There is a new NBER working paper on these topics, by Anna Chorniy, Janet Currie, and Lyudmyla Sonchak, here is the abstract:

In the U.S., nearly 11% of school-age children have been diagnosed with ADHD, and approximately 10% of children suffer from asthma. In the last decade, the number of children diagnosed with these conditions has inexplicably been on the rise. This paper proposes a novel explanation of this trend. First, the increase is concentrated in the Medicaid caseload nationwide. Second, nearly 80% of states transitioned their Medicaid programs from fee-for-service (FFS) reimbursement to managed care (MMC) by 2016. Using Medicaid claims from South Carolina, we show that this change contributed to the increase in asthma and ADHD caseloads. Empirically, we rely on exogenous variation in MMC enrollment due a change in the “default” Medicaid plan from FFS or MMC, and an increase in the availability of MMC. We find that the transition from FFS to MMC explains most of the rise in the number of Medicaid children being treated for ADHD and asthma. These results can be explained by the incentives created by the risk adjustment and quality control systems in MMC.

The economics of medical diagnoses remain a drastically understudied area.

Due to popular demand, we are releasing a transcript of the Conversation with Lindsey and Teles.

We talk about liberaltarianism, how bad is crony capitalism really, whether government affects the distribution of wealth much, universities as part of the problem, whether IP law is too lax or too tough, why Steve didn’t do better in high school, the British system of government, Charles Murray, the Federalist Society, Karl Marx, Thailand, the Coase Theorem, and Star Trek, among other topics.  Here is one bit:

COWEN: What’s the most important idea in the book that you understand better than he [Brink Lindsey] does?

TELES: Well, so there is a division of labor here. Brink did a lot more work on the cases than I did, although we talked about them all and I did a lot more work on the political analysis. We draw a lot on great, really seminal article by Rick Hall at University of Michigan called “Lobbying as Legislative Subsidy.” And I think that idea is dramatically under appreciated. The idea that what lobbyists are essentially doing is providing information, that information is scarce, it is a source of power. And one thing that we add is, if the state isn’t providing information itself, it essentially has to get it from outside. And when they get it from outside, it imports the overall inequality and information gathering and processing that’s in civil society. And that can be a very strong source of inequality in policy outcomes. I think Brink understands that, but this is my wheelhouse so I think probably if you were gonna push me, I’d say I understood it better that he did.

And this:

LINDSEY: One can see the whole sort of second wave feminist movement since the 60s as an anti rent-seeking movement, that white men were accumulating a lot of rents because of the way society was structured, that they were the breadwinner and there was a sexual division of labor, and they received higher pay than they would have otherwise because they were assumed to be the breadwinner, and women were just sort of kept out of the workforce in direct competition with men in many roles. The last half century has been an ongoing anti rent-seeking campaign and the dissipation of those rents especially by less skilled white men has been a cause of a great deal of angst and frustration and political acting out in recent years.

Here is a link to the podcast version of the chat, plus further explanation of my interview method for the two.  Better yet, you can order their new book The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality.

As I’m on the road, I’ve only read summaries.  Kevin Drum has an excellent post on how the distributional implications harm the blue states, follow-up here.  Scott Sumner says better than expected.  Kevin writes:

The Republican tax bill eliminates deductions for a bunch of odd things: tuition debt, mortgage interest, alimony, medical expenses, state and local taxes, gambling losses, tax prep expenses, moving expenses, and a few others.

Bravo!  I’m actually impressed, noting that many of these deductions are limited rather than eliminated as I understand matters.  Furthermore, in various embedded ways the plan discourages the itemizing of deductions, which in turn limits the value of remaining deductions for many taxpayers, but in a politically subtle way.  The bill even nips at the endowment income for well-off universities, though I don’t favor that change, as it may harm innovation.

The plan as a whole is a reckless expansion of the deficit, but if that is going to happen anyway this is one of the better ways to do it.  In fact, we should tax companies less and homes/land more.  Why?  First, for behavioral reasons homeowners are insufficiently diversified; the tax code should not encourage that.  Second, this bill will (modestly) lower land, home, and rental values in the fancy cities on the coasts, a net gain at least for non-itemizers perhaps (caveat: I don’t know everything that is in the bill).  Third, big, fancy homes on big plots of land are not that “green,” and furthermore residence size seems to bring a lot of hedonic adaptation.  Fourth, there are more likely increasing returns across companies than across expensive homes.  Fifth, American equities seem to bring a long-run return of 5-7% and real estate zero percent.  More of the former please!  Companies > homes.

I believe that with further examination I could find many ugly and stupid aspects of this bill, and many politically craven decisions.  And again, I don’t favor increasing the debt.  But holding the size of the debt constant, let’s face it — this is a step in the right direction.

Arlington County is considering whether to relax regulations that allow homeowners to legally rent to long-term tenants on a portion of their property, after only 20 homeowners out of 28,000 eligible successfully obtained licenses over the past eight years.

At a time when people increasingly are sharing cars, bicycles and workspaces, and are renting out rooms by the night on Airbnb, the idea of providing a legal way for residents to safely lease their garage or basement room to a young adult — or anyone else — seemed like a no-brainer.

But the detailed regulations, written in part to mollify wary neighbors, apparently stopped the practice from taking off, county officials said.

That is from Patricia Sullivan at the Washington Post.  As a frontier for further deregulation, this does not seem to be a hopeless cause:

California’s legislature passed bills in 2016 that made it easier for local communities to create ADUs, prompting cities throughout the state to adopt ordinances that are designed to be more user-friendly.

Even California.

In the debate over corporate taxation it’s often assumed that corporate taxes are equivalent to taxes on capital. But corporations are only a minority of firms. Most of the firms in the pass-through sector are small partnerships but by no means are all pass-through firms small. Indeed, corporate profits are less than half of all business profits as shown by the following graph from the Tax Foundation.

What this means is that a cut in the income tax is also a cut in the capital tax. Indeed, a cut in the top marginal income tax rate is a bigger cut in capital taxation than a cut in the top corporate tax rate. (Unfortunately, it now looks like the top marginal rate on income won’t be cut.)

Since pass through businesses can be large, some people have suggested that these businesses should be taxed like corporations. That would be a mistake. An ideal tax system should be neutral as to organizational form. So, if anything, corporate taxation should be moved more in the direction of pass-through taxation.

Hat tip: Lunch with Steve Pearlstein, Bryan Caplan and Tyler.

This is an out-of-synch bonus episode, rushed out because I think their new, just-out book — The Captured Economy: How the Powerful Slow Down Growth, Enrich Themselves, and Increase Inequality — is so important.  You will find the podcast here, lots of rapid fire back and forth.

Everyone wanted me to interview them together, but I said no, I would instead interview them separately and ask about 2/3 the same questions to see how their answers might hang together, or not.  That is how co-authors should be treated!  I also asked each what the other has for breakfast, and by the end each had confessed to several crimes, to avoid a longer sentence of course.

Here is the smallest of bits:

COWEN: Are higher levels of executive compensation part of the problem?

TELES: There you probably would get a different answer between me and Lindsey.

COWEN: That’s why I asked

Recommended, again here is the podcast (no transcript, we wanted to get this out right away).

Here is a recent paper (PDF) by Leonard Kukić of LSE:

Beyond the recent past, and beyond the Soviet Union, we know little about the performance of Eastern European economies. This paper fills the knowledge void by analysing socialist Yugoslavia using a diagnostic tool that identifies the mechanisms that drive economic growth – business cycle accounting. The analysis provides novel findings. During the “Golden Age” of economic growth, total factor productivity became gradually more important in sustaining economic growth. Distorted labour incentives were a major constraint on growth since the mid-1960s, and explain the slowdown of the economy during the 1980s. Socialist growth was primarily handicapped by poor incentives to work, rather than by poor incentives to innovate or to imitate. In an attempt to liberalise the economy, economic power was delegated to the labour-managed firms. These firms were maximising income per worker, which hindered the ability of Yugoslavs to supply labour.

That is via the essential follow Pseudoerasmus.

Here is the back and forth, it is more Matt than I, but plenty of both of us.  Here is one excerpt:

Matt: …I think the possible surprise here lies in the connection between finance and identity. People are sort of inchoately aware of it now; we use the term “identity theft” to mean “someone using your name and Social Security number to get a credit card.” But most people don’t really think of their credit report as being central to their identity. Really ambitious proponents of blockchain technology, though, envision a world in which a lot of identity information — your citizenship and marital status and college degrees and employment and certifications and whatnot, maybe your fingerprints and retinas and DNA, as well as of course your credit information — are encoded on a blockchain and used in every aspect of your life. (India has a governmental system a little bit like this, and China is building one, though the blockchain vision usually involves decentralized non-governmental systems.)

I think that the idea that financial intermediaries should be the keepers of identity is pretty uncomfortable, but then, the idea that Facebook would be the keeper of identity seems like it would be uncomfortable, and in fact Facebook has quickly taken over a lot of the work of verifying identity, at least online. One thing that we might see in the next 20 years is a fight between financial institutions and social networks and decentralized blockchain builders over who gets to be the keeper and verifier of everyone’s identity.


Prostitution Reduces Rape

by on October 31, 2017 at 7:34 am in Economics, Law | Permalink

A new paper in the American Economic Journal: Economic Policy by Bisschop, Kastoryano, and van der Klaauw looks at the opening and closing of prostitution zones (tippelzones) in 25 Dutch cities.

Our empirical results show that opening a tippelzone reduces sexual abuse and
rape. These results are mainly driven by a 30–40 percent reduction in the first two
years after opening the tippelzone.
For tippelzones with a licensing system, we
additionally find long-term decreases in sexual assaults and a 25 percent decrease
in drug-related crime, which persists in the medium to long run.

Cunningham and Shah studied decriminalization of indoor prostitution in Rhode Island and found very similar results.

We exploit the fact that a Rhode Island District Court
judge unexpectedly decriminalized indoor prostitution in 2003 to provide the first causal estimates
of the impact of decriminalization on the composition of the sex market, rape offenses, and sexually
transmitted infection outcomes. Not surprisingly, we find that decriminalization increased the size
of the indoor market. However, we also find that decriminalization caused both forcible rape offenses
and gonorrhea incidence to decline for the overall population. Our synthetic control model finds 824
fewer reported rape offenses (31 percent decrease) and 1,035 fewer cases of female gonorrhea (39
percent decrease) from 2004 to 2009.

In addition a working paper by Riccardo Ciacci and María Micaela Sviatschi studies prostitution in New York and also finds that prostitution significantly reduces sex crimes such as rape:

We use a unique data set to study the effect of indoor prostitution establishments on sex
crimes. We built a daily panel from January 1, 2004 to June 30, 2012 with the exact location of
police stops for sex crimes and the day of opening and location of indoor prostitution establishments.
We find that indoor prostitution decreases sex crime with no effect on other types
of crime. We argue that the reduction is mostly driven by potential sex offenders that become
customers of indoor prostitution establishments. We also rule out other mechanisms such as
an increase in the number of police officers and a reduction of potential victims in areas where
these businesses opened. In addition, results are robust to different data sources and measures
of sex crimes apart from police stops.

It’s become common to think that rape is about power and not about sex. No doubt. But some of it is about sex. Quoting Ciacci and Sviatschi again:

We find evidence consistent with the fact that potential perpetrators substitute
towards indoor prostitution establishments instead of engaging in sex crimes….This mechanism is in line with a survey of men who had purchased sex from women in London.
About 54% of these men stated that if prostitution did not exist then they would be more
likely to rape women who were not prostitutes. This belief was clearly held by one man who even
stated: “Sometimes you might rape someone: you can go to a prostitute instead” (Farley et al.,

In short, a wide variety of evidence from different authors, times and places, and experiments shows clearly and credibly that prostitution reduces rape. This finding is of great importance in considering how prostitution should be rationally regulated.

The Great Moderation and Leverage

by on October 30, 2017 at 7:23 am in Economics | Permalink

In response to my earlier post, The Great Moderation Never Ended,  the perceptive Kevin Drum noted that the moderation seems to have been asymmetric–the booms have moderated more than the busts. That’s correct but it’s more than lower economic growth–expansions also last longer. It’s as if the booms have been smoothed over a longer period of time but not the busts.

Søren Hove Ravn points me to a paper of his with co-authors, Leverage and Deepening: Business Cycle Skewness that documents this fact and also proposes a theory.

The authors argue that financial innovation made credit more easily accessible and easier credit led to more leverage. Leverage, however, has an asymmetric feature. When asset prices are up everything is golden, wealth is high and credit is easy because lenders are happy to lend to the rich. When asset prices decline, however, the economy takes a double hit, wealth is low and credit is tight. The net result is that booms are smoothed but busts become, if anything, even more violent.

The theory is promising because it explains both the negative skewness and the great moderation. It’s also important because higher leverage, longer expansions and greater negative skew are new features of business cycles that appear across many developed economies as shown by Jorda, Schularick and Taylor in Macrofinancial History and the New Business Cycle Facts. In this paper Jorda et al. create new data series using over 150 years of data from 17 economies and conclude:

…leverage is associated with dampened business cycle volatility, but more spectacular crashes.

and more generally:

We find that rates of growth, volatility, skewness, and
tail events all seem to depend on the ratio of private credit to income. Moreover, key
correlations and international cross-correlations appear to also depend quite importantly
on this leverage measure. Business cycle properties have changed with the financialization
of economies, especially in the postwar upswing of the financial hockey stick. The manner
in which macroeconomic aggregates correlate with each other has evolved as leverage
has risen. Credit plays a critical role in understanding aggregate economic dynamics.

Lights On, Lights Off

by on October 29, 2017 at 7:21 am in Economics, Science | Permalink

You can learn a lot from satellite pictures of the earth at night; the famous picture of North and South Korea, which Tyler and I feature in Modern Principles, is just one such example.

ESRI has an interesting picture-story illustrating the lights that have turned on and those that have turned off between 2012 and 2016. It’s remarkable how much North India literally turns on in this short space of time. Lights have also turned off around the globe. Not only in places like Syria but also in much of the United States and Northern Europe. In the latter two cases, as the surprising result of more efficient lighting and campaigns to reduce light pollution. Check it out.

Here is a long and very interesting post with many distinct points.  Here is one of them:

So the entire corporate tax is pre-paid, or borne, by the stockholders who are unfortunate enough to be around when the corporate tax is announced.  Anyone who buys shares after the corporate tax is imposed gets the shares at a lower price, so his or her return is entirely unaffected by the corporate tax.

People who buy shares after the corporate tax is imposed bear no burden of the tax. The corporate tax does not affect the rate of return received by current owners at all, because they got to buy at low prices.

So much for corporate taxes soaking the rich. This is an important fact, missing in all the distributional analysis I have seen.

Here is another:

Pietro Peretto reminds me there is an active literature on optimal taxation in endogenous-growth economies, including his Corporate taxes, growth and welfare in a Schumpeterian economy , Schumpeterian Growth with Productive Public Spending and Distortionary TaxationThe Growth and Welfare Effects of Deficit-Financed Dividend Tax Cuts and Implications of Tax Policy for Innovation and Aggregate Productivity Growth.  Nir Javinovich and Sergio Rebelo have a nice recent “Nonlinear effects of taxation on growth,” in the JPE, Nancy Stokey and Sergio have “Growth effects of flat-rate taxes” also in the JPE, and I have inside information that Chad Jones is working on it too. So, there is no lack of academic literature on the question just which kinds of taxes reduce growth, which of course leads to huge distortions.

Worth a full read.

That is part of the title of a new paper by Sharat Ganapati, here is the abstract:

American industries have grown more concentrated over the last few decades, driven primarily by the growth of the very largest firms. Classical economics implies that this should lead to hikes in prices, reduction in output, and decreases in consumer welfare. I investigate forty years of data from 1972-2012 using publicly available market shares and price indices for both the manufacturing and non-manufacturing sectors and find mixed evidence. Manufacturing concentration increases are indeed correlated with slightly higher prices, but not lower output. However concentration increases are correlated with increases in productivity, offsetting a large portion of the price increase. In contrast, non-manufacturing concentration increases over the last twenty years are not correlated with observable price changes, but are correlated with increases in output.

In other words, the output restrictions are not there.  The amazing thing is that, over the last few years, I have seen a few dozen journalists and also economists handle this question, without ever asking much less trying to answer this question (Noah Smith being an exception).

After decades of researching the impact that humans are having on animal and plant species around the world, Chris Thomas has a simple message: Cheer up. Yes, we’ve wiped out woolly mammoths and ground sloths, and are finishing off black rhinos and Siberian tigers, but the doom is not all gloom. Myriad species, thanks in large part to humans who inadvertently transport them around the world, have blossomed in new regions, mated with like species and formed new hybrids that have themselves gone forth and prospered. We’re talking mammals, birds, trees, insects, microbes—all your flora and fauna. “Virtually all countries and islands in the world have experienced substantial increases in the numbers of species that can be found in and on them,” writes Thomas in his new book, Inheritors of the Earth: How Nature Is Thriving in an Age of Extinction.

That is the introduction to a very interesting interview with Chris Thomas, a conservation biologist. Read the whole thing.

Hat tip: The Browser.