Month: December 2011

Facts about engines

The RMS Titanic weighed almost 50,000 tons and could carry 3,500 people. Before it sunk, it was world-famous as the massive titan of the sea. Its multiple engines, powered by 159 coal furnaces, were designed to deliver 46,000 horsepower.

Compare that to today’s beastly mode of transport: the Boeing 777. Bangalore Aviation points out that a single GE90-115B engine puts out over 110,000 horsepower, or more than twice the design output of all the Titanic’s steam engines.

And that power is obviously hooked up to a much smaller vehicle. The Titanic had to carry 14,000,000 pounds of coal alone; the 777 has a total weight of only 775,000 pounds.

Here is more and for the pointer I thank Roland Stephen.

Why not treat debt and equity the same?

Varun, a loyal MR reader, asks me:

I do have a fairly simple question on tax policy I’ve never really seen a good answer to:  Why do we treat interest payments differently in terms of taxation? Why are interest payments tax deductible?
Clearly a zero corporate tax rate is best, but why do we offer tax shields for highly levered companies? All of private equity, and much of banking etc. is built on this tax arbitrage. Wouldn’t treating interest payments on par with dividends and corporate profits (hopefully at a lower tax rate) unlock a great deal of value, drive an increase in (stock) investment, while significantly un-levering businesses? Why do we borrow when we can seek investment?
More importantly, isn’t it odd that few advocate such a simple policy change: to treat debt and capital investment identically.
A good question, but there is a problem with treating debt payments any other way.  In general, expenses must be deductible in some manner, if the government is to tax corporations on net rather than gross returns, however roughly or imperfectly.  And it is difficult not to treat interest like an expense of some kind.  For instance de facto interest could be embedded in repurchase agreements, which for the purposes of tax law would look more like “real expenses” and thus would be tax deductible.  The borrowing would still go on, but in a more awkward fashion.
Without tax deductible interest payments, there would be an excess incentive to pay cash up front for assets rather than doing a mix of borrowing and holding cash for option demand.  Corporations would go bankrupt more easily and in general face higher transactions costs.

Contrary to common impression, the tax deductibility of interest payments does not give a tax advantage to borrowing, not if the return to savings is taxed.  What you save by borrowing and writing off interest payments you pay back tax on your more liquid asset holdings; admittedly there are complications and wedges when lending and borrowing rates are not the same.  Therefore tax-deductible interest payments makes tax law roughly neutral in intertemporal terms, with lots of qualifications tacked on to that claim, including the possibility that some corporations can avoid the taxes on liquid asset holdings altogether.

The tax deductibility of interest payments operates in a highly imperfect manner, but at its core it is a piece of what an ideal (roughly) neutral tax system would look like, not a deviation from such neutrality.

The opening sentences of *Paul Clifford*

By Edward George Earle Lytton Bulwer-Lytton:

It was a dark and stormy night; the rain fell in torrents—except at occasional intervals, when it was checked by a violent gust of wind which swept up the streets (for it is in London that our scene lies), rattling along the housetops, and fiercely agitating the scanty flame of the lamps that struggled against the darkness.

In his defense, the book was published in 1830.

The Hanke-Henry calendar

The extra week is simply called the extra week, and Henry is joined by Johns Hopkins economist Steve Hanke. Their rhetoric is bottom-line as well as common-sense.

The Hanke-Henry calendar would streamline financial operations, they write in an article republished by the libertarian Cato Institute, because Gregorian calendar anomalies make a muddle of interest-calculating conventions. Sunday-only Christmas and New Year’s holidays would also eliminate their mid-week appearances and “get rid of this zoo we’re in right now, when the whole economy collapses for two weeks,” Henry said.

Not satisfied with conquering calendrical irrationality, Henry and Hanke take on timekeeping, too. “The time in Australia is the same as it is for us, but their clocks are set different,” Henry said. “We’re just saying, ‘Set your clocks to the same time, because it is the same time.’” All the world’s clocks would be set to Universal Time, or Greenwich Mean Time as it’s generally known. Time zones would be abolished, as would Daylight Saving Time, of which Henry is especially not fond.

The full article is here, courtesy of Brent Depperschmidt.  You will note that Hanke is also a major advocate of currency boards, see the connection?

Does wealth equal power?

That request was the first on the list and it came from Ezra Abrams, who wrote:

Wealth is equal to raw naked power: the power to fund PACs; the power to endow university chairs to influence people; the power to tear down neighborhoods and erect shopping malls. to what extent does the increase in wealth and income of the upper x% (relative to median or some other broad measure) mean that too much power is concentrated in the hands of too few people one amusing example is from Kahnemann’s thinking fast and slow. Small schools show the best results b gates poured money into small schools However, what gates didn’t realize is that this is a small numbers artifacts; small schools show the best and worst results cause with a small school you can deviate from the mean …there you have raw naked power having a huge influence on educational policy

I disagree with most of that.  The scholarly literature suggests that campaign finance reform doesn’t matter as much as people think.

The big banks control our government less than some critics have suggested.

Academics are quite liberal/democratic, yet college students seems to be slightly more conservative than the American public as a whole.  The major impact of endowed chairs is to cement the roles of Harvard, Princeton and comparable schools as intellectual leaders.

Bill Gates influenced computer operating systems a good deal, but since he earned his money I’m not sure he has had a big impact on final outcomes.  (The anti-malaria campaign may yet pay off.)  He also has moved away from the “small classroom” idea, after he viewed the data.  Fiscal pressures — not pressures from the wealthy — probably mean the idea will lose out anyway.

There are several reasons why wealth does not translate into power so easily.  First, effective philanthropy is extremely difficult to achieve, especially if that philanthropy is trying to counteract prevailing social trends.  Nor should it be assumed that non-profits are always the drivers of change.  Second, the wealthy in groups do not always coordinate very effectively, to say the least.  Each is used to being in charge (remember when the Lakers had Karl Malone and Gary Payton as well as Bryant and O’Neal?)  Third, many of the very wealthy choose to consume ego rents rather than effectiveness.  Fourth, “democracy” and “the market” control large chunks of modern life, and it is hard for outsiders to commandeer those processes.  Most of the major functions of government are there because people want them to be there, for better or worse.

The best way to think about wealth and power is with some ideas from Harry Eckstein.  There will be, for reasons of spontaneous order, a general concordance between the status and influence of groups in the broader world, and the power of those groups when it comes to government.  American economic policy, for instance, really is more pro-business than in much of Europe, and that does stem from the more commercial nature of our republic.  That said, the ability of the rich at the margin to control policy through intentional acts, either individually or in groups is much overrated.

Wealth does protect you from the depredations of others, such as being treated very badly by the police or legal system.  In this defensive sense wealth can give you a good deal of power.

Overall the quality of argumentation and evidence on this topic is extremely low.

Addendum: Iceland, by the way, doesn’t want the money of the Chinese billionaire.

What exactly is the argument against gold?

Mark Thorson has a request:

I’ve heard it said that there isn’t enough gold in the world to make it the only form of currency, but the gold bugs say that’s because gold is underpriced. If gold were priced appropriately, there would be enough gold to replace all of the world’s currency. What’s wrong with that argument?

The most fundamental argument against a gold standard is that when the relative price of gold is go up, that creates deflationary pressures on the general price level, thereby harming output and employment.  There is also the potential for radically high inflation through gold, though today that seems like less a problem than it was in the seventeenth century.

Why put your economy at the mercy of these essentially random forces?  I believe the 19th century was a relatively good time to have had a gold standard, but the last twenty years, with their rising commodity prices, would have been an especially bad time.  When it comes to the next twenty years, who knows?

Whether or not there is “enough gold,” and there always will be at some price, the transition to a gold standard still involves the likelihood of major price level shocks, if only because the transition itself involves a repricing of gold.  A gold standard, by the way, is still compatible with plenty of state intervention.

Here is one earlier post on the gold standard, you can enter “gold standard” into the MR search function for dozens more.

Paying for Parking

Parking is too cheap and the price is too sticky. As Tyler wrote in his NYT column:

If developers were allowed to face directly the high land costs of providing so much parking, the number of spaces would be a result of a careful economic calculation rather than a matter of satisfying a legal requirement. Parking would be scarcer, and more likely to have a price – or a higher one than it does now – and people would be more careful about when and where they drove.

The subsidies are largely invisible to drivers who park their cars – and thus free or cheap parking spaces feel like natural outcomes of the market, or perhaps even an entitlement. Yet the law is allocating this land rather than letting market prices adjudicate whether we need more parking, and whether that parking should be free. We end up overusing land for cars – and overusing cars too. You don’t have to hate sprawl,

Slowly things are beginning to change, however, as this excellent piece on parking in LA and parking scholar Donald Shoup describes:

Shoup is not opposed to all parking lots; he’s against cities requiring parking lots. “Would you require every home to come with a pool or every office to include a dining room because someone might want it?” asks Shoup. “Why not let developers build parking where the market demands it and charge its true value?”

…This spring the DOT plans to introduce an $18.5 million smart wireless meter system based on Shoup’s theories. Called ExpressPark, the 6,000-meter array will be installed on downtown streets and lots, along with sensors buried in the pavement of every parking spot to detect the presence of cars and price accordingly, from as little as 50 cents an hour to $6. Street parking, like pork bellies, will be open to market forces. As blocks fill, prices will rise; when occupancy drops, so will rates. In an area like downtown, ideal for Shoup’s progressive pricing, people will park based on how much they’re willing to pay versus how far they are willing to walk to a destination. In a trendy area like Melrose Avenue’s shopping district, where parking on side streets is forbidden to visitors, Shoup would open those residential blocks to market-priced meters, wooing home owners by guaranteeing that meter profits would be turned over to them in the form of property tax deductions. (That benefit could add up to thousands of dollars a year per household.)

Brooklyn’s Park Slope neighborhood is already experimenting with a version of the system, and so are San Francisco, Seattle, and Washington, D.C.

In D.C. you can now pay many parking meters via cell-phone. I’ve used the system and it works well.

Here are previous MR posts on parking.

Why do universities have endowments?

Alan Gunn asks:

Why do universities (in the US and Britain only) have endowments, and should they? And why does no one but Henry Hansmann [pdf, eBook version here] write about this question?

Because they can.  Tax law doesn’t stop them, and why should a University President spend down the fund?  An ongoing high balance in the fund means prestige, a good ranking, and an ability to make credible commitments to quality faculty and quality programs.

Current donors know that their support will feed into something long-run and grand.  Rationally or not, it is less persuasive for an alumni donor to hear a pitch like “We will spend down the corpus.  Penn State will rise seventeen spots in the ratings, for twenty years, and then fade into obscurity.”  Many givers care predominantly about the “here and now,” but they donate to political campaigns, or benevolent charities, not universities.

Ultimately we need a theory of segmented giving, and how board structures of universities support such giving.  University board members benefit most from a prestigious school with a high endowment and other prestigious board members.  In general those boards will support accumulating the endowment, at least if the school has any chance for prestige in the first place.  Spending money within the university instead distributes those benefits to current faculty and students, rather than to the decision-makers over the endowment.

Note that while the most visible colleges and universities usually have large endowments, the median and modal schools have endowments very close to zero.  They have no chance of accumulating their way to substantial prestige benefits.

Alternatively, you could drop the fancy institutional economics and apply crude price theory.  Universities can borrow or otherwise raise money tax-free, and at g > r you should expect ongoing and rising accumulation.

It is striking how much the list of top U.S. universities does not change over the last century, albeit with some new entries from the west coast.  Among other things, that suggests there has been no fancy, expensive and effective new product that a school might invest in and run down its endowment for.  This might change in the next twenty years.  One can imagine a middling school running down its endowment to spend its way to leadership in on-line education.

I have never seen a good paper on which non-profits accumulate endowments and which do not, and how that difference functions as both cause and effect.  I would think, for instance, that the Heritage Foundation has a substantial endowment, but many think tanks do not.

Here is a new paper on university endowments (pdf), by Gilbert and Hrdlicka, asking whether endowments are invested in too risky a fashion.  It also raises the question of how well endowment practices will survive in a time with low rates of return.  Here is a 2008 dialogue on endowment reform.  Here is a 2009 law review piece on university endowments, it is a little slow to load.  Here is a TIAA-CREF perspective (pdf) on the investment committees for university endowments; they tend to be run by donors.  Here is a look at mandatory payout proposals.  Here is a good 2010 paper (pdf) on what happens when endowment values decline, it is called “Why I Lost My Secretary.”

Has blogging brought a new golden age of heterodox macro?

Here is a long feature article from The Economist, excerpt:

The clearest example of the power of blogging as a way of getting fringe ideas noticed is “The Money Illusion”, a blog by Scott Sumner of Bentley University, in Waltham, Massachusetts. In the wake of the financial crisis Mr Sumner, a proponent of market monetarism, felt he had something to say, but no great hope of being heard.

Do read the whole thing, it is interesting throughout and also an important article.  I would answer yes to the question posed by the title of this post, we are in a golden age of macro once again, yet it is played more or less by the technical rules of the 1920s and 30s, because a lot of blog readers are turned off by heavy math.  And couldn’t a lot of those old macro ideas have been turned into shorter blog posts anyway?  It’s like getting to rerun earlier macro debates but with terser, more articulate, and better trained macroeconomists.  Isn’t that fun?

I know that Scott would insist he is not heterodox macro at all, but I can report I found it striking to be cited in this article as a more or less establishment source, rather than heterodox myself.  In both cases the journalist is probably correct.

Insurance markets in everything

Afghan shopkeeper Nasratullah Niazai has developed a brisk new business over the past year. For about $2 a pop, he uploads into customers’ cellphones a collection of Taliban songs and ringtones.

A skinny 22-year-old who operates a one-room computer store on the outskirts of the Afghan capital, Mr. Niazai is no Taliban. Neither are most of his customers.

Instead, the songs and ringtones romanticizing the insurgents’ jihad against the infidel invaders serve as potentially lifesaving travel insurance for Kabulis who brave increasingly perilous countryside roads.

Sentries at improvised Taliban checkpoints, some only an hour’s drive away from central Kabul, routinely check travelers’ cellphones. As a result, government officials, police, soldiers, security guards, university students, translators for Western companies, construction workers and scores of others go to extraordinary lengths to scrub their phones of any evidence of links to the coalition and the Afghan government—and to masquerade as Taliban sympathizers.

Business has boomed in the past year, Mr. Niazai said. The songs that buyers like best, he said, are “the emotional ones sung by children with beautiful voices.”

The story is here and the pointer is from @nickschifrin.