Category: Law
Are there too many speed bumps?
Probably yes. That is the topic of my latest Bloomberg column, here is one excerpt:
Another economic approach would consider whether the private sector, when trying to accommodate customer demand, finds that speed bumps help or hurt business. That’s a kind of market test of the concept, and indeed I often see speed bumps in shopping mall parking lots, to slow down traffic and ease the risk of accidents, including to pedestrians. The mall and parking lot owners have decided that the benefits of greater safety will attract more customers than the inconveniences of driving more slowly, and other possible costs, will put customers off. That is a seat-of-the-pants cost-benefit test, and it suggests some role for the bumps in the broader world.
That said, my personal impression is that these private-sector speed bumps are smoother and gentler than the ones I often find in neighborhoods. When it comes to local roads, the residents are actively trying to keep outside drivers away, whereas the shopping mall and parking lot owners seek the best overall environment for commercial reasons. As a tentative conclusion, I think some speed bumps are a good idea, but many are too obstructive, and perhaps they are too numerous as well; this view is supported by some recent research.
Another angle of the speed bumps debate is how much it revolves around issues of symbolic value, and that in part explains why the discussion can become so heated.
By its very design, a speed bump is a deliberate obstruction with maximum transparency as such. It is sending a message that the social goals of safety or neighborhood quiet are sufficiently important that it is worth slowing people’s progress when they travel. There are many regulations that try to make our lives safer, but most of them are hidden, with nontransparent costs, such as auto-safety regulations as applied through crash tests. A speed bump, in contrast, can work only if people notice it each time. So to the extent a society accepts speed bumps, it is visibly advertising the notion that limits to fast transportation — a symbol of progress — are acceptable in the name of safety and cozy locality.
Do read the whole thing.
An economic critique of prison
That is a new article by Peter N. Salib, at the University of Chicago, here is the abstract:
This Article argues that we should not imprison people who commit crimes. This is true despite the fact that essentially all legal scholars, attorneys, judges, and laypeople see prison as the sine qua non of a criminal justice system. Without prison, most would argue, we could not punish past crimes, deter future crimes, or keep dangerous criminals safely separate from the rest of society. Scholars of law and economics have generally held the same view, treating prison as an indispensable tool for minimizing social harm. But the prevailing view is wrong. Employing the tools of economic analysis, this Article demonstrates that prison imposes enormous but well-hidden societal losses. It is therefore a deeply inefficient device for serving the utilitarian aims of the criminal law system — namely, optimally deterring bad social actors while minimizing total social costs. The Article goes on to engage in a thought experiment, asking whether an alternative system of criminal punishment could serve those goals more efficiently. It concludes that there exist economically superior alternatives to prison available right now. The alternatives are practicable. They plausibly comport with our current legal rules and more general moral principles. They could theoretically be implemented tomorrow, and, if we wished, we could bid farewell forever to our sprawling, socially-suboptimal system of imprisonment.
One of the suggested alternatives is (non-prison) mandatory labor in the highest-value available jobs, combined with monitoring, and also restitution to the victims or the government.
Benefits and Costs of the Better Seeing State?
The Economist has two good pieces on India’s Aadhaar card. First, the bright side:
IT TAKES a little over 90 seconds. At the government-subsidised ration shop in Sargasan, a village in Gujarat, Chandana Prajapati places her thumb on a fingerprint scanner. A list of the staples she and her family are entitled to this month appears on the shopkeeper’s computer: 10kg of rice, 25kg of wheat, some cooking oil, salt and sugar. The 55-year-old housewife has no cash nor credit card, but no matter. By tapping in an identifying number and presenting her thumb one more time, Mrs Prajapati authorises a payment of 271 rupees ($4.20) straight from her bank account. It is technical wizardry worthy of Stockholm or New York; yet outside buffaloes graze, a pot of water is coming to the boil on a pile of firewood and children scamper between mud-brick houses.
Like most Indians, Mrs Prajapati would have struggled to identify herself to the authorities a few years ago, let alone to a faraway bank. But 99% of adults are now enrolled in Aadhaar, a scheme which has amassed the fingerprints and iris scans of over 1.1bn people since 2010. With her authorisation, any government body or private business can check whether her fingerprints or irises match those recorded against her unique 12-digit identifying number in its database. When it comes to identification, India has unexpectedly leapfrogged every country with the possible exception of Estonia, a tiddler with a penchant for innovation.
The Aadhaar system has cut corruption and cleaned the rolls of people with fake identities trying to scam fertilizer, food or some other subsidized good. But the government wants the mark of the beast Aadhaar system to be used for just about everything including paying taxes, getting school lunches, buying airline tickets or a cell phone and that makes some people worried:
In theory, the law on Aadhaar passed last year by Mr Modi’s government includes stringent protections against the sharing of information; its rules allowing exceptions on grounds of national security, although vaguely worded, appear well intended. Sweden has required all citizens to have a national ID number since 1947—the year of India’s birth—with little trouble. Most Swedes consider the scheme, which is linked to tax, school, medical and other records, an immense convenience.
But India is not a tidy Nordic kingdom. Mr Modi’s government, with its strident nationalism and occasional recklessness—such as last year’s abrupt voiding of most of the paper currency in circulation—does not always inspire confidence that it will respect citizens’ rights and legal niceties. By sneaking the linkage between Aadhaar and tax into a budget bill, it raises concerns about intent: will the government stalk tax evaders, or perhaps enemies of the state, using ostensibly “fire-walled” Aadhaar data? Many Indians will remember that, following sectarian riots in the past, ruling parties were accused of using voter rolls to target victims.
As the Economist wisely concludes:
…for Aadhaar to fulfil its potential, Indians must trust that it will not be misused. Adopting coercive regulations, ignoring the Supreme Court’s qualms and dismissing critics peremptorily will achieve the opposite.
Interpreting Contracts via Surveys and Experiments
Interpreting the language of contracts is the most common and least satisfactory task courts perform in contract disputes. This article proposes to take much of this task out of the hands of lawyers and judges, entrusting it instead to the public. The article develops and tests a novel regime — the “survey interpretation method” — in which interpretation disputes are resolved though large surveys of representative respondents, by choosing the meaning that a majority supports. The article demonstrates the rich potential under this method to examine variations of the contractual language that could have made an intended meaning clearer. A similar survey regime has been applied successfully in trademark and unfair competition law to interpret precontractual messages, and the article shows how it could be extended to interpret contractual texts. To demonstrate the technique, the article applies the survey interpretation method to five real cases in which courts struggled to interpret contracts. It then provides normative, pragmatic, and doctrinal supports for the proposed regime.
Just to be clear, I do not favor such a regime, but I think it is what we will be getting.
For the pointer I thank William the Irishman.
It’s time for some game theory, United Airlines edition
I agree the man should have left the plane in the first place, the police should not have used violence, the CEO should have apologized right away, United (possibly) should have known earlier it needed to transport the employees, and a bunch of other things. Perhaps United should have mimicked Ryan Air and charged people fifteen euros (or much more!) for dragging them off the flight. But let’s put that behind us and consider some analysis:
The priority of all other confirmed passengers may be determined based on a passenger’s fare class, itinerary, status of frequent flyer program membership, and the time in which the passenger presents him/herself for check-in without advanced seat assignment.”
There is also an exception for disabilities.
From the passenger’s point of view, this operates like randomization, as customers were told “the computer will decide.” An alternative of course is to eliminate the random shuffle and require cash payments to passengers no matter what, waiting until someone volunteers to give up his or her seat at the required high price.
One problem with using money to buy people out of queues is that it encourages more upfront queuing to begin with, and that involves negative externalities for passengers as a whole. In any model of stochastic demand and fixed capacity in the short run, demand will sometimes be too high, and I don’t know of many retail markets that rely on price alone to ration quantity. Given that reality, I am not sure why everyone is insisting the airlines should do things this way. If Nordstrom starts to run out of their blue cooking pots on the day of the sale, so be it, they don’t raise the price toward the end of the day as supplies dwindle. Paying $5 to each denied pot-buyer just ensures they are more likely to run out of pots the next time around.
You could spend many moons debating whether price-only solutions to short-run shortages lead to higher or lower upfront prices (and thus higher or lower deadweight loss) than price + quality adjustment solutions to short-run shortages. As far as I know, this question hasn’t been settled, and quality adjustment is well-known as a means of enabling more upfront price discrimination. If nothing else, it pushes more people into business class. The subtler mechanism is that the airlines have plenty of reasons to favor their more loyal customers, if only because of market segmentation, and this is one of them. The market segmentation effects brings more collusion, and higher prices, but the price discrimination effect tends to boost output.
To consider possible analogies, let’s say it was a queue to buy concert tickets, with more people in line than seats for the show. One option is to give cash to those who can’t get tickets, rather than just turning them away, but I’ve never heard anyone argue this would be efficient. The cash payments are a tax on product supply and also they encourage too much queuing in the first place. Instead we send some people home without tickets, even if they have waited in line for a long time. In essence, randomization is one factor behind who is sent home without a ticket, because no arrival, when deciding whether or not to show up, knows exactly how many other people will have been prior in line. Don’t be surprised if the airlines sometimes use a similar system.
As Garett Jones points out, sometimes the ATM runs out of cash and you don’t get any bonus afterwards. There are plenty of other examples.
Maybe United should allow for a secondary market for the doctor to stay on the plane by buying flying rights from some other passenger, one who wouldn’t take the United offer but who might take the doctor’s better offer. That idea is worth consideration, though arranging the contract could be tricky unless the passengers belong to a common system with pre-arranged arbitration in place (Facebook could run it? PayPal?) With tickets this kind of resale works smoothly through StubHub and the like. (By the way, once the guy proclaimed he was a doctor going to see his ailing patients, did any of the other passengers offer to get off instead? Hmm…)
The “re-accommodation” seems much worse to many people because the doctor already was seated. An endowment effect argument therefore might require that the airline use a full auction once seats are taken. That would increase the incentive of the airline to spot demand-supply imbalances in advance of boarding, and it might well be a good idea. On the other hand, the presence of an endowment effect can help make “removal” an especially effective pre-emptive demand tax in world-states of potential excess demand. The more you hate being removed from your seat, the fewer people have to be removed to achieve a greater S-D balancing ex ante. Furthermore, the highest valuation buyers will make sure to be loyal buyers, which presumably is what the airline wants.
The cynical, who have studied randomization in optimal tax theory (that is not I, I love human rights too much and spent my youth reading the Salamancans), would even say that the higher value are the trips, and the more people fear being manhandled, the more it makes sense to use stochastic pain as a deterrent for overbooking. Think of it as a way to increase the degree of ex ante price discrimination, and limit cross-buyer externalities, at minimal cost in terms of actual output.
Finally, the United episode gets at a more general problem with algorithms. Even if the selection of seat loser is “truly random,” it will not always look random to the outside world. The bumping of the doctor has been a huge event on Chinese social media, and how many of those Chinese are thinking that the doctor was bumped because he was Chinese. The international loss of reputation here is significant, and it damages the United States as a whole, not just United as a brand name. In essence, individual companies under-invest in perceptions of fairness, and reliance on “truly random” algorithms can make this worse rather than better. A deliberate human chooser might well have done better, if only by knowing that a public defense of the choice would have been required, and that might have nudged United back toward the full auction or some other solution. In essence, companies may be oversupplying “reliance on randomness,” not taking the collective negative externality into account. Counterintuitively, relying on algorithms can increase perceptions of unfairness, and many of the costs of unfairness come on the perceptions side, even if “the true model” is making choices using a fair process.
Two other factors are worth considering. First, due to social media it will be increasingly difficult to write and enforce retail contracts with legal meanings very different from their “common sense” meanings. Maybe I’ll write a separate post on whether that will raise or lower transactions costs, but I suspect a bit of both.
Second, given that the stock of United tanked after the incident, now airline customer service will improve rather rapidly. In the long run of course that will translate into higher prices too, so the net effect of this shift will prove regressive. The more you complain, the more you are redistributing wealth — through the medium of preferred price-quality configurations — away from lower earners and toward the wealthy.
I’m not saying that the United rules are efficient, either generally or in this particular case, but I do see many people not even willing to ask the question of under what conditions they might be efficient. And that is indeed to correct way to start on analyzing this problem.
Addendum: This is also a story of price controls, on that let’s turn the microphone over to Air Genius Gary Leff:
More importantly, United didn’t do it because Department of Transportation regulations set maximum required compensation for involuntary denied boarding (in this case 4 times the passenger’s fare paid up to a maximum of $1350). So they’re not going to offer more than that for voluntary denied boardings, especially since the violent outcome here wasn’t expected and the United Express gate agent had no authority to do more.
The Hijra of India
Driving around Mumba one sometimes sees hijra begging at street intersections. The Indian term hijra is typically translated as eunuch but not all hijra are eunuchs or even want to be eunuchs so the term transgender is more accurate. In India, transgendered people are discriminated against, widely disliked, and feared. At the same time their blessings are sometimes sought after on important occasions.
It’s common for a transgendered person to be abandoned and thrown out of their home. Most then come to live in small communes of hijra headed by a guru and served by chelas (disciples/students).
We chelas must work hard, do the cooking inside the house, and most of the dancing outside. We have an obligation to look after our guru when she grows old, just like we would look after our own mother. In return, when we first become hijras our Chaman Guru teaches us chelas the way of the eunuchs.
(The quote is from William Dalrymple’s wonderful book, City of Djinns: A Year in Delhi. Dalrymple, however, draws too close a connection between hijra and the kind of eunuchs who were forcibly created to guard harems among the Mughals).
The communes of 5-15 hijras are like families but also like firms. The hijra make money by begging and by blessing weddings and births. The guru’s job is to learn the time and place of such celebrations for which she develop informants among midwives, musicians and caterers. A supra-community of hijra divide each city into exclusive territories. Each guru thus has a local monopoly and any hijra thrown out by her guru forfeits the right to work. A hijra thus has little choice but to work as a chela especially since other avenues of work are closed. Thus, the guru is both mother, father and boss.
The woman in the guru makes him feel motherly toward his chelas, but the man in him makes him authoritarian and dictatorial.
The blessings of the hijra are always double-edged. When are the blessed paying for the blessing and when are they are paying for the hijra not to curse them or just to go away? The hijra are not above embarrassing your wedding guests with bawdy and rude behavior.
Times have never been easy for the hijra but times are especially tough now because only the traditional occupations are open to them yet fewer people today believe in either their blessings or their curses. Many people consider them a nuisance. As a result, earnings are down.
Our main occupation is to perform badhai at weddings, or when a child is born. At such times we sing and dance to bless the newlyweds or the newborn. But can badhai alone fill our stomachs? Obviously not, and so we supplement our earnings by begging on city streets, and performing sex work, and dancing in bars and night clubs. Dancing comes naturally to us hijras.
…We are thus destitute. Estranged from family and ostracized by society, people couldn’t care less how we earn a livelihood, or where our next meal comes from. If a hijra commits a crime, the mob rushes to attack him while the police are only too glad to press charges against him. This is not to justify crime, but to reiterate that all crimes have a social dimension, and in the case of hijras this cannot be overlooked. Yet it is never taken into account.
A small trans and hijra empowerment movement works to bring greater acceptance to allow hijra to move into other occupations. On Sunday, I attended a hijra festival. The hijra were sweet and welcoming when I talked with them but it was not well attended.
The movement has found success among India’s liberal “internationalized” elite. India’s Supreme Court, for example, recognized a third gender in 2014, so Indian passports, driver’s licenses and other official documents now include M, F and an Other category. Gay sex, however, is still against the law (although prosecutions are rare to nonexistent). It’s notable that Bangladesh and Pakistan, two other countries not known for their liberalism, also recognize a third gender. The seeming contradiction is in part because sexual categories are different than in the West so, for example, sex between men and the third gender (hijra) isn’t considered sex between two men. As is true everywhere, all these issues are complicated and contested.
Intellectuals can also find support for the third gender in Hindu culture. The Vedas, for example, refer to Tritiya prakrti, people of the third sex, and the major Hindu texts treat homosexuality as normal, or at most give it mild admonishments. Hindu gods will often be reincarnated in different genders or even as hermaphrodites (the sculpture at Elephanta island near Mumbai shown at left depicts a hermaphrodite reincarnation of Shiva). The famous erotic carvings at the Khajuraho temples and elsewhere include depictions of homosexual sex.
The relative tolerance of the Hindu classics leads some people to blame Islamic and British influences on Indian society for it’s intolerance but discrimination against the Hijra is widespread. Although intellectuals may find support for tolerance in Hindu classics, the folk do not. Indians by and large are embarrassed about Khajuraho’s depiction of heterosexual sex, let alone anything more challenging.
The willingness of trans and hijra, both in India and the West, to live with discrimination and abandonment is testament to the great drive to live as one feels one is. I wish the hijra good fortune.
Hat tip: Kshitij Batra for discussion.
The Uttar Pradesh Association of Dead People
The amazing story of Lal Bihari, founder of the Uttar Pradesh Association of Dead People, illustrates many of the issues I wrote about in my post on the chaos of land records in India.
When Lal Bihari first heard about his death, he thought it was a joke. He smiled at the lekhpal, the village officer responsible for land records. But there was no smile in return. “Lal Bihari died last year,” the lekhpal repeated. “I don’t know who you are.” That was when the 22-year-old from Amilo in Azamgarh, Uttar Pradesh (UP), realised something was amiss. He had come to his birthplace Khalilabad for residence, income and caste certificates. He needed them to get a bank loan for his handloom business.
“But I am here before you,” he said, puzzled. “You know me. I have met you before.” The lekhpal showed him the land record, a piece of paper, and read it out. It said that the previous year, 30 July 1976, after the death of Lal Bihari, his one bigha (one-fifth of an acre) of land had devolved to his cousins. He was officially dead.
Lal’s cousins had bribed a local official and declared him dead in order to take his land. One would think it a fairly easy procedure to prove that you aren’t dead but even in the United States this can take months. In India, it took 17 years.
“The price of my death was Rs 300,” says Lal Bihari. After he discovered he had ‘died’, Lal Bihari went to a lawyer, who said, “A dead man has come to me,” and laughed. Neighbours would mock him—“Look, there goes the ghost.” He felt humiliated. Since a court case could take decades, he visited various government departments. He beseeched and quarreled with officials. He filed complaints. In vain. “The enquiry would be conducted by the very officials who had listed me as dead,” he says.
Finding no help from officials, Lal began to engage in more and more desperate measures:
In 1985, he tried to get himself arrested. He kidnapped his cousin, a boy named Baburam in the fifth standard, whose family had shown him dead. But once he picked up Baburam from school, he didn’t know what to do. “I took him to a movie every day,” he says.
After five days, when the family did not file a police complaint, he decided to soak Baburam’s shirt in goat’s blood and send it over. “I thought it would scare them into going to the police,” he says. But the butcher he knew didn’t help and told him to go to the poultry seller. “The blood from a chicken was never going to be enough,” says Lal Bihari. He dropped the idea. The plan flopped, though Baburam got a new shirt.…He bribed a policeman Rs 500 to get a case registered against him and his cousin for rioting. The policeman returned the money when he discovered the motive. He applied for widow’s pension for his wife, Karami. “They would refuse because I was alive. This would be a record for me,” he says. But the government’s refusal made no mention of him.
Next, Lal Bihari sold his property to contest the 1988 Lok Sabha election from Allahabad against former Prime Minister VP Singh. Surprising even himself, he got about 1,600 votes.
Lal’s bizarre case began to get newspaper attention and finally in 1994 he was once again declared alive and his property restored. The story, however, doesn’t end there. In his adventures, Lal had befriended many dead people and so he founded the UP Mritak Sangh, the Uttar Pradesh Association of Dead People. The association organizes marches of the walking dead. In 2003 Lal Bihari won the IgNobel peace prize.
Lal Bihari continues to be very much alive.
Hat tip: Amit Varma.
Alcohol Bans in India and the United States
The Indian Supreme Court has just banned sales of alcohol within 500 meters of a national highway. The ban affects not just liquor stores but tens of thousands of restaurants and hotels. In response, the Rajasthan Public Works Department announced that they would now recategorize highways in urban areas as roads! Other states may follow suit. (David Keohane at the FT has further background on the India ban.)
Lost in the shenanigans is that even if the ban were implemented perfectly it’s not at all obvious that it would reduce traffic accidents. Alcohol can be easily stored and if you are thirsty driving 500 meters doesn’t seem like very far to go to buy alcohol.
Entire counties in the United States have banned alcohol but that doesn’t seem to have reduced traffic fatalities. It may even have increased fatalities because residents of dry counties drive to a wet county to find a bar and then they drive drunk for longer distances as they head home.
In India Possession is Maybe 6/10th of the Law
In India you will often see signs asserting Ownership and Possession on buildings and lots that are 
unoccupied or under construction. The reason is not to stop squatters but rather to avoid the double selling problem. In the United States, it’s fairly easy to find out who owns a piece of land or even an expensive asset like a car. The land registry and titling system in India, however, is expensive and not always easy to check. As Gulzar Natarajan writes:
For something so valuable, land records in most developing countries are archaic. No register, which reliably confirms title, exists anywhere in India. Small experiments in some states to build such register have not been successful. Existing registers suffer from problems arising from lack of updation, fragmentation of lands, informal family partitions, unregistered power of attorney transactions, and numerous boundary and ownership disputes. The magnitude of these problems gets amplified manifold in urban areas.
It’s possible, for example, for a family member to sell family land without anyone else knowing about it. In Muslim customary law, gifts made on the deathbed can override a will which (surprise!) tends to benefit late-stage caregivers. Verbal deals in general are not uncommon.
Indeed, without proper land registration it’s possible for an entirely unconnected person to sell land that he doesn’t own. Even if the real owners have some type of title, the ensuing court process between the real owners and those who thought or claimed they were the real owners will be time and wealth consuming. Forged documents are common. A large majority of all legal cases in India’s clogged court system are property disputes. The best thing is to occupy the land but if you can’t do that you want to signpost the land to make it as clear as possible who owns it so if someone is offered the land for sale they know who to call to verify.
Signposting is an old device for avoiding the double spending/selling problem by making ownership claims public and verifiable. The blockchain ledger is a modern version. A land registry system on the blockchain could work and systems are being tested in Sweden, Georgia and Cook County. Implementing such systems, however, first requires that land be mapped and parceled–and in many states in India the last land surveys were done by the British before independence. Surveys are becoming easier with drones and automatic surveying but India’s land surveying, registering and titling system still has a long way to go.
China Creates SEZ for Medical Tourism
The Chinese government have set up a special economic zone for medical tourism.
Hainan Boao Lecheng international medical tourism pilot zone, the first of its kind in the country, was approved by the State Council in 2013. It enjoys nine preferential polices, including special permission for medical talent, technology, devices and drugs, and an allowance for entrance of foreign capital and international communications.
The pilot zone also has permission to carry out leading-edge medical technology research, such as stem cell clinical research.
The zone, for example, offers a way to skirt the slow Chinese FDA (and presumably the slow US FDA as well).
Established in 2013, the Hainan program will open up new treatments–including Keytruda–to affluent Chinese residents who can afford the travel and medical costs, while other patients will have to wait for regulators to approve them. In recent years, mainland Chinese patients have increasingly traveled to Hong Kong or elsewhere in the face of lagging drug approvals by the China FDA and high treatment costs.
The zone is too small to have a significant impact on worldwide R&D but China’s original SEZs soon expanded. The SEZ could also encourage some interesting experiments. Keep an eye out for billionaires who travel to the island for a holiday and emerging looking younger and healthier.
What is the best way to attract high-skilled migrants?
Combining unique, annual, bilateral data on labor flows of highly skilled immigrants for 10 OECD destinations between 2000 and 2012, with new databases comprising both unilateral and bilateral policy instruments, we present the first judicious cross-country assessment of policies aimed to attract and select high-skilled workers. Points-based systems are much more effective in attracting and selecting high-skilled migrants than requiring a job offer, labor market tests, and shortage lists. Offers of permanent residency, while attracting the highly skilled, overall reduce the human capital content of labor flows because they prove more attractive to non-high-skilled workers. Bilateral recognition of diploma and social security agreements foster greater flows of high-skilled workers and improve the skill selectivity of immigrant flows. Conversely, double taxation agreements deter high-skilled migrants, although they do not alter overall skill selectivity. Our results are robust to a variety of empirical specifications that account for destination-specific amenities, multilateral resistance to migration, and the endogeneity of immigration policies.
I would urge a bit of caution, however. If you are Canada or Australia, and your country is not going to birth Google, you care most about the average skill level. If you are the United States, you might focus more on policies that boost the far right hand tail of value creation, because the benefits from that will be very high indeed. That means taking more chances on immigrants with an uncertain future but big potential upside, even if only with a small probability.
For the pointer I thank the excellent Kevin Lewis.
Problems with destination-based corporate taxes and the Ryan blueprint
That is a recent paper by Reuven S. Avi-Yonah and Kimberly Clausing. It has content throughout, but this struck me as the most interesting section:
1. A U.S. pharmaceutical with foreign subsidiaries could develop its intellectual property in the United States (claiming deductions for wages, overhead and R&D), and then sell (i.e., export) the foreign rights to its Irish subsidiary (at the highest price possible). The proceeds would not be taxable. Ireland would allow that subsidiary to amortize its purchase price. This creates tax benefits in each jurisdiction by reason of the different regimes. If the Irish subsidiary manufactures drugs, the profits could be distributed up to the U.S. parent tax-free under a territorial system. If the Irish subsidiary is in danger of becoming profitable for Irish tax purposes, the U.S. parent would just sell it more IP.
2. If an Irish parent owns a U.S. subsidiary, the Irish parent can issue debt to fund the purchases of the IP. The U.S. subsidiary then invests the cash to generate more IP (expensing all equipment and deducting all salaries) and sells the IP to its parent.
3. If an Irish parent has purchased the U.S. IP rights, it would not want to license the rights to the U.S. subsidiary (income for Irish parent under Irish tax law and no deduction for U.S. subsidiary). So it just contributes the rights to another U.S. subsidiary. Could the U.S. subsidiary amortize the parent’s basis under the Blueprint? When one U.S. subsidiary licenses to another, no net tax would be paid. Any royalties would be taxable to the licensor but deductible for the payor.
4. How does the Blueprint work for services? If a U.S. hedge fund manager provides services to an offshore hedge fund, is that considered an export that is tax exempt? What if the U.S. manager develops a trading algorithm and sells it (or licenses) it to an offshore hedge fund? Are the proceeds and royalties exempt? If so, then the hedge fund becomes a giant tax shelter to the manager, because he would not pay 25% on this income–he would pay zero, with no further tax. This is much better than the current carried interest provision, which has attracted bipartisan condemnation because it enables individuals with income of many millions to pay a reduced rate. The Blueprint result is much worse.
What about moving the American capital out West?
If the US capital would move to the West coast where would it be located? Would this make more sense as China/ India grow in power? How would US policy change if at all having a West coast perspective if such a thing exists? What if it had moved previously at some point in our history? Is there anything that would have played out differently?
That is a request from George, a loyal MR reader.
It has become increasingly clear that the D.C. bureaucracy and policy world will be able to thwart most of what the Trump administration might have been thinking of doing. In this particular case I see much upside in that, but still it is a dangerous precedent. The political culture of the ruling capital city should not always hold such sway.
The longer-run problem, of course, is that putting the national government in a city makes that city “more professional” in a way that also will turn the city more toward the Democratic Party, noting that many cities in America are fairly Democratic to begin with.
Increasingly, I am a fan of the idea of distributing our government across various cities and regions of the country. so here are a few suggestions, focusing on the West:
1. The agencies concerned with economic regulation would go to Salt Lake City, Utah.
2. The offices concerned with science policy, including the NIH and NSF, would be relocated in or near Silicon Valley. I believe the ability to absorb the dynamism would outweigh the rent-seeking problem. There is already plenty of venture capital in the Bay Area, and the lure of government funds is relatively non-corrupting there. Rents are high but the total number of staff is not enormous, so give them each a big raise.
3. The Department of Agriculture would go in Honolulu, Hawaii. It would be harder to get to, and once you were there you might just go swimming. An alternative would be Twin Falls, Idaho “…near the site where Evel Knievel attempted to jump across the Snake River Canyon in 1974 with a rocket-powered motorcycle.”
4. The National Endowment for the Arts would be put in southern California, so as to be reminded that America’s heritage is one of popular culture. This would be one of the agency moves easiest to pull off.
5. The defense establishment would be clustered near Los Angeles as well, where there has long been a military connection and also a talented pool of engineers and numerous airports and access to the ocean.
6. I see New York City capture of the Treasury as an overrated issue, so if it must go out West I am fine with Denver, Dallas, or Houston, cities with a fair number of direct flights to back east. San Francisco would work in the abstract, but rents are too high there.
7. The presidency goes to Sacramento, which is already a major capital and has enough space for something larger and better-guarded than the White House. It is also not too close to the other parts of the federal government, and it would lower the relative status of the governor and legislature of California, to the benefit of America’s largest and richest state and bellwether of our future.
It is hard to predict how big a change all this would make, or how much of the change would be due to decentralization per se, rather than the movement westward. Maybe those living in the western part of the country would feel less like outsiders, while those marooned in the East simply would go insane. New England would be the new Rust Belt, and in some ways it already is the current Rust Belt. Foreign policy would be more Pacific-oriented, mostly a good thing if believe in doing something rather than nothing, but that could backfire as well.
Virginia real estate would be worth less.
As for moving the federal government out West earlier in American history, I don’t see how one might run a bureaucracy where a professional major league baseball team cannot be supported. So we’re talking 1950s or later, and even up through the 1960s. Probably the main effect would have been to ruin California even more quickly than turned out to be the case.
Trump’s executive order on climate change
One of the best things about Cass Sunstein as a writer is that his goal is to inform us. Here is his opening bit:
Contrary to numerous reports, President Donald Trump’s executive order on climate change does not come even close to eliminating President Barack Obama’s legacy with respect to greenhouse-gas reductions. Most of that legacy, involving dramatic emissions cuts in the transportation sector and from household appliances, remains intact.
Nonetheless, the order is massively important and, in some respects, reckless. In addition to mandating reassessment of the Clean Power Plan, which regulates coal companies, Trump jettisoned, all at once, the Obama administration’s “social cost of carbon,” which has been the linchpin of national climate policy since 2009. But he did not say what the Trump administration will replace it with. On that count, he punted — which is not the worst thing, and which leaves some crucial decisions open for his staff.
Here is the full column, and it has much more of interest. I feel bad about running such “remedial material” on MR, but overall I see reporting on Trump as continuing at very low standards, even in some otherwise very good outlets.
From the comments: on the change in your internet privacy
I am still seeing many misleading headlines and takes on the recent Congressional vote to “sell your internet privacy.” Do read this thread to the bottom (link here):
March 29, 2017 at 9:27 am [edit]
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The rules that are being changed went into effect january 4th? is that correct?
TC again: If you believe these claims to be wrong, by all means tell us and I will investigate the matter further. But so far I think I am witnessing another case of “Trump exaggerated click-bait headlines” on this one. It is fine if you think this change is a bad idea, but it is hard for me to see it as the internet privacy skies falling, especially if you already are using Google and Facebook. It’s not exactly the case that our privacy birthright has been stolen from us…
Here is further useful perspective from The Washington Post.
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Something is not quite adding up here. According to Ars Technica, this vote replaces a rule that hasnt even taken affect yet. :
https://arstechnica.com/information-technology/2017/03/how-isps-can-sell-your-web-history-and-how-to-stop-them/
“So what has changed for Internet users? In one sense, nothing changed this week, because the requirement to obtain customer consent before sharing or selling data is not scheduled to take effect until at least December 4, 2017. ISPs didn’t have to follow the rules yesterday or the day before, and they won’t ever have to follow them if the rules are eliminated.”
Im not saying this vote is a good thing, but it sounds to me like all the things we fear are already possible.