Archive for the ‘Economics’ Category

Happiness – Part 2

April 9, 2010

I had intended to do a detailed follow-up to my earlier post about happiness research.  However, I think the reasons for my scepticism of the work by Derek Bok and others have already been expressed far more cogently by Steven Landsberg, Will Wilkinson, and Richard Epstein.

Recall that Bok thinks there is a troubling disconnect between the following facts: (1) society has grown much more prosperous in the past three decades but (2) self-reported levels of happiness have remained largely constant during the same period.  Bok asks, “what is the point of working such long hours and risking environmental disaster in order to keep on doubling and redoubling our Gross Domestic Product?”  In my earlier post, I suggested that subjectively reported happiness seemed to be a thin basis on which to make recommendations about public policy settings, let alone radically reshaping public policy.

Landsburg points out a flaw in Bok’s approach, which I find reasonably compelling:

Wait a minute, now. Self-reported happiness has been flat for fifty years despite rising incomes. Self-reported happiness has also been flat for fifty years despite dramatic increases in leisure and environmental quality. (Since 1965, the average American has gained about six hours a week of leisure—the equivalent of seven vacation weeks a year.)  So why aren’t Bok and Kolbert asking why we bother to come home from the office, take vacations, and clean our air and water?

Will Wilkinson piles on:

Landsburg asks an excellent question. Income inequality has skyrocketed, but that hasn’t made Americans less happy. So why care?

I essentially agree with Wilkinson’s conclusion: 

The fact of stable U.S. levels of self-reported happiness is an ideological Rorschach test; the way it is used tells you more about the person using it than anything else.

Anyway, the answer to Bok’s question is pretty easy. There are many, many other benefits of economic growth.

Finally, there is a very good discussion between Richard Epstein and Russ Roberts, which you can download here.  Epstein discusses some of the false assumptions of the happiness researchers and argues convincingly that envy is a terrible motivation for public policy.


Gambling and Tax I

March 8, 2010

It is often said that income tax law subsidises gambling. Because there is no income tax on winnings from earnings, there is a “tax expenditure” which subsidises gambling. Philosophically the concept of tax expenditure is difficult – after all, what does it mean to say that an activity should otherwise be taxed? – but the point is pretty clear: not taxing certain activities which are comparable to other taxable activities has the same effect as a direct subsidy to the untaxed activities.

It has been found by the courts on numerous occasions that winnings from gambling “with the motive of making casual gains or merely for sport or amusement” is not taxable [Duggan v Commissioner of Inland Revenue [1973] 1 NZLR 682]. In that sense, the income tax system would seem to subsidise those who casually gamble. However, in a more important sense, a progressive income tax tends to punish those who take much larger and much more serious gambles.

Assume that there are 10 typists, all of whom earn $45,000 per annum. Any one who becomes a typist will earn that much. There are also ten actresses. Nine of those actresses earn $10,000 per annum, and one earns $360,000. Any one who becomes an actress faces the nine-tenths chance that she will earn $10,000, and a one-tenth chance that she will earn $360,000. To the careful observer, it is clear that the expected value of entering into either job – typing or acting – is equal, at $45,000. And yet, the progressive taxation system results in tax treatment that is quite different. The typists will on average pay $9,290 in tax. The actresses will on average pay $14,345.

So, the tax system may subsidise risk taking in one dimension, but in another massively penalises it. By changing the payoffs in this way, the income tax encourages a form of inefficient risk aversion. In Part II, I will consider whether profits from iPredict are taxable.

Ignorant but Rational

March 3, 2010

Don Brash accused the public of being ignorant, and then said that this was caused by “the failure of teachers to teach and politicians to explain some of the basic facts of life.” The claim of ignorance on issues of public policy is certainly correct, but the diagnosis for why this is the case is wrong.

When are people more likely to be ignorant? When the costs of being informed are high, and the benefits of being informed are low. So, being ignorant about how much you earn could end up being very costly – you may accumulate debt, you will poorly assess your preferred consumption bundle, etc. That’s why people tend to know how much they earn.

But what are the costs of ignorance in public policy? Well, the cost of voting for a nonsensical idea is pretty low, because the chance of your vote determining the outcome of the election is tiny. If there’s a one in a million chance of your vote affecting the election, and the cost of tariffs for you personally is $5, then the expected cost to you is one ten thousandth of 5 cents if you vote for a party that supports tariffs. Equally, voting for policies that are illogical may have psychic benefits – you might decide to do something because of personal bias.

But if ignorance and irrationality is driven by our current institutions, then institutional change could alter those incentives. As opposed to each citizen getting to vote, we could have a higher level of aggregation achieved by cross-sectional juries of citizens. We could massively decentralise state functions and then allow greater personal choice in jurisidiction, including the possibility of virtual jurisdictions. An easy first step would be to end get out the vote campaigns.

Mobile Termination Rates

February 22, 2010

Many are getting outraged at New Zealand’s high mobile termination rates – the cost of terminating a call on another network. Many of the comparisons made to other countries – in particular those made by Drop the Rate Mate campaign – are false.

New Zealand operates a calling party pays (CPP) regime – the party that makes the call pays for the cost of the call. The examples of countries which have no termination rates (the United States, Singapore, Hong Kong, etc.) operate receiving party pays (RPP) regimes. If you think about it, it becomes very clear why CPP rates are higher than RPP rates.

When I buy a phone, I care about the cost to me of terminating on other networks. But I cannot control that price, because it is charged by other networks. Equally, I care little about the cost of terminating a call on my cellphone – because I don’t pay that – the people that call me pay that. In technical language, under CPP the terminating network has the incentive to exploit subscribers from originating networks due to its monopolistic market power.

RPP has one draw back – sometimes people refuse to answer the phone if they think the conversation will not be worth the price. Equally however, in CPP regimes, some people do not make calls that are worth it from the point of view of the receiving party. Some phone calls which would have net utility are not made under either regime. It is my understanding that regulation required mobile companies to operate CPP regimes. Now we are considering regulation to bring MTRs down (or the threat of regulation, which is forcing the mobile companies to lower rates). The whole regulatory issue of MTRs has arisen by virtue of prior intervention!

This article has a lot more on the interface between calling regimes and regulation.


February 19, 2010

Jesse made reference to the fact that I thought it was harder for the Government to deliver benefits to special interests than many people think, so I thought I would expand on the point.

Let’s consider an example. Let’s say that the beef lobby has sought favours from Government through donations and votes, and the Government wants to help their supporters out. Let’s say they decide to give $500 per hectare to every beef farmer. This will, in fact, not help the beef farmer. After all, before the intervention the return to sheep farmer and beef farmers were about equal (otherwise they would switch business), and so the effect of the subsidy will merelylead to many sheep farmers converting their farm to beef farming. In the process, the return on the actual production on beef will drop – and it will ultimately balance out the benefit. You may get $500 per hectare from the Government, but the return on the sale of beef will drop by $500 per hectare.

Or take another example, which leads to one-off beneficiaries. The restriction on entry into the taxi industry is common around the world. Often, taxi drivers have to purchase medallions from the Government. Initially, this will restrict supply, driving up the prices that taxi drivers can charge. However, as those medallions are exchanged in the market, the higher prices you can charge become capitalised into the value of the taxi medallion. The second generation taxi drivers can charge high prices – but that is compensation for the massive price of the taxi medallion.  So, taxi medallions deliver a one-off gain to current taxi drivers, but no ongoing benefit for taxi drivers.

Generally speaking, the more concentrated benefits will occur in those areas where the Government also limits supply – doctors, lawyers, accountants, etc. That’s why the typical first act of lobbying is for registration or other restrictions on entry. Sometimes these restrictions pose as uniform regulations, the fixed cost of which affects more heavily those who engage least in the industry, and who will be dissuaded from competing.  See here.

This also explains why the Government has a tendency to deliver services rather than goods. Goods can be exchanged easily – recipients can sell them. If you deliver goods in a discriminatory way (i.e., don’t give them to certain races or income groups), there will be an incentive to trade them to those who value them the highest – i.e., those who would have got them in the absence of intervention. However, services are typically non-transferable, and so it provides an effective way for the Government to discriminate.