Month: January 2005

The Time to Deduct

Congress has just passed a bill which lets taxpayers deduct this month’s donations to tsunami relief on their 2004 taxes.  I think this is a good idea but why stop at one month and why stop at tsunami relief?  Taxpayers can deduct IRA contributions from their previous years taxes up until April 15, why not allow the same thing for charitable deductions?

    Allowing deductions to be made at the same time as taxes are paid will help individuals to make better decisions because it is much easier to examine the donation-tax tradeoff when you are doing your taxes in April than in the previous year when you are making your donations.  Today, in contrast, you have to make your charitable donations at least 4 and a half months before the tradeoff becomes salient.

Is French taxation progressive?

…French social policy is not overwhelmingly redistributive, and it is not financed with progressive income taxes, as in Denmark and Sweden, nor is it financed with a mix of progressive income taxes and payroll taxes, as in Germany, Canada, and Britain.  As in other corporatist/continental consrevative welfare states, French social spending is financed with a mix of regressive payroll taxes, regressive sales taxes, and, for a little over a decade, a smaller "general social contribution" tax…

From the 1950s until roughly 1980 France was the leader in income inequality among OECD nations….in France the top 20% of income earners received 24% of transfer payments and the bottom 20% of earners only 18%.  By 1991 French social policy was slightly more progressive, but French manual workers "remain[ed] in virtually the same relative position…"

…France remains a highly stratified society in both the social and economic sense.  The wealthiest 10% of the French income ladder are 50% richer than their Swedish counterparts and the upper quarter of the French income ladder is not brought down by the tax system the way it is in Denmark, Sweden, and Germany…today many of France’s wealthy citizens occupy privileged spots at the core of the "welfare state."  This is one of the key reasons they tend to support it.

That is from Timothy Smith’s recent and excellent France in Crisis: Welfare, Inequality, and Globalization since 1980.  The tale is told from a center-left perspective, and yes he also explains what the French get right.  Highly recommended, it is the best book I know on the contemporary French economy and polity.

Toll Collect

After more than a year of delay, Toll Collect, Germany’s high-tech system of road pricing for big trucks, started operation earlier this week and appears to be working well.  Some 800,000 trucks use Germany’s 12,000 km of highways every day – all of these trucks will soon be tracked by GPS (i.e. from outer space!) and the big ones will be billed.  The toll system will also be tied into traffic reports and routing systems.

In other tolling news, Texas is considering a massive superhighway project that would be privately built, operated and tolled.

I see toll roads, most privately operated and some privately owned, as the road of the future.  Road pricing can not only reduce congestion it can also help with accident externalities.

Previous posts on this topic including my debate with Tyler can be found here.

Stupid product warnings

A toilet brush with a tag that says "Do not use for personal hygiene" has taken top prize for the wackiest consumer warning label of the year, according to an anti-lawsuit group.

The Michigan Lawsuit Abuse Watch, M-LAW, whose main mission is to reveal how lawsuits and anxiety over lawsuits have created a need for overly obvious warnings on products, sponsors the The Wacky Warning Label Contest each year.

Other top finishers this year include:

— A scooter with the warning "This product moves when used."

— A digital thermometer with the advice "Once used rectally, the thermometer should not be used orally."

— An electric blender used for chopping and dicing that reminds users to " "Never remove food or other items from the blades while the product is operating."

— And a three-inch bag of air used for packaging that read "Do not use this product as a toy, pillow, or flotation device."

Here is the link.  Read Alex too.

How many people can you warn how quickly?

Why didn’t warnings race around the Web ahead of the tsunami? We live at a time when news of Scott Peterson’s guilty verdict can spread in minutes from cell phone text messages sent from inside the courtroom to millions of people across the planet. Yet no one took advantage of the Web as the tsunami dashed toward shorelines.

"An effective viral campaign could’ve been launched in minutes," says Toronto-based tech author Don Tapscott.

Why didn’t thousands of tourists’ cell phones chirp with a call or text message saying, "Run away!"? Why didn’t BlackBerrys buzz with e-mail? Why didn’t TV sets at resorts show CNN reporting where the waves might hit next?

"These questions are going to haunt us," says Yrjo Lansipuro at the Ministry of Foreign Affairs of Finland, a nation that lost about 200 citizens who were in the regions hit by the tsunamis.

"Could a warning have reached people in time?"

Let’s say that I, and I alone, knew that a major disaster would strike the Indian coast in three hours’ time.  What would I do?  I admire the State Department in many regards, but calling them would not be my first instinct (it takes long enough to get an ordinary reimbursement processed there).  I would try the following:

1. Post a warning on MR and, with suitably serious language, and a plea to spread the word.

2. Call or email the few people I know in India.

3. Google to the phone numbers of tourist hotels on the coast, call them up, and sound serious, lying if necessary.

How many people, if any, would such efforts save?  Probably not very many, unless I got lucky at the hotel level.  How would I phrase the warnings to sound credible, elicit cooperation, and minimize free-rider problems?  Keep in mind that cranks predict earthquakes all the time, what is to distinguish me from them?  Furthermore no local wants to scare away potential tourists or customers.

Our best bet may be coordinated cell phone warnings sent to customers in the affected regions:

…we now have a system in place that enables us to issue a warning to customers of Finnish mobile operators in any region of the world with 30 minutes’ notice…

Read more hereThis article discusses how much scientists knew in the first place.

Incentives matter

Swofford, a postal worker from Seminole County, claimed his prize Tuesday in a $34.7 million lump sum payout, ending weeks of mystery about who won the November 24 drawing.

Swofford, 53, and his wife separated three years ago. But two weeks after the winning numbers were announced, Ann Swofford served him with divorce papers and claimed a share of the prize.

Just before Christmas, the Swoffords and their lawyers hammered out an agreement. His wife will get $5.25 million and $1 million will be set aside to support their 11-year-old son. In return, she agreed not to seek any more of Swofford’s winnings.

Swofford said he remembered reading about a divorce case where a lottery winner kept it a secret and was penalized in court.

Here is the full story.  And here is a very different discussion of how incentives can matter.

Gerard Debreu has passed away

Gerard Debreu, 83, a former University of California
at Berkeley economist who won a Nobel Prize for breakthroughs in the
study of supply and demand, died Dec. 31 in Paris. No cause of death
was reported.

Dr. Debreu taught at Berkeley for more than 30 years.
He won the 1983 Nobel Prize in economic sciences for his theoretical
work on how prices operate to balance supply and demand.

Here is an obituary.  Here is The New York Times account.

“What do you believe is true even though you cannot prove it?”

Leading scientists and creative thinkers were asked to address this question.  My favorite answer was from Judith Harris:

I believe, though I cannot prove it, that three – not two – selection processes were involved in human evolution.

The first two are familiar: natural selection, which selects for fitness, and sexual selection, which selects for sexiness.

The third process selects for beauty, but not sexual beauty – not adult beauty. The ones doing the selecting weren’t potential mates: they were parents. Parental selection, I call it.

Nicholas Humphrey gave another good answer:

I believe that human consciousness is a conjuring trick, designed to fool us into thinking we are in the presence of an inexplicable mystery. Who is the conjuror and why is s/he doing it? The conjuror is natural selection, and the purpose has been to bolster human self-confidence and self-importance – so as to increase the value we each place on our own and others’ lives.

The New York Times offers the full list of responses.  Arnold Kling offers further commentary.

Addendum: Eric Crampton points me to 120 additional answers, including Jared Diamond, Steven Pinker, and many other notables.  My answer?  I will go with Denis Dutton, with honorable mentions to Robert Trivers and Alexander Vilenkin.  I like Carlos Rovelli too.  Yes I know you don’t all click on all of the links but these are worth checking out. 

Freezing social security benefits in real terms

Wednesday I reported on the Bush Administration plan to check the growth of social security benefits.  To take an extreme version of the idea, what if nominal benefits rose with the price index rather than with the general level of wages?  Real benefits then would be constant rather than rising over time.

I see the following possible problems:

1. Perhaps the elderly face rates of price inflation (e.g., health care, personal servants) above and beyond the measured CPI.

2. It is unjust to keep our real contribution to the elderly constant over time.

3. The elderly will suffer a negative relative status effect.  Everyone else will have nanotechnology robots, but the elderly in 2075 will not.  They will be left behind.

4. The value of the social security program will grow small, in real terms, relative to the economy as a whole.

On #1, we should be willing to make all required differential adjustments (email me if you know a good source on rates of price inflation faced by the elderly, and yes it must adjust for changes in medical technology).  On #2, I will grant the point but dollars can be used to fight many injustices.  Rising real benefits, although "automatic" on today’s books, are in fact a new expenditure and should be evaluated as such.  It is unlikely that this is the best anti-poverty program we can devise.  Plus the elderly will enjoy a rising standard of living, over time, as the economy grows wealthier and they can save more when young.  #3 boils down to #2.  #4 is not a problem per se, if it results from growing riches.  And note that price indexing would not kick in until the more distant future.

The real issue, I suspect, boils down to medical care.  Many life-saving improvements are falling in price in real terms (what did a triple bypass cost in 1940? — infinity).  So we encounter more opportunities to prolong lives.  But if benefits are fixed in real terms, not all of these opportunities can be exploited.  That is, more people will use the new improvements, but constant benefit levels mean that access will be more differential than if real benefits would rise.  Are you prepared for this?

If you are a critic, here is the real problem.  The most important service for many of the elderly is health care.  Yet price indices are notoriously inaccurate and unjust when many prices are falling from levels of "infinity" to "very high."

The bottom line: I am ready to push the "yes button" on this change.  That being said, I would use the money to address our broader fiscal problems, and not to finance a transition to government-run personalized accounts.  As the economy grows, over time, we would in any case move toward a greater importance for private saving.  And if you wish, bundle the whole thing with greater means-testing.

Here is a good discussion on how social security indexing works and would work under possible reforms.  Here is further useful commentary.  Here is Matt Yglesias on tinkering with the retirement age, another good idea.  Russ Roberts offers general comments on the problem of social security, try Arnold Kling as well.  Brad DeLong lays down the party line.

India facts of the day

According to a report by the National Council for Applied Economic Research, which is based in New Delhi and partly government financed, half of India’s 10.7 million households with an income of up to a million rupees ($23,000) are in smaller cities.

The report recorded a big rise in the number of rich households, those with incomes of 1 million rupees to 5 million rupees, in smaller cities like Vadodara, Nagpur, Ahmedabad and Vijayawada. And while in 1995 just 2.8 percent of households were counted as middle class, with income of 200,000 rupees to a million rupees, the report projected that 12.8 percent would be counted as such by 2009.

Low agricultural productivity, which implies rural poverty, has been central to India’s problems.  The country has been trying to leap into the service age, but without  having had an Industrial Revolution.  But for the first time, its smaller cities seem to be turning a corner.  Continuing…and here is the New York Times story.

Social security update

The Bush administration has signaled that it will
propose changing the formula that sets initial Social Security benefit
levels, cutting promised benefits by nearly a third in the coming
decades, according to several Republicans close to the White House.

Under the proposal, the first-year benefits for
retirees would be calculated using inflation rates rather than the rise
in wages over a worker’s lifetime. Because wages tend to rise
considerably faster than inflation, the new formula would stunt the
growth of benefits, slowly at first but more quickly by the middle of
the century. The White House hopes that some, if not all, of those
benefit cuts would be made up by gains in newly created personal
investment accounts that would harness returns on stocks and bonds.

But by embracing "price indexing," the president would for the first
time detail the painful costs involved in closing the gap between the
Social Security benefits promised to future retirees and the taxes
available to fund them. In late February or March, the administration
plans to produce its proposed overhaul of the system, including
creation of personal investment accounts and the new benefit

The change would save trillions of dollars in scheduled expenditures
and solve Social Security’s long-term deficit, but at a cost. According
to the Social Security Administration’s chief actuary, a middle-class
worker retiring in 2022 would see guaranteed benefits cut by 9.9
percent. By 2042, average monthly benefits for middle- and high-income
workers would fall by more than a quarter. A retiree in 2075 would
receive 54 percent of the benefit now promised.

Here is a CNN story.  Here is the Washington Post account.

This is a step in the right direction, see my previous post.  I’ll soon be offering more analysis.

…if the atoms obeyed Newton’s laws, they would disintegrate whenever they bumped into another atom.  What keeps two atoms locked in a stable molecule is the fact that electrons can simultaneously be in so many places at the same time that they form an electron "cloud" which binds the atoms together.  Thus, the reason why molecules are stable and the universe does not disintegate is that electrons can be many places at the same time.

But if electrons can exist in parallel states hovering between existence and nonexistence, then why can’t the universe?  After all, at one point the universe was smaller than an electron.  Once we introduce the possibility of applying the quantum principle to the universe, we are forced to consider parallel universes.

That is from Michio Kaku’s Parallel Worlds: A Journey Through Creation, Higher Dimensions, and the Future of the Cosmos.  The book offers the best popular explanation I have seen of why we may be living in a hologram.  But if you wish to feel better about your intellect, and baffle your friend with a Ph.d. in physics, buy him Douglass North’s new Understanding the Process of Economic Change.