Tax-loss carryforwards
This old 1987 Auerbach and Poterba paper (pdf) came immediately to mind:
The most important finding is that tax-loss carryforwards are highly persistent and significantly affect investment incentives for some firms. Nearly 15% of the firms in our sample had tax-loss carryforwards in 1984, and the fraction is much higher in some industries.
The stock of tax-loss carryforwards in the United Kingdom was nearly three times as large as the annual revenue yield of the corporation tax.
Saturday assorted links
1. The case for the Clinton Foundation, by Dylan Matthews. And a look from The Economist.
2. Larry Summers on Shimon Peres.
5. Which states are sung about the most? (hint: not Connecticut)
New issue of Econ Journal Watch
In this issue (.pdf):
Instrument found flat: Stan Liebowitz criticizes an influential Journal of Political Economy article about music piracy’s impact on the sound recording industry.
You get what you measure: Daniel Schwekendiek explainshow South Korea followed a proven template of incentivizing exports to boost Web of Science publications and raise the rankings of its academic institutions.
Now entering a Republican-free zone: Mitchell Langbert, Anthony J. Quain, and Daniel Klein report on the voter registration of faculty at 40 leading U.S. universities in Economics, History, Journalism, Law, and Psychology.
Whither science in gender sociology? Charlotta Stern investigates whether gender sociologists blinker themselves from scientific findings about sex differences.
Carl Menger on classical political economy in relation to the politics of his day: A first-ever English translation of Menger’s 1891 article calling for a recovery of the Smithian tradition, with an introduction by the translators Erwin Dekker and Stefan Kolev.
How to Do Well by Doing Good! In this 1984 essay,Gordon Tullock counsels young economists that doing well and doing good go together. Some elements of the essay, if accurate once, are dated now, but others are timeless.
EJW Audio
Erwin Dekker on Carl Menger on Adam Smith
Frank Machovec on Perfect Competition
Call for papers
EJW fosters open exchange. We welcome proposals and submissions of diverse viewpoints, and also submissions ‘beyond Econ,’ from contiguous social sciences.
Download entire September 2016 issue (.pdf)
How much energy do building codes save?
Not that much, or so it seems from the latest study of California, just published by Arik Levinson in the AER. This seems to be the bottom line:
1. In 1978 California started to enact some of the world’s most ambitious residential building energy codes. These building codes have been updated 13 times since.
2. The promise was for 80% savings for new buildings constructed after 1990. These assumptions assumed everything would go according to plan and there would be no behavioral adjustments.
3. The actual results?: “For electricity, post-1978 houses in California may be using up to 15 percent less than pre-1978 houses, but do not use less per degree-day when the weather gets hot, and do not use relatively less than similar post-1978 houses in other states with less strict building codes.” For natural gas there is a 25% savings, noting that this trend and the electricity trend both predate the 1978 legislation.
4. Levinson conjectures that most of the savings are coming from natural turnover in the housing stock disfavoring the least energy efficient units.
Here are earlier versions of the paper. Of course most regulations never receive a study anything near this thorough.
Trump and the stock market: what was the debate about?
The two people (Wolfers and Ozimek) who did the empirical work did a great job, but much of the rest of the exchange from other commentators has missed the point.
If you approach the debate as an emotional referendum on how good or bad Trump (Clinton) would be, you’re probably going to get it wrong. You will view yesterday’s exchange as being about choosing the Wolfers estimation or the Ozimek one, the latter showing that increases in Trump’s odds didn’t seem to hurt the stock market up through a particular date. If then you sided with Wolfers, you could keep a very negative view of what Trump would be like, or if you sided with Adam’s investigation you could still wonder to a greater extent.
The better way to think about the exchange is that Adam (and I) raised a puzzle. Given that economists as a whole don’t like Trump (look at endorsements), why haven’t the regular fluctuations in his odds had more of an impact on the stock market?
Now comes the Justin Wolfers study, showing the stock market went up a lot as Hillary Clinton was winning the debate. That makes the puzzle bigger not smaller. It adds to the preexisting prior about what correlations we should find in those earlier data points. Why for instance didn’t Trump’s fairly rapid pneumonia-inspired, pre-debate rise from 30 to 36 spook the markets in a big way? Why didn’t Trump’s longer-term rise from near zero to 36 bring a lot of market turmoil? And since a strong economy should help the incumbent Party, the puzzle is all the stronger; you can’t expect a strong economy to boost both the stock market and Trump’s odds as a confounding third factor. And note of course that Justin himself, in other contexts including on Twitter, will assign weight to the churning movements in the prediction markets, even if he doesn’t consider them any kind of decisive test.
A few of the options on the table are to say gridlock is stronger than we had thought, prediction markets less reliable, other candidates less reliable, or that Trump cutting taxes on capital relative to HRC will for the stock market outweigh some of the costs of his presidency. I’m not pushing any one of those, I am suggesting that at least one from this and a broader list ought to be true.
Many many of you have responded to such conundrums with answers starting with but not ending with the concept of noise and low-powered tests. That is a perfectly fine set of responses but then you must apply the resulting beliefs consistently to all other spheres. You could say for instance: “So much noise comes along in our economy. I do prefer Clinton to Trump, but because of all this noise I’m really not so sure Clinton will work out better for the economy. All of the other intervening economic events is what the prediction market and stock market data were picking up and that is why Adam’s test was imperfect. My judgments are imperfect too.”
That is an entirely permissible answer, if you really believe it and embrace it. The error is to segment your belief space. If you say “Wolfers beats Ozimek because Ozimek doesn’t consider noise enough, therefore I stick with my belief that Trump is really bad for the economy,” well that kind of mistake belongs in a Jonathan Haidt novel. I find few people are willing to embrace the more consistent statistical preference plus agnosticism, rather they play the game of “statistical noise for thee but not for me.”
Plenty of statistical tests have low power, including, believe it or not, the ones you run with your political intuitions.
Most generally, don’t look to throw out information, or see one study as trumping another, rather seek to use and interpret all of the information available.
By the way, one possible answer that fully reconciles the data of both Wolfers and Ozimek is to suggest stock markets started seeing Trump as “incurably terrible” only during the debate itself. That is hardly a confirmed hypothesis (we’ll see going forward), but it is another way of recognizing why Wolfers and Ozimek have not produced competing hypotheses, rather two pieces of information for revising a broader Bayesian mosaic.
From the comments, on cyberattacks
As someone who does software and hardware, I don’t think we are anywhere near the point where a mix of hardware and software in everyday things will give us anything more than sorrow. We are already seeing rather scary things with the Internet of Things: Denial of service attacks larger than anything we’ve ever seen, because networked software is often faulty, and selling it only in hardware means vulnerabilities stay forever. It’s not just that someone can take over your CCTV camera, or the system controlling your lightbulbs, but that their computing power can be used to attack any business or individual at any time.
We have seen attacks this week that were large enough to shut down any online payment processor. For instance, imagine that the set of people with the resources for launching those attacks wanted to stop Hillary from taking online donations for as long as possible: I’d not bet against them being able to do that for a couple of weeks at the least, and that’s today. Every day more devices with weak security and no updates are sold. We see records of attack strength beaten every month: Akamai has trouble handling them today. The more devices we sell, the bigger the weapon we are handing out, and we are lacking any mechanisms to increase security because incentives are all wrong.
That is from Bob.
Against solitary confinement
Sens. Richard Durbin (D-Ill.) and Chris Coons (D-Del.) introduced the Solitary Confinement Reform Act, which would require federal prisons to ensure that any period in solitary is as brief as possible and under the least restrictive conditions possible. It would also mandate that prisoners in solitary spend at least four hours per day outside their cells, have access to rehabilitative and educational programs, and be permitted to interact with other people in addition to other reforms. The legislation would protect youth, people with mental and physical disabilities, LGBT people, pregnant women, and other vulnerable populations from the harms of solitary confinement.
Here is more from the ACLU. Who are the main writers and thinkers on this topic?
Assorted Friday links
1. Quora claims about Germans.
2. Profile of Daniel Hannan, one of the people behind Brexit.
3. The case against esoteric Trumpism. And list of academic and intellectual Trump supporters.
4. Why is the margin on Japanese food higher than the margin on Chinese food? Or is it?
5. “China’s recent obsession with glass tourist attractions has gone round the U-bend with the opening of some see-through treetop public toilets.” Link here.
Justin Wolfers argues that Wall Street fears Trump
Wall Street fears a Trump presidency. Stocks may lose 10 to 12 percent of their value if he wins the November election, and there may be a broader economic downturn.
These conclusions arise from close analysis of financial markets during Monday’s presidential debate…
Monday’s presidential debate provided a rough approximation of this experiment. At 9 p.m., before the debate began, the betting markets gave Mr. Trump a 35 percent chance of becoming president. Two hours later, after the debate, we had entered the parallel universe in which economic conditions were the same, but Mr. Trump’s chances had fallen a tad below 30 percent.
During the debate, the overnight futures markets rallied, raising the value of broad stock market gauges like the Standard & Poor’s 500-stock index by two-thirds to three-quarters of a percentage point. This was a consequential move, and because it was driven by the reduced chance of a Trump presidency, it reveals that the market believes that stocks would be worth more if he were to lose the election.
Here is the NYT article. I noticed exactly this pattern myself, but I wish Justin would consider why this correlation does not hold more broadly in the data across other time periods. Trump rose from a joke candidate to as high as 36 in the prediction market, without much denting the stock market. Are we supposed to think improved prosperity drove both developments?
Here are some good remarks from Scott Sumner.
Do stock markets respond to political prediction markets?
Analyses of the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections . We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during Election Day. Analyzing high frequency financial fluctuations following the release of flawed exit poll data on Election Day 2004, and then during the vote count, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.
Does the S&P 500 mind the idea of a Trump presidency?
People, I do think there is a uniquely bad figure on the American national scene right now, and I am hoping for that figure to leave the stage very soon. Nonetheless intellectual honesty and the pursuit of truth require me to communicate the following result to you. This is from Sweet, Ozimek, and Asher:
More formal econometric analysis confirms the absence of a relationship between the S&P 500 and Trump’s electoral odds. Regression analysis shows that day-to-day changes in Trump’s odds of winning had a statistically insignificant effect on log differences in the S&P 500.
See pp.21-22. No, this doesn’t change my mind about the campaign and election, but how many commentators are willing to report this at all? Try to come to terms with this? The purpose of writing a blog is to force oneself to deal with the uncomfortable, not to push pat answers on the readers. I know many of you feel it is your moral duty to stack arguments for or against one of the candidates as high as possible, but I have never myself viewed that as my mission here, no matter what I might be rooting for.
And please note that “stock markets failed to predict [fill in the particular historical event here]” is not a very strong response. I again repeat the question: how many of you are short the market and long on volatility?
That’s what I thought.
Does a VAT promote exports?
Joel Slemrod goes through the details (pdf), including a discussion of a co-authored 1990 paper by Feldstein and Krugman, and also the Lerner theorem. As you might expect, there is much wisdom, and microeconomics, in that six-page piece. His answer on the tax side is basically “no,” a VAT does not favor exports, consistent with what Krugman argued a few days ago. I should note this is not such an easy question, and I don’t think one economist in twenty, if asked on the spot, would come up with exactly the right answer and why (not an excuse for those who get it wrong with prep and Google at their disposal, though I should add this is one of the most esoteric economic errors I have seen a candidate/advisor make).
Here is a summary passage from Slemrod:
First step, understand why a uniform VAT is equivalent to a uniform RST [retail sales tax]; both levy tax on domestic consumption regardless of where goods or services were produced. Second step, calmly reassure oneself that, as is intuitive, an RST does not favor domestic over foreign production and neither encourages nor discourages exports or imports. This implies step three: that a VAT (like an RST) neither encourages nor discourages exports or imports. If step three fails, return to steps one and two until fully convinced.
Quick: say a country taxes imports and subsidizes exports, how quickly can you see that in a first-order model this ought to be neutral?
That all said, it turns out that Trump and Navarro are (partly) right after all, although probably not for the reasons they might have thought.
In fact it is Feldstein and Krugman (p.12) who best explain why, and this has to do with how a VAT boosts savings (and thus trade surpluses), relative to the USA system of taxation:
The best case for arguing that a VAT enhances competitiveness is not what it does but what it doesn’t do: a VAT, unlike an income tax, does not place a tax on saving. Thus, to the extent that a VAT substitutes for an income tax, it will tend to reduce the current propensity to consume. As many economists have pointed out (see, in particular, Frenkel and Rain 1988), to the extent that a value-added tax that substitutes for an income tax reduces current consumption, it will in turn will tend to lead to a trade surplus in the short run. A trade surplus, other things equal, tends to increase the size of the traded goods sector.
Now I am fine with “going all Don Boudreaux” and believing that more Mexican imports are no problem whatsoever. If Mexico, because of its tax system, saves more and ends up investing more in the United States, great, even if the measured U.S. trade deficit goes up. I am happy with that situation, whether or not I believe the correct model is one where all trade accounts fall into balance in some super-long run.
But if you banish I from C + I + G, condemn trade surpluses, and believe that single country moves toward a higher trade surplus drain aggregate demand from the global economy, then actually Trump and Navarro have a point. Fortunately, none of that is my view, so we are back to them being wrong. Perhaps this is a case of “Aggregate Demand Drain for Me but not For Thee.”
Assorted Thursday links
1. The economics of how strippers get paid.
2. Ancient Roman coins found in Japan.
3. In 1970 the demand for housing went up.
4. MIE: auction to slap/punch Martin Shkreli.
5. Rise of the Shenzhen Robomasters. Good video too.
6. The culture that is Harvard Crimson: “Let’s not mince words: this is unacceptable.”
Don’t Take a Test on a Hot Polluted Day
Taking a test on a hot and polluted day can result in a measurably lower score which, if the test is for something like a university entrance exam, can have permanent consequences. I find both of these results hard to believe which doesn’t necessarily mean that they shouldn’t be believed.
Heat Stress and Human Capital Production by Jisung Park
How does temperature affect the human capital production process? Evidence from 4.6 million New York City high school exit exams suggests that heat stress on exam days reduces test scores and educational attainment by economically significant magnitudes, and that cumulative heat exposure during the school-year prior may affect the rate of learning. Taking an exam on a 90°F day relative to a 72°F day leads to a 0.19 standard deviation reduction in exam performance, equivalent to a quarter of the Black-White achievement gap, and a 12.3% higher likelihood of failing an exam. Teachers clearly try to offset the impacts of exam day heat stress by selectively boosting grades just below passing thresholds, while existing air conditioning seems to have a limited protective effect. These findings may have implications for estimating the social cost of carbon, for designing education policy, and for understanding of climate in explaining income gaps across individuals and nations.
The Long-Run Economic Consequences of High-Stakes Examinations: Evidence from Transitory Variation in Pollution by Avraham Ebenstein, Victor Lavy and Sefi Roth.
Cognitive performance during high-stakes exams can be affected by random disturbances that, even if transitory, may have permanent consequences. We evaluate this hypothesis among Israeli students who took a series of matriculation exams between 2000 and 2002. Exploiting variation across the same student taking multiple exams, we find that transitory PM2.5 exposure is associated with a significant decline in student performance. We then examine these students in 2010 and find that PM2.5 exposure during exams is negatively associated with postsecondary educational attainment and earnings. The results highlight how reliance on noisy signals of student quality can lead to allocative inefficiency.
Suburbs will soar on the wings of tech
That is my latest Bloomberg column, here is one excerpt:
Self-driving vehicles are also likely to help the suburbs most. One of the worst things about the suburbs is the commute to the city or to other parts of the suburbs. But what if you could read, text or watch TV – safely — during that commuting time? What if you could tackle your day’s work just as you do on a train or plane? Commuting would seem a lot less painful. As driverless vehicles evolve to accommodate work and leisure uses of the automobile space, pleasure will replace commuting stress.
What about drones? They too would seem to favor remote areas where it is harder to access useful goods and services. Drones may do more for exurbs and rural areas than for the suburbs, but it seems cities will gain least. Walking or biking to nearby shops is a potential substitute for drone delivery. Rolling sidewalk drones might find it harder to negotiate crowded cities, and cities with a dense network of tall buildings may be less friendly to flying drones. Population density may increase the risk of a drone falling on someone.
And another:
Or consider the advent of the “smart home” and the Internet of things. Wouldn’t it be nice to just talk to your stove/computer/3-D printer/robot and say, “Make me some pureed squash”? Any forecast on this topic seems speculative. Still, the suburbs often have more new homes and more new appliances because it’s harder to rebuild or to re-equip older city apartments. So I suspect the arrival of the smart home will favor the suburbs, too.
There is much more at the link. Note that unlike the earlier “telecommuting revolution,” which did not harm cities at all, many of these changes will speed the actual movement of people and goods, not just information. Their effects will be more like those of the interstate highways of the 1950s and 60s, and that favored the suburbs not cities.