Category: Law

Do land use restrictions increase restaurant quality and diversity?

Daniel Shoag and Stan Veuger say yes, but I am not so convinced.

It turns out that metrics of land use restrictions are correlated with restaurant quality, across cities.  To cut to the chase, Los Angeles ranks number one on this index, and I can agree with that assessment in terms of food quality and also diversity.  (Other good food cities, such as Miami, also rank high on the index.)  Yet for the metropolitan area near L.A., food is generally best where the land use restrictions are least binding.  Beverly Hills and Santa Monica have some decent fancy restaurants, but the real gems are to be found elsewhere, in fringes such as northeast Hollywood, Silverlake (gentrifying a bit too much these days, however), north Orange County, Monterey Park, and so on.  Pasadena has hardly anywhere excellent to eat.

I would suggest an alternative channel of influence: urban areas with high inequality have both better food (see An Economist Gets Lunch, but basically imagine the wealthier people generating demand and the poorer people supplying cheap labor) and more building restrictions.  The wealthier people decide to do something to keep the poorer people out of their neighborhoods.

I hate to say “correlation does not prove causation,” but…correlation does not prove causation.

Via the excellent Kevin Lewis.

Further new results on the marginal rate of income taxation

I study optimal income taxation when human capital investment is imperfectly observable by employers. In my model, Bayesian employer inference about worker productivity drives a wedge between the private and social returns to human capital investment by compressing the wage distribution. The resulting positive externality from worker investment implies lower optimal marginal tax rates, all else being equal. To quantify the significance of this externality for optimal taxation, I calibrate the model to match empirical moments from the United States, including new evidence on how the speed of employer learning about new labor market entrants varies over the worker productivity distribution. Taking into account the spillover from human capital investment introduced by employer inference reduces optimal marginal tax rates by 13 percentage points at around 100,000 dollars of income, with little change in the tails of the income distribution. The welfare gain from this adjustment is equivalent to raising every worker’s consumption by one percent.

That is from the Harvard job market paper of Ashley C. Craig, via Steven Hamilton.

The optimal rate of income taxation

An established view is that the revenue maximizing top tax rate for the US is approximately 73 percent. The revenue maximizing top tax rate is approximately 49 percent in a quantitative human capital model. The key reason for the lower top tax rate is the presence of two new forces not captured by the model underlying the established view. These new forces are strengthened by the endogenous response of top earners’ human capital to a change in the top tax rate.

That is from a recent paper by Badel, Huggett, and Luo, via Scott Winship.

The wealth tax and privacy — from the comments

Despite the unnecessary duplication (FATCA etc), I’m actually in favor of requiring banks to disclose how much income US taxpayers earn on ther accounts in the US and abroad. Unfortunately, if you are going to have an income tax system, you can’t simply rely on everyone voluntarily reporting. But, this also raises serious privacy concerns that need to be balanced. The wealth tax on all or most all assets would significantly alter the current balance between disclosure and privacy. As noted in the article, *everything* would need to be disclosed to the IRS *every year* much like an annual estate tax return. Expect substantial additional reporting requirements on all assets. Think that won’t apply to you? How else are they going to know you don’t have $50 million hidden somewhere? How are *taxpayers* going to know they don’t meet that (or some other) threshold ? Trust me, lawyers and accountants, (legitimately) worrying about their own potential liability, will insist that far more people undergo these audits internally just to make sure they are not above the limit.

These privacy issues also have potentially serious political implications. I suppose Bill and Hillary and Barrack and Michelle (add your own list) would be subject to these annual wealth tax returns. Annual audit by the IRS on everything? Do they really want the Trump administration (or some other) having access to all that? This sounds like a potential special prosecutor on steroids and one that is not always going to be politically neutral. I see the potential here for a lot of political abuse and not just from one side or the other.

That is from Vivian Darkbloom on MR and in the LOC, with other good points in the comment too.

How easy is it to administer a wealth tax?

A third issue is logistical. A wealth tax would be like an estate tax levied every year. Figuring out the tax owed on large estates is complicated, costly and time-consuming. The Internal Revenue Service gives estates a year to file a return, but even then, executors often have to file extensions. And on the other end, auditors go through the returns, which can take years before an estate is settled.

The process requires not just lawyers and accountants but valuation experts who assess the worth of assets like closely held family businesses.

“It would be a highly cumbersome tax return to prepare on an annual basis,” said Jeff Moes, executive vice president and chief fiduciary officer at FineMark National Bank & Trust, which serves high-net-worth clients. “Every federal estate tax goes through an audit, and presumably this would go through an audit as well. They’d have to figure out if the valuation methodology is correct.”

“A billionaire would have a return that would be literally three feet high,” he added. “Our $100 million clients own multiple closely held businesses. All of them would require an expert valuation and five-year financials.”

And then the government would need to have enough auditors to verify everything that was submitted. In 2018, for example, an estimated 4,000 estate tax returns will be filed, with tax owed on 1,900 of them. That’s a tenth the number of tax returns that would be filed under Ms. Warren’s wealth tax plan.

Here is more from Paul Sullivan at the NYT.

Biotech on the Blockchain?

Bloomberg: In a novel approach for the biotechnology industry, small-cap company Agenus Inc. is aiming to raise $50 million to $100 million by issuing digital securities backed by future sales of an experimental cancer drug.

The digital securities will allow investors to bet on future sales of single products and will have a limited impact on shareholders’ equity, the company said. Agenus plans to offer at least 25 million of what it calls biotech electronic security tokens, or BESTs, to certain high-net-worth individuals and institutional investors starting Feb. 15.

I find this puzzling. First, why break out one drug from the rest of the firm? Investors generally want diversification and this is the opposite. Agenus is basically saying the rest of the firm is a value suck. Second, one of the virtues of the blockchain is that it allows for easy trade but the SEC requires that to buy these securities you must be an accredited investor and as such there are typically encumbrances on transfer. Thus, putting the securities on the blockchain doesn’t lower transaction costs, the way it could for other assets.

A lot of assets will be tokenized (i.e. securitized on the blockchain) in the future so this is an area to watch but to succeed tokenization must increase diversification and reduce transaction costs and this tokenization does neither.

The Impact of the Affordable Care Act: Evidence from California’s Hospital Sector

The Affordable Care Act (ACA) authorized the largest expansion of public health insurance in the U.S. since the mid-1960s. We exploit ACA-induced changes in the discontinuity in coverage at age 65 using a regression discontinuity based design to examine effects of the expansion on health insurance coverage, hospital use, and patient health. We then link these changes to effects on hospital finances. We show that a substantial share of the federally-funded Medicaid expansion substituted for existing locally-funded safety net programs. Despite this offset, the expansion produced a substantial increase in hospital revenue and profitability, with larger gains for government hospitals. On the benefits side, we do not detect significant improvements in patient health, although the expansion led to substantially greater hospital and emergency room use, and a reallocation of care from public to private and better-quality hospitals.

That is from a new NBER working paper by Mark Duggan, Atul Gupta, and Emilie Jackson.

My Conversation with Noel Johnson and Mark Koyama

Lots of economic history in this one, with the underlying themes of persecution and tolerance, here is the audio and video.

We talk about the evolution of anti-Semitism, how the Black Death influenced Europe, the economics and politics of volcanic eruptions, how much prejudice will come back, amateur astronomy,  Jared Diamond, cousin marriage and the origins of the West, why England was a coherent nation-state so early, the origins of the Industrial Revolution, Schindler’s List, and more.  I split the time between the two, here is one excerpt:

JOHNSON: Mark and I have done a lot of work on building datasets of Jewish persecution and Jewish expulsions at the city level and the country level in Europe over a very long period of time. And a question that I, for one, don’t fully understand is, you don’t need to actually kill all the Jews or expel them in order to extract resources from them. In fact, in some way, this is off the equilibrium path. You’re no longer in some optimal equilibrium for both the ruler and for the Jewish community.

Oftentimes, these Jewish communities would be expelled from a city, they would be invited to come back, and they would come back — in 5, 10, 15 years, sometimes even shorter. But that’s a little bit easier to understand.

In the case I gave you in England in 1290s, I think I understand a little bit about why it might have happened that way. I think it was signaling credibility in some political compact between the king and the nobles, but I’m not sure. But that’s an example of top down.

Other times, clearly, people are . . . You have, say, guilds moving against these Jewish communities. An example of this would be in 1614, when the most well-known Jewish persecution was in Frankfurt am Main. It was called the Fettmilch Massacre. Fettmilch was a baker. He was in guild, and he was upset about the terms of the political deal between the city rulers — the city council — and what the guilds were getting. One of the things that the guilds wanted were the Jews to be expelled. This was competition in some sense.

There was this bit from me:

COWEN: If the Black Death raised wages, does that mean that immigration today lowers wages?


COWEN: Large volcanic eruptions earlier in history. From an economic point of view, what’s the single most interesting thing we know about them?

JOHNSON: I think what’s very interesting about the volcanic eruptions is that we are discovering more and more that they may have played a large role in political change that occurred. Joe Manning at Yale, and I believe his graduate student (Bruce M.S. Campbell) have been doing work on . . . They looked at a series of volcanic eruptions that led to the end of the pharaonic empire. That ended around 30 or 60 BC, I forget. Right around that time.

That was an empire that lasted for 300 years, but they experienced all these crop failures. And then once you look at it, you see that in Indonesia, all these major volcanic eruptions were happening in perfect timing with these crop failures that were taking place. Actually, they can tell from looking at the Nile and how much it’s flooding and things.

COWEN: Politics becomes nastier when the volcano goes off?

And from Mark Koyama:

COWEN: Why was China, as a nation or territory, so large so early in world history?

KOYAMA: Yeah, that’s a great question. There are several potential explanations, one of which is geographic. Another one would be an argument from the writing system. But I think the geography story is quite important. Jared Diamond, building on people like Eric Jones, argued that China’s geography . . .

Essentially there are two core geographic regions in China around the Yellow and Yangtze river deltas, which produced a huge amount of grain or rice. If you control those core regions, you can raise large armies. You can have a large population and dominate the subsequent regions.

Whereas, the argument is for Europe that these core regions are, perhaps, arguably more separated by geographical boundaries. The limitation of that argument on its own is that geography is static, so it doesn’t really tell you anything about the timing.

The interesting thing about China, in my view, is not just that it was once unified, or unified early. But it’s persistently unified. It reunifies. Interestingly enough, the periods of de-unification get consistently smaller. So there are always periods where it’s fragmented, like the warlord period in the early 20th century, but over time may become smaller.

Europe doesn’t seem to have that centrifugal force, so a lot of Europe is unified by the Romans, but it’s not able to come back together along those lines later.

And the argument that I put forward in an article with Tuan-Hwee Sng and Chiu Yu Ko of National University of Singapore is that it’s not just the core geographical reason. That’s part of it. But actually, the periodic threat from a nomadic steppe is another key factor.

This is geographic because China has a very sharp slope from really productive agricultural land to land which is only fit for horses, for Eurasian steppe. China could be invaded very easily from the north by these steppe nomads, whereas Europe — it was much less vulnerable to this. And that helps to explain why the Chinese state is often a northern state.

So if I can add, if you think about China today, or even China in the past, the really productive land — a lot of it’s in the quite far south, in Shanghai, Yangtze delta. But the political center of China is near Beijing, or it’s in the north. And that’s due to this political economy threat from the steppe. And it’s these periodic steppe invasions which we argue are responsible for the centralization, an almost militarized character of the Chinese state through history.


COWEN: Max Weber. Overrated or underrated?

KOYAMA: Underrated.


KOYAMA: Because most people just know the Protestant theory, and they misreport it. Whereas, actually, his most interesting stuff is on Chinese religion and ancient Judaism. And the role of —

COWEN: The history of music, right?

There is much more at the link.  I am very happy to recommend their forthcoming book Persecution and Tolerance: The Long Road to Religious Freedom.

How the government shutdown will end the real Deep State has acted

Here is a reprise from my January 17 column:

The real power here is held by government employees, especially those in critical jobs. Let’s say that more TSA screeners decided to walk off the job. It’s already the case that the TSA absentee rate has gone up to 7.6 percent, from 3.2 percent a year ago. It is possible to imagine screeners staying home in much greater numbers, thus crippling the entire nation. That could either force President Donald Trump’s hand or lead to a congressional override of a potential presidential veto.

And the close:

So what does the final equilibrium look like? Some number of extra weeks (months?) of talking about Trump and the wall. Trump over time becoming less popular. Congressional Republicans folding, and Trump lying about both the outcome and the process. Democrats looking better, at least relatively. Federal workers emerging with bruised morale, but mostly intact.

If you think those are implausible outcomes, you haven’t been paying close enough attention to the last two years.

File under Prophets of the Marginal Revolution…

Unsolved Shootings are Rising

In 2015, I documented that crime in Baltimore was rising rapidly as police resources became stretched as they dealt with riots and anger following the death of Freddie Gray. I warned that the city could tip into a permanently higher crime rate.

It’s now become clear that is exactly what happened as an investigative report by The Trace reveals:

Instead of getting backup, detectives were pulled from their cases, sometimes for days at a time, to help quell the violence. By 2016, homicide investigators cumulatively spent 10,000 hours working riot duty and patrol rather than tracking down murderers…

In the ensuing months, Baltimore’s closure rate for shootings dropped to 25 percent, the lowest in recent history. More than 1,100 cases from 2015 and 2016 alone remained unsolved by the following summer.

As the closure rate fell, the number of shootings increased (see data at right).

It’s not just Baltimore, however:

The crisis of unsolved shootings isn’t confined to cash-strapped cities like Baltimore, but also hits some of America’s most affluent metropolises. In 2016, Los Angeles made arrests for just 17 percent of gun assaults, and Chicago for less than 12 percent. The same year, San Francisco managed to make arrests in just 15 percent of the city’s nonfatal shootings. In Boston, the figure was just 10 percent.

Crime is lower today than in the past but we are in danger of becoming complacent. The rate of unsolved crimes is very high and in some cities it is soaring. Any city with an arrest rate for assaults of 15% is primed for a crime wave.

We need more police as well as better policing.

Addendum: I wonder how many of these cities are still devoting significant resources to marijuana busts?

Shout it from the rooftops

Many top earners during the high-rate era, such as politicians Dwight Eisenhower and Ronald Reagan, entertainer Jack Benny and librettist Alan Jay Lerner, didn’t pay the top rates. In 1952, for example, when the top rate was 92%, the highest-earning 1% of taxpayers had an average rate of 32%, according to Elliot Brownlee, a tax historian and emeritus professor at the University of California, Santa Barbara.

“When top tax rates were high, there was always a large gap between the stated rates and what the highest earners actually paid as a percentage of their income,” says Joel Slemrod, an economics professor at the University of Michigan.

This one would not work today:

Gen. Dwight Eisenhower also successfully argued that $635,000 he earned from his 1948 memoir, “Crusade in Europe,” should be treated as a capital gain, saving him as much as $400,000 of tax, says Joseph Thorndike, a historian with Tax Notes magazine.

Here is the Laura Saunders WSJ piece.

In India Everyone Gets Affirmative Action

India has long affirmative-action-like programs for members of scheduled castes, scheduled tribes and other backward classes (yes, that is the official name). The programs typically reserve a certain number of political seats, government jobs, and educational placements for members of historically disadvantaged and discriminated against groups, hence the the term reservations. Over time, the number of reservations has been increased and the category expanded to more and more groups. In fact, under a new reservation program just announced, virtually everyone will be covered by one reservation or another!

The new program will cover household income of less than 8 lakhs which is $11,000, far above India’s GDP per capita! The new program is meant to benefit middle and upper castes who have chafed under reservations for the historically discriminated against. The fact that the program is open to so many people, however, means that it’s really not much of a benefit at all.

Moreover, ultimately reservations mean very little if there aren’t private-sector, wealth-creating jobs which is India’s primary challenge.

The ongoing death of football?

From the NFL to rec leagues, football is facing a stark, new threat: an evaporating insurance market that is fundamentally altering the economics of the sport, squeezing and even killing off programs faced with higher costs and a scarcity of available coverage, an Outside the Lines investigation has found.

The NFL no longer has general liability insurance covering head trauma, according to multiple sources; just one carrier is willing to provide workers’ compensation coverage for NFL teams. Before concussion litigation roiled the NFL beginning in 2011, at least a dozen carriers occupied the insurance market for pro football, according to industry experts.

The insurance choices for football helmet manufacturers are equally slim; one helmet company executive said he was aware of only one. Pop Warner Little Scholars, which oversees 225,000 youth players, was forced to switch insurers after its longtime carrier, a subsidiary of the insurance giant AIG, refused to provide coverage without an exclusion for any neurological injury.

“People say football will never go away, but if we can’t get insurance, it will,” Jon Butler, Pop Warner’s executive director, lamented to colleagues after discovering that just one carrier was willing to cover the organization for head trauma, according to a person who was present.

Here is the full ESPN article.  It is substantive throughout, a very good piece, and hockey and soccer are having insurance troubles too.

Via John Chamberlain.