Not really.  Here is John Cochrane:

The Irish bank [holding Apple profits] can lend the money anywhere. It can buy US mortgage backed securities, it can lend the money wholesale to US banks who lend it out to US businesses. It can even lend the money to Apple US. If Apple or any other US company wants to invest, they can borrow from the Irish bank. Conversely, if profits are repatriated to US banks, those banks can lend the money overseas.

Here is the full story.

Addendum: There are some very good points in the comments.

The Color of Law

by on September 19, 2017 at 7:25 am in Books, Economics, History, Law | Permalink

Richard Rothstein’s The Color of Law is a good history of government discrimination against African-Americans in the housing market. Most notably, the FHA and the VA refused to guarantee mortgage loans or loans to builders unless the neighborhood was segregated. Indeed, the FHA wouldn’t even insure a project if there were too many African Americans living nearby.

In 1940, for example, a Detroit builder was denied FHA insurance for a project that was near an African American neighborhood. He then constructed a half-mile concrete wall, six feed high and a foot thick, separating the two neighborhoods, and the FHA then approved the loan.

Rothstein is no libertarian but to his credit he does acknowledge that one of the few anti-segregation forces in the early twentieth century was the Lochner influenced reasoning of the Supreme Court. In Louisville, Kentucky, wealthy blacks began to buy houses in previously white neighborhoods. In response, the city passed an ordinance making it illegal for blacks to move into majority-white neighborhoods and vice-versa. The NAACP organized a test case. Warley, an African American, agreed to buy a house from Buchanan, if not prevented by law from doing so. Buchanan then argued that the law reduced the value of his house because he could not sell to Warley or other African-Americans. Thus, the ordinance was a taking which violated the 14th Amendment right not to be deprived of property without due process of law.

The State of Kentucky responded with a brief arguing that segregation was divinely ordained and that “negroes carry a blight with them wherever they go.” The racism was sickening but Kentucky also had the great mass of intellectuals behind it because they were asserting the progressive belief that the state’s police powers could and should overrule individual rights, especially property rights. Under Lochner, however, “unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract” violated the 14th Amendment. Rothstein writes:

“In 1917, the Supreme Court overturned the racial zoning ordinance of Louisville, Kentucky, where many neighborhoods included both races before twentieth-century segregation….The Court majority was enamored of the idea that the central purpose of the Fourteenth Amendment was not to protect the rights of freed slaves but a business rule: “freedom of contract.” Relying on this interpretation, the Court had struck down minimum wage and workplace safety laws on the grounds that they interfered with the right of workers and business owners to negotiate individual employment conditions without government interference. Similarly, the Court ruled that racial zoning ordinances interfered with the right of a property owner to sell to whomever he pleased.”

Sure, it’s a grudging acknowledgment, but most people don’t even do that so give Rothstein credit where credit is due.

Governments evolved other measures to promote segregation such as zoning laws and the white-subsidy systems of the FHA and VA. Nevertheless, Buchanan v. Warley was likely an very important decision. Bill Fischel goes so far as to argue that Buchanan v. Warley prevented apartheid in America.

Addendum: On segregation and Lochner, see David Bernstein’s excellent book Rehabilitating Lochner from which I have also drawn.

The economics of Graham-Cassidy

by on September 19, 2017 at 1:20 am in Economics, Law, Medicine | Permalink

It is good for forcing some fiscal discipline on health care, but state governments are fiscally too weak to take over America’s public sector health care finance.  That is the message of my latest Bloomberg column.  Here is one excerpt:

There is another problem with state experimentation in this context. So many health-care problems are on the supply side, namely weak incentives for quality care, barriers to entry and innovation, and regulations that raise costs but don’t improve safety. Ideally policy experimentation could cover all of these dimensions, but almost all of the debate is on the side of financing and insurance coverage. With a more or less fixed set of supply-side institutions, simply pushing more financing decisions into state governments may not produce much, if any, improvement.

So overall the reform doesn’t seem to be feasible.  But here is the part to bug you:

It is a legitimate worry that Graham-Cassidy might cut health-care benefits in an unequal fashion, but the bill may be more egalitarian than it at first appears. Due to the embedded formulas, the bill redistributes resources to red states, in particular states that have not already accepted the Medicaid expansion from Obamacare. Often those are rural states, some of them in economic decline. Favoring such states does have an egalitarian aspect, even if the Republican Party isn’t very effective in explaining the policy in those terms.

The biggest losers from Graham-Cassidy are likely New York and California, two states with very costly Medicaid rolls. That might appear anti-egalitarian, but is it really? The beneficiaries in those states tend to be relatively young, and thus their human capital endowments, in the form of future life enjoyment, are usually quite high. All things considered, a 28-year old lower middle-class immigrant in Los Angeles is arguably better off than a 61-year-old in Nebraska with $100,000 in the bank. Giving a benefit to the red state individual actually may reflect the more egalitarian sentiment, although that’s not usually how health-care policy discussions are framed by either Democrats or Republicans.

Like it or not, the forward-looking perspective is probably the correct one here.  One not altogether illogical response is to treat this as a reductio ad absurdum on egalitarian ideas.  Another response is to base health care policy more on efficiency, and again to discard the egalitarian ideal, which in turn would resurrect some chance of being able to defend redistribution toward the young.  What doesn’t make sense is to invoke egalitarian ideals only selectively, as people are fond of doing.

Here is one proposal:

What if I told you that the credit rating companies already had a system to verify identities before opening new accounts — but, because this would be a minor inconvenience, and a drag on their profits, they only allow this status to last for 90 days for any given account unless a police report can be filed, and furthermore, while they may claim that they’ll do this, it’s not actually a legal requirement? From a Krebs on Security piece from 2015 (as ever, Krebs is two years ahead of the zeitgeist):

“With a fraud alert on your credit file, lenders or service providers should not grant credit in your name without first contacting you to obtain your approval — by phone or whatever other method you specify when you apply for the fraud alert … Fraud alerts only last for 90 days, although you can renew them as often as you like. More importantly, while lenders and service providers are supposed to seek and obtain your approval before granting credit in your name if you have a fraud alert on your file, they’re not legally required to do this.”

That’s right: a solution to the ongoing insane catastrophe which is the American credit system already exists. The infrastructure and process for it is already in place. But thanks to regulatory capture, an inability to understand the scale of data hacks that modern technology enables, or sheer incompetence, it only exists on a case-by-case, opt-in, short-term solution.

Obviously everybody should have this verification — “two-factor authentication,” if you will — turned on and kept on. This would not be a panacea, of course. Security hipsters will loudly protest that phones and email are terrible second authentication factors that no one should even consider using. Phone and email are not ideal, but the point is, universalizing this existing solution would hugely improve matters for a relatively trivial cost.

That is from Jon Evans.  I still would like to know what is the social cost of identity theft.  Furthermore, what is the cost of identity theft as a ratio of the cost of some people simply not paying borrowed money back?

Everyone is all a-flutter on this issue, and attacking Equifax, but I am looking for more reliable information before voicing an opinion.

*The Color of Money*

by on September 18, 2017 at 2:08 pm in Books, Economics, History | Permalink

The author is Mehrsa Baradaran, and the subtitle is Black Banks and the Racial Wealth Gap.  Here is one excerpt:

Not only were black bankers stuck in a perpetual money pit, but they were often cast as the villains when thing went wrong.  That their loans went primarily to the black middle class and were out of reach of the majority of blacks sometimes made black banks the targets of criticism.  Abram Harris was one of these critics.  Harris was the first nationally renowned black economist and the first to do a comprehensive study of black banks, called The Negro as Capitalist (1936).  Harris headed the Howard economics department from 1936 to 1945, when he became the first black economist at the University of Chicago.  He was recruited there by Frank Knight…Harris had held Marxist sympathies while at Howard, but with his move to Chicago, his economic philosophy became more traditional.

Here is Wikipedia on Harris.  As for Baradaran, I found this to be “two books in one.”  First, it was an OK and useful but not original look at the evolution of the racial wealth gap.  Second, it was a very interesting but interspersed history of black banking in America.  Overall recommended.  Here is the book’s home page.

Buffett Wins Bet

by on September 18, 2017 at 7:25 am in Economics | Permalink

NYPost: The Oracle of Omaha once again has proven that Wall Street’s pricey investments are often a lousy deal. Warren Buffett made a $1 million bet at end of 2007 with hedge fund manager Ted Seides of Protégé Partners. Buffett wagered that a low-cost S&P 500 index fund would perform better than a group of Protégé’s hedge funds.

Buffett’s index investment bet is so far ahead that Seides concedes the match, although it doesn’t officially end until Dec. 31.

The problem for Seides is his five funds through the middle of this year have been only able to gain 2.2% a year since 2008, compared with more than 7% a year for the S&P 500 — a huge difference. That means Seides’ $1 million hedge fund investments have only earned $220,000 [through 2016] in the same period that Buffett’s low-fee investment gained $854,000.

I am shocked that Seides put his money on five funds-of-funds, thus piling fees on fees. It was a loser bet. Mark Perry at Carpe Diem has more of the stats.

In one way, this is another win for index fund investing but there is still an anomaly. The S&P trounced the hedge funds but it still lost to an investment in Berkshire Hathaway! (see addendum) Admittedly the race was pretty close at times but after ten years Berkshire was up 91.5% and the S&P 500 up 69.1%.

Addendum: An astute reader with access to a Bloomberg terminal points out that an investment in the S&P 500 pays dividends while famously Berkshire Hathaway does not. Moreover, when you compare total returns the S&P 500 is up 110.7% over this period and Berkshire is up 91.8% so indexing over this period even beats Buffett!

Reed Hastings, the Netflix CEO who co-founded the company long before “streaming” entered the popular lexicon, was born during a fairly remarkable year for film. 1960 was the year Alfred Hitchcock’s Psycho astounded and terrified audiences, influencing a half-century of horror to come. It was a year of outstanding comedies (Billy Wilder’s The Apartment), outstanding epics (Stanley Kubrick’s Spartacus) and outstandingly creepy thrillers (Michael Powell’s Peeping Tom—a close cousin of Psycho).

But in the vast world of Netflix streaming, 1960 doesn’t exist. There’s one movie from 1961 available to watch (the original Parent Trap) and one selection from 1959 (Compulsion), but not a single film from 1960. It’s like it never happened. There aren’t any movies from 1963 either. Or 1968, 1955 or 1948. There are no Hitchcock films on Netflix. No classics from Sergio Leone or François Truffaut. When Debbie Reynolds died last Christmas week, grieving fans had to turn to Amazon Video for Singin’ in the Rain and Susan Slept Here. You could fill a large film studies textbook with what’s not available on Netflix.

Netflix’s selection of classic cinema is abominable—and it seems to shrink more every year or so. As of this month, the streaming platform offers just 43 movies made before 1970, and fewer than 25 from the pre-1950 era (several of which are World War II documentaries). It’s the sort of classics selection you’d expect to find in a decrepit video store in 1993, not on a leading entertainment platform that serves some 100 million global subscribers.

The bottom line is that streaming rights are expensive, whereas for shipping around DVDs the company can simply buy a disc.  Alternatively, you could say that the law for tangible media — such as discs — is less infested with special interests than the law for digital rights?  What does that say about our future?

Here is the article, via Ted Gioia.

A City on the Hill

by on September 17, 2017 at 7:43 am in Economics, Law, Religion | Permalink

The Redeemed Christian Church of Nigeria has built its own private city.

A 25-megawatt power plant with gas piped in from the Nigerian capital serves the 5,000 private homes on site, 500 of them built by the church’s construction company. New housing estates are springing up every few months where thick palm forests grew just a few years ago. Education is provided, from creche to university level. The Redemption Camp health centre has an emergency unit and a maternity ward.

On Holiness Avenue, a branch of Tantaliser’s fast food chain does a brisk trade. There is an on-site post office, a supermarket, a dozen banks, furniture makers and mechanics’ workshops. An aerodrome and a polytechnic are in the works.

…“If you wait for the government, it won’t get done,” says Olubiyi. So the camp relies on the government for very little – it builds its own roads, collects its own rubbish, and organises its own sewerage systems. And being well out of Lagos, like the other megachurches’ camps, means that it has little to do with municipal authorities. Government officials can check that the church is complying with regulations, but they are expected to report to the camp’s relevant office. Sometimes, according to the head of the power plant, the government sends the technicians running its own stations to learn from them.

There is a police station on site, which occasionally deals with a death or the disappearance of a child, but the camp’s security is mostly provided by its small army of private guards in blue uniforms. They direct traffic, deal with crowd control, and stop children who haven’t paid for the wristband from going into Emmanuel Park – home to the aforementioned ferris wheel.

As in Gurgaon, India, where the government fails opportunities are opened for entrepreneurs who think big.

Below are the 15 countries that exported the highest dollar value worth of cement during 2016:

  1. China: US$692.4 million (7.6% of total cement exports)
  2. Thailand: $612.2 million (6.8%)
  3. United Arab Emirates: $544.4 million (6%)
  4. Turkey: $494.8 million (5.5%)
  5. Germany: $486.3 million (5.4%)
  6. Spain: $477.3 million (5.3%)
  7. Vietnam: $403 million (4.4%)
  8. Japan: $391.3 million (4.3%)
  9. Canada: $368.7 million (4.1%)
  10. India: $267 million (2.9%)
  11. Greece: $248.6 million (2.7%)
  12. Senegal: $209 million (2.3%)
  13. United States: $205.9 million (2.3%)
  14. Pakistan: $185.6 million (2%)
  15. South Korea: $162.9 million (1.8%)

Here is the link.

Possibly so, though some more good years would be nice, to say the least.  To some extent this could be noise, or delayed catch-up growth.  Still, there seems to be a break in the previous trend:

In 2015, median household incomes rose by 5.2 percent. That was the fastest surge in percentage terms since the Census Bureau began keeping records in the 1960s. Women living alone saw their incomes rise by 8.7 percent. Median incomes for Hispanics rose by 6.1 percent. Immigrants’ incomes, excluding naturalized citizens, jumped by over 10 percent.

The news was especially good for the poor. The share of overall income that went to the poorest fifth increased by 3 percent, while the share that went to the affluent groups did not change. In that year, the poverty rate fell by 1.2 percentage points, the steepest decline since 1999.

…The numbers for 2016 have just been released by the Census Bureau, and the trends are pretty much the same. Median household income rose another 3.2 percent, after inflation, to its highest level ever. The poverty rate fell some more. The share of national income going to labor is now rising, while the share going to capital is falling.

That is from the new David Brooks column.

A simple point about corporate tax reform

by on September 15, 2017 at 12:40 am in Economics | Permalink

For the most part, the empirical literature suggests that “cash flow” drives investment more than does say the real interest rate; you can take the latter as one proxy for non-massive changes in rates of return.  So a plan to cut “back taxes” for companies still might stimulate investment, even if it doesn’t appear to alter marginal incentives in the appropriate way.  It will give corporations a higher realized cash flow over the immediately prior period, and again that has had decent predictive power over investment.  But causality?  That is tougher to say, but of course there are theories that self-financed investments are more attractive to managers than having to bring in additional outside monitors.

There is a genuine question whether you should side with the theory or the empirics here, and I am myself agnostic.  Furthermore, perhaps the cash flow of the prior periods proxies for the expected rate of return more accurately than do our available measurements for the expected rate of return.  So you don’t have to take the empirical result as documenting the importance of cash flow.

Still, if you hear someone attacking a tax reform plan as a “corporate giveaway,” just ask them how well they know this literature.  There is at least some chance that “giveaways” boost investment more than do targeted marginal changes.

In 2004 Canada prohibited paying Canadian sperm donors, leading to a tremendous shortage as I had predicted in 2003 (see also my post, The Great Canadian Sperm Shortage). Canadian Peter Jaworski has an update (oddly enough published in USA Today):

Canada used to have a sufficient supply of domestic sperm donors. But in 2004, we passed the Assisted Human Reproduction Act, which made it illegal to compensate donors for their sperm. Shortly thereafter, the number of willing donors plummeted, and sperm donor clinics were shuttered. Now, there is basically just one sperm donor clinic in Canada, and 30-70 Canadian men who donate sperm. Since demand far outstrips supply, we turn to you. We import sperm from for-profit companies in the U.S., where compensating sperm donors is both legal and normal.

Note, by the way, that contrary to what you might expect from Titmuss et al. US sperm is considered to be of high quality because it comes with information about the donor.

And sperm isn’t the only precious bodily fluid that Canada imports.

Canada has never had enough domestic blood plasma for plasma-protein products, such as immune globulin. Our demand for those products, however, is increasing. Last year, we collected only enough blood plasma from unremunerated donors to manufacture 17% of the immune globulin demanded. The rest we imported from you, in exchange for $623 million, or $512 million U.S.

Reliance on your blood plasma looked like it might change a little bit when, in 2012, a company called Canadian Plasma Resources announced plans to open clinics in Ontario dedicated to collecting blood plasma. The trouble is that its business model included compensating donors. Almost immediately, groups such as the Canadian Union of Public Employees and the Canadian Health Coalition began to lobby the Ontario government to pass a law to stop CPR from opening clinics. Ontario obliged in 2014, passing the Safeguarding Health Care Integrity Act, which among other things made compensation illegal.

…As for safety, the fact that we import products made with remunerated donors should tell you that it is emphatically not an issue. Health Canada has said that there is no health concern. The CEO of Canadian Blood Services, Graham Sher, took to YouTube to explain that “it is categorically untrue to say, in 2015 or 2016, that plasma-protein products from paid donors are less safe or unsafe. They are not. They are as safe as the products that are manufactured from our non-remunerated or unpaid donors.”

As Jaworski writes:

What Canada should do is legalize compensation for renewable bodily fluids in our own country. It would be the morally right thing to do. It would help make and save more lives, without harming anybody.

Social insect colonies are highly successful, self-organized complex systems. Surprisingly however, most social insect colonies contain large numbers of highly inactive workers. Although this may seem inefficient, it may be that inactive workers actually contribute to colony function. Indeed, the most commonly proposed explanation for inactive workers is that they form a ‘reserve’ labor force that becomes active when needed, thus helping mitigate the effects of colony workload fluctuations or worker loss. Thus, it may be that inactive workers facilitate colony flexibility and resilience. However, this idea has not been empirically confirmed. Here we test whether colonies of Temnothorax rugatulus ants replace highly active (spending large proportions of time on specific tasks) or highly inactive (spending large proportions of time completely immobile) workers when they are experimentally removed. We show that colonies maintained pre-removal activity levels even after active workers were removed, and that previously inactive workers became active subsequent to the removal of active workers. Conversely, when inactive workers were removed, inactivity levels decreased and remained lower post-removal. Thus, colonies seem to have mechanisms for maintaining a certain number of active workers, but not a set number of inactive workers. The rapid replacement (within 1 week) of active workers suggests that the tasks they perform, mainly foraging and brood care, are necessary for colony function on short timescales. Conversely, the lack of replacement of inactive workers even 2 weeks after their removal suggests that any potential functions they have, including being a ‘reserve’, are less important, or auxiliary, and do not need immediate recovery. Thus, inactive workers act as a reserve labor force and may still play a role as food stores for the colony, but a role in facilitating colony-wide communication is unlikely. Our results are consistent with the often cited, but never yet empirically supported hypothesis that inactive workers act as a pool of ‘reserve’ labor that may allow colonies to quickly take advantage of novel resources and to mitigate worker loss.

That is by Daniel Charbonneau, Takao Sasaki, and Anna Dornhaus, file under “speculative.”  For the pointer I thank Eric Durbrow.

That topic has been knocking around for some time, with varying opinions.  I’ve now seen the clearest and most thorough treatment to date, namely from Gerald Auten and David Splinter.  It hasn’t received that much attention, perhaps because the results don’t have such a strong built-in constituency, but here goes:

Previous studies using U.S. tax return data conclude that the top one percent income share increased substantially since 1960. This study re-estimates the long-term trend in inequality after accounting for changes in the tax base, income sources missing from individual tax returns and changes in marriage rates. This more consistent estimate suggests that top one percent income shares increased by only about a quarter as much as unadjusted shares. Further, accounting for government transfers suggests that top one percent shares increased a tenth as much. These results show that unadjusted tax return based measures present a distorted view of inequality trends, as incomes reported on tax returns are sensitive to changes in tax laws and ignore income sources outside the individual tax system.

You’ll find the paper at the first link here.

Here is the abstract:

Counterfactual experiments show that deregulating existing urban land from 2014 regulation levels back to 1980 levels would have increased US GDP and productivity roughly to their current trend levels. California, New York, and the Mid-Atlantic region expand the most in these counterfactuals, drawing population out of the South and the Rustbelt. General equilibrium effects, particularly the reallocation of capital across states, accounts for much of these gains.

Alternatively, note from the paper that:

…deregulating all of the regions to 1980 levels would raise labor productivity by about 10 percent, and consumption by about 9 percent in the neoclassical economy, and would raise labor productivity by about 16 percent, and consumption by about 11 percent in the economy with the externality.

That is from Herkenhoff, Ohanian, and Prescott.  I’d like to make two broader points about the paper:

1. This is yet another example of real business cycle theory methods proving useful.  There are genuine problems with these approaches, but at least most of the blogosphere critics don’t understand them, and their uses, very well.

2. Sometimes you hear Texas described as a “low-wage” economy, perhaps contrasted with the high wages of California.  But there are some subtle wage effects from the Texas approach that often go unnoticed.  By drawing people out of high-rent areas, Texas keeps the lid on land rents elsewhere, thereby boosting real wages in say San Francisco.  Furthermore, San Francisco employers must pay their workers more, the more attractive is the “move to Texas” option.  So the full positive effect of the Texas model on wages is considerably higher than you can see by looking at Texas wages alone.  Once again, the distinction between the seen and the unseen turns out to be relevant.