Wednesday, March 31, 2010

Mankiw on Taxes

Greg Mankiw proposes we re-think measuring tax burdens. We generally measure them by calculating taxes, adjusted for GDP.
Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can. For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics:

Taxes/GDP x GDP/Person = Taxes/Person

Here are the results for some of the largest developed nations:

France: .461 x 33,744 = 15,556.
Germany: .406 x 34,219 = 13,893.
UK: .390 x 35,165 = 13,714.
US: .282 x 46,443 = 13,097.
Canada: .334 x 38,290 = 12,789.
Italy: .426 x 29,290 = 12,478.
Spain: .373 x 29,527 = 11,014.
Japan: .274 x 32,817 = 8,992

The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.
Brad Delong and Matthew Yglesias says this implies that North Korea is a wonderful tax haven and Slovakia could stand much higher tax rates.

There's a reason why Mankiw focused on the countries he did: institutions. Japan, Italy, US, and the UK have similar economic systems (similar compared to the rest of the world). Mindlessly treating North Korea as the same as South Korea makes the same mistakes economists made decades ago when we wondered why all countries weren't converging to the same GDP. But the Solow model's predictions only work when countries are institutionally similar: "conditional convergence." Comparing Solvakia and Spain about tax revenue misses the point.

Tuesday, March 30, 2010

Logic 101

Menzie Chinn comments on Robert Samuelson's concerns about the true budget impact of PPACA:
Here is where Mr. Samuelson dismisses the entire budgeting process in Washington:
But the CBO estimate is misleading, because it must embody the law's many unrealistic assumptions and gimmicks. Benefits are phased in "so that the first 10 years of [higher] revenue would be used to pay for only six years of spending" increases, a former CBO director, Douglas Holtz-Eakin, wrote in the New York Times on March 20. Holtz-Eakin also noted the $70 billion of premiums for a new program of long-term care that reduce present deficits but will be paid out in benefits later. Then there's the "doc fix" -- higher Medicare reimbursements under separate legislation that would cost about $200 billion over a decade.
The logical implication based upon this argument: Might as well close up CBO.
Actually the logical implication is that the CBO scoring for the health care bill is nonsense and you shouldn't make graphs like this one (JGTRRA is the second Bush tax cut and EGTRRA is the first).

The bottom line is that the CBO scoring system, like most systems, can be gamed.

Sunday, March 28, 2010

Priorities on GW

Robert Stavins wonders who killed cap-and-trade and argues that
U.S. public support on this issue has decreased significantly, as has been validated by a number of reliable polls, including from the Gallup Organization. Indeed, in January of this year, a Pew Research Center poll found that “dealing with global warming” was ranked 21st among 21 possible priorities for the President and Congress.
A quick glance confirms this--global warming is not a top priority--but that's not a perfect measure. It could be a somewhat high priority on everyone's list which would mean it's still pretty damn important. Scroll down on the Pew link and you'll find that GW has never been that high as a top priority (topping 38% in 2007, when they started asking about it). It looks like GW was just edged out due to recent events; people haven't stopped caring. I wouldn't call it dead yet.

Saturday, March 27, 2010

Krugman on Reform

Paul Krugman has a smart insight about financial (or any) reform. Straightforward reform only needs mediocre regulators. Highly specialized and nuanced reform requires smart regulators to implement right. Get the so-so regulators with complex reform and you'll get something far worse than no reform at all.
That doesn’t make financial reform useless. But it is a worry, since you can’t count on always having smart, well-intentioned people doing the regulating.
Always? How about ever?

Wednesday, March 24, 2010

Obamacare and Entrepreneurship

With legislation as sweeping as the recent health care reform, lots of interesting questions boil to the surface. For one, will the reform be good for entrepreneurship or bad for it? Two commentators at Megan McArdle give conflicting reports, one arguing that it's good and the other that it's bad.

On one hand, entrepreneurs tend to be younger people and younger people tend not to buy health insurance even if they can afford it. The reform makes people buy insurance (though the penalty for not doing so is somewhat low) and will subsidize those who make little enough to purchase it. Thus there are those who have to buy it but make enough so they will get little or no government help. A forced expense will take money away from the all-important start-up capital.

On the other hand, those with a pre-existing condition (since you can't deny someone based on if they have a pre-existing condition) can now leave their employer's health plan and strike out on their own, confident they can get the health insurance they need. Untethered, we could see more entrepreneurship.

Which effect is more powerful depends on various questions: How important is a few to several hundred dollars a month for a new business? How common are people with pre-existing conditions? Are people with pre-existing conditions more or less likely to start a business (unlikely but if it's true it would probably be the most important variable)? I don't know the answer to any of these, but I suspect the bad outweighs the good.

Bryan Caplan, however, points out another possible confounding issue:
If preliminary summaries of Obamacare are true, it looks like individual health insurance will soon be a better deal than employer-provided health insurance. In the individual market, you can now wait until you're really sick to buy insurance: "Heads I win, tails I break even." Firms won't have that gimme - and it seems more valuable than premiums' tax deductibility. Admittedly, Obamacare imposes a small penalty on individuals who don't buy insurance, and a moderate penalty on firms that don't provide it. But it still seems like it will be in the financial self-interest of many firms and their workers to get rid of insurance, and split the (cash savings minus penalties).

This could push it to being good for entrepreneurship as companies can pay the fine and neither has health insurance until the employee gets sick (in which case they might get a subsidy).

It's not an easy thing to sort out.

Monday, March 15, 2010

Health Care Profitability

Everyone's talking about how profitable health insurance companies are (notably on tonight's Daily Show) but the secret is they're not that profitable compared to other industries. The large numbers shot around about increased profits are absolute dollars, not relative to their revenue, and tell us nothing about how profitable an industry actually is. Profit margin (which adjusts for revenue) is a much better measure. And health insurance performs quite bad compared other industries. I got the data from Yahoo Finance; here's the most recent quarter.

Note, REIT is healthcare facilities, not health insurance nor hospitals. According to Yahoo, these companies are in finance...basically real estate for health-related services. Healthcare plans (including Aetna, Wellpoint, Universal Americacore, etc) is number 88. Home health care was 55. Hospitals rank 100 (out of 215).

RankIndustryProfit Margin
1Closed-End Fund - Foreign38.3
2REIT - Healthcare Facilities25.2
3Drug Manufacturers - Major22.2
4Publishing - Periodicals21.8
6Application Software20.6
8Internet Information Providers18.7
9Healthcare Information Providers16.8
10REIT - Industrial16.6
11Agricultural Chemicals16.4
12Long Distance Carriers15.1
13Networking & Communication Devices14.4
14Beverages - Brewers13.8
15Personal Products13.4
16Oil & Gas Drilling & Exploration12.8
17Information & Delivery Services12.6
18Beverages - Wineries & Distillers12.3
19Air Services, Other12.3
21Diversified Investments11.8
23Drug Manufacturers - Other11.1
24Technical & System Software10.9
27Education & Training Services10.3
28Medical Instruments & Supplies10.2
29Beverages - Soft Drinks10.1
30Wireless Communications9.9
31Industrial Metals & Minerals9.9
32Telecom Services - Domestic9.6
33Steel & Iron9.5
34REIT - Residential9.3
35Processed & Packaged Goods9.2
36Electric Utilities9.2
37Business Software & Services9.2
38Foreign Regional Banks8.9
39Personal Services8.7
40Semiconductor - Specialized8.6
41CATV Systems8.6
43Diversified Computer Systems8.5
44Regional - Southwest Banks8.3
45Diversified Utilities8.2
46Cleaning Products8.1
47Medical Laboratories & Research7.9
48General Entertainment7.7
49Gas Utilities7.7
50Publishing - Books7.6
51Personal Computers7.6
52Oil & Gas Equipment & Services7.4
53Investment Brokerage - Regional7.4
54Toys & Games7.3
55Home Health Care7.2
56Textile - Apperel Footwear & Accessories7.0
57Waste Management6.9
59Accident & Health Insurance6.7
60Aerospace/Defence Products & Services6.6
61Major Integrated Oil & Gas6.5
62Telecom Services - Foreign6.4
63Oil & Gas Piplines6.4
64Food - Major Diversified6.4
65Business Services6.4
66Auto Parts Stores6.2
67Sporting Activities5.8
68Medical Appliances & Equipment5.8
69Entertainment - Diversified5.8
70Photographic Equipment & Supplies5.7
71REIT - Retail5.6
72Drug Delivery5.6
73Tobacco Products, Other5.5
74Diversified Communication Services5.4
75Specialty Eateries5.3
76Industrial Electrical Equipment5.3
77Small Tools & Accessories5.1
78Semiconductor - Broad Line5.1
79REIT - Office5.1
80Pollution & Treatment Controls5.1
81Drugs - Generic5.1
82Insurance Brokers5.0
83Management Services4.9
84Research Services4.7
85Consumer Services4.7
87Information Technology Services4.4
88Health Care Plans4.4
89Auto Parts Wholesale4.3
90Packaging & Containers4.1
91Security & Protection Services3.9
93Chemicals - Major Diversified3.8
94Industrial Equipment Wholesale3.7
95Industrial Equipment & Components3.7
96Home Improvement Stores3.7
97General Contractors3.5
98Aerospace/Defense - Major Diversified3.5
99Housewares & Accessories3.4

I thank Mark Perry who did a table for August of 2009. (Insurance companies dropped by two ranks since then.)

Monday, March 08, 2010

Peltzman on Germs

Slate columnist Darshak Sanghavi blames hand sanitizers' fundamental approach for their lack of effect on flu prevention.
To begin, the influenza virus mostly spreads via tiny droplets in the air (for example, from sneezes)—not by dirty hands or surfaces—which limits the role of Purell. It probably wouldn't matter even if flu transferred though hand contact, which is how most cold viruses spread...The average child touches his or her mouth and nose every three minutes, and both adults and children come in contact with as many as 30 different objects every minute. Even hospitals can't get staff to use Purell before seeing patients; it's impossible for day care staff, parents, or teachers to wash a child's hands 20 times each hour.
But what about adults? For that, I immediately thought of the Peltzman Effect.

Sam Peltzman discovered that increased safety standards on cars don't reduce accident fatalities. Because cars are safer, people feel safer and drive more recklessly. Similarly, hand sanitizer makes people feel braver and expose themselves to more germs. On net, there's no change, but it's not Purell's fault.

Sunday, March 07, 2010

Tattletales and Signaling Theory

You learn lots of important things in kindergarten. Don't lie. Don't cut in line. Always say "please" and "thank you." Share your toys. Don't tattle. These are all good lessons, but the last one doesn't really make sense. Tattletales inform proper authorities of people who broke the rules. If the rules are just, exposing violators of those rules should also be just. If it's not good to point out that little Suzy cut in line, how can one say it's bad to cut in line? And yet, if you're hosting a party and a guest came to you to rat out another guest because she jumped in front of everyone at the buffet table, you'll probably have a lower opinion of the informant, not the accused.

It gets even more confusing because it's not a hard fast rule. "Tattling" on a murderer or a thief is generally considered an act of bravery. Same thing goes with exposing corrupt politicians or companies doing unethical accounting or illegal polluting. We call them whistle blowers and put them on the cover of Time Magazine. Context matters a lot: during the 2009 snow storm I, like so many others, were stranded at the Dulles Airport. A woman cut in line for rebooking (a line I was waiting in for two hours). It took us a while to figure out she was cutting and not asking a humdrum question and while no one protested, we wish we had. (Why we didn't is another story entirely.)

My best guess to explain this asymmetry is signaling theory. Signaling is economics speak for "actions speak louder than words." It's about using demonstrative actions to show people you have some quality. Saying you're a trustworthy person doesn't mean much. But if you fess up to something you did wrong, you can signal you're a trustworthy person and people are more likely to believe you. Tattletales interfere with that signaling system.

Suppose I cut in line at a buffet to get the last Swedish meatball. If I sneak away to devour my ill-gotten gains in peace, those who witnessed it will look down on me for my selfishness and rudeness. But suppose I admit to everyone that I cut in line and apologize. I've put myself out there, subjecting myself to the will of the mob. By admitting dishonesty, everyone would look down on me. Someone might lay claim to my meatball. But it's also possible that everyone would laugh it off and they'll go away thinking "that David fellow is an honest guy; he didn't have to admit to such a minor offense but he did and that says a lot."

Now I'm not saying that a good way to gain people's trust is to swipe something and then fess up. The whole point is you're putting yourself at risk to be worse off than if you said nothing and it certainly doesn't work if you follow up every heart-felt apology with another act of rudeness. But it shows that there's value in not exposing a violator because doing so denies them the opportunity to signal honesty. If a third party tells everyone I cut in line, then me stepping up to admit it doesn't mean anything. Thus, we discourage tattletales because they mess up our signaling system.

This signaling system doesn't always work. When the expected costs of signaling are unconditionally greater than the expected benefits, we don't expect anyone to signal so we tolerate, no, celebrate, tattlers. From murderers to emergency situation line jumpers, whistle blowers end up just getting rid of the creeps.