The Russians will soon find out.

Moscow Mayor Juri Luschkov said: "Weather forecasters in our city and
the surrounding area will be held responsible for financial losses that
the city incurs through their incorrect prognoses."….

He did not elaborate on how much the fines would be or if the cash
would be taken from the weathermen, or the companies they worked for.

The
fines come after the head of the Romanian National Meteorology Agency,
Ion Poiana, was fired after he predicted warm weather fronts on days
when temperatures plunged to a record minus 36 degrees centigrade.

Thanks to Carl Close for the pointer.

Recently Bryan Caplan and I were chatting about Georgism.  Henry George is well-known for his insistence on taxing land.  But why land?  What makes land special rather than labor or capital?

As I understand the doctrine, there is no special case for taxing improvements on land.  Instead government should tax the "barebones" or "in situ" value on land.  Say that land currently sells for $100,000 an acre, but would sell for $50,000 unimproved.  We should levy the tax only on the $50,000.  Supposedly we are then taxing an inelastic factor and creating only minimal distortions.  Did not Adam Smith offer a similar recommendation?  What better way to fund government?

Fair enough, but then why not tax the in situ values of labor as well?  The "barebones" value of labor is of course leisure.  That is what labor is worth when no extra effort is added to the picture.  Therefore an optimal tax system should try to tax leisure.  This may prove difficult, but why should it be harder than taxing the barebones value of land?  Note that sometimes we are content to tax complements to leisure, such as large camper vans. 

What if we taxed complements to the in situ value of land?  These would be the factors — like labor and capital — that add value to barebones land.  So I take the Georgist view to imply two claims.  First, it is easier or better to tax barebones land than barebones labor.  Second, taxing a factor directly is much better than taxing complements of that factor.  Since I am not convinced either of these are true, I hold no particular attachment to the idea of a single tax on land.

I also share Benjamin Tucker’s concern as to how the in situ value of land should be defined.  Some of the problems are conceptual rather than empirical.  Land values are interdependent.  When assessing the in situ value of my land, what assumptions should be made about the values of surrounding lands or the actions of other people?  When the steamship is invented, should all taxes on American land have risen? 

I might add that Bryan has different objections, which he may someday reveal to us all.

My out of print 1997 book Risk and Business Cycles is now available on-line through the new Google search service.  They want $100 for the ebook, but you can search the book here.

The book has four core arguments.  First, rational expectations theory, as a methodological but not descriptive assumption, is the friend of Austrian Business Cycle theory, not its enemy.  Second, classic Austrian Business Cycle theory is not tenable (more on this some other time; the basic argument is that ABC requires an excessively particular theory of how individual investors err).  Third, the theory should be refocused around the category of risky investments, thereby leading to a viable synthesis of Keynes and Hayek.  Fourth, there is some (non-decisive) empirical evidence in favor of such a synthesis.

Here is my previous post on Austrian Business Cycle Theory and its relevance for current events.

"A growing body of literature suggests that additional riches do not make citizens in wealthy countries any happier, at least not above a certain level.  Using information taken from questionnaires, once a country has a per capita income of roughly $10,000 a year or more, the aggregate income-happiness link appears weak.  Helliwell (2002, p.28) argues that the curve flattens out at about half of current American per capita income, or roughly the standard of living in contemporary Greece.  These results might lead us to wonder whether economic growth is so important after all.

Despite this important body of evidence, I nonetheless wish to treat wealth and happiness as comoving in the broad sense.  Questionnaire evidence should not distract our attention from our primary institutional means of improving human well-being, namely economic growth.

The flat-lining of the happiness-wealth relationship may in part reflect a framing effect.  The literature usually focuses on aspiration or treadmill effects, whereby the wealthy expect more.  Their greater wealth therefore translates into less happiness than might have been expected.  But this is not the only adjustment occasioned by growing wealth.  The wealthy also recalibrate how they should respond to questions about our happiness.  If happiness itself is subject to framing effects, surely talk about happiness is subject to framing effects as well.  The wealthy develop higher standards for reporting when they are “happy” or “very happy.” 

So let us assume that both framing effects – concerning both happiness and talk about happiness – operate at the same time.  This will imply that even a constant measured level of reported happiness implies growing real happiness over time.  Life improvements do usually make us happier, while both our expectations and our reporting standards adjust upwardly.  This is the most likely interpretation of the aggregate data.  Most individuals strive to earn higher incomes, even after they have experienced the strength of “aspiration” and “treadmill” effects.    

Note that within a country wealthier people report unambiguously higher levels of happiness, on average, than do poorer people (Dieter 1984).  This result has not been challenged seriously.  Now to some extent this result may reflect a zero-sum relative status effect.  The wealthier people feel better at the expense of the poorer people, because they stand above them.   Nonetheless it is unlikely that the entire effect boils down to a zero-sum game; wealthier lives are easier and happier in absolute terms in numerous ways, as discussed above.  Even if my neighbor does not like the fact that I own a new car, the gainer’s gain exceeds the loser’s loss in many of these cases.  Again, some of the apparent “zero-sum” element will be a framing effect for “talk about happiness,” rather than happiness itself.  If a buy a Mercedes, my polled neighbor may express greater dissatisfaction with his Volkswagen.  That same neighbor, if he had a Lada in Moscow, circa 1978, might express greater satisfaction on the questionnaire.  Nonetheless in absolute terms he still prefers the Volkswagen in contemporary America.

It is also an open question whether the flattening point for the happiness-wealth relationship changes over time.  If the world as a whole became much wealthier, for instance, might the “point of flattening” shift out to a higher income level?  In this hypothetical future, people without access to limb regeneration and daily supersonic transport would feel deprived and thus less happy.  Most likely, this would mean that we had produced a way of shifting up the whole curve.  The standard of living found in contemporary Greece would not make people as happy as in the wealthier society of the future.  At any point in time the curve may have a large flat range, but over time the absolute level of the curve, and thus human welfare, increases nonetheless. 

The happiness literature also takes a limited view of what well-being, interpreted as broadly as possible, consists of.  The contemporary empirical literature on happiness starts with the operational definition of whether an honest, self-aware person would report himself or herself as being happy, if so asked.  Even if this accurately captures one notion of happiness, it is not the only relevant notion. 

For instance a wealthier economy probably gives us more “fleeting” happiness experiences, or at least greater chances to trade-off long and short-term sources of happiness.  Recent research (Kahneman, et.al. 2004) looks at the allocation of time during the day and classifies events according to how much (temporary) happiness they produce.  It turns out that intimate relations, time spent with friends, and television, all appear to make people happier in this sense.  Working and commuting make people less happy.  A wealthier economy will offer greater options for structuring these choices, again noting that there may be trade-offs between long- and short-term happiness.  Wealthier economies, on average, are associated with higher levels of leisure time, although they accommodate workaholic preferences as well.

Often context effects matter for temporary happiness.  An individual will admit to being happier if he has recently found a dime, or if his soccer team won rather than lost (Schwarz and Strack 1999).  These sources of happiness will likely be systematically larger over time in the wealthier society.  A diverse commercial economy offers more sources of temporary stimulations and more short-term turns of good fortune.

Most generally, we must ask which institutional structures give people the greatest opportunities to structure their lives to achieve their preferred forms of happiness or well-being.  Some persons may seek temporary stimulations, others may want to feel fulfilled at the end of their lives, and others may seek to maximize the quality of their modal day.  Some will seek happiness through out-competing their peers for status, while others will look inward.  Again, greater opportunities and freedoms will likely favor the wealthier society in these regards.  Well-being is not a single variable to be maximized; rather individuals prefer to structure the kinds of well-being or happiness they can achieve.

Finally, even if we accept the “flat-line” empirical result as valid, the questions are posed to individuals in normal life circumstances.  The answers will not pick up the ability of wealthier economies to postpone or mitigate extreme tragedies, whether in the wealthier or poorer parts of our world.  For instance the happiness measures, by their nature, do not pick up the benefits of greater life expectancy.  The dead and incapacitated cannot complain about their situation, at least not in questionnaire form.  If an immigrant, or a child of immigrants, fills out the form, there is no comparison with a pre-immigration state of affairs.  By its very nature, happiness research draws upon a fixed pool of people in relatively normal circumstances.  This will limit its ability to measure some of the largest welfare changes brought by economic growth.  Happiness research, whatever its positive uses, is poorly suited to underpin a welfare economics of tragedy.

The happiness literature at most shows that many more changes are irrelevant than we had previously thought.  This result would not, however, eliminate the major benefits of economic growth, as experienced over longer periods of time.  It might turn out that (if we believe the happiness literature) many “small” changes are irrelevant or nearly irrelevant for happiness.  Yet sufficiently large changes still can boost or harm our welfare by significant amounts.  If the small changes do not much matter, that is all the more reason to focus on the large changes and thus reason to elevate the importance of infra-marginal welfare economics.

To give a few examples of how large changes matter, most life catastrophes create significant misery.  Very sick individuals have less autonomy, experience more pain, and face the stress of dealing with their condition.  The death of a child or close family member has a strongly detrimental affect on happiness for most individuals, often persisting for many years.  Torture, extreme stress, rape and severe physical pain also produce depression, trauma, and persisting unhappiness.  Individuals who have been through wars, revolutions, and collapses of civil order typically experience recurring flashbacks, nightmares, irritability, depression, alcoholism, troubled relationships, and inability to concentrate.  Well-functioning capitalist democracies tend to minimize these problems.

It is sometimes questioned whether even extreme catastrophes make people less happy.  Individuals who experience severe disabilities or physical handicaps do to some extent adjust their expectations.  Often these victims compare themselves to individuals who are even worse off than they are, or they lower their aspirations in life.  The loss in happiness is not as great as a naïve perspective might expect.  Nonetheless victims of catastrophe still report lower levels of happiness than do comparable healthy individuals.  The happiness difference is most distinct, the greater the extent of the disability.  At the very least, a significant percentage of victims experience an ongoing "core of distress" for many years.

People cope least successfully when the catastrophe or malady is ongoing and involves an ongoing deterioration of condition.  Most of the counterintuitive results come when the bad event has a “once and for all” nature, such as a one-time physical handicap.  In these cases many people recover their initial level of self-reported happiness.  But individuals remain subjectively badly off when they suffer from progressive or degenerative problems.  So to the extent that a poorer society brings an ongoing worsening of conditions for many individuals, the associated human suffering will be greater.  Once again, we are led back to significant benefits from ongoing economic growth."

Read also Will Wilkinson on the topic.  And if the above remarks appear to differ from my previous remarks on these topics, it is because I am still changing my mind.

Harvey Rosen has been promoted to chairman of the Council of Economic Advisors.  Rosen is a respected professor of public finance and expert on tax policy from Princeton.  Speaking personally, I find his work accomplished but boring.  He can, however, surprise at times.  I like this paper quite a bit, especially the title (fortunately CEA chairman need not pass through a Congressional gauntlet 🙂 ).

The Self-Employed are Less Likely to Have Health Insurance Than Wage Earners. So What?

David Altig and I are featured in this week’s WSJ Econoblog on the topic of the "savings crisis," with sidetrips into behavioral economics, preference sovereignty, weight loss, and more!

Here are some lengthy excerpts from today’s WSJ article on the economics profession.  Did you know that 15% of the Harvard undergraduate class is majoring in economics?  And Nobel Prize winners can earn $300,000 or more?