Month: February 2008

If you get speeding tickets, watch out: The chances are good that
you will also engage in possibly dangerous investing behavior, too.
That is the implication of a new study that found that individuals who
receive more speeding tickets tend to churn their portfolios…They found that, other things being equal, an investor’s portfolio
turnover rate rose 11 percent after each additional speeding ticket he
received.

Here is the paper.  Here is a longer description of the piece.  The researchers do control for many variables, including age; the most likely conclusion is that there is a general propensity for thrill-seeking behind both speeding and trading behavior.  Do note this is a study of the Finns.

Addendum: Via Deron Bauman, here is a good article that sadness triggers consumer spending.

Via Mark Thoma, here is an interview with Paul Romer about growth in Mauritius.  One question is how much Romer’s growth theory was needed to generate this advice.  Second, I am surprised how little attention he gives to Mauritius being a small country.  I don’t think that country size makes the advice much different, but perhaps expectations should be adjusted.  Most small countries aren’t well-diversified and their growth rates depend heavily on real shocks.  Singapore is an exception, most of all because its citizenry is obsessed with accumulating human capital and thus it depends upon a general flow of foreign capital rather than specific sectors.  I don’t see harm in Mauritius trying to follow this same path but I wouldn’t expect them to succeed to a comparable degree.

Speaking of small countries, Fred Sautet has an interesting blog post on what happened to the New Zealand reforms.  Since the reforms starting in the 1980s, New Zealand has had excellent economic policies, probably better than Mauritius can expect to implement.  But New Zealand has not had stunning rates of economic growth.  A big part of the answer is simply that New Zealand still depends on the demands for dairy and agriculture.  Yes, many parts of the country are booming but the worldwide demand for commodities is a big part of the reason why.  The deregulation of agriculture helped but without rising food prices growth would be lower yet.  Earlier, it was Britain’s removal of imperial preference in 1972 that sent the country tumbling over the edge in the first place.  Yes freedom is still better but in general small countries are less of an "economic laboratory" than we might think.  Conversely, while there are some good explanations for "the Irish miracle," a small country with a few million people can with good luck grow quite rapidly. 

Just think about the determinants of your own family income; probably for most years policy changes are not #1 on the list.  A country of 1.2 million people, such as Mauritius, is more diversifed than your family, but not as much more diversified as you might think.  When it comes to real factors, Say’s Law does hold.  Demand for your labor depends on the production decisions of 300 million mostly wealthy and often quite diversified Americans.  That offers your income a great deal of protection, relative to what suppliers on Mauritius can expect.

Lawrence H. White responds to critics.  In my Cato email I received:

"A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money," White concludes. "From the perspective of limiting money growth appropriately, the gold standard is far from a crazy idea.”

"Far from a crazy idea," OK.  But would you push the button for it?  I say no.  There is little doubt that over the broad sweep of world history, commodity standards have outperformed paper money.  But we don’t live in the broad sweep of world history, we live in 2008 and our ability to monitor and control central banks is unparalleled.  The central banks of the wealthier nations work pretty well.  My main worry with the gold standard is simply the pro-cyclicality of the money supply and for all its talk of money demand the paper doesn’t much address this concern.  For instance would you really want a contracting money supply in today’s environment?  And yes credit crunches of this kind happen in market settings too so you can’t blame it all on Alan Greenspan. 

And I am not reassured by this (admittedly true) sentence: "At the right reentry rate, dollar prices would not need to jump [from the transition]."  One five or ten percent deflation is enough to crush the economy and indeed the whole gold standard idea.  Given the socialist calculation debate, can we really know the right transition price?  Gold at $900 an ounce?  $600 an ounce?  Anybody?

Addendum: Here is White’s response; see also the exchange in the comments with White and others.

The tax credit for ethanol is an example of a cost ineffective subsidy.
The cost of reducing CO2 emissions through this subsidy exceeded $1,700
per ton of CO2 avoided in 2006 and the cost of reducing oil consumption
over $85 per barrel.

I am not shocked, but it is worse than I had thought.  Here is the full paper.  But the funny thing is, that’s not even the worse thing I read about biofuels today.  Courtesy of Daniel Akst, try this article:

…a growing body of scientific evidence suggests these gasoline
alternatives will actually boost carbon-dioxide levels and thereby
aggravate the problem of global warming. A study published in
the latest issue of Science finds that corn-based ethanol, instead of
reducing greenhouse-gas emissions by a hoped-for 20%, will nearly
double the output of CO2 and other gases that trap the sun’s heat. A
separate paper in Science concludes that the clearing of native
habitats around the world to grow more biofuel crops will lead to more
carbon emissions.

Or try this ungated version of a similar result.  Wonderful.

As you know, I’m not enthusiastic about a fiscal stimulus plan.  What we need is a stimulus plan that does not increasing the budget deficit or waste taxpayer funds but that does increase the incentive to produce output.  So what would I do?  Here’s a new idea.

The IRS knows how much income that each taxpayer reported last year.  So let’s cut everyone’s marginal tax rate based on last year’s income.  In other words, suppose that last year Joe earned $66,520 which puts him in a 25% tax bracket.  Joe’s tax schedule this year will be exactly the same as last year except for every dollar earned above $66,520 the tax rate drops to 15%.   We do this for all taxpayers so that each taxpayer has their own schedule and for each taxpayer there is a decreasing marginal tax rate.

Note that this plan increases the incentive to work and it doesn’t increase the deficit.  In fact, the Tabarrok plan increases tax revenues!  The key is a marginal tax cut with a different margin for every taxpayer based upon last year’s return.

That’s the basic idea but there are some obvious modifications that could solve various problems.  For example, the new schedule could be based on an average of say the last three years of income or the average plus some roundup for growth etc.  It’s also possible to cap the base on which the lower marginal tax rate applies, for example, we could create a lower tax rate on every dollar of income above last year’s income up to an increase of 20%.

It is true that a permanent system like this could be (partially) gamed but the system can work very well if used occasionally, say for the most serious recessions.  We would also learn a lot by applying this system and looking at the taxpayer response.