Assorted links

1. Advice for holiday shopping: buy it, don't wait.

2. Rich Germans demand higher taxes.

3. A Georgist approach to financing health care reform: tax water.

4. Don Boudreaux defends insider trading.

5. A simple look at dark pools and high-frequency trading.

6. Essay on Freakonomics and other popular economics books, as they relate to the economics profession.  How fun is economics really?

Comments

I don't think that this assertion is correct in the Henry George piece:
"The most recent recession started as a real estate bubble, of course, so George has a painful new relevance."

Henry George did not want speculators sitting on land, waiting for its price to rise, while keeping it out of current use. He wanted all land to be improved and used. The recent housing bubble involved a frenzy to develop and use land, which is the opposite of George's problem with speculators who kept land from being used.

I've started holiday prep, but that's because I'm making most of my gifts this year. I doubt I'm the only one doing that this year.

The essay on Freakonomics misses what is compelling about the "economics imperialism" critique. See, economics is a real science, it is rigorous, and the people who do it are freakishly smart. Economists use real fancy statistical methods to find the plain truth in cold hard data. And because they are profound enough to recognize the basic but difficult realities that "people respond to incentives" and "everything has tradeoffs," they can discover truths that hysterical ideologues refuse to accept.

The game is to raise the prestige of the field. This game is not exactly zero-sum, but it doesn't result in Pareto improvements for all parties either.

Economists can retreat from the above claims whenever necessary -- they have to, because reality intercedes. But that doesn't mean those claims aren't being made, and that economists are just poor misunderstood Frankensteins who want the masses to believe that their field isn't that dismal.

By the way, economists have gotten a ridiculous amount of mileage out of the wishy-washy claims that "people respond to incentives" and "everything has tradeoffs." For example, Boudreaux's article on insider trading is extraordinarily selective in how it applies these insights to an analysis of a particular law.

What I don't understand is people who discuss information like one would discuss sand-- some fungible, quantifiable element that you can put into piles and compare.
I can have a gigabyte's worth of information about a company and lose out to someone who knows the single sentence: 'The CEO is going to announce his retirement tomorrow.'

It's just beyond dumb. One wonders what Claude Shannon would think of this abuse of his work.

Doesn't East Asia follow Boudreaux's advice, with disastrous results? It's too complicated for each company to have its own rules, so they have none, and the insiders loot the firms.

East Asian firms sometimes signal honesty by listing on a foreign exchange, but this is bundled with too many other things to send too clear a signal. They could centralize rules in some other way, but coordination is difficult. Let one of these countries solve the problem before trying it elsewhere!

Also, Boudreaux ignores the question of what enforcement regimes are feasible. The current regime has no relation to the written law. Martha Stewart lost her broker's license for trading on public (or at least non-proprietary) information of executive malfeasance. The rule of law would be a massive step up from the current regime, but is even that possible? Ignoring the SEC, Congress interrogates anyone who makes a lot of money by shorting.

I've been reading that same article on insider trading, in the same place - the WSJ editorial page - for twenty-five years, at least, and I'm sure it's older than that. Do they just dig it up, get someone like Boudreaux to update it a little, and republish it every so often?

Of course, there's a twist here. Boudreaux claims that insider trading is good for the small investor because, essentially, it discourages him from wasting his time researching individual firms. How kind. But what about big investors who aren't privy to the inside information?

And what's this business about lenders? Since when do sensible lenders rely on the stock price? They get a lot more information than that. And presenting false information to potential lenders - and stockholders for that matter - is not just a civil matter - it's fraud. So there's plenty of disincentive already not to conceal information.

@4:10 - Didn't Henry George want land to be put to use, so if the "highest and best use" for the land was to wait and use it later? Then, I don't think that he would be against current use. If people were building houses and then not using those, he would tax them for 100% of the value of the land rental value, and thus make them want to sell off or rent the house to someone who would use it. Clearly the ability to speculate and hold assets back is part of a well functioning neoclassical economy. Ownership of land was not important to George, because he thought that it was wrong to be able to own and bequeath land, thus making it unavailable for use by other current and future citizens. A 100% tax on land more or less eliminates the difference between owning and renting.

"If people were building houses and then not using those, he would tax them for 100% of the value of the land rental value, and thus make them want to sell off or rent the house to someone who would use it. Clearly the ability to speculate and hold assets back is part of a well functioning neoclassical economy."

No, a Georgist tax on land would not exceed 90% of the land rental value, otherwise land valuation would become problematic. A land tax would reduce the ability to speculate on future land values, but this would not impair the functioning of the economy, since land value is created by diffuse externalities which do not enter the market process. If anything, speculation on land values has negative effects; see this PhD dissertation.

@Ann, Is trading on inside information socialism for the rich? How do shareholders set comp levels for executives if they are free to trade on inside information?

"No, a Georgist tax on land would not exceed 90% of the land rental value, otherwise land valuation would become problematic."

At the risk of being pedantic, is that from Henry George, or is it a modern reinterpretation? Sure a full tax on (the unimproved value of) land would create problems, but George felt that private ownership of land was morally wrong and that public ownership would put it to use, which would drive up the demand for labor and capital and thus wages and interest.

"I just cracked open a dusty copy of Progress and Poverty from my shelf, and from Book IX, Chapter II (three pages in in my edition):
"Now, it is evident that to take rent in taxation for public purposes, which virtually abolishes private ownership in land, would be to destroy the tendency to an absolute decrease in wages and interest...Labor and capital would thus not merely gain what is now taken from them in taxation, but would gain by the positive decline in rent caused by the the decrease in speculative land values."

I don't see any guidance suggesting a limit on taxation at 90%. That would be more practical, but then again it wouldn't be George.

Boudreaux writes, insider trading laws prevent market prices from "adjusting as quickly as possible." "when prices lie, market participants ... harm ... themselves [and] the economy."

Is there evidence insiders can significantly affect prices?

Large companies are required to provide material information at regular intervals. Insider trading often involves trades shortly before significant news is announced. Are prices sub-optimal for long enough periods to affect investment and production decisions? Is there any evidence that prices that "lie" for a few weeks harm the economy? Harms described in his hypothetical result from fraud in reporting earnings, not a lack of insider trading.

Do market prices ordinarily tell the "truth"? Repeated asset bubbles suggest otherwise.

Rather than promote disclosure of information through prices, insider trading encourages manipulating information in order to benefit from predictable price swings. In general, stocks would become less attractive when insiders take a larger portion of gains.

"As if rich guy's profits are given to him from above. Right, tax back into the poverty anyone who dares to be more productive than others! That'll show him."

Ugh.

2. Rich Germans signal ability to pay higher taxes and social solidarity (relevant in the German context). Even if the signal is not very credible, and it isn't, it's nonetheless costless, so it's worth a try.

"Europeans still believe in taxing the rich to help the poor; Americans have argued back (bitterly) for over 100 years."

Actually, Europeans believe in taxing everybody -- including the poor -- with the VAT (which is a flat consumption tax). In France, for example, the non-progressive 19.6% VAT brings in almost half of state revenues.

In the U.S., it's the emphasis on increasing taxes on the rich that actually restrains tax revenues -- since once you define rich as 'any family making over $250,000 a year', there just aren't enough rich people to extract more taxes from. Which is why there are suspicions that Obama would like a VAT. But the common idea in the U.S. that it is the rich (and only the rich) who should be taxed more may save us from that fate.

Slocum, in the US the common idea is that people making $300,000 are middle class.

Barbar - what exactly do you find compelling about the "economics imperalism" critique? From what you say about it, it sounds to me just like inter-disciplinary academic sniping. Do the economics imperalism critiquers actually say anything interesting, like something that could be disproved?

I do agree with you that economists have gotten a ridiculous amount of mileage out of wishy-washy claims that "people respond to inccentives" and "everything has trade-offs". I think it's quite incredible how much insight can be gotten without needing to be specific about what people want, I think it is one of the more impressive accomplishments of human intellect.

Andrew Barbar - if all a trader knows is the single sentence "The CEO is going to announce his retirement tomorrow", should they buy or sell the stock?

I do agree with you that economists have gotten a ridiculous amount of mileage out of wishy-washy claims that "people respond to inccentives" and "everything has trade-offs".

I meant something more like Steven Levitt claiming that it's ridiculous to try to solve social problems by changing human behavior (because, you know, human behavior never responds to...) Likewise, "everything has tradeoffs" does not settle anything at all. And yet how often do you actually see tradeoffs being quantified in the public sphere?

As for the economics imperialism critique, please read Ed Lazear, "Economic Imperialism," published in the Quarterly Journal of Economics. If you can't be bothered, the article non-ironically begins "Economics is not only a social science, it is a genuine science." And it's true: while other social sciences have drifted aimlessly trying to explain things like crime and poverty and politics, economics has swooped in to use "science" to dissolve all of these problems.

Comments for this post are closed