Month: March 2007

Digital currency with meta information

A loyal MR reader asks:

What is currency and what are the potential implications of a
completely digital currency that could have unlimited meta information
attached to it? [Some obvious implications would be tracking
transactions and the government’s ability to enforce taxes, etc., some
more esoteric stuff would be attaching conditions much like covenants,
say that a particular payment could only be used to buy products that
were carbon neutral, possibly down the road having policy implications.]

Higher taxes and carbon offsets we’ve already covered.  More generally, the use of "covenant currency," as I shall call it, would raise prices.  Restricted money simply isn’t worth as much.  It also would lead to a secondary market in currency.  Say you paid with me with money that can only be used to buy corn from Africa.  I’ll try to resell that money to the people who were going to buy corn in Africa anyway.  Of course the supply of targeted covenant money for that end may exceed the demand for it, and then price will adjust; think of this as an extreme form of legal tender laws.

Would it ever be efficient to use covenant money?  I doubt it.  It is a tax — on the holding and use of cash balances — when a simple transfer would do.  Use regular money for your transactions and, if you wish, send some cash to the corn sellers of Africa.

Inflation is also a tax on cash balances, and few people think that is the right or the best fiscal way to finance subsidies to various worthy groups.

#11 in a series of 50.

Dynamic public finance models

A loyal MR reader asks:

What are your thoughts on the new dynamic optimal public finance policy models being built and simulated?  Will they yield any new insights applicable for the real world, or are they a fad?

Real insights maybe, real measurements for sure.  I take this paper by Mankiw to be a paradigmatic example.  Through this body of literature we learn, or confirm our previous intuitions, that:

1. Cutting U.S. income tax rates is not, in general, self-financing.  We also get a rough idea of how much revenue we can make up in the long run.

2. Many forms of corporate and capital income taxation are, in the long or even medium run, inefficient.

3. Ideally we should move to a consumption tax.  (NB: Moving outside the models, I am scared that this kind of tax reform will just turn into another tax increase.  We’ll add a VAT to income taxation rather than shift to the VAT.  Yikes.)

These results are the bread and butter of applied public finance.  You can complain all you want about the assumptions, the artificiality, and the use of intuition to throw out unacceptable calibrations, but at the end of the day there is not a better way to do the work. 

A fad, perhaps, but there is nothing wrong with that.  The Beatles were a fad too.

By the way, here is an interesting paper on a different frontier in public finance, namely field experiments.

#10 in a series of 50.

This one is from Gingdao

[please discuss] China

I love China, and I love braised pork belly.  That’s why we have China Fact of the Day, and that is why I eat and cook so much Chinese food.  (French food is its only rival.)  The pragmatic optimism of the Chinese is a delight.  It’s a shame about the Great Leap Forward and all that other stuff.  I never get tired of reading books on Mao, the recent biography and the one by his doctor are especially good.  Chinese opera has marvelous quivering timbres, although they are usually ruined by electrification and by recording.  The Story of Qiu Ju is my favorite Chinese film, although there are many good ones.  Soul Mountain is my favorite Chinese novel.  China is also the future of Western classical music.  Tang horses are overpriced but still they are amazing and subtle.

Here is why China will not take over the world, sadly the trip to Shanghai still awaits us.  By the way, their nominal exchange rate peg is not a real peg in the medium- to long-run.

#09 in a series of 50.

The Ramsey Club vs the Pigou Club

It’s quite surprising that the major consumers of the world’s oil have not been able to agree to an oil tax under the auspices of something like the Kyoto Protocol.  It’s surprising because if the major consumers of oil all increased taxes they would end up bearing very little of the burden. 

The result is a simple application of the theory of tax incidence.  The burden of a tax falls on those who can least afford to escape the tax.  The world’s demand for oil is inelastic but the supply is even more inelastic.  What is Saudi Arabia, for example, going to do with its oil except sell it?  The oil is already fetching a price well above cost so if there is a world tax on oil that’s like a tax on land – Saudi Arabian land to be precise – and a tax on land is born by land owners not by consumers.

Members of the Pigou Club should take note.  For the Pigou Club to work to alleviate global warming the Pigouvian tax must reduce the global consumption of oil (not just say US consumption) but with the supply of oil being very inelastic that’s not going to happen.  A tax could drive high-cost US producers out-of-business but the major world producers are going to keep selling even with a high tax. In other words, membership in the Pigou club has few privileges unless you can put the major producers under (does that advice sound familiar?)

If you want to tax Hugo Chavez, however, please do join the Ramsey Club.

A’ la carte TV

…explore the potential effects of not only making cable tv a la carte, but also requiring that television content providers allow choice in how the consumer pays for the service – either an advertisement based system or a fee that would eliminate the commercials.  Additionally, require that the consumers be given a choice of types of advertisements they would be exposed to (I could choose for example an advertisement-based model, but that I would not want to see ads for children’s toys or cereal, and that I wanted to see no political ads).

Here is my earlier post on a’la carte cable.  The second question is, in effect, whether a cable company should be allowed to own TiVo and similar providers.  Yes, and Grossman and Hart suggest such mergers can encourage joint investments with value specific to that relationship, in this case perhaps computer-TV linkages.  By the way, the net effect of TiVo will be more shows with ads; if they add commercials to The Sopranos, the people who hate ads can take them out themselves.

Buying and selling specific ads?  The people who want to zap children’s ads for sugar are precisely the homes the advertisers wish to reach; I’ll bet the Coasian equilibrium keeps the ads running but involves parental quotas on TV watching.

#08 in a series of 50.

Is IQ what is truly scarce?

There is a new view — or should I say an old view? — percolating in the blogosphere: "There is something special about IQ.  We must conserve IQ at very high cost, and gains in IQ will bring very high social returns." 

In practical terms, "Conservation of IQ" is used to argue for limits on immigration, against various meliorist attempts, and possibly even for eugenics.  I’ve heard it used to argue for outlawing marijuana, which of course destroys brain cells.

Imagine an evolutionary approach: given the Industrial Revolution and subsequent developments, perhaps IQ has higher social returns than was once the case.  So we must rebuild our intuitions to favor IQ more than otherwise.  When evaluating policy, one question is simply to ask whether it raises or lowers average IQ within a polity or region.

There is also a methodological argument: IQ is (arguably) prior to economic notions of rationality.  Perhaps economists should treat rationality as an open variable and dependent on IQ.

I don’t assign special status to The Conservation of IQ for two reasons.  The first is the Flynn effect, or the fact that measured IQs have been rising steadily over time.  This implies some combination of a) IQ gains come naturally under conditions of progress, and b) IQ statistics are to some extent phony and don’t measure real intelligence.  We can debate the mix, but either deflates fears that IQ is somehow especially scarce or endangered.  These data also suggest that IQ is an artifice to be unpacked rather than a primary category.

Second, defenders of the IQ view tend to read evolutionary biology and intelligence research.  My roots are in cultural history.  Clusters of amazing achievement come and go pretty quickly, usually through some mix of environmental effects and luck.  Look at Venetian painting.  It was much better centuries ago, but I doubt if Venetian IQs have been falling.  Once we see how such enormous differences can be explained by non-IQ factors, I again don’t obsess over the variable.

I do think economists should study IQ more.  And for sure I value it in friends.  But when analyzing social problems, institutions, social psychology, and economic mechanisms still command most of my analytic attention. 

A few of you had asked about IQ, I crammed my thoughts into this one post, so this is #04-07 in a series of 50.  Do, by the way, save your thoughts on immigration for other posts.

Trade Secrets

In Race, Poverty and American Tort Awards (and here), Eric Helland and I show that tort awards increase strongly with county poverty rates especially with minority poverty.  A 1% increase in black poverty rates, for example, can increase tort awards by 3-10 percent with a similar increase in Hispanic poverty rates.   Careful forum shopping can easily raise awards by 50-100%.

Anthony Buzbee, a famed plaintiff’s attorney, inadvertently let the cat out of the bag recently when talking about Starr county in Texas.

"That venue probably adds about seventy-five percent to the value of
the case," he said. "You’ve got an injured Hispanic client, you’ve got
a completely Hispanic jury, and you’ve got an Hispanic judge. All
right. That’s how it is."

In other parts of Texas, Buzbee went on, a plaintiff may have the
burden of showing "here’s what the company did wrong, all right? But
when you’re in Starr County, traditionally, you need to just show that
the guy was working, and he was hurt. And that’s the hurdle: Just prove
that he wasn’t hurt at Wal-Mart, buying something on his off time, and
traditionally, you win those cases."

Buzbee’s words were caught on tape.  Need I tell you the rest of the story?  Buzbee, of course, is suing.  I wonder where he will bring the case?

Thanks to Ted Frank at Overlawyered for the pointer.