super-cheap mortgages and renting them out at a profit, don’t seem to have found those opportunities yet.

I have a different take: We are observing the consequences of a adjustment in the timing of housing purchases. In fact, the Reuters article even makes the connection:

"This is a worrisome report and while it reflects the volatility caused by the end of the (government home-buyer) tax credits, it also indicates a deterioration in the underlying trend for housing demand," said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch in New York.

The bold emphasis is mine, and I focused it on that part of the statement because the phrasing of it seemed to be intended for maximum scariness: "Volatility caused by the end of the home-buyer tax credits." Why did it cause volatility? People probably moved their housing purchases up by several months or even a few years in order to get the temporary tax credit. This inflated previous housing purchases, and deflated them in the post credit period. The volatility was not caused by the "end of the tax credits" so much as the existence of the temporary tax credits!

This also had another consequence, which is that people probably didn't just adjust on the time dimension, but also in terms of what kind of housing attributes are desired. Remember, no two houses are exactly the same, which makes the housing market a matching game. When a tax credit is on the line, you might settle for a house that you wouldn't have if you had more time. This temporal shift has likely caused a temporal mismatch of housing preferences between buyers and sellers. Having buyers change composition like that is likely to cause funny things to happen.

I would add to support for my claim, based on the article:

1. First time home buyers, who were the ones eligible for the credit, declined in their representation as buyers.
2. The addition to the inventory of previously owned homes for sale did not seem to have a similar increase to match the decline in sales (though it did increase).

The housing market might not be setting a market clearing price yet (which rose 0.7%), but since median national house prices mean very little, I am less inclined to view this data as indicating that a significant price decline is on the way. It could be. I think it could also be very reasonable for sellers to let the mismatch period pass before making big conclusions about what their house might be able to sell for.

Taxes for Blogs? In Exchange for What?

The Tax Foundation reports:

After dutifully reporting even the smallest profits on their tax filings this year, a number - though no one knows exactly what that number is - of Philadelphia bloggers were dispatched letters informing them that they owe $300 for a [lifetime] privilege license [or $50 per year for an annual license], plus taxes on any profits they made.

Even if, as with Sean Barry, that profit is $11 over two years.[...]

Even though small-time bloggers aren't exactly raking in the dough, the city requires privilege licenses for any business engaged in any "activity for profit," says tax attorney Michael Mandale of Center City law firm Mandale Kaufmann. This applies "whether or not they earned a profit during the preceding year," he adds.

So even if your blog collects a handful of hits a day, as long as there's the potential for it to be lucrative - and, as Mandale points out, most hosting sites set aside space for bloggers to sell advertising - the city thinks you should cut it a check. According to Andrea Mannino of the Philadelphia Department of Revenue, in fact, simply choosing the option to make money from ads - regardless of how much or little money is actually generated - qualifies a blog as a business.

Two thoughts:

1) Usually, there is some kind of service-based justification for a business license fee (they require police protection, infrastructure, etc).* I see no argument for a quid pro quo here, this is just a stick-up. Am I missing something?

2) I would love to have access to the internal dialogue that went into deciding on blogging fees of $300/lifetime or $50/year. My guess is that it would follow the pure sellers problem (aka revenue maximization).

*You can argue that bloggers should report their blogging income, without getting into the quid pro quo issue, as that is the norm. The issue is making them pay for the license in addition to taxing blogger income.

Stewart Gets It!

The end of this clip is incredible. John Stewart (through Charlton Heston) makes it clear that neither the right nor left are principled defenders of the Constitution. Both sides use the Constitution like a drunk uses a lamp post: more for support than illumination.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Extremist Makeover - Homeland Edition
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

[HT: Dan Smith]

Ben Powell on Farm Subsidies

What I'm Reading

Blockquoting X

X = Russ Roberts:

When your teenager drives drunk and wrecks the car, and you give him a do-over—repairing the car and handing him back the keys—he’s going to keep driving drunk. Washington keeps giving bad banks and Wall Street firms a do-over. Here are the keys. Keep driving. The story always ends with a crash.

Cheap Talk: The PA Tax Amnesty

My current research involves state tax amnesties, and part of it is going to involve credible threats. Remember this creepy commercial that circulated the web last spring?



Well, the amnesty is over. Time for the crack downs to begin, right? Rebekah Lu reports:

In the wake of the Pennsylvania Sales Tax Amnesty program, which Governor Rendell calls 'an overwhelming success' Pennsylvania has announced that it is still willing to take money from any tax delinquents out there who didn't pay up when they had the chance to avoid paying penalties. (The Amnesty program waived all penalties plus half the interest owed.)During the amnesty program the state had suspended the voluntary disclosure program which is the usual avenue for delinquent taxpayers to come forward and pay their debts. As of August 1st that program is again available. In return for coming forward voluntarily taxpayers now taxpayers will be responsible for any taxes owed plus all the interest. A 5 percent non-participation penalty is also assessed.

So by "amnesty", the state was really just undertaking a heavy marketing promotion of a special they were running on an already existing and permanent tax amnesty program. Half-off everybody, this time only!!

The Panther's "Name Your Own Price" Ticket: My Two Theories of Rent Extraction

From Wired:

To counteract that wave, the Panthers are trying out a bold, new season ticket-selection process called Perfect Plan. The system is ridiculously simple: Fans need only pick out an area within BankAtlantic Center and propose a per-game price for a specific seat. Then, within 24 hours, someone from the team will notify them to either accept their “bid,” reject it, or offer them a seat elsewhere in the arena for a price similar to what they offered.

I think this system of pricing will turn out perform two functions for the Panthers:

1. It will serve as a mechanism for extracting an anchoring rent. People will propose a price, which will be anchored in their mind when they are offered an alternative seat with lower value.
   
2. It will put ticket scalpers into a position for falling victim to the winner's curse. I suspect this somehow is aided by the recent ban on scalpers from using software bots to purchase tickets online, but I'm not sure on the mechanism.

Labor Demand Slopes Down: #3,672

Forthcoming in the Journal of Urban Economics (ungated, but I haven't compared to see if they are the same). Abstract:

This study examines the effect of state minimum wage changes on new and existing business establishments. It employs a refined border approach in conjunction with other differencing methods to control for unobserved heterogeneous area characteristics. The findings suggest that state minimum wage increases deter new establishments from locating in an area, particularly in industries that rely on low-education workforces, such as the retail and manufacturing industries. However, existing establishments, regardless of industry type, are not found to be adversely affected by minimum wage policy.

Clearly on the wrong side of the Laffer

The inflection point of the Laffer curve is under discussion at Ezra Klein's blog. It unintentionally reminds me that FDR once seriously proposed a 99.5 percent marginal income tax rate, proving once in for all that such exercises are important:

As pointed out earlier in this essay, Herbert Hoover's own version of a "New Deal" had hiked the top marginal income tax rate from 24 to 63 percent in 1932. But he was a piker compared to his tax-happy successor. Under Roosevelt, the top rate was raised at first to 79 percent and then later to 90 percent. Economic historian Burton Folsom notes that in 1941 Roosevelt even proposed a whopping 99.5-percent marginal rate on all incomes over $100,000. "Why not?" he said when an advisor questioned the idea.

Moral Portfolio Theory

From Psychology Today:

"Save a Plastic Bag, Help Save the World." The idea, of course, is that if we throw away fewer plastic bags, nature will benefit. Many such small virtuous actions can, in congregate, impart an enormous benefit. Also underlying the slogan is another idea, which is generally unexpressed explicitly yet a part of our collective folk psychology, that good behavior leads to a virtuous circle: doing one good deed puts us in a beneficial mindset that leads us to do more good deeds....Unfortunately, as psychological research has shown, human behavior doesn't work like that at all. On the contrary: single, small acts of virtuous behavior actually predispose us to behave worse.

Last Names for Economists

In the middle ages, there was a tendency for people to take their occupation as their last name. For example: Smith, Miller, Taylor, Baker, Cooper, etc.

If that practice was to reoccur, I wonder what last name would work well for us economists. I have heard far worse last names than Economist, but I bet some more creative last names could be used to represent the occupation. Dismalist? Oikonomia? Maxyew (derived from "Max U")? Samuelsonite?

Is the Welfare State Larger in America than in Europe?

Apparently, and by a considerable amount, according to a new article in International Tax and Public Finance (I couldn't find an ungated copy). I haven't read it, but here is the abstract:

Fighting poverty is an important concern in most societies. This usually involves transferring resources to the poor. There exists a widespread view that European countries are much more generous to the poor than the United States. We study whether this is really the case. First, we argue that using data on aggregate spending does not allow us to conclude who the final recipients of social expenditure are. We then analyze microeconomic evidence from the Current Population Survey and the European Community Household Panel and find mixed results. In particular, when the concept of relative poverty is used, we find that every individual below the poverty line receives an average transfer in the United States that is 45% higher than in the European Union. When the old are excluded from the sample, this difference is reduced to 14%.

Quote of the year: There are two sides to the coin edition

I just put up a CNN article concerning the 100 worst stimulus projects. The article goes on to say that some people believe the report is a bit one sided. (It is; the point is you can never have enough examples for class of the government funding, say, international ant research.) But check out this nugget, from the lead researcher for a group receiving money to develop choreography that didn't like the cut of the report's jib:

"I think it's sad that this research money that is really allowing innovation and funding students doing great research is being used as a political tool," Latulipe said.

You just can't make this stuff up.

100 Worst Stimulus Projects

As CNN reports here, Senators Coburn and McCain have assembled a report that lists the 100 worst stimulus projects. The title of it is "Summertime Blues," the official summary page is here and the report itself is here.

In related news, here's the 2010 Congressional Pig Book.

A Belated Review of "Firefly"

Yes, the show that was canceled in 2002, but which I only just now watched on Netflix.

I had never really heard of it and almost stopped watching midway through the first episode because I had to recoil from the unexpected blending of Sci-Fi and Western. The economist in me struggled with the notion that an intergalactic race of humans would travel from planet-to-planet in order to go on horseback cattle-drives. I managed to stay with it, however, and enjoyed it more as the (only) season progressed. I had a hard time discerning why I liked it, and really it wasn't until the end of the series and the follow-up movie that I was really able to articulate what I enjoyed about the show. In fact, I would say that the show took this entire span to develop its theme, and in the end I felt it was a decidedly libertarian theme. Since I know a fair number of libertarians follow the blog, I decided I would briefly explain why, since libertarian entertainment is in rather short supply.

(FWIW: I'm not the only one to make the connection, but I didn't agree with the few reviews I read. Here is Tyler Cowen, who sees it as "Burkean Conservative," but mentions that he had only seen it through 8 episodes. I read on a message board that the show's creator, Jos Whedon, is a socialist but said at a sci-fi convention that he intended to make the lead character libertarian).

The main setting of the show is on a space ship called Serenity, and takes place in the years following a failed war of succession during the 26th century. Most planets are ruled as part of an empire known as "The Alliance," but planets on the outer rim of the galaxy remain independent in a nobody bothers sort of way. The crew of the ship take miscellaneous jobs, most of which involve some form of smuggling or bootlegging, and the crew does its best to remain an honorable bunch.

More to the point of my review, however, is that the setting of the show really demonstrates a crew trying to navigate between two conflicting totalitarian regimes. The Alliance is a decidedly leftist regime with a strict utilitarian welfare function. In this regime, individualism is viewed with suspicion because it seems unnecessary, given the Alliance's pure and great objectives ("why wouldn't they want to conform" is a reoccurring Alliance retort). The individual human is flawed, but perfectable, and the perfection of humanity is the end in itself. They pursue this perfection with a utilitarian theme, which at its lowest point sacrificed an entire planet to an experimental drug that created a barbaric race called Reavers.

The outer planets are not ruled as a collective, but the constant threat of Alliance coercion causes them to operate in a state of either lawlessness and/or reclusiveness. In the series, each planet seems to be ruled by some type of right-wing regime that makes them about as totalitarian as the Alliance itself. This, to me, was a most logical outcome. The Alliance's pursuit of perfection created a galaxy-wide black market (an organ shortage, no less!). At the same time, the constant fear of annihilation (even among those who were not part of the black market) cultivated rather conservative societies, ruled by dogma and norms that apparently had proven useful for survival, and often with a very religious bend to them.

The crew of the Serenity demonstrate little interest in living under either regime, and frequently find themselves at odds with both camps. Indeed, their desire for independence makes them natural enemies of both forms of totalitarianism. Though it is the sort of independence that characterized much of the early American pioneers: rugged individualists who were also fiercely defensive of their community. In this way, they portray libertarians better than libertarians usually portray themselves.

By the series end, and especially in the movie, you get to see just how similar the leftist Alliance is to their conservative counterparts from the outer planets in their religiosity. Both preach adherence to blind faith and cultivate a self-serving status hierarchy. In no place are their similarities more apparent in the treatment of the character River, who it is implied has some psychic abilities. On one occasion in the outer planets, she is nearly burned following accusations of witchcraft. The Alliance, on the other hand, wants to dissect her brain "for the greater good," by which it turns out to mean the greater good for the ruling elites.

The way the two conflicting ideologies managed to merge in their practices, and watching a crew of independent (yet, not isolationist) bunch trying to navigate between them made for a decidedly enjoyable experience. My two cents. If you watched the show, I'd be curious to know how my interpretation squares with yours.

Mopping Up Excess Reserves

As you probably know, the Fed has expanded base money by roughly 140% over the last couple years. Under normal circumstances, we would expect a rapid increase in the money supply to follow (recall that M = B m, where M is the money supply, B is base money, and m is the money multiplier). However, banks are holding higher reserves (that's in the denominator of m, hence the multiplier is decreasing). So the unprecedented increase in B is being largely offset by the decrease in m. As a result, M1 and M2 have grown slowly.

Bob McTeer asks whether the Fed should "mop up" the excess reserves held by banks:

The idea that the excess reserves held on banks’ balance sheets should be “mopped up” to prevent them being used in inflationary ways later is a very dangerous idea. They are there voluntarily because bankers feel they are needed. To remove them would cause further bank retrenchment, as it did in the 1930s when the Fed decided to “mop up” the excess reserves of that time.

As the economy and confidence improves, banks will begin using their excess reserves more aggressively. At that point, the Fed will have to be very careful not to stifle that desirable activity on the one hand or let it get out of hand and become inflationary on the other hand. Since they have lots of good, two-handed economists, I think they can pull it off.

Should the rapid increase in B over the past few years be mopped up? Absolutely. But when? Ahhh. That is the tricky part. Ideally, we would want B to fall as m returns to normal levels--that is, when banks start lending out their reserves. If the Fed reduces B too quickly or too soon, the money supply will shrink (deflation). If it reduces B too slowly or too late, the money supply will grow (inflation). This, unfortunately, is the knife's edge that central bankers must traverse if they are to maintain monetary equilibrium.

HT: Harry David

Incentives and Cairo housing

On a recent trip to Cairo, I was struck by two things.

First, there were a lot of run-down apartment buildings. Emphasis on "run down" and "a lot," and interspersed throughout the city. Yes, Egypt isn't the richest country in the world, but it's still a large (read: more than 20 million) city and prevalence of poor buildings was surprising in all areas of the city.

Second, there seemed to be a preponderance of unfinished buildings. This isn't entirely uncommon in Muslim areas but, again, Cairo is a large city and, once more, there was surprising amount of (seemingly non-progressing) construction.

Things like this don't happen without reason; where there's bizarre outcomes, government nonsense isn't usually too far behind. See if you can guess for yourself the government policies that exaggerate these outcomes-- I'll put the answers below the fold.

+/-

1. Apartment owners are not allowed to raise the rent on a family living in a unit. Thus, once families secure an apartment, they keep it as long as possible at the same level of rent. Think generations. Incentive to improve the building to satisfy tenants? Little. In fact, insofar that the only way you can get more revenue from your building is by getting new customers, the incentive is to (perhaps actively) make the experience as bad as possible. Rent control, anyone?

2. Building owners don't pay taxes on building until the construction is complete. Thus, buildings in perpetual states of construction don't pay taxes. Not hard to see the incentive there-- keep it unfinished and avoid the State.

One Line to Sum Up Somalia

From the NYT:

Somalia’s sheer ungovernability is both its curse and its blessing.

HT: Pete B.

Austrian Capital Theory

From Steve Horwitz @ FEE:

Capital is not like a bucket of water from which we scoop identical cups. Instead, capital goods, including human capital, have a limited number of specific uses to which they can be put. As Peter Boettke puts it, capital is not like Play-Doh, which can be formed into any shape, but like Legos, the versatility of which is limited by the sizes, shapes, and interconnections of the pieces.

Austrians speak of the need for capital to be “complementary” to other capital in order for it to help create an integrated production plan. A producer must have the “right” capital, that is, capital that “fits together.” An important implication here is that “more” capital isn’t always better. What firms need are pieces that fit, not just duplicates of what they already have.

Shared Beliefs, Focal Points, and Phone Finding

I lost my phone last Thursday.

Fortunately, I knew exactly where I'd left it. I constantly check the clock on my phone during class to adjust my lecture speed so that I don't spend too much or too little time on any subtopic. Given that I had driven straight home from class, and that I realized I'd left my phone almost immediately upon getting home, I knew it had to be sitting on the podium. But when I returned, it wasn't there.

I figured there were two possibilities:
1. Someone found the phone and decided to keep or sell it.
2. Someone found the phone and attempted to get it back to me.

Obviously, P(1) > 0. There are criminals in the world. However, I reasonably assumed the conditional probability that the person finding my phone was a criminal was quite low. Most likely the person finding my phone would be a college professor, as it was on the podium. There was also a relatively high probability that a student taking summer classes found my phone. Regardless, I'd guess few individuals in these groups are criminals or have access to criminal networks such that reselling the phone would be worth the risk of being caught. There was also a possibility that someone on the cleaning staff located my phone. Now, I'd imagine the probability that cleaners--typically from low-income households--have access to criminal networks would be significantly higher than college professors and students taking summer classes. But the odds that a cleaner found my phone would be low. I teach a morning class and cleaners typically work at night. So scores of people would have to overlook my phone for it to be on the podium when the cleaners arrived in the evening. Hence, I believed P(1) < P(2).

But how would they attempt to get it to me? They did not try to call me. Nor, to my knowledge, did they try to call anyone in my recent calls. Instead, they would likely do what people in our society normally do when the find something that has been lost: drop it off at a lost and found. This is where focal points become important.

Where is the lost and found? As it turns out, there are several options. Here are the most likely:
1. Secretary
2. Campus police
3. Johnson Center Information Desk
4. Student Union Information Desk

A lazy person might just walk over to the secretary in the building where the phone was lost and let her deal with it. But this assumes two things. First, it assumes that the phone finder knows where the secretary is. I am an instructor in that building and (until I actively began looking) I didn't know where her desk was located. Second, it assumes that either (1) I will know to go to the secretary to retrieve my phone or (2) the secretary will know where I'm likely to go and be willing to take the phone there. Note the importance of shared beliefs. The only way this works out is if the phone finder and I or the secretary and I have shared beliefs about what should happen to lost and found phones.

If the secretary option is not particularly salient, perhaps the next option would be the campus police. However, the GMU police station has recently moved from a building relatively close to the class where I lost my phone to the other side of campus. This decreases the likelihood of my phone ending up there for two reasons. First, it requires more effort to get it there than any of the other potentially salient options. Second, given that the change took place recently, it increases the likelihood that either I or the phone finder is not aware of the change and hence decreases the likelihood of a match. Knowing this, even a phone finder aware of the station change might be reluctant to take the phone to the police. Again, note the importance of shared beliefs and knowledge about shared beliefs.

The third option, JC Info desk, has an advantage in that it is right in the center of campus. All the food vendors are located in the JC. Going to any other class or office on campus would likely cause you to walk past the JC. However, the JC is in the opposite direction of the nearest parking lot. So instructors or students showing up for one summer class might have to go out of their way to go to the JC.

The fourth option, the Student Union Info desk, is anything but centrally located and is also off path from the nearest parking lot. While this option might be particularly salient to students, it is not likely to be as salient to instructors. And recall that the phone finder is likely to believe the phone was lost by an instructor since it was on the poduim. Hence, even if it were salient for a student phone finder, the student would have to consider whether it would be salient for me.

So where did the phone finder conclude that I would most likely look for my phone? Well, since I was fortunate enough to retrieve it today, I can tell you. And we can all learn a little something about shared beliefs. Take a guess. The answer is below the fold.

+/-

JC Info Desk

Ecuminical (and Financial) Incentives

From Slate:

Working with David Yermack of New York University, the two preachers' sons set out to test the Corinthian hypothesis by investigating the economic incentives affecting the United Methodist clergy of Oklahoma, where Hartzell's stepfather had spent his career. In "Is Higher Calling Enough?" a study forthcoming in the Journal of Labor Economics, the researchers show that Oklahoma's ministers are driven not just by spiritual motivations but also by high-powered financial incentives. Working with more than 40 years of church records covering more than 2,000 clergy, the authors find that ministers received about a 3 percent share of revenues generated from boosting membership, comparable to the pay-for-profit sensitivity of Fortune 500 CEOs. They also uncover some unfortunate side-effects of financial incentives for ministers who, motivated by material concerns, may have been encouraged to poach congregants from one another's flocks rather than to bring new believers into the fold.

Nerd Alert: Econ T-Shirts

I've designed and ordered a couple shirts at Cafe Press. Understanding that the marginal cost [of the design] falls to zero, I have made these designs available in a "shop" so that--if you are as nerdy as I am--you can order them. Here are a few of the Ts.

The first two shirts are related to Pete Boettke's claim that Austrian economists can decide to emphasize the Austrian or the Economics.





The third shirt allows you to channel your inner Scott Sumner and advocate a nominal income target.



Shirt number four is a little less cryptic, allowing your nerdy econ friends to see you support a constant PQ.



And finally, though I imagine few of our readers are interested, there's a shirt w/ the JEL code for "Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems."



Interested in having your own? It's a little more complicated to order than I would have thought. But details are below the fold. I'm sure there will be more to come, as I really like custom shirts.+/-

Instructions for ordering from the shop:
1. choose the design [MV=PQ, Nominal Income Target, etc.]
2. choose the shirt type [Mens T, Women's T, etc]
3. choose the color
4. choose the size [there is a sizing chart ]

For the Teaching Vault: Deadweight Loss

The deadweight loss of Ohio's income tax is LeBron James.*

The deadweight loss of the British Income Tax code is Usain Bolt.

*Incidentally, my first publication was on the state income tax incidence on All Star MLB free agents. Players paid non of the tax.

New Member of the "Juicing the Mitchell" Club

It is Jason Kuznicki at the League of Ordinary Gentleman (Hat Tip: Zach Wendling). Jason summarizes support for Alvin Irvine's (the improbable SC gubernatorial candidate) proposal to have action figures made of himself to give to children at Christmas:

Compared to endless war, stripping us of our civil liberties, running up giant budget deficits, and all the rest… I have to say I’m all in favor Greene’s proposal. Politicians have limited time. Let’s use it wisely. Or at least use it up.

Indeed, welcome to the club Jason!

InTrade on LeBron James

As a longtime Cleveland Cavs fan, I have been keeping an eye on the LeBron James resigning saga. Right now, the InTrade odds seem to favor the Bulls, but note that the low volume reveals an internal inconsistency (the probabilities don't add up correctly). For Cavs fans, the disappointing bottom line is that the most liquid market puts only a 29% chance at him returning.