Thursday, October 29, 2009

Contrarian Spurrious Correlation of the Day

Murders and suicides seem to be negatively correlated according to shock-jock economists at freakonomics. Really? It seems Levitt should be able to look at this and find easy econometric techniques that would rule out any causal relationship. Right off the bat, it seems that higher suicides in Japan come from the fact that life insurance covers suicide. Problem is, he would have start once again caring more about doing real work and less about shocking the world for fun and profit.

Salience and Taxes

Are taxes distortionary when they're higher, or just when we think about them more. This paper by Amy Finkelstein of MIT (HT: Ian Ayres) seems to suggest that it's not the rate, but the "salience" (i.e. how much we think about taxes) that drive us crazy. It explains that using irrational numbers to calculate taxes might keep us from getting to wrapped around the axle over them. This might explain why small business owners are more crazed about taxes than others since they have to file and pay taxes using quarterly estimated tax forms instead of filing once at the end of the year. This year I had some weird "additional tax" thrown on by the state of VA (which has a really complicated filing) and had to spend over a month of phone calls and correspondence trying to get an explanation of what was going on with it. For some reason they claimed that I was supposed to have been filing estimated tax forms because the withholding was too low, which is nuts.
Anyway, I don't mind taxes. I think if I knew what I was paying and knew what I was left with at the end, and had to think less about "this part goes to tax" I probably wouldn't mind the taxes so much, and it wouldn't mess with my consumption choices as much. This is one thing that's always puzzled me about sales taxes here in the US. Why can't they just be included in the price? Why does something priced at a dollar have to come out to $1.06 or something?
This is also probably why we don't think too much about tariffs on imports. We never see how it impacts the prices, so we almost just assume that we're not really "paying" any of the burden (which of course is patently false). This might mean that the consumption distortions from trade restrictions are not as high, but it might mean that the production distortions are even higher.

Green Jobs are More than Broken windows

A number of bloggers (see here or here or here) in the econoblogoshpere have been relating green jobs to the parable of the broken window, by Frederic Bastiat:
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

It seems that the comparison of using stimulus dollars for green investments to broken windows is akin to making a type III error: giving the right answer to the wrong question. No, green investments by the public sector will not increase the long-run number of jobs, and they may have some unintended consequences if future harm is not priced with a tax or an auction. However, short-term public sector jobs will reduce the pain of the current recession by reducing overall employment in the short term. Then the question is what the best thing to do is, i.e. "are green jobs better than the next best alternative for public funds?" To many the answer is "yes." Investments made now to clean up the environment and improve our energy infrastructure will do a lot to increase welfare even if that welfare is not well measured by the metrics of GDP and employment. The "broken windows" analogy also frames the debate in a misleading way. If the analogy is apt, then it must be the case that the "windows" are already "broken" and the cleanup investments are just paying the tab for the vandalism of past generations.

Wednesday, October 28, 2009

Split or Steal

Lesson: Don't trust anyone who's been stabbed in the back before (especially if you're the one who did it).